<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 8, 1997
THE FAIRCHILD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-6560 34-0728587
(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
Washington Dulles International Airport
300 West Service Road
P.O. Box 10803
Chantilly, Virginia 20153
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 478-5800
N.A.
(Former name or former address, if changed since last report)
<PAGE>
-2-
Item 5. Other Events
The undersigned hereby amends the Form 8-K filed on December 8,
1997 in order to include a signed consent of Rothstein, Kass & Company, P.C. and
to include an unaudited income statement for 1994 for Nacanco Pakeltene
("Nacanco").
Item 7. Financial Statements and Exhibits
(c) Exhibits
1. Shared Technologies Fairchild Inc. financial statements at
December 31, 1996 and for each of the three years ended December 31, 1996
and for the quarter ended September 30, 1997.
2. Nacanco's financial statements for the years ended December
31, 1995 and 1996.
3. Consent of Arthur Andersen LLP.
4. Consent of Independent Accountants.
5. Consent of Independent Certified Public Accountants.
<PAGE>
-3-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 15, 1997 THE FAIRCHILD CORPORATION
By: /s/ Colin M. Cohen
----------------------------------------
Name: Colin M. Cohen
Title: Senior Vice President
<PAGE>
-4-
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
(1) Shared Technologies Fairchild Inc. financial
statements at December 31, 1996 and for each of the
three years ended December 31, 1996 and for the
quarter ended September 30, 1997.
(2) Nacanco's financial statements for the year ended
December 31, 1995 and 1996.
(3) Consent of Arthur Anderson LLP.
(4) Consent of Independent Accountants.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Shared Technologies Fairchild Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Shared
Technologies Fairchild Inc. and subsidiaries (the "Company") as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year 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 audit. The summarized
financial data for Shared Technologies Cellular Inc., contained in Note 4 are
based on the financial statements of Shared Technologies Cellular Inc., which
were audited by other auditors. Their report has been furnished to us and our
opinion, insofar as it relates to the data in Note 4, is based solely on the
report of the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Shared Technologies Fairchild Inc. and subsidiaries as
of December 31, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Anderson LLP
-----------------------
Washington, D.C.
March 7, 1997
F-1
<PAGE>
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
Shared Technologies Fairchild Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Shared
Technologies Fairchild Inc. and Subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the two-year period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shared Technologies
Fairchild Inc. and Subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for the two-year period then ended in
conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for its investment in one of its subsidiaries.
ROTHSTEIN, KASS & COMPANY, P.C.
-------------------------------
Roseland, New Jersey
March 1, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Shared Technologies Cellular, Inc.
We have audited the accompanying consolidated balance sheets of Shared
Technologies Cellular, Inc. and Subsidiary as of December 31, 1996 and 1995 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Shared
Technologies Cellular, Inc. and Subsidiary as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company's significant operating losses,
default on a promissory note, and working capital deficits raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index on Page F-1 is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 11, 1997
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,703 $ 476
Billed accounts receivable, less allowance
for doubtful accounts of $611 and $410, respectively 23,752 9,855
Unbilled accounts receivable 8,811 -
Advances to affiliates - 985
Inventories 1,976 -
Other current assets 1,853 754
-------- --------
Total current assets 39,095 12,070
======== ========
PROPERTY AND EQUIPMENT, AT COST:
Telecommunications 90,158 28,904
Office and data processing 5,776 6,049
-------- --------
95,934 34,953
Accumulated depreciation and amortization 28,169 18,305
-------- --------
Property and equipment, net 67,765 16,648
OTHER ASSETS:
Costs in excess of net assets acquired, less accumulated
amortization of $6,189 and $792 253,329 10,280
Deferred financing and debt issuance costs 8,513 1,263
Investment in affiliates 457 1,581
Deferred income taxes - 560
Other 407 461
-------- --------
262,706 14,145
-------- --------
Total assets $369,566 $ 42,863
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-4
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 13,576 $ 2,870
Accounts payable 17,356 9,035
Accrued expenses 9,558 2,221
Advanced billings 6,935 1,337
Accrued dividends 435 -
-------- --------
Total current liabilities 47,860 15,463
-------- --------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 238,261 4,128
REDEEMABLE PUT WARRANT 1,069 428
-------- --------
Total liabilities 287,190 20,019
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK, $0.01 par value, authorized
250 shares, outstanding 250 shares in 1996 25,000 -
-------- --------
REDEEMABLE SPECIAL PREFERRED STOCK, $0.01 par value, authorized
200 shares, outstanding 200 shares in 1996 14,167 -
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value- Series C, authorized 1,500 shares,
outstanding 428 and 907 shares in 1996 and 1995, respectively 4 9
Series D, authorized 1,000 shares, outstanding 441 and 457 shares
in 1996 and 1995, respectively 4 5
Common stock, $0.004 par value, authorized 50,000 shares,
outstanding 15,682 and 8,506 shares in 1996 and 1995, respectively 63 34
Capital in excess of par value 76,054 44,777
Accumulated deficit (32,916) (21,981)
-------- --------
Total stockholders' equity 43,209 22,844
-------- --------
Total liabilities and stockholders' equity $369,566 $ 42,863
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-5
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Shared telecommunications services $ 96,016 $ 35,176 $ 28,667
Telecommunications systems 61,225 11,910 6,483
Cellular services - - 10,217
--------- --------- ---------
Total revenues 157,241 47,086 45,367
--------- --------- ---------
COST OF REVENUES:
Shared telecommunications services 45,133 19,473 15,717
Telecommunications systems 37,439 9,399 5,161
Cellular services - - 5,294
--------- --------- ---------
Total cost of revenues 82,572 28,872 26,172
--------- --------- ---------
Gross Margin 74,669 18,214 19,195
Selling, General And Administrative Expenses 55,329 16,188 16,909
--------- --------- ---------
Operating Income 19,340 2,026 2,286
OTHER (EXPENSE) INCOME:
Gain on sale of subsidiary stock - 1,375 -
Equity in loss of affiliates (3,927) (1,752) -
Interest expense (22,903) (882) (522)
Interest income 15 205 163
Minority interest in net income of subsidiaries - - (128)
--------- --------- ---------
(26,815) (1,054) (487)
--------- --------- ---------
(Loss) Income before income tax (provision) benefit and
extraordinary item (7,475) 972 1,799
Income tax (provision) benefit (783) (45) 487
--------- --------- ---------
(Loss) income before extraordinary item (8,258) 927 2,286
Extraordinary item, loss on early retirement of debt (311) - -
--------- --------- ---------
Net (loss) income (8,569) 927 2,286
Preferred stock dividends (2,366) (398) (478)
--------- --------- ---------
Net (loss) income applicable to common stockholders $ (10,935) $ 529 $ 1,808
========= ========= =========
(Loss) income per common share:
(Loss) income before extraordinary item $ (0.77) $ 0.06 $ 0.27
Extraordinary item (0.02) - -
--------- --------- ---------
Net (loss) income $ (0.79) $ 0.06 $ 0.27
--------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,787 8,482 6,792
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Series C Series D Series E
Preferred Stock Preferred Stock Preferred Stock
----------------- ----------------- -----------------
For the years ended December 31, (In thousands) Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 988 $ 10 453 $ 5 - $ -
Preferred Stock
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 400
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 5 400 4
Preferred stock dividends
Dividend accretion of redeemable put warrant
Exercise of common stock options and warrants
Issuance of common stock
Conversion of preferred stock (400) (4)
proceeds from sale of common stock, net expenses of
$112
Common stock issued in lieu of compensation and
payment of accrued expenses
Net income - -
------- -------- ------- ------- ------- -------
Balance, December 31, 1995 907 9 457 5 - -
Preferred stock dividends
Exercise of common stock options and warrants
Issuance of common stock
Conversion of preferred stock (479) (5) (16) (1)
Issuance of common stock for benefit plan
Net loss
------- -------- ------- ------- ------- -------
Balance, December 31, 1996 428 $ 4 441 $ 4 - $ -
======= ======== ======= ======= ======= =======
<CAPTION>
Series F
Preferred Stock Common Stock Capital
----------------- ------------ in Excess of
For the years ended December 31, (In thousands) Shares Amount Shares Amount Par Value
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 - $ - 5,190 $ 21 $ 31,759
Preferred Stock
Dividend accretion of redeemable put warrant
Exercise of common stock options and warrants 26 71
Proceeds from sale of Series D preferred stock (1)
Issuances for acquisitions 700 7 4,989
Proceeds from sale of common stock,
net of expenses of $371 1,329 $ 6 4,556
Common stock issued in lieu of compensation and
conversion of Series C preferred stock and other 83 114
Net income -
------- ------- -------- -------- -----------
Balance, December 31, 1994 700 7 6,628 27 41,488
Preferred stock dividends
Dividend accretion of redeemable put warrant
Exercise of common stock options and warrants 17 70
Issuance of common stock 405 2 1,804
Conversion of preferred stock (700) (7) 1,100 4 7
proceeds from sale of common stock, net expenses of
$112 300 1 1,162
Common stock issued in lieu of compensation and
payment of accrued expenses 56 246
Net income -
------- ------- -------- -------- -----------
Balance, December 31, 1995 - - 8,506 34 44,777
Preferred stock dividends
Exercise of common stock options and warrants 675 3 3,210
Issuance of common stock 6,000 24 27,726
Conversion of preferred stock 442 1 5
Issuance of common stock for benefit plan 59 1 336
Net loss -
------- ------- -------- -------- -----------
Balance, December 31, 1996 - - $ 15,682 $ 63 $ 76,054
======= ======= ======== ======== ===========
<CAPTION>
Obligations Total
Accumulated to Issue Stockholders'
For the years ended December 31, (In thousands) Deficit Common Stock Equity
<S> <C> <C> <C>
Balance, January 1, 1994 $ (24,248) $ 1,756 $ 9,303
Preferred Stock (478) (478)
Dividend accretion of redeemable put warrant (25) (25)
Exercise of common stock options and warrants (71)
Proceeds from sale of Series D preferred stock (1)
Issuances for acquisitions 5,000
Proceeds from sale of common stock,
net of expenses of $371 4,562
Common stock issued in lieu of compensation and
conversion of Series C preferred stock and other 50 163
Net income 2,286 - 2,286
----------- ---------- ----------
Balance, December 31, 1994 (22,465) 1,806 20,881
Preferred stock dividends (398) (398)
Dividend accretion of redeemable put warrant (45) (45)
Exercise of common stock options and warrants 70
Issuance of common stock (1,806) -
Conversion of preferred stock -
proceeds from sale of common stock, net expenses of
$112 1,163
Common stock issued in lieu of compensation and
payment of accrued expenses 246
Net income 927 - 927
----------- ---------- ----------
Balance, December 31, 1995 (21,981) - 22,844
Preferred stock dividends (2,366) (2,366)
Exercise of common stock options and warrants 3,213
Issuance of common stock 27,750
Conversion of preferred stock -
Issuance of common stock for benefit plan 337
Net loss (8,569) - (8,569)
----------- ---------- ----------
Balance, December 31, 1996 $ (32,916) $ - $ 43,209
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (8,569) $ 927 $ 2,286
Adjustments-
Loss on early retirement of debt 311 - -
Depreciation and amortization 15,530 3,967 3,702
Provision for doubtful accounts 32 321 413
Gain on sale of subsidiary stock - (1,375) -
Accretion on 12 1/4% bonds 11,526 - -
Accretion on put warrant 641 - -
Equity in loss of affiliate 3,927 1,752 -
Common stock of subsidiary issued for services - - 16
Stock options and common stock issued in lieu of
compensation and other 337 177 114
Minority interest in net income of subsidiaries - - 128
Gain on sale of franchise - - (202)
Amortization of discount on note - 90 52
Change in assets and liabilities, net of effect of acquisitions:
Accounts receivable (86) (2,639) (2,147)
Other current assets 483 (52) (179)
Other assets 83 - (430)
Deferred income taxes 560 (10) (550)
Accounts payable (4,277) 2,208 1,629
Accrued expenses 2,261 (556) (1,707)
Advanced billings 1,203 68 (67)
Other liabilities 435 - -
--------- ------- -------
Net cash provided by operating activities 24,397 4,878 3,058
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (9,702) (3,679) (3,223)
Acquisitions, net of cash acquired (225,924) (1,382) (3,948)
Payments to affiliate (8,407) - -
Deferred merger costs - (750) -
Other investments (2,804) (106) -
Long-term deposits - (10) -
--------- ------- -------
Net cash used in investing activities (246,837) (5,927) (7,171)
--------- ------- -------
</TABLE>
F-8
<PAGE>
Shared Technologies Fairchild Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995, and 1994
(In Thousands) (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Repayments of long-term debt and capital lease obligations $(12,662) $(2,226) $(2,409)
Proceeds from borrowings- - 2,684 2,315
Credit Facility term loans 120,000 - -
Revolving Credit Facility 10,000 - -
Senior Subordinated Discount Notes 114,999 - -
Proceeds from sales of common and preferred stock 3,213 1,233 4,631
Preferred stock dividends paid (1,467) (398) (478)
Deferred financing and debt issuance costs (9,416) - -
Cash of subsidiary previously consolidated - (10) -
Repayment of advances to subsidiary - 70 -
Deferred registration costs - - (182)
--------- -------- --------
Net cash provided by financing activities 224,667 1,353 3,877
--------- -------- --------
NET INCREASE (DECREASE) IN CASH 2,227 304 (236)
CASH, beginning of year 476 172 408
--------- -------- --------
CASH, end of year $ 2,703 $ 476 $ 172
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for-
Interest $ 11,377 $ 856 $ 441
Income taxes 223 84 -
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations to issue common stock in connection with acquisitions - - 50
Issuance of preferred stock in connection with acquisition 38,269 - 5,000
Issuance of common stock to acquire FII 27,750 - -
Redeemable put warrant issued in connection with bank financing - - 358
Capital lease obligations incurred for lease of new equipment - 355 64
Dividend accretion on redeemable put warrant - 45 25
Dividend accretion on preferred stock 899 - -
Costs of intangible assets included in accounts payable - - 203
Note received for sale of franchise - - 202
Issuance of note relating to acquisition - 800 -
Issuance of common stock to settle accrued expenses - 69 -
Deferred merger costs included in accounts payable - 513 -
Reclassification of advance to subsidiary to investment in subsidiary - 1,184 -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
Shared Technologies Fairchild Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 1996 and 1995
(In Thousands Except per Share Data)
1. BUSINESS AND ORGANIZATION:
On March 13, 1996, Shared Technologies Inc. merged with Fairchild Industries,
Inc. ("FII"), and changed its name to Shared Technologies Fairchild Inc.
("STFI") (see Note 3).
STFI, together with its subsidiaries (collectively the "Company") operates in
the telecommunications industry by providing shared telecommunications services
("STS") and telecommunications systems ("Systems") which provides
telecommunications and office automation services and equipment to tenants of
office buildings. One of the Company's affiliates, Shared Technologies Cellular
Inc. ("STC"), is a national cellular service provider, offering short-term
rentals, prepaid and activation services through major retail outlets across the
United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries in which the Company has a controlling interest.
The effects of all significant intercompany transactions have been eliminated in
consolidation. Investments in companies owned between 20 and 50 percent by the
Company are recorded using the equity method.
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. 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.
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. Advanced billings represent pre-billings for
services not yet rendered. Advanced billings are generally for services to be
rendered within one year.
F-10
<PAGE>
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 to be installed at customer sites.
PROPERTY AND EQUIPMENT
Properties are stated at cost and depreciated over estimated useful lives,
generally on a straight-line basis. All telecommunications equipment is
classified as equipment. No interest costs were capitalized in any of the years
presented. Useful lives for property and equipment are:
Telecommunications equipment 8 years
Office and data processing 3 - 8 years
Depreciation expense related to property and equipment amounted to $10,133,
$3,534 and $3,123 for 1996, 1995 and 1994, respectively.
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 equipment rentals, local
telephone access service and maintenance contracts in advance. The deferred
revenue is relieved when the revenue is earned. Systems and equipment sales are
recognized at time of shipment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
AMORTIZATION OF COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of cost of purchased businesses over the fair value of their net
assets at acquisition dates is being amortized on a straight-line basis
primarily over 40 years. The Company recorded amortization of $5,397, $433 and
$579 for the years ended 1996, 1995 and 1994, respectively.
F-11
<PAGE>
DEFERRED FINANCING AND DEBT ISSUANCE COSTS
Costs incurred related to the issuance of debt are deferred and are being
amortized over the life of the related debt. The amortization of deferred
financing and debt issuance costs included in interest expense was $939 in 1996.
INCOME TAXES
The Company accounts for income taxes under 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.
INCOME (LOSS) PER COMMON SHARE
Primary income (loss) per common share is computed by deducting preferred stock
dividends from net income. The resulting net income applicable to common stock,
is divided by the weighted average number of common shares outstanding,
including the dilutive effect, if any, of options, warrants and obligations to
issue common stock.
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, 1996,
1995 and 1994.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company reviews its
long-lived assets, including property and equipment, goodwill and identifiable
intangibles 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.
F-12
<PAGE>
RECLASSIFICATIONS
Certain reclassifications to prior year financial statements were made in order
to conform with the current year presentation.
3. THE MERGER AGREEMENT AND OTHER ACQUISITIONS:
On March 13, 1996, the Company's stockholders approved and the Company
consummated its merger with FII, a subsidiary of RHI Holdings, Inc. ("RHI") for
consideration of $295,191 of securities and assumed debt. Under the merger
agreement, STFI issued to RHI 6,000 shares of common stock, 250 shares of
convertible preferred stock with a $25,000 initial liquidation preference and
200 shares of special preferred stock with a $20,000 initial liquidation
preference (see Note 8). The Company issued 12 1/4 percent Senior Subordinated
Discount Notes Due 2006 with an initial accreted value of $114,999 and received
$125,000 (of an available $145,000) in loans from a credit facility with
financial institutions (see Note 6). The funds were used primarily for the
retirement of certain liabilities assumed from FII in connection with the
merger, and the retirement of the Company's existing credit facility. In
connection with the merger, the Company entered into two-year employment
agreements with key employees for annual compensation aggregating $1,250, and
adopted the 1996 Equity Incentive Plan. The merger was accounted for using the
purchase method of accounting and resulted in $248,117 of cost in excess of net
assets acquired, which is being amortized over 40 years.
On June 30, 1995, the Company purchased all of the outstanding capital stock of
Office Telephone Management ("OTM"). OTM provides telecommunication management
services primarily to businesses located in executive office suites. The
purchase price was $2,135 of which $1,335 was paid in cash and the balance
through the issuance of an $800 note, (discounted at 8.59 percent) payable June
30, 2005.
In June 1994, the Company acquired all of the partnership interests in Access
Telecommunication Group, L.P. and Access Telemanagement, Inc. (collectively
Access). The purchase price was $9,252 of which $4,252 was paid in cash and the
balance through the issuance of 400 shares of Series E Preferred Stock valued at
$3.75 per share and 700 shares of Series F Preferred Stock valued at $5.00 per
share.
The following unaudited pro forma financial statements of operations for 1996
and 1995 give effect to the acquisitions as if they had occurred on January 1 of
each year.
F-13
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Revenues $184,525 $174,852
Income before extraordinary items (4,621) (8,528)
Net income (4,932) (8,528)
Net income available to common stockholders (8,520) (12,246)
(Loss) income per common share:
(Loss) income before extraordinary item $ (0.60) $ (0.86)
Extraordinary item (0.02) -
-------- --------
Net (loss) income $ (0.62) $ (0.86)
======== ========
</TABLE>
4. INVESTMENT IN AFFILIATE:
During December 1995, STC issued approximately $3,000 in voting preferred stock
to third parties. The voting rights assigned to the preferred stock reduced the
Company's voting interest in STC to approximately 42.7 percent, resulting in the
Company's loss of voting control of STC. As a result of additional common stock
issuances to third parties, partially offset by the Company's receiving 250
shares of STC Series B voting Convertible Preferred Stock, the Company's voting
interest in STC was reduced to approximately 41.3 percent during 1996.
Accordingly, STC has been accounted for on the equity method for 1996 and 1995.
The summarized balance sheet of STC as of December 31, 1996 and 1995, and the
related summarized statement of operations of STC for the years then ended, are
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Summarized balance sheet:
Current assets $ 2,070 $ 5,824
Telecommunications and office equipment, net 2,131 2,158
Other assets 10,061 6,396
------- -------
Total assets $14,262 $14,378
======= =======
Current liabilities $11,045 7,676
Note payable 360 1,600
------- -------
Total liabilities 11,405 9,276
Stockholders' equity 2,857 5,102
------- -------
Total liabilities and stockholders' equity $14,262 $14,378
======= =======
Summarized statement of operations:
Revenues
Gross margin $20,914 $13,613
Operating loss 7,285 5,026
Net loss 6,888 2,989
8,796 2,848
</TABLE>
F-14
<PAGE>
5. Accrued Expenses:
Accrued expenses at December 31, 1996 and 1995, consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
State sales and excise taxes $1,986 $1,040
Deferred lease obligations - 222
Property taxes 230 150
Concession fees 204 176
Salaries and wages 3,598 -
Other 3,540 633
------ ------
$9,558 $2,221
====== ======
</TABLE>
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations at December 31, 1996 and 1995,
consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Credit Facility Term Loans $113,250 $ -
Revolving Credit Facility 10,000 -
Senior Subordinated Discount Notes 126,525 -
Bank Revolver - 2,174
Other long-term debt and capital leases 2,062 4,824
-------- ------
251,837 6,998
Less- Current portion 13,576 2,870
-------- ------
$238,261 $4,128
======== ======
</TABLE>
THE CREDIT FACILITY
The Company, through its wholly owned subsidiary, Shared Technologies Fairchild
Communications Corp. ("STFCC"), entered into a Credit Facility with a consortium
of banks upon the merger with FII in March 1996. The Credit Facility consists of
(a) a Tranche A Senior Secured Term Loan Facility providing for term loans to
the Company in a principal amount not to exceed $50.0 million (the "Tranche A
Term Facility"); (b) a Tranche B Senior Secured Term Loan Facility providing for
term loans to the Company in a principal amount not to exceed $70.0 million (the
"Tranche B Term Facility" and, together with the Tranche A Term Facility, the
"Term Facilities"); and (c) a Senior Secured Revolving Credit Facility providing
for revolving loans to the Company in an aggregate principal amount at any time
not to exceed $25 million (the "Revolving Facility").
F-15
<PAGE>
The Tranche A Term Facility requires quarterly payments due over 5 years;
$44,750 was outstanding at year end. The Tranche B Term Facility requires
quarterly payments over 7 years; $68,500 was outstanding at year end.
The Company will be required to make mandatory prepayments of loans in amounts,
at times and subject to exceptions (a) in respect of 75 percent (subject to
step-down based upon a leverage ratio test) of consolidated excess cash flow of
the Company and its subsidiaries, (b) in respect of 100 percent of the net
proceeds of certain dispositions of assets or the stock of subsidiaries or the
incurrence of certain indebtedness by the Company or any of its subsidiaries and
(c) in respect of 100 percent (subject to step-down based upon a leverage ratio
test) of the net proceeds of the issuance of any equity securities by the
Company or any of its subsidiaries. At the Company's option, loans may be
repaid, and revolving credit commitments may be permanently reduced, in whole or
in part, at any time.
The obligations of the Company's wholly owned subsidiary, STFCC, under the
Credit Facility are unconditionally and jointly and severally guaranteed by the
Company and the subsidiary guarantors. In addition, the Credit Facility is
secured by first priority security interests in all the capital stock and the
tangible and intangible assets of the Company and the guarantors, including all
the capital stock of, or other equity interests in, the Company and each direct
or indirect domestic subsidiary of the Company. The wholly owned subsidiary,
STFCC, is restricted from payment of dividends or other distributions to its
parent, STFI, except to the extent necessary to pay preferred dividends and
other identified items.
At the Company's option, the interest rates per annum applicable to the Credit
Facility will be either Adjusted LIBOR plus a margin ranging from 2.75 to 3.50
percent, or the Adjusted Base Rate plus a margin ranging from 1.75 to 2.50
percent. The Alternate Base Rate is the higher of Credit Suisse's Prime Rate and
the Federal Funds Effective Rate plus 0.5 percent. At December 31, 1996, the
interest rate for the Tranche A Term Facility was 8.375 percent and the interest
rate for the Tranche B Term Facility was 9.125 percent. The Revolving Facility
interest rates at year end ranged from 8.125 to 10.0 percent.
As required under the Credit Agreement, the Company entered into interest rate
swap agreements with two commercial banks. The three contracts, each with a
$10,000 notional amount, expire from May 1999 through May 2001. In order to
protect the Company from interest rate increases, the agreements require the
Company to pay a fixed interest rate in lieu of a variable interest rate. The
Company accounts
F-16
<PAGE>
for the interest rate swaps as hedge agreements and recognizes interest expense
based on the fixed rate.
The Credit Facility contains a number of significant covenants that, among other
things, restricts the ability of the Company to dispose of assets, incur
additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, enter into leases,
investments or acquisitions, engage in mergers or consolidations, make capital
expenditures, or engage in certain transactions with subsidiaries and affiliates
and otherwise restrict corporate activities. In addition, under the Credit
Facility, the Company is required to comply with specified financial ratios and
tests, including a limitation on capital expenditures, a minimum Earnings Before
Interest, Taxes, Depreciation, and Amortization ("EBITDA") test (as defined), a
fixed charge coverage ratio, an interest coverage ratio, a leverage ratio and a
minimum net worth test.
SENIOR SUBORDINATED DISCOUNT NOTES
As part of the acquisition of FII, the Company also issued $163,637 of aggregate
principal amount (with an initial accreted value of $114,999) of Senior
Subordinated Discount Notes (the "Discount Notes"). The discount notes bear an
annual interest rate of 12.25 percent with the principal fully due on March 1,
2006. Interest will begin accruing on March 1, 1999, with payments due
semi-annually thereafter. The discount on the Discount Notes is being amortized
to interest expense using the effective interest method over the three year
accretion period, ending March 1, 1999.
The Discount Notes are not redeemable prior to March 1, 2001 except that,
subject to certain limitations, until 1999, the Company may redeem, at its
option, up to an aggregate of 25 percent of the principal amount of the Discount
Notes at a specified redemption price plus accrued interest until the date of
the redemption. On or after March 2001, the Discount Notes are redeemable at the
option of the Company, in whole or in part, at the specified redemption prices
plus accrued interest to the date of redemption.
Upon a change in control of the Company, as defined, the holders of the Discount
Notes may require the Company to repurchase the Discount Notes at 101 percent of
the accreted value plus accrued interest to the date of repurchase.
The Discount Notes of the Company's wholly owned subsidiary, STFCC, are
subordinated to all existing and future senior indebtedness, as defined, of the
Company. The Discount Notes are unconditionally and jointly and severely
guaranteed on an unsecured senior subordinated basis by the Company and its
subsidiary guarantors.
F-17
<PAGE>
In addition to similar restrictions to the Credit Agreement, the indenture under
which the Discount Notes were issued limits (i) the issuance of additional debt
and preferred stock by the Company and subsidiaries, (ii) the payment of
dividends on capital stock of the Company and its subsidiaries and the purchase,
redemption or retirement of capital stock or indebtedness, (iii) investments and
(iv) sales of assets, including capital stock of subsidiaries.
BANK REVOLVER
In May 1994, the Company entered into a $5,000 financing agreement with a bank
collateralized by certain assets of the Company. The agreement provided for a
revolving credit line for a maximum, as defined, of $4,000 to be used for
expansion in the shared telecommunications services business and a $1,000 term
loan. The Company retired this debt in 1996 and recorded an extraordinary
expense of $311.
DEBT MATURITY
Scheduled maturities on long-term debt and capital lease obligations are as
follows:
<TABLE>
<CAPTION>
Year Ending Long-Term Capital Lease
December 31, Debt Obligations
- ------------ ---- -----------
<S> <C> <C>
1997 $ 13,036 $ 540
1998 16,528 349
1999 11,926 88
2000 10,120 31
2001 31,370 -
Thereafter 204,961 -
-------- ------
Subtotal 287,941 1,008
Less- Accretion of 12-1/4% discount notes (37,112) -
-------- ------
Total debt maturities $250,829 $1,008
======== ======
</TABLE>
If the Company is unable to generate sufficient cash flow or otherwise fails to
comply with the various debt covenants, it would be in default under the terms
thereof. This would permit the holders of such indebtedness to accelerate the
maturity of such indebtedness and could cause default under such indebtedness of
the Company. The Company's ability to meet its obligations will be dependent
upon the future performance of the Company, which will be subject to prevailing
economic conditions and to financial, business and other factors, including
factors beyond the control of the Company.
F-18
<PAGE>
7. REDEEMABLE PUT WARRANT:
In connection with the May 1994 bank financing agreement, the Company issued the
bank a redeemable put warrant for a number of common shares of the Company's
outstanding common stock, subject to certain anti-dilution adjustments. The
warrant was redeemable at the Company's option prior to May 1996, and is
redeemable 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 in cash upon
redemption of the warrant, and therefore, initially valued the warrant at the
present value of the minimum guarantee discounted at 11.25 percent. To the
extent that the Company's stock price exceeds approximately $6.03 per share, the
bank may elect to receive stock in lieu of the $500 cash as the value of the
stock will exceed $500. At December 31, 1996, the Company's stock price was
$9.125 per share. The Company has therefore accreted through interest expense
the additional value due to the bank, resulting in a liability of $1,069 at
year-end. The liability will continue to fluctuate until redemption based on the
Company's stock price.
8. REDEEMABLE PREFERRED STOCK:
CONVERTIBLE PREFERRED STOCK
In connection with the Merger, the Company issued non-voting Convertible
Preferred Stock to RHI with an initial liquidation preference of $25.0 million.
Dividends on the Convertible Preferred Stock are payable quarterly at the rate
of 6 percent 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 percent per annum until paid.
The Convertible Preferred Stock has a liquidation preference of $25.0 million in
the aggregate plus an additional amount equal to the total amount of dividends
the holder would have received if dividends were paid quarterly in cash at the
rate of 10 percent per annum for the life of the issue, minus the total amount
of cash dividends actually paid (the "Liquidation Preference"). Each share is
convertible at any time at the option of the holder into such number of Common
Shares as is determined by dividing the Liquidation Preference thereof by the
conversion price of $6.375. The conversion price is subject to adjustment upon
occurrence of adjustment events including, but not limited to, stock dividends,
stock subdivisions and reclassifications or combinations.
The Convertible Preferred Stock is not redeemable at the Company's option during
the first three years after
F-19
<PAGE>
issuance, but thereafter, upon 30 days' prior written notice, is redeemable at
the Company's option at a redemption price of 100 percent of the Liquidation
Preference. In March 2008, the Company is required to redeem 100 percent of the
outstanding shares of Convertible Preferred Stock at the Liquidation Preference.
SPECIAL PREFERRED STOCK
In connection with the Merger, the Company issued non-voting Special Preferred
Stock to RHI with an initial Liquidation Preference of $20.0 million and
recorded at an initial fair value of $13,269. No dividends are payable on the
Special Preferred Stock until 2007 when the outstanding Special Preferred Stock
will receive a dividend at a rate equal to the interest rate on the Discount
Notes and calculated on the then outstanding Liquidation Preference. The Special
Preferred Stock's initial liquidation preference of $20.0 million will increase
by $1.0 million each year after 1996 to a maximum liquidation preference of
$30.0 million in 2007. The Company is accreting the Special Preferred Stock to
$30.0 million using the effective interest method and records the accretion as
preferred dividends.
Shares are redeemable at the Company's option at any time upon 30 days' prior
written notice, at a redemption price of 100 percent of the Liquidation
Preference. All outstanding Special Preferred Stock is mandatorily redeemable in
its entirety at 100 percent of the Liquidation Preference upon a change of
control of the Company and, in any event, in 2008. In addition, in March of each
year, commencing with March 31, 1997, the Company is required to redeem, at a
price equal to 100 percent of the liquidation preference in effect from time to
time, an amount of Special Preferred Stock equal to 50 percent of the amount, if
any, by which the consolidated EBITDA, as defined, of the Company and its
subsidiaries exceeds a specified amount for the immediately preceding year ended
December 31. At December 31, 1996, the threshold was $47,000; therefore, no
amounts were due.
9. STOCKHOLDERS' EQUITY:
SHAREHOLDERS AGREEMENT
RHI and the Company are parties to a Shareholders Agreement pursuant to which
they have agreed to cause the Board of Directors to consist at all times of
eleven directors, with RHI having the ability to nominate three or four and the
Chairman and Chief Executive Officer of the Company having the ability to
nominate seven. Each party agrees to vote for the other party's nominees. Under
the terms of the Shareholders
F-20
<PAGE>
Agreement, the Chairman and Chief Executive Officer of the Company and RHI have
agreed to certain restrictions with respect to the resale of securities, other
than the Special Preferred Stock, of the Company owned by them as of the date of
the Merger.
The Shareholders Agreement terminates at such time as either the Chairman and
Chief Executive Officer of the Company or RHI owns less than 25 percent of the
shares of Common Stock owned respectively by such Stockholders on the date of
the Merger or the current individual ceases to be Chief Executive Officer of the
Company.
COMMON STOCK
The Company has authorized 50,000 shares of common stock at $0.004 par value per
share with equal voting rights.
During January 1995, the Company completed a private placement to sell to a
certain investor 300 shares of common stock at $4.25 per share, pursuant to
Regulation S of the Securities Act of 1933. The Company received $1,163, after
deducting expenses of $112, including an underwriter commission of $102 paid to
a firm in which one of the principals is a director and stockholder of the
Company. In addition, the underwriter was granted a five year common stock
purchase warrant to acquire 30 shares of the Company's common stock for $5.00
per share.
In May and June 1994, the Company sold, through a private placement to certain
investors, 1,329 shares of common stock and an equal number of warrants, for net
proceeds of $4,562, after deducting expenses of $371. The warrants are
exercisable prior to June 26, 1999 at a per share price of $4.25, subject to
certain anti-dilution protection. As of December 31, 1995, no warrants had been
exercised.
SERIES C PREFERRED STOCK
Series C Preferred Stock is non-voting and is entitled to a liquidation value of
$4 per share and dividends of $.32 per share per annum, payable quarterly in
arrears. These shares are convertible into common stock, at the holder's option,
on a one share of common stock for two shares of Series C Preferred Stock basis,
at any time, subject to certain anti-dilution protection for the Preferred
Stockholders. At the Company's option, the Series C Preferred Stock is
redeemable, in whole or in part, at any time after June 30, 1993, at $6 per
share plus all accrued dividends.
SERIES D PREFERRED STOCK
In December 1993, the Company commenced a private placement to sell to certain
investors units consisting of one share
F-21
<PAGE>
of Series D Preferred Stock and one warrant to purchase one share of common
stock. As of December 31, 1995, the Company had sold 457 units for net proceeds
of $1,740, after deducting expenses of $430. Series D Preferred Stock is
entitled to dividends of 5 percent 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
are 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, an investment banking
firm received warrants to purchase 16 shares of the Company's common stock at an
exercise price of $5.75 per share. As of December 31, 1996, 428 warrants had
been exercised.
SERIES E PREFERRED STOCK
The Series E Preferred Stock was converted into 400 shares of common stock in
January 1995. The holders also received warrants, which expire on December 31,
1999, to purchase 175 shares of the Company's common stock, at an exercise price
of $4.25 per share, subject to certain anti-dilutive provisions.
SERIES F PREFERRED STOCK
These shares were converted on August 1, 1995 into 700 shares of common stock.
In 1996, an additional 111 shares of the Company's common stock were issued in
connection with the provisions of conversion of the Series F Preferred Stock, as
defined.
Additionally, the Company issued warrants to the sellers of Access to purchase
225 shares of the Company's common stock at an exercise price of $4.25 per
share, subject to certain anti-dilution adjustments.
10. GAIN ON SALE OF SUBSIDIARY COMMON STOCK:
In April 1995, STC completed its SB-2 filing with the Securities and Exchange
Commission and became a public company. Prior to this date, STC was
approximately an 86 percent owned subsidiary of the Company. STC sold 950 shares
of common stock at $5.25 per share, which generated net proceeds of
approximately $3,274 after underwriters' commissions and offering expenses. The
net effect of the public offering on the consolidated financial statements was a
gain of approximately $1,375.
F-22
<PAGE>
11. STOCK OPTION PLANS:
1987 STOCK OPTION PLAN
Under the 1987 Stock Option Plan (the "1987 Plan"), the Company is authorized to
issue options to purchase an aggregate of 1,200 shares of Common Stock of the
Company. All options granted are exercisable at the date of grant, with a term
of five to ten years and are exercisable in accordance with vesting schedules
set individually by the Board of Directors. As of December 31, 1996,
approximately 131 options were available for grant. Options to purchase 556
shares of common stock were outstanding at December 31, 1996.
BOARD OF DIRECTORS STOCK OPTION PLAN
The Board of Directors Stock Option Plan (the "Directors' Plan"), was adopted by
the Board of Directors in 1994 and accepted by the stockholders of the Company
in 1995. Under the Directors' Plan, an "independent director" is a director of
the Company who is neither an employee nor a principal stockholder of the
Company. The Directors' Plan provided for a one-time grant of an option to
purchase 15 shares of common stock to all independent directors who served
during the 1994-95 term.
Each independent director who received the initial one-time option grant in
1994, and who was elected to a new term as a director in 1995 or is reelected in
1996, shall receive upon such reelection a grant of an option for 5 or 10
options, respectively. Reelection after 1996 of any independent director in
service as of September 22, 1994, shall entitle such director to a grant of 15
options.
All options issued under the Directors' Plan are exercisable at the closing bid
price for the date preceding the date of grant. The options vest over three
years and are exercisable for so long as the optionee continues as an
independent director and for a period of 90 days after the optionee ceases to be
a director of the Company. The maximum term of the option is ten years from the
date of grant. The maximum number of shares of common stock which may be issued
under the Directors' Plan is 250 shares, of which options to purchase 145 are
outstanding as of December 31, 1996.
1996 EQUITY INCENTIVE PLAN
In connection with the acquisition of FII, the Company adopted the 1996 Equity
Incentive Plan (the "1996 Plan"), pursuant to which the Company will offer
shares, and share-based compensation, to key employees. The 1996 Plan provides
for the grant to eligible employees of stock
F-23
<PAGE>
options, stock appreciation rights, restricted stock, performance shares, and
performance units (the "Awards"). The 1996 Plan is administered by the
Compensation Committee of the Company's Board of Directors (the "Compensation
Committee"). The 1996 Plan provides that not more than 1,500 shares of common
stock will be granted under the 1996 Plan, subject to certain anti-dilutive
adjustments. The exercise price will be set by the Compensation Committee, but
can not be less than the market value of the stock at date of issuance. Stock
appreciation rights may be granted only in tandem with stock options. Options to
purchase 1,478 shares of common stock were outstanding at December 31, 1996.
SUMMARY ACTIVITY
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
OPTIONS RANGE AVERAGE
--------- -------------- ----------
<S> <C> <C> <C>
Balance outstanding, January 1, 1994 464 $1.72 - 11.00 $4.06
Granted 317 3.25 - 4.50 3.60
Expired (59) 4.00 - 5.50 5.43
Exercised (25) 2.84 2.84
--------- -------------- ----------
Balance outstanding, December 31, 1994 697 1.72 - 11.00 3.78
Granted 40 4.13 4.13
Expired (2) 5.00 - 5.72 5.16
Exercised (2) 2.28 - 2.84 2.58
--------- -------------- ----------
Balance outstanding, December 31, 1995 733 1.72 - 11.00 3.79
Granted 1,716 4.13 - 7.75 4.50
Expired (32) 4.38 4.38
Exercised (238) 1.72 - 5.50 3.48
--------- -------------- ----------
Balance outstanding, December 31, 1996 2,179 $1.72 - $11.00 $ 4.37
========= ============== ==========
</TABLE>
At December 31, 1996, there were 440 options immediately exercisable at prices
ranging from $2 to $11.
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation, " effective for the Company's December 31, 1996,
financial statements. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, compensation cost has
been recognized for its stock plans based on the intrinsic value of the stock
option at date of grant (i.e., the difference between the exercise price and the
fair value of the Company's stock). Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, the Company's net (loss) income and (loss) earnings per share would have
been reduced to the pro forma amounts indicated below.
F-24
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
Net (loss) income available to common shareholders:
<S> <C> <C>
As reported $(10,935) $ 529
Pro forma (12,364) 507
(Loss) earnings per share:
As reported (0.79) 0.06
Pro forma (0.90) 0.06
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option granted was $3.26 per option and was estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1996 and 1995:
risk-free interest rates of 6.0 percent; no dividend yields; expected lives of 5
to 10 years; and expected volatilities of 52 percent.
12. RETIREMENT AND SAVINGS PLAN:
On March 3, 1989, the Company adopted a savings and retirement plan (the
"Plan"), which covers substantially all of the Company's employees. Participants
in the Plan may elect to make contributions up to a maximum of 20 percent of
their compensation. For each participant, the Company will make a matching
contribution of one-half of the participant's contributions, up to 5 percent of
the participant's compensation. Matching contributions may be made in the form
of the Company's common stock and are vested at the rate of 33 percent per year.
The Company's expense relating to the matching contributions was approximately
$609, $199 and $163 for 1996, 1995 and 1994, respectively. At December 31, 1996
and 1995, the Plan owned 148 and 134 shares, respectively, of the Company's
common stock.
13. 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.
F-25
<PAGE>
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ (10) $ -
State and local (223) (45) (63)
------ ------ ------
(223) (55) (63)
------ ------ ------
Deferred:
Federal (560) 10 550
State and local - - -
------ ------ ------
(560) 10 550
------ ------ ------
Total (expense) benefit $(783) $ (45) $ 487
====== ====== ======
</TABLE>
The income tax provision for continuing operations differs from that computed
using the statutory Federal income tax rate of 35 percent in 1996, 1995 and 1994
for the following reasons.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed statutory amount $2,616 $(340) $(630)
Effect of net operating losses - 285 567
Valuation allowance on net operating loss tax benefits (3,004) 10 550
Other (395) - -
------ ----- -----
$ (783) $ (45) $ 487
====== ===== =====
</TABLE>
The following table is a summary of the significant components of the continuing
operations portion of the Company's deferred tax assets and liabilities as of
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
DEFERRED (PROVISION)
BENEFIT
-------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Equity in loss of subsidiary $ 1,588 104
Accrued expenses not yet tax deductible 5,581 164
NOL carryforwards 9,156 8,641
-------- -------
16,325 8,909
Deferred tax liabilities:
Asset basis differences - fixed assets (11,008) (1,218)
Asset basis differences - intangible assets
(Goodwill and other intangibles) (1,373) (183)
-------- -------
(12,381) (1,401)
-------- -------
</TABLE>
F-26
<PAGE>
<TABLE>
<S> <C> <C>
Deferred tax asset, net 3,944 7,508
Less- Valuation allowance (3,944) (6,948)
------- -------
Net deferred tax asset $ -- $ 560
======= =======
</TABLE>
At December 31, 1996 and 1995, the Company recorded net deferred tax assets of
$0 and $560, respectively, and corresponding valuation allowances of $3,944 and
$6,948, respectively. The valuation allowances were decreased by $3,004, $439
and $1,418 respectively, for the years ended December 31, 1996, 1995 and 1994.
At December 31, 1996, the Company's NOL carryforward for federal income tax
purposes is approximately $23,100, expiring between 2001 and 2011. NOL's
available for state income tax purposes are less than those for federal purposes
and generally expire earlier. Limitations apply to the use of NOL's.
14. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company has entered into operating leases for the use of office facilities
and equipment, which expire through 2007. Certain of the leases are subject to
escalations for increases in real estate taxes and other operating expenses.
Rent expense amounted to approximately $6,093, $2,200 and $1,856 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Aggregate approximate future minimum lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-------
<S> <C>
1997 $5,278
1998 4,807
1999 4,156
2000 3,345
2001 2,674
Thereafter 3,230
-------
$23,490
=======
</TABLE>
CONTINGENCIES
As a result of the acquisition of FII (the "Merger"), the Company became liable
for all liabilities of FII with respect to the operations of the former
businesses of FII, including the FII Telecommunications Business and its
F-27
<PAGE>
aerospace and industrial fasteners business up to the effective date of the
Merger as well as operations of FII disposed of prior to the Merger, including
its injection molding business. As a matter of law, the Company will not be
released from FII's obligations with respect to such liabilities.
As a pre-condition of the Merger: (a) FII, its parent RHI, and RHI's parent,
Fairchild and certain other subsidiaries of Fairchild underwent a
recapitalization pursuant to which FII divested itself of all assets unrelated
to the FII Telecommunications Business; (b) RHI assumed all liabilities of FII
unrelated to the FII Telecommunications Business (other than the Retained
Liabilities), including but not limited to the following (collectively, the
"Non-communications Liabilities"): (i) contingent liabilities related to a
dispute with the United States Government under Government Contract Accounts
rules concerning potential liability arising out of the use of and accounting
for approximately $50.0 million in excess pension funds relating to certain
government contracts in the discontinued aerospace business of FII; (ii) all
environmental liabilities except those related to the FII Telecommunications
Business; (iii) approximately $50.0 million (at June 30, 1995) of costs
associated with post-retirement healthcare benefits; and (iv) all other accrued
liabilities and any and all other unasserted liabilities unrelated to the FII
Telecommunications Business; and (c) pursuant to certain indemnification
agreements (the "Indemnification Agreements"), the Company is indemnified (i) by
Fairchild and RHI jointly and severally with respect to all Non-communications
Liabilities and all tax liabilities of FII and STFTI resulting from the FII
Recapitalization or otherwise attributable to periods prior to the Merger and
(ii) by Fairchild Holding Corp. (a company formed in connection with the FII
Recapitalization) with respect to the liabilities that are indemnified for being
herein collectively referred to as the "Indemnified Liabilities"). The Company
believes no taxable gain or loss was recognized by FII or any of its affiliates
on the transfer of the FII assets and liabilities pursuant to the FII
recapitalization.
In December 1995, a suit was filed against the Company in U.S. District Court
for the Southern District of New York alleging breach of a letter agreement and
seeking an amount in excess of $2.25 million for a commission allegedly owed to
a vendor as a result of a vendor initiating negotiations between the Company and
FII and negotiating the Merger. A vendor has alleged that the Company entered
into a fee agreement, whereby the Company agreed to pay to the vendor 0.75
percent of the value of the transaction as a fee. FII has denied that FII at any
time engaged the vendor for this transaction. The Company filed an answer in
January 1996,
F-28
<PAGE>
denying that any commission is owed. This litigation is in the discovery
process. Management believes, however, that an adverse outcome, if any, will not
have a material adverse effect on the Company's consolidated financial
statements.
In January 1994, the Company entered into a consulting agreement for financial
and marketing services, which expires in November 1996. The agreement provides
for the following compensation; $30 upon signing, $6 per month retainer, and
$150 upon the attainment of a specific financial ratio, which as of December 31,
1995 had been attained. In addition, the consultant was issued a three year
warrant to purchase 300 shares of the Company's common stock at a purchase price
of $5.75 per share and a five year warrant to purchase 250 shares of the
Company's common stock at a purchase price of $7.00 per share. The consultant
may not compete with the Company during the term of this agreement and for two
years thereafter.
In November 1995, the Company entered into a three year consulting agreement
with a financial advisor requiring annual compensation of $250.
In December 1995, the Company granted options to employees of the Company, STC
and certain members of the Board of Directors of the Company and STC, to
purchase an aggregate of 350 shares of STC common stock, held by the Company.
The options are exercisable for five years, at $2.50 per share.
The Company's sales and use tax returns in certain jurisdictions are currently
under examination. Management believes these examinations will not result in a
material change from liabilities provided.
In addition to the above matters, the Company is a party to various legal
actions, the outcome of which, in the opinion of management, will not have a
material adverse effect on results of operations, cash flows or financial
position of the Company.
15. RELATED PARTY TRANSACTIONS:
As of December 31, 1993, the company had paid approximately $288 of life
insurance premiums on behalf of an officer of the Company, which was to be
repaid from the proceeds of a $2,500 face value life insurance policy owned by
the president. In January 1994, the beneficiary on the policy was changed to the
Company in order to reduce the premium payments required by the Company. As of
December 31, 1996, the amount due to the Company for premiums paid exceeded the
cash surrender value of the policy by approximately $130. Accordingly, the
officer has agreed to reimburse the Company for this amount. The receivable and
cash surrender
F-29
<PAGE>
value are reflected in other assets in the accompanying consolidated balance
sheets.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 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 No. 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.
CURRENT ASSETS AND LIABILITIES
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.
LONG-TERM DEBT
There is no active market for the Company's long-term debt securities, and
consequently, no quoted market prices are available. The Company's long-term
debt securities can be segregated into two distinct categories: variable rate
long-term debt that reprices frequently and fixed rate long-term debt.
VARIABLE RATE LONG-TERM DEBT - The Company's Credit Facility Term Loans, Credit
Revolving Facility and Bank Revolver carry a rate of interest which varies in
relation to LIBOR or prime, a common market interest rate. Because these loans
reprice within one to six months, fluctuations in market interest rates do not
materially impact the fair market value of these obligations. Therefore, the
carrying value of these financial instruments approximate fair market value.
F-30
<PAGE>
FIXED RATE LONG-TERM DEBT - The fair value of the Company's Senior Subordinated
Discount Notes is estimated using a discounted cash flow analysis based on the
Company's borrowing cost for similar credit facilities, at December 31, 1996. As
minimal changes in the market level of interest rates occurred since issuance in
March 1996, the Company estimates that carrying value approximates fair market
value, at December 31, 1996.
INTEREST RATE SWAP AGREEMENTS
The Company holds interest rate swap agreements with two commercial banks in
order to reduce the impact of potential interest rate increases on its variable
rate debt. At December 31, 1996, it would have cost approximately $1,059 to
break the Company's interest rate swap agreements. The Company is exposed to
credit loss in the event of non-performance by the banks, however, such
non-performance is not anticipated.
REDEEMABLE PUT WARRANT
The carrying amount of the redeemable put warrant approximates fair market value
as it is adjusted quarterly to reflect the Company's liability due to the
holder.
REDEEMABLE PREFERRED STOCK
The Company estimates the fair market value of the Redeemable Convertible
Preferred Stock at carrying value based on the conversion feature and underlying
value of common stock at year end.
The fair market value of the Redeemable Special Preferred Stock is estimated at
carrying cost. Carrying cost reflects a discount to face value.
This disclosure relates to financial instruments only. The fair value
assumptions were based upon subjective estimates of market conditions and
perceived risks of the financial instruments at a certain point in time.
17. CONSOLIDATING FINANCIAL STATEMENTS:
The following unaudited statements separately show Shared Technologies Fairchild
Inc. and the subsidiaries of Shared Technologies Fairchild Inc. (representing
Shared Technologies Fairchild Communications Corp., and Shared Technologies
Fairchild Telecommunications Inc., or "STFTI"). These statements are provided to
fulfill reporting requirements and represent guarantors of the Senior
Subordinated Discount Notes issued by STFCC.
F-31
<PAGE>
<TABLE>
<CAPTION>
Eliminating Consolidated
STFTI STFCC STFI Entries STFI
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets-
Cash and cash equivalents $ 2,377 $ - $ 326 $ - $ 2,703
Accounts receivable, net 32,520 - 43 - 32,563
Other current assets 3,829 - - - 3,829
--------- --------- --------- --------- ---------
Total current assets 38,726 - 369 - 39,095
--------- --------- --------- --------- ---------
Equipment-
Property and equipment 95,934 - - - 95,934
Accumulated depreciation (28,169) - - - (28,169)
--------- --------- --------- --------- ---------
67,765 - - - 67,765
--------- --------- --------- --------- ---------
Other assets-
Costs in excess of net assets acquired, net 253,329 - - - 253,329
Deferred financing and debt issuance costs - 8,513 - - 8,513
Investments in affiliates - - 12,053 (11,596) 457
Investment in Subsidiaries - 95,421 84,905 (180,326) -
Other 407 - - - 407
Note receivable - 134,461 - (134,461) -
--------- --------- --------- --------- ---------
253,736 238,395 96,958 (326,383) 262,706
--------- --------- --------- --------- ---------
Total assets $ 360,227 $ 238,395 $ 97,327 $(326,383) $ 369,566
========= ========= ========= ========= =========
Liabilities and stockholders' equity:
Current liabilities-
Current portion of long-term debt and
capital lease obligations $ - $ 13,576 $ - $ - $ 13,576
Accounts payable 17,356 - - - 17,356
Accrued expenses 9,553 - 5 - 9,558
Advanced billings 6,935 - - - 6,935
Accrued dividends - - 435 - 435
--------- --------- --------- --------- ---------
Total current liabilities 33,844 13,576 440 - 47,860
--------- --------- --------- --------- ---------
Long-term debt, less current portion 134,461 238,261 - (134,461) 238,261
--------- --------- --------- --------- ---------
Redeemable put warrant - - 1,069 - 1,069
--------- --------- --------- --------- ---------
Redeemable convertible preferred stock - - 25,000 - 25,000
--------- --------- --------- --------- ---------
Redeemable special preferred stock - - 14,167 - 14,167
--------- --------- --------- --------- ---------
Stockholders' equity-
Preferred stock Series C - - 4 - 4
</TABLE>
F-32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Preferred stock Series D - - 4 - 4
Common stock - - 63 - 63
Capital in excess of par value - - 76,054 - 76,054
Accumulated deficit 11,596 (13,442) (19,474) (11,596) (32,916)
Intercompany 180,326 - - (180,326) -
--------- --------- --------- --------- ---------
Total stockholders' equity 191,922 (13,442) 56,651 (191,922) 43,209
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 360,227 $ 238,395 97,327 $(326,383) $ 369,566
========= ========= ========= ========= =========
<CAPTION>
Eliminating Consolidated
STFTI STFCC STFI Entries STFI
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 152,241 $ - $ 5,000 $ - $ 157,241
Cost of revenues 81,616 - 956 - 82,572
--------- --------- --------- --------- ---------
Gross margin 70,625 - 4,044 - 74,669
--------- --------- --------- --------- ---------
Selling, general and administrative expenses 55,329 - - - 55,329
--------- --------- --------- --------- ---------
Operating income 15,296 - 4,044 - 19,340
Other (expense) income
Equity in (loss) earnings of subsidiary and affiliates - - (11,986) 8,059 (3,927)
Interest expense, net (9,461) (13,442) 15 - (22,888)
--------- --------- --------- --------- ---------
(9,461) (13,442) (11,971) 8,059 (26,815)
--------- --------- --------- --------- ---------
Income (loss) before income taxes provision and
extraordinary item 5,835 (13,442) (7,927) 8,059 (7,475)
Income tax provision (783) - - - (783)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item 5,052 (13,442) (7,927) 8,059 (8,258)
Extraordinary item, loss on early retirement (311) - - - (311)
--------- --------- --------- --------- ---------
Net income (loss) 4,741 (13,442) (7,927) 8,059 (8,569)
Preferred stock dividends - - (2,366) - (2,366)
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stock $ 4,741 $ (13,442) $ (10,293) $ 8,059 $ (10,935)
========= ========= ========= ========= =========
<CAPTION>
Eliminating Consolidated
STFTI STFCC STFI Entries STFI
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ 4,741 $ (13,442) $ (7,927) $ 8,059 $ (8,569)
Adjustments-
Loss on early retirement of debt 311 - - - 311
Depreciation and amortization 15,530 - - - 15,530
Provision for doubtful accounts 32 - - - 32
Accretion on 12 1/4% bonds - 11,526 - - 11,526
Accretion on put warrant - - 641 - 641
</TABLE>
F-33
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Equity in earnings (loss) of affiliate - - 11,986 (8,059) 3,927
Stock options and common stock issued
in lieu of compensation and other - - 337 - 337
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable (44) - (42) - (86)
Other current assets 483 - - - 483
Other assets 83 - - - 83
Deferred income taxes - - 560 - 560
Accounts payable (4,277) - - - (4,277)
Accrued expenses 2,261 - - - 2,261
Advanced billings 1,203 - - - 1,203
Other liabilities - - 435 - 435
--------- --------- --------- --------- ---------
Net cash provided by
operating activities 20,323 (1,916) 5,990 - 24,397
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of equipment (9,702) - - - (9,702)
Acquisition, net of cash acquired (225,924) - - - (225,924)
Payments to affiliate (8,407) - - - (8,407)
Investments in affiliates - - (2,804) - (2,804)
--------- --------- --------- --------- ---------
Net cash used in investing
activities (244,033) - (2,804) - (246,837)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayments of long-term
debt and capital lease obligations (4,912) (7,750) - - (12,662)
Proceeds from borrowings-
Credit facility term loans - 120,000 - - 120,000
Revolving credit facility - 10,000 - - 10,000
Senior subordinated discount notes - 114,999 - - 114,999
Proceeds from sales of common and
preferred stock - - 3,213 - 3,213
Preferred stock dividends paid - - (1,467) - (1,467)
Deferred financing and debt issuance costs - (9,416) - - (9,416)
(Advances to) amounts received from affiliates 230,523 (225,917) (4,606) - -
--------- --------- --------- --------- ---------
Net cash provided by
financing activities 225,611 1,916 (2,860) - 224,667
--------- --------- --------- --------- ---------
Net increase (decrease) in cash 1,901 - 326 - 2,227
Cash, beginning of year 476 - - - 476
--------- --------- --------- --------- ---------
Cash, end of year $ 2,377 $ - $ 326 $ - $ 2,703
========= ========= ========= ========= =========
</TABLE>
F-34
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
September 30,1997 December 31, 1996
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 178 $ 2,703
Accounts receivable, less allowance
for doubtful accounts of $300
in 1997 and $611 in 1996 34,155 32,563
Inventories 4,735 1,976
Other current assets 3,961 1,853
Total current assets 43,029 39,095
Equipment:
Property & Equipment 105,302 95,934
Accumulated depreciation (37,234) (28,169)
68,068 67,765
Other Assets:
Investments in affiliates 754 457
Intangible assets 258,075 261,842
Deferred income taxes - -
Other 316 407
259,145 262,706
--------- ---------
Total assets $ 370,242 $ 369,566
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
September 30,1997 December 31, 1996
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity CURRENT LIABILITIES:
Current portion of long-term
debt and capital lease obligations $ 16,083 $ 13,576
Accounts payable 18,394 17,356
Accrued expenses 7,948 9,558
Accrued dividends 1,555 435
Advanced billings 7,079 6,935
Total current liabilities 51,059 47,860
Long-Term Debt and Capital Lease
Obligations less current
portion 239,633 238,261
Redeemable Put Warrant 887 1,069
Convertible preferred stock
$.01 par value, authorized 250 shares,
outstanding 250 shares in 1997 and 1996 25,000 25,000
Special preferred stock
$.01 par value, authorized 200 shares,
outstanding 200 shares in 1997 and 1996 15,061 14,167
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
25,000 shares:
Series C, outstanding no shares in 1997 and
428 shares in 1996 - 4
Series D, outstanding 58 shares in 1997 and
441 shares in 1996 1 4
Common stock; $.004 par value, 50,000 shares
authorized, outstanding 17,186 shares in 1997
and 15,682 shares in 1996 69 63
Additional paid-in capital 78,137 76,054
Accumulated deficit (39,605) (32,916)
Total stockholders' equity 38,602 43,209
Total liabilities and
stockholders' equity $ 370,242 $ 369,566
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statements of Operations
For the Nine Months Ended
September 30, 1997 and 1996
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
<S> <C> <C>
Revenue:
Shared telecommunications services $ 82,539 $ 69,310
Telecommunications systems 59,240 41,585
Total Revenue 141,779 110,895
Cost of Revenue:
Shared telecommunications services 39,272 34,233
Telecommunications systems 31,853 25,019
Total Cost of Revenue 71,125 59,252
Gross Margin 70,654 51,643
Selling, General & Administrative Expenses: 51,536 39,118
Operating Income 19,118 12,525
Other income (expense):
Equity in loss of affiliate (210) (2,009)
Net interest expense (21,694) (15,246)
(21,904) (17,255)
Income (loss) before income taxes and
extraordinary items (2,786) (4,730)
Income tax (214) (74)
Income (loss) before extraordinary item (3,000) (4,804)
Extraordinary item, loss on early retirement
of debt - (310)
Net Income(loss) (3,000) (5,114)
Preferred Stock Dividends (3,689) (1,682)
Net income (loss) applicable to
common stock $ (6,689) $ (6,796)
Net (loss) per common share:
Income (loss) before extraordinary item $ (0.42) $ (0.49)
Extraordinary item - (.02)
Net income (loss) $ (0.42) $ (0.52)
Weighted Average Shares Outstanding 16,039 13,316
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statements of Operations
For the Three Months Ended
September 30, 1997 and 1996
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
<S> <C> <C>
Revenue:
Shared telecommunications
services $ 26,937 $ 27,384
Telecommunications systems 19,224 19,739
Total Revenue 46,161 47,123
Cost of Revenue:
Shared telecommunications services 13,061 13,143
Telecommunications systems 11,434 11,301
Total Cost of Revenue 24,495 24,444
Gross Margin 21,666 22,679
Selling, General & Administrative Expenses: 17,202 16,262
Operating Income 4,464 6,417
Other income (expense):
Equity in loss of affiliate (24) (310)
Net interest expense (7,214) (6,995)
(7,238) (7,305)
Income (loss) before income taxes and
extraordinary items (2,774) (888)
Income tax (6) (34)
Income (loss) before extraordinary item (2,780) (922)
Extraordinary item, loss on early retirement
of debt - -
Net Income(loss) (2,780) (922)
Preferred Stock Dividends (1,390) (1,081)
Net income (loss) applicable to
common stock $ (4,170) $ (2,003)
Net (loss) per common share:
Income (loss) before extraordinary item $ (0.25) $ (0.13)
Extraordinary item - -
Net income (loss) $ (0.25) $ (0.13)
Weighted Average Shares Outstanding 16,531 15,066
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1997 and 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net Income (loss) $ (3,000) $ (5,114)
Adjustments:
Extraordinary loss on early retirement of
debt -- 310
Depreciation & amortization 14,294 11,525
Accretion of put warrant (182) --
Equity in loss of subsidiary 210 2,009
Accretion on 12 1/4% bonds 11,782 7,803
Amortization of discount on note 14
Change in Assets and Liabilities:
Accounts receivable (1,592) (1,031)
Inventory (2,759) --
Other current assets (2,369) (627)
Other assets 1,016 1,732
Accounts payable 1,038 646
Accrued expenses (490) 2,039
Advanced billings 144 (472)
Net cash provided by operating activities 18,092 18,834
Cash Flows Used in Investing Activities
Purchases of equipment (9,368) (7,092)
Investments in subsidiaries (507) (1,494)
Acquisitions, net of cash acquired (1,240) (4,011)
Net cash used in investing activities (11,115) (12,597)
Cash Flows From Financing Activities:
Preferred stock dividends (3,689) (1,007)
Repayments of notes payable, long-term
debt and capital lease obligations (9,903) (192,004)
Borrowings under notes payable and long-
term debt 2,000 244,999
Payments to affiliate -- (8,407)
Deferred finance costs (886) (9,416)
Proceeds from sales of common stock 2,082 373
Repayment of FII preferred stock 894 (40,706)
Net cash provided by (used in) financing
activities (9,502) (6,168)
Net increase (decrease) in cash (2,525) 69
Cash, Beginning of Period 2,703 476
Cash, End of Period $ 178 $ 545
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest $ 12,908 $ 6,300
Income taxes 214 119
Non cash transactions-
Issuance of common stock to acquire FII -- 27,750
Issuance of preferred stock to acquire FII -- 38,269
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Series C Series D
Preferred Stock Preferred Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance, January 1, 1997 428 $ 4 441 $ 4
Preferred stock dividends - - - -
Dividend accretion of special
preferred stock - - - -
Exercise of common stock - - - -
options and warrants
Issuance of common stock for 401(k)
plan match - - - -
Preferred stock converted to common
stock (428) (4) (383) (3)
Net loss - - - -
Balance, September 30, 1997 - $ - 58 $ 1
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in
Shares Amount Capital
<S> <C> <C> <C>
Balance, January 1, 1997 15,682 $ 63 $76,054
Preferred stock dividends
Dividend accretion of special
preferred stock
Exercise of common stock options
and warrants 724 3 1,498
Issuance of common stock
for 401(k)plan match 82 - 580
Preferred stock converted
to common stock 698 3 5
Net Loss
Balance, September 30, 1997 17,186 $ 69 $78,137
</TABLE>
The accompanying notes are an integral part of these
financial statements
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
<S> <C> <C>
Balance, January 1, 1997 (32,916) 43,209
Preferred stock dividends (2,795) (2,795)
Dividend accretion of special preferred stock (894) (894)
Exercise of common stock options and warrants 1,501
Issuance of common stock for 401(k) plan match 580
Preferred stock converted to common stock 1
Net loss (3,000) (3,000)
Balance, September 30, 1997 ($39,605) $ 38,602
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Notes to Consolidated Financial Statements
September 30, 1997
(in thousands)
(Unaudited)
1. Basis of Presentation:
The consolidated financial statements included herein have been prepared by
Shared Technologies Fairchild 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, 1996 report on Form 10-K.
2. Investment in Unconsolidated Subsidiary
The Company's investment in its unconsolidated subsidiary, Shared
Technologies Cellular, Inc. (STC), is accounted for under the equity method.
Prior to December 1995, STC was a majority-owned subsidiary and was included on
a consolidated basis. During December 1995, STC issued approximately $3,000 in
voting preferred stock to third parties. Although the Company's ownership
percentage of approximately 58% did not change, the voting rights assigned to
the preferred stock reduced the Company's voting interest in STC, resulting in
the Company's loss of voting control of STC. Accordingly, STC has been accounted
for on the equity method since 1996. At September 30, 1997 the Company had an
ownership interest of approximately 25.4% in STC. Summarized balance sheet and
statement of operations information for STC as of, and for the nine months
ended, September 30, 1997 is as follows:
Summarized Balance Sheet
<TABLE>
<S> <C>
Current assets $ 3,379
Property and equipment, net 1,844
Other assets 9,614
Total assets $ 14,837
Current liabilities $ 9,457
Note payable 1,193
Total liabilities 10,650
Stockholders' equity 4,187
Total liabilities and stockholders' equity $ 14,837
</TABLE>
Summarized Statement of Operations
<TABLE>
<S> <C>
Revenues $ 19,089
Gross margin 8,430
Operating loss (471)
Net loss (670)
</TABLE>
In August 1996 the Company reached an agreement with STC to purchase $2,500
<PAGE>
in STC preferred stock. This investment was financed through the conversion of
existing advances owed by STC to the Company in the amount of $1,200 and a cash
payment of $1,300. The STC preferred stock was convertible into 833 shares of
common stock at the Company's option. In addition, upon conversion of such STC
preferred stock, the Company would receive a warrant to purchase an additional
833 shares of STC common stock, subject to adjustment. Subsequently, in August
1997, the Company sold such preferred stock to a third party investor for $250
and recorded a gain of $20.
3. Acquisitions:
On March 13, 1996, the Company's stockholders approved and the Company
consummated its merger with Fairchild Industries, Inc.("FII"), following a
reorganization transferring all non-communication assets to FII's parent, RHI
Holding, Inc. ("RHI"). The Company changed its name to Shared Technologies
Fairchild Inc.("STFI"). Pursuant to the merger agreement, STFI issued to RHI,
6,000 shares of common stock, 250 shares of convertible preferred stock with a
$25,000 liquidation preference and 20 shares of special preferred stock with a
$20,000 initial liquidation preference. In addition the Company raised in the
capital market approximately $111,000 after offering expenses, through the
issuance of 12 1/4% Senior Subordinated Notes Due 2006 and approximately
$125,000 (of an available $145,000) in loans from a credit facility with
financial institutions. The funds were used primarily for the retirement of
certain liabilities assumed from FII in connection with the merger, and the
retirement of the Company's existing credit facility. In connection with the
merger, the Company entered into two year employment agreements with key
employees for initial annual compensation aggregating $1,250, and adopted the
1996 Equity Incentive Plan. The merger was accounted for using the purchase
method of accounting. The total purchase consideration of approximately $71,581
was allocated to the net tangible and intangible assets of FII based upon their
respective fair market values as follows:
<TABLE>
<S> <C>
Assets
Cash $ 1,551
Accounts receivable 24,747
Other current assets 2,572
Equipment 51,532
Goodwill 248,008
Total Assets 328,410
Liabilities and stockholders' equity
Capital lease obligations $ (262)
Accounts payable (11,577)
Accrued expenses (6,981)
Advanced billings (6,102)
Due to affiliated company (8,407)
Long term debt (182,794)
FII preferred stock (40,706)
Net purchase price $ 71,581
</TABLE>
The following unaudited pro forma statements of operations for the nine
months ended September 30, 1996 give effect to the above acquisitions and the
change in reporting of STC to the equity method (Note 2) and the pro forma
effect of STC acquisitions, as if they occurred on January 1, 1996:
<TABLE>
<CAPTION>
1996
<S> <C>
Revenues $ 138,178
Cost of revenues 70,968
Gross margin 67,211
Selling, general and
administrative expenses 50,310
Operating income 16,901
Equity in loss of subsidiary (2,009)
Interest expense, net (20,594)
Loss before income tax expense
and extraordinary item (5,702)
Income taxes (64)
Extraordinary item loss on early
retirement of debt (332)
Net Loss (6,098)
Preferred stock dividends (2,196)
Loss applicable to common stock $ (8,294)
Net loss per common share $ (.56)
Weighted average number of common
shares outstanding 14,849
</TABLE>
<PAGE>
4. Contingencies:
In December 1995, a suit was filed against the Company alleging a breach of
a letter agreement and seeking an amount in excess of $2,250 for a commission
allegedly owed in connection with the merger with FII (Note 3). The Company
denies that the claimant at any time was engaged in connection with the merger.
The Company filed an answer in January 1996, denying that any commission is
owed. This litigation is schedules for trial in December 1997. While any
litigation contains an element of uncertainty, management is of the opinion that
the ultimate resolution of this matter should not have a material adverse effect
upon results of operations, cash flows or financial position of the Company.
On July 31, 1997 the Company was served with a purported shareholder class
action complaint in an action commenced in the Delaware Chancery Court in New
Castle County. The Company and its directors are named as defendants. The
complaint seeks injunctive relief, costs and attorneys' fees with respect to the
proposed merger of the Company and Tel-Save Holdings, Inc. which was announced
on July 17, 1997 (See Note 9).
As of October 27, 1997, an agreement in principal had been reached between
the Company and counsel for the plaintiff class, which agreement, subject to
court approval, would result in dismissal of the Complaint with prejudice and
release of all claims of the plaintiff class relating to the merger.
The Company's sales and use tax returns in certain jurisdictions are
currently under examination. Management believes these examinations will not
result in a material change from liabilities provided.
In addition to the above matters, the Company is a party to various legal
actions, the outcome of which, in the opinion of management, will not have a
material adverse effect on results of operations, cash flows or financial
position of the Company.
5. Income Taxes:
The Company accounts for income taxes under 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.
6. Extraordinary Item:
At June 30, 1996, the Company recorded an extraordinary loss of $310
relating to the early retirement of a $5,000 credit facility. The early
retirement took place as a result of requirements in the merger agreement with
FII (Note 3).
7. Earnings per Share:
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
changes the reporting requirements for earnings per share ("EPS") for publicly
<PAGE>
traded companies by replacing primary EPS with basic EPS and changing the
disclosures associated with this change. The Company is required to adopt this
standard for its December 31, 1997 year-end and is currently evaluating the
impact of this standard.
8. Consolidating Financial Statements:
The following unaudited statements separately show Shared Technologies
Fairchild Inc. and the subsidiaries of Shared Technologies Fairchild Inc. These
statements are provided to fulfill SEC reporting requirements. All of Shared
Technologies Fairchild Inc.'s subsidiaries are wholly owned and are full
guarantors on the 12 1/4% Senior Subordinated Notes due 2006.
Shared Technologies Fairchild Inc.
September 30, 1997
<TABLE>
<CAPTION>
Eliminating Consolidated
STFTI STFCC STFI Entries STFI
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents 150 28 178
Accounts receivable, net 33,766 389 34,155
Inventories 4,735 4,735
Other current assets 3,961 3,961
---------------------------------------------------------------------------------
Total current assets 42,612 0 417 0 43,029
---------------------------------------------------------------------------------
Equipment:
Property & Equipment 105,302 105,302
Accumulated depreciation (37,234) (37,234)
---------------------------------------------------------------------------------
New Property & Equip 68,068 0 0 0 68,068
---------------------------------------------------------------------------------
Other Assets:
Investment in affiliates 382 47,540 55,174 (102,342) 754
Intangible assets 7,627 250,448 258,075
Note Receivable 144,173 (144,173) -
Intercompany Receivable 143,322 228,866 (372,188) -
Deferred income taxes
Other 316 316
---------------------------------------------------------------------------------
Total Other Assets 144,020 428,206 305,622 (618,703) 259,145
---------------------------------------------------------------------------------
Total assets $ 254,700 $ 428,206 306,039 (618,703) 370,242
=================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of
long term debt and
capital lease obligations 16,083 16,083
Accounts payable 18,394 18,394
Accrued expenses 7,488 460 7,948
Accrued dividends 1,555 1,555
Advanced billings 7,079 7,079
---------------------------------------------------------------------------------
Total current liabilities 32,961 16,083 2,015 0 51,059
---------------------------------------------------------------------------------
Long-term debt, and current
lease obligations
less current portion 144,173 239,633 (144,173) 239,633
---------------------------------------------------------------------------------
Redeemable put warrant 887 887
---------------------------------------------------------------------------------
Convertible preferred stock 25,000 25,000
---------------------------------------------------------------------------------
Special preferred stock 15,061 15,061
---------------------------------------------------------------------------------
Stockholders' equity:
Preferred Stock, Series C - -
Preferred Stock, Series D 1 1
Common Stock 1 1 69 (2) 69
Additional paid-in capital 47,538 54,802 78,137 (102,340) 78,137
Accumulated deficit 30,027 (25,635) (43,997) (39,605)
Intercompany 143,322 228,866 (372,188) -
---------------------------------------------------------------------------------
Total stockholders' equity 77,566 172,490 263,076 (474,530) 38,602
---------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 254,700 428,206 306,039 (618,703) 370,242
=================================================================================
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
STFTI STFCC STFI Entries STFI
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE
Total revenue 131,980 9,799 141,779
Total cost of revenue 71,125 71,125
---------------------------------------------------------------------
Gross margin 60,855 - 9,799 - 70,654
Gross margin % 46.11% 100% 49.83%
---------------------------------------------------------------------
Selling, general & administrative
expenses 45,941 5,595 51,536
---------------------------------------------------------------------
Operating Income 14,914 - 4,204 - 19,118
Other income (expense):
Equity in loss of
affiliate (11,806) 11,596 (210)
interest expense, net (9,712) (12,192) 210 (21,694)
---------------------------------------------------------------------
(9,712) (12,192) (11,596) 11,596 (21,904)
---------------------------------------------------------------------
Income(loss)before income
taxes and extraordinary
item 5,202 (7,392) 11,596 (2,786) (12,192)
Income tax (214) (214)
---------------------------------------------------------------------
Income (loss) before
extraordinary item 4,988 (12,192) (7,392) 11,596 (3,000)
Extraordinary item, loss on early
retirement of debt - - - - -
---------------------------------------------------------------------
Net income (loss) 4,988 (12,192) (7,392) 11,596 (3,000)
Preferred stock dividends (3,689) (3,689)
Income (loss)applicable
to common stock 4,988 (12,192) (11,081) 11,596 (6,689)
---------------------------------------------------------------------
</TABLE>
9. Merger Agreement. On July 16, 1997, the Company, Tel-Save Holdings Inc.
("Tel-Save"), and TSHCo, Inc. ("Merger Sub"), a wholly owned subsidiary of
Tel-Save, entered into an Agreement and Plan of Merger (the "Merger Agreement").
Pursuant to the Merger Agreement the Company shall be merged (the "Merger") with
and into Merger Sub and each common stock holder of the Company shall receive
for each share of the Company's common stock $11.25 worth of shares of common
stock of Tel-Save based upon the average closing price of Tel-Save common stock
for the 15 trading days ending on the third business day prior to the closing of
the Merger. Holders of Series C and Series D preferred stock of the Company will
receive preferred stock in Tel-Save with substantially identical terms to the
series C and D preferred stock of the Company. The Merger is intended to be a
tax-free exchange of shares and is expected to qualify for pooling of interests
accounting treatment. The Merger is subject to approval of stockholders of both
companies and other customary closing conditions.
In connection with the Merger Agreement, the Company has entered into a
Stock Option Agreement with Tel-Save pursuant to which Tel-Save has the option
(the "Option") to acquire 3,000,000 shares of common stock of the Company upon
the termination of the Merger Agreement under certain circumstances (a "Purchase
Event"). The Option expires on the earlier of (a) consummation of the Merger,
(b) January 15, 1998 or (c) the termination of the Merger Agreement other than
<PAGE>
pursuant to a Purchase Event (as such term is defined in the Stock Option
Agreement). In addition, the Company has entered into a Voting Agreement with
Daniel Borislow, the Chairman and Chief Executive Officer of Tel-Save, pursuant
to which Mr. Borislow has agreed to vote his shares of Tel-Save common stock in
favor of the Merger and the Merger Agreement.
On October 30, 1997, the Tel-Save Holdings, Inc. and Shared Technologies
Fairchild Inc. Joint Proxy Statement was filed with the Securities and Exchange
Commission giving notice of each company's special meeting of stockholders to be
held on December 1, 1997.
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
AUDITOR'S REPORT AND FINANCIAL STATEMENTS
AT 31 DECEMBER 1996 AND 1995
<PAGE>
AUDITOR'S REPORT
To the Board of Directors
Nacanco Paketleme Sanayi ve
Ticaret A.S.
Manisa
1. We have audited the accompanying US dollar balance sheets of Nacanco
Paketleme Sanayi ve Ticaret A.S. ("the Company") at 31 December 1996
and 1995, and the related US dollar statements of income and of 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 audit.
2. We conducted our audit in accordance with the auditing standards
generally accepted in the United States of America. 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.
3. In our opinion, the US dollar financial statements referred to above
present fairly, in all material respects, the financial positions of
Nacanco Paketleme Sanayi ve Ticaret A.S. at 31 December 1996 and
1995 and the results of its operations and cash flows for the years then
ended in conformity with the accounting principles generally accepted in
the United States of America.
Basaran Serbest Muhasebeci
Mali Musavirlik Anonim Sirketi
a member of
Price Waterhouse
Z Uras, SMMM
Istanbul, 13 November 1997
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
BALANCE SHEETS
AT 31 DECEMBER
(Amounts expressed in thousands of US dollars)
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
ASSETS
<S> <C> <C>
Current assets:-
Cash and due from banks (Note 4) 16,632 14,103
Marketable securities 394 1,360
Trade receivables (Note 5) 7,585 10,050
Due from related companies (Note 16) - 12
Inventories (Note 6) 13,947 15,612
Other receivables and prepaid expenses 118 333
Deferred tax assets (Note 10) 247 395
--- ---
Total current assets 38,923 41,865
Long-term trade receivables 114 82
Property, plant and equipment - net (Note 7) 36,230 32,633
Other long-term assets (Note 8) 1,401 1,892
----- -----
Total assets 76,668 76,472
====== ======
</TABLE>
The accompanying notes form an integral part of these financial statements.
2
<PAGE>
NACANCO PAKETLEME SANAYY VE TYCARET A.S.
BALANCE SHEETS
AT 31 DECEMBER
(Amounts expressed in thousands of US dollars)
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:-
Trade payables (Note 9) 2,328 3,371
Due to related companies (Note 16) 2,029 4,081
Short-term borrowing (Note 12) - 2,000
Current portion of long-term borrowing (Note 12) 103 186
Income taxes payable (Note 10) 12,582 11,512
Accrued expenses and other payables (Note 11) 1,720 1,853
----- -----
Total current liabilities 18,762 23,003
Long-term borrowing (Note 12) 206 559
Reserve for employment termination benefits (Note 13) 360 289
Non-current deferred tax liability - net (Note 10) 513 1,107
--- -----
Total liabilities 19,841 24,958
------ ------
Shareholders' equity:-
Share capital (Notes 14 and 15) 18,267 18,267
Retained earnings 38,560 33,247
------ ------
Total shareholders' equity 56,827 51,514
------ ------
Total liabilities and shareholders' equity 76,668 76,472
====== ======
Commitments and contingencies (Note 21)
</TABLE>
The accompanying notes form an integral part of these financial statements.
3
<PAGE>
NACANCO PAKETLEME SANAYY VE TYCARET A.S.
STATEMENTS OF INCOME
FOR THE YEARS ENDED 31 DECEMBER 1996, 1995 AND 1994
(Amounts expressed in thousands of US dollars)
<TABLE>
<CAPTION>
1994
1996 1995 (UNAUDITED)
US$'000 US$'000 US$'000
<S> <C> <C> <C>
Net sales 105,069 97,160 72,516
Cost of sales (Note 17) (66,484) (65,728) (41,511)
------ ------ ------
Gross profit 38,585 31,432 31,005
General and administrative expenses (Note 18) (1,342) (1,117) 970
Selling and marketing expenses (356) (238) 225
Royalty expenses (Note 20) (1,603) (1,595) --
----- ------ ------
Operating profit 35,284 28,482 29,810
Financial income (expense) - net (Note 19) 1,453 2,675 (4,650)
Other expenses (399) (135) (944)
--- ----- ------
Income before taxes and translation loss 36,338 31,022 24,216
Provision for taxes (Note 10) (17,789) (15,248) (9,651)
Translation loss (430) (311) (4,776)
--- --- ------
Net income for the year 18,119 15,463 9,789
====== ====== ======
Weighted average number of shares
with TL1,000 face value each (Note 2) 166,500,000 166,500,000 166,500,000
=========== =========== ===========
Earning per share in US dollars (Note 2) 0.109 0.092 0.059
===== ===== =====
</TABLE>
The accompanying notes form an integral part of these financial statements.
4
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
STATEMENTS OF INCOME
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
(Amounts expressed in thousands of US dollars)
The accompanying notes form an integral part of these financial statements.
5
<PAGE>
NACANCO PAKETLEME SANAYY VE TYCARET A.S.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
Cash flows from operating activities:-
- ------------------------------------
<S> <C> <C>
Net income 18,119 15,463
Adjustments to reconcile net income to
net cash provided by operating activities:-
Depreciation for the year 2,413 2,125
Reserve for employment termination benefits 71 136
Loss/(gain) on sale of property, plant and equipment 25 (8)
Decrease/(increase) in trade receivables 2,465 (4,827)
Decrease in due from related parties 12 5
Decrease in other receivables and prepaid expenses 215 794
Decrease/(increase) in inventories 1,665 (1,119)
Decrease in long-term assets 491 1,224
(Decrease)/increase in trade payables (1,043) 427
(Decrease)/increase in due to related parties (2,052) 2,355
(Decrease)/increase in accrued expenses (133) 1,182
Change in taxes 616 2,872
------ -----
Total adjustments 4,745 5,166
------ -----
Net cash provided by operating activities 22,864 20,629
------ ------
Cash flows used in investing activities:-
- ---------------------------------------
Capital expenditure (6,407) (3,411)
Proceeds from sale of property, plant and equipment 372 114
Investment in subsidiary (24) (24)
------ -----
Net cash used in investing activities (6,059) (3,321)
------ -----
Cash flows from financing activities:-
- ------------------------------------
Dividends paid (12,806) (4,721)
Payments of bank borrowings (2,436) (2,400)
------ -----
Net cash used in financing activities (15,242) (7,121)
------ -----
Net increase in cash and cash equivalents 1,563 10,187
Cash and cash equivalents at the beginning of the year 15,463 5,276
------ -----
Cash and cash equivalents at the end of the year 17,026 15,463
====== ======
Supplemental disclosure of cash flow information:-
- ------------------------------------------------
Cash paid during the year for
Interest 234 502
Income taxes 18,355 7,612
</TABLE>
The accompanying notes form an integral part of these financial statements.
5
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS
Nacanco Paketleme Sanayi ve Ticaret A.S. ("the Company") was established on
10 April 1988 and is registered in Manisa, Turkey. Its primary activity is the
production and sale of customized steel and aluminum cans for soft drinks and
beer. The Company is 65% owned by Pechiney International S.A. (Note 15).
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS AND SIGNIFICANT
ACCOUNTING POLICIES
The Company maintains its books of account both in Turkish lira based on the
Turkish Commercial Code, tax legislation and Turkish Standard Chart of Accounts
and in US dollars in accordance with the accounting principles generally
accepted in the United States of America (US GAAP) (Note 3).
Dividends, when declared, are paid in Turkish lira. There are no exchange
restrictions with respect to the Turkish Lira.
The following significant accounting policies have been applied in the
preparation of these financial statements.
Cash and cash equivalents
- -------------------------
Cash and cash equivalents include cash, due from banks and marketable securities
with original maturities of less than three months.
Marketable securities
- ---------------------
Marketable securities consist of reverse repurchase agreements with a
predetermined sale price at fixed future dates comprise Turkish government bonds
and Treasury bills and are stated at cost plus accrued interest.
Inventories
- -----------
Inventories are stated at the lower of actual cost or net realizable value. Cost
is determined using the standard costing method for all inventories. At the year
end, price and value differences are allocated between inventories on hand and
cost of goods sold. The cost elements included in the inventory are materials,
labor and an appropriate amount of overhead (Note 6).
Property, plant and equipment and related depreciation
- ------------------------------------------------------
Property, plant and equipment are stated at cost (Note 7). The depreciation for
property, plant and equipment is provided for on a straight-line basis which
approximates the economical useful lives of such assets as follows:-
<TABLE>
<CAPTION>
%
-
<S> <C>
Buildings 2
Machinery and equipment 5.8
Furniture and fixtures 33
Motor vehicles 33
</TABLE>
6
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 2 - (CONTINUED)
Related companies
- -----------------
For the purpose of the financial statements, shareholders, the investee company
and the companies and parties identified by the Company as being controlled
by/affiliated with them are considered and referred to as related companies
(Note 16).
Income taxation
- ---------------
Income taxes are recorded using the liability method. Deferred tax assets and
liabilities are recorded with respect to differences between the basis of assets
and liabilities for tax purposes and financial reporting purposes. Valuation
allowances in respect of deferred tax assets are recorded when it is considered
more likely than not that such deferred tax assets will not be realized
(Note 10).
Forward contracts
- -----------------
Forward contracts represent US dollar hedges against firm raw material purchase
commitments denominated in Deutschemarks. Gains or losses on such forward
contracts are treated as elements of the cost of raw materials purchased.
Employment termination benefits
- -------------------------------
Employment termination benefits, as required by Turkish Labor Law, are
recognised in the financial statements as they are earned. The total provision
represents the vested benefit obligation assuming the termination of the
employment of all employees eligible for such termination benefits at the
balance sheet date (Note 13).
Revenue recognition
- -------------------
Revenue is recognised on the shipment of goods.
Disclosure about fair value of financial instruments
- ----------------------------------------------------
The fair values of certain financial instruments carried at cost, including cash
and due from banks, deposits with banks, marketable securities and short term
loans are considered to approximate their respective carrying values due to
their short-term nature.
The carrying value of trade receivables are estimated to be their fair values.
Balances denominated in foreign currencies are translated at year-end exchange
rates.
Fair value of derivatives foreign exchange instruments (Note 21) are based on
the values of the underlying currencies.
7
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 2 - (CONTINUED)
Earnings per share
- ------------------
Earnings per share disclosed in the accompanying statement of income are
determined by dividing net income by the average number of shares in existence
during the year concerned.
Use of estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 3 - FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the Turkish lira. Primarily all
revenues are denominated in Turkish lira generally with purchase prices tied to
the US dollar exchange rates. Significant portion of purchases are denominated
in other currencies, primarily the US dollar and the Deutschmark.
The Turkish lira has experienced significant inflation since prior to the
inception of the Company. Annual inflation in Turkey for the year ended 31
December 1996 was 84.9% (1995: 64.9%) based on the nationwide wholesale price
index (WPI) announced by the state institute of statistics of the Republic of
Turkey.
Because the economy of Turkey has been highly inflationary, the Company has
selected the US dollar as its reporting currency for international reporting
purposes. The translation of the financial statements has been done in
accordance with Financial Accounting Standards Board Statement Number 52
"Foreign Currency Translation" for entities in highly inflationary economies by
translating transactions denominated in other than the US dollar at the exchange
rate on the transaction date. Gains and losses on foreign currency translations
are recorded to the statement of income in the period that they occur. Assets
and liabilities denominated in other than the US dollar are translated into the
US dollar at period end exchange rates.
8
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 4 - CASH AND DUE FROM BANKS
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
<S> <C> <C>
Cash on hand 2 6
------ ------
Due from banks:-
Demand deposits - USD 174 5
- TL 136 28
- other currency 90 76
Time deposits - USD 14,680 13,693
- TL 27 295
- other currency 1,523 -
------ ------
16,632 14,103
====== ======
<CAPTION>
NOTE 5 - TRADE RECEIVABLES
1996 1995
US$'000 US$'000
<S> <C> <C>
Maksan Mesrubat ve Kutulama San. A.S. 1,975 2,077
Fruko Tamek Meyva Sulari San. A.S. 1,747 1,323
T Tuborg Bira ve Malt San. A.S. 797 1,601
Guney Biracilik ve Malt San. A.S. 738 1,055
Ege Biracilik ve Malt San. A.S. 611 1,429
Erciyes Biracilik ve Malt San.A.S. - 701
Post-dated cheques 219 -
Other 1,498 1,864
------ ------
7,585 10,050
====== ======
<CAPTION>
NOTE 6 - INVENTORIES
1996 1995
US$'000 US$'000
<S> <C> <C>
Raw materials 2,025 1,472
Finished goods 4,743 5,374
Ends 1,093 147
Goods-in-transit 5,003 7,336
Spare parts 1,083 1,283
------ ------
13,947 15,612
====== ======
</TABLE>
9
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1 January 1996 Additions Disposals Transfers 31 December 1996
US$'000 US$'000 US$'000 US$'000 US$'000
<S> <C> <C> <C> <C> <C>
Land 294 - - - 294
Buildings 4,751 - - - 4,751
Machinery and equipment 31,131 - (442) 8,200 38,889
Motor vehicles 239 - (12) 57 284
Furniture and fixtures 463 - - 14 477
--- ------- -------- -- ---
36,878 - (454) 8,271 44,695
Construction in progress 3,281 6,407 - (8,271) 1,417
----- ----- ------- ----- -----
40,159 6,407 (454) - 46,112
Less: Accumulated depreciation (7,526) (2,413) 57 - (9,882)
----- ----- -- -------- ------
Net book value 32,633 3,994 (397) - 36,230
====== ===== === ======== ======
</TABLE>
<TABLE>
<CAPTION>
1 January 1995 Additions Disposals Transfers 31 December 1995
US$'000 US$'000 US$'000 US$'000 US$'000
<S> <C> <C> <C> <C> <C>
Land 294 - - - 294
Buildings 4,751 - - - 4,751
Machinery and equipment 30,712 - (105) 524 31,131
Motor vehicles 247 25 (33) - 239
Furniture and fixtures 456 - (3) 10 463
--- ------- - -- ---
36,460 25 (141) 534 36,878
Construction in progress 429 3,386 - (534) 3,281
--- ----- ------- --- -----
36,889 3,411 (141) - 40,159
Less: Accumulated depreciation (5,436) (2,125) 35 - (7,526)
----- ----- -- -------- -----
Net book value 31,453 1,286 (106) - 32,633
====== ===== === ======== ======
</TABLE>
10
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 7 - (CONTINUED)
The mortgage on real estate, amounting to approximately US$821 (1995: US$1,482),
has been given to Manisa Chamber of Commerce.
In 1995, the Company gave a sequestration right by way of attachment to customs
authorities on its building and machinery as collateral against its import
commitments (Note 21). The limit of the global sequestration right on the
Company's building and machinery amounts to TL265.5 million (some US$2.5
million). The usage amounted to US$1,162,000 at 31 December 1996 (1995:
US$1,782,000).
NOTE 8- OTHER LONG-TERM ASSETS
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
<S> <C> <C>
Up-front payment for volume discount - net of amortization 1,294 1,642
Others 107 250
--- ---
1,401 1,892
===== =====
</TABLE>
The Company made a special sales agreement with Fruko-Tamek Meyva Sulari Sanayi
A.S. ("Fruko") in 1994. According to the agreement, the Company paid
US$2,000,000 to Fruko as a prepayment for volume discount on future sales of a
specified number of units. Effective from 1 January 1995, the prepaid discounts
have been subject to amortisation based on the quantity of goods sold to Fruko.
NOTE 9 - TRADE PAYABLES
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
<S> <C> <C>
Rasselstein AG 1,263 558
Le Fer Blanc S.A. - 993
Other 1,065 1,820
----- -----
2,328 3,371
===== =====
</TABLE>
Rasselstein AG is the Company's main coil supplier. Other payables comprise of
trade payables to miscellaneous foreign and domestic suppliers for purchases of
raw and auxiliary materials.
NOTE 10 - TAXATION
The corporation tax rate (including fund premiums) is 27.5%, whereas the minimum
effective rate on the total income of a company before exemptions, if any, is
22%. Investment incentive allowance, income from participations and income from
investment funds are not subject to corporate tax, however investment incentive
allowance is subject to a withholding tax of 16.5%.
Income after corporation tax (including fund premiums), adjusted for certain
exemptions and deductions, is subject to withholding tax at 11% for quoted
companies (companies with a minimum of 15% of their nominal share capital held
by the public) and 22% for other companies. Thus, the standard total effective
rate is 44% for the Company at 31 December 1996.
11
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 10 - (CONTINUED)
Interest income on Turkish government bonds and Treasury bills is subject to
corporation tax, but is partially exempt from the withholding tax. The partial
exemption is determined according to the portion of the interest income in total
income.
The total provison for taxes reflected in the accompanying financial statements
are different from the amounts computed by applying the above mentioned standard
effective rates as follows;
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
<S> <C> <C>
Provision for tax with effective tax rate of 44% 15,989 13,650
Effect of remeasurement in USD 1,800 1,598
----- -----
Provison for taxes in the accompanying
financial statements 17,789 15,248
====== ======
</TABLE>
Taxes payable calculated by the Company at 31 December 1996 and 1995 in Turkish
lira and converted into US dollars at the exchange rate prevailing at that date
are as follows:-
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
<S> <C> <C>
Statutory taxation 14,702 12,884
Prepaid taxes (2,120) (1,372)
----- -----
Statutory income taxes payable - net 12,582 11,512
====== ======
</TABLE>
Deferred taxes:-
- --------------
The breakdowns of cumulative timing differences and resulting deferred tax
assets/liabilities provided at 31 December 1996 and 1995 using the
prevailing/expected future tax rates, were as follows:-
<TABLE>
<CAPTION>
1996 1995
---------------------------------------- -----------------------------------------
Cumulative Cumulative
timing differences Deferred tax timing differences Deferred tax
(income)/ expense assets/(liabilities) (income)/ expense assets/(liabilities)
TL million US$'000 TL million US$'000
<S> <C> <C> <C> <C>
Current timing differences:-
- --------------------------
Accrual for export discounts to be given 41,891 171 20,825 154
Accrual for professional fees 9,783 40 2,975 22
Accrual for customer claims 6,672 27 6,248 46
Accrual for free cans to be given - - 18,743 139
Accrual for other expenses 1,906 9 4,633 34
--- --
247 395
=== ===
Non-current timing differences:-
- ------------------------------
Adjustment for depreciation of fixed assets
according to their useful lives (160,350) (656) (166,819) (1,234)
Reserve for employment termination benefits 35,074 143 17,171 127
--- ---
(513) (1,107)
=== =====
</TABLE>
12
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
13
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 10 - (CONTINUED)
Tax charges in the accompanying statements of income, which was calculated, on a
monthly basis throughout the year, in Turkish lira and converted into US dollars
at the monthly average rates, amounted to US$17,789,000 in total at 31 December
1996 (1995: US$15,248,000), including the effects of deferred tax credits of
US$633,000 (1995: US$1,762,000).
In Turkey, there is no procedure for the final agreement of tax assessments. Tax
returns are filed within four months of the end of the year to which they
relate. The tax authorities may, however, examine the accounting records and/or
revise assessments within five years.
NOTE 11 - ACCRUED EXPENSES AND OTHER PAYABLES
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
<S> <C> <C>
Value added tax payable 658 605
Payroll and withholdings 571 243
Other 491 1,005
--- -----
1,720 1,853
===== =====
</TABLE>
NOTE 12 - BORROWING
<TABLE>
<CAPTION>
1996 1995
Maturity Interest rate % US$'000 US$'000
-------- --------------- ------- -------
<S> <C> <C> <C> <C>
Short-term borrowing:-
Citibank N.A. Izmir 6 July 1996 Libor plus 1.25 - 2,000
=====
Long-term borrowing:-
Sinai Yatirim ve Kredi Bankasi A.O. 31 August 1999 25 309 745
--- ---
Less: Current portion of long-term
borrowing (103) (186)
--- ---
Long-term borrowing 206 559
=== ===
</TABLE>
At 31 December 1996, the letters of guarantee provided to Sinai Yatirim ve Kredi
Bankasi A.O. for the above borrowing amounted to US$402,000 (1995: US$969,000).
NOTE 13 - RESERVE FOR EMPLOYMENT TERMINATION BENEFITS
There are no agreements for pension commitments other then the legal requirement
as explained below.
Under Turkish labor law, as supplemented by union agreements, the Company is
required to pay termination benefits to each employee who has completed one year
of service and whose employment is terminated without due cause, who retires,
completes 25 years of service (20 years for women), is called up for military
service or dies. The amount payable consists of one month's salary, limited to
US$496 (1995: US$526) for each year of service. The Company has calculated the
reserve in accordance with these limits. At 31 December 1996, the Company's
total earned
14
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
benefits calculated on this basis were US$360,000 (1995: US$289,000). With
effect from 1 January 1997 the limit has been increased to US$718 for each year
of service.
15
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 14 - CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Share Retained
capital earnings Total
US$'000 US$'000 US$'000
<S> <C> <C> <C>
1 January 1995 18,267 20,721 38,988
Dividends paid - (2,937) (2,937)
Net income for the year - 15,463 15,463
------ ------ ------
31 December 1995 18,267 33,247 51,514
Dividends paid - (12,806) (12,806)
Net income for the year - 18,119 18,119
------ ------ ------
31 December 1996 18,267 38,560 56,827
====== ====== ======
</TABLE>
Retained earnings, as per the statutory financial statements, other than legal
reserves are available for distribution, subject to the legal reserve
requirements referred to below.
The legal reserves consist of first and second legal reserves, appropriated in
accordance with the Turkish Commercial Code (TCC). The TCC stipulates that the
first legal reserve is appropriated out of statutory profits at the rate of 5%
per annum, until the total reserve reaches 20% of the issued and fully paid-in
share capital. The second legal reserve is appropriated at the rate of 10% per
annum of all cash distributions in excess of 5% of the paid-in share capital.
Under the TCC, the legal reserves are not available for distribution unless they
exceed 50% of the paid-in share capital but may be used to offset losses in the
event that the general reserve is exhausted.
Dividend distribution is made by the Company in Turkish lira in accordance with
the Turkish Commercial Code (TCC) after deducting taxes and setting aside the
legal reserves as discussed above.
In the accompanying financial statements, legal reserves are not presented
separately, but included in 'Retained Earnings'. At 31 December 1996 and 1995,
the legal reserves per the statutory financial statements amounted to TL171,750
million (some US$1,598,000) and TL67,397 million(some US$1,133,000 at the
exchange rate prevailing at 31 December 1995), respectively. At 31 December 1996
and 1995, unappropriated profits other than legal reserves per the statutory
financial statements amounted to TL11,104 million (some US$103,000) and
TL216,262 million (some US$3,635,000 at the exchange rate prevailing at 31
December 1995), respectively.
16
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 15 - SHARE CAPITAL
The Company's authorized capital consists of 166,500,000 shares of TL1,000 each,
which are fully paid up. The Company's paid-in share capital and shareholding
structure in terms of Turkish lira at 31 December 1996 and 1995 were as
follows:-
<TABLE>
<CAPTION>
1996 1995
------------------------ -------------------------
TL million Share (%) TL million Share (%)
<S> <C> <C> <C> <C>
Pechiney International S.A. 108,225 65.00 108,219 65.00
RHI Holdings Incorporated 53,055 31.87 53,055 31.87
Jeffrey Steiner 5,220 3.13 5,220 3.13
National Can Puerto Rico - - 3 -
American National Can Company - - 3 -
------- ------ ------- ------
166,500 100.00 166,500 100.00
======= ====== ======= ======
Capital at historical US dollar value 18,267 18,267
(US$'000) ======= =======
<CAPTION>
NOTE 16 - RELATED COMPANY TRANSACTIONS
1996 1995
US$'000 US$'000
<S> <C> <C>
Due from related companies:-
- ------------------------
Nacanco China - 12
===== =====
Due to related companies:-
- ------------------------
Pechiney Rhenalu 1,417 103
Nacanco France S.A. 453 1,053
American National Can Company 106 2,579
Nacanco UK 53 61
Nacanco Italy - 280
Nacanco Germany - 5
----- -----
2,029 4,081
===== =====
Sales to related companies:-
- --------------------------
Pechiney Rhenalu - scrap aluminium 1,497 772
Nacanco Iberica - aluminium cans - 259
----- -----
1,497 1,031
===== =====
</TABLE>
17
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 16 - (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
Purchases from related companies:-
- --------------------------------
<S> <C> <C>
Pechiney Rhenalu - aluminium coils 12,329 3,080
Nacanco France S.A. - ends 11,114 16,676
Sitac - ends/cans 4,662 -
Nogara - ends/cans 857 -
American National Can Company - spare parts 633 709
Nacanco Ireland - ends/cans 241 190
Nacanco UK - ends - 627
Nacanco Italy - cans - 604
------ ------
29,836 21,886
====== ======
Property, plant and equipment purchases:-
- ---------------------------------------
American National Can Company 3,054 2,550
Nacanco UK 106 -
Nacanco Germany 3 64
Nacanco Spain 1 -
Nacanco Italy - 11
----- -----
3,164 2,625
===== =====
Other charges to the Company:-
- ----------------------------
Royalty expenses 1,250 1,250
===== =====
<CAPTION>
NOTE 17 - COST OF SALES
Cost of sales comprises the following:-
1996 1995
US$'000 US$'000
<S> <C> <C>
Direct material costs 52,353 52,183
Labor 7,601 4,028
Depreciation 2,602 2,267
Other overheads 3,928 7,250
------ ------
66,484 65,728
====== ======
</TABLE>
18
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 18 - GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
<S> <C> <C>
Salaries 652 434
Travel expenses 102 70
Communication expenses 93 109
Fringe benefits 70 97
Other 425 407
----- -----
1,342 1,117
===== =====
<CAPTION>
NOTE 19 - FINANCIAL INCOME
1996 1995
US$'000 US$'000
<S> <C> <C>
Financial income:-
- ----------------
Interest income on bank deposits 928 2,003
Interest income on marketable securities 303 798
Other 384 376
----- -----
1,615 3,177
Financial expenses:-
- ------------------
Interest expense on borrowing 162 502
----- -----
Financial income - net 1,453 2,675
===== =====
</TABLE>
NOTE 20 - ROYALTY
The Company had a technical assistance and trademark license agreement with
American National Can Company for a period of five years from 4 April 1988. The
agreement included a clause stating that the agreement would be automatically
renewed for the subsequent years unless 12 months' written notice was given by
either party. The parties drew up an amendment to the existing contract,
changing the annual royalty amount effective from 1 January 1994 to
US$1,250,000. The amendment was approved by the Foreign Investment Department of
Treasury and of the Republic of Turkey. Royalty is subject to a withholding tax
at the rate of 22% including fund premiums which the Company is also liable to
pay. At 31 December 1996, royalty expenses including withholding tax amounted to
US$1,603,000 (1995: US$1,595,000).
19
<PAGE>
NACANCO PAKETLEME SANAYI VE TICARET A.S.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 1996 AND 1995
NOTE 21 - COMMITMENTS AND CONTINGENCIES
The commitments and contingent liabilities of the Company are summarised as
follows:-
<TABLE>
<CAPTION>
1996 1995
US$'000 US$'000
<S> <C> <C>
Letters of guarantee 1,686 4,089
Sequestration rights (Note 7) 1,162 1,782
Mortgage given (Note 7) 1 1
----- -----
2,849 5,872
===== =====
</TABLE>
The Company enters into cross currency forward contracts to hedge its exposure
to fluctuations in foreign exchange rates for raw material purchases. The
forward contracts were made to purchase Deutschemark (DM) against the US dollar
to hedge material purchases in DM. The forward contracts, maturing between 15
January and 15 December, amounted to DM16,800,000 (1995: DM15,600,000) against
US$11,072,298 (1995: US$11,167,670) at 31 December 1996.
At maturities, a loss of some US$1,322,000 (1995: US$785,000) was incurred on
the forward contracts in 1997. In the accompanying financial statements, no
accrual was made for the portion of loss belonging to the year ended 31 December
1996 which was approximately US$128,000 (1995: US$280,000).
There was no correction for 1995 taxation during the preparation of tax returns
in 1996.
NOTE 22 - SUBSEQUENT EVENTS
- - The Company signed a new agreement with one of its major customers in April
1997 for the purchases of a specified amount of cans over an eight-year
period. The agreement requires a up-front payment of DM6 million to the
customer as an advance for the volume discount on the future sales.
- - At the Board of Directors' meeting held on 28 April 1997, the Company
decided to distribute a dividend amounting to TL1,698,307 million (some
US$13,019,000 translated at the date of declaration) which was distributed
subsequently.
-------------------------------------------
<PAGE>
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 8-K, into the Company's previously filed
Registration Statement File No. 333-37297.
ARTHUR ANDERSEN LLP
December 12, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-37297) of
the Fairchild Corporation of our report dated November 13, 1997 relating to the
financial statements of Nacanco Paketleme Sanayi Ve Ticaret A.S. which appears
in the Current Report on Form 8-K of the Fairchild Corporation dated December 8,
1997.
Babaran Serbest Muhasebeci
Mali Mupavirlik Anonim Pirketi
a member of Price Waterhouse
Istanbul, Turkey
December 8, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 8-K, into the previously filed Registration
Statement File No. 333-37297.
Rothstein, Kass & Company P.C.
Roseland, New Jersey
December 12, 1997
