SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
_ X _ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996
_ _ _ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _ _ _ TO _ _
Commission File Number 0-17366
SHARED TECHNOLOGIES FAIRCHILD INC.
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(Exact name of registrant as specified in its charter)
Delaware 87-0424558
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(State or other jurisdiction of Incorporation (I.R.S. Employer
or organization) Identification No.)
100 Great Meadow Road, Suite 104
Wethersfield, Connecticut 06109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 258-2400
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.004 par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_ _ X _ _ No _ _ _ _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's Common Stock held by
nonaffiliates as of March 21, 1997 was approximately $49,350,000, based on
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the average of the closing bid and asked prices as reported on such date in the
over-the-counter market.
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock, as of March 20, 1997.
15,704,399 shares of Common Stock
$.004 par value
The following document is hereby incorporated by reference into Part III of this
Form 10-K: The registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on April 30, 1997 to be filed with the Securities and
Exchange Commission in definitive form on or before April 15, 1997.
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PART I
Item 1.
Business
(a) General Development of Business - Shared Technologies Fairchild
Inc., which was incorporated as Shared Technologies Inc. on January 30, 1986,
its subsidiaries and affiliated partnerships (collectively, the "Company") are
engaged in providing shared telecommunications services ("STS") and
telecommunication systems ("Systems") to tenants of modern, multi-tenant office
buildings. As an STS provider, the Company generally obtains the exclusive right
from a building owner (the Owner/Developer") to install an on-site
communications system, called a private branch exchange ("PBX"), or an off-site
communications system, called Centrex, and to market telecommunications and
office automation services and equipment to tenants.
In May 1991, the Company acquired the stock of Boston
Telecommunications Company (BTC), a provider of STS in the Boston area. The
Company paid $1,097,000 consisting of acquisition cost less cash received of
$197,000, stock purchase warrants valued at $300,000 and a $600,000 promissory
note payable. In May 1989, the Company acquired interests in four entities
providing STS in the greater Chicago area from Shared Services, Inc. and I.S.E.,
Inc. for $180,000. Additionally, in February 1989, the Company purchased the
stock of Multi-Tenant Services, Inc. (MTS) a former division of BellSouth
Corporation for $4,048,000 of which $391,000 was paid in cash and in payment of
the balance the Company assumed existing lease obligations. MTS was a provider
of STS in nine metropolitan areas.
During 1992, the Company completed a restructuring due to its working
capital deficit and the maturity of its principal financing arrangements which
were due to the FDIC, as receiver for the Company's principal lender. The
restructuring included Shared Technologies Inc. and all of its subsidiaries. The
restructuring resulted in the Company recording a gain of $5,162,000 before
related expenses of $1,361,000 for consulting fees related to the restructuring
and income taxes of $45,000. As a result of the restructuring, approximately
$900,000 of vendor payables and $1,500,000 of capital lease obligations were
forgiven and $3,300,000 of vendor payables were converted to three year
non-interest bearing notes payable (see Note 7 of Notes to Consolidated
Financial Statements). Additionally, a settlement agreement was entered into
with the Federal Deposit Insurance Corporation ("FDIC") as receiver for the
Company's principal lender which resulted in the Company paying off its term
loan and revolving credit arrangements and recognizing a gain of approximately
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$2,700,000. In April 1994 the Company entered into a settlement agreement which
provides for the payment of $750,000 plus interest at 10% which resulted in an
accrued extraordinary loss of $150,000 in 1993.
In connection with the restructuring, the Company also raised equity
capital of approximately $5,780,000 from certain institutional investors, net of
expenses. A firm, one of whose principals was a director and stockholder of the
Company, at the time, served as Underwriter for the offering. The Company paid
this firm underwriting commissions and expenses totaling $446,750 for the
offering. No other parties to the restructuring were affiliated with the
Company. The Company also entered into agreements with Series A and B Preferred
Stockholders to convert their holdings, including $327,920 of the accrued
dividends related thereto, into Series C Preferred Stock. As part of this
conversion, $40,990 of the accrued dividends was forgiven by the stockholders.
In September 1992 the Company effected a one-for-four reverse stock
split of Common Stock and increased the par value of Common Stock from $.001 to
$.004 per share. All per share amounts contained herein have been retroactively
adjusted to reflect this split.
In December and October 1993 the Company commenced management and
subsequently completed the acquisition of certain assets and liabilities of Road
and Show South, Ltd. and Road and Show Cellular East, Inc., respectively. The
purchase price for South was $1,261,611 which represents $46,111 cash and an
obligation to issue 272,763 shares of the Company's common stock. The purchase
price for East was $750,245 which represents $209,245 cash and an obligation to
issue 121,403 shares of the Company's common stock.
In June 1994, Shared Technologies Inc., completed its acquisition of
the partnership interests of Access Telecommunication Group, L. P. ("Access")
for $9,000,000, subject to certain post closing adjustments. The $9,000,000
includes $4,000,000, paid at closing with the proceeds from the private
placement sale of approximately 1,062,000 shares of the Company's Common Stock,
and the issuance to the sellers of $400,000 shares of Preferred E stock, valued
at $1,500,000 and 700,000 shares of Preferred F stock valued at $3,500,000.
In April 1995, the Company's subsidiary, Shared Technologies Cellular,
Inc. ("STC"), completed an initial public offering. Prior to this date, STC was
approximately an 86% owned subsidiary of the Company. STC sold 950,000 shares of
common stock at $5.25 per share which generated net proceeds of approximately
$3,274,000 after
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underwriter's commissions and offering expenses. The net effect of the public
offering on the Company's consolidated financial statements was a gain of
approximately $1,375,000.
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 $2,135,000, of which $1,335,000 was paid in cash, and the
balance through the issuance of a $800,000 note, including interest at 8.59% per
annum, through June 30, 2005.
During December 1995, STC affected a private placement of approximately
$3,000,000 in Series A voting preferred stock to third parties. Although the
Company's ownership percentage of common stock of 59.3% did not change, the
voting rights assigned to the preferred stock reduced the Company's voting
interest in STC to 42.7%, resulting in the Company's loss of voting control of
STC. Accordingly, as a result of this stock issuance, the Company has accounted
for STC on an equity basis with all assets and liabilities of STC eliminated and
a non-current asset recorded to reflect the Company's equity investment in STC.
In March 1996, the Company's stockholders approved and the Company
consummated a merger with Fairchild Industries, Inc. ("FII") with and into the
Company. The Company simultaneously changed its name to Shared Technologies
Fairchild Inc. ("STFI"). In connection with the merger, the Company issued
6,000,000 shares of common stock, 250,000 shares of cumulative convertible
preferred stock with an initial $25,000,000 liquidation preference and 200,000
shares of special preferred stock with a $20,000,000 initial liquidation
preference. In addition the Company raised approximately $111,000,000, net of
expenses through the sale of 12 1/4% senior subordinated discount notes due
2006, and approximately $123,000,000 (of an available $145,000,000) in loans
from a credit facility with Credit Suisse, Citicorp USA, Inc. and NationsBank.
The funds were used primarily for the retirement two series of FII's preferred
stock and of certain liabilities assumed from FII in connection with the merger
and the retirement of the Company's existing credit facility.
In June 1996, the Company entered into a management agreement to serve
as manager of ICS Communications, Inc. ("ICS"), a Dallas-based provider of cable
and telephone services to over 600 residential properties nationwide. The
management agreement is on a month-to-month basis, and was still in effect as of
March 20, 1997. Additionally, the Company entered into a letter of intent with
ICS in June 1996, which contemplates that the Company will become a minority
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equity holder of ICS, while continuing in the capacity of manager of the ICS
business.
In March 1997, the Company entered into a similar short-term agreement
to manage the shared telecommunications services business of GE Capital-ResCom,
L.P. ("ResCom"), which provides services to tenants of approximately 1,000
residential complexes nationwide. Similar to the ICS agreement, it is
contemplated that the Company will obtain a minority equity position in the
ResCom business, while continuing to serve as manager.
In addition to the above transactions, the Company has continued to
pursue and achieve internal growth in its existing operations.
(b) Financial Information about Industry Segments - The Company is
engaged in one industry segment, the telecommunications industry, providing a
wide range of telecommunications and office automation services and equipment.
(c) Narrative Description of Business
(1) (i) Products and Services
Shared Telecommunication Services (STS)
The Company provides STS to commercial tenants in office buildings in
which the Company typically has installed a dedicated private branch exchange
(PBX) switch under exclusive agreement with the building owner, thereby
permitting the Company's customers to obtain all their telephone and
telecommunications needs from a single source and a single point of contact.
Under multi-year contracts that usually extend through the terms of the tenants'
leases, the Company offers its customers access to services provided by
regulated communications companies, such as local, discounted long distance,
international and "800" telephone services. The Company also provides telephone
switching equipment and telephones, as well as voice mail, telephone calling
cards, local area network wiring, voice and data cable installation. Other
services provided by the Company include audio conferencing, automatic call
distribution services and message center capability. In addition, the Company's
customers receive a convenient single monthly customized invoice for all
services provided by the Company.
Historically, the Company has marketed its services to small and
medium-sized (25 to 250 lines) business customers who are not otherwise able to
take advantage of economies of scale in procuring
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their telecommunications services. "One-stop shopping" is provided for these
customers' telecommunications needs without the substantial initial capital
costs that would be incurred with the purchase of the same telecommunications
system from multiple suppliers. The Company offers its customers (i) services
that would otherwise not be cost-effective for, or readily available to, such
customers due to the size of their business; (ii) reduced capital expenditures
and space requirements by allowing its customers to utilize the Company's
existing infrastructure and centrally located hardware; and (iii) comprehensive
maintenance programs. Additional services are available as the customer's
business and telecommunications needs grow. The Company also provides its
customers with the benefits of responsive on-site service.
STS providers, such as the Company, negotiate and enter into long-term
telecommunications agreements with owners and developers of office buildings.
Under these agreements, the STS provider typically has the right for a period of
up to ten or more years to install switching equipment, wiring and telephones
capable of serving all of the tenants in an office building. Typically, the
right to install a dedicated PBX switch is exclusive. Such agreements provide
for the owners to assist the STS provider by identifying potential tenant
customers. Generally, an STS provider leases and pays rent to the owner for
switch room space in the building and, under certain circumstances, may agree to
provide an incentive to the owner. By contracting with an STS provider, an owner
will have the benefit of a state-of-the-art telecommunications infrastructure in
its building and be able to offer its tenants the ability to access
sophisticated telecommunications services.
Telecommunications Systems (Systems)
The Company's telecommunications systems business provides end users
with a wide variety of telecommunications products and services and offers its
customers the flexibility to expand or enhance their telecommunications systems
as their businesses change. Through its telecommunications systems business, the
Company is also able to provide customized telecommunications solutions to those
of its customers choosing to purchase, rather than lease, equipment. Under the
trade name Telecom 2000(, the Company sells directly to end users a wide
selection of telecommunications equipment produced by leading manufacturers,
including Northern Telecom, Inc., AT&T, NEC, Octel Communications Corporation,
Centigram Communications Corporation and Active Voice Corporation. Through a
staff of field and other engineers, the Company designs and installs all of its
customers' telecommunications infrastructure needs in a complete turn-key
telecommunications system including post-installation maintenance.
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Post-installation maintenance consists of complete maintenance of the customer's
entire telecommunications system, including warranty and post-warranty
maintenance contracts, upgrades and adds, moves and changes. Telecommunications
systems installations include PBX and key telephone systems, voice mail,
automated call distribution systems and entire call centers. The Company also
provides a variety of long distance services including basic services, "800"
services, calling cards, international calling and various other network
services. The Company provides telecommunications systems to commercial
customers and government agencies with systems ranging in size from 15 to
several thousand lines.
Customer service options range from nine-to-five coverage to 24 hours a
day, 365-days a year maintenance contracts. The Company also contracts with
customers to staff their facilities with dedicated service personnel under long
term contracts. As of December 31, 1996, the Company provided telecommunications
systems nationwide, including maintenance and other services covering in excess
of 500,000 customer lines.
Cellular
The Company owns an equity investment in Shared Technologies Cellular,
Inc. ("STC") which is a national cellular services provider, offering rental or
prepaid services to over 640 of the approximately 950 Cellular Geographical
Service Areas ("CGSA") within the United States, and cellular activation
services in over 690 CGSA's. As a reseller or agent for cellular and PCS
carriers, STC can offer cellular service to approximately 94 percent of the US
population.
STS Buildings
As of December 31, 1996, the Company was providing STS in 28
metropolitan areas. The Company is able to realize significant operating
economies by sharing management, administrative, sales and technical staff
across a number of locations. The following table sets forth as of December 31,
1996, on a city-by-city basis, the Net Leaseable Square Feet and the Potential
Lines of Service in each location where the Company provides STS to tenants.
Total
Leaseable Sq. Potential Total Lines
Location Feet Lines in Service
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Atlanta 13,607,723 45,359 11,250
Austin 400,000 1,333 3,077
Baltimore 479,000 1,597 133
Birmingham 1,435,000 4,783 1,144
Boston 4,596,000 15,320 3,060
Chicago 18,856,319 62,854 12,676
Dallas 19,390,123 64,634 13,483
Ft. Lauderdale 561,000 1,870 898
Hartford 1,855,000 6,183 2,475
Houston 11,419,555 37,065 3,130
Indianapolis 6,724,439 22,415 8,642
Los Angeles 7,845,108 26,150 4,195
Miami 2,583,216 8,611 2,316
Milwaukee 394,000 1,313 166
Minneapolis 5,918,230 19,727 6,428
Myrtle Beach 125,820 419 20
New Jersey 625,000 2,083 856
New Orleans 4,697,500 15,658 7,195
Orlando 435,000 1,450 801
Philadelphia 9,427,600 31,425 5,658
Phoenix 2,837,400 9,458 3,015
Pittsburgh 7,346,272 24,488 2,205
Salt Lake City 1,010,000 3,367 864
Seattle 4,848,721 16,162 3,518
Stamford 1,937,200 6,457 627
Tampa 2,869,636 9,565 3,787
Nashville 1,352,600 4,509 1,767
Washington D.C. 11,701,100 39,004 8,241
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Totals 144,978,562 483,259 111,627
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Penetration Rate* 26%
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*Penetration rate assuming a 10% National Vacancy rate. Lines in
Service/(Potential Lines x 90%).
Owner/Developer Agreements
In most buildings where it provides STS, the Company or its assignor
has entered into a contractual agreement ("Owner/Developer Agreement") with the
building Owner/Developer. Subject to specific provisions contained in certain
Owner/Developer Agreements, the Owner/Developer Agreements generally grant the
Company the exclusive right to provide STS in the building and the
Owner/Developer is precluded from entering into a "materially similar
arrangement" with a third party. In addition, the Company is granted a right of
first refusal in the building for the offering of additional STS, such as
telephone answering services, word and data processing, telex, copier
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services and certain other STS. The term of the agreement is generally for ten
years with renewal options.
The Owner/Developer Agreements generally provide for the payment of
royalties to the Owner/Developer which may be based on a percentage of gross
revenues or on a percentage of rental, sale and service income or net
long-distance revenues. Such royalty payments may commence at the initial
service date, at some later date, typically 18 to 24 months after the Company
commences to provide STS to the building, or at the time the Company achieves a
certain level of market penetration in the building.
The Company is responsible for the costs and expenses incurred in
operating and maintaining the STS equipment in the building and must obtain the
Owner/Developer's approval to make any modification in the STS equipment which
would affect the building structure. The agreement is assignable by the
Owner/Developer upon the sale of the building. Certain Owner/Developers also
have the right to purchase the Company's STS equipment in the building at a
nominal or fair market price if the agreement is terminated.
Each Owner/Developer Agreement either contains a lease, or references a
separately executed lease, for the space necessary for the Company's on-site
personnel and equipment.
Tenant Contracts
The Company is a party to a master shared tenant services agreement
("Tenant Contract") with substantially all of its STS customers. The Tenant
Contract contains terms and conditions governing the provision of STS.
Subsequent to signing a Tenant Contract, tenants submit individual customer
orders for specific equipment rentals and STS. In addition to the typical Tenant
Contracts for STS, the Company has agreements with several tenants who have
their own PBX to maintain the system and manage the tenant's telephone call
billing system, and the Company receives a monthly fee for its services.
The Company generally signs contracts for a period coterminous with the
customer's lease in the building. The Company feels it has staggered the
contracts such that there is no time when a material amount of contracts come
due at the same time. Additionally, the Company does not have any individual
customer contracts which are material.
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(iii) Sales and Marketing
The Company markets its services and products through a direct sales
force which is segmented into distinct geographic markets. Typically, under
agreements with the Company, the owner identifies prospective and existing
tenants to the Company's local sales force. After establishing contact with the
potential customer and obtaining an understanding of the prospective customer's
telecommunications needs, the Company's local sales representative arranges for
a presentation of the Company's products and services and the cost of potential
solutions meeting the customers requirements. After securing a sale, members of
the Company's sales force follow-up with customers by offering them new
value-added services. Management believes that direct sales activities are more
effective than advertising for securing and maintaining the businesses of small
to medium-sized services customers. A significant percentage of new systems
sales result from upgrading, enlarging or replacing systems currently used by
the Company's existing customers. As of December 31, 1996, the Company had
approximately 66 employees in its direct sales force.
Customer Service
The Company strives to provide superior customer service and believes
that personal contact with potential and existing customers is a significant
factor in securing and retaining customers. Each new customer account is
processed locally at the site location that was responsible for obtaining the
account. The Company's customer service staff is dedicated to providing new
customers with a smooth transition to its services and systems. All customers'
calls for repair, moves, adds, and changes are handled and processed at the
local site. Management believes that this personal and local handling of the
customer service function is very important to the customers, creating strong
alliances for the Company and encouraging repeat business. The Company's local
offices retain total responsibility for all aspects of their respective
customers services (including equipment, local service, and long distance). As a
result, the customer only needs to place one call to inquire about any aspect of
its service. The management of each local office site is evaluated quarterly on
the quality of its customer service and the Company's field service
representatives conduct periodic audits of all its customers to assess their
satisfaction with all aspects of service. The Company's service contracts with
STS customers are typically for a duration of five years (or expire upon
termination of a customer's building lease). Service contracts with the
Company's telecommunications systems customer are typically for one to three
year duration and generally for automatic extensions of such term.
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Management Information Systems (MIS)
Providing accurate and customized billing for customers is an integral
component of the Company's business. The Company's MIS systems process millions
of call records a month for the telecommunications services business and combine
this information with other recurring and nonrecurring customer charges to
produce monthly invoices. Tenants are quoted a monthly charge for leased
equipment which includes a rental fee for equipment, a charge for access to the
PBX owned by the Company and installed in the buildings where such tenants are
located, and a local access charge for access based on the cost of the trunk
lines which connect the building to the central office of the local telephone
company. In addition, tenants are charged for special services and usage,
including "800" service, dedicated circuits, directory listings, local message
units, directory assistance, calling card services, third party billing calls,
and long-distance at a discount from the standard rates charged by long-distance
providers. The Company believes that its detailed billing reports provide a
unique service to small and medium-sized customers allowing customers to
understand and control their telecommunications costs.
The MIS systems also track telecommunications installations and
customer requests from initial request to final collection. Each customer
request is entered into the job order system to monitor the progress of the work
as well as to keep track of the time and material requisitioned for the job.
The Company's MIS systems can be expanded with minimal incremental cost
to accommodate substantially more volume. Such systems feature backup processors
and short-time response maintenance agreements and are designed to respond to
customer needs as well as support the Company's operations.
Canadian Operations
In June 1996, STF Canada, Inc., a wholly-owned subsidiary of the
Company, entered into an agreement with RH Telecom, ICN. ("RHTI"), an affiliate
of O&Y Properties, Inc., a major property management company that currently
manages in excess of 12 million square feet of mixed use properties across
Canada, and with Rogers Cablesystems Limited ("Rogers"), a Canadian
telecommunications company, pursuant to which the three parties formed Shared
Technologies of Canada Inc. ("STOC"), with each party holding a one-third
interest in STOC. STOC provides shared telecommunications services in Canada,
combining the Company's telecommunications services expertise with RHTI's
extensive property
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management resources and expertise and Rogers' resources as a Canadian
telecommunications service provider.
The Company believes it is well positioned to continue to grow through
the continued implementation of its business strategy, the key elements of which
are:
- Increased Penetration of Existing Buildings. The Company intends to
increase its focus on generating additional revenue from the buildings in which
it now provides shared telecommunications services. Although the Company may
continue to make selective acquisitions of STS providers in the future, its
principal focus will be on marketing services within its existing buildings,
both to new customers and to existing customers.
- Significant Additions of Buildings. The Company plans to continue to
take advantage of its improved market position to aggressively pursue
opportunities to add buildings to its portfolio, in particular, through
multi-building contracts with large commercial property owners.
- Expanded Service Offerings. The Company intends to capitalize on the
growing demand for new telecommunications and information technology by
expanding its services to include high speed access to the Internet, video
teleconferencing, wireless services and the delivery of cable programming. The
Company's existing infrastructure allows for low-cost delivery of these services
at minimal incremental expense to the Company. The Company believes that many of
these services would otherwise not be readily available or affordable to its
customers.
- Cross Marketing of Services and Systems. The Company intends to
leverage its Systems business by marketing telecommunications services to its
existing Systems customer base. In addition, the Company intends increasingly to
market Systems to its STS customers relocating from existing rental space who
continue to require customized telecommunications solutions, including the
purchase or lease of equipment or the provision of long distance and other
network services offered by the Company.
(iv) Patents, Trademarks, Licenses, Franchises, Concessions
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See Item 1(d) (i) - "Owner/Developer Agreements" herein. Additionally,
Shared Technologies Fairchild and Shared Technologies Cellular are registered
trademark.
(v) Seasonality
While the Company's business is not generally seasonal, the Company has
experienced, over the last several years, a reduction in local and long distance
revenues in the month of December which is believed to be associated with the
holiday season.
(vi) Working Capital
To date, the Company has funded its working capital shortfall through
borrowings and sales of its securities. See Item 1(a) - "General Development of
Business"; "Management's Discussion and Analysis of Results of Operations and
Financial Condition". The Company requires working to sustain its growth and
maintain its revenue base.
In March 1996, the Company's stockholders approved and the
Company consummated a merger with Fairchild Industries, Inc. ("FII") with and
into the Company. The Company simultaneously changed its name to Shared
Technologies Fairchild Inc. ("STFI"). In connection with the merger, the Company
issued 6,000,000 shares of common stock, 250,000 shares of cumulative
convertible preferred stock with an initial $25,000,000 liquidation preference
and 200,000 shares of special preferred stock with a $20,000,000 initial
liquidation preference. In addition the Company raised approximately
$111,000,000 net of expenses through the sale of 12 1/4% senior subordinated
discount notes due 2006, and approximately $123,000,000 (of an available
$145,000,000) in loans from a credit facility with Credit Suisse, Citicorp USA,
Inc. and NationsBank. The funds were used primarily for the retirement two
series of FII's preferred stock and of certain liabilities assumed from FII in
connection with the merger and the retirement of the Company's existing credit
facility.
As of March 15, 1997, the Company has approximately $20 million
available under the credit facility to fund working capital requirements. The
credit facility contains, among other things, affirmative and negative covenants
which are usual and customary with respect to senior secured indebtedness.
The Company expects to satisfy its future cash requirements through
cash from operations and borrowings under the Credit Facility.
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The Company expects that its working capital requirements will remain manageable
primarily due to the minimal capital requirements of the Systems business and,
with respect to the Services business, its ability to negotiate favorable
payment terms with its vendors and to bill its customers in advance for many
recurring services.
(vii) Dependence on a Single Customer
No single customer or building accounts for 10% or more of the
Company's revenues. The Company's business is not dependent upon a single or a
few customers.
(viii) Backlog
At any given period the Company maintains new contracts signed but not
yet installed due to the term of the contract which further adds to this
backlog. The number of additional lines not yet installed related to new
contracts cannot be determined due to changes that occur through the
installation date. Therefore, backlog information cannot be quantified.
(ix) Government Regulation
The Company is subject to specific regulations in several states.
Within various states, such regulations may include limitations on the number of
lines or PBX switches per system, limitations of shared telecommunications
systems to single buildings or building complexes, requirements that such
building complexes be under common ownership or common ownership, management and
control and the imposition of local exchange access rates that may be higher
than those for similar single-user PBX systems.
Rates for telecommunications services generally are governed by tariffs
filed by certified carriers with various regulatory agencies. Future changes in
the regulatory structure under which such tariffs are filed, or material changes
in the tariffs themselves, could have a material adverse effect on the Company's
business.
The Company's Systems business is generally exempt from governmental
regulation from the standpoint of marketing and sales. However, various
regulatory bodies, including the Federal Communications Commission, require that
manufacturers of equipment obtain certain certifications.
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On February 8, 1996, the Telecommunications Act of 1996
("Telecommunications Act") was enacted as Federal law. The Telecommunications
Act made certain changes in the regulatory environment in which the Company
operates by: (i) pre-empting any State or local law or regulation that
prohibits, or has the effect of prohibiting, the ability of any entity to
provide any interstate or intrastate telecommunications service which may result
in the removal of regulatory barriers that have heretofore discouraged the
Company from expanding its business in certain States; (ii) prohibiting local
exchange telephone companies from prohibiting, or imposing unreasonable or
discriminatory conditions on, the resale of those companies' telecommunications
services which may result in the removal or relaxation of some of the
restrictions on shared telecommunications systems referred to above, and reduces
the risk that telephone companies could modify their tariffs to improve more
restrictive terms and conditions on such Systems; (iii) authorizing the FCC to
forebear from applying any regulation to a telecommunications carrier or class
of telecommunications carriers under certain conditions, which may result in a
relaxation of the FCC's regulatory supervision of over the Company's operations;
and (iv) authorizing the Regional Bell Operating Companies upon satisfying
certain conditions, to apply for, and the FCC to grant, authority to offer
long-distance services to customers within the States in which they offer local
telephone service. This will result in more intense competition within the
markets in which the Company operates.
The Telecommunications Act has affected government regulation of
telecommunications, both at the state and federal level. Although the long term
goal of the legislation is deregulatory, federal and state government regulatory
agencies have created new rules to govern competition in the local exchange
market that, in the short term, could subject the Company's shared
telecommunications services to greater regulation than in the past.
(x) Competition
The Company's STS business competes with regulated major carriers that
may provide a portion of the services that the Company provides, but are
typically not structured to provide all of a customer's telecommunications
requirements. The Company also competes with small independent operators serving
regional or local markets and with other STS providers, including the Realcom
unit of MFS WorldCom, Inc. ("MFS"). The Company also competes with equipment
manufacturers and distributors and long distance companies for the provision of
telephone and other telecommunications equipment and services to tenants in
buildings under franchise with the Company. Within the past five years,
competition has expanded to include a group of
-16-
companies known as alternate access providers, including MFS, TCG, Inc. and
others. The major competitive factors in the STS market are technology, price
and service. The Company's principal competitive advantages are its ability to
provide "one-stop shopping" for telecommunications services and site-based
technical service.
The principal competitors of the Company's Systems business and, once a
building franchise has been obtained, the Company's STS business, include the
direct sales channels of manufacturers such as Lucent Technologies, Northern
Telecom, Inc., NEC, other distributors of equipment manufactured by such
companies, as well as the Regional Bell Operating Companies ("RBOCs").
On February 8, 1996, the Telecommunications Act was enacted as Federal
Law. The Telecommunications Act makes certain changes in the regulatory
environment in which the Company operates by: (i) pre-empting any State or local
law or regulation that prohibits, or has the effect of prohibiting, the ability
of any entity to provide any interstate or intrastate telecommunications
services which may result in the removal of regulatory barriers that have
heretofore discouraged the Company from expanding its business in certain
States; (ii) prohibiting local exchange telephone companies from prohibiting, or
imposing unreasonable or discriminatory conditions on, the resale of those
companies' telecommunications services which may result in the removal or
relaxation of some of the restriction on shared telecommunications Systems
referred to in the preceding paragraph, and reduces the risk that telephone
companies could modify their tariffs to impose more restrictive terms and
conditions on such Systems; (iii) authorizing the FCC to forebear from applying
any regulation to a telecommunications carrier or class of telecommunications
carriers under certain conditions, which may result in a relaxation of the FCC's
regulatory oversight over the Company's operations; (iv) authorizing the RBOCs,
upon satisfying certain conditions, to apply for, and the FCC to grant,
authority to offer long-distance services to customers within the States in
which they offer local telephone service. This may result in more intense
competition within the markets in which the Company operates. Other provisions
of the Telecommunications Act direct the FCC to conduct rulemaking proceedings
on a variety of subjects, including interconnections, resale, and universal
service, which may affect the Company, but it is not possible to predict the
outcome of any such proceedings.
The Telecommunication Act may result in greater competition for the
Company. The RBOCs are free immediately to seek authority to offer long distance
service outside their current operating areas. They will be free to offer long
distance services to customers within their current operating regions after
satisfying the law's
-17-
requirements for opening their local markets to competition. GTE and other local
exchange carriers are free immediately to seek authority to offer long distance
services both within and outside their regions.
Long distance carriers also are permitted to seek authority to offer
local exchange services. The major carriers (AT&T, MCI and Sprint) will be
subject, on an interim basis, to restrictions on joint marketing of local and
long distance services.
(xiii) Employees
As of March 15, 1997, the Company had 787 employees, of whom 66 were
covered by two collective bargaining agreements. One agreement expires in 1998
and the other expires in 1999. Management believes its relations with their
employees are satisfactory.
Item 2.
Property
As of December 31, 1996, the Company leased real property totaling
approximately 340,000 square feet. The Company does not own any real property.
Each of the leased properties is, in management's opinion, generally well
maintained, is suitable to support the Company's business and is adequate for
the Company's present needs.
The Company leases from RHI Holdings, Inc., the former parent of FII,
on an arm's-length basis, office space at Washington-Dulles International
Airport.
Item 3.
Legal Proceedings
As a result of the merger with FII, the Company became liable for all
liabilities of FII. The Federal Corporate Administrative Contracting Officer
(the "AOC"), based upon the advice of the United States Defense Contract Audit
Agency, has made a determination that FII did not comply with Federal
Acquisition Regulations and Cost Accounting Standards in accounting for the (i)
the 1985 reversion to FII of approximately $50.0 million in excess pension funds
in connection with the termination of defined benefit pension plans, and (ii)
pension costs upon the closing of segments of FII's business.
-18-
The ACO has directed FII to prepare a cost impact proposal relating to such plan
terminations and segment closings and, following receipt of such cost impact
proposal, may seek adjustments to contract prices. The ACO alleges that
substantial amounts will be due if such adjustments are made. In connection with
the merger FII stated that it believes it has properly accounted for the asset
reversions in accordance with applicable accounting standards. FII has had
discussions with the government to attempt to resolve these pension accounting
issues.
The aforementioned government claim (the "Contingent Pension
Liability") and other liabilities are covered by an indemnification agreement
(the "Indemnification Agreement") entered into between the Company and RHI
Holdings, Inc. ("RHI"), the former parent of FII. Pursuant to the
Indemnification Agreement, RHI agreed to indemnify the Company for various
liabilities, including the Contingent Pension Liability. However, since RHI is
primarily a holding company, any claim by the Company pursuant to said
Indemnification Agreement will be effectively subordinated to the creditors of
RHI's subsidiaries. There is no expiration date with respect to the
Indemnification Agreement. RHI's indemnification obligations under the
Indemnification Agreement are secured by all of the shares of Cumulative
Convertible Preferred Stock (other than an amount equal to $1,500,000 in initial
liquidation preference) and the Special Preferred Stock issued to RHI in the
merger.
In view of the Indemnification Agreement and RHI's current financial
condition, it is the opinion of the Company's management that the Contingent
Pension Liability is unlikely to have a material adverse effect on the Company's
financial condition, future results of operations or cash flows.
In December 1995, Gerard Klauer Mattison & Co., LLC ("GKM"), filed suit
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 GKM as a result of GKM initiating
negotiations between the Company and FII and negotiating the Merger. GKM has
alleged that the Company entered into a fee agreement, whereby the Company
agreed to pay to GKM 0.75% of the value of the transaction as a fee. FII has
denied that FII at any time engaged GKM for this transaction. The Company filed
an Answer in January, 1996, denying that any commission is owed. This litigation
is in the discovery process. Management believes, however, that an adverse
outcome, if any, would not have a material adverse effect on the Company's
consolidated financial position.
-19-
The Company is a party to other lawsuits and administrative proceedings
that arose in the ordinary course of its business. Although the final results in
all suits and proceedings cannot be predicted, the Company presently believes
that the ultimate resolution of all such other lawsuits and proceedings, after
taking into account the liabilities accrued with respect to such matters, will
not have a material adverse effect on the Company's financial condition, results
of operations or cash flows. See Note 14 to the Company's Consolidated Financial
Statements.
The Company has no other material litigation or unasserted claims, the
outcome of which would have a material impact on the Company's financial
condition, results of operations or cash flows.
Item 4.
Submission of Matters to a Vote of Security Holders None.
PART II
Item 5.
Market for Registrant's Common Stock and Related Stockholder Matters
The Company's shares of Common Stock (trading symbol: STCH) have been
quoted and traded in the over-the-counter market since December 13, 1988.
Over-the-counter market quotations reflect interdealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. During 1996 and 1995, the quarterly high and low closing prices
were as follows:
1996 1995
---- ----
High Low High Low
First Quarter $6 3/8 3 5/8 $5 1/4 $3 1/2
Second Quarter 9 5/8 4 1/8 5 3/4 4
Third Quarter 8 1/10 5 1/4 5 1/4 3 7/8
Fourth Quarter 9 7/8 6 11/16 4 3/4 3 1/8
The number of beneficial holders of the Company's Common Stock as of March 6,
1997 was 1,448.
Item 6.
Selected Financial Data
-20-
The following table sets forth the selected financial data of the Company for
each of the last five years. Financial statements for 1993 and 1992 are not
presented in this filing. Such selected financial data were derived from audited
consolidated financial statements not included herein. The selected financial
data of the Company should be read in conjunction with the Consolidated
Financial Statements and related notes appearing elsewhere in this Form 10-K. In
September 1992 the Company effected a one-for-four reverse stock split of common
stock and increased the par value of common stock from $.001 to $.004 per share.
Weighted average common shares outstanding and per share information have been
retroactively adjusted to reflect this split. All amounts, except per share
amounts, are in thousands.
Statement of Operations Data: 1996 1995 1994 1993 1992
- ---------------------------- ---- ---- ---- ------ ----
Revenues $157,241 $47,086 $45,367 $25,426 $24,077
Gross margin 74,669 18,214 19,195 10,912 9,254
Selling, general and
administrative expenses 55,329 16,188 16,909 9,797 9,959
Business Development Expenses - - - 305 -
Operating income (loss) 19,340 2,026 2,286 810 (705)
Interest expense, net (22,888) (667) (359) (438) (290)
Equity in loss of affiliate (3,927) (1,752) - - -
Minority interest in net
income of subsidiaries - - (128) (82) (37)
Gain on sale of subsidiary stock - 1,375 - - -
Income taxes (783) (45) 487 - -
Extraordinary Items:
(Loss) gain on restructuring - - - (150) 3,756
Loss on early retirement (311) - - - -
of debt
Net income (loss) (8,569) 927 2,286 140 2,724
Net income (loss) per
common share applicable
to common stockholders (.79) .06 .27 (.04) .59
Weighted average common
shares outstanding 13,787 8,482 6,792 5,132 4,063
-21-
Balance Sheet Data:
Working capital deficit ($8,765) ($3,393) ($3,691) ($ 3,874) ($4,506)
Total assets 369,566 42,863 37,925 20,601 18,752
Notes payable, convertible
promissory notes payable,
other long-term debt (incl.
current portion) and
redeemable preferred stock 291,004 6,998 4,727 3,719 4,745
Stockholders' equity (deficit) 43,209 22,844 20,881 9,302 6,034
Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition
The following Management's discussion and analysis of results of operations and
financial condition include forward-looking statements with respect to the
Company's future financial performance. These forward-looking statements are
subject to various risks and uncertainties which could cause actual results to
differ materially from historical results or those currently anticipated.
Overview and Recent Developments
STFI is a national provider of shared telecommunications services ("STS") and
telecommunications systems ("Systems") to tenants of multi-tenant commercial
office buildings. One of STFI's affiliates, Shared Technologies Cellular Inc.
("STC"), is a provider of short-term portable cellular telephone rentals and
prepaid, or debit, cellular telephone service.
In March 1996, STFI's stockholders approved, and STFI completed, a merger with
Fairchild Industries, Inc.("FII") following a reorganization in which FII
transferred all non-communications assets to its parent, RHI Holding, Inc. As a
result of the merger, STFI is the largest provider of STS in the United States.
On a pro forma basis, STFI generated approximately $185 million in revenues and
$24 million in operating income for the year ended December 31, 1996.
-22-
Results of Operations
The following table sets forth various components of STFI's statements of
operations expressed as a percentage of revenues:
Year Ended
December 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
Revenues 100.00% 100.00% 100.00%
Cost of revenues 52.51% 61.32% 57.69%
-------------- -------------- --------------
Gross Margin 47.49% 38.68% 42.31%
Selling, General and Administrative Expenses
35.19% 34.38% 37.27%
-------------- -------------- --------------
Operating Income 12.30% 4.30% 5.04%
Interest expense (net) -14.55% -1.44% -0.79%
Minority Interest 0.00% 0.00% -0.28%
Gain on sale of subsidiary stock
0.00% 2.92% 0.00%
Equity in loss of subsidiaries -2.50% -3.72% 0.00%
Income Tax Benefit (Expense) -0.50% -0.10% 1.07%
Extraordinary Item -0.20% 0.00% 0.00%
-------------- -------------- --------------
Net (loss) Income -5.45% 1.96% 5.04%
============== ============== ==============
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Revenues
STFI's revenues for the year ended December 31, 1996 increased by $110.2
million, or 233.8%, to $157.2 million compared to $47.1 million for the year
ended December 31, 1995. This increase was principally due to the March 13, 1996
merger with Fairchild Industries, Inc. ("FII"). Shared Telecommunications
Services ("STS") revenue increased $60.8 million, or 173.0%, and
telecommunications systems ("Systems") revenues increased $49.3 million or 414%.
Gross margin
Gross margin increased in 1996 to 47.5% of revenues, from 38.7% of revenues in
1995. The following table sets forth the components of the
-23-
Company's overall gross margin for 1996 for the STS and Systems divisions,
respectively.
Weighted
Division Revenues GM GM
---------------------------------------------------------------------------
STS 61.1% 53.0% 32.4%
Systems 38.9% 38.9% 15.1%
----- ----- -----
Company Total 100.0% 47.5%
============== =============
In 1996, the Company's gross margin was a combination of STS gross margin of
53.0% and Systems gross margin of 38.9%. In 1995 the Company's gross margin was
a combination of STS gross margin of 44.6% and Systems gross margin of 21.1%.
STS increased gross margin from the 1995 level mainly due to the network
synergies resulting from the March 1996 FII merger. Systems margins increased
from 21.1% in 1995 to 38.9% in 1996. This increase was due primarily to the FII
merger and the resultant change in the mix of systems revenue. The Company's
Systems revenue was comprised of long-distance revenues outside of its building
sites and the sale and ongoing maintenance of equipment to customers in and out
of its building. The long distance component had margins in the range of 20-25%,
while the sale of equipment, with its maintenance component, provides margins in
the range of 35-40%. With the completion of the March 1996 merger of FII, the
Company's sales mix in Systems became more concentrated in the equipment sale
and maintenance end. Therefore, the Company's margin has increased accordingly.
In addition the revenues generated from the management agreement with ICS
Communications, Inc. ("ICS") have been included in Systems revenue. Since the
associated cost for this revenue of $5 million is in the selling, general and
administrative expense, it has a positive effect on Systems gross margin.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") as a percentage of revenue
increased to 35.2% for 1996, compared to 34.4% for 1995. This increase was due
to the merger with FII, principally in the Systems division, as the higher
margin sale of equipment and maintenance requires sales and support personnel.
Operating income
-24-
Operating income increased by $17.3 million, or 854.6%, to $19.3 million in
1996, from $2.0 million in 1995. The increase was mainly due to the merger with
FII.
Equity in loss if affiliates
The Company recorded an equity loss of $3.9 million, $3.7 of which came as a
result of STC losses of $8.9 million for the year ended December 31, 1996. The
remaining $.2 million came as a result of the Company's portion of the losses
incurred by Shared Technologies of Canada, Inc.
Interest expense
Interest expense, net of interest income, increased by $22.2 million to $22.9
million for 1996, compared to $0.7 million in 1995. This increase was due to the
merger with FII and the resulting bank and bond debt incurred as a result of the
transaction. As of December 31, 1996, the Company has bank debt in the amount of
$123.3 million and bond debt in the amount of $126.5 million. It should be noted
that the interest on the bonds is initially accretive and, therefore, non-cash.
The total non-cash portion of interest expense was $12.1 million as of December
31, 1996.
Extraordinary item - Loss on early retirement of debt
An extraordinary loss of $0.3 million for 1996 was recorded to reflect the
expense associated with the early retirement of pre-merger bank debt which was
paid at the conclusion of the March 1996 FII merger.
Income tax expense
The Company's income tax expense of $.8 million consisted of actual payments of
tax for approximately $.2 million and the reversal of a tax asset benefit of $.6
million. Since the March 1996 merger, and the corresponding loss due primarily
to interest charges on debt, the company reversed its tax benefit.
Net income (loss)
As a result of the factors listed above, net loss for the year ended December
31, 1996 was $8.6 million compared to net income of $.9 million for 1995.
Net (loss) income applicable to common stockholders
As a result of the FII merger, the Company issued additional mandatorily
redeemable preferred stock, this resulted in the Company recording higher
preferred cash dividends and non-cash dividends through the accretion of these
instruments to liquidation values.
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
-25-
Revenues
STFI's revenues rose to a record $47.1 million in 1995 an increase of $1.7
million or 3.7% over 1994 revenues of $45.4 million. This increase occurred
despite the loss of STC revenue as STC results were recorded per the equity
method in 1995; STC accounted for $10.2 million of 1994 revenue. STS revenue
increased $6.5 million or 22.7% and Systems $5.4 million or 83.1% in 1995 over
1994 levels. Approximately $2.9 million of the growth in revenue for STS was
attributable to a full year of service at locations acquired in June 1994 with
the acquisition of Access Telecommunications Group, L.P. (Access), $1.6 million
was attributable to the June 1995 acquisition of Office Telephone Management
(OTM), the remaining increase of approximately $2.0 million was generated
through internal growth at existing and new locations. Approximately $4.7
million of the growth in Systems revenues is attributable to a full year of
activity at accounts acquired with the June 1994 acquisition of Access, the
remaining increase of $1.8 million was generated internally.
Gross margin
Gross margin dropped to 38.7% of revenues for 1995 from 42.3% for 1994, a
reduction of 3.6%. The following table sets forth the components of the
Company's overall gross margin for 1995 as a factor of sales percentage and
gross margin percentage per line of business:
Weighted
Division Revenues GM GM
---------------------------------------------------------------------------
STS 74.7% 44.6% 33.3%
Systems 25.3% 21.1% 5.4
Company Total 100.0% 38.7%
============== ==============
As shown above, the 1995 gross margin was a mix of STS gross margin of 44.6% and
Systems gross margin of 21.1%. In 1994 the Company's gross margin was a
combination of STS gross margin of 45.2%, Systems gross margin of 20.4% and STC
gross margin of 48.2%. STS produced slightly reduced gross margin from the 1994
level mainly due to the acquisition of OTM operations which produced gross
margin of approximately 30%. Systems experienced slightly improved gross margin
mainly due to a full year of operations obtained with the Access acquisition.
The overall decrease in the Company's gross margin was principally the result of
changes in sales mix. The change in accounting to the equity method for STC
results of operations created an overall drop in
-26-
gross margin of approximately 1.7% for 1995. The drop in STS gross margin for
1995 contributed 0.4% to the overall reduction in gross margin for 1995. The
remainder of the decrease in gross margin was generated by Systems. As noted
above, Systems revenues grew at a faster rate than STS revenues in 1995. Since
Systems produces significantly lower gross margin compared to STS, the growth in
Systems sales depressed overall gross margin for the Company 1.5%.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") as a percentage of
revenues decreased to 34.4% for 1995 compared to 37.3% for 1994. The Company has
reduced SG&A as a percentage of revenues by increasing revenues without adding a
comparable percentage of SG&A costs. Certain SG&A costs are essentially fixed
and do not increase significantly with revenue growth. In addition the Company
has carefully chosen to expand in locations with existing management
infrastructures already in place.
Operating income
Operating income decreased by $0.3 million or 11.4% to $2.0 million in 1995 from
$2.3 million in 1994. The decrease was partially the result of STC no longer a
part of the STFI consolidated group in 1995. STC contributed approximately $0.7
million to operating income in 1994. This was offset by improved STS and Systems
contribution of $0.4 million in 1995 over 1994 levels.
Gain on sale of subsidiary stock
In April 1995 the Company successfully completed a public offering of STC stock.
Following the offering the Company's percentage of ownership decreased from
approximately 86% to 60%. The accounting treatment of the sale required the
Company to record a gain of $1.4 million for the year ended December 31, 1995.
Equity in loss of subsidiary
In December 1995, STC issued approximately $3.0 million in voting preferred
stock to third parties. While STFI's ownership percentage did not change, STFI's
voting interest in STC was reduced to 42.7%, resulting in STFI's loss of voting
control. Accordingly, subsequent to this stock issuance, STC was accounted for
under the equity method, The Company recorded an equity loss of $1.7 million as
a result of STC losses of $2.8 million for the year ended December 31, 1995
Interest expense
-27-
Interest expense net of interest income increased by $0.3 million for the year
ended December 31, 1995 over the year ended December 31, 1994. This is
attributable to the addition of approximately $4.4 million in interest bearing
debt during 1995. Approximately $0.3 million in non interest bearing debts were
repaid during 1995.
Income tax benefit (expense)
The Company recorded an insignificant amount of income tax expense for the year
ended December 31, 1995 compared to a net benefit of $0.5 million for the year
ended December 31, 1994. Income tax expense for 1995 was mainly the result of
state income taxes. During 1994 STFI adjusted the deferred tax asset valuation
reserve per Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" ("SFAS 109"). This adjustment resulted in a deferred tax asset of
$8.0 million, a corresponding valuation reserve of $7.4 million and a $0.6
million tax benefit for the year ended December 31, 1994. This benefit was
partially offset by state income taxes resulting in a net benefit of $0.5
million for 1994. The source of the deferred tax asset is principally the
expected future utilization on a conservative basis of net operating losses
("NOL") generated in prior years. Based on the requirements of SFAS 109 the
Company recalculated the deferred tax asset and adjusted the valuation reserve
for the year ended December 31, 1995. This adjustment resulted in no significant
impact to the Company's results of operations for the year ended December 31,
1995. At December 31, 1995 the Company's NOL carryforward for federal income tax
purposes was approximately $21.8 million.
Net income
As a result of the factors listed above, net income for the year ended December
31, 1995 decreased by $1.4 million or 60.9% to $0.9 million from $2.3 million
for 1994.
Liquidity and Capital Resources
Net cash provided by operations reached $24.4 million in 1996 compared to $4.9
million in 1995 and $3.1 million in 1994. The Company's working capital deficit
was $8.8 million at December 31, 1996 compared to $3.4 million and $3.7 million
for December 31, 1995 and 1994 respectively. The increase in the Company's
working capital deficit was directly related to the March 1996 merger with FII
and the current portion of bank debt raised as part of this transaction. The
Company's current portion of long-term debt and capital leases went from $2.9
million in the year ended December 31, 1995 to $13.6 million in the year ended
December 31, 1996.
-28-
The merged Company has continued to invest in capital equipment directed at
internal growth, expansion into new operations and upgrading telecommunication
equipment at existing locations. The Company invested $9.7 million in the
purchase of equipment in 1996 compared to $3.7 million and $3.2 million in 1995
and 1994, respectively. The Company invested $225.9, net of cash, acquired in
the merger of FII and had invested $5.3 million to complete two other
acquisitions; Office Telephone Management in June 1995 and Access
Telecommunications Group, LP in June 1994.
Financing activities were focused primarily on raising capital to provide cash
for investing activities. For the year ended 1996 the company raised $125
million of bank debt of which $5 million was the amount taken down on a $25
million revolver, and $115 million in Senior Subordinated Discount Notes both in
connection with the March 1996 merger with FII. Additionally, the Company
received $3.2 million from the exercise of employee and director options as well
as the exercise of warrants issued in conjunction with its Preferred D stock.
The Company paid $9.4 million in deferred financing and debt issuance costs and
$8.4 million in payments to affiliates, both of which are related directly to
the merger with FII. It paid $1.5 million in preferred stock dividends and $12.7
million for repayments of debt. During 1995 the Company borrowed $2.7 million
and raised $1.2 million from sales of common stock to help finance the current
year's equipment purchases and the acquisition of OTM. During 1994 approximately
$4.6 million was raised from sales of common and preferred stock to help the
Company fund operations. In 1995 and 1994 the Company spent $4.6 million to
repay notes, long-term debt and capital lease obligations.
Cash requirements for 1997 will be significant due to the merger with FII and
the continued payments of its principal and interest for debt. The Company
anticipates that it will continue repaying its borrowings and providing cash
flow for operations and capital expenditures through cash flow from operations.
As of March 1997 the Company has a credit facility available of approximately
$15 million.
The initial cost of capital equipment to establish shared telecommunications
services in a building typically ranges from $50,000 to $80,000 with additional
start-up working capital expenditures of less than $50,000. The Company
currently anticipates that capital expenditures for 1997 will be approximately
$13.5 million.
Due to the Company's net operating loss carryforwards, the Company currently
anticipates minimal federal income tax payments during 1997.
The Company does not anticipate inflation to materially impact its operations in
1997.
-29-
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
-30-
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
-31-
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
ASSETS
1996 1995
------- ------
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
======== =======
The accompanying notes are an integral part of these consolidated balance sheets
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
1996 1995
------- -------
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
======== =======
The accompanying notes are an integral part of these consolidated balance sheets
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)
1996 1995 1994
---- ---- ----
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
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
SERIES C SERIES D SERIES E
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
--------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
BALANCE, JANUARY 1, 1994 988 $10 453 $5 - $ -
Preferred stock dividends
Dividend accretion of redeemable put warrant
Exercise of common stock options and warrants
Proceeds from sale of Series D preferred stock 4
Issuances for acquisitions 400 4
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 of 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 - $ -
==== ==== ==== ==== ==== ====
SERIES F OBLIGATIONS
PREFERRED STOCK COMMON STOCK CAPITAL IN TO ISSUE TOTAL
--------------- ------------ EXCESS OF ACCUMULATED COMMON STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT STOCK EQUITY
------ ------ ------ ------ --------- ------- ----- ------
- $ - 5,190 $21 $31,759 $(24,248) $1,756 $ 9,303
(478) (478)
(25) (25)
26 71 71
(1) (1)
700 7 4,989 5,000
1,329 6 4,556 4,562
83 114 50 163
2,286 2,286
- - - - - - - -
700 7 6,628 27 41,488 (22,465) 1,806 20,881
(398) (398)
(45) (45)
17 70 70
405 2 1,804 (1,806) -
(700) (7) 1,100 4 7 -
300 1 1,162 1,163
56 246 246
927 927
- - - - - - - -
- - 8,506 34 44,777 (21,981) - 22,844
(2,366) (2,366)
675 3 3,210 3,213
6,000 24 27,726 27,750
442 1 5 -
59 1 336 337
(8,569) (8,569)
---- ---- ---- ---- ------- -------- ------ ------
- $ - 15,682 $ 63 $76,054 $(32,916) $ - $43,209
==== ==== ====== ==== ====== ======= ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
1996 1995 1994
---- ---- ----
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)
------ ----- -----
Shared Technologies Fairchild Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995, and 1994
(In Thousands)
(Continued)
1996 1995 1994
------ ------ ------
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 -
The accompanying notes are an integral part of these consolidated financial statements.
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.
-2-
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.
-3-
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.
RECLASSIFICATIONS
Certain reclassifications to prior year financial statements were made in order
to conform with the current year presentation.
-4-
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.
1996 1995
------ ------
(Unaudited)
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)
======== ========
-5-
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:
1996 1995
------ ------
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
5. Accrued Expenses:
Accrued expenses at December 31, 1996 and 1995, consist of the following:
1996 1995
------ ------
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
====== ======
-6-
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:
1996 1995
--------- --------
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
========= ========
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").
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
-7-
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 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.
-8-
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:
Year Ending Long-Term Capital Lease
December 31, Debt Obligations
- ------------ ---------- ------------
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
========== ============
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.
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
-9-
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 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
-10-
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 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
-11-
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 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.
-12-
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 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").
-13-
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
NUMBER OF WEIGHTED
OPTIONS RANGE AVERAGE
--------- ------------- ----------
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
========= ============= ==========
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.
1996 1995
Net (loss) income available to common shareholders: -------- --------
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
-14-
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.
Income tax (expense) benefit consists of the following:
1996 1995 1994
------ ------ ------
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
====== ====== ======
-15-
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.
1996 1995 1994
------ ------ ------
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
====== ====== ======
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.
DEFERRED (PROVISION)
BENEFIT
------------------
1996 1995
------ ------
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)
------ ------
Deferred tax asset, net 3,944 7,508
Less- Valuation allowance (3,944) (6,948)
------ ------
Net deferred tax asset $ - $ 560
====== ======
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.
-16-
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:
OPERATING
LEASES
------------
1997 $5,278
1998 4,807
1999 4,156
2000 3,345
2001 2,674
Thereafter 3,230
------------
$23,490
============
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
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
-17-
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, 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
-18-
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 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.
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.
-19-
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.,
-20-
or "STFTI"). These statements are provided to fulfill reporting requirements and
represent guarantors of the Senior Subordinated Discount Notes issued by STFCC.
Eliminating Consolidated
STFTI STFCC STFI Entries STFI
-------- -------- ----------- ------------ --------
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
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
======== ======== =========== ============ ========
-21-
Eliminating Consolidated
STFTI STFCC STFI Entries STFI
--------- --------- -------- ----------- ------------
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 taxe 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)
========= ========= ======== =========== ============
PRELIMINARY AND TENTATIVE FOR DISCUSSION PURPOSES ONLY
-22-
ELIMINATING CONSOLIDATED
STFTI STFCC STFI Entries STFI
------- ------- ------------ ------------ --------
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
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
======== ======= ============ ============ ========
PRELIMINARY AND TENTATIVE FOR DISCUSSION PURPOSES ONLY
-23-
Item 8.
Financial Statements and Supplementary Data
Attached.
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10.
Directors and Executive Officers of the Registrant
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management
Item 13.
Certain Relationships and related Transactions
The Company incorporates by reference items 10, 11, 12 and 13 in its
Proxy Statement for its Annual Meeting of Stockholders to be held on April 30,
1997 (to be filed with the Securities and Exchange Commission on or before April
15, 1997).
PART IV
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 10-K
(a) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Cash Flow for the years ended December 31, 1996, 1995
and 1994.
Notes to Consolidated Financial Statements
Financial Statements Schedules: Schedule VIII
(b) Reports on Form 8-K
On March 28, 1996 the Company files a Form 8-K Item 2 and 7 detailing
the completion of the merger of Fairchild Industries, Inc., with and into the
Company effective March 13, 1996.
On May 9, 1996 the Company filed a Form 8-K Item 2 and 7 detailing that
on April 27, 1996 the Company, through its subsidiary Shared Technologies
Cellular, Inc. completed its acquisition of certain assets of Cellular Global
Investments of Northern California, Inc., Access Cellular Corp., Summit
Assurance Cellular, Inc., Road and Show Cellular Arizona, Road and Show Cellular
West, Northstar Cellular Corp. and Craig A. Marlar.
On May 28, 1996 the Company filed a Form 8-K Item 7 in which it
included audited financial statements of Fairchild Industries, Inc. and
consolidated subsidiaries pursuant to its March 13, 1996 merger.
On November 22, 1996 the Company filed a Form 8-K Item 4 concerning its
change in public accountants from Rothstein, Kass & Company, P.C. to Arthur
Andersen LLP.
(c) Exhibits
Exhibit No. Description of Exhibit
1.0 Purchase Agreement dated March 8, 1996 among the Company,
the guarantors named therein and CS First Boston Corporation
and Citicorp USA, Inc. Incorporated by reference to the
Company's Form 8-K filed on March 27, 1996.
2.1 Agreement and Plan of Merger dated as of November 9, 1995
among Shared Technologies Fairchild Inc. (formerly Shared
Technologies Inc.) ("STFI"), Fairchild Industries, Inc.
("FII"), RHI Holdings, Inc. ("RHI") and The Fairchild
Corporation ("TFA"). Incorporated by reference to the
Company's Form 8-K filed on March 27, 1996.
2.2 First Amendment to Agreement and Plan of Merger dated as of
February 2, 1996 among STFI, FII, RHI and TFC. Incorporated
by reference to the Company's Form 8-K filed on March 27,
1996.
2.3 Second Amendment to Agreement and Plan of Merger dated as of
February 24, 1996 among STFI, RHI and TFC. Incorporated by
reference to the Company's Form 8-K filed on March 27, 1996.
2.4 Third Amendment to Agreement and Plan of Merger dated as of
March 1, 1996 among STFI. FII, RHI and TFC. Incorporated by
reference to the Company's Form 8-K filed on March 27, 1996.
3(i).1 Restated Certificate of Incorporation of the Company.
Incorporated by reference to the Company's Form 8-K filed on
March 27, 1996.
3(i).2 Certificate of Merger of STI and FII. Incorporated by
reference to the Company's Form 8-K filed on March 27, 1996.
3(i).3 Certificate of Incorporation of Shared Technologies
Fairchild Communications Corp. ("STAFF"). Incorporated by
reference to the Company's Form 8-K filed on March 27, 1996.
-32-
3(ii).1 Amended and Restated By-laws of STI. Incorporated by
reference to the Company's Form 8-K filed on March 27, 1996.
3(ii).2 Amendment to Amended and Restated By-laws of STI.
Incorporated by reference to the Company's Form 8-K filed on
March 27, 1996.
3(ii).3 By-laws of the Company. Incorporated by reference to the
Company's Form 8-K filed on March 27, 1996.
4.1 Certificate of Designations of Series G 6% Cumulative
Convertible Preferred Stock of STFI. Incorporated by
reference to the Company's Form 8-K filed on March 27, 1996.
4.2 Certificate of Designations of Series H Special Preferred
Stock of STFI. Incorporated by reference to the Company's
Form 8-K filed on March 27, 1996.
4.3 Certificate of Designations of Series I 6% Cumulative
Convertible Preferred Stock of STFI. Incorporated by
reference to the Company's Form 8-K filed on March 27, 1996.
4.4 Certificate of Designations of Series J Special Preferred
Stock of STFI. Incorporated by reference to the Company's
Form 8-K filed on March 27, 1996.
4.5 Indenture dated as of March 1, 1996 among the Company, the
guarantors named therein and United States Trust Company of
New York, as trustee. Incorporated by reference to the
Company's Form 8-K filed on March 27, 1996.
4.6 First Supplemental Indenture dated as of March 13, 1996
among the Company, the guarantors named therein and United
States Trust Company of New York, as trustee. Incorporated
by reference to the Company's Form 8-K filed on March 27,
1996.
10.1 Registration Rights Agreement dated March 8, 1996 among the
Company, STFI, the guarantors named therein and CS First
Boston Corporation and
-33-
Citicorp USA, Inc. Incorporated by reference to the
Company's Form 8-K filed on March 27, 1996.
10.2 Registration Rights Agreement dated March 13, 1996 among
STI, RHI and TFC. Incorporated by reference to the Company's
Form 8-K filed on March 27, 1996.
10.3 Credit Agreement dated as of March 12, 1996 among the
Company, STFI, Credit Suisse, Citicorp USA, Inc.,
NationsBank and the other lenders named therein.
Incorporated by reference to the Company's Form 8-K filed on
March 27, 1996.
10.4 Security Agreement dated as of March 13, 1996 among STAFF,
STFI, each subsidiary of STAFF named therein and Credit
Suisse, as collateral agent for the secured parties.
Incorporated by reference to the Company's Form 8-K filed on
March 27, 1996.
10.5 Pledge Agreement dated as of March 13, 1996 among STFCC,
STFI, each subsidiary of STFCC named therein and Credit
Suisse, as collateral agent for the secured parties
Incorporated by reference to the Company's Form 8-K filed on
March 27, 1996.
10.6 Parent Guarantee Agreement dated as March 12, 1996 between
STI and Credit Suisse, as collateral agent for the secured
parties. Incorporated by reference to the Company's Form 8-K
filed on March 27, 1996.
10.7 Subsidiary Guarantee Agreement dated as of March 12, 1996
among the subsidiaries of STFCC and STFI named therein and
Credit Suisse, as collateral agent for the secured parties.
Incorporated by reference to the Company's Form 8-K filed on
March 27, 1996.
10.8 Agreement to Exchange 6% Cumulative Convertible Preferred
Stock and Special Preferred Stock dated as of March 1, 1996
among STI FII, RHI and TFC.
-34-
Incorporated by reference to the Company's Form 8-K filed on
March 27, 1996.
10.9 Shareholders' Agreement dated as of March 13, 1996 among
STI, RHI and Anthony D, Autorino. Incorporated by reference
to the Company's Form 8-K filed on March 27, 1996.
10.10 Tax Sharing Agreement dated as of March 13, 1996 between STI
and RHI. Incorporated by reference to the Company's Form 8-K
filed on March 27, 1996.
10.11 Indemnification Agreement dated as of March 13, 1996 between
STI and Incorporated by reference to the Company's Form 8-K
filed on March 27, 1996.
10.12 Indemnification Agreement dated as of March 13, 1996 among
STI, TFC and RHI. Incorporated by reference to the Company's
Form 8-K filed on March 27, 1996.
10.13 Indemnity Subrogation and Contribution Agreement dated as of
March 12, 1996 between STFCC and Credit Suisse as collateral
agent for the secured parties. Incorporated by reference to
the Company's Form 8-K filed on March 27, 1996.
10.14 Management Agreement dated August 1996 by and among Shared
Technologies Fairchild Inc., ICS Communications, Inc.,
Interactive Cable Systems, Inc. and MCI Telecommunications
Corporation.
10.15 Interim Management Agreement dated February 24, 1997 by and
among Shared Technologies Fairchild Inc., GE Capital-ResCom,
L.P., ResCom, Inc. and POTS, Inc.
21 List of subsidiaries of the Registrant.
27 Financial Data Schedule
99 Pursuant to Regulation S-X Rule 3-09 the Company is
incorporated by reference. The audited consolidated
financial statements for Shared Technologies Cellular, Inc.
("STC") included as part of STC's Form 10-K filed on or
before March 31, 1997.
-37-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHARED TECHNOLOGIES FAIRCHILD INC.
----------------------------------
(Registrant)
By /s/ Anthony D. Autorino
-------------------------------
Anthony D. Autorino
Chairman, Chief Executive
Officer and Director
Date: March 27, 1997
By /s/ Vincent DiVincenzo
-------------------------------
Vincent DiVincenzo
Senior Vice President - Finance and
Administration, Treasurer, Chief
Financial Officer and Director
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Anthony D. Autorino By /s/ Jeffrey J. Steiner
-------------------------------- ------------------------------
Anthony D. Autorino Jeffrey J. Steiner
Chairman, Chief Executive Officer Vice Chairman and Director
and Director March 27, 1997
Date: March 27, 1997
By /s/ Mel D. Borer By /s/ Jo McKenzie
-------------------------------- ------------------------------
Mel D. Borer, President, Chief Jo McKenzie, Director
Operating Officer and Director March 27, 1997
Date: March 27 1997
-36-
By /s/ Natalia Hercot By /s/ Thomas H. Decker
-------------------------------- ------------------------------
Natalia Hercot, Director Thomas H. Decker, Director
Date: March 27, 1997 Date: March 27, 1997
By /s/ Ajit G. Hutheesing By /s/ Donald E. Miller
-------------------------------- ------------------------------
Ajit G. Hutheesing, Director Donald E. Miller, Director
March 27, 1997 Date: March 27, 1997
By /s/ Vincent DiVincenzo By /s/ William A. DiBella
-------------------------------- ------------------------------
Vincent DiVincenzo, Director William A. DiBella, Director
Date: March 27 1997 Date: March 27, 1997
-37-