-----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, DeWjeTo5hY+C3SzM0J5gUA4Ov2pOaPyiH97D0FdD4sqrmzkcaf8z97xCw2uEIj4V PfEvT3Veat81vgNeK0s4wA== 0000914039-99-000150.txt : 19990402 0000914039-99-000150.hdr.sgml : 19990402 ACCESSION NUMBER: 0000914039-99-000150 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHARED TECHNOLOGIES CELLULAR INC CENTRAL INDEX KEY: 0000933583 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 061386411 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13558 FILM NUMBER: 99580987 BUSINESS ADDRESS: STREET 1: 100 GREAT MEADOW RD STREET 2: SUITE 102 CITY: WETHERSFIELD STATE: CT ZIP: 06109 BUSINESS PHONE: 8602582500 MAIL ADDRESS: STREET 1: C/O SHARED TECHNOLOGIES CELLULAR INC STREET 2: 100 GREAT MEADOW ROAD SUITE 102 CITY: WETHERSFIELD STATE: CT ZIP: 06109 10-K 1 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K _ X _ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT Of 1934 For the fiscal year ended December 31, 1998 OR _ _ _ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________ to ________ Commission File Number 1-13732 SHARED TECHNOLOGIES CELLULAR, INC. (Exact name of registrant as specified in its charter) Delaware 06-1386411 (State or other jurisdiction of (I.R.S. Employer incorporation 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) 258-2500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 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 29, 1999 was approximately $51,060,000 based on 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 29, 1999 7,650,107 shares of Common Stock $.01 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 May 20, 1999 to be filed with the Securities and Exchange Commission in definitive form on or before April 30, 1999. 2 PART I ITEM 1. BUSINESS (a) General Development of Business - Shared Technologies Cellular, Inc. ("STC" or the "Company"), a Delaware corporation incorporated in 1989, is a national cellular service provider offering rental, prepaid and activation services in over 690 of approximately 750 Cellular Geographical Service Areas ("CGSA") within the United States. The Company rents cellular telephones to business and leisure travelers and to individuals at sporting events or in government agencies. As a reseller or agent for cellular and PCS carriers, the Company offers cellular service to approximately 96% of the U.S. population. STC also performs nationwide cellular activation services through a variety of retail and commercial outlets. The Company has expanded the scope of its prepaid (debit) cellular service to include a national activation, customer service and collection service operation through major mass merchants. Through the acquisitions of certain assets from Road and Show Cellular East, Inc., Road and Show South Ltd. and Road and Show Pennsylvania, Inc. (collectively "Road and Show"), in December 1993, the Company obtained a national distribution network, including relationships with national car rental companies and hotels, which the Company has significantly expanded since that date. Immediately following the Road and Show acquisitions, the Company had approximately 1,300 portable cellular telephones available to rent at approximately 60 distribution outlets. As of December 31, 1998, the Company had approximately 4,000 cellular telephones available to rent at approximately 300 distribution outlets. In April 1995, the Company completed its initial public offering. Prior to the offering, the Company was an approximately 86%-owned subsidiary of Shared Technologies Fairchild Inc., ("STFI"). The Company sold 950,000 shares of its common stock, $0.01 par value ("Common Stock") for $5.25 per share, which generated net proceeds of approximately $3,562,000 after underwriters' commissions and offering expenses. In conjunction with the Company's initial public offering, $1,184,000 of the amount due to STFI was contributed to the Company's capital in excess of par value. In May 1995, the Company commenced management of, and subsequently acquired the outstanding capital stock of Cellular Hotline, Inc., ("Hotline"), a cellular telephone activation service provider. The purchase price was $1,329,000 comprised of $217,000 in cash, the assumption of $712,000 of accounts payable, the issuance of a promissory note of $150,000 and the balance through the issuance of 50,000 shares of the Company's Common Stock, valued at $5.00 per share. At the discretion of the former Hotline stockholders, in September 1995, STC was required to repurchase all of the Common Stock issued to the former Hotline stockholders for $5.00 per share. Additionally, at closing, STC issued options to purchase 50,000 additional shares, exercisable at $7.50 per share for three years. The options to purchase 50,000 additional shares expired, without being exercised, in May 1998. In November 1995, the Company completed its acquisition of substantially all of the assets of PTC Cellular, Inc. ("PTCC"), one of the largest in-car cellular telephone providers in the United States. The purchase price was $3,725,000, comprised of $300,000 in cash, $1,200,000 in assumed accounts payable, a five-year promissory note in the principal amount of $2,000,000 and the issuance of 100,000 shares of Common Stock, valued at $2.25 per share. In December 1995, the Company sold its resale business to SNET Mobility, Inc. The sale included the Company's customer accounts relating to the resale business and the corresponding accounts receivable, for approximately $1.1 million in cash. In December 1995, the Company completed a $3 million private placement of equity with International Capital Partners, Inc., ("ICP"), a Stamford, Connecticut based investment firm, two of whose principals are currently directors of the Company. The $3 million offering proceeds, net of commissions, was used primarily for the acquisition of certain assets of PTCC and to provide additional working capital. Under the terms of the offering, STC issued 300,000 3 shares of its Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Stock"). Each preferred shareholder was entitled to receive dividends equal to 10% per annum for the first twelve month period, payable in additional shares of Series A Stock. In addition, the Company issued to ICP a five-year warrant to purchase 150,000 shares of the Company's Common Stock at an exercise price of $2.50. In May 1996, all of the outstanding Series A Stock, including 11,260 shares received as dividends, were converted into 1,146,450 shares of Common Stock. In August 1996 the Company's' stockholders voted to cancel the Company's' authority to issue additional shares of the Series A Stock. In April 1996, the Company completed its acquisition of substantially all of the assets of its only franchisee, Summit Assurance Cellular, Inc. and certain other parties (collectively "Summit") The purchase price was approximately $3,563,000 comprised of $335,000 in cash, the assumption of $669,000 of accounts payable and $656,000 of notes payable, the issuance of a promissory note for $953,000, and the issuance of 300,000 shares of Common Stock, valued at $3.125 per share and three-year warrants each to purchase 100,000 shares of the Company's Common Stock at prices of $3.00, $4.00 and $5.00 per share, respectively. These warrants were valued at $13,000. In April 1998, the Company, Summit and Craig Marlar, who was an officer and director of Summit and was a director of the Company until his resignation in April 1998, entered into a settlement of litigation arising out of the acquisition of certain assets of Summit, whereby the Company received from Summit 100,000 shares of the Company's common stock. The stock received was in exchange for the assumption by the Company of $150,000 to a vendor on behalf of Summit, a one-year extension of the expiration date of the warrants issued in connection with the acquisition, the issuance to Summit of a warrant to purchase 100,000 shares of the Company's common stock at an exercise price of $5.00 per share, and forgiveness of all amounts due, including accrued interest, on a note receivable from Summit in the principal amount of $180,000. The effect of this transaction on the Company's results of operations was immaterial. In August 1996, the Company completed a $5 million private placement with ICP and STFI for 500,000 shares of Series B Preferred Stock, $.01 par value per share (the "Series B Stock"). The Company received gross proceeds from the offering of $5 million, including the cancellation of $1,200,000 of preexisting debt to STFI. A commission of $125,000 was paid to ICP. In August 1997, all of the outstanding Series B Stock was converted into 1,667,000 shares of the Company's Common Stock and the shareholders received warrants to purchase an equal number of Common Stock at an exercise price of $3.00 per share. Separately, the Company engaged the services of ICP to provide certain financial advisory services to the Company for a period of one year. In consideration for such services, the Company issued a five-year Common Stock Warrant to ICP for the purchase of 240,000 shares of Common Stock at an exercise price of $3.00 per share and on terms substantially the same as those provided for in the Common Stock Warrants issued to the purchasers of the Series B Stock. In December 1996, the Company entered into an agreement (the "Purchase Agreement") with RHI Holdings, Inc. ("RHI") pursuant to which the Company sold to RHI 500,000 common stock units ("Units") with each Unit consisting of one share of Common Stock, and one warrant to purchase an additional share of Common Stock at $3.00 per share. The Company received proceeds of $1,469,000, net of certain transactional expenses, from the sale of such Units. The Purchase Agreement provided for STC to use its best efforts to cause the Board of Directors of STC to include at least one member designated by RHI so long as RHI owns capital stock (or the rights to purchase capital stock) comprising 5% or more of the voting power in STC, and at least two members designated by RHI so long as RHI owns capital stock (or the rights to purchase capital stock) comprising 10% or more of the voting power in STC. To date, no RHI-designated directors have joined the Board of Directors. The Company used the proceeds received from the sale of the Units for working capital. In August and September 1997, the Company sold an additional 407,000 Units through a private placement that included various members of the Company's management. The sale generated proceeds of $1,220,000. In April 1998, the Company secured debt financing in the principal amount of $4,000,000 from four lenders, in connection with which the Company issued warrants to purchase an aggregate of 400,000 shares of the Company's Common Stock. Pursuant to credit agreements entered into in April 1998, the Company borrowed $1,000,000 from Anthony D. Autorino, the Company's Chairman and Chief Executive Officer; $500,000 from ICP; $2,000,000 from Salomon Brothers Holding Company Inc. ("Salomon"); and $500,000 from a private investor. The credit agreements had a maturity date of July 1999 and a floating interest rate of 2.5% above a rate comparable to the prime rate. The Company used a portion of the proceeds raised in February 1999 (see below) to repay the $4,000,000 of debt. In connection with the April 1998 debt financing, the Company issued to Mr. Autorino, ICP, Salomon and the private 4 investor warrants for the purchase of 100,000, 50,000, 200,000 and 50,000 shares of Common Stock, respectively. The warrants are exercisable at $5.00 per share, and expire April 15, 2003. The warrants were valued at $100,000. In connection with the financing, the Company paid a facility fee of $25,000 to ICP Investments, Inc. with respect to the funding by ICP and the private investor, and paid a facility fee of $50,000 to Salomon. In May 1998, the Company issued to nine investors through a nonpublic offering, 5% convertible notes in the aggregate principal amount of $2,400,000 (the "Notes"). The Company relied on the exemption provided by Regulation D promulgated under the Act. Purchasers of the Notes included an affiliate of ICP, International Capital Partners Profit Sharing Trust, which purchased a Note in the amount of $200,000. The Notes have a term of seven years and are convertible at any time at the option of the noteholder into shares of the Company's Common Stock at a rate of $5.00 per share, subject to certain antidilution adjustments. The Company has the right to force conversion of the Notes after three years, in the event that the Company's Common Stock trades at or above $10 per share for at least five consecutive trading days. In February 1999, the Company closed a $15 million private placement of equity with 20 investors, led by Marshall Capital Management, Inc., an affiliate of Credit Suisse First Boston, and a number of European-based institutional investors. Oakes, Fitzwilliams & Co. S.A. of London acted as placement agent for the Company in connection with the sales to the European investors. Pursuant to a Securities Purchase Agreement entered into between the Company and the investors (the "Securities Purchase Agreement"), the Company issued an aggregate of 15,000 shares of a new Series C Convertible Preferred Stock, $.01 per share, and Warrants to purchase an aggregate of 300,000 shares of Common Stock, $.01 par value, of the Company. Each share of Series C Convertible Preferred Stock is convertible into Common Stock of the Company (See Item 14, Reports on Form 8-K). (b) Financial Information about Industry Segments - The Company is engaged in three industry segments within the telecommunications industry; providing a wide range of services including, debit cellular phone services, short-term cellular phone rentals and activation of cellular phones. (c) Narrative Description of Business (1)(i) Products and Services DEBIT SERVICES The significant revenue growth of the cellular industry has been accompanied by an equally significant increase in carrier bad debt expense. Carrier response to this problem has been the imposition of increasingly stringent credit requirements on potential customers, which have resulted in the rejection of approximately 35% of those applying for cellular service. To allow these customers access to cellular communications, STC has developed a program that allows subscribers an easy, pay-as-you-go option for cellular service. Debit, or prepaid, cellular service provides a solution to credit problems and affords businesses more control over their cellular expenses. STC is pursuing prepaid cellular aggressively, as it represents a substantial and relatively untapped segment of the cellular marketplace. STC has entered the prepaid cellular market in a number of ways. First, is CellEase(R), which makes prepaid service available to customers at select retailers and electronic shopping networks. Currently, customers can choose one of several handsets and purchase CellEase(R) airtime usage. The Company's back office capabilities are comprehensive, providing the tracking, customer service, collection services, marketing, and reporting functions required to support the growing customer demand for prepaid cellular service. In February, 1999, STC signed an agreement appointing MCI WorldCom as a distribution channel for its prepaid cellular offering. MCI WorldCom will market STC's prepaid cellular offering to national retail accounts under the MCI WorldCom name, although promotional materials and airtime usage cards also will carry the CellEase(R) logo. 5 STC's other product, It's About Choices(TM), allows customers to choose between prepaid and postpaid (traditional) cellular service. Sold as a "phone-in-a-box," It's About Choices(TM) is a true consumer electronics product with a single SKU (stock keeping unit) number nationwide. The customer purchases the phone and usage cards, returns home, charges the battery, and calls STC to initiate service. Customers electing traditional cellular service must pass a credit check and sign a one-year service contract before the phone is activated. If the customer does not meet credit standards, the phone may be activated on a prepaid basis. STC also makes its prepaid offering available on a private-label basis. Dealers interested in entering the fast-growing prepaid cellular market need only to contract with STC to obtain nationwide service and the necessary back office systems. Customers face no credit checks, security deposits, monthly access fees, or long-term contracts when they obtain this service. CELLULAR PHONE RENTALS The Company markets its cellular telephone rental services principally through car rental agencies, international airlines and hotels. The Company has agreements with the Hertz Corporation ("Hertz"), National Car Rental System, Inc., ("National"), Budget Rent-A-Car Corporation ("Budget"), Avis Rent-A-Car Systems, Inc. ("Avis"), and Alamo Rent-A-Car, Inc. ("Alamo"), as well as car rental company licensees, to offer its portable cellular telephones at designated car rental locations. The Company's phones are located primarily in airport terminals (rental car locations) in approximately 70 cities throughout the United States. In addition, the Company markets its cellular telephone services at conventions and sporting events. For example, the Company has rented cellular telephones at the NCAA basketball tournament for the last four years, the 1996 Summer Olympics in Atlanta, and the 1996 and 1995 New York Marathon. The Company also rents cellular telephones on site following emergency and disaster situations through arrangements with telecommunications carriers, the Federal Emergency Management Agency and other governmental agencies. ACTIVATION SERVICES With the acquisition of Hotline, STC became one of the largest providers of nationwide cellular phone activation services. The Company acts as an agent linking retail points of sale to more than 690 cellular markets, using its 1,200 individual carrier contracts nationwide. The Company maintains contracts and relationships with most cellular carriers in the United States, and can provide the necessary administrative services to permit a customer in a store within the United States to purchase a phone with activated cellular service. In addition to charging a service fee to the national distribution partner, the Company also derives revenues from the cellular carrier in the form of commissions, residual payments, and other revenue sharing. The Company offers its activation services to the cellular carriers under its "MOVE/Customer Retention Program". This program is a nationwide subscriber retention/relocation program which offers a carrier's customers the ability to exit from existing contracts and establish service at the new location with one phone call. The old carrier benefits as it receives a portion of the activation fee from the new cellular carrier via the Company, while the customer is allowed to terminate its existing contract without paying the contract's early cancellation fee. (iv) PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS The Company, through its wholly-owned subsidiary, The Cellular Hotline, Inc., holds a patent for point-of-sale programming of cellular phones that is utilized in connection with phone activations. In addition, the Company has certain technology licenses, including agreements with Telemac Corporation, US Intellicom, Boston Communications Group, and JRC International. "Shared Technologies Cellular" is a registered trademark that is owned by STFI. STC has a royalty-free license to use such mark for 15 years. The Company has registered the trademark "CellEase" and is currently using "It's About Choices", which it is contemplating registering. 6 (v) SEASONALITY The Company has experienced a reduction of revenues from phone rentals in the winter months due to the reduction in business travel during the holiday season and inclement weather. (vi) WORKING CAPITAL Since its inception as a subsidiary of STFI, and through its initial public offering in April 1995, the Company's losses were substantially funded by STFI and private placements of debt and equity. In addition, STFI funded the purchase price paid for the Company's Road and Show acquisitions. In January 1997 and in April 1996, STFI contributed to the Company's capital in excess of par value approximately $1,700,000 and $1,184,000, respectively, of the Company's indebtedness to STFI. See Item 1(a) - "General Development of Business", "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Notes to Consolidated Financial Statements" herein. (vii) DEPENDENCE ON CERTAIN CUSTOMERS Approximately 24%, 12%, 19% and 10% of the Company's revenues for 1998 were attributable to SmarTalk TeleServices, Inc. ("SmarTalk"), Thorn Americas, Inc., Hertz and Avis, respectively. The Company's relationship with SmarTalk was terminated in the fourth quarter of 1998 (See "Legal Proceedings"). STC's distributor relationship with Thorn Americas, Inc. ended in November 1998. The Company has enjoyed its relationship with Hertz and Avis for several years. Nevertheless, the longevity of these relationships is generally subject to contractual termination provisions that are effective upon relatively short notice. (viii) BACKLOG At any given time the Company maintains approximately 4,000 portable cellular telephones available for short-term rentals. Due to the varying utilization of the telephones, backlog information for the portable rental business cannot be quantified. (ix) GOVERNMENT REGULATION From time to time, legislation and regulations that could potentially affect the Company, either beneficially or adversely, have been proposed by federal and state legislators and regulators. Management is not aware of any current pending or proposed legislation or regulations which, if adopted, would have a material adverse impact on the Company's operations. (x) COMPETITION The telecommunications industry in general, and the cellular telephone industry in particular, are highly competitive. Competitive factors include price, customer service, geographical coverage and the ability to increase revenues through marketing. The Company's short-term portable service competes with local, regional and national cellular service companies, some of which have substantially more experience and greater financial, technical and other resources than the Company. Other cellular providers in the debit market include: Boston Communications Group, USCI, Inc., national carriers such as MCI, GTE, AT&T, and local resellers. In addition, Topp Telecom, Inc., an alternative technology provider, offers a turnkey solution similar to the STC CellEase program. In the activation business, the Company faces competition mainly from other resellers, mass merchants, carriers and agents, many of which may have substantially more experience and greater financial, marketing, technical and other resources than the Company. (xiii) EMPLOYEES As of March 26, 1999, the Company had 312 employees; 10 in management, 21 in administration, 268 in sales and service and 13 in technical positions. The Company's employees are not represented by a labor union. The Company believes its relations with its employees are satisfactory. 7 ITEM 2. PROPERTY The Company does not own any real estate and has no present plans to purchase any real estate. The Company's principal executive office is leased and is located at 100 Great Meadow Road, Suite 104, Wethersfield, Connecticut 06109. The Company's executive office currently occupies approximately 23,000 square feet pursuant to a five-year lease agreement, as amended in July 1998, expiring in 2001 (the "Term"). The Company pays a monthly rent of approximately $35,000 during the remainder of the Term. In addition, the Company leases an aggregate of approximately 26,000 square feet in various locations nationwide for the purpose of direct sales by its sales force, for a total monthly rent of approximately $25,000. Each of the leased properties is, in management's opinion, generally well maintained and is suitable to support the Company's business. ITEM 3. LEGAL PROCEEDINGS In January 1999, the Company filed a lawsuit against SmarTalk and certain individuals in the U.S. District Court for the District of Connecticut. The Company's complaint includes allegations of breach of contract and fraud in connection with various agreements between SmarTalk and the Company. SmarTalk subsequently filed for federal bankruptcy protection. The Company's complaint seeks recovery of $25 million in damages, and the Company has filed a proof of claim with the bankruptcy court (U.S. Bankruptcy Court, District of Delaware) for $14.4 million. The Company intends to aggressively prosecute its claim, although due to SmarTalk's impaired financial condition, the amount of any recovery against SmarTalk is questionable. The Company is not involved in any other litigation which, individually or in the aggregate, if resolved against the Company, would be likely to have a material adverse effect on the Company's financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fiscal quarter ended December 31, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's shares of common stock (trading symbol: STCL) have been quoted and traded in the over-the-counter market since April 21, 1995. Over-the-counter market quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. During 1998 and 1997, the quarterly high and low closing prices were as follows:
1998 1998 1997 1997 ----- ----- ------- ------- High Low High Low First Quarter 5 3 1/4 2 21/32 1 3/8 Second Quarter 8 1/8 4 1/4 2 3/8 1 3/16 Third Quarter 7 3/8 5 1/8 6 1/4 1 15/16 Fourth Quarter 7 3 3/4 5 3/4 3 1/8
8 Number of beneficial holders of the Company's common stock as of March 15, 1999 was 677. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth the selected financial data of the Company for each of the last five years. Financial statements for 1995 and 1994 are not presented in this filing. Such selected financial data were derived from audited 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. All amounts, except per share amounts, are in thousands.
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Statement of Operations-Data: Revenues $ 28,200 $ 24,198 $ 20,914 $ 13,613 $ 10,217 Gross margin 10,835 10,667 7,285 5,026 4,923 Total operating expenses 21,523 14,120 14,173 8,015 4,272 Income (loss) from operations (10,688) (3,453) (6,888) (2,989) 651 Gain on sale of division -- -- -- 689 -- Loss on discontinued affiliate -- -- -- (364) -- Loss on contract cancellation -- -- (980) -- -- Interest expense, net 952 232 906 136 49 Net income (loss) before income taxes (11,640) (3,685) (8,774) (2,800) 602 Income taxes (6) (10) (22) (48) -- Net income (loss) (11,646) (3,695) (8,796) (2,848) 602 Preferred stock dividends -- -- (112) -- -- Net income (loss) applicable to common stock $(11,646) $ (3,695) $ (8,908) $ (2,848) $ 602 Net income (loss) per common share, basic and diluted $ (1.58) $ (0.63) $ (2.18) $ (1.04) $ 0.28 Weighted average number of shares outstanding 7,375 5,900 4,082 2,748 2,185 Balance Sheet Data: Working deficit $(16,099) $ (6,955) $ (8,975) $ (1,851) $ (920) Total assets 13,487 11,536 14,262 14,378 5,452 Notes payable (including current portion) 7,331 1,487 2,578 2,000 -- Other liabilities 14,840 7,832 8,768 6,290 2,449 Indebtedness to STFI 1,411 1,052 59 985 2,434 Accumulated deficit (28,354) (16,708) (13,013) (4,105) (1,256) Stockholders' equity (deficit) $(10,095) $ 1,165 $ 2,857 $ 5,102 $ 569
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION: YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Revenues for 1998 were $28,200,000, compared to $24,198,000 for 1997, an increase of $4,002,000 (17%). This increase was due to the expansion of the debit (prepaid) services, which grew by over 100%. The loss from operations, excluding non-recurring charges, was $4,194,000 in 1998 and $1,416,000 in 1997. The net loss for 1998 was $11,646,000, compared to a net loss of $3,695,000 for 1997. The basic and diluted loss per common share was $1.58 for 1998, compared to $0.63 for 1997. Revenues Debit, or prepaid, operations had revenues of $12,737,000 for 1998, compared to $6,299,000 for 1997. The increase in revenues of $6,438,000 (102%) was due to a new end-user program being marketed under the CellEase brand name. The Company experienced significant revenue growth from CellEase beginning in April 1998. The increase in the CellEase program was partially offset by a $2,796,000 reduction in revenues from a major distributor due to a price reduction given in order to keep the distributor competitive with the CellEase program. In addition, during the fourth quarter of 1998, the distributor transitioned its prepaid cellular phone business customers over to the Company's CellEase end-user program, which negatively impacted revenues. For the fourth quarter of 1998, revenues from the CellEase program were below Company expectations. This was a direct result of the deterioration of the Company's relationship with its main distributor, SmarTalk TeleServices, Inc. ("SmarTalk"). In the fourth quarter, SmarTalk introduced a new prepaid cellular phone to retailers that did not utilize the Company's' cellular service, which the Company has alleged in a lawsuit against SmarTalk was in violation of SmarTalk's contract with STC (see "Legal Proceedings"). Retailers were confused by conflicting directives, resulting in significant lost revenues to the Company, which was particularly detrimental to the Company's sales for the year-end holiday period. In January 1999, SmarTalk filed for bankruptcy. Cellular telephone rental operations had revenues of $14,037,000 for 1998, compared to $15,242,000 for 1997. The decrease in revenues of $1,205,000 (8%) was attributable to the Company de-emphazising the Special Events and Airlines programs due to local competition and the high costs to generate revenues from such operations. Revenues from the car rental companies were flat for the two years. However, during the second half of 1998, the Company changed its emphasis to be more of a sales-oriented business and less of a service-oriented business. As a result, revenues from the car rental companies for the last six months of 1998, compared to the last six months of 1997, increased 6%. Activation operations had revenues of $1,426,000 for 1998, compared to $2,657,000 for 1997. The decrease of $1,231,000 (46%) was mainly attributable to the discontinuance of operations at military bases in late 1997. In addition, the Company closed its Texas activation location in November 1997. Gross Margin Gross margin was 38% of revenues for 1998, compared to 44% of revenues for 1997. The decrease in gross margin was mainly due to a change in the revenue mix. The following table summarizes the change in the revenue mix and the corresponding gross margin for the two years:
1998 1997 Revenues Gross margin Revenues Gross margin Debit 45% 27% 26% 43% Rental 50% 48% 63% 46% Activation 5% 45% 11% 37% 100% 38% 100% 44%
10 The gross margin for the debit operations decreased as a result of a price reduction given to a major distributor and due to the end-user CellEase program having a lower margin than the distributor program. The distributor program accounted for most of the 1997 debit revenues. The gross margin for portable cellular rental operations improved slightly due to a slight reduction in carrier costs. The gross margin for the activation operations improved significantly due to a change in the product mix to more retail activations, which generally provided higher commissions to the Company than activations performed at the military bases. Selling, General and Administrative Expenses Selling, general and administrative expenses ("S,G&A") were $15,029,000 for 1998, compared to $12,083,000 for 1997, an increase of $2,946,000. As a percentage of revenues, S,G&A increased to 53% for 1998, compared to 50% for 1997. The percentage increase was attributable to additional corporate overhead incurred following the March 1998 acquisition of Shared Technologies Fairchild Inc. ("STFI") by Intermedia Communications, Inc. STFI, the former parent of the Company, had been providing certain support and management services to the Company under a management agreement. Such additional expenses included payroll for certain former employees of STFI who had not previously received direct compensation from the Company. Field S,G&A, as a percentage of revenues, decreased slightly to 41% in 1998, compared to 42% in 1997. As previously discussed, the Company did not achieve the anticipated fourth quarter 1998 CellEase revenues, even though the Company increased its S,G&A in anticipation of the additional revenues. Loss on Distributor Contract In December 1998 the Company terminated its relationship with SmarTalk and filed a lawsuit against SmarTalk (see "Legal Proceedings"). SmarTalk subsequently filed for bankruptcy protection. As a result, the Company recognized a one-time $6,494,000 charge related to the termination of its agreement with SmarTalk. The charge included approximately $1,975,000 of receivables owed by SmarTalk. An additional $3,121,000 pertains to the unamortized portion of prepaid assets relating to a subsidy the Company paid SmarTalk for cellular phone sales to retailers. The Company had been amortizing the subsidy against future revenues generated from end users. An additional $1,398,000 related to expenses incurred by the Company in the fourth quarter of 1998 in connection with the Company's contract with SmarTalk, including the addition of a new call center in Hartford and expansion of the existing call center in St. Louis. In addition, the Company purchased several thousand new cellular lines in anticipation of an increase in volume. Most of the new lines required significant minimum commitment periods. The Company also incurred losses from the cost of lines for existing customers that could not purchase airtime as a result of the problems with SmarTalk. Interest Expense Interest expense was $952,000 for 1998, compared to $232,000 for 1997. Interest expense was mainly due to debt from acquisitions made in prior years, debt to STFI, and debt financing completed in May 1998. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenues for 1997 were $24,198,000, an increase of $3,284,000 (16%) over revenues for 1996. This increase was primarily due to the expansion of the debit business and the April 1996 purchase of the operations of the Company's sole franchisee, both of which were partially offset by the elimination of the in-car cellular rental operations. The loss from operations, excluding non-recurring charges, was $1,416,000 in 1997 and $6,888,000 in 1996. The net loss for 1997 was $3,695,000, compared to a net loss of $8,796,000 for 1996. The improvement was a result of the change in the revenue mix to more profitable lines of business and a reduction in operating expenses. The basic and diluted loss per common share was $0.63 for 1997, compared to $2.18 for 1996. Revenues The cellular telephone rental operations had revenues of $15,242,000 for 1997, compared to $16,339,000 for 1996. The decrease of $1,097,000 (7%) was attributable to two non-recurring sources of revenue in 1996. In 1996, the in-car operation generated revenues of $3,143,000; such line of business was discontinued in 1997. In the third quarter of 1996, the Company generated revenues of $1,434,000 from the summer's Olympic Games. These decreases for 1997 11 were offset by $2,259,000 in additional revenues in 1997 from the Summit acquisition. The remaining balance of the increase was mainly due to the addition of Avis, which allowed the Company to increase its penetration within existing portable cellular rental market areas. The debit operations had revenues of $6,299,000 for 1997, compared to $1,516,000 for 1996. This significant increase was due to the rapid expansion into the debit business in the first quarter of 1997. The Company increased the number of cellular prepaid lines with Rent A Center from 5,000 to 15,000 during that period. The activation operations had revenues of $2,657,000 for 1997, compared to $3,059,000 for 1996. This decrease was mainly due to a reduction in activation revenues by the Company's Texas location that was closed in November 1997. In addition, several national retailers ceased to offer cellular telephone activations through the Company in 1996. These revenue losses were offset by activations done at various retail locations. Gross Margin Gross margin increased to 44% of revenues for 1997, from 35% of revenues for 1996. This improvement was mainly due to significant changes in revenue mix. The in-car operations represented 15% of 1996 revenues but had no gross margin, compared to no revenues in 1997. As previously discussed, the in-car operations were discontinued in 1997. The gross margin for both the portable cellular rental and the debit operations improved due to a reduction in carrier costs as a result of better line management and lower carrier usage costs. As a percentage of revenue, the debit business increased from 7% in 1996 to 26% in 1997. The activation operations had a small reduction in gross margin due to lower activation commissions received from carriers. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") decreased $2,090,000 (15%), to $12,083,000 for 1997 from $14,173,000 for 1996. As a percentage of revenues, SG&A decreased to 50% for 1997, compared to 68% for 1996. This decrease was due to several factors. In the latter part of fiscal year 1996, the Company made a concerted effort to reduce its operating expenses. The Company consolidated its Special Events operation into its portable rental business, it transitioned its in-car cellular telephone rental operation to its portable cellular telephone rental business, and implemented other cost-cutting measures, such as staff reductions, office closings and travel restrictions that resulted in an overall decrease in SG&A. The Company was also able to include the revenues from the Summit acquisition with minimal amounts of additional SG&A, which helped to reduce SG&A as a percentage of revenues. Loss on Discontinued Product Line During 1997, the Company completed the transition of its in-car rental accounts to portable rentals. In conjunction with this transition, the Company attempted to develop alternate uses for the in-car cellular telephones, as well as the capitalized software development costs associated with the in-car cellular rental business. Although management believes that there are viable uses for such assets, the probability that such usage will be successful is not known. As a result, the Company recognized a $2,037,000 writedown to reduce the in-car cellular phones and the capitalized software development costs to net realizable value and classified them on the balance sheet as assets held for disposition. Interest Expense Interest expense was $232,000 for 1997, compared to $906,000 for 1996. Interest expense in 1997 was mainly due to debt relating to the PTCC acquisition in November 1995 and the Summit acquisition in April 1996. LIQUIDITY AND CAPITAL RESOURCES: The Company had a working capital deficit of $16,099,000 at December 31, 1998, compared to a deficit of $6,955,000 at December 31, 1997. Stockholders' deficit at December 31, 1998 was $10,095,000, compared to stockholders' equity of $1,165,000 at December 31, 1997. 12 Net cash used in operations for the year ended December 31, 1998 was $4,941,000. This was mainly due to the operating loss for the period, offset by delayed payments to carriers and other vendors. Net cash used in investing activities for the year ended December 31, 1998 was $1,133,000. This was mainly attributable to the purchase of cellular phones for rental operations, computer and office equipment to support the CellEase program, and deposit requirements by carriers for additional lines. During the year ended December 31, 1998, the Company received $6,400,000 of debt financing, as previously discussed. The Company continued to make required payments on its existing debt. The Company will require additional funds in order to satisfy existing obligations arising from completed acquisitions, and to fund current expansion plans. In February 1999, the Company closed on a $15 million private placement of equity with 20 investors (See Item 14, Reports on Form 8-K). Also, in March 1999, the Company signed a letter of intent with a financial institution the Company currently does business with to establish a $10 million credit facility, subject to the financial institution's satisfactory completion of a due diligence review of the Company. Management believes that ongoing operations, together with the equity financing and the credit facility, will provide the Company with sufficient funds to finance operations and planned expansion for at least the next 12 months, and long-term liquidity will depend on the Company's ability to attain profitable operations. YEAR 2000 COMPLIANCE: The Company has conducted a review of its computer systems and believes that the majority of its systems are properly adapted to avoid a Year 2000 problem. The Company believes that all its computer systems will be Year 2000 compliant by the end of the second quarter of 1999. The Company further intends to conduct extensive testing of its systems to assure that it is Year 2000 compliant by the end of the second quarter. The expense incurred by the Company to achieve compliance has not been material. The Company is currently working with outside vendors to obtain assurances that they are Year 2000 compliant. However, there can be no assurance that all of the Company's vendors, including carriers, will achieve compliance on a timely basis. In the event of any such noncompliance by vendors, a material adverse effect to the Company's operations and financial results could occur. The Company has not developed any contingency plan to address the possibility of vendor-related Year 2000 problems. 1999 COMPANY OUTLOOK The Company expects to show revenue growth in each of its operations in 1999. The wireless industry continues to diversify and expand with abundant opportunities. PCS, GSM and other wireless carriers are now entering the marketplace. Subscription growth continues to be double-digit as new products and services, such as pre-paid cellular, have been launched. The Company believes it is positioned to take advantage of these opportunities; offering travelers a communication device throughout the United States, offering pre-paid cellular and activation services through national retailers, and working with wireless carriers to offer their customers, who are relocating, a more economical activation process. The debit operations are expected to show considerable revenue growth in 1999. In February 1999, the Company signed an agreement with MCI WorldCom for the retail distribution of the Company's prepaid cellular services under the MCI WorldCom brand name, utilizing MCI WorldCom's extensive network of retail distribution locations. The cellular phone rental operations are expected to have moderate revenue growth in 1999. To achieve this, STC intends to refocus the car rental partner's efforts in soliciting more customers through training and improved policies and procedures, by improving awareness through marketing programs, and by penetrating the premiere traveler programs (e.g. Avis Preferred, Hertz Gold). In addition, the Company is in the process of analyzing a new product (handset), pricing structure and partner contribution in the solicitation of the cellular rental program. The activation operations are expected to have moderate revenue growth. The Company is working with various carriers to implement its MOVE/Customer Retention Program, which provides activation services for carriers' customers who are in the process of relocating. The Company has automated the activation process by establishing an activation Internet site, which should make the Program more attractive to carriers. 13 "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: THE MANAGEMENT'S DISCUSSION AND ANALYSIS MAY INCLUDE FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN ANY FORWARD-LOOKING STATEMENT. SUCH RISKS AND UNCERTAINTIES MAY INCLUDE, WITHOUT LIMITATION, TECHNOLOGICAL OBSOLESCENCE, PRICE AND INDUSTRY COMPETITION, FINANCING CAPABILITIES, DEPENDENCE ON MAJOR CUSTOMERS AND RELATIONSHIPS, DEPENDENCE ON RELATIONSHIPS WITH TECHNOLOGY LICENSORS AND TELECOMMUNICATIONS CARRIERS, AND THE COMPANY'S ABILITY TO EFFECTIVELY EXECUTE ITS BUSINESS PLAN WITH RESPECT TO SIGNIFICANT PROJECTED GROWTH IN ITS DEBIT SERVICES DIVISION, IN PARTICULAR, WITH RESPECT TO ITS VENTURE WITH MCI WORLDCOM. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 14 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE (ITEM 8) Page FINANCIAL STATEMENTS: Independent Auditors' Report F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity (Deficiency) F-5 Consolidated Statements of Cash Flows F-6-7 Notes to Consolidated Financial Statements F-8-20 FINANCIAL STATEMENT SCHEDULE (A): Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996 S-1 NOTE: (a) All other schedules are not submitted because they are either not applicable, not required or the required information is included in the consolidated financial statements or notes thereto. F-1 15 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Shared Technologies Cellular, Inc. We have audited the accompanying consolidated balance sheets of Shared Technologies Cellular, Inc. and Subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows and financial statement schedule for each of the three years in the period ended December 31, 1998. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 consolidated financial position of Shared Technologies Cellular, Inc. and Subsidiary as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. ROTHSTEIN, KASS & COMPANY, P.C. Roseland, New Jersey March 5, 1999 F-2 16 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
1998 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash $ 229,000 $ 294,000 Accounts receivable, less allowance for doubtful accounts of $896,000 in 1998 and $991,000 in 1997 1,169,000 1,637,000 Carrier commissions receivable, less unearned income 992,000 163,000 Inventories 234,000 131,000 Current portion of note receivable 107,000 Prepaid expenses and other current assets 2,030,000 127,000 ------------ ------------ Total current assets 4,654,000 2,459,000 ------------ ------------ TELECOMMUNICATIONS AND OFFICE EQUIPMENT, net 1,125,000 985,000 ------------ ------------ OTHER ASSETS: Intangible assets, net 6,993,000 7,551,000 Deposits 715,000 326,000 Note receivable, less current portion 62,000 Assets held for disposition 153,000 ------------ ------------ 7,708,000 8,092,000 ------------ ------------ $ 13,487,000 $ 11,536,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Current portion of notes payable $ 5,913,000 $ 530,000 Accounts payable 7,439,000 3,876,000 Accrued expenses and other current liabilities 6,153,000 3,912,000 Deferred revenues 1,248,000 44,000 Due to former parent 1,052,000 ------------ ------------ Total current liabilities 20,753,000 9,414,000 ------------ ------------ NOTES PAYABLE, less current portion 2,829,000 957,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIENCY): Preferred stock, $.01 par value, authorized 5,000,000 shares, no shares issued or outstanding Common stock, $.01 par value, authorized 20,000,000 shares, issued and outstanding 7,567,000 shares in 1998 and 7,216,000 shares in 1997 76,000 72,000 Capital in excess of par value 18,183,000 17,801,000 Accumulated deficit (28,354,000) (16,708,000) ------------ ------------ Total stockholders' equity (deficiency) (10,095,000) 1,165,000 ------------ ------------ $ 13,487,000 $ 11,536,000 ============ ============
See accompanying notes to consolidated financial statements F-3 17 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ REVENUES $ 28,200,000 $ 24,198,000 $ 20,914,000 COST OF REVENUES 17,365,000 13,531,000 13,629,000 ------------ ------------ ------------ GROSS MARGIN 10,835,000 10,667,000 7,285,000 ------------ ------------ ------------ SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 15,029,000 12,083,000 14,173,000 LOSS ON DISCONTINUED PRODUCT LINE 2,037,000 LOSS ON DISTRIBUTOR CONTRACT 6,494,000 ------------ ------------ ------------ 21,523,000 14,120,000 14,173,000 ------------ ------------ ------------ LOSS FROM OPERATIONS (10,688,000) (3,453,000) (6,888,000) ------------ ------------ ------------ OTHER EXPENSE: Interest expense (952,000) (232,000) (906,000) Loss on contract cancellation (980,000) ------------ ------------ ------------ (952,000) (232,000) (1,886,000) ------------ ------------ ------------ LOSS BEFORE INCOME TAXES (11,640,000) (3,685,000) (8,774,000) INCOME TAXES (6,000) (10,000) (22,000) ------------ ------------ ------------ NET LOSS (11,646,000) (3,695,000) (8,796,000) PREFERRED STOCK DIVIDENDS (112,000) ------------ ------------ ------------ NET LOSS APPLICABLE TO COMMON STOCK $(11,646,000) $ (3,695,000) $ (8,908,000) ============ ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.58) $ (.63) $ (2.18) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,375,000 5,900,000 4,082,000 ============ ============ ============
See accompanying notes to consolidated financial statements F-4 18 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) Years Ended December 31, 1998, 1997 and 1996
Series A Series B Preferred Stock Preferred Stock ----------------------------- ------------------------------- Shares Amount Shares Amount -------------- ------------- --------------- -------------- BALANCES, January 1, 1996 300,000 3,000 - $ - ISSUANCE OF COMMON STOCK ISSUANCE OF PREFERRED STOCK 500,000 5,000 PREFERRED STOCK DIVIDEND 11,000 CONVERSION OF PREFERRED STOCK (311,000) (3,000) ISSUANCE OF COMMON STOCK FOR ACQUISITIONS COMMON STOCK SUBSCRIPTION NET LOSS -------------- ------------- --------------- -------------- BALANCES, December 31, 1996 - - 500,000 5,000 ISSUANCE OF COMMON STOCK CONVERSION OF PREFERRED STOCK (500,000) (5,000) NET LOSS -------------- ------------- --------------- -------------- BALANCES, December 31, 1997 - - - - ISSUANCES OF COMMON STOCK AND WARRANTS EXERCISE OF WARRANTS AND OPTIONS CANCELLATION OF COMMON STOCK NET LOSS -------------- ------------- --------------- -------------- BALANCES, December 31, 1998 - - - $ - ============== ============= =============== ==============
Common Stock Common Capital in ------------------------------- Stock Excess of Shares Amount Subscription Par Value --------------- -------------- ------------- ----------------- BALANCES, January 1, 1996 3,089,000 $ 31,000 $ 5,000 $ 9,173,000 ISSUANCE OF COMMON STOCK 264,000 3,000 760,000 ISSUANCE OF PREFERRED STOCK 4,828,000 PREFERRED STOCK DIVIDEND 112,000 CONVERSION OF PREFERRED STOCK 1,147,000 11,000 (8,000) ISSUANCE OF COMMON STOCK FOR ACQUISITIONS 300,000 3,000 947,000 COMMON STOCK SUBSCRIPTION 63,000 1,000 (5,000) 4,000 NET LOSS --------------- -------------- ------------- ----------------- BALANCES, December 31, 1996 4,863,000 49,000 - 15,816,000 ISSUANCE OF COMMON STOCK 686,000 7,000 1,996,000 CONVERSION OF PREFERRED STOCK 1,667,000 16,000 (11,000) NET LOSS --------------- -------------- ------------- ----------------- BALANCES, December 31, 1997 7,216,000 72,000 - 17,801,000 ISSUANCES OF COMMON STOCK AND WARRANTS 271,000 3,000 201,000 EXERCISE OF WARRANTS AND OPTIONS 180,000 2,000 547,000 CANCELLATION OF COMMON STOCK (100,000) (1,000) (366,000) NET LOSS --------------- -------------- ------------- ----------------- BALANCES, December 31, 1998 7,567,000 $ 76,000 $ - $ 18,183,000 =============== ============== ============= =================
Total Stockholders' Accumulated Note Equity Deficit Receivable (Deficiency) ----------------- -------------- ---------------- BALANCES, January 1, 1996 $ (4,105,000) $ (5,000) $ 5,102,000 ISSUANCE OF COMMON STOCK 763,000 ISSUANCE OF PREFERRED STOCK 4,833,000 PREFERRED STOCK DIVIDEND (112,000) - CONVERSION OF PREFERRED STOCK - ISSUANCE OF COMMON STOCK FOR ACQUISITIONS 950,000 COMMON STOCK SUBSCRIPTION 5,000 5,000 NET LOSS (8,796,000) (8,796,000) ----------------- -------------- ---------------- BALANCES, December 31, 1996 (13,013,000) - 2,857,000 ISSUANCE OF COMMON STOCK 2,003,000 CONVERSION OF PREFERRED STOCK - NET LOSS (3,695,000) (3,695,000) ----------------- -------------- ---------------- BALANCES, December 31, 1997 (16,708,000) - 1,165,000 ISSUANCES OF COMMON STOCK AND WARRANTS 204,000 EXERCISE OF WARRANTS AND OPTIONS 549,000 CANCELLATION OF COMMON STOCK (367,000) NET LOSS (11,646,000) (11,646,000) ----------------- -------------- ---------------- BALANCES, December 31, 1998 $ (28,354,000) $ - $ (10,095,000) ================= ============== ================
See accompanying notes to consolidated financial statements F-5 19 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(11,646,000) $ (3,695,000) $ (8,796,000) Adjustments to reconcile net loss to net cash used in operating activities: Accretion of interest on notes payable 75,000 30,000 Write-off of assets held for disposition 153,000 2,037,000 Depreciation and amortization 1,332,000 1,292,000 1,684,000 Common stock issued for compensation and services 104,000 71,000 40,000 Accrued interest, note receivable (11,000) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 468,000 (16,000) (429,000) Carrier commissions receivable (829,000) (110,000) 400,000 Inventories (103,000) (51,000) (31,000) Prepaid expenses and other current assets (1,903,000) 6,000 339,000 Accounts payable and other current liabilities 6,204,000 (980,000) 2,124,000 Deferred revenues 1,204,000 44,000 (404,000) ------------ ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES: (4,941,000) (1,413,000) (5,043,000) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of businesses (336,000) Purchases of equipment (744,000) (318,000) (953,000) Payments for intangible assets (514,000) (Increase) decrease in deposits (389,000) 47,000 (231,000) Collection of receivable from sale of assets 1,078,000 Collections of note receivable 45,000 ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (1,133,000) (271,000) (911,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable 6,400,000 Payments for debt issuance costs (171,000) Payments on notes payable (530,000) (1,091,000) (1,080,000) Advances from (payments to) former parent (239,000) 993,000 274,000 Issuance of common and preferred stock 1,932,000 4,362,000 Exercise of warrants and options 549,000 ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 6,009,000 1,834,000 3,556,000 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH (65,000) 150,000 (2,398,000) CASH, beginning of year 294,000 144,000 2,542,000 ------------ ------------ ------------ CASH, end of year $ 229,000 $ 294,000 $ 144,000 ============ ============ ============
See accompanying notes to consolidated financial statements F-6 20 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 --------- --------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 863,000 $ 379,000 $ 280,000 ========= ========= ========== Income taxes $ 6,000 $ 10,000 $ 20,000 ========= ========= ========== SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Cost of intangible assets included in accounts payable $ -- $ -- $ 88,000 ========= ========= ========== Issuance of common stock for acquisitions $ -- $ -- $ 950,000 ========= ========= ========== Note payable incurred for acquisition of assets $ -- $ -- $1,139,000 ========= ========= ========== Issuance of Series B Convertible Preferred Stock in exchange for amount due to parent $ -- $ -- $1,200,000 ========= ========= ========== Preferred stock issued for preferred stock dividend $ -- $ -- $ 112,000 ========= ========= ========== Cancellation of common stock to settle outstanding receivable $ 367,000 $ -- $ -- ========= ========= ========== Issuance of warrants in connection with certain promissory notes $ 100,000 $ -- $ -- ========= ========= ==========
See accompanying notes to consolidated financial statements F-7 21 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS Shared Technologies Cellular, Inc. (STC) together with its subsidiary (collectively the "Company") is a nationwide provider of short-term cellular telephone services, activation services and debit telephone services in the United States. The Company's operations are subject to regulation by the Federal Communications Commission (FCC), which has generally preempted the regulatory jurisdiction of state agencies with respect to the business in which the Company is engaged. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of STC and its wholly-owned subsidiary. All material intercompany accounts and transactions have been eliminated in consolidation. Cash The Company maintains its cash in bank deposit accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not subject to any significant credit risk on cash. Fair Value of Financial Instruments The fair value of the Company's assets and liabilities which qualify as financial instruments under Statement of Financial Accounting Standards No. 107 approximates the carrying amounts presented in the consolidated balance sheets. Carrier Commissions Receivable Carrier commissions receivable are due from cellular carriers for new cellular telephone line activations done by the Company. The commissions are earned only after the cellular telephone user has remained on the cellular telephone network for a specified period of time (vesting period). The Company records an allowance, as a reduction to carrier commissions receivable, for estimated cancellations of cellular service by the user prior to the end of the aforementioned vesting period. Although there is a short-term vesting period for which the Company must wait in order to receive its commission, the Company believes that the revenue process has been completed and recognizes the revenue over the estimated life of the phone line, typically twelve months. F-8 22 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Inventories Inventories, consisting of telecommunications equipment and parts expected to be sold to customers, are valued at the lower of cost, on the first-in, first-out (FIFO) method, or market. Impairment of Long-Lived Assets The Company reviews its long-lived assets, such as telecommunications and office equipment, identifiable intangibles and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. Impairment is the amount by which the carrying value of the asset exceeds its fair value. Telecommunications and Office Equipment Telecommunications and office equipment are stated at cost. The Company records depreciation on the straight-line method over the estimated useful lives of the assets as follows: Telecommunications equipment 2-5 years Office equipment 3-5 years Intangible Assets Goodwill represents the excess of cost over the fair market value of net assets of acquired businesses and is amortized over periods ranging from 15 to 20 years from the respective acquisition dates. The Company monitors the cash flows of the acquired operations to assess whether any impairment of recorded goodwill has occurred. The Company amortizes the cost to obtain exclusive agreements to provide cellular telephone rentals at specific locations on the straight-line basis over the life of the respective agreements, generally five to six years. Debt Issuance Costs Costs incurred relating to the issuance of debt are deferred and are being amortized over the life of the related debt. The amortization of debt issuance costs included in interest expense was $83,000, nil and nil in 1998, 1997 and 1996, respectively. Revenue Recognition Revenues related to providing cellular telephone services are recognized as the service is provided. Debit card revenue is recognized over the estimated period in which the Company provides debit telephone service to its customers. F-9 23 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Advertising Costs The Company expenses costs of advertising and promotions as incurred. Advertising expenses included in selling, general and administrative expenses for the years ended December 31, 1998, 1997 and 1996 were approximately $308,000, $132,000 and $153,000, respectively. Income Taxes The Company filed its federal income tax returns on a consolidated basis with its former parent through April 1996, the date of its initial public offering ("IPO"). Subsequent to April 1996, the Company's income tax returns are being filed separately. The Company complies with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes", which requires an asset and liability approach to financial reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the 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 affect taxable income. Valuation allowances are established, when necessary, to reduce the deferred tax assets to the amount expected to be realized. 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. Loss Per Common Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share". SFAS No. 128 requires dual presentation of basic and diluted earnings per share for all periods presented. Basic earnings per share excludes dilution and is computed by dividing loss applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Prior period loss information has been restated as required by SFAS No. 128. Diluted loss per common share is the same as basic loss per common share for the years ended December 31, 1998, 1997 and 1996. Unexercised stock options to purchase 699,000, 365,000 and 281,000 shares of the Company's common stock as of December 31, 1998, 1997 and 1996, respectively, were not included in the computations of diluted earnings per share because their effect would have been antidilutive as a result of the Company's losses. F-10 24 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - LIQUIDITY The Company has incurred cumulative net losses of approximately $28,350,000 through December 31, 1998 and has a working capital deficit of approximately $16,100,000 at December 31, 1998. In February 1999, the Company completed a $15,000,000 private placement of equity issuing an aggregate of 15,000 shares of Series C Convertible Preferred Stock (Note 19). Long-term liquidity is dependent on the Company's ability to attain profitable operations. NOTE 4 - ACQUISITIONS In April 1996, the Company completed its acquisition of substantially all of the assets of its only franchisee, Summit Assurance Cellular Inc. and its subsidiaries and affiliates (Summit). The purchase price was $3,563,000, comprised of $335,000 in cash, the assumption of $669,000 of accounts payable and $656,000 of notes payable, the issuance of a promissory note for $953,000, the issuance of 300,000 shares of the Company's common stock valued at fair market value of $3.125 per share and warrants to purchase an aggregate of 300,000 shares of the Company's common stock at prices of $3.00, $4.00 and $5.00 per share, respectively, for each 100,000 shares. These warrants were valued at $13,000, which represents the excess of the fair market value of the common stock over the exercise price on the date of issuance. The warrants vested immediately and expire in 2000. In 1998, the Company received 100,000 shares of its common stock which was issued in the Summit acquisition and assumed a $150,000 liability of Summit, in payment for the remaining balance of the note receivable from Summit. In addition, the Company issued to Summit a warrant for the purchase of 100,000 shares exercisable at $5 per share and expiring in 2001. The following unaudited pro forma condensed consolidated statement of operations for 1996 gives effect to the acquisition of Summit as if it had occurred on January 1, 1996: Revenues $ 21,784,000 ============ Net loss $ (9,269,000) ============ Net loss applicable to common stockholders $ (9,382,000) ============ Basic and diluted loss per common share $ (2.25) ============
NOTE 5 - PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current asset consist of the following at December 31, 1998 and 1997:
1998 1997 Prepaid telephone line charges $ 732,000 $ 88,000 Prepaid access fees 878,000 33,000 Marketable securities 408,000 Other 12,000 6,000 ---------- ---------- $2,030,000 $ 127,000 ========== ==========
F-11 25 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - TELECOMMUNICATIONS AND OFFICE EQUIPMENT Telecommunications and office equipment consist of the following at December 31, 1998 and 1997:
1998 1997 Telecommunications equipment $2,504,000 $2,341,000 Office equipment 1,411,000 835,000 ---------- ---------- 3,915,000 3,176,000 Accumulated depreciation 2,790,000 2,191,000 ---------- ---------- $1,125,000 $ 985,000 ========== ==========
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $604,000, $650,000 and $902,000, respectively. NOTE 7 - INTANGIBLE ASSETS Intangible assets consist of the following at December 31, 1998 and 1997:
1998 1997 Goodwill $8,426,000 $8,426,000 Covenant not to compete 142,000 142,000 Rental car agreement 520,000 520,000 Debt issuance costs 171,000 ---------- ---------- 9,259,000 9,088,000 Accumulated amortization 2,266,000 1,537,000 ---------- ---------- $6,993,000 $7,551,000 ========== ==========
Amortization expense for the years ended December 31, 1998, 1997 and 1996 was $619,000, $642,000 and $782,000, respectively. NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following at December 31, 1998 and 1997:
1998 1997 Sales and other taxes $4,428,000 $3,174,000 Payroll and payroll taxes 124,000 137,000 Commissions 222,000 166,000 Other 1,379,000 435,000 ---------- ---------- $6,153,000 $3,912,000 ========== ==========
F-12 26 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - NOTES PAYABLE Notes payable consist of the following at December 31, 1998 and 1997:
1998 1997 Promissory note bearing interest at 8% per annum and payable in semi-annual principal installments of $225,000 through May 2000. The note is collateralized by certain of the Company's assets. $ 675,000 $ 1,125,000 Promissory notes bearing interest at 10% per annum and payable in monthly installments of $8,500 through March 2002. 281,000 362,000 Promissory notes bearing interest at prime rate (7.75% at December 31, 1998) plus 2.50% per annum and payable on or before July 1, 1999. The notes include warrants to purchase 400,000 shares of the Company's common stock at $5.00 per share through April 2003. 3,975,000 Convertible debt bearing interest at 5% per annum. Interest is payable quarterly, with principal, due in May 2005. The debt may be converted into shares of the Company's common stock, at $5.00 per share. 2,400,000 Promissory note, to former parent, bearing interest at Prime (7.75% at December 31, 1998) plus 2% per annum payable quarterly, with principal, due in November 1999. 1,411,000 -- ------------------ ------------------- 8,742,000 1,487,000 Less current portion 5,913,000 530,000 ------------------ ------------------- $ 2,829,000 $ 957,000 ================== ===================
F-13 27 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - NOTES PAYABLE (CONTINUED) Aggregate future principal payments are as follows: Year Ending December 31, 1999 $ 5,913,000 2000 310,000 2001 94,000 2002 25,000 2003 Thereafter 2,400,000 ------------------- $ 8,742,000 =================== NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIENCY) The Company has reserved for issuance 3,316,000 shares of its common stock relating to common stock purchase warrants outstanding as of December 31, 1998, at prices ranging from $2.50 to $7.09 per share. In August and September 1997, the Company sold an aggregate of 407,000 units, at $3.00 per unit, through a private placement that included various members of the Company's management. Each unit consists of one share of common stock and one warrant to purchase one share of common stock at $3.00 per share. During December 1996, the Company entered into an agreement to sell an aggregate of 500,000 units, at $3.00 per unit, through a private placement. In December 1996, 250,000 units were sold, and the remaining 250,000 units were sold in January 1997. In August 1996, the Company sold 500,000 shares of Series B Convertible Preferred Stock (Series B) for $10 per share through a private placement, including 250,000 shares purchased by its former parent, Shared Technologies Fairchild Inc. (STFI). Each share of Series B, which pays no dividends was convertible into a minimum of 2.50 shares and a maximum of 3.33 shares of the Company's common stock, subject to certain adjustments. In addition, in 1996, the Company paid $125,000 and issued warrants to purchase 240,000 shares of common stock, at an exercise price of $3.00 per share, to a firm which provided advisory services to the Company. This advisory firm in which two of its principals are directors of the Company, was a party to the sale of 250,000 shares of Series B. During 1997, the Series B stockholders converted their shares into an aggregate of 1,667,000 shares of the Company's common stock. Upon conversion of the Series B shares, the holders received one warrant per common share to purchase an additional share of the Company's common stock at an exercise price of $3.00 per share. F-14 28 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCK OPTION PLANS The Board of Directors adopted, and the Company's stockholders approved, as amended, a stock option plan (the Plan) pursuant to which 825,000 shares of the Company's common stock are reserved for issuance upon the exercise of options granted to officers, employees, consultants and directors of the Company. Options issued under the Plan are nonqualified stock options (NSO's) and the Board of Directors (Committee) will grant NSO's at an exercise price which is not less than the fair market value on the date such options are granted. The Plan further provides that the maximum period in which stock options may be exercised will be determined by the Committee, except that they may not be exercisable after ten years from the date of grant. At December 31, 1998, options to purchase 657,000 shares of common stock were outstanding. The Board of Directors adopted, and the stockholders approved, the Company's 1994 Director Option Plan (the Director Plan), as amended, pursuant to which 100,000 shares of the Company's common stock are reserved for issuance upon the exercise of options to be granted to non-employee directors of the Company. Under the Director Plan, an eligible director will automatically receive, at the commencement of the Director's one-year term, nonstatutory options to purchase 4,000 shares of the Company's common stock at an exercise price equal to the fair market value of such shares at the time of grant. Each such option vests ratably over a one-year period following the grant and is exercisable within the ten years from the date of grant, but generally may not be exercised more than 90 days after the date the director ceases to serve as a director of the Company. At December 31, 1998, options to purchase 42,000 shares of the Company's common stock were outstanding under the Director Plan. The activity in the Plan and the Director Plan are as follows:
Exercise Price Per Share Number of Weighted Options Range Average --------------- ----------------- ------------- Balance outstanding, January 1, 1996 231,000 $ 1.63-5.00 $ 3.45 Granted 55,000 2.75-4.75 3.69 Expired (5,000) 3.68 3.68 --------------- ----------------- ------------- Balance outstanding, December 31, 1996 281,000 1.63-5.00 3.33 Granted 93,000 2.13-2.50 2.15 Expired (9,000) 3.68-5.00 4.22 --------------- ----------------- ------------- Balance outstanding, December 31, 1997 365,000 1.63-4.75 3.01 Granted 380,000 5.56-7.13 5.60 Exercised (28,000) 2.13-4.75 2.75 Expired (18,000) 2.13-6.50 4.10 --------------- ----------------- ------------- Balance outstanding, December 31, 1998 699,000 $ 1.63-7.13 $ 4.38 =============== ================= ============= Exercisable, December 31, 1998 292,000 $ 1.63-7.13 $ 3.36 =============== ================= =============
F-15 29 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - STOCK OPTION PLANS (CONTINUED) The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation". The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates, consistent with SFAS No. 123, the Company's net loss and net loss per share would have been adjusted to the pro forma amounts indicated below:
1998 1997 1996 Net loss applicable to common stockholders: As reported $ (11,646,000) $ (3,695,000) $ (8,908,000) Pro forma (12,009,000) (3,770,000) (8,920,000) Net loss per share applicable to common stockholders: As reported (1.58) (.63) (2.18) Pro forma (1.63) (.64) (2.19)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free interest rate of 5%, 6% and 6%, respectively; no dividend yield; expected lives of 3 to 10 years; and expected volatility of 91%, 64% and 62%, respectively. NOTE 12 - LOSS ON DISCONTINUED PRODUCT LINE During 1997, the Company completed the transition of the existing in-car rental accounts to portable rentals. In conjunction with this transition, the Company attempted to develop alternate uses for the in-car cellular telephones as well as the capitalized software associated with the in-car cellular rental business. Although management believes that there are viable uses for such assets, the probability that such uses will be successful is not known. As a result, the Company reduced the in-car cellular phones and the capitalized software to net realizable value and classified them on the balance sheet as assets held for disposition. The company wrote-off the balance of the in-car cellular phones during the year ended December 31, 1998. NOTE 13 - SAVINGS AND RETIREMENT PLAN In June 1996, the Company formed a savings and retirement plan (the Plan) which covers substantially all eligible employees. Participants in the Plan may elect to make contributions up to a maximum of 20% of their compensation. For each participant, the Company will make a matching contribution of one-half of the participant's contributions, up to 5% of the participant's compensation. Matching contributions may be made in the form of the Company's common stock and are vested at the rate of 33% per year based on years of employment. Prior to the formation of the Plan, the Company participated in a plan maintained by its former parent STFI. Matching contributions in STFI's plan were made in STFI common stock. For the years ended December 31, 1998, 1997 and 1996, the Company's matching contributions were $104,000, $71,000 and $40,000, respectively. F-16 30 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - INCOME TAXES A reconciliation of income tax benefit, to the federal statutory rate follows:
Years Ended December 31, ------------------------ 1998 1997 1996 ---- ---- ---- Income tax benefit on reported pretax loss at federal statutory rate (34.0)% (34.0)% (34.0)% State net operating losses (6.0) (6.0) (6.0) Net operating loss carryforward not recognized 40.0 40.0 40.0 ---- ---- ---- Income taxes 0.0% 0.0% 0.0% ==== ==== ====
At December 31, 1998 and 1997, the Company recorded net deferred tax assets of approximately $9,702,000 and $5,511,000, respectively, and valuation allowances in the same amounts. The valuation allowances were increased by $4,191,000, $1,111,000 and $3,296,000, respectively, for the years ended December 31, 1998, 1997 and 1996, respectively. SFAS No. 109 requires that the Company record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax asset will not be realized". The ultimate realization of the deferred tax asset depends on the Company's ability to generate sufficient taxable income. The net deferred tax assets and liabilities as of December 31, 1998 and 1997 are as follows: 1998 1997 Deferred tax assets: Net operating loss carryforwards $ 9,289,000 $ 5,164,000 Allowance for doubtful accounts 367,000 390,000 Asset basis difference, intangible assets 57,000 ----------- ----------- 9,713,000 5,554,000 ----------- ----------- Deferred tax liabilities, asset basis difference for equipment and intangible assets (11,000) (43,000) ----------- ----------- Deferred tax asset, net 9,702,000 5,511,000 Valuation allowance for deferred tax asset (9,702,000) (5,511,000) ----------- ----------- $ -- $ -- =========== =========== At December 31, 1998, the Company has federal net operating loss carryforwards of approximately $23,223,000, which can be utilized against future taxable income and expire through the year 2018. Net operating losses available for state income tax purposes are less than those for federal purposes and generally expire earlier. F-17 31 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - COMMITMENTS AND CONTINGENCIES The Company has leases for office facilities and equipment, which expire in various years through December 2002. Future aggregate minimum annual rental payments as of December 31, 1998 are as follows:
Year ending December 31 1999 $ 696,000 2000 688,000 2001 662,000 2002 112,000
Rent expense for the years ended December 31, 1998, 1997 and 1996 was approximately $558,000, $352,000 and $418,000, respectively. Leased equipment expense for the year ended December 31, 1998 was approximately $61,000. The Company, in the ordinary course of business, 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. In connection with a vendor's requirement, the Company has a standby letter of credit with a bank in the amount of $400,000. This letter of credit expires March 29, 1999 and is collateralized by certain assets of the Company. NOTE 16 - DEPENDENCE UPON KEY RELATIONSHIPS AND MAJOR CUSTOMERS Approximately 24% and 12%, related to the debit segment, and 19% and 10%, related to the rental segment, of the Company's revenues for 1998 were attributable to four customers. Approximately 26%, related to the debit segment, and 24%, 13% and 11%, related to the rental segment, of the Company's revenues for 1997 were attributable to four customers. Approximately 21%, 16%, and 13%, related to the rental segment of the Company's revenues for 1996 were attributable to three customers. The agreements with these companies are terminable with cause and require written notification, typically effective upon relatively short notice. The termination of any one of these agreements would have a material adverse effect on the Company. In 1998, certain of the agreements relating to 36% and 26% of the Company's revenues in 1998 and 1997, respectively, were terminated. NOTE 17 - LOSS ON CONTRACT CANCELLATION In 1996, in connection with the transition of the in-car cellular phone service to portable rentals, the Company recognized a loss of approximately $980,000 relating to the cancellation of a contract for the production of certain in-car telecommunications equipment. F-18 32 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - LOSS ON DISTRIBUTOR CONTRACT During 1998, the Company entered into an agreement with SmarTalk TeleServices, Inc. ("SmarTalk") which designated the Company as the exclusive nationwide cellular service provider for SmarTalk's prepaid cellular phone program with respect to certain retail distributor channels, including nationwide retail stores and television infomercials. The agreement required SmarTalk to provide the cellular phone to the customer and the Company to provide all services relating to the activation of the phone, including, but not limited to, the maintenance of all individual phone lines. Subsequent to the inception of the nationwide program, SmarTalk incurred financial difficulties and eventually filed for bankruptcy protection. Prior to the filing, STC entered into a new agreement (the "Transition Agreement") pursuant to which the Company and SmarTalk agreed to terminate their relationship through a brief transition period. Subsequent to signing of the Transition Agreement, SmarTalk failed to pay to the Company all amounts due under such agreement. As a result of its problems with SmarTalk, the Company elected to take a write-off of certain assets in 1998. In addition, the Company reclassified expenses incurred during the fourth quarter of 1998, in connection with the SmarTalk problems. NOTE 19 - SUBSEQUENT EVENT On February 5, 1999, the Company completed a $15 million private placement, issuing an aggregate of 15,000 shares of a new Series C Convertible Preferred Stock, $.01 par value, and warrants to purchase an aggregate of 300,000 shares of common stock, at $9 per share. Each share of Series C Convertible Preferred Stock is convertible into common stock of the Company based upon certain formulas and limitations. The warrants expire in February 2004 and are subject to mandatory exercise, subject to certain conditions. The Company has the right to require conversion of all of the outstanding shares of Series C Convertible Preferred Stock at any time after February 5, 2000, if the closing bid price for the Company's common stock is greater than $15 for fifteen consecutive trading days. The Series C Convertible Preferred Stock may be redeemed by the holder upon certain events. NOTE 20 - SEGMENT INFORMATION The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," effective January 1, 1998. SFAS 131 requires disclosures of segment information on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. Segment information listed below reflects the three principal business units of the Company (as described in Note 1). Each segment is managed according to the products which are provided to the respective customers and information is reported on the basis of reporting to the Company's Chief Operating Decision Maker (CODM). The Company's CODM uses segment information relating to the operations of each segment, however, segment balance sheet data is not prepared or used by the CODM. F-19 33 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20 - SEGMENT INFORMATION (CONTINUED) Operating segment information for 1998, 1997, and 1996 is summarized as follows:
RENTAL DEBIT ACTIVATION CORPORATE CONSOLIDATED 1998 Revenues $ 14,037,000 $ 12,737,000 $ 1,426,000 $ -- $ 28,200,000 ============ ============ ============ ============ ============ Operating loss $ (777,000) $ (5,942,000) $ (365,000) $ (3,604,000) $(10,688,000) Interest expense (952,000) (952,000) ------------ ------------ ------------ ------------ ------------ Loss before income taxes $ (777,000) $ (5,942,000) $ (365,000) $ (4,556,000) $(11,640,000) ============ ============ ============ ============ ============ RENTAL DEBIT ACTIVATION CORPORATE CONSOLIDATED 1997 Revenues $ 15,242,000 $ 6,299,000 $ 2,657,000 $ -- $ 24,198,000 ============ ============ ============ ============ ============ Operating income (loss) $ (965,000) $ 1,471,000 $ 86,000 $ (4,045,000) $ (3,453,000) Interest expense (232,000) (232,000) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes $ (965,000) $ 1,471,000 $ 86,000 $ (4,277,000) $ (3,685,000) ============ ============ ============ ============ ============ RENTAL DEBIT ACTIVATION CORPORATE CONSOLIDATED 1996 Revenues $ 16,339,000 $ 1,516,000 $ 3,059,000 $ -- $ 20,914,000 ============ ============ ============ ============ ============ Operating loss $ (2,920,000) $ (96,000) $ (160,000) $ (3,712,000) $ (6,888,000) Interest expense (906,000) (906,000) Other expense (980,000) (980,000) ------------ ------------ ------------ ------------ ------------ Loss before income taxes $ (3,900,000) $ (96,000) $ (160,000) $ (4,618,000) $ (8,774,000) ============ ============ ============ ============ ============
F-20 34 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1998, 1997 and 1996
Balance at Charged to Balance at Beginning Costs and End Description of Year Expenses Deductions (1) of Year ----------- --------------- --------------- --------------- --------------- YEAR ENDED DECEMBER 31, 1998: Allowance for doubtful accounts $ 991,000 $ 1,579,000 $ 1,674,000 $ 896,000 =============== =============== =============== =============== YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts $ 1,392,000 $ 1,341,000 $ 1,742,000 $ 991,000 =============== =============== =============== =============== YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful accounts $ 685,000 $ 1,772,000 $ 1,065,000 $ 1,392,000 =============== =============== =============== ===============
(1) Represents write off of uncollectible accounts, net of recoveries. S-1 35 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 May 20, 1999 (to be filed with the Securities and Exchange Commission on or before April 30, 1999). PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1998 and 1997. Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. Financial Statement Schedules: Schedule II. (b) REPORTS ON FORM 8-K On February 12, 1999, the Company filed a report on Form 8-K, Item 5, detailing that the Company entered into an agreement on February 5, 1999 to close on a $15 million private placement of equity with 20 investors, led by Marshall Capital Management, Inc., an affiliate of Credit Suisse First Boston, and a number of European-based institutional investors. Oakes, Fitzwilliams & Co. S.A. of London acted as placement agent for the Company in connection with the sales to the European investors. Pursuant to a Securities Purchase Agreement entered into between the Company and the investors (the "Securities Purchase Agreement"), the Company issued an aggregate of 15,000 shares of a new Series C Convertible 36 Preferred Stock, $.01 per share, and Warrants to purchase an aggregate of 300,000 shares of Common Stock, $.01 par value, of the Company. Each share of Series C Convertible Preferred Stock is convertible into Common Stock of the Company in accordance with the formula described below. The Company intends to use the proceeds from the offering to repay approximately $5.5 million of outstanding indebtedness and for general corporate purposes. Description of Series C Convertible Preferred Stock. The following description of the rights and preferences of the Series C Convertible Preferred Stock is a summary, and is qualified in its entirety by reference to the entire text of the Certificate of Designations, Preferences and Rights of the Series C Convertible Preferred Stock (the "Certificate of Designation"), which is attached as an exhibit to this Current Report on Form 8-K. Voting. The holders of shares of Series C Convertible Preferred Stock are not entitled to vote with respect to the business, management or affairs of the Company. For so long as any shares of Series C Convertible Preferred Stock are outstanding, the following matters, however, will require the approval of the holders of at least two-thirds of the then-outstanding shares of Series C Convertible Preferred Stock: (i) altering, changing, modifying or amending the terms of the Series C Convertible Preferred Stock or the terms of any other stock of the Company so as to adversely affect the Series C Convertible Preferred Stock; (ii) creating any new class or series of capital stock having a preference over or ranking pari passu with the Series C Convertible Preferred Stock as to redemption or distribution of assets upon a Liquidation Event (as defined in the Certificate of Designation) or any other liquidation, dissolution or winding up of the Company; (iii) increasing the authorized number of shares of Series C Convertible Preferred Stock; (iv) reissuing any shares of Series C Convertible Preferred Stock which have been converted or redeemed in accordance with the terms of the Certificate of Designation; (v) issuing any Pari Passu Securities or Senior Securities (each as defined in the Certificate of Designation) (other than non-convertible debt securities or debt securities which are convertible into or exchangeable for Common Stock of the Company or any other equity or convertible security of the Company junior to the Series C Convertible Preferred Stock); (vi) redeeming, declaring, paying or making any provision for any dividend or distribution with respect to the Common Stock of the Company or any other capital stock of the Company ranking junior to the Series C Convertible Preferred Stock as to the distribution of assets upon liquidation, dissolution or winding up of the Company; and (vii) issuing any Series C Convertible Preferred Stock except pursuant to the terms of the Securities Purchase Agreement, a copy of which is filed as an exhibit to this Current Report on Form 8-K. Dividends. The Series C Convertible Preferred Stock will not bear dividends. Liquidation. Upon the liquidation, dissolution or winding up of the Company, the holders of Series C Convertible Preferred Stock, before any distribution to the holders of Junior Securities (as defined in the Certificate of Designation) but after payment to holders of Senior Securities, will be entitled to receive an amount equal to the Stated Value (defined below) plus the Premium (defined below) accrued on its Series C Convertible Preferred Stock in accordance with the terms of the Certificate of Designation (the "Liquidation Preference"). Conversion. Each share of Series C Convertible Preferred Stock is convertible into shares of Common Stock of the Company in accordance with the following formula: 37 Number of Shares of Stated Value plus accrued Premium = ----------------------------------- Common Stock Issuable Conversion Price The "Stated Value" is equal to $1,000 per share. The "Premium" is equal to 6%, payable in Common Stock or cash, at the Company's option (subject to certain conditions), upon conversion. The "Conversion Price" is equal to the lesser of $7 and the Variable Conversion Price. The "Variable Conversion Price" is equal to the average of the lowest Closing Bid Prices (as defined in the Certificate of Designation) for the Common Stock of the Company on any five (5) consecutive trading days during the period of fifteen (15) trading days immediately prior to the conversion date. If the Company's Common Stock trades above $11 per share (subject to adjustment upon the occurrence of certain events, including but not limited to a stock split or dividend or a merger or consolidation of the Company) for ten (10) consecutive days, and if at all times during such period, certain conditions set forth in the Certificate of Designation are satisfied, the Conversion Price will be equal to $7 thereafter. If, following conversion, the Company fails to deliver shares of its Common Stock to an investor in accordance with the Certificate of Designation, it may incur monetary and other penalties (including, in certain circumstances, mandatory redemption of the Series C Convertible Preferred Stock). On February 5, 2004, all shares of Series C Convertible Preferred Stock then outstanding will be automatically converted into shares of Common Stock at the then-prevailing Conversion Price. Conversion Limitations. The number of shares of Common Stock issued upon conversion of all outstanding shares of Series C Convertible Preferred Stock may not exceed the following amounts during the periods specified (each, a "Conversion Limit Amount"):
Conversion Period Limit Amount During the 1st Year Following the Issue Date 3,975,000 During the 2nd Year Following the Issue Date 4,200,000 During the 3rd Year Following the Issue Date 4,425,000 During the 4th Year Following the Issue Date 4,650,000 Following the 4th Anniversary of the Issue Date 4,875,000
The Conversion Limit Amount is subject to adjustment in accordance with the terms of the Certificate of Designation. In addition, until the Company obtains the approval of the holders of a majority of the Company's outstanding Common Stock, the number of shares of Common Stock issued upon conversion of Series C Convertible Preferred Stock or exercise of the Warrants may not exceed 19.99% of the number of shares of Common Stock outstanding on February 5, 1999, or 1,512,661 shares. The Company has agreed to seek such stockholder approval (the "Stockholder Approval") at a meeting of stockholders to be held no later than May 31, 1999. As of the date of this Current Report, but for the limitation described in the second preceding sentence, the 15,000 shares of Series C Convertible Preferred Stock would be convertible into approximately 2,142,857 shares of Common Stock of the Company, or 28% of the total number of shares of Common Stock issued and outstanding on February 5, 1999. Further, the total number of shares of Common Stock issuable upon conversion of the Series C Convertible Preferred Stock and exercise of the Warrants as of the date of this Current Report, but for the aforementioned limitation, would be approximately 2,442,857 shares, or 32% of the total number of shares of Common Stock issued and outstanding on February 5, 1999. Mandatory Conversion. The Company has the right to require conversion of all of the outstanding shares of Series C Convertible Preferred Stock at any time after February 5, 2000 if the Closing Bid Price for the Company's Common Stock is greater than $15.00 for fifteen (15) consecutive trading days, subject to satisfaction of certain conditions set forth in the Certificate of Designation. Mandatory Redemption. Each purchaser of Series C Convertible Preferred Stock will have the right upon the occurrence of a Mandatory Redemption Event (as such term is defined in the Certificate of Designation, which term includes, among other things, failure to receive the Stockholder Approval by May 31, 1999 ), to require the Company to redeem all or any part of such purchaser's Series C Convertible Preferred Stock for a price (the 38 "Mandatory Redemption Price") equal to the greater of (a) the Liquidation Preference of the shares being redeemed multiplied by 115% and (b) an amount calculated on the basis of the applicable Conversion Price and the price at which the Common Stock of the Company is then trading. If the Corporation fails to pay the Mandatory Redemption Price within ten (10) business days of the mandatory redemption date, the holder of Series C Convertible Preferred Stock shall have the right to regain its rights as such a holder and, upon written notice to such effect from the holder, the Company shall return to such holder the certificates representing the Series C Convertible Preferred Stock delivered to the Company in connection with the mandatory redemption. In such event, the Conversion Price otherwise applicable to future conversions of the Series C Convertible Preferred Stock shall be reduced by one percent for each day beyond such tenth business day in which the failure to pay continued, until the date of such notice, but the maximum reduction of the Conversion Price shall be fifty percent. Optional Redemption. The Company will have the right, upon the satisfaction of certain Optional Redemption Conditions (as defined in the Certificate of Designation), to redeem any Series C Convertible Preferred Stock submitted for conversion at a Conversion Price that is less than $7 (subject to adjustment upon the occurrence of certain events set forth in the Certificate of Designation) for a price equal to an amount representing an annualized return of 110% on the Stated Value of the Series C Convertible Preferred Stock being redeemed, plus accrued Premium. Preemptive Rights. Pursuant to the Securities Purchase Agreement, each purchaser of the Series C Convertible Preferred Stock will have the right, upon the issuance of certain equity securities by the Company, to either purchase a pro rata share of such securities or, at the option of such purchaser, to exchange all or any part of such purchaser's shares of Series C Convertible Preferred Stock for an equal amount of such securities. Description of the Warrants. Pursuant to the Securities Purchase Agreement, each investor received a Warrant for the purchase of 20,000 shares of Common Stock of the Company for each $1 million of Series C Convertible Preferred Stock issued. The Warrants are exercisable at $9 per share (subject to adjustment upon the occurrence of certain events set forth in the Warrants). The Warrants will expire five (5) years after the date of issuance, and are subject to mandatory exercise, subject to certain conditions set forth therein, if the Company's Common Stock trades at or above $18 per share (subject to adjustment upon the occurrence of certain events set forth in the Warrants) for five (5) consecutive trading days. Cashless exercise is permitted under the terms of the Warrants and is required for any exercise after February 5, 2001. If, following exercise of the Warrants, the Company fails to deliver shares of its Common Stock to an investor in accordance with the terms of the Warrants, it may incur monetary and other penalties. Description of the Registration Rights Agreement. In accordance with the Securities Purchase Agreement, the Company entered into a Registration Rights Agreement with the investors, pursuant to which the Company is required, within thirty (30) days after February 5, 1999, to file with the Securities and Exchange Commission a registration statement on Form S-3 covering the resale of the Common Stock issuable upon conversion of the Series C Convertible Preferred Stock and exercise of the Warrants. The Company may incur monetary and other penalties (including in certain circumstances mandatory redemption of the Series C Convertible Preferred Stock) in the event that such registration statement is not filed within such 30-day period or declared effective in accordance with the terms of the Registration Rights Agreement, or if such registration statement becomes unavailable for the resale of shares of Common Stock of the Company and such unavailability continues for a period set forth in the Registration Rights Agreement. The Company included exhibits 4.1, 4.2, 4.3 and 4.4, in accordance with form 8-K, item 5. The exhibits included the Certificate of Designations, Preferences and Rights of the Series C Convertible Preferred Stock, the Securities Purchase Agreement, the Registration Rights Agreement and the Form of Warrant to Purchase Common Stock of the Company, all dated January 28, 1999. 39 (c) EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 3.(i) Second Restated Certificate of Incorporation, dated June 25, 1998. 3.(ii) Restated By-laws. Incorporated by reference from Exhibit 3.(ii) to the Company's Quarterly Report on Form 10-Q dated May 15, 1998. 4.1 Specimen of Common Stock Certificate. Incorporated by reference from exhibit 4.2 to the Company's Registration Statement of Form SB-2 filed with Amendment No. 3 to such Registration Statement dated January 27, 1995. 4.2 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of Shared Technologies Cellular, Inc. dated August 19, 1996. Incorporated by Reference from Exhibit 4.1 to the Company's Form 8-K dated August 19, 1996 and filed September 5, 1996. 4.3 Series B Convertible Preferred Stock Purchase Agreement by and between International Capital Partners, Inc. and the Company dated August 19, 1996 (agreement between STFI and the Company is substantially the same), including form of Common Stock Warrant. Incorporated by Reference from Exhibit 4.2 to the Company's Form 8-K dated August 19, 1996 and filed September 15, 1996. 4.4 Equity Holders Agreement by and among International Capital Partners, Inc., Zeisiger Capital Group, LLC and Shared Technologies Fairchild Inc. dated August 19, 1996. Incorporated by Reference from Exhibit 4.3 to the Company's Form 8-K dated August 19, 1996 and filed September 15, 1996. 4.5 Purchase Agreement, Common Stock Warrant Certificate and Option Agreement by and among RHI Holdings, Inc., and the Company dated December 27, 1996. Incorporated by Reference from Exhibit 4.1, 4.2, 4.3 respectively to the Company's Form 8-K dated December 27, 1996, and filed January 22, 1997. 4.6 Pledge Agreement, dated as of April 15, 1998, by and between Shared Technologies Cellular, Inc., as Pledgor, Anthony D. Autorino and Salomon Brothers Holding Company Inc. as Lenders and Salomon Brothers Holding Company Inc. as Collateral Agent. Incorporated by Reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q dated May 15, 1998. 4.7 Form of Registration Rights Agreement dated as of April 15, 1998, between Shared Technologies Cellular, Inc., and Salomon Brothers Holding Company Inc. Incorporated by Reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q dated May 15, 1998. 4.8 Form of Warrant Purchase Agreement, dated as of April 15, 1998, between Shared Technologies Cellular, Inc., and Salomon Brothers Holding Company Inc. Incorporated by Reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q dated May 15, 1998. 4.9 Form of Shared Technologies Cellular, Inc., Common Stock Purchase Warrant, dated April 15, 1998, in favor of Salomon Brothers Holding Company Inc. or its registered assigns. Incorporated by Reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q dated May 15, 1998. 4.10 Form of Subscription Agreement dated May 1998 between Shared Technologies Cellular, Inc., and the Purchasers (as defined therein), including form of Convertible Note. Incorporated by Reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q dated May 15, 1998. 4.11 Certificate of Designations, Preferences and Rights of the Series C Convertible Preferred Stock of Shared Technologies Cellular, Inc. dated January 28, 1999. Incorporated by Reference from Exhibit 4.1 to the Company's Form 8-K dated February 5, 1999 and filed February 12, 1999.
40 4.12 Securities Purchase Agreement among the Company and the Purchasers dated as of January 28, 1999. Incorporated by Reference from Exhibit 4.2 to the Company's Form 8-K dated February 5, 1999 and filed February 12, 1999. 4.13 Registration Rights Agreement among the Company and the Purchasers dated as of January 28, 1999. Incorporated by Reference from Exhibit 4.3 to the Company's Form 8-K dated February 5, 1999 and filed February 12, 1999. 4.14 Form of Warrant to Purchase Common Stock of the Company issued to the Purchasers. Incorporated by Reference from Exhibit 4.4 to the Company's Form 8-K dated February 5, 1999 and filed February 12, 1999. 10.1 Agreement by and between the Hertz Corporation and the Company dated October 1, 1996. Incorporated by reference from Exhibit 10.1 to the Company's Form 10-K dated March 27, 1997. 10.2 Agreement by and between National Car Rental System, Inc. and the Company dated July 1, 1996. Incorporated by reference from Exhibit 10.2 to the Company's Form 10-K dated March 27, 1997. 10.3 Lease Agreement by and between Putnam Park Associated and the Company dated January 1, 1995. Incorporated by reference from Exhibit 10.10 to the Company's Registration Statement on Form SB-2 filed with Amendment No. 1 to such Registration Statement dated January 4, 1995. 10.4 Sample Customer Service Agreement. Incorporated by reference from Exhibit 10.15 to the Company's Registration Statement on Form SB-2 filed with Amendment No. 1 to such Registration Statement dated January 4, 1995. 10.5 Sample Customer Service Agreement. Incorporated by reference from Exhibit 10.16 to the Company's Registration Statement on Form SB-2 filed with Amendment No. 1 to such Registration Statement dated January 4, 1995. 10.6 Shared Technologies Cellular, Inc. Savings and Retirement Plan, Effective as of April 1, 1996. Incorporated by reference from Exhibit 10.15 to the Company's Form 10-K dated March 27, 1997. 10.7 Agreement by and between Budget Rent A Car Corporation and the Company dated July 28, 1997. Incorporated by reference form Exhibit 10.16 to the Company's Form 10-K dated March 31, 1998. 10.8 Agreement by and between Thorn Americas, Inc. and the Company dated December 1, 1996. Incorporated by reference form Exhibit 10.17 to the Company's Form 10-K dated March 31, 1998. 10.9 1994 Stock Option Plan, as amended, November 11, 1998. 10.10 1994 Director Option Plan, as amended, November 11, 1998. 10.11* Prepaid Cellular Reseller Agreement by and between the Company and MCI Telecommunications Corporation and WorldCom Technologies, Inc. dated February 19, 1999. 21 List of subsidiary of the registrant. 27 Financial Data Schedule
- ---------- * Confidential treatment as to certain portions has been requested until April 1, 2004. The copy filed as an exhibit omits the information subject to the confidentiality treatment. 41 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 CELLULAR, INC. (Registrant) By \s\ Anthony D. Autorino Anthony D. Autorino Chief Executive Officer and Director Date: March 30, 1999 By \s\ Vincent DiVencenzo Vincent DiVincenzo Chief Financial Officer and Director Date: March 30, 1999 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/ William A. DiBella Anthony D. Autorino William A. DiBella Chief Executive Officer Director and Director Date: March 30, 1999 Date: March 30, 1999 By: /s/ Ajit G. Hutheesing By: /s/ Thomas H. Decker Ajit G. Huthessing Thomas H. Decker Director Director Date: March 29,1999 Date: March 29, 1999 By: /s/ Vincent DiVincenzo By: /s/ Nicholas E. Sinacori Vincent DiVincenzo Nicholas E. Sinacori Chief Financial Officer Director and Director Date: March 29, 1999 Date: March 30,1999 By: /s/ Bruce Carswell Bruce Carswell Director Date: March 29, 1999 EX-3 2 EX-3 1 Exhibit 3 SECOND RESTATED CERTIFICATE OF INCORPORATION OF SHARED TECHNOLOGIES CELLULAR, INC. --------------------------------------- Pursuant to Section 245 of the General Corporation Law of the State of Delaware ----------------------------------------- SHARED TECHNOLOGIES CELLULAR, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), does hereby certify as follows: 1. The name of Corporation is Shared Technologies Cellular, Inc. 2. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on March 14, 1989. A Restated Certificate of Incorporation was filed with the Secretary of State on October 6, 1994. 3. This Second Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Section 245 of the General Corporation Law, as amended, of the State of Delaware (the "GCL") by the written consent of the Board of Directors of the Corporation in accordance with Section 141(f) of the GCL. 4. This Second Restated Certificate of Incorporation hereby restates and integrates, but does not further amend, the provisions of the Corporation's Restated Certificate of Incorporation, as amended to date, so that the same shall read in its entirety as follows: FIRST: The name of the Corporation is Shared Technologies Cellular, Inc. (hereinafter, the "Corporation"). SECOND: The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, County of Castle, Delaware 19801. The name of the Corporation's registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law, as amended, of the State of Delaware (the "GCL"), as set forth in Title 8 of the Delaware Code. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 25,000,000 shares, of which 5,000,000 shall be Preferred Stock with a par value of $.01 per share and 20,000,000 shares shall be Common Stock with a par value of $.01 per share. 2 The Preferred Stock is to be issued in one or more series, with each series to have such designations, preferences, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions provided for the issue of each series adopted by the Board of Directors of the Corporation, subject to the limitations prescribed by law and in accordance with the provisions hereof, the Board of Directors being hereby expressly vested with authority to adopt any such resolution or resolutions. The authority of the Board of Directors with respect to each series shall include, but not be limited to, the determination or fixing of the following: (1) The number of shares to constitute the series and the distinctive designation thereof; (2) The amount or rate of dividends on the shares of the series, whether dividends shall be cumulative and, if so, from what date or dates; (3) Whether the shares of the series shall be redeemable and, if redeemable, the terms and provisions upon which the shares of the series may be redeemed and the premium, if any, and any dividends accrued thereon which the shares of the series shall be entitled to receive upon the redemption thereof; (4) Whether the shares of the series shall be subject to the operations of a retirement or sinking fund to be applied to the purchase or redemption of the shares for retirement and, if such retirement or sinking fund be established, the annual amount thereof and the terms and provisions relative to the operation thereof; (5) Whether the shares of the series shall be convertible into shares of any class or classes, with or without par value, or of any other series of the same class, and if convertible, the conversion price or prices or the rate at which the conversion may be made and the method, if any, of adjusting the same; (6) The rights of the shares of the series in the event of the voluntary or involuntary liquidation, dissolution, or winding up of the Corporation; (7) The restrictions, if any, on the payment of the dividends upon, and the making of distributions to, any class of stock ranking junior to the shares of the series, and the restrictions, if any, on the purchase or redemption of the shares of any such junior class; (8) Whether the series shall have voting rights in addition to the voting rights provided by law, and, if so, the terms of such voting rights; and (9) Any other relative rights, preferences, and limitations of that series. - 2 - 3 The holders of the Common Stock shall be entitled to one vote for each share of Common Stock held. FIFTH: The Board of Directors has heretofore created and reserved a series of the Corporation's Preferred Stock with a par value of $.01, known and designated as "Series B Convertible Preferred Stock" (hereinafter, "Series B Preferred"), such series of stock consisting of One Million Two Hundred Fifty Thousand (1,250,000) shares. The powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions of the Series B Preferred are as follows: 1. Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of each share of Series B Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of any other class or series of the Corporation's capital stock by reason of their ownership thereof, an amount per share equal to the sum of (a) the price at which such share was originally issued by the Corporation (the "Original Issue Price"), plus (b) an amount equal to a rate of return on such holder's investment for the period commencing on the Original Issue Date therefor and ending on the date full payment shall be tendered to the holders of the Series B Preferred with respect to such liquidation, dissolution, or winding up, equal to the product of (1) the Original Issue Price therefor and (2) Twelve Percent (12%) per annum. If the assets or surplus funds to be distributed to the holders of the Series B Preferred are insufficient to permit the payment to such holders of their full preferential amount, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of the Series B Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. All of the preferential amounts to be paid to the holders of the Series B Preferred pursuant to this Section 1 of Article FIFTH shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Corporation to, the holders of any other class or series of the Corporation's capital stock in connection with such liquidation, dissolution or winding up. 2. Conversion. The holders of the Series B Preferred shall have conversion rights as follows (the "Conversion Rights"): a. Right to Convert. Each share of Series B Preferred shall be convertible at the option of the holder thereof at any time from the date of first issuance of such shares of Series B Preferred (the "Original Issue Date") and without the payment of any additional consideration therefor into that number of fully paid and non-assessable shares of Common Stock as is determined by dividing Ten Dollars and No/100 ($10.00) by the Conversion Price (determined as hereinafter provided) in effect at the time of conversion. The - 3 - 4 Conversion Price at which shares of Common Stock shall be deliverable upon conversion (the "Conversion Price") shall be the lesser of: (i) Four and No/100 Dollars ($4.00) (this amount, as from time to time adjusted in the manner hereinafter provided, being referred to as the "Maximum Conversion Price"), or (ii) One Hundred Per Cent (100%) (this percentage, as from time to time adjusted in the manner hereinafter provided, being referred to as the "Adjusting Percentage") of the average closing bid price of the Common Stock quoted on the NASDAQ Stock Market or any exchange on which the Common Stock is listed (or the closing bid price of the Common Stock quoted in the Over-the-Counter Market Summary if not on the NASDAQ system or an exchange) for the forty (40) consecutive trading days preceding the date of conversion (the "Closing Price"). In no event shall the Conversion Price be less than Three and No/100 Dollars ($3.00) (this amount, as from time to time adjusted in the manner hereinafter provided, being referred to as the "Minimum Conversion Price"). The Maximum and Minimum Conversion Prices and the Adjusting Percentage shall be subject to adjustment (in order to adjust the number of shares of Common Stock into which the Series B Preferred is convertible) as hereinafter provided. b. Mechanics of Conversion. In the event that a holder of shares of Series B Preferred shall elect to convert the same into shares of Common Stock, such holder shall give written notice of such election (a "Conversion Notice") to the Corporation at the office of the Corporation. Such Conversion Notice shall state therein the holder's name or the names of the holder's nominees in which he wishes the certificate or certificates for shares of Common Stock to be issued, together with the applicable federal taxpayer identification number. Such conversion shall be deemed to have been made on the date that the holder has given the Corporation a Conversion Notice, and the person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. A holder who has given a Conversion Notice shall promptly thereafter surrender the certificate or certificates evidencing the shares of Series B Preferred that have been converted, duly endorsed, at the office of the Corporation or of any transfer agent for the Series B Preferred, but the failure to promptly surrender such certificate or certificates shall in no way effect the right or time of conversion. The Corporation shall, as soon as practicable after receipt of the certificate or certificates evidencing the shares of Series B Preferred that have been converted, issue and deliver to the holder of Series B Preferred who has given such Conversion Notice, or to his nominee or nominees, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled. - 4 - 5 c. Adjustments to Conversion Price for Diluting Issues. (1) Special Definitions. For purposes of this Subsection 2.c., the following definitions shall apply: (a) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (b) "Original Issue Date" shall mean the date on which the first share of Series B Preferred was issued. (c) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than Series B Preferred) or other securities directly or indirectly convertible into or exchangeable for Common Stock. (d) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or deemed to be issued) by the Corporation after the Original Issue Date. (e) "Dilutive Issue" shall mean the issuance by the Corporation of Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued) without consideration or for a consideration per share less than the Conversion Price in effect on the date of and immediately prior to such issue and for which no adjustment is made pursuant to Subsection 2.c.(5). (2) Issue of Options and Convertible Securities Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities and the consideration per share to be paid upon exercise or conversion of such Options or Convertible Securities is less than the Conversion Price in effect on the date of, and immediately prior to the issue of such Options or Convertible Securities, then the maximum number of shares of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which Additional Shares of Common Stock are deemed to be issued no further - 5 - 6 adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities. (3) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock in a Dilutive Issue. In the event of a Dilutive Issue, the following adjustments shall be made: If the percentage determined by dividing the consideration per share received by the Corporation in the Dilutive Issue by the then Closing Price (the "Test Percentage") is less than the then effective Adjusting Percentage, the Adjusting Percentage shall be reduced to the Test Percentage and such percentage shall be the basis for all future adjustments. Upon such adjustment the Maximum and Minimum Conversion Prices shall be reduced by the dollar amount equal to the difference between the Conversion Price on the date of the Dilutive Issue and the consideration received by the Corporation in such Dilutive Issue. The foregoing notwithstanding, no adjustment shall be made under this Subsection 2.c.(3): (a) upon the conversion or exchange of shares of Series B Preferred into any other instrument or shares of capital stock prior to January 1, 1998; (b) upon the exercise of Warrants held by holders of Series B Preferred; (c) upon the issuance of up to ten percent (10%) of the then issued and outstanding shares of Common Stock of the Corporation pursuant to Options granted to officers, directors or employees of, or consultants to, the Corporation under any stock option, incentive, bonus or compensation program; (d) for which adjustment is made in the Conversion Price pursuant to Subsection 2.c.(5); or (e) if the amount of such reduction would be an amount less than $.05, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.05 or more. - 6 - 7 (4) Determination of Consideration. For purposes of this Subsection 2.c., the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (a) Cash and Property: Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; and (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors. (b) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 2.c.(2), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (5) Adjustment for Dividends, Distributions, Subdivisions, Combinations or Consolidation of Common Stock. (a) Stock Dividends, Distributions or Subdivisions. In the event the Corporation at any time or from time to time after the Original Issue Date shall declare or pay any dividend, or make any other distribution on the Common Stock, payable in Common Stock or effect a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then and in any such event, the Minimum and Maximum Conversion Prices shall be proportionately decreased to reflect such - 7 - 8 dividend, distribution or subdivision as of: (A) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend or distribution, or (B) in the case of any such subdivision, at the close of business on the date immediately prior to the date upon which such corporation action becomes effective. (b) Combinations or Consolidations. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Minimum and Maximum Conversion Prices in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (6) Adjustment for Reclassification or Reorganization. In case of any capital reorganization or reclassification of the capital stock of the Corporation (other than a reclassification covered in Subsection 2.c.(5)(b)), each share of Series B Preferred shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series B Preferred would have been entitled upon such reorganization or reclassification. In any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of these provisions set forth with respect to the rights and interest thereafter of the holders of the Series B Preferred, to the end that these provisions (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series B Preferred. (7) No Impairment. The Corporation will not, by amendment, of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 2 of Article FIFTH and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series B Preferred against impairment. - 8 - 9 (8) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Adjusting Percentage and the Minimum and Maximum Conversion Prices pursuant to this Section 2 of Article FIFTH, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with these terms and furnish to each holder of Series B Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series B Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Minimum and Maximum Conversion Prices and the Adjusting Percentage at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Series B Preferred. (9) Notices of Record Date. In the event of (i) any taking by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, or (ii) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series B Preferred at least twenty (20) days (thirty (30) days in the case of an acquisition of the Corporation through a merger or consolidation of the Corporation or the sale of all or substantially all of its assets and properties) prior to the record date specified therein, a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (C) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. (10) Common Stock Reserved. The Corporation shall reserve and keep available out of its authorized but unissued Common Stock - 9 - 10 such number of shares of Common Stock as shall be sufficient to effect conversion of the Series B Preferred. The number of shares so reserved shall be determined and revised twice a year, as of January 1 and June 30. d. Additional Adjustments to Conversion Price. In the event that within the period beginning on the day after the date that shares of the Series B Preferred are first issued, and ending on and including the one hundred eighty-first (181st) day following the date that shares of the Series B Preferred are first issued, the Corporation fails to obtain an aggregate of Five Million and No/100 Dollars ($5,000,000.00) in Qualified Capital (as hereinafter defined) the Minimum Conversion Price and the Maximum Conversion Price shall be reduced by Fifty Cents ($0.50). As used herein, the term "Qualified Capital" shall mean any combination of the following: (1) the proceeds (net of commissions and selling expenses) from the sale of capital stock of the Corporation and (2) up to Two Million Five Hundred Thousand and No/100 ($2,500,000.00) in aggregate principal amount of a revolving loan facility entered into with an institutional lender, provided that such facility (A) commences during the aforesaid period ending on the one hundred eighty-first (181st) day following the date that the shares of Series B Preferred are first issued, (B) has an expiration date of no less than twelve (12) months from the date such facility first commences (the "Available Period") and (C) shall entitle the Corporation to borrow, repay and reborrow such principal amount during the Available Period under terms and conditions usual for such facilities. 3. Voting Rights. Except as otherwise expressly provided herein or as required by law, each holder of Series B Preferred shall be entitled to vote on all matters submitted to the stockholders of the Corporation for a vote, as though the Common Stock and the Series B Preferred constituted a single class of stock, provided that the holder of a share of Series B Preferred shall be entitled to vote together with the Common Stock as if such holder held four (4) of shares of Common Stock for each of his shares of Series B Preferred then convertible in accordance with Section 2 above. 4. Dividend Rights. There shall be no dividends payable on the Series B Preferred. 5. Board Participation. The Board of Directors shall consist of not more than seven (7) members, four (4) of which shall be elected by holders of Series B Preferred as a class. At least two (2) of the director(s) elected by holders of Series B Preferred as a class shall be mandatory member(s) of the Compensation Committee of the Board of Directors. - 10 - 11 6. Optional Redemption. a. Election. At any time after August 19, 1997, in the event that the closing bid price for the Common Stock quoted on the NASDAQ Stock Market or any exchange on which the Common Stock is listed (or the closing bid price of the Common Stock quoted in the Over-the-Counter Market Summary if not on the NASDAQ system or an exchange) exceeds Seven and No/100 Dollars ($7.00) per share for forty (40) consecutive trading days, the Corporation may redeem all but not less than all of the shares of Series B Preferred that are then issued and outstanding, at a redemption price equal to the Original Issue Price therefor, upon sending written notice of such redemption to each holder of the Series B Preferred in the manner set forth herein on the day immediately following such forty (40) consecutive trading days. The Corporation may not redeem any shares of Series B Preferred unless funds are then legally available for the redemption of all shares of the Series B Preferred. Holders of shares of the Series B Preferred shall continue to be entitled to convert such shares into Common Stock prior to the Optional Redemption Date (as hereinafter defined). b. Notice. Notice of redemption shall be sent by certified or registered mail (return receipt requested), postage prepaid to each holder of record of shares of Series B Preferred at such holder's address as it appears on the records of the Corporation. Such notice shall specify the date set for redemption (the "Optional Redemption Date"), which date shall be at least thirty-five (35) days following the date upon which the Corporation has sent notice of redemption and no greater than forty-five (45) days following the date upon which the Corporation has sent notice of redemption. Any holder of shares of Series B Preferred who converts such shares during any period in which there is notice of redemption outstanding under this Section 6 of Article FIFTH shall be deemed, for all purposes, to have reduced the number of shares of Series B Preferred to be redeemed from him by the number of shares so converted. In the event that a notice of redemption is given under this Section 6 of Article FIFTH, the Corporation shall be obliged to redeem all of the shares of the Series B Preferred on the Optional Redemption Date by payment of the Original Issue Price or Original Issue Prices therefor as provided herein, subject to such shares being previously converted by the holder as provided above. Upon such redemption and payment as provided herein, the holder of the shares of Series B Preferred shall have no further right or interest in such shares. c. Rights Following Redemption. If, on or before the Optional Redemption Date the funds necessary for such redemption shall have been set aside by the Corporation and deposited with a bank or trust company, in trust for the pro rata benefit of the holders of the shares of Series B Preferred, then, notwithstanding that any certificates for such shares shall not have been - 11 - 12 surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding from and after the Optional Redemption Date, and all rights of holders of such shares shall forthwith, after the Optional Redemption Date, cease and terminate, excepting only the right to receive the redemption funds therefor to which they are entitled, but without interest. Any interest accrued on funds so deposited and unclaimed by stockholders entitled thereto shall be paid to the Corporation from time to time. In case the holders of shares of Series B Preferred shall not, within six years after the Optional Redemption date, claim the amounts so deposited with respect to the redemption thereof, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof to such holder and such holder shall look only to the Corporation for the payment thereof. Any funds so deposited with a bank or trust company which shall not be required for such redemption by reason of the exercise subsequent to the date of such deposit of the right of conversion thereof, or otherwise, shall be returned to the Corporation forthwith. d. Rights Upon Failure to Redeem. If the Corporation for any reason fails to redeem any of the shares of Series B Preferred in accordance with this Section 6 of Article FIFTH on the Optional Redemption Date, then notwithstanding anything to the contrary contained in this Certificate of Incorporation, all shares of Series B Preferred then outstanding shall continue to be entitled to the conversion and other rights, preferences and privileges of the Series B Preferred until such shares have been redeemed and the Optional Redemption Price has been paid or otherwise set aside with respect thereto. 7. Mandatory Redemption. a. Election. In the event that the sum of the Corporation's EBITDA (as hereinafter defined) for the years ended December 31, 1996 and December 31, 1997 is less than Five Million and No/100 Dollars ($5,000,000.00), each holder of the Series B Preferred shall have the right to require the Corporation to redeem such holder's shares at a per share redemption price (the "Mandatory Redemption Price") equal to the sum of (i) the Original Issue Price therefor, plus (ii) a rate of return on investment for the period commencing on the Original Issue Date therefor and ending on the Mandatory Redemption Date (as hereinafter defined), equal to the product of (1) the Original Issue Price therefor and (2) Twelve Percent (12%) per annum. Each holder desiring to require the Corporation to redeem such holder's shares of Series B Preferred shall give written notice thereof to the Corporation at its principal office at least ten (10) days before the requested date of redemption (the "Mandatory Redemption Date"). Upon the Mandatory Redemption Date, such holder shall surrender the certificate or certificates for his shares of the Series B Preferred, duly endorsed, at the office of the Corporation in exchange - 12 - 13 for payment of the Mandatory Redemption Price. Upon redemption and payment as provided herein, such holder shall have no further interest in the Series B Preferred. b. Available Funds. If at the time at which redemption is demanded sufficient funds are not legally available for such redemption on the Mandatory Redemption Date to redeem all of the shares of Series B Preferred then required to be redeemed, any and all such unredeemed shares shall thereafter be promptly redeemed, at such time and to the extent that funds of the Corporation become legally available therefor. The shares of the Series B Preferred that are subject to redemption but have not been redeemed and as to which the Mandatory Redemption Price is not paid due to insufficient legally available funds, or otherwise, shall continue to be entitled to the conversion and other rights, preferences and privileges of the Series B Preferred until such shares have been redeemed and the Mandatory Redemption Price has been paid with respect thereto. In the event that insufficient funds are legally available on any Mandatory Redemption Date to redeem all shares of Series B Preferred for which the holders thereof have required redemption, the number of shares to be redeemed of each holder of shares of Series B Preferred that has requested redemption on such Mandatory Redemption Date shall be determined by the Board of Directors, acting in good faith, considering the funds available for redemption and the Original Issue Prices of the shares to be redeemed, and with the intent to redeem a pro rata number of shares from each holder upon the aggregate number of shares held by such holder. c. EBITDA. As used herein the term "EBITDA" means the sum of the Corporation's (i) net income (or net loss) from continuing operations (excluding extraordinary items of income or expense), plus (ii) all interest expense, plus (iii) income tax expense, plus (iv) depreciation expense, plus (v) amortization expense. All calculations shall be in accordance with generally accepted accounting principles (as in effect from time to time in the United States of America), consistently applied, and shall be based upon the Corporation's audited year-end financial statements for the years for which such calculations are being made. 8. Other Rights and Privileges. So long as any shares of Series B Preferred shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of more than fifty (50%) percent of the then outstanding shares of Series B Preferred: a. alter, change or amend the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series B Preferred generally; - 13 - 14 b. authorize, create or issue any other class of stock or series of Preferred Stock or other equity securities having any preference or priority as to dividends or assets upon liquidation superior to or on a parity with any such preference or priority of Series B Preferred; c. merge into another corporation or entity with the result that the holders of capital stock of the Corporation after giving effect to the exercise of all then exercisable Options and Convertible Securities would own less than fifty (50%) percent of the capital voting stock of the surviving entity or sell all or substantially all of the assets of the Corporation; d. pay or declare any dividend or distribution on any shares or Common Stock or other securities of the Corporation; e. increase or decrease the number of directors constituting the Board of Directors; f. apply any of its assets to the redemption, retirement, purchase or other acquisition directly or indirectly, through subsidiaries, if any, or otherwise, of any shares of its capital stock; or g. effect a recapitalization or reorganization or reclassification of the capital stock of the Corporation. SIXTH: In furtherance of and not in limitation of powers conferred by statute, it is further provided: 1. Election of directors need not be by written ballot. 2. The Board of Directors is expressly authorized to adopt, amend or repeal the By-Laws of the Corporation. SEVENTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this - 14 - 15 Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. EIGHTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director for any act or omission; provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty or loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the GCL is hereafter amended to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the GCL as so amended. Any repeal or modification of this Article EIGHTH by the stockholders of the Corporation or otherwise shall not apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omission of such director occurring prior to such amendment or repeal. NINTH: (a) The Corporation shall, to the fullest extent permitted by Section 145 of the GCL, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) against any and all of the expenses (including attorneys' fees), judgment, fines and amounts paid in settlement actually or reasonably incurred by such person by reason of having been an officer, director, employee or agent at the request of the Corporation, any subsidiary of the Corporation or of any other corporation, partnership, joint venture, trust or other enterprise for which any and all persons who acted as officer, director, employee or agent at the request of the Corporation, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that the person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) - 15 - 16 actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in sections (a) and (b) of this Article NINTH, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under sections (a) and (b) of this Article NINTH (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in sections (a) and (b) of this Article NINTH. Such determination shall be made (1) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article NINTH. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Article NINTH shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. (g) The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent - 16 - 17 of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify a person against such liability under this Article NINTH. (h) The indemnification and advancement of expenses provided by, or granted pursuant to, this Article NINTH shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (i) If a claim for indemnification pursuant to this Article NINTH is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the applicable standard of conduct set forth in the GCL for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the GCL, nor an actual determination by the Corporation (including its Board, independent legal counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. TENTH: The Corporation reserves the right to rescind, amend, alter, change, or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, SHARED TECHNOLOGIES CELLULAR, INC. has caused this Restated Certificate of Incorporation to be signed by Anthony D. Autorino, its Chairman and Chief Executive Officer, this _____ day of _________, 1998. SHARED TECHNOLOGIES CELLULAR, INC. By: ____________________________________ Anthony D. Autorino Chairman and Chief Executive Officer 46869_1C.DOC/s1 - 17 - 18 CERTIFICATE OF CORRECTION FILED TO CORRECT CERTAIN ERRORS IN THE RESTATED CERTIFICATE OF INCORPORATION OF SHARED TECHNOLOGIES CELLULAR, INC. Filed in the Office of the Secretary of State of Delaware on October 6, 1994 SHARED TECHNOLOGIES CELLULAR, INC. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the Corporation is Shared Technologies Cellular, Inc. (the "Corporation"). 2. That the Corporation filed a Restated Certificate of Incorporation with the Secretary of State of Delaware on October 6, 1994 and that said Restated Certificate of Incorporation requires correction as permitted by Section 103(f) of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of said Restated Certificate of Incorporation to be corrected is as follows: (a) Section (a) of Article NINTH is corrected to read as follows, with the language to be corrected and/or inadvertently omitted underscored herein for reference: "(a) The Corporation shall, to the fullest extent permitted by Section 145 of the GCL, indemnify any person was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) against any and all of the expenses (including attorneys' fees), judgment, fines and amounts paid in settlement actually or reasonably incurred by such person by reason of having been an officer, director, employee or agent at the request of the Corporation, any subsidiary of the Corporation or of any other corporation, partnership, joint venture, trust or other enterprise for which any and all persons who acted as officer, director, employee or agent at the request of the Corporation, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that the person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, 19 conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful." (b) The last sentence of section (i) of Article NINTH is corrected to read as follows, with the language inadvertently omitted underscored herein for reference: "Neither the failure of the Corporation (including its Board, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the GCL, nor an actual determination by the Corporation (including its Board, independent legal counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct." IN WITNESS WHEREOF, said Shared Technologies Cellular, Inc. has caused this Certificate of Correction to be executed by Anthony D. Autorino, its Chairman and Chief Executive Officer, this _____ day of _________, 1998. ____________________________________ Anthony D. Autorino Chairman and Chief Executive Officer 46869_1C.DOC/s2 -2- 20 SHARED TECHNOLOGIES CELLULAR, INC. UNANIMOUS WRITTEN CONSENT OF DIRECTORS JUNE __, 1998 The undersigned, constituting all of the members of the Board of Directors of SHARED TECHNOLOGIES CELLULAR, INC., a Delaware corporation (the "Corporation"), acting pursuant to the provisions of Sections 103, 141(f) and 245 of the Delaware General Corporation Law, do hereby approve and adopt the following resolutions, without notice or the holding of a meeting of the Board of Directors, which resolutions shall take effect as though adopted at a meeting duly called and held, at which a quorum was present and acting throughout: WHEREAS, the Corporation filed its original Certificate of Incorporation with the Delaware Secretary of State on March 14, 1989; and WHEREAS, the Corporation filed a Restated Certificate of Incorporation on October 6, 1994 (the "Restated Certificate"), and has amended and supplemented such Original Restated Certificate a number of times since that date; and WHEREAS, the Restated Certificate as filed with the Delaware Secretary of State contained typographical errors and inadvertent language omissions which, in the view of this Board of Directors, need to be corrected to avoid confusion; and further RESOLVED, that this Board of Directors hereby deems it advisable to restate and integrate all provisions of the Corporation's Restated Certificate of Incorporation, as amended and supplemented to date, into one complete certificate. NOW, THEREFORE, be it RESOLVED, that the errors and omissions contained in the Corporation's Restated Certificate be corrected by the filing of a Certificate of Correction in the form attached hereto as Exhibit A (the "Certificate of Correction"); and further RESOLVED, that provisions of the Restated Certificate, as amended and supplemented to date, be restated and integrated to read as set forth in the Second Restated Certificate of Incorporation attached hereto as Exhibit B (the "Restated Certificate"); and further 21 RESOLVED, that the proper officers of the Corporation be, and each of them hereby is, authorized and empowered, in the name and on behalf of the Corporation, to execute and file with the Delaware Secretary of State the Certificate of Correction and the Restated Certificate, and to pay any and all fees in connection therewith; and further RESOLVED, that the proper officers of the Corporation be, and each of them hereby is, authorized and directed to take or cause to be taken any and all such further actions as they or any of them shall deem necessary, desirable or convenient to carry out the intent of the foregoing resolutions. IN WITNESS WHEREOF, the undersigned directors have executed this Consent as of the date set forth above, and hereby direct that this Consent be inserted in the minute book of the Corporation with the proceedings of the Board of Directors' meetings. __________________________________ ___________________________________ Anthony D. Autorino Ajit G. Hutheesing __________________________________ ___________________________________ Thomas H. Decker Vincent DiVincenzo __________________________________ ___________________________________ William A. DiBella Nicholas E. Sinacori 46867_1C.DOC/s1 - 2 - EX-10.9 3 EX-10.9 1 Exhibit 10.9 SHARED TECHNOLOGIES CELLULAR, INC. 1994 STOCK OPTION PLAN As amended, November 11, 1998 1. Purpose. The Shared Technologies Cellular, Inc. 1994 Stock Option Plan (the "Plan") is intended to encourage the ownership of stock of Shared Technologies Cellular, Inc., a Delaware corporation (the "Company"), by qualified and competent persons who are key to the success of the Company and its direct and indirect subsidiaries (the "Subsidiaries") and to provide additional incentive for them to promote the growth, development and financial success of the Company and its Subsidiaries business as determined by a committee consisting of two or more members of the Board of Directors of the Company (the "Board"), as appointed pursuant to Section 2 hereof, by offering them an opportunity to increase their proprietary interest in the Company through the grant of nonqualified stock options (the "Options") to purchase shares of Common Stock of the Company, par value $0.01 per share (the "Common Stock"). Consistent with these objectives, the Plan authorizes the granting of Options to acquire shares of Common Stock pursuant to the terms and conditions hereinafter set forth. The Options are not intended to qualify as "Incentive Stock Options" within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Administration of the Plan. a. Members of the Committee. The Plan shall be administered by a committee (the "Committee") duly appointed by the Board which shall consist of at least two members of the Board, each of whom shall be a "Non-Employee Director" as defined in subsection (b)(3)(i) of Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Members of the Committee shall serve at the pleasure of the Board of Directors of the Company. b. Authority of the Committee. The Committee shall adopt such rules as it may deem appropriate in order to carry out the purposes of the Plan. Subject to the provisions of this Plan, the Committee shall have the complete authority, in its discretion, to make the following determinations with respect to each Option to be granted by the Company: (A) the person to receive the Option; (B) the time of granting the Option; (C) the number of shares subject thereto; (D) the Option Price (as defined in Section 5(b) hereof); and (E) the Option Period (as defined in Section 5(d) hereof). In making such determinations the Committee may take into account the nature of the services rendered by the person, their present and potential contributions to the success of the Company and its Subsidiaries, and such other factors as the Committee in its discretion shall deem relevant. Subject to the provisions of this Plan, all questions of interpretation, administration, and application of the Plan shall be determined by a majority of the members of the Committee then in office, except that the Committee may 2 authorize any one or more of its members, or any officer of the Company, to execute and deliver documents on behalf of the Committee. The determination of such majority shall be final and binding in all matters relating to the Plan or all persons concerned. No member of the Committee shall be liable for any act done or omitted to be done by such member or by any other member of the Committee in connection with the Plan, except for such member's own willful misconduct or as expressly provided by statute. 3. Persons to Whom Options May be Granted. Options may be granted, at the discretion of the Committee: a. To one or more persons who are employees or employees and directors of the Company or of any of its present or future Subsidiaries, or any employee of a Parent Corporation (within the meaning of Code Section 424(e)) (collectively, an "Employee"); b. To one or more persons who provides services to the Company or of any of its present or future Subsidiaries as a consultant or otherwise in the capacity of an independent contractor and who is not otherwise an Employee. 4. Stock Subject to the Plan. The shares subject to the Plan shall consist of 825,000 shares of Common Stock, subject to adjustment pursuant to Section 5(h) hereof, which shares may be either authorized but unissued shares or previously issued shares of Common Stock reacquired and held by the Company as treasury shares, not reserved for any other purpose. The Company shall at all times during the term of this Plan and of the Options granted hereunder reserve and keep available such number of shares of the Company's stock as will be sufficient to satisfy the requirements of this Plan and shall pay all fees and expenses necessarily incurred by the Company in connection therewith. If any outstanding Option under the Plan for any reason expires or is canceled or otherwise terminated without having been exercised in full, the shares of Common Stock allocable to the unexercised portion of such Option shall (unless the Plan shall have been terminated) become available for subsequent grants of Options under the Plan. 5. Terms and Conditions of Options. Each Option granted pursuant to the Plan shall be evidenced by a written agreement (the "Option Agreement") between the Company and the person to whom such Option is awarded (the "Optionee"), which Option Agreement shall comply with and be subject to the following terms and conditions: a. Number of Shares. Each Option Agreement shall state the number of shares of Common Stock to which the Option relates. b. Option Price. Each Option Agreement shall state the option price, which shall not be less than seventy percent (70%) of the Fair Market Value (as defined below) of the shares of Common Stock on the date of grant of the Option (the "Option Price"). The term "Fair Market Value" of a share of Common Stock shall mean (i) if the shares of Common Stock are then traded on an over-the-counter 2 3 market, the average of the closing bid and asked prices for the shares of Common Stock in such over-the-counter market for the last preceding date on which there was a sale of such Common Stock in such market, (ii) if the shares of Common Stock are then listed on a national securities exchange, the closing sales price per share for the last preceding date on which there was a sale of such Common Stock on such exchange, or (iii) if the shares of Common Stock are not then traded in an over-the-counter market or listed on a national securities exchange, such value as the Committee in its discretion may determine. The Option Price shall be subject to adjustment as provided in Section 5(h) hereof. c. Payment of Option Price. (i) Shares of Common Stock shall be issued to the Optionee upon payment in full either in cash (or cash equivalent) or by an exchange of shares of Common Stock of the Company previously owned by the Optionee, or a combination of both, in an amount or having a combined value equal to the aggregate purchase price for the shares subject to the Option or portion thereof being exercised. The value of the previously owned shares of Common Stock exchanged in full or partial payment for the shares purchased upon the exercise of an Option shall be equal to the aggregate Fair Market Value of such shares on the date of the exercise of such Option. (ii) Whenever shares of Common Stock are to be issued under the Plan, the Company shall have the power to require the recipient of the Common Stock to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to issuance of the certificate for shares of Common Stock. The Option Agreement may provide that an Optionee shall be entitled to elect to pay all or a portion of all federal, state or local withholding taxes arising in connection with the exercise of an Option by electing to (1) have the Company withhold shares of Common Stock, or (2) deliver other shares of Common Stock previously owned by the Optionee having a Fair Market Value equal to the amount to be withheld; provided, however, that the amount to be withheld shall not exceed the Optionee's estimated total federal, state and local tax obligations associated with the transaction. The election shall be made in writing and shall be made according to such rules and in such form as the committee shall from time to time determine. The Fair Market Value of fractional shares remaining after payment of the withholding taxes shall be paid to the Optionee in cash. d. Terms and Exercise of Options. Options shall be exercisable over the exercise period as and at the times and upon such conditions as the committee may determine, as reflected in the Option Agreement, including the authority to accelerate the exercisability of any outstanding Option at such time and under such circumstances as it, in its sole discretion, deems appropriate (the "Option Period"), provided however, that the Option period shall not exceed ten (10) years from the date of grant of such Option. The Option Period shall be subject to earlier termination as provided in Sections 5(e) and 5(f) hereof. An Option may be exercised, as to any or all full shares of Common Stock as to which the Option has become exercisable, by giving written notice of such exercise to the Committee or to such individual(s) as the Committee may from time to time designate. 3 4 e. Termination of Employment Other than for Death, Disability or Retirement In the event that the employment of an Optionee shall terminate (other than by reason of death, disability or retirement), all Options of such Optionee that are exercisable at the time of such termination may, unless earlier terminated in accordance with their terms, be exercised within three (3) months after such termination; provided, however, that if the employment of an Optionee shall terminate for Cause (as defined herein), all options theretofore granted to such Optionee shall, to the extent not theretofore exercised, terminate immediately. The term "Cause" means for purposes of whether and when an Optionee has incurred a termination of employment for Cause any act or omission which permits the Company or the Parent Corporation to terminate the written agreement or arrangement between such Optionee and the Company or the Parent Corporation, as the case may be; Cause as defined in such agreement or arrangement, or in the event there is no such agreement or arrangement or the agreement or arrangement does not define the term "Cause", than Cause shall mean (a) the conviction of the Optionee for committing a felony under Federal law or the law of the state in which such action occurred or (b) the willful or negligent failure on the part of such Optionee to perform his duties to the Company or the Parent Corporation, as the case may be. f. Termination of Employment Due to Death, Disability or Retirement of Optionee. If an Optionee shall die while employed by the Company, its Subsidiaries or the Parent Corporation, or within three (3) months after the termination of such Optionee's employment other than for Cause, or if the Optionee's employment shall terminate by reason of Disability (within the meaning of Section 22(e)(3) of the Code) or retirement, all Options theretofore granted to such Optionee (to the extent otherwise exercisable at the time of death or termination of employment) may, unless earlier terminated in accordance with their terms, be exercised by the Optionee or by the Optionee's estate or by a person who acquired the right to exercise such Option by bequest or inheritance or otherwise by reason of death or disability of the Optionee, at any time within six months (or such longer period as may be determined by the Committee in its sole discretion) after the date of any such death, disability or retirement of the Optionee. g. Nontransferability of Options. Options granted under the Plan shall not be transferable otherwise than by will or by the laws of descent and distribution, and Options may be exercised, during the lifetime of the Optionee, only by the Optionee or by his guardian or legal representative. h. Effect of Certain Changes. (i) If there is any change in the number or class of shares of Common Stock through the declaration of stock or cash dividends, or, recapitalization resulting in stock splits, or combinations or exchanges of such shares, the number or class of shares of Common Stock available for Options, the number or class of such shares covered by outstanding Options, and the exercise price per share of such Options may be proportionately adjusted by the Committee in its sole discretion to reflect any such 4 5 change in the number or class of issued shares of Common Stock; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. In the event of any other extraordinary corporate transaction, including but not limited to distributions of cash or other property to the Company's shareholders, the Committee may equitably adjust outstanding Options as it deems appropriate in its sole discretion. (ii) In the event of the proposed dissolution or liquidation of the Company, in the event of any corporate separation or division, including, but not limited to, split-up, split-off or spin-off, or in the event of a merger or consolidation of the Company with another corporation, the Committee may provide that the holder of each Option then exercisable shall have the right to exercise such Option (at its then Option Price) solely for the kind and amount of shares of stock and other securities, property, cash or any combination thereof receivable upon such dissolution, liquidation or corporate separation or division, or merger or consolidation by a holder of the number of shares of Common Stock for which such option might have been exercised immediately prior to such dissolution, liquidation, or corporate separation or division, or merger or consolidation. (iii) Paragraph (ii) of this Section 5(h) shall not apply to a merger or consolidation in which the Company is the surviving corporation and shares of Common Stock are not converted into or exchanged for stock, securities of any other corporation, cash or any other thing of value. Notwithstanding the preceding sentence, in case of any consolidation or merger of another corporation into the Company in which the Company is the surviving corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination, but including any change in such shares into two or more classes or series of shares), the Committee may provide that the holder of each Option then exercisable shall have the right to exercise such Option solely for the kind and amount of shares of stock and other securities (including those of any new direct or indirect parent of the Company), property, cash or any combination thereof receivable upon such reclassification, change, consolidation or merger by the holder of the number of shares of Common Stock for which such Option might have been exercised. (iv) In the event of a change in the Common Stock of the Company as presently constituted, which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. (v) To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. 5 6 (vi) Except as expressly provided in this Section 5(h), the Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation; and any issue by the Company of shares of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to the Option. The grant of any Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassification, reorganizations or changes of its capital or business structures or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets. i. Rights as a Stockholder. An Optionee or a transferree of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate to him or her for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 5(h) hereof. j. Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Optionee's employment at any time, nor confer upon any Optionee any right to continue in the employ of the Company, nor will anything in the Plan require an Optionee to continue in the employ of the Company. k. Other Provisions. The Option Agreements authorized under the Plan shall contain such other provisions not inconsistent with this Plan, including, without limitation, the imposition of restrictions upon the exercise of an Option as the Committee shall deem advisable. l. Change of Control. (i) In the event of a Change of Control of the Company, subject to the condition set forth in Section 5(l)(ii) below, all restrictions and conditions applicable to Options then outstanding shall be deemed satisfied, and such Options shall be deemed to be fully vested, as of the date of the Change of Control. For purposes of this Plan, a Change in Control shall be deemed to occur if the persons who were directors of the Company shall cease to constitute a majority of the Board of the Company in connection with any of the following transactions: (A) the acquisition by a third person, including a "person" as defined in Section 13(d)(3) of the Exchange Act, of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of the directors of the Company; or (B) as the result of, or in connection with, any tender or exchange offer, merger, consolidation or other business combination, sale of assets, or any combination of the foregoing transactions. 6 7 (ii) Notwithstanding the occurrence of any Change of Control, an Option shall only receive the benefit of the removal of restrictions and accelerated vesting, as provided by Section 5(l)(i) above, if such Option is held by an employee of the Company and such employee's employment with the Company's terminates, for any reason, following such Change of Control. For the purposes hereof, termination shall include any reduction in compensation, geographic relocation of the employee, or any material diminution in job status or responsibilities. (iii) In the case of any tender or exchange offer, merger, consolidation or other business combination or sale of all or substantially all of the assets of the Company, which does not constitute a Change in Control, or in the case of a reorganization or liquidation of the Company, the Committee, or the board of directors of any corporation assuming the obligations of the Company hereunder shall, as to outstanding Options, (A) make appropriate provision for the protection of any such outstanding Options by the substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable in respect of the shares of Company Stock, or (B) upon written notice to the Participants, provide that the Company or the merged, consolidated or otherwise reorganized corporation shall have the right, upon the effective date of any such merger, consolidation, sale of assets or reorganization, to purchase all Options held by each Participant as to which restrictions have not lapsed as of that date at an amount equal to the aggregate fair market value on such date of the shares, such amount to be paid in cash or, if stock of the merged, consolidated or otherwise reorganized corporation is issuable in respect of the shares of the Common Stock of the Company, then, in the discretion of the Committee, in stock of such merged, consolidated or otherwise reorganized corporation equal in fair market value to the aforesaid amount. In any such case the Committee shall, in good faith, determine fair market value. The Committee may, in its discretion, advance the lapse of restrictions and conditions applicable to Options outstanding as of the date of the merger, consolidation, sale of assets or reorganization. 6. Term of Plan. Options under this Plan may be granted pursuant to the Plan from time to time within a period of ten (10) years from the date the Plan is adopted by the Board, or the date the Plan is approved by the stockholders of the Company, whichever is earlier. 7. Amendment. The Board may at the time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part; provided, however, that no amendment which requires shareholder approval in order for the exemptions available under Rule 16b-3 to be applicable to the Plan and the Optionees, shall be effective unless the same shall be approved by the stockholders of the Company entitled to vote thereon on or before the effective date of the amendment. Such approval shall be obtained in such manner as is required by the Company's Certificate of Incorporation, its By-Laws, and the laws of the State of Delaware as in effect at the time of such approval. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights or 7 8 obligations of any Optionee, without such Optionee's consent, under any Option theretofore granted under the Plan. 8. Headings. The headings of sections and subsections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of the Plan. 9. Governing Law. The Plan and all rights hereunder shall be construed in accordance with and governed by the laws of the State of Delaware. Dated as of November 11, 1998 ____________________________________ Anthony D. Autorino Chairman and Chief Executive Officer 8 EX-10.10 4 EX-10.10 1 Exhibit 10.10 SHARED TECHNOLOGIES CELLULAR, INC. 1994 DIRECTOR OPTION PLAN As amended November 11, 1998 1. PURPOSE The purpose of this 1994 Director Option Plan (The "Plan") of Shared Technologies Cellular, Inc., a Delaware corporation (the "Company"), is to encourage ownership in the Company by outside directors of the Company whose continued services are considered essential to the Company's future progress and to provide them with a further incentive to remain as directors of the Company. 2. ADMINISTRATION The Board of Directors shall supervise and administer the Plan. Grants of stock options under the Plan and the amount and nature of the awards to be granted shall be automatic and nondiscretionary in accordance with Section 5. However, all questions of interpretation of the Plan or of any options issued under it shall be determined by the Board of Directors and such determination shall be final and binding upon all persons having an interest in the Plan. 3. DIRECTORS ELIGIBLE FOR PARTICIPATION Each director of the Company who is not an employee of the Company or any Subsidiary, or affiliate of the Company shall be eligible to participate in the Plan. 4. STOCK SUBJECT TO THE PLAN (a) The maximum number of shares which may be issued under the Plan shall be 100,000 shares of the Company's Common Stock. $.01 par value per share ("Common Stock") (b) If any outstanding option under the Plan for any reason expires or is terminated without having been exercised in full, the shares allocable to the unexercised portion of such option shall again become available for grant pursuant to the Plan. (c) All options granted under the Plan shall be non-statutory options not entitled to special tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended to date and as may be amended from time to time (the "Code"). 2 5. TERMS, CONDITIONS AND FORMS OF OPTIONS Each option granted under the Plan shall be evidenced by a written agreement in such form as the Board of Directors shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: (a) Option Grant Dates. Each eligible director will automatically receive an option to purchase 4,000 thousand shares of Common Stock at the commencement of such director's one (1) year term. All options granted under the Plan will be immediately vest and become exercisable at the rate of one-twelfth (1/12) per full month of service from the date of grant, with full vesting as of the one-year anniversary following the date of grant. (b) Option Exercise Price. The option exercise price per share for each option granted under the Plan shall be equal to: (i) if the Common Stock is then traded on the over-the-counter market, the average of the Closing bid and ask prices for the shares of Common Stock in such over-the-counter market for the last preceding date on which there was a sale of such Common Stock in such market; (ii) if the Common Stock is then listed on a national securities exchange, the closing sales price per share for the last preceding date on which there was a sale of such Common Stock on such exchange; or (iii) if, on the relevant date, the Common Stock is not publicly traded or reported as described in (i) or (ii), the value determined in good faith by the Board of Directors. (c) Options Non-Transferable. Each option granted under the Plan by its terms shall not be transferable by the optionee otherwise than by will, or by the laws of descent and distribution, and shall be exercised during the lifetime of the optionee only by him. No option or interest therein may be transferred, assigned, pledged or hypothecated by the optionee during his lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. (d) Exercise Period. Except as otherwise provided in the Plan, each option may be exercised fully on the date of grant of such option, provided that, subject to the provisions of Section 5(e), no option may be exercised more than ninety (90) days after the optionee ceases to serve as a director of the Company. No option shall be exercisable after the expiration of ten (10) years from the date of grant or prior to approval of the Plan by the stockholders of the Company, whichever is earlier. (e) Exercise Period Upon Disability or Death. Notwithstanding the provisions of Section 5(d), any option granted under the Plan: (i) may be exercised in full by an optionee who becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) 2 3 while serving as a director of the Company; or (ii) may be exercised (x) in full upon the death of an optionee while serving as a director of the Company, or (y) to the extent then exercisable upon the death of an optionee within ninety (90) days of ceasing to serve as a director of the Company, by the person to whom it is transferred by will, by the laws of descent and distribution, or by written notice filed pursuant to Section 5(h); in each such case within six months (or such longer period as may be determined by the Board of Directors in its sole discretion) after the date the optionee ceases to be such a director; provided, that in no option shall be exercisable after the expiration of ten (10) years from the date of grant. (f) Exercise Procedure. Options may be exercised only by written notice to the Company at its principal office accompanied by payment of the full consideration for the shares as to which they are exercised. (g) Payment of Purchase Price. Options granted under the Plan may provide for the payment of the exercise price (i) by delivery of cash (or cash equivalent) in an amount equal to the exercise price of such options or, (ii) to the extent provided in the applicable option agreement, by delivery to the Company of shares of Common Stock then owned by the optionee having a fair market value equal in amount to the exercise price of the options being exercised, or (iii) by any combination of such methods of payment. The fair market value of any shares of Common Stock or other non-cash consideration which may be delivered upon exercise of an option shall be determined by the Board of Directors. (h) Exercise by Representative Following Death of Director. A director, by written notice to the Company, may designate one or more persons (and for time to time change such designation) including his legal representative, who, by reason of his death, shall acquire the right to exercise all or a portion of the option. If the person or persons so designated wish to exercise all or a portion of the option, they must do so within the term of the option as provided herein. Any exercise by a representative shall be subject to the provisions of the Plan. (i) Change of Control. (i) In the event of a Change of Control of the Company, subject to the condition set forth in Section 5(i)(ii) below, all restrictions and conditions applicable to Options then outstanding shall be deemed satisfied, and such Options shall be deemed to 3 4 be fully vested, as of the date of the Change of Control. For purposes of this Plan, a Change in Control shall be deemed to occur if the persons who were directors of the Company shall cease to constitute a majority of the Board of the Company in connection with any of the following transactions: (1) the acquisition by a third person, including a "person" as defined in Section 13(d)(3) of the Exchange Act, of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of the directors of the Company; or (2) as the result of, or in connection with, any tender or exchange offer, merger, consolidation or other business combination, sale of assets, or any combination of the foregoing transactions. (ii) Notwithstanding the occurrence of any Change of Control, an Option shall only receive the benefit of the removal of restrictions and accelerated vesting, as provided by Section 5(i)(i) above, if such Option is held by a director of the Company and such director's service on the Company's Board of Directors terminates, for any reason, following such Change of Control. (iii) In the case of any tender or exchange offer, merger, consolidation or other business combination or sale of all or substantially all of the assets of the Company, which does not constitute a Change in Control, or in the case of a reorganization or liquidation of the Company, the Committee, or the board of directors of any corporation assuming the obligations of the Company hereunder shall, as to outstanding Options, (i) make appropriate provision for the protection of any such outstanding Options by the substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable in respect of the shares of Company Stock, or (ii) upon written notice to the Participants, provide that the Company or the merged, consolidated or otherwise reorganized corporation shall have the right, upon the effective date of any such merger, consolidation, sale of assets or reorganization, to purchase all Options held by each Participant as to which restrictions have not lapsed as of that date at an amount equal to the aggregate fair market value on such date of the shares, such amount to be paid in cash or, if stock of the merged, consolidated or otherwise reorganized corporation is issuable in respect of the shares of the Common Stock of the Company, then, in the discretion of the Committee, in stock of such merged, consolidated or otherwise reorganized corporation equal in fair market value to the aforesaid amount. In any such case the Committee shall, in good faith, determine fair market value. The Committee may, in its discretion, advance the lapse of restrictions and conditions applicable to Options outstanding as of the date of the merger, consolidation, sale of assets or reorganization. 6. ASSIGNMENTS 4 5 The rights and benefits under the Plan may not be assigned except for the designation of a beneficiary as provided in Section 5. 7. LIMITATION OF RIGHTS (a) No Right to Continue as a Director. Neither the Plan, nor the granting of an option not any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a director for any period of time. (b) No Stockholders' Right for Options. An optionee shall have no rights as a stockholder with respect to the shares covered by his options until the date of the issuance to him of a stock certificate therefor, and no adjustment will be made for dividends or other rights for which the record date is prior to the date such certificate is issued. 8. CHANGES IN CAPITAL STOCK (a) If (x) the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities of the Company, or (y) additional shares of Common Stock or new or different shares of Common Stock or other securities of the Company or other non-cash assets are distributed with respect to such shares or other securities, through or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction with respect to such shares or other securities, an appropriate and proportionate adjustment shall be made in (i) the maximum number and kind of shares reserved for issuance under the Plan, and (ii) the number and kind of shares or other securities subject to any then outstanding options under the Plan, and (iii) the price for each share subject to any then outstanding options under the Plan without changing the aggregate purchase price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. No fractional shares will be issued under the Plan on account of any such adjustments. Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 8 if such adjustment would cause the Plan to fail to comply with Rule 16b-3 or any successor rule promulgated pursuant to Section 16 of the Securities Exchange Act of 1934. (b) In the event that the Company is merged or consolidated into or with another corporation (in which consolidation or merger, the stockholders of the Company receive distributions of cash or securities of another issuer as a result thereof), or in the event that all or substantially all of the assets of the Company are acquired by any other person or entity, or in the event of a reorganization or liquidation of the Company, the Board of Directors of the Company, or the Board of Directors of any corporation 5 6 assuming the obligations of the Company, shall, as to outstanding options, take one or more of the following actions; (i) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), (ii) upon written notice to the optionees, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice, or (iii) if, under the terms of a merger transaction, holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the merger (the "Merger Price"), make or provide for a cash payment to the optionees equal to the difference between (A) the Merger Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Merger Price) and (B) the aggregate exercise price of all such outstanding options in exchange for the termination of such options. 9. AMENDMENT OF THE PLAN The Board of Directors may suspend or discontinue the Plan or review or amend it in any respect whatsoever; provided, however that without approval of the stockholders of the Company no revision or amendment shall change the number of shares subject to the Plan or the number of shares issuable to any director of the Company under the Plan (except as provided in Section 8), change the designation of the class of any directors eligible to receive options, or materially increase the benefits accruing to participants under the Plan. The Plan may not be amended more than once in any six-month period. 10. WITHHOLDING Prior to issuance of shares of Common Stock upon exercise of an Option, the Optionee shall pay or make adequate provision for any federal or local taxes or any kind required by law to be withheld by the Company with respect to any shares issued upon exercise of options under the Plan. 11. EFFECTIVE DATE AND DURATION OF THE PLAN (a) Effective Date. The Plan shall become effective when adopted by the Board of Directors and approved by the Company's stockholders. Amendments to the Plan not requiring stockholder approval shall become effective when adopted by the Board of Directors; amendments requiring stockholder approval shall become effective when adopted by the Board of Directors, but no option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular optionee) unless and until such amendment shall have been approved by the Company's stockholders. If such stockholder approval is not obtained within twelve months of the Board's adoption of 6 7 such amendment, any options granted on or after the date of such amendment shall terminate to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular optionee. (b) Termination. Unless sooner terminated in accordance with Section 9, the Plan shall terminate upon the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors. 12. COMPLIANCE WITH RULE 16b-3 Transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successor promulgated pursuant to Section 16 of the Securities Exchange Act of 1934. To the extent any provision of the Plan or action by the Board of Directors in administering the Plan fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board of Directors. 13. GOVERNING LAW The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware. 14. SUCCESSORS AND ASSIGNS This Plan shall inure to the benefit of and be binding upon each successor and assign of the Company. All obligations imposed upon a optionee, and all rights granted to the Company hereunder, shall be binding upon the optionee's heirs, legal representatives and successors. 15. ENTIRE AGREEMENT This Plan and the written agreement with respect to each option granted under this Plan constitute the entire agreement with respect to the subject matter hereof and thereof, provided that in the event of any inconsistency between the Plan and such written agreement, the terms and conditions of this Plan shall control. Dated as of November 11, 1998 ____________________________________ Anthony D. Autorino Chairman and Chief Executive Officer 7 EX-10.11 5 EX-10.11 1 Exhibit 10.11 PREPAID CELLULAR RESELLER AGREEMENT This Prepaid Cellular Reseller Agreement (the "Agreement") is made as of the 19th day of February, 1999, by and between Shared Technologies Cellular, Inc., a Delaware corporation, having its principal place of business at 100 Great Meadow Road, Suite 102, Wethersfield, CT 06109 ("STC"), and MCI Telecommunications Corporation and WorldCom Technologies, Inc. and their respective affiliates (collectively, "MCI WORLDCOM"). WHEREAS, STC provides certain prepaid cellular communications services, which include the utilization of certain third-party relationships with technology providers and cellular service carriers, automated audit and billing systems, an interactive voice response ("IVR") platform, activation of Phones, sale and redemption of PINs, and related End User service. Such prepaid cellular services to be provided to End Users pursuant to the terms of this Agreement are herein referred to as the "Services." As used herein, the term "End Users" refers to end users of the Services. WHEREAS, MCI WORLDCOM is engaged in the business of selling prepaid long-distance cards and services through direct distribution and major retail outlets across the U.S.; WHEREAS, this Agreement provides for a program, pursuant to which MCI WORLDCOM and STC will market and sell the Services to End Users under an MCI WorldCom brand name, pursuant to which MCI WORLDCOM will have responsibility for distribution development, marketing, merchandising and brand management, and pursuant to which STC will be responsible for providing the Services, back-office service administration and End User service for the Services; and WHEREAS, under the program, End Users will purchase MCI WorldCom branded prepaid cellular phone and airtime kits for use of the Services (a "Phone Kit"), pursuant to the terms hereof. Such Phone Kits may include initial airtime or require a separate airtime purchase for service activation, with additional airtime available by purchase of additional cards through retail and by purchase of PINs by phone from STC. NOW, THEREFORE, in consideration of the promises and covenants contained herein, the receipt and adequacy of which are acknowledged, the parties agree as follows. 1. GENERAL DESCRIPTION OF PROGRAM. (a) Scope. MCI WORLDCOM and STC are entering into this Agreement for the purpose of marketing and providing Services to End Users under an MCI WorldCom brand name through the MCI WORLDCOM retail accounts listed on the attached Exhibit A (the "Retailers"), and short-form direct response TV advertising by STC consistent with the terms of this Agreement, with additional usage available to End Users by purchase from the Retailers and by phone from STC's interactive voice response system ("IVR"). (b) Phone Kits, PINs and Cards. Retail sales of the Services will include the sale of Phone Kits 2 by MCI WORLDCOM through the Retailers and by STC through direct-response television advertisements. Each Phone Kit will include one cellular prepaid phone programmed or enabled with software and/or other technology obtained by STC from its technology partner(s), to enable the phone to utilize the Services (a "Phone"). In addition, each Phone Kit may include initial airtime or require a separate airtime card (a "Card") purchase for service activation. As used herein, the term "Card" refers to a plastic (or comparable material) card that has a personal identification number ("PIN") printed on it for use of the Services. Airtime (i.e. usage) of the Services is obtained through the redemption of PINs by End Users. After an End User purchases a Phone Kit, and separate Card if required, the End User must call STC to activate the Phone. The additional purchase of airtime from a Retailer consists of an End User purchasing a Card (which contains a PIN). Alternatively, the additional purchase of airtime directly from STC consists of the purchase of another PIN only by means of the End User calling STC's IVR, the phone number for which shall appear on all Cards. (i) Card Denominations. Cards shall be in face value denominations of $30, $50 and $75. (ii) PIN Expirations. All PINs will be valid for a period of 60 days from the date that they are redeemed (see "Redemption" below). However, in the event that an End User purchases and redeems another PIN within 30 days after the expiration of a prior PIN, STC will reinstate for 60 days the amount of unused airtime that had been remaining on the expired PIN (a "PIN Recharge"). (iii) Activation. In order for an End User to use his or her Phone, the End User must initially activate the Phone. Activation is accomplished when an End User redeems (see "Redemption" below) the PIN on the initial Card included in the Phone Kit or on a Card purchased separately. A minimum of $30 of airtime must be redeemed in order to activate a Phone. At the same time, the End User also needs to provide STC with the electronic serial number ("ESN") that appears on that particular Phone. STC then assigns a MIN to the Phone. The term "MIN" means mobile identification number. A MIN is equivalent to a phone number. Once activated, in order for a MIN to remain active an End User must redeem a PIN at least once every 60 days. (iv) Redemption. There are two ways for an End User to supply airtime to a Phone; by purchasing a Card from a Retailer and calling STC with the PIN, or by purchasing a PIN directly from STC. With respect to Cards, a Card's PIN may be redeemed by an End User by calling STC's IVR, whereby the End User gives STC the PIN from the Card. The PIN appears on the Card in a secured manner. In response, STC gives the End User an airtime control code ("ACC"), which the End User inputs into the Phone's keypad. This loads the Phone for airtime. Similarly, with respect to PINs purchased directly from STC, a End User calls STC's IVR, purchases a PIN, and STC provides the End User with an ACC (see Section 7(i), "Accepted Payment Methods"). Redemption is deemed to occur when STC gives the ACC to the End User, both for Card PIN redemptions and PIN purchases directly from STC. 2 3 2. TERM. This Agreement shall commence as of the date first written above and have an initial term of two (2) years. The term hereof shall automatically renew for successive one (1) year terms unless either party gives notice of termination at least 120 days prior to the end of the term then in effect. 3. TERMINATION. (a) Both parties shall have the right to terminate this Agreement by reason of an uncured default of the other party in accordance with Section 3 hereof. (b) Both parties shall have the right to terminate this Agreement for convenience with 120 days' notice, subject to the following. The term "for convenience" shall mean for any reason other than an uncured default of the other party. (i) In the event that MCI WORLDCOM elects to terminate this Agreement for convenience, MCI WORLDCOM agrees to implement one of the following options, A) that, for a period of one (1) year (inclusive of the notice period required by Paragraph 3(b) hereof) following the effective date of such termination, MCI WORLDCOM shall continue to offer and promote only the Services, to the exclusion of other prepaid cellular services, to all Retailers from which MCI WORLDCOM had taken orders for the Services during the term of this Agreement or, B) MCI WORLDCOM may choose to pay a buyout equal to $___ for each End User with an active MIN, with respect to End Users that became users of the Services through one of the Retailers. In the event of a termination for convenience, either by MCI WORLDCOM pursuant to this Section 3(b)(i) or by STC pursuant to Section 3(b)(ii) below, no sales of Cards or PINs to End Users shall occur after the effective date of such termination and no PIN Recharges shall occur following such termination effective date. STC shall continue to honor all PINs during the sixty (60) day period following such termination effective date. (ii) In the event that STC elects to terminate this Agreement for convenience, STC agrees to implement one of the following options, A) that, for a period of one (1) year (inclusive of the notice period required by Paragraph 3(b) hereof) following the effective date of such termination, STC shall continue to provide all Services to MCI WORLDCOM , or B), STC may choose to pay a buyout equal $___ for each End User with an active MIN, with respect to End Users that became users of the Services through one of the Retailers. (c) In the event that MCI WORLDCOM elects not to renew this Agreement, then for a period of one (1) year following the expiration of this Agreement, MCI WORLDCOM shall continue to offer and promote the Services, on a non-exclusive basis, to all of the Retailers to which it had offered the Services immediately prior to such termination. (d) In the event that STC elects not to renew this Agreement, then for a period of one (1) year 3 4 following the expiration of this Agreement, STC shall continue to make available to MCI WORLDCOM all services to support the provision of Services. 4. EXCLUSIVITY. [redacted] 5. PRICING. Suggested retail pricing ("SRP") for the Services, on a per-minute basis, inclusive of telecommunications taxes, is as follows. (a) Local service: $____ (b) Long-distance: $____ (c) Roaming: $____ (d) Local service airtime pertains to calls made by an End User that originate and terminate within the local cellular service area of the End User's MIN ("Local Area"). Local service rates also apply to airtime for all incoming calls received by an End User within such End User's Local Area, regardless of from where they originate. Long-distance service airtime pertains to all calls made by an End User that originate within the End User's Local Area and terminate outside of such Local Area. Roaming applies to all calls made or received by an End User outside of the Local Area. (e) The parties agree to use commercially reasonable efforts to maintain competitive pricing levels, with respect to other national providers. Any reductions of SRP shall be by mutual written agreement between the parties, and shall become implemented within approximately 30 days of such agreement. The parties shall consider the following factors in determining what constitutes such competitive pricing: end user pricing for activation, redemption, access, local airtime, long distance and roaming services; and whether pricing is on a tiered basis, in which case such comparison shall be made using a blended rate. (f) Returned Phones. MCI WORLDCOM shall provide weekly reports to STC detailing all Phone returns by End Users and Retailers, which reports shall include the ESN of each such Phone. If a Phone has not been activated, then STC shall not charge MCI WORLDCOM for the $10 of initial airtime. If a Phone has been activated, STC will promptly deactivate the Phone and refund to MCI WORLDCOM the wholesale cost of the usage associated with the initial Card. 6. DISCOUNTS AND COMMISSIONS. (a) Card PIN Discount to MCI WORLDCOM. STC agrees to sell PINs to MCI WORLDCOM for Cards at a base discount of __% off of the SRP of such PINs ("Base Discount"). For example, 4 5 STC will charge MCI WORLDCOM $__ for a PIN that is used on a Card with an SRP of $___. For initial airtime (included in the Phone Kit), STC will charge MCI WORLDCOM $____ for such $___ of initial airtime. STC shall furnish PINs to MCI WORLDCOM to enable MCI WORLDCOM to produce Cards bearing PINs, which PINs shall be provided in sufficient quantities as reasonably required by MCI WORLDCOM. However, the actual sale of each PIN shall be deemed to occur only when such PIN is redeemed by an End User from STC. (b) Average Monthly Usage Commission to MCI WORLDCOM. STC agrees to pay a commission to MCI WORLDCOM based on a percentage of the average monthly usage of End Users using the Services ("Average Monthly Usage Commission"). Such Average Monthly Usage Commission shall be based on the aggregate dollar amount (based on SRPs) of PINs redeemed by all End Users each month during the term of this Agreement, divided by the total number of active MINs during such month ("Average Monthly Usage"). The Average Monthly Usage Commission shall be an amount representing ___% for each dollar that the Average Monthly Usage exceeds $___, multiplied by the aggregate dollar amount (based SRPs) of PINs redeemed by all End Users during such month. The Average Monthly Usage Commission will be reported monthly to MCI WORLDCOM by the 15th of the following month, with payment from STC net 30 from the date of the report. (i) For example, if Average Monthly Usage were $____ for a particular month in which an aggregate of $1,000,000 of PINs were redeemed by End Users, then STC would pay MCI WORLDCOM an Average Monthly Usage Commission of $______ (i.e. ____% x $1,000,000). Average Monthly Usage Commissions shall be payable by the last day of the month following the month in which they accrue. (c) Commissions on Direct PIN Sales by STC. With respect to sales of MCI WORLDCOM branded PINs made by STC directly to End Users, STC agrees to pay MCI WORLDCOM a monthly commission in the amount of __% of the SRP of each such PIN sold ("PIN Commissions"). STC shall be responsible for collecting from End Users the purchase price of such PINs and paying PIN Commissions to MCI WORLDCOM within 30 days from the end of the month in which the PIN sales occurred. (d) MIN Activation Commissions on Phone Kit Sales by STC. When STC generates an MCI WORLDCOM branded Phone Kit sale, STC shall pay to MCI WORLDCOM an activation commission (an "Activation Commission"), which shall accrue at the time the Phone is activated. Activation Commissions shall be based on ___ percent (_%) of the sales price of the Phone Kit excluding the wholesale value of the PIN for the initial Card. Such commissions shall be payable by the last day of the month following the month in which they accrue. The wholesale value of the initial Card PIN for Phone Kit sales generated by STC shall be the SRP of the Card less MCI WORLDCOM's Base Discount. (i) For example, if STC were to generate a Phone Kit sale for $____ (including an initial 5 6 $__ Card), then, upon activation of the Phone, STC would become obligated to pay an Activation Commission to MCI WORLDCOM in the amount of $_____ (i.e. % x [$____ - $____]). (e) STC agrees to provide MCI WORLDCOM with PIN discounts and sales commissions equal to or greater than those given to any other distributor or agent of STC that purchases comparable volumes of services from STC. STC further agrees that its pricing shall remain competitive with the prepaid cellular services industry. 7. STC'S RESPONSIBILITIES. Without in any way limiting the responsibilities of STC elsewhere stated in this Agreement, STC shall have the following additional responsibilities: (a) Services. STC agrees to provide the Services to End Users pursuant to the terms hereof. (b) Carrier Relations. STC shall be responsible for maintaining agreements with cellular carriers as necessary to provide the Services in the cellular markets identified in Exhibit A. MCI WORLDCOM shall have no responsibility or liability with respect to such carriers, except to the extent arising out of MCI WORLDCOM's act or negligence. STC will be the customer of record with such carriers and shall be responsible for payment of all charges billed to STC for the Services. STC shall indemnify and hold MCI WORLDCOM harmless with respect to any claims by such carriers or End Users against MCI WORLDCOM arising in connection with the Services, except to the extent that any such claim arises out of MCI WORLDCOM's act or negligence, subject to the obligation of MCI WORLDCOM to insert language in its standard End User agreements to the effect that MCI WORLDCOM provides no warranties, express or implied, with respect to the Services. This indemnification expressly excludes claims relating to Phones and related goods sold by or on behalf of MCI WORLDCOM. STC and MCI WORLDCOM agree to work together in performing a market analysis with respect to optimizing wireless wholesale costs. (c) Fraud/Cloning. STC shall be responsible for all charges that may result from the cloning of MINs or ESNs relating to the Services, except to the extent caused by the act or negligence of MCI WORLDCOM. STC shall provide monthly reports to MCI WORLDCOM detailing incidents of such cloning. (d) Regulatory Approvals. To the extent that any regulatory approvals may be required in order for STC to provide the Services, all such approvals, including, without limitation, tariff filings, permits, certifications, authorizations and licenses, shall be the responsibility of STC. (e) Use of MCI WORLDCOM Long-Distance Services. STC agrees to to select MCI WORLDCOM, or an MCI WORLDCOM affiliate, as the long-distance carrier for the Services, when at all possible, subject to STC's reasonable discretion with respect to the terms on which such long-distance services are offered to STC. (f) Response Times for Order Fulfillment. 6 7 (i) Activations. STC will use its reasonable efforts to activate Phones (i.e. provide them with an active MIN) and provide ESN changes within, on average, ___ hours of STC's receipt of End Users' telephonic activation orders. STC will make available sufficient blocks of MINs for all major cellular service markets in the U.S. (ii) PINs. STC shall provide Card PINs to MCI WORLDCOM within three (3) business days of STC's receipt of MCI WORLDCOM's written or electronic purchase orders. (iii) End User Service Levels. STC shall maintain a monthly average response time to End User service calls such that the average time on hold for End Users calling the toll-free service number during hours of operation shall be ___ seconds, and End Users calling the IVR system shall have unrestricted access with no time on hold. STC shall further maintain a monthly average call abandonment rate not to exceed ______ percent (_%). In addressing End User calls, STC will endeavor to provide a complete answer or problem resolution in the course of each End User's call, while generally taking no more than ____ ( ) ____ to resolve most Service issues, except in the case of Service problems that affect a significant number of End Users, in which case STC will prioritize its response to such problems in order to try to provide a more rapid resolution. In the event that STC fails to meet the standards set forth in this Subparagraph 7(f)(iii), STC shall be entitled to a thirty (30) day cure period to cure such default. Additional performance and service level criteria shall be added as reasonably requested by MCI WORLDCOM and agreed to by STC in writing. (g) IVR System. STC shall maintain an interactive voice response ("IVR") system for End Users to obtain activation for their Phones and to purchase and redeem PINs. The IVR system shall be operative 24 hours a day, seven days a week. (h) Toll-Free End User Service Number. STC shall provide a toll-free telephone number for End Users to call for activations, redemptions and Services support. STC shall provide staffing for such End User support line seven days a week, from 8:00 a.m. to 12:00 a.m. Eastern time Monday through Saturday and 8:00 a.m. to 6:00 p.m. Eastern time on Sunday, with the exception of New Years Day, Easter Sunday, Thanksgiving Day and Christmas Day at which time the operator center is closed. Additionally, operator center(s) will close at 2:00 p.m. Eastern time on Christmas Eve and New Years Eve. (i) Accepted Payment Methods. STC agrees to accept payment by End Users for PINs by means of all major credit cards and by automatic check handling payments against U.S. bank accounts, subject to STC's reasonable discretion with respect to such transactions. (j) Payment Terms for PINs. STC shall invoice MCI WORLDCOM monthly for PINs, as follows. Certain Retailers shall be equipped with technology that will enable Cards with magnetic strips to be run through a card swipe device when a Card is purchased from such Retailer. The PIN on that Card will only then become enabled for redemption (herein referred to as "POS-Enabled PINs"). This process is intended to reduce theft problems. STC shall invoice MCI WORLDCOM 7 8 for POS-Enabled PINs in the month following the month in which such PINs are redeemed. In other instances, MCI WORLDCOM will sell Cards to Retailers with Non-POS-Enabled PINs, both on a consignment basis and on a non-consignment basis. With respect to Non-POS-Enabled PINs sold to Retailers by MCI WORLDCOM on a consignment basis, STC shall invoice MCI WORLDCOM for such PINs in the month following the month in which such PINs are redeemed. With respect to Non-POS-Enabled PINs sold to Retailers by MCI WORLDCOM on a non-consignment basis, STC shall invoice MCI WORLDCOM for such PINs when the Cards bearing such PINs are shipped by MCI WORLDCOM to the Retailers. MCI WORLDCOM shall notify STC at the time that it ships such Cards. MCI WORLDCOM shall pay all invoices within 30 days of the invoice date. (k) Taxes. STC shall be responsible for the payment of all federal telecommunications taxes applicable to the sale of the Services. (l) Reporting. STC shall provide the following information to MCI WORLDCOM on a weekly basis, (i) An activations report, by Retailer showing both new PIN redemptions and reactivations of previously expired PINs, (ii) a redemption report, by retailer/channel (with STC being a channel), showing redemptions by Card denomination. STC shall also provide the following information to MCI WORLDCOM on a monthly basis, a) a summary of activations report with ESNs, b) summary of redemptions report by control numbers, and (iii) an average commissions report (by the 15th of the following month), with detail to illustrate the number of End Users, by MIN, and aggregate PIN redemptions (based on SRPs) broken out by new and existing End Users. STC shall also provide other reports as mutually determined to be necessary. (m) Phones and Programming. (i) Technology Rights/Systems. STC shall be responsible for maintaining agreements with technology providers for licensing applicable technology(ies), generating PINs and providing programming for Phones, and will provide full indemnification to MCI WORLDCOM for any and all claims brought against MCI WORLDCOM in connection therewith, including, without limitation, any such claims for patent infringement. STC also shall purchase, maintain and operate systems necessary for PIN generation. STC further agrees to use its reasonable efforts to secure additional technology rights with respect to new technologies relating to the Services, as such technologies become available. (ii) Access to Programming Information. STC agrees to make available to MCI WORLDCOM and its authorized agents such information as reasonably required to enable MCI WORLDCOM, and such agents, to program Phones in order that such Phones will function properly with the Services. (iii) Phone Kit Fulfillment Option. MCI WORLDCOM shall have the option of delegating to STC the responsibility for preparing Phones for retail sale, for a fee of $____ 8 9 per Phone, payable on a net 30-day basis. Such preparation of Phones would include: (A) programming (sometimes referred to as "flashing") the Phones with the technology necessary to enable the Phones to function properly with the Services; (B) packaging the Phones in Phone Kits (using materials provided by MCI WORLDCOM), including packing, shrink wrapping and labeling for retail distribution; and (C) providing monthly reports to MCI WORLDCOM, in a mutually agreeable format, detailing such Phone Kit fulfillments. (n) Direct Response TV Sales. STC shall establish a direct response television advertising program to market and sell the Services, as follows: (i) Commissions Payable to MCI WORLDCOM. MCI WORLDCOM shall be entitled to receive commissions on all sales of MCI WORLDCOM branded Phone Kits by STC directly to End Users that call the toll-free number appearing in STC's television advertisements, in accordance with Section 6(d) hereof. (ii) Phone Kits. STC shall be solely responsible for all fulfillment associated with Phone Kits sold through STC's direct-response TV advertisements. These Phone Kits shall have the same appearance as Phone Kits sold by MCI WORLDCOM through the Retailers. STC shall have no responsibility with respect to the sale of Phone Kits through the Retailers, which shall be the sole responsibility of MCI WORLDCOM. (iii) Pricing. STC agrees to adhere to the same pricing guidelines for its direct-response TV ad sales as otherwise applicable to the sale of the Services, as set forth in Section 5. (iv) MCI WORLDCOM's Ad Law Dept. Approval. Reference is made to Paragraph 9(b) hereof with respect to the need for MCI WORLDCOM's Advertising Law Department to review the content of all television advertisements that contain any reference to Mark(s) of MCI WORLDCOM. (o) STC Support of MCI WORLDCOM Switch-Based Programs. STC shall support programs of MCI WORLDCOM that provide debit cellular services via non-handset-debit-technolog(ies), in accordance with Exhibit C hereof. 8. MCI WORLDCOM'S RESPONSIBILITIES. Without in any way limiting the responsibilities of MCI WORLDCOM elsewhere stated in this Agreement, MCI WORLDCOM shall have the following additional responsibilities: 9 10 (a) Marketing and Distribution of Services. MCI WORLDCOM shall market, promote and sell the Services through the Retailers, using its commercially reasonable efforts to effectively promote such sales to the same degree as it would any of its other major products and services. Such efforts shall include, without limitation, facilitating in-store Retailer promotions and advertising in Retailers circulars, which may be accomplished through co-op advertising or market development fund programs offered by MCI WORLDCOM to the Retailers. (b) Production of Cards. MCI WORLDCOM shall be responsible for production of all Cards, which shall describe in reasonable detail the procedures for activation and redemption of PINs for use of the Services, and shall conform to the requirements set forth in Section 8(c) below. MCI WORLDCOM shall produce such quantity of Cards as reasonably required to sufficiently satisfy End User demand. MCI WORLDCOM shall maintain inventory control of its Cards by means of control numbers for each PIN, which will be provided to MCI WORLDCOM by STC. Such control numbers are necessary because the PIN is concealed until an End User purchases the Card and reveals the PIN. It should be noted that not all Cards will have a scratch-off area for the concealment of PINs. (c) Point of Sale Materials. MCI WORLDCOM shall be responsible for production of all point of sale ("POS") materials, including product packaging, labeling, instructions, coverage maps, signage, and marketing materials such as retail displays and product brochures. Such POS materials shall be subject to STC's prior approval as to form and content, which approval shall not be unreasonably withheld or delayed. (i) STC Service Provider. All POS materials, with the exception of materials related to Phone Kits and Phones, shall clearly display the CellEase(R) logo and shall indicate: "Also redeemable by CellEase(R) customers" and shall display only STC's toll-free number for End Users to call. STC shall provide MCI WORLDCOM with language and logo requirements for POS materials for the purpose of identifying the technology partner(s) associated with the Services. (ii) PIN Purchase Requirement. All POS materials shall prominently and clearly indicate that End Users must redeem one PIN at least every 60 days in order to maintain Service. (d) Programming of Phones/Transmittal of Data to STC. MCI WORLDCOM shall be responsible for the programming of Phones prior to shipment to the Retailers, unless such task is delegated to STC pursuant to Section 7(m)(iii) hereof. Phones shall be programmed with STC-authorized prepaid cellular technology(ies), and shall be configured for STC-approved rate plans. When programming Phones, MCI WORLDCOM shall utilize data supplied to MCI WORLDCOM through STC's carrier activation terminal system. STC shall provide MCI WORLDCOM with remote access to STC's carrier activation terminal. MCI WORLDCOM also shall transmit, or cause to be transmitted by Retailers, to STC all data reasonably required by STC to track ESNs and PINs 10 11 electronically, except that to the extent that a Retailer does not have electronic data capabilities then such data shall be transmitted by such other means as practicable. Such data shall be reported in a mutually agreeable format. (e) Retailer Interface with STC's Systems. MCI WORLDCOM shall use its reasonable efforts to advise and recommend to the Retailers that they establish automated POS activation systems that utilize either MCI WORLDCOM's or STC's POS activation system. In the event that any Retailer(s) utilize MCI WORLDCOM's POS activation system, then MCI WORLDCOM shall electronically transmit to STC all data received from such Retailer(s) immediately upon MCI WORLDCOM's receipt of such data. (f) Reporting. MCI WORLDCOM shall provide monthly reports to STC, in a mutually agreeable format, detailing sales data by each Retailer for Phone Kits and Cards, and other related information, including ESNs and control numbers as shipped to each Retailer. For returns, MCI WORLDCOM will send STC the ESNs for all returned Phones in a timely manner. (g) Taxes. MCI WORLDCOM shall be responsible for advising the Retailers that they are responsible for charging, collecting and remitting all sales and use taxes and governmental and quasi-governmental surcharges on sales of Phones and Cards. 9. TRADEMARKS/SERVICE MARKS USAGE. (a) Neither party nor either party's subdistributors or agents shall use any trademarks, service marks, tradenames or other intellectual property (collectively, "Marks") of the other in any manner, except as expressly authorized in writing or in this Agreement by the owning party, all of which Marks shall remain the exclusive property of the owner, without any right of implied license pursuant to this Agreement. Upon termination of this Agreement, the parties shall return to each other all marketing and sales materials then in their possession that contain any Marks of the other party, and shall immediately cease any and all use of any Marks of the other party, except that each party shall have the right to continue to use POS materials and television advertisements containing Marks of the other party for such time after termination of this Agreement until its inventory of such POS materials are substantially depleted and until a new television advertisement can be produced, but in no case beyond 90 days following the termination of this Agreement. (b) Without in any way limiting the foregoing, it is expressly understood and agreed that all uses by STC of MCI WORLDCOM Marks, including, without limitation, in television ads, require submission by MCI WORLDCOM to its Advertising Law Department for prior approval, which approval shall not be unreasonably withheld or delayed. (c) STC hereby represents and warrants that CellEase(R) is a registered trademark of STC, and such falls within the definition of the term Mark, as used herein. 11 12 (d) The parties hereby mutually represent to each other that each of them has all right, title and interest in and to all Marks to be used in connection with the Services, that use of any such Mark shall not violate any trademark, service mark, copyright, trade secret, proprietary right or publicity right of any third party. In the event that the use of any party's Mark in connection with the Services becomes the subject of a claim of infringement against the other party hereto, then the party whose Mark is alleged to have caused such infringement shall indemnify and hold harmless the other party hereto with respect to such claim. If a Mark becomes unusable due to such a claim, then the party whose Mark is the subject of such claim shall provide a noninfringing replacement Mark for use in connection with this Agreement, as reasonably required. 10. PUBLICITY. Any press releases concerning this Agreement shall be subject to prior mutual review and approval, which approval shall not be unreasonably withheld or delayed. 11. RELATIONSHIP OF THE PARTIES. (a) The relationship between STC and MCI WORLDCOM arising from this Agreement does not in any way constitute a joint venture, partnership, general agency, or employment relationship. (b) Neither party shall make any unauthorized representations or warranties concerning the products or services of the other. 12. DEFAULT. Except as otherwise provided in this Agreement, in the event either party fails to perform any of its obligations under this Agreement and such failure continues for more than ten (10) business days, or, in the case of a non-monetary default, thirty (30) days, following written notice of such default, then the non-defaulting party shall have the right to terminate this Agreement immediately upon written notice to the other party, without limiting any other remedies available hereunder or at law or in equity. 13. LIMITATIONS OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER, DIRECTLY OR OTHERWISE, FOR INCIDENTAL, CONSEQUENTIAL (INCLUDING LOST PROFITS), INDIRECT, PUNITIVE OR SPECIAL DAMAGES ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT. 14. NOTICE. Whenever any notice is required to be given hereunder, such notice shall be given in writing and personally delivered or sent by certified or registered mail, return receipt requested, or by overnight courier. Notice shall be deemed to have been given at the time of receipt, if personally delivered, or three (3) days after mailing if sent by certified or registered mail, or upon delivery if sent by overnight courier. Either party may change its notice address by giving notice of the change to the other party pursuant to this Section. If sent by MCI WORLDCOM to STC, such notice shall be addressed to: 12 13 Shared Technologies Cellular, Inc. 100 Great Meadow Road, Suite 102 Wethersfield, CT 06109 Attention: Legal Department If sent by STC to MCI WORLDCOM, such notice shall be addressed to: MCI Telecommunications Corporation Legal Department, 2nd Floor Three Ravina Drive Atlanta, GA 30346-2102 All notices relating to matters that require the approval of the Advertising Law Department of MCI WORLDCOM, pursuant to Section 8(b) hereof, shall include a copy of the applicable notice to be sent to: Advertising Group Law & Public Policy MCI Communications Corporation 2nd Floor 1133 19th Street, N.W. Washington, D.C. 20036 Attn: Assoc. Litigation Counsel Fax: 202-736-6471 15. ASSIGNMENT. Neither party may assign this Agreement to any third party without the prior written consent of the other party, such consent not to be unreasonably withheld or delayed. This Agreement shall be valid and binding upon all heirs, successors and permitted transferees or assigns of the parties hereto. 16. EXCUSE OF PERFORMANCE. Either party shall be relieved from liability for non-performance due to any cause beyond the reasonable control of the party to be excused, including delays of suppliers or carriers. In the event of such cause for delay, the party so affected shall take commercially reasonable steps to avoid or remove such cause of non-performance and both parties shall recommence performance as soon as such cause is removed or ceases, but in no event longer than 30 days following the first date of such non-performance. The party claiming such delay shall give the other party notice of the delay as soon as reasonably practicable. 17. AUDIT RIGHTS. The parties each shall have audit rights, limited to two audits per year, with respect to the other's records reasonably related to each party's obligations hereunder, including, without limitation, sales and revenue records, billing data, activation and redemption data, and information concerning commissions and discounts. 13 14 18. ARBITRATION. Any dispute or disagreement arising between the parties in connection with this Agreement, which is not settled to the mutual satisfaction of the parties within thirty (30) days (or such longer period as may be mutually agreed upon) from the date that either party informs the other in writing that such dispute or disagreement exists, shall be settled by arbitration in accordance with the J.A.M.S./ENDISPUTE Arbitration Rules and Procedures, as amended by this Agreement. The cost of the arbitration, including the fees and expenses of the arbitrator(s), will be shared equally by the parties unless the award otherwise provides. Each party shall bear the cost of preparing and presenting its case. The parties agree that this provision and the arbitrator's authority to grant relief shall be subject to the United States Arbitration Act, 9 U.S.C. 1-16 et seq. ("USAA"), the provisions of this Agreement, and the AVA-AAA Code of Ethics for Arbitrators in Commercial Disputes. The parties agree that the arbitrator(s) shall have no power or authority to make awards or issue orders of any kind except as expressly permitted by this Agreement, and in no event shall the arbitrator(s) have the authority to make any award that provides for punitive or exemplary damages. The decision of the arbitrator(s) shall follow the plain meaning of the relevant documents, and shall be final and binding upon the parties. The award may be confirmed and enforced in any court of competent jurisdiction. All post-award proceedings shall be governed by the USAA. 19. GENERAL. (a) This Agreement shall be governed by the laws of the State of New York, without giving effect to any principle of conflict-of-laws that would require the application of the law of any other jurisdiction. (b) This Agreement, including any exhibits or addenda attached hereto, constitutes the entire understanding between the parties relating to the subject matter hereof and supersedes any and all prior discussions, proposals or agreements, whether oral or written. (c) No modification, addition or waiver to this Agreement shall be valid unless made in writing signed by the parties hereto. (d) In the event of a dispute arising out of this Agreement, the prevailing party shall be entitled to recovery of its reasonable legal fees and expenses. (e) The waiver of any provision of this Agreement shall not be construed as a continuing waiver of such breach or of other breaches of the same or of other provisions hereof. (f) The section headings of this Agreement are for reference purposes only and shall not constitute a part hereof or affect the meaning or interpretation of this Agreement. Whether defined terms are stated in the singular or plural shall not affect their construction as defined terms. (g) All payment obligations, provisions relating to limitations of liability, post-termination obligations and any other provisions that by sense and context are intended to survive the termination of this Agreement shall so remain in effect after the termination hereof. 14 15 (h) Each party represents that it has full power and authority to enter into and perform this Agreement and knows of no impediment to its performance. The parties acknowledge that they have each read this Agreement in its entirety, understand it and agree to be bound by its terms and conditions. [Remainder of page intentionally left blank.] 15 16 IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives as of the date first written above. SHARED TECHNOLOGIES CELLULAR, INC. MCI TELECOMMUNICATIONS CORPORATION By:_______________________________ By:_______________________________ Date: February ___, 1999 Date: February ___, 1999 [all exhibits redacted] 16 EX-21 6 EX-21 1 Exhibit 21 Shared Technologies Cellular, Inc. List of subsidiary of the registrant. The Cellular Hotline, Inc. EX-27 7 EX-27
5 1000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 229 408 2065 896 234 4654 3872 2747 13487 20753 0 0 0 76 (10171) 13487 28200 28200 17365 17365 21523 0 952 (11640) 6 (11646) 0 0 0 (11646) (1.58) (1.58)
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