-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PqfuGc1S2KF2KqzMDwv/KOwPes2Xea6NRA4WmZtTIssNOPT0D1ZrJGioZvC+NJFW 82fvWk6prADKIYY7P3bmdw== 0000903893-97-000531.txt : 19970328 0000903893-97-000531.hdr.sgml : 19970328 ACCESSION NUMBER: 0000903893-97-000531 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHARED TECHNOLOGIES FAIRCHILD INC CENTRAL INDEX KEY: 0000817632 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 870424558 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17366 FILM NUMBER: 97565717 BUSINESS ADDRESS: STREET 1: 100 GREAT MEADOW RD STREET 2: STE 104 CITY: WETHERSFIELD STATE: CT ZIP: 06109 BUSINESS PHONE: 8602582474 MAIL ADDRESS: STREET 1: 100 GREAT MEADOW ROAD SUITE 104 STREET 2: 100 GREAT MEADOW ROAD SUITE 104 CITY: WETHERSFIELD STATE: CT ZIP: 06109 FORMER COMPANY: FORMER CONFORMED NAME: SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP /CT DATE OF NAME CHANGE: 19960430 FORMER COMPANY: FORMER CONFORMED NAME: SHARED TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K 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. ----------------------------------------- (Exact name of registrant as specified in its charter) Delaware 87-0424558 --------------------------------------------------- (State or other jurisdiction of Incorporation (I.R.S. Employer or organization) Identification No.) 100 Great Meadow Road, Suite 104 Wethersfield, Connecticut 06109 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (860) 258-2400 ---------------------- Securities registered pursuant to Section 12(b) of the Act: None -------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.004 par value ------------------------------- 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 -1- 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. -2- 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 -3- $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 -4- 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 -5- 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 -6- 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. -7- 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 - -------- ------------ --------- ----------- -8- 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 ----------- -------- ------- Totals 144,978,562 483,259 111,627 =========== ======== ======= Penetration Rate* 26% - ----------------------------- *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 -9- 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. -10- (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. -11- 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 -12- 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 -13- 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. -14- 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. -15- 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- EX-10.14 2 MANAGEMENT AGREEMENT EXHIBIT 10.14 MANAGEMENT AGREEMENT This Management Agreement ("Agreement") is made and entered into as of the day of August, 1996, by and among (i) SHARED TECHNOLOGIES FAIRCHILD, INC., a Delaware corporation (the "Manager"), (ii) ICS COMMUNICATIONS, INC., a Delaware corporation ("ICS"), (iii) INTERACTIVE CABLE SYSTEMS, INC., a California corporation ("Interactive"), which is a subsidiary of ICS (Interactive and Interactive's subsidiaries are referred to herein collectively as the "Company"), and (iv) MCI TELECOMMUNICATIONS CORPORATION, a Delaware corporation ("MCI"). RECITALS: The Company is engaged in the business of installing, operating, maintaining and managing telephone, cable and other communications systems in multi-unit residential buildings (collectively, the "Company's Business"); and The Company desires that the Manager provide management personnel and services for the Company's Business, and the Manager desires and agrees to provide the necessary personnel and services therefor; and In order to induce the Manager to enter into this Management Agreement, MCI has agreed to indemnify the Manager as is more specifically set forth herein. NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, the parties hereto agree as follows: 1. APPOINTMENT OF THE MANAGER. Subject to the terms and conditions set forth herein, the Company hereby appoints and employs the Manager as the Company's exclusive agent to provide management services set forth in Section 4 hereof in connection with the Company's Business. The Manager accepts the appointment as exclusive agent and agrees to manage the Company's Business during the term of this Agreement, in accordance with the terms and conditions hereinafter set forth. 2. TERM. 2.1 The effective date of this Agreement shall be August 1, 1996 (the "Commencement Date"), and this Agreement shall continue in effect until (a) terminated as provided in Section 9, or (b) the execution of a management agreement by ICS Holdings LLC, a limited liability company -57- ("LLC") and the Manager for the management of LLC's business (the "LLC Management Agreement"). 3. COMPENSATION OF THE MANAGER. 3.1 Base Compensation. The Company will pay to the Manager a monthly fee of One Million Dollars ($1,000,000) (the "Base Compensation") on August 9, 1996 and on the first day of each month thereafter until termination pursuant to Section 9. In the event termination (computed to include all cure periods if applicable) occurs prior to the last day of a month, the Manager shall be entitled to retain only that pro rata portion of the Base Compensation for the month in which termination occurs as the number of days of such month prior to and including the date of termination bears to the total number of days of such month. Upon termination, the Manager shall remit to Company the difference (if any) between the amount of Base Compensation paid for such month and the amount to which the Manager is entitled pursuant to this paragraph. 3.2 Service Fees for Additional Services. In addition to its Base Compensation, the Manager shall also be entitled to receive from the Company as compensation for Additional Services provided pursuant to Section 4.3 hereof the following fees and expenses (collectively, the "Service Fees"): a. an amount equal to $2.50 per month per billing statement generated by the Manager for telecommunications services (regardless of the number of telephone or facsimile lines reflected on any one billing statement) pursuant to the Statement of Work attached hereto as Exhibit A (the "Billing Fee"); plus b. an amount equal to $3.00 per month per telecommunications subscriber line monitored and maintained by the Manager pursuant to the Statement of Work attached hereto as Exhibit B (the "Maintenance Fee") and actual replacement costs of equipment; plus c. an amount equal to $50.00 per hour (or pro rata portion thereof) for changes, additions or modifications of telephone numbers, plus the actual cost of equipment and hardware installed or provided in connection therewith pursuant to the Statement of Work attached hereto as Exhibit C (the "Installation Fee"). provided, however, that to the extent the Company is able to obtain from another provider more favorable pricing (considered on comparable terms and conditions) with respect to the services described in clauses 3.2(a), 3.2(b), and/or 3.2(c), the Company shall so notify the Manager in writing and shall provide written substantiation of the third-party provider's offer. The Manager shall either (1) agree to lower the Billing Fee, the Maintenance Fee, and/or the hourly component of the Installation Fee, as the case may be, payable under this Agreement to the level proposed by the third-party provider; or (2) agree to allow the third-party provider to provide the services described in clauses 3.2(a), 3.2(b), and/or 3.2(c). -58- 4. MANAGEMENT OF THE COMPANY'S BUSINESS. 4.1 In General. The Manager shall use reasonable efforts to manage and direct the Company's Business in accordance with good operating practices in the telecommunications and cable industry and shall use reasonable efforts to achieve the objectives of the Company's Business Plan ("Business Plan"), a copy of which is attached hereto as Exhibit E. Notwithstanding anything to the contrary herein, the Manager hereby agrees (a) to consult with the Company and to obtain the approval of the Company with respect to any and all "Major Actions" (as defined in Section 4.4 below); and (b) to use reasonable efforts to manage and direct the Company's Business in accordance with the guidelines and requirements set forth herein and in compliance with all obligations and covenants of the Company. 4.2 Duties of the Manager. Without limiting the generality of the foregoing, the Manager shall be and is hereby granted the authority and has the obligation, in accordance with the Business Plan, to supervise, direct and oversee the following activities: a. Hiring, compensation, supervision, and discharge, on behalf of the Company, of all employees and personnel of the Company necessary for the operation of the Company's Business. b. Preparation and maintenance of accurate, full and complete books and records for the Company, including without limitation, accounting books and records relating to the Company's Business in accordance with generally accepted accounting principles and the provisions of this Agreement for accounting purposes, and in accordance with federal income tax accounting principles utilizing the accrual method of accounting for tax purposes; and, completion, on a timely basis, of all reports, filings, tax returns and other documents required of the Company by any governmental entity or person having jurisdiction over, or authority concerning the Company's Business, with regard to the operation of the Company's Business. c. From time to time, negotiation of leases, licenses, service contracts, franchise and other agreements for all aspects of the Company's Business upon the Company's direction. d. Procurement, maintenance and compliance with all permits, licenses and other governmental approvals as are necessary to operate the Company's Business. e. Provision on a quarterly basis, or as otherwise required, of information or preparation of financial statements or reports for any filings with regulatory agencies, such as, but not limited to, the Internal Revenue Service, and information for any filings with lending institutions; and preparation of and delivery to the Company as soon as available, and in any event within 90 days after the close of each Fiscal Year during the term of this Agreement, the consolidated and consolidating balance sheets -59- of the Company and its subsidiaries as of the close of the Fiscal Year, and the respective statements of income and retained earnings and changes in financial position (on a consolidated basis) of the Company, and its subsidiaries for the Fiscal Year, in each case setting forth in comparative form the figures for the preceding Fiscal Year. f. The operation of the Company's Business in the ordinary course of business, including, without limitation, the purchase and timing of purchase of inventory, payments of accounts payable, and collection of accounts receivable. g. Generally, the performance of all things necessary for the overall management, direction and supervision of the Company's Business and personnel in accordance with the Business Plan. 4.3 Additional Services. In addition to the Manager's duties set forth in Sections 4.1 and 4.2 above, the Manager hereby agrees to provide the following additional services for the compensation set forth in Section 3.2: (i) generation and mailing of monthly billing statements for telecommunications services; (ii) monitoring and maintenance of telecommunications lines; and (iii) changes, additions or modifications of telephone numbers. The Manager's responsibility with respect to each service is described in detail in Exhibits B, C and D, respectively (collectively, the "Additional Services"). 4.4 Major Actions. "Major Actions" shall mean each of the following: a. any merger or consolidation with, or acquisition of all or substantially all of the assets or capital stock of, another person (or a division or other business unit of another person) or other business combination or any dissolution and winding-up of the Company; b. except as contemplated by the Business Plan, entering into any material transaction or agreement, which obligates or subjects the Company to pay a liability in excess of $100,000; c. except as contemplated by the Business Plan, incurring any indebtedness for borrowed money which would result, at any time after the incurrence, in the total outstanding indebtedness of the Company for borrowed money (excluding indebtedness incurred by the Company pursuant to the Business Plan) exceeding $100,000; d. except as contemplated by the Business Plan, entering into, amending, granting any waiver with respect to or terminating any agreement outside of the ordinary course of business to the extent that the agreement provides for (or, pursuant to its terms, could reasonably be expected to result in) the payment or receipt by the Company of more than an aggregate amount of $100,000 during the term thereof; -60- e. except as contemplated by the Business Plan, entering into any agreement or transaction which has a term in excess of two years; f. except as contemplated by the Business Plan, entering into any employment or consulting agreement (or series of related employment or consulting agreements with the same person) with a term of more than one year or which provides for (or, pursuant to its terms, could reasonably be expected to result in) payments (including any payments pursuant to an employment or consulting agreement between the Company and the employee or consultant) to the employee or consultant in excess of $100,000; g. other than this Agreement, and except as specifically contemplated by the Business Plan from time to time, entering into any transaction or agreement (i) with the Manager or any Affiliate of the Manager or (ii) in which the Manager or any Affiliate of the Manager has a substantial financial interest; h. appointment or removal of any principal executive officer of the Company; i. appointing or changing the Company's independent certified public accountants; j. except as required by GAAP or applicable law, adopting or changing any accounting principle; k. commencing or settling any litigation, arbitration or governmental proceeding which is likely to result in costs or liabilities in excess of $100,000, or is likely to have a material impact on the Company or the Company's Business; l. adopting or modifying or amending in any material respect the Business Plan; m. except as contemplated by the Business Plan, making any loans, investments or advances to, or guaranteeing the obligations of, any person; n. incorporating, forming or otherwise organizing a subsidiary of the Company; o. the sale of any assets of the Company having a fair market value of $100,000 or more; p. changing the location of the principal office of the Company; -61- q. the filing by the Company of a voluntary petition in bankruptcy or for reorganization or for the adoption of an arrangement or an admission seeking the relief therein provided under any existing or future law of any jurisdiction relating to bankruptcy, insolvency, reorganization or relief of debtors; r. except as contemplated by the Business Plan, permitting any material encumbrances on any assets of the Company; or s. entering into any options, contingent agreements or other arrangements which if exercised or consummated in accordance with their terms would result in an action constituting a "Major Action." 4.5 Personnel. a. The Manager's Personnel. The Manager shall at all times, assign and maintain sufficient employees and personnel, including, without limitation, executive officers, office personnel, general bookkeeping staff, and other personnel as may be required to provide proper supervision and management of the Company and to otherwise comply with the obligations of the Manager set forth in this Agreement. The Manager shall provide its own personnel for the performance of the Additional Services described in Section 4.3 hereof. b. The Company's Personnel. The Manager shall supervise the work of, control, hire and discharge, employees of the Company. All employees of the Company shall remain under the supervision and control of the Manager, and all wages, salaries and other compensation paid thereto, including, without limitation, unemployment insurance, social security, workman's compensation and disability benefits, shall constitute operating expenses of the Company's Business and shall be chargeable to the Company. 5. CONDUCT OF BUSINESS IN THE COMPANY'S NAME 5.1 Use of the Company's Name. The Manager shall have the right and power to contract with third parties for, on behalf of, and in the name of the Company or otherwise bind the Company to the extent permitted pursuant to the terms of this Agreement. Third parties dealing with the Company shall be entitled to rely conclusively upon the power and authority of the Manager. 5.2 Reimbursement for Liabilities of the Company. All debts and liabilities arising in the course of the operations of the Company's Business are and shall be the obligations of the Company, and the Manager shall not be liable for any of the obligations by reason of its management of the Company's Business for the Company. 6. COMPLIANCE WITH LAWS. -62- 6.1 The Manager shall comply with and abide by all applicable laws, rules, regulations, requirements, orders, notices, determinations and ordinances of any federal, state or municipal authority having jurisdiction over the Company's Business. 6.2 With respect to any material violation of any requirements described in the foregoing paragraph, the Manager shall promptly notify the Company in writing of its receipt of any non-compliance notice, and the Company shall have the right to contest or to require that the Manager contest any of the foregoing. The Manager shall also provide the Company with a written statement detailing the specific steps that will be taken (i) to bring the Company into compliance with the requirement alleged to have been violated and (ii) to prevent future violations of that requirement; provided, however, that if the Manager is in good faith and with due diligence contesting the alleged violation, the Manager shall not be obligated to provide the written statement described in the foregoing clause, but shall be required only to state in its notice that the Manager is contesting the alleged violation and the Manager's basis therefor. 7. RIGHT OF INSPECTION ICS, Interactive, and their respective agents, officers, accountants, attorneys or any other party designated by ICS or Interactive, shall have the right during reasonable business hours to examine or make extracts from any and all books and records maintained by the Manager or its affiliates in connection with the operation of the Company's Business in order to examine any part of the work performed by the Manager in connection with this Agreement or for any other purpose which the Company, in its sole discretion, shall deem necessary or advisable. All books and records described in the foregoing sentence are acknowledged to be the property of the Company. 8. REPRESENTATIONS AND WARRANTIES 8.1 Representations and Warranties of MCI, ICS and Interactive. MCI, ICS and Interactive represent and warrant to the Manager as follows: (A) Corporate Power. MCI is a corporation duly organized and in good standing under the law of the State of Delaware. ICS is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and Interactive is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and each has the full and unrestricted corporate power and corporate authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. Each of ICS and Interactive is qualified and in good standing as a foreign corporation in every jurisdiction where the nature of its business or the character of its properties makes qualification necessary. Each of ICS and Interactive has the full and unrestricted corporate power and corporate authority to own, operate and lease its properties and to carry on its business. -63- (B) Authorization. All corporate action on the part of MCI, ICS and Interactive necessary for the authorization, execution, delivery and performance by MCI, ICS and Interactive, respectively of this Agreement and the consummation of the transactions contemplated herein, has been taken or will be taken on or before August 12, 1996. (C) Validity; Execution. This Agreement is a valid and binding obligation of each of MCI, ICS and Interactive, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting enforcement of creditors' rights generally. The execution, delivery and performance by each of MCI, ICS and Interactive of this Agreement and compliance therewith will not result in any violation of and will not conflict with, or result in a breach of any of the terms of, or constitute a default under, any provision of state or Federal law to which MCI, ICS or Interactive is subject, or any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which MCI, ICS or Interactive is a party or by which it is bound, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of MCI, ICS or Interactive. None of MCI, ICS nor Interactive is subject to any law, ordinance, regulation, rule, order, judgment, injunction, decree, charter, bylaw, contract, commitment, lease, agreement, instrument or other restriction or any kind that would prevent MCI's , ICS's or Interactive's consummation of this Agreement or any of the transactions contemplated hereby without the consent of any third party, that would require the consent of any third party to the consummation of this Agreement or any of the transactions contemplated hereby, or that would result in any penalty, forfeiture or other termination as a result of their consummation (except, in each case, to the extent that consents and/or waivers have been obtained). 8.2 The Manager's Representations and Warranties. The Manager represents and warrants to Company as follows: (A) Corporate Power. The Manager is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the full and unrestricted corporate power and corporate authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. The Manager is qualified and in good standing as a foreign corporation in every jurisdiction where the nature of its business or the character of its properties makes qualification necessary. The Manager has the full and unrestricted corporate power and corporate authority to own, operate and lease its properties and to carry on its business. (B) Authorization. All corporate action on the part of the Manager necessary for the authorization, execution, delivery and performance by the Manager of this Agreement and the consummation of the transactions contemplated herein has been taken or will be taken prior to August 9, 1996. -64- (C) Validity; Execution. This Agreement is a valid and binding obligation of each of the Manager, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting enforcement of creditors' rights generally. The execution, delivery and performance by the Manager of this Agreement and compliance therewith will not result in any violation of and will not conflict with, or result in a breach of any of the terms of, or constitute a default under, any provision of state or Federal law to which the Manager is subject, or any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which the Manager is a party or by which it is bound, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Manager. The Manager is not subject to any law, ordinance, regulation, rule, order, judgment, injunction, decree, charter, bylaw, contract, commitment, lease, agreement, instrument or other restriction or any kind that would prevent the Manager's consummation of this Agreement or any of the transactions contemplated hereby without the consent of any third party, that would require the consent of any third party to the consummation of this Agreement or any of the transactions contemplated hereby, or that would result in any penalty, forfeiture or other termination as a result of their consummation (except, in each case, to the extent that consents and/or waivers have been obtained). 9. RIGHTS OF TERMINATION 9.1 Joint Rights of Termination. Either the Company or the Manager may terminate this Agreement without cause upon thirty (30) days prior written notice. 9.2 The Manager's Rights of Termination. The Manager shall have the right to terminate this Agreement upon the occurrence of any of the following events: a. A material breach by MCI, ICS or Company (as the case may be) under this Agreement; or b. In the event Base Compensation is not paid when due. 9.3 Company's Rights of Termination. The Company shall have the right to terminate this Agreement upon occurrence of any of the following events: (a) willful misconduct or gross negligence by the Manager in the performance of its duties under this Agreement or a material breach by the Manager under this Agreement; or (b) the dissolution, liquidation, bankruptcy or insolvency of the Manager (including (i) the filing of a voluntary petition seeking liquidation, reorganization, arrangement or readjustment in any form, of its debts under Title 11 of the United States Code or any other federal or state insolvency law, or its filing of an answer consenting to or acquiescing in the subject petition, (ii) the making of any assignment for financing purposes, or (iii) the expiration -65- of 90 days after the filing of an (A) involuntary petition under Title 11 of the United States Code, (B) an application for the appointment of a receiver for its assets, or (C) an involuntary petition seeking liquidation, reorganization, arrangement or readjustment of its debts under any other federal or state insolvency law, provided that the same shall not have been vacated, set aside or stayed within the 90-day period). 9.4 Exercise of the Right of Termination. (a) Upon the occurrence of any event listed in Section 9.2, the Manager shall not have the right to terminate this Agreement until it has given written notice to the Company stating that in the Manager's opinion an event described in Section 9.2 has occurred that gives the Manager the right to terminate this Agreement; provided, however, that (i) upon the occurrence of any event listed in Section 9.2(a), the Company shall have fifteen days following delivery of the notice described in the foregoing clause to cure or cause to be cured the breach under this Agreement, or a longer period of reasonable duration if the default or breach is not capable of being cured within fifteen days and the Company is using diligent efforts to cure the default or breach, and (ii) upon the occurrence of any event listed in Section 9.2(b), the Company shall have one day following delivery of the notice described in the foregoing clause to cure or cause to be cured the failure to pay the Base Compensation (in either case, the "Cure Period"). Upon the expiration of the Cure Period, the Manager may terminate this Agreement unless the Company has cured or caused to be cured its default or breach. The Company shall remain liable for amounts, if any, payable to the Manager pursuant to Sections 3, 4 or 5 hereof for accrued but unpaid compensation or unreimbursed expenses to the last day of the calendar month in which termination occurs. (b) Upon the occurrence of any event listed in Section 9.3, the Company shall not have the right to terminate this Agreement until it has given written notice to the Manager stating that in the Company's opinion an event listed in Section 9.3(a) or (b) has occurred that gives the Company the right to terminate this Agreement; provided, however, that with respect to any event described in Section 9.3(a), the Manager shall have thirty days following delivery of the notice described in the foregoing clause to cure its default, or a longer period of reasonable duration if the default is not capable of being cured within thirty days the Manager is using diligent efforts to cure the default or breach (in either case, the "Cure Period"). The Manager shall have no Cure Period with respect to an the occurrence of an event described in Section 9.3(b). Upon the expiration of the Cure Period, if any, the Company may terminate this Agreement unless the Manager has cured its default or breach. (c) The right of termination shall be in addition to other rights and remedies as shall be available at law or in equity. 9.5 Transition Following Termination. Following any termination of this Agreement, (i) the Manager agrees to deliver to the Company on or before the date the termination will be effective all books and records related to the Company's Business which are in the possession of the Manager; and (ii) the Manager shall use reasonable efforts to cooperate -66- in connection with effecting a business like and efficient transition of the Company's operations and management, including transition to a newly selected manager. 10. INDEMNIFICATION; LIMITATION OF LIABILITY MCI, ICS and Company hereby agree jointly and severally to indemnify, protect, defend and hold the Manager harmless from and against any and all liability, damage, cost or expense, including without limitation, court costs and reasonable attorney's fees and expenses (but excluding costs and expenses specifically identified herein as being payable by the Manager) incurred by the Manager in connection with, or as the result of, the performance by the Manager of the Manager's duties and obligations hereunder, other than any liability, damage, cost, or expense resulting from the willful misconduct or gross negligence of the Manager relating to the Company's Business. This Section 10 shall survive any termination or expiration of this Agreement for a period of three years from such termination or expiration. 11. MISCELLANEOUS 11.1 Limitation of the Manager's Liability Notwithstanding anything to the contrary in this Agreement, the Manager shall have no liability to the Company with respect to any breach of its obligations or covenants or any failure to perform its duties and responsibilities hereunder except to the extent that the Manager's breach of its obligations or failure to perform hereunder is due to the Manager's willful misconduct or gross negligence. 11.2 Consents; Waivers. Any and all consents, amendments, agreements, approvals or waivers provided for or permitted by this Agreement shall be in writing. Failure on the part of any party hereto to insist upon strict compliance by any other party, with any of the terms, covenants, or conditions hereto shall not be deemed a waiver of the term, covenant or condition. 11.3 Successors Bound; Assignment Prohibited. This Agreement shall be binding upon and inure to the benefit of the Company, and their respective successors and assigns, and shall be binding and inure to the benefit of the Manager and its permitted successors and assigns. The Manager may not assign this Agreement except (i) with the prior written consent of the Company or (ii) to a wholly-owned subsidiary of the Manager. 11.4 No Partnership or Joint Venture. Nothing contained in this Agreement shall constitute or be construed to be or create a partnership or joint venture between the Company, its successors or assigns, on the one part, and the Manager, its successors or assigns, on the other part. 11.5 Amendments. This Agreement may not be amended without the written consent of each of the parties hereto. -67- 11.6 Headings. The Article and Section headings contained herein are for convenience of reference only and are not intended to define, limit or describe the scope or intent of any provision of this Agreement. 11.7 Third Parties. Any provisions herein to the contrary notwithstanding, it is agreed that none of the obligations hereunder of any party shall run to or be enforceable by any party other than another party to this Agreement. 11.8 Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto and supersede all prior negotiations, commitments, understandings and agreements among the parties hereto, whether formal or informal, in respect of any and all matters contemplated hereby. 11.9 Severability. If any term, covenant, condition or provision of this Agreement shall be invalid or unenforceable, the remainder of this Agreement shall not be affected thereby, and each term, covenant, condition and provision shall be valid and be enforced to the fullest extent permitted by law. 11.10 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to the choice of law principles thereof. 11.11 Notices. Except for telephonic notices permitted herein, all notices, requests, demands and other communications hereunder ("Notices") shall be in writing and shall be deemed to have been duly given if (i) delivered personally or sent by registered or certified mail, return receipt requested, first class postage prepaid and properly addressed or (ii) made by facsimile delivered or transmitted, to the party to whom the notice is directed. All Notices sent by mail shall be effective upon being deposited in the United States mail in the manner prescribed above. For purposes of this Agreement, all Notices or other communications given or made hereunder shall be as follows: If to ICS: ICS Communications, Inc. 520 West Arapaho Road Richardson, Texas 75080 Tel: (214) 669-6000 Fax: (214) 669-6113 If to the Company: Interactive Cable Systems, Inc. 520 West Arapaho Road -68- Richardson, Texas 75080 Tel: (214) 669-6000 Fax: (214) 669-6113 If to Manager: Shared Technologies Fairchild, Inc. 100 Great Meadow Road, Suite 104 Wethersfield, CT 06109 Attn: Mr. Anthony D. Autorino Tel: (860) 258-2403 Fax: (860) 258-2455 -69- If to MCI: MCI Telecommunications Corporation 1801 Pennsylvania Avenue, N.W. Washington, DC 20006 Attn: Mr. Bill Armistead Tel: (202) 887-2113 Fax: (202) 887-2660 11.12 Further Instruments. The parties hereto shall execute and deliver all other appropriate supplemental agreements and other instruments, and take any other action necessary to make this Agreement fully and legally effective, binding and enforceable as between the parties. Any expenses incurred in connection therewith shall be borne by each party. 11.13 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original copy, and all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all the parties shall not have signed the same counterpart. 11.14 Confidentiality. a. Maintenance of Confidentiality. Each of the parties shall, during the Term of this Agreement and at all times thereafter, maintain in confidence all proprietary information provided by one party to the other party in connection with this Agreement. Each of the parties further agrees that it shall not use the proprietary or confidential information during the Term of this Agreement or at any time thereafter for any purpose other than the performance of its obligations under this Agreement. Each party shall take all reasonable measures necessary to prevent any unauthorized disclosure of the proprietary or confidential information by any of its employees, agents or consultants. b. Permitted Disclosures. Nothing herein shall prevent any party, or any employee, agent or consultant of any party from using, disclosing, or authorizing the disclosure of any information it receives in connection with this Agreement which: (i) is disclosed in order to comply with a judicial order issued by a court of competent jurisdiction or with government laws or regulations, in which event, to the extent possible, the receiving party shall give prior written notice to the disclosing party of the disclosure as soon as practicable and the receiving party, at the disclosing party's expense, shall cooperate with the disclosing party in using all reasonable efforts to obtain an appropriate protective or comparable confidentiality order; -70- (ii) is lawfully acquired by the receiving party from a source which the receiving party reasonably believes is not under any obligation to the disclosing party regarding disclosure of the information; (iii) is already known to the receiving party at the time of receipt or disclosure, or subsequently becomes publicly available other than through disclosure by the receiving party in violation of this Agreement or any other obligation of confidentiality, (iv) is approved for release by prior written authorization of the disclosing party; or (v) is independently developed or formulated by the receiving party without making use of any proprietary or confidential information disclosed in connection with this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Management Agreement to be executed by their duly authorized officers. SHARED TECHNOLOGIES FAIRCHILD, INC. By: ----------------------------- ICS COMMUNICATIONS, INC. By: ----------------------------- INTERACTIVE CABLE SYSTEMS, INC. By: ----------------------------- MCI TELECOMMUNICATIONS CORPORATION By: ----------------------------- -71- EX-10.15 3 INTERIM MANAGEMENT AGREEMENT EXHIBIT 10.15 INTERIM MANAGEMENT AGREEMENT This Interim Management Agreement ("Agreement") is made and entered into as of the 24th of February, 1997, by and among Shared Technologies Fairchild, Inc., a Delaware corporation (the "Manager"), GE Capital-ResCom, L.P., a Delaware limited partnership (the "Company"), ResCom, Inc., a California corporation, and POTS, Inc., a Delaware corporation (ResCom, Inc. and POTS, Inc. are sometimes referred to herein collectively as the "Partners"). RECITALS: The Company is engaged in the business of installing, operating, maintaining and managing telephone and other communications systems in multi-unit residential buildings (collectively, the "Company's Business"); and The Manager has knowledge and experience in managing and operating businesses engaged in providing telecommunications systems in residential and commercial buildings; and The Company desires that the Manager provide management personnel and services for the Company's Business, and the Manager desires and agrees to provide the necessary personnel and services therefor; and In order to induce the Manager to enter into this Management Agreement, the Partners have agreed to indemnify the Manager as is more specifically set forth herein. NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, the parties hereto agree as follows: 1. APPOINTMENT OF THE MANAGER. Subject to the terms and conditions set forth herein, the Company hereby appoints and employs the Manager as the Company's exclusive agent to provide management services set forth in Section 4 hereof in connection with the Company's Business during the term of this Agreement. The Manager accepts the appointment as exclusive agent and agrees to manage the Company's Business during the term of this Agreement, in accordance with the terms and conditions hereinafter set forth. 2. TERM. 2.1 The effective date of this Agreement shall be February 24, 1997 (the "Commencement Date"), and this Agreement shall continue in effect until the earlier of (a) termination pursuant to Section 9 hereof, (b) the execution of a management agreement by -40- ResCom, L.L.C., a limited liability company formed or to be formed under the laws of the State of Delaware ("NewCo") and the Manager for the management of NewCo's business (the "Definitive Management Agreement"), or (c) July 31, 1997. 3. COMPENSATION OF THE MANAGER. 3.1 Base Compensation. The Company shall pay to the Manager a monthly fee of one million dollars ($1,000,000.00) (the "Base Compensation") on the first day of each month beginning on April 1, 1997 until termination pursuant to Section 9 or expiration of this Agreement pursuant to Section 2; provided, however, that the Company shall pay to the Manager on February 24, 1997 an amount equal to $1,166,667.00 in respect of a pro rata portion of Base Compensation for the month of February 1997 and Base Compensation for the month of March 1997. In the event termination (computed to include all cure periods if applicable) occurs prior to the last day of a month, the Manager shall be entitled to retain only that pro rata portion of the Base Compensation for the month in which termination occurs as the number of days of such month prior to and including the date of termination bears to the total number of days of such month. Upon termination, the Manager shall remit to Company the difference (if any) between the amount of Base Compensation paid for such month and the amount to which the Manager is entitled pursuant to this paragraph. 3.2 Service Fees for Additional Services. In addition to its Base Compensation, the Manager shall also be entitled to receive from the Company as compensation for Additional Services provided pursuant to Section 4.3 hereof the following fees and expenses (collectively, the "Service Fees"): a. an amount equal to $2.50 per month per billing statement generated by the Manager for telecommunications services (regardless of the number of telephone or facsimile lines reflected on any one billing statement) pursuant to a scope of work to be mutually determined by the parties (the "Billing Fee"); plus b. an amount equal to $3.00 per month per telecommunications subscriber line monitored and maintained by the Manager pursuant to a scope of work to be mutually determined by the parties (the "Maintenance Fee") and actual replacement costs of equipment; plus c. an amount equal to $50.00 per hour (or pro rata portion thereof) for changes, additions or modifications of telephone numbers, plus the actual cost of equipment and hardware installed or provided in connection therewith pursuant to a scope of work to be mutually determined by the parties (the "Installation Fee"). provided, however, that to the extent the Company is able to obtain from another provider more favorable pricing (considered on comparable terms and conditions) with respect to the services described in clauses 3.2(a), 3.2(b), and 3.2(c), the Company shall so notify the Manager in writing and shall provide written substantiation of the third-party provider's offer. The Manager shall -41- either (1) agree to lower the Billing Fee, the Maintenance Fee, and/or the hourly component of the Installation Fee, as the case may be, payable under this Agreement to the level proposed by the third-party provider; or (2) agree to allow the third-party provider to provide the services described in clauses 3.2(a), 3.2(b), and/or 3.2(c). 4. MANAGEMENT OF THE COMPANY'S BUSINESS. 4.1 In General. The Manager shall use reasonable efforts to manage and direct the Company's Business in accordance with good operating practices in the telecommunications industry. The Manager shall use reasonable efforts to achieve the objectives of the Company's Business Plan ("Business Plan"), a copy of which is attached hereto as Exhibit A. Notwithstanding anything to the contrary herein, the Manager hereby agrees (a) to consult with the Company and to obtain the approval of the Planning Committee of the Company with respect to any and all "Major Actions" (as defined in Section 4.4 below); and (b) to use reasonable efforts to manage and direct the Company's Business in accordance with the guidelines and requirements set forth herein and in compliance with all obligations and covenants of the Company. 4.2 Duties of the Manager. Without limiting the generality of the foregoing, the Manager shall be and is hereby granted the authority and has the obligation, in accordance with the Business Plan, to manage the Company's Business in the ordinary course, specifically and without limitation to: a. Make such recommendations to the Planning Committee as are consistent with the Business Plan with respect to hiring, compensation, supervision, and discharge, on behalf of the Company, of all employees and personnel of the Company necessary for the operation of the Company's Business. b. Prepare and maintain accurate, full and complete books and records for the Company, including without limitation, accounting books and records relating to the Company's Business in accordance with generally accepted accounting principles and the provisions of this Agreement for accounting purposes, and in accordance with federal income tax accounting principles utilizing the accrual method of accounting for tax purposes; and, completion, on a timely basis, of all reports, filings, tax returns and other documents required of the Company by any governmental entity or person having jurisdiction over, or authority concerning the Company's Business, with regard to the operation of the Company's Business. c. From time to time, negotiate leases, licenses, service contracts, franchise and other agreements for all aspects of the Company's Business upon the Company's direction. -42- d. Make recommendations to the Company with respect to procurement, maintenance and compliance with all permits, licenses and other governmental approvals as are necessary to operate the Company's Business. e. Provide on a quarterly basis, or as otherwise required, information or prepare financial statements or reports for any filings with regulatory agencies, such as, but not limited to, the Internal Revenue Service, and information for any filings with lending institutions; and prepare and deliver to the Company as soon as available, and in any event within 90 days after the close of each Fiscal Year during the term of this Agreement, the consolidated and consolidating balance sheets of the Company and its subsidiaries as of the close of the Fiscal Year, and the respective statements of income and retained earnings and changes in financial position (on a consolidated basis) of the Company, and its subsidiaries for the Fiscal Year, in each case setting forth in comparative form the figures for the preceding Fiscal Year. f. Make recommendations to the Planning Committee with respect to the purchase and timing of purchase of inventory, payments of accounts payable, and collection of accounts receivable. g. Generally perform all things necessary for the overall management, direction and supervision of the Company's Business and personnel in accordance with the Business Plan. 4.3 Additional Services. In addition to the Manager's duties set forth in Sections 4.1 and 4.2 above, the Manager hereby agrees to make available the following additional services for the compensation set forth in Section 3.2: (i) generation and mailing of monthly billing statements for telecommunications services; (ii) monitoring and maintenance of telecommunications lines; and (iii) changes, additions or modifications of telephone numbers (collectively, the "Additional Services"). The Manager shall only provide such Additional Services upon the written request of the President of the Company, which request shall be delivered no later than 30 days prior to the date Manager is to commence providing such Additional Services. 4.4 Major Actions. "Major Actions" shall mean each of the following: a. any merger or consolidation with, or acquisition of all or substantially all of the assets or capital stock of, another person (or a division or other business unit of another person) or other business combination or any dissolution and winding-up of the Company; b. except as contemplated by the Business Plan, entering into any material transaction or agreement, which obligates or subjects the Company to pay a liability in excess of $50,000; -43- c. except as contemplated by the Business Plan, incurring any indebtedness for trade payables in the ordinary course of business in excess of $50,000 per month (excluding monthly trade payables to local exchange or local inter-exchange carriers and monthly commitments under service contracts to the extent in existence on the date hereof); d. except as contemplated by the Business Plan, entering into, amending, granting any waiver with respect to or terminating any agreement outside of the ordinary course of business to the extent that the agreement provides for (or, pursuant to its terms, could reasonably be expected to result in) the payment or receipt by the Company of more than an aggregate amount of $50,000 during the term thereof; e. except as contemplated by the Business Plan, entering into any agreement or transaction which has a term in excess of six months; f. except as contemplated by the Business Plan, entering into any employment or consulting agreement (or series of related employment or consulting agreements with the same person) with a term of more than six months or which provides for (or, pursuant to its terms, could reasonably be expected to result in) payments (including any payments pursuant to an employment or consulting agreement between the Company and the employee or consultant) to the employee or consultant in excess of $50,000; g. other than this Agreement, and except as specifically contemplated by the Business Plan from time to time, entering into any transaction or agreement (i) with the Manager or any Affiliate of the Manager or (ii) in which the Manager or any Affiliate of the Manager has a substantial financial interest; h. use of trademarks owned or leased to the Company by any of the Partners; i. appointing or changing the Company's independent certified public accountants; j. except as required by GAAP or applicable law, adopting or changing any accounting principle; k. commencing or settling any litigation, arbitration or governmental proceeding which is likely to result in costs or liabilities in excess of $50,000, or is likely to have a material impact on the Company or the Company's Business; l. adopting or modifying or amending in any material respect the Business Plan; -44- m. except as contemplated by the Business Plan, making any loans, investments or advances to, or guaranteeing the obligations of, any person; n. incorporating, forming or otherwise organizing a subsidiary of the Company; o. the sale of any assets of the Company having a fair market value of $50,000 or more; p. changing the location of the principal office of the Company; q. the filing by the Company of a voluntary petition in bankruptcy or for reorganization or for the adoption of an arrangement or an admission seeking the relief therein provided under any existing or future law of any jurisdiction relating to bankruptcy, insolvency, reorganization or relief of debtors; r. except as contemplated by the Business Plan, permitting any material encumbrances on any assets of the Company; or -45- s. entering into any options, contingent agreements or other arrangements which if exercised or consummated in accordance with their terms would result in an action constituting a "Major Action." 4.5 Personnel. a. The Manager's Personnel. The Manager shall at all times, assign and maintain sufficient employees and personnel, including, without limitation, executive officers, office personnel, general bookkeeping staff, and other personnel as may be required to provide proper supervision and management of the Company and to otherwise comply with the obligations of the Manager set forth in this Agreement. Exhibit B sets forth the initial list of personnel designated by the Manager pursuant to this Section 4.5(a) and their respective functions, which list may be revised by the Manager at any time in the Manager's reasonable discretion. The Manager shall provide its own personnel for the performance of the Additional Services described in Section 4.3 hereof. b. The Company's Personnel. The Manager shall supervise the work of employees of the Company. All employees of the Company shall remain under the supervision and control of the Manager, and all wages, salaries and other compensation paid thereto, including, without limitation, unemployment insurance, social security, workman's compensation and disability benefits, shall constitute operating expenses of the Company's Business and shall be chargeable to the Company. 5. CONDUCT OF BUSINESS IN THE COMPANY'S NAME 5.1 Authority to Act on Behalf of the Company. The Manager shall have the right and power to contract with third parties for, on behalf of, and in the name of the Company or otherwise bind the Company to the extent permitted pursuant to the terms of this Agreement. Third parties dealing with the Company shall be entitled to rely conclusively upon the power and authority of the Manager. 5.2 Reimbursement for Liabilities of the Company. All debts and liabilities arising in the course of the operations of the Company's Business are and shall be the obligations of the Company, and the Manager shall not be liable for any of the obligations by reason of its management of the Company's Business for the Company. 6. COMPLIANCE WITH LAWS AND COMPANY'S INTEGRITY POLICY. 6.1 The Manager shall comply with and abide by all applicable laws, rules, regulations, requirements, orders, notices, determinations and ordinances of any federal, state or municipal authority having jurisdiction over the Company's Business. -46- 6.2 Subject to Section 6.1, the Manager shall use best efforts to comply with and abide by the Company's Integrity Policy set forth in Exhibit C hereto (the "Integrity Policy") in the performance of its obligations hereunder. 6.3 With respect to any material violation of any requirements described in Section 6.1 with respect to which the Company receives a notice of non-compliance, and with respect to any violation of the Integrity Policy of which the Manager receives actual notice, the Manager shall promptly notify the Company in writing, and the Company shall have the right to contest or to require that the Manager contest any of the foregoing. The Manager shall also provide the Company with a written statement detailing the specific steps that will be taken (i) to bring the Company into compliance with the requirement of law or the provision of the Integrity Policy alleged to have been violated and (ii) to prevent future violations of that requirement or provision; provided, however, that if the Manager is in good faith and with due diligence contesting the alleged violation, the Manager shall not be obligated to provide the written statement described in the foregoing clause, but shall be required only to state in its notice that the Manager is contesting the alleged violation and the Manager's basis therefor. 7. RIGHT OF INSPECTION The Company, the Partners and their respective agents, officers, accountants, attorneys or any other party designated by the Company, shall have the right during reasonable business hours to examine or make extracts from any and all books and records maintained by the Manager or its affiliates in connection with the operation of the Company's Business in order to examine any part of the work performed by the Manager in connection with this Agreement or for any other purpose which the Company, in its sole discretion, shall deem necessary or advisable. All books and records described in the foregoing sentence are acknowledged to be the property of the Company. 8. REPRESENTATIONS AND WARRANTIES 8.1 Representations and Warranties of the Partners and the Company. The Partners and the Company jointly and severally represent and warrant to the Manager as follows: (A) Corporate Power. ResCom, Inc. is a corporation duly organized and in good standing under the law of the State of California. POTS, Inc. is a corporation duly organized and in good standing under the law of the State of Delaware. The Company is a limited partnership validly existing and in good standing under the laws of the State of Delaware. Each of the Partners and the Company has the full and unrestricted corporate or partnership (as the case may be) power and corporate or partnership (as the case may be) authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. Each of the Partners and the Company is qualified and in good standing as a foreign corporation or partnership (as the case may be) in every jurisdiction where the nature of its business or the character of its properties makes qualification necessary. Each of the Partners -47- and the Company has the full and unrestricted corporate or partnership power and corporate or partnership authority to own, operate and lease its properties and to carry on its business. (B) Authorization. All corporate action on the part of the Partners and all partnership action on the part of the Company necessary for the authorization, execution, delivery and performance by the Partners and the Company of this Agreement and the consummation of the transactions contemplated herein, has been taken or will be taken on or before February 24, 1997. (C) Validity; Execution. This Agreement is a valid and binding obligation of each of the Partners and the Company, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting enforcement of creditors' rights generally. The execution, delivery and performance by each of the Partners and the Company of this Agreement and compliance therewith will not result in any violation of and will not conflict with, or result in a breach of any of the terms of, or constitute a default under, any provision of state or Federal law to which the Partners or the Company is subject, or any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which the Partners or the Company is a party or by which it is bound, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Partners or the Company. Neither the Partners nor the Company is subject to any law, ordinance, regulation, rule, order, judgment, injunction, decree, charter, bylaw, contract, commitment, lease, agreement, instrument or other restriction or any kind that would prevent the Partners' or the Company's consummation of this Agreement or any of the transactions contemplated hereby without the consent of any third party, that would require the consent of any third party to the consummation of this Agreement or any of the transactions contemplated hereby, or that would result in any penalty, forfeiture or other termination as a result of their consummation (except, in each case, to the extent that consents and/or waivers have been obtained). 8.2 The Manager's Representations and Warranties. The Manager represents and warrants to Company as follows: (A) Corporate Power. The Manager is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the full and unrestricted corporate power and corporate authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. The Manager is qualified and in good standing as a foreign corporation in every jurisdiction where the nature of its business or the character of its properties makes qualification necessary. The Manager has the full and unrestricted corporate power and corporate authority to own, operate and lease its properties and to carry on its business. (B) Authorization. All corporate action on the part of the Manager necessary for the authorization, execution, delivery and performance by the Manager of this Agreement -48- and the consummation of the transactions contemplated herein has been taken or will be taken prior to February 24, 1997. (C) Validity; Execution. This Agreement is a valid and binding obligation of the Manager, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting enforcement of creditors' rights generally. The execution, delivery and performance by the Manager of this Agreement and compliance therewith will not result in any violation of and will not conflict with, or result in a breach of any of the terms of, or constitute a default under, any provision of state or Federal law to which the Manager is subject, or any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which the Manager is a party or by which it is bound, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Manager. The Manager is not subject to any law, ordinance, regulation, rule, order, judgment, injunction, decree, charter, bylaw, contract, commitment, lease, agreement, instrument or other restriction or any kind that would prevent the Manager's consummation of this Agreement or any of the transactions contemplated hereby without the consent of any third party, that would require the consent of any third party to the consummation of this Agreement or any of the transactions contemplated hereby, or that would result in any penalty, forfeiture or other termination as a result of their consummation (except, in each case, to the extent that consents and/or waivers have been obtained). 9. RIGHTS OF TERMINATION 9.1 Joint Rights of Termination. Either the Company or the Manager may terminate this Agreement without cause upon thirty (30) days prior written notice. 9.2 The Manager's Rights of Termination. The Manager shall have the right to terminate this Agreement upon the occurrence of any of the following events: a. A material breach by the Partners or the Company (as the case may be) under this Agreement; or b. In the event Base Compensation or the Service Fees are not paid when due. 9.3 Company's Rights of Termination. The Company shall have the right to terminate this Agreement upon occurrence of any of the following events: (a) willful misconduct or gross negligence by the Manager in the performance of its duties under this Agreement or a material breach by the Manager under this Agreement; (b) the dissolution, liquidation, bankruptcy or insolvency of the Manager (including (i) the filing of a voluntary petition seeking liquidation, reorganization, arrangement -49- or readjustment in any form, of its debts under Title 11 of the United States Code or any other federal or state insolvency law, or its filing of an answer consenting to or acquiescing in the subject petition, (ii) the making of any assignment for financing purposes, or (iii) the expiration of 90 days after the filing of an (A) involuntary petition under Title 11 of the United States Code, (B) an application for the appointment of a receiver for its assets, or (C) an involuntary petition seeking liquidation, reorganization, arrangement or readjustment of its debts under any other federal or state insolvency law, provided that the same shall not have been vacated, set aside or stayed within the 90-day period); or (c) a sale of the Company or substantially all of the Company's assets. 9.4 Exercise of the Right of Termination. (a) Upon the occurrence of any event listed in Section 9.2, the Manager shall not have the right to terminate this Agreement until it has given written notice to the Company stating that in the Manager's opinion an event described in Section 9.2 has occurred that gives the Manager the right to terminate this Agreement; provided, however, that (i) upon the occurrence of any event listed in Section 9.2(a), the Company shall have fifteen days following delivery of the notice described in the foregoing clause to cure or cause to be cured the breach under this Agreement, or a longer period of reasonable duration if the default or breach is not capable of being cured within fifteen days and the Company is using diligent efforts to cure the default or breach, and (ii) upon the occurrence of any event listed in Section 9.2(b), the Company shall have one day following delivery of the notice described in the foregoing clause to cure or cause to be cured the failure to pay the Base Compensation (in either case, the "Cure Period"). Upon the expiration of the Cure Period, the Manager may terminate this Agreement unless the Company has cured or caused to be cured its default or breach. The Company shall remain liable for amounts, if any, payable to the Manager pursuant to Sections 3, 4 or 5 hereof for accrued but unpaid compensation or unreimbursed expenses to the last day of the calendar month in which termination occurs. (b) Upon the occurrence of any event listed in Section 9.3, the Company shall not have the right to terminate this Agreement until it has given written notice to the Manager stating that in the Company's opinion an event listed in Section 9.3(a) or (b) has occurred that gives the Company the right to terminate this Agreement; provided, however, that with respect to any event described in Section 9.3(a), the Manager shall have thirty days following delivery of the notice described in the foregoing clause to cure its default, or a longer period of reasonable duration if the default is not capable of being cured within thirty days the Manager is using diligent efforts to cure the default or breach (in either case, the "Cure Period"). The Manager shall have no Cure Period with respect to an the occurrence of an event described in Section 9.3(b). Upon the expiration of the Cure Period, if any, the Company may terminate this Agreement unless the Manager has cured its default or breach. (c) The right of termination shall be in addition to other rights and remedies as shall be available at law or in equity. -50- 9.5 Transition Following Termination. Following any termination of this Agreement, (i) the Manager agrees to deliver to the Company on or before the date the termination will be effective all books and records related to the Company's Business which are in the possession of the Manager; and (ii) the Manager shall use reasonable efforts to cooperate in connection with effecting a business like and efficient transition of the Company's operations and management, including transition to a newly selected manager. 10. INDEMNIFICATION; LIMITATION OF LIABILITY 10.1 The Partners and the Company hereby agree jointly and severally to indemnify, protect, defend and hold the Manager harmless from and against any and all liability, damage, cost or expense, including without limitation, court costs and reasonable attorney's fees and expenses (but excluding costs and expenses specifically identified herein as being payable by the Manager) incurred by the Manager in connection with, or as the result of, the performance by the Manager of the Manager's duties and obligations hereunder, other than any liability, damage, cost, or expense resulting from the willful misconduct or gross negligence of the Manager relating to the Company's Business. This Section 10 shall survive any termination or expiration of this Agreement for a period of three years from such termination or expiration. 10.2 The Manager hereby agrees to indemnify, protect, defend and hold the Company harmless from and against any and all damages in excess of $50,000 to the extent incurred by the Company as a direct result of the Manager's entering into contracts on behalf of the Company that violate the terms of this Agreement. 11. MISCELLANEOUS 11.1 Limitation of the Manager's Liability Notwithstanding anything to the contrary in this Agreement, the Manager shall have no liability to the Company with respect to any breach of its obligations or covenants or any failure to perform its duties and responsibilities hereunder except to the extent that the Manager's breach of its obligations or failure to perform hereunder is due to the Manager's willful misconduct or gross negligence, except as otherwise provided in Section 10.2. 11.2 Consents; Waivers. Any and all consents, amendments, agreements, approvals or waivers provided for or permitted by this Agreement shall be in writing. Failure on the part of any party hereto to insist upon strict compliance by any other party, with any of the terms, covenants, or conditions hereto shall not be deemed a waiver of the term, covenant or condition. 11.3 Successors Bound; Assignment Prohibited. This Agreement shall be binding upon and inure to the benefit of the Company, and their respective successors and assigns, and shall -51- be binding and inure to the benefit of the Manager and its permitted successors and assigns. The Manager may not assign this Agreement except with the prior written consent of the Company. 11.4 No Partnership or Joint Venture. Nothing contained in this Agreement shall constitute or be construed to be or create a partnership or joint venture between the Company, its successors or assigns, on the one part, and the Manager, its successors or assigns, on the other part. 11.5 Amendments. This Agreement may not be amended without the written consent of each of the parties hereto. 11.6 Headings. The Article and Section headings contained herein are for convenience of reference only and are not intended to define, limit or describe the scope or intent of any provision of this Agreement. 11.7 Third Parties. Any provisions herein to the contrary notwithstanding, it is agreed that none of the obligations hereunder of any party shall run to or be enforceable by any party other than another party to this Agreement. 11.8 Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto and supersede all prior negotiations, commitments, understandings and agreements among the parties hereto, whether formal or informal, in respect of any and all matters contemplated hereby. 11.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without reference to the choice of law principles thereof. 11.10 Notices. Except for telephonic notices permitted herein, all notices, requests, demands and other communications hereunder ("Notices") shall be in writing and shall be deemed to have been duly given if (i) delivered personally or sent by registered or certified mail, return receipt requested, first class postage prepaid and properly addressed or (ii) made by facsimile delivered or transmitted, to the party to whom the notice is directed, so long as the notifying Party retains a facsimile confirmation sheet from the sending facsimile machine. All Notices sent by mail shall be effective upon being deposited in the United States mail in the manner prescribed above. For purposes of this Agreement, all Notices or other communications given or made hereunder shall be as follows: If to the Partners: POTS, Inc. c/o GE Capital Corp. 292 Longridge Road Stamford, Connecticut 06927 -52- Attn: Jane Alpert Tel: (203) 357-4575 Fax: (203) 357-6768 ResCom, Inc. c/o GE Capital ResCom, L.P. 5757 Century Blvd., Suite 400 Los Angeles, California 90045 Attn: Howard Ruby Tel: (310) 410-7170 Fax: (310) 410-7450 -53- If to the Company: GE Capital ResCom, L.P. 5757 Century Blvd., Suite 400 Los Angeles, California 90045 Attn: Robert E. Stenson, Esquire Tel: (310) 410-7380 Fax: (310) 410-7450 If to Manager: Shared Technologies Fairchild, Inc. 100 Great Meadow Road, Suite 104 Wethersfield, CT 06109 Attn: Mr. Anthony D. Autorino Tel: (860) 258-2403 Fax: (860) 258-2455 -69- 11.11 Arbitration. Any controversy, dispute or claim arising out of or relating to this Agreement, any modification or extension hereof, or any breach hereof (including the question whether any particular matter is arbitrable hereunder) shall be settled exclusively by arbitration, in [New York, New York] in accordance with the rules of the CPR Legal Program then in force (the "Rules"). The party requesting arbitration shall serve upon the other party to the controversy, dispute or claim a written demand for arbitration stating the substance of the controversy, dispute or claim and the contention of the party requesting arbitration. The parties hereto agree to abide by all awards and decisions rendered in an arbitration proceeding in accordance with the foregoing, and all such awards and decisions may be filed by the prevailing party with any court having jurisdiction over the person or property of the other party as a basis for judgment and the issuance of execution thereon. All costs and expenses of arbitration or litigation relating to this Agreement shall be paid by the non-prevailing party. 11.12 Further Instruments. The parties hereto shall execute and deliver all other appropriate supplemental agreements and other instruments, and take any other action necessary to make this Agreement fully and legally effective, binding and enforceable as between the parties. Any expenses incurred in connection therewith shall be borne by each party. 11.13 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original copy, and all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all the parties shall not have signed the same counterpart. -54- 11.14 Confidentiality. a. Maintenance of Confidentiality. Each of the parties shall, during the Term of this Agreement and at all times thereafter, maintain in confidence all proprietary information provided by one party to the other party in connection with this Agreement. Each of the parties further agrees that it shall not use the proprietary or confidential information during the Term of this Agreement or at any time thereafter for any purpose other than the performance of its obligations under this Agreement. Each party shall take all reasonable measures necessary to prevent any unauthorized disclosure of the proprietary or confidential information by any of its employees, agents or consultants. b. Permitted Disclosures. Nothing herein shall prevent any party, or any employee, agent or consultant of any party from using, disclosing, or authorizing the disclosure of any information it receives in connection with this Agreement which: (i) is disclosed in order to comply with a judicial order issued by a court of competent jurisdiction or with government laws or regulations, in which event, to the extent possible, the receiving party shall give prior written notice to the disclosing party of the disclosure as soon as practicable and the receiving party, at the disclosing party's expense, shall cooperate with the disclosing party in using all reasonable efforts to obtain an appropriate protective or comparable confidentiality order; (ii) is lawfully acquired by the receiving party from a source which the receiving party reasonably believes is not under any obligation to the disclosing party regarding disclosure of the information; (iii) is already known to the receiving party at the time of receipt or disclosure, or subsequently becomes publicly available other than through disclosure by the receiving party in violation of this Agreement or any other obligation of confidentiality, (iv) is approved for release by prior written authorization of the disclosing party; or (v) is independently developed or formulated by the receiving party without making use of any proprietary or confidential information disclosed in connection with this Agreement. 11.15 Further Covenant. The parties hereto agree that, with respect to their respective obligations hereunder, time is of the essence. IN WITNESS WHEREOF, the parties hereto have caused this Interim Management Agreement to be executed by their duly authorized officers. -55- Shared Technologies Fairchild, Inc. By: --------------------------------------- Anthony D. Autorino Chief Executive Officer GE ResCom, L.P. By: --------------------------------------- Robert E. Stenson Title: Vice President, Legal and Regulatory Affairs ResCom, Inc. By: --------------------------------------- Howard Ruby Title: POTS, Inc. By: --------------------------------------- Ed Santoro Title: -56- EX-21 4 SUBSIDIARIES EXHIBIT 21 Subsidiaries of Shared Technologies Fairchild Inc. 1. Access Network Services, Inc. 2. Shared Technologies Fairchild Communications Corp. 3. Shared Technologies Fairchild Telecom, Inc. 4. STF Canada, Inc. EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2703 0 24363 (611) 1976 39095 95934 (28169) 369566 47860 126525 0 39175 63 0 369566 157241 157241 (82572) (82572) (3912) 0 (22903) (7475) (783) (8258) 0 (311) 0 (8569) (.79) 0
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