-----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, MO+YSD88un99mdbQVk5cCWi4GqVmzCqcYZT4wDI/IzxX1L05JwgRuOx2kjoBEFXA BdBDhcTyulijn7yRSFU0xQ== 0000933583-97-000010.txt : 19970401 0000933583-97-000010.hdr.sgml : 19970401 ACCESSION NUMBER: 0000933583-97-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 001-13558 FILM NUMBER: 97571163 BUSINESS ADDRESS: STREET 1: 100 GREAT MEADOW RD STREET 2: SUITE 102 CITY: WETHERSFIELD STATE: CT ZIP: 06109 BUSINESS PHONE: 8602582474 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 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K _ X _ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996 _ _ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _ _ _ TO _ _ Commission File Number 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 102 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 19, 1997 was approximately $2,321,000, 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 19, 1997 5,112,737 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 23, 1997 to be filed with the Securities and Exchange Commission in definitive form on or before April 30, 1997. 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 or prepaid services in over 640 of approximately 950 Cellular Geographical Service Areas (` `CGSA' ') within the United States, and cellular activation services in over 690 CGSA's. As a reseller or agent for cellular and PCS carriers, STC can offer cellular service to approximately 94% of the US population. STC rents portable cellular telephones to business and leisure travelers, the press, attendees, and participants at conventions, sporting events and government agencies. STC also operates as a cellular agent at certain locations which involves selling, installing and providing airtime services for cellular customers. STC also performs nationwide cellular activation services through major retail chains, automobile dealers and mail order distribution companies. Most recently, STC began supporting the activation, customer service and collection services for national prepaid (debit) cellular service operation. 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, 1996, the Company had approximately 5,000 cellular telephones available to rent at approximately 350 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 and June 1995, the Company commenced management and subsequently completed its acquisition of the outstanding capital stock of Cellular Hotline, Inc., (` `Hotline' ') for $617,000. The $617,000 was comprised of $367,000 in cash, paid at closing, and the issuance of 50,000 shares of Common Stock, valued at $250,000. The Company used a portion of the proceeds from its April 21, 1995 public offering for the cash portion of the purchase. 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, at an aggregate cost of $250,000. The Common Stock was subsequently retired. Additionally, at closing, STC issued options to purchase 50,000 additional shares, excersizable at $7.50 per share for three years. Hotline is one of the largest providers of cellular activation services in the United States. In addition, the acquisition also enabled the Company to begin offering debit services by utilizing the technology developed by Hotline. In November 1995, the Company commenced management and subsequently completed its acquisition of certain assets of PTC Cellular, Inc. (` `PTCC' '). The purchase price was $3,800,000, comprised of $300,000 in cash, $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 $300,000. Additionally, the agreement provided for royalty payments in the amount of three percent (3%) of revenues generated from certain of the acquired assets, not to exceed an aggregate of $2,500,000. PTCC was one of the largest in-car cellular telephone providers in the United States and a main competitor of the Company. 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. On December 29, 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 shares of its Series A Convertible Preferred Stock, $.01 par value per share (the ` `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. On May 14, 1996, all of the outstanding Series A Stock was converted into 1,146,450 shares of Common Stock. Subsequently, in August 1996 the Company's stockholders voted to cancel the Company's authority to issue additional shares of the Series A Stock. On April 27, 1996 the Company completed its acquisition of certain assets of Cellular Global Investments of Northern California, Inc., Access Cellular Corp., Road and Show Cellular West, Road and Show Cellular Arizona Corp, Summit Assurance Cellular, Inc., Northstar Cellular Corp, and Craig A. Marlar (` `Summit' '). The purchase price was approximately $3,562,000 comprised of approximately $335,000 in cash, $1,324,000 in assumed liabilities, the issuance of a promissory note for approximately $953,000, and the issuance of 300,000 shares of Common Stock, valued at $937,500. Additionally, at closing, the Company issued three-year warrants, valued at $12,500, to purchase an aggregate of 300,000 additional shares of Common Stock. The warrants are excersizable as follows: 100,000 shares at $3.00 per share; 100,000 shares at $4.00 per share and 100,000 at $5.00 per share. On August 19, 1996 the Company completed a $5 million private placement with ICP and STFI for 500,000 shares of its newly issued 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 or preexisting debt to STFI. A commission of $125,000 was paid to ICP. Each share of Series B Stock is convertible into the Company's Common Stock, at a conversion factor of 2.50 to 3.33 per share, subject to certain adjustments. For each preferred share converted, the holder will receive a warrant to purchase such equal number of shares of Common Stock at an exercise price of $3.00 per share. The Series B Stock has immediate voting rights similar to the Common Stock as if the holder held four (4) shares of Common Stock for each share of such Series B Stock. Separately, the Company has 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 the Company's 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. On December 27, 1996, the Company entered into an agreement (the ` `Purchase Agreement' ') with RHI Holdings, Inc. (` `RHI' ') pursuant to which the Company agreed to sell to RHI up to 1,500,000 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. On December 30, 1996, the Company closed on the sale of 250,000 Units to RHI, and received proceeds of $730,000, net of certain transactional expenses. On February 10, 1997, the Company sold an additional 250,000 Units to RHI, receiving net proceeds of $750,000. The Purchase Agreement has since terminated. As such, RHI has no obligation to purchase any additional Units from the Company. However, the Company may sell additional Units to other purchasers. The Purchase Agreement provides that STC shall 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 of 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. (b) Financial Information about Industry Segments - The Company is engaged in one industry segment, the telecommunications industry, providing a wide range of services including, short- term cellular telephone rentals, activation of cellular phones and debit cellular phone systems. (c) Narrative Description of Business (1) (i) Products and Services 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' '), and Budget Rent a Car Corporation (` `Budget' ') and a letter of intent with Avis Rent a Car Systems, Inc (` `Avis' '), as well as significant car rental company licensees, to exclusively offer its portable cellular telephones at designated car rental locations, primarily at terminal airports, in approximately 70 cities throughout the United States. In addition, during 1996, the Company developed an airline cellular rental program designed to market to international customers in- bound to the United States. These travelers typically do not utilize the car rental companies, and require the communication convenience of renting a cellular phone. Through contracts with United Airlines (` `United' '), Continental Airlines (` `Continental' '), and most recently American Airlines (` `American' '), STC coordinates cellular phone rentals in most major cities, utilizing its centralized reservation/customer service and fulfillment center located in St. Louis, MO. In addition, the Company markets its cellular telephone services at conventions and sporting events. For example, the Company rented cellular telephones at the 1994 World Cup soccer tournament (which was held in nine cities throughout the United States), the 1995 Special Olympics, the 1995 and 1996 New York Marathon, and the 1996 Olympics in Atlanta. 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. In that connection, the Company provided portable cellular telephones to businesses and emergency response personnel following the 1995 Oklahoma City bombing and the 1996 TWA Flight 800 crash. Activation Services With the acquisition of Hotline, STC became one of the largest providers of nationwide cellular phone activation services in the United States. Hotline acts as an agent linking retail points of sale to more than 690 cellular markets, using its 1,200 individual carrier contracts nationwide. By serving the unique activation requirements of major national retail chains, automobile dealers, and mail order distribution companies, Hotline acts as a single point of contact for these distribution outlets. Hotline maintains contracts and relationships with most cellular carriers in the United States and Canada, 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 fee for their service to the national distribution partner, the Company also collects revenue from the cellular carrier in the form of commissions, residual payments, and other payments. Debit Services In addition to national cellular activations, the acquisition of Hotline propelled STC into the prepaid (debit) cellular service market. The growth of the cellular industry has been accompanied by increasing amounts of fraudulent use and bad debts. Cellular carriers have responded to the bad debt problem by imposing stringent credit requirements on potential customers which have resulted in 35% of the subscribers who apply for cellular service being rejected. To allow these customers to enjoy the advantages of cellular communications, STC has embarked on a program to capitalize on this growing segment of subscribers. Through its Hotline operations, subscribers are presented with a cellular debit phone, which allows subscribers an easy, pay-as-you-go option for cellular service. Debit, or prepaid, cellular service is presented as a solution for credit issues and for businesses requiring more control over the cellular expenses in their organizations. Cellular debit services open a substantial and relatively untapped segment of the cellular marketplace, which STC intends to aggressively pursue. Hotline provides the necessary tracking, customer service, collection services, and reporting functions required to support its prepaid cellular service. The Company currently has an agreement with a national retailer, Thorn Americas, Inc. (` `Rent A Center' ') for whom the Company is performing these functions. As of March 25, 1997 the Company had activated approximately 14,000 lines for Rent a Center throughout the United States. Agency Sales For customers who require a more traditional approach to cellular telecommunications, STC serves as an agent for select cellular carriers. The Company provides cellular activation as well as mobile equipment sales and services. The agency division targets niche regional markets, (ie: corporate accounts, government organizations) which allows its customers, through the services provided by STC, to achieve economies of scale. As an agent for the cellular carriers, STC can offer an extensive list of cellular products and services to its customer base. Currently, STC has operations in Dallas, and Ft. Worth Texas and in Hartford and Stamford, Connecticut, with plans to expand into new cities in the future. (iv) Patents, Trademarks, Licenses, Franchises, Concessions ` `Shared Technologies Cellular' ' is a registered trademark, which is licensed to the Company by STFI. The Company holds a registration on the servicemark ` `CellEase' ' which is used in connection with the Company's debit cellular businesses. (v) Seasonality The Company has experienced a reduction of revenues in the winter months due to the reduction in business travel during the holiday season and inclimate 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 had been funded by STFI. In addition, STFI funded the purchase price paid in the Company's Road and Show acquisitions. In January 1994 and in April 1995, 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 Results of Operations and Financial Condition,' ' and ` `Notes to Consolidated Financial Statements' ' herein. (vii) Dependence on a Single Customer The Company is dependent upon its relationships with Hertz and National, which collectively account for approximately 32% and 38% of the Company's revenues during 1996 and 1995 respectively. The Company's agreements with Hertz and National are terminable on 120 and 90 days' notice with cause, respectively. The termination of either of these relationships would have a material adverse effect on the Company. In addition, individual locations covered by the Hertz agreement may be terminated on the same notice. The termination of one or more significant revenue producing locations could have a material adverse effect on the Company. (viii) Backlog At any given period the Company maintains approximately 5,000 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. As of December 31, 1996, the Company has activated approximately 5,000 debit lines for Rent A Center, and had a backlog of approximately 9,000 additional debit lines to be activated, which have since been fulfilled. (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 both regional and national cellular service companies, some of which have substantially more experience and greater financial, technical and other resources than the Company. In the agency and 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 15, 1997, the Company had approximately 192 employees; 11 in management, 71 in administration, 105 in sales and service and 5 in technical positions. The Company's employees are not represented by an union. The Company believes its relations with its employees are satisfactory. 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 offices are leased and are located at 100 Great Meadow Road, Suite 102, Wethersfield, Connecticut 06109. The Company currently occupies approximately 6,250 square feet pursuant to a five year lease agreement expiring in 1999 (the ` `Term' '). The Company pays a monthly rent of approximately $8,100 during the remainder of the Term. In addition, the Company leases an aggregate of approximately 15,700 square feet in certain locations for the purposes of direct sales by its sales force for a total monthly rent of approximately $13,000. Each of the leased properties is, in management's opinion, generally well maintained and is suitable to support the Company's business. The Company does not anticipate a significant expansion of its current leased space. Item 3. Legal Proceedings In connection with the Company's purchase of certain assets from PTC Cellular, Inc. (` `PTCC' ') in November 1995, the Company delivered a $2 million note to PTCC. The current principal balance on such note was approximately $1,700,000 as of March 24, 1997, payable in semi-annual installments of $225,000, plus interest of 8%, through 1999. The Company did not pay the November 1, 1996 installment due under the note. Consequently, on January 16, 1997, PTCC filed a claim against the Company for breach of the note, which claim was filed in the Circuit Court of the 11th Judicial Circuit, Dade County, Florida. Although the Company reserves certain defenses to PTCC's claim, it subsequently made a partial payment of the missed installment payment and is actively in negotiations with PTCC to resolve this matter. In the event that the Company does not reach a satisfactory resolution with PTCC, an adverse outcome from this claim would be likely to have a material adverse effect to the Company's financial condition and cash flows. 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 The annual meeting of stockholders of the Company was held on June 12, 1996. Three matters of business were held to vote for the following purposes: (1) the election of eight directors of the Company for the ensuing annual term (` `Proposal 1' ') (2) the amendment of the 1994 Director Option Plan (` `Proposal 2' '); and (3) the reappointment of the Company's auditors (` `Proposal 3' '). The following tables provide shareholder election results in number of shares: Proposal 1
Directors For Withheld Anthony D. Autorino 3,226,523 6,000 Thomas H. Decker 3,225,923 6,600 William A. DiBella 3,225,923 6,600 Vincent DiVincenzo 3,226,523 6,000 Sean P. Hayes 3,226,523 6,000 Ajit G. Hutheesing 3,226,523 6,000 Craig A. Marlar 3,225,923 6,600 Kevin Schottlaender 3,225,923 6,600 Richard P. Webb 3,225,923 6,600
Proposal 2 For Against Abstain 3,221,823 6,350 4,350 Proposal 3 For Against Abstain 3,227,173 3,100 2,250 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 1996 and 1995, the quarterly high and low closing prices were as follows:
1996 1996 1995 1995 High Low High Low First Quarter 4 1/8 1 5/8 n/a n/a Second Quarter 6 1/8 2 3/4 6 3 1/2 Third Quarter 4 1/4 1 15/16 4 15/32 3 Fourth Quarter 3 1 1/2 4 1/8 1 5/8
Number of beneficial holders of the Company's common stock as of March 6, 1997 was 1,123. 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 1993 and 1992 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.
Statement of 1996 1995 1994 1993 1992 Operations-Data: Revenues $20,914 $13,613 $10,217 $2,200 $1,394 Gross margin 7,285 5,026 4,923 596 382 Total operating expenses 14,172 8,015 4,272 1,463 803 Income (loss) from operations (6,888) (2,989) 651 (867) (421) Gain on sale of division - 689 - - - Loss on discontinued affiliate - 364 - - - Loss on contract cancellation (980) - - - - Interest expense (income)net 906 136 49 (8) (3) Net income (loss) before income taxes (8,774) (2,800) 602 (859) (418) Income taxes (22) (48) - - - Net income (loss) (8,796) (2,848) 602 (859) (418) Preferred stock dividends (113) - - - - Net income (loss) applicable to common stock (8,909) (2,848) 602 (859) (418) Net income (loss) per common share (2.18) (1.04) 0.28 (0.39) (0.19) Weighted average number of shares outstanding 4,082 2,748 2,185 2,185 2,185 Balance Sheet-Data: Working Capital (deficit) $(8,975) $(1,851) $(920) $(301) $(1073) Total assets 14,262 14,378 5,452 3,173 (630) Notes payable (including current portion) 2,579 2,000 - - 82 Obligations under capital leases (including current portion) - - - 190 - Other liabilities 8,767 6,290 2,449 687 328 Indebtedness to STFI 59 985 2,434 4,153 1,219 Accumulated deficit(13,013) (4,105) (1,256) (1,858) (581) Stockholders' equity (deficit) 2,857 5,102 569 (1,857) (989)
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition The following management's discussion and analysis of results of operations and financial condition include forward-looking statements with respect to the Company's future financial performance. These forward-looking statements are subject to various risks and uncertainties which could cause actual results to differ materially from historical results of those currently anticipated. Revenues Shared Technologies Cellular, Inc.'s revenues rose to a record of $20,914,000 in the year ended December 31, 1996, an increase of $7,301,000 (54%) over the year ended December 31, 1995 revenues. Acquisitions in conjunction with the expansion of the Company's existing businesses were the major factors for the growth in revenues. The portable rental operation had a $5,825,000 (79%) revenue increase due to several factors: In April 1996, the Company purchased the portable cellular telephone business of Summit, (See Item 1(a) - ` `General Development of Business.' ') completing the Company's ability to be a nationwide provider of portable cellular telephones. This acquisition allowed the Company to generate $2,399,000 (33%) in additional revenues in 1996. The Company also generated approximately $1,434,000 (19%) in revenues at the 1996 Summer Olympics in Atlanta. The balance of the increase ($1,992,000 or 27%) in the portable rental operation was due to the transition of some of the in-car accounts and improved penetration at existing locations. As a result of the acquisition of certain in-car cellular telephone assets of PTCC as of November 1, 1995, the Company generated $2,171,000 (223%) more in in-car rental revenues in 1996 than in 1995. However, due to unacceptable profit margins, the Company transitioned the existing accounts to portable rentals, and discontinued offering in-car cellular telephone rentals in the fourth quarter of 1996. The debit, or prepaid, cellular telephone operation was started in late 1995 and generated $1,516,000 in revenues in 1996, versus $33,000 in 1995. In late 1996, the Company signed an agreement with Rent A Center which was principally responsible for this dramatic revenue growth. This increase in debit revenues were offset by a decrease of $856,000 (33%) in activation revenues from 1996 to 1995. This decrease was due to several national retailers discontinuing to offer cellular telephone activations to their customers. The agency operation had revenues of $1,339,000 in 1996, a $665,000 increase from 1995. The increase was due to the conversion of the sales force in Connecticut from a resale business into an agency operation. In December 1995, the Company sold the resale business to SNET Mobility, Inc. The resale business generated $1,987,000 in revenues in 1995. The Company's revenues of $13,613,000 for the year ended December 31, 1995 represented an increase of $3,396,000 (33%) over the year ended December 31, 1994. The increase was mainly due to the acquisition of Hotline in May 1995 which generated $2,570,000 of revenues in 1995 and the acquisition of certain assets of PTCC in November 1995 which generated $972,000 of revenues in 1995. The transportation portable rental operation had a $1,898,000 revenue increase (58%) due to the Company's continued expansion in the number of car rental outlets from which it rents phones, and the increased penetration within its existing locations. This increase in the transportation portable rental operation was offset by a $2,364,000 decrease in the Company's events portable rental operations due principally to the significant ($1,820,000) revenue generated by the World Cup in 1994. Gross Margin Gross margin increased $2,259,000, or 45%, for the year ended December 31, 1996 over the year ended December 31, 1995. As a percentage of revenues, gross margin decreased slightly in 1996 to 35% of revenues from 37% of revenues in 1995. The decrease was the result of significant changes in the Company's revenue mix as a result of various acquisitions, the sale of the resale business and the rapid growth of the debit business. In addition, the in-car rental operation showed a dramatic decrease in its gross margin as a result of decreasing revenues offset by fixed costs and significant amounts of fraudulent phone usage, which the Company was forced to absorb. The following chart summarizes the impact of these changes on gross margins for both 1996 and 1995:
1996 1996 1995 1995 Revenues Gross Revenues Gross Margin Margin Portable Rental 63% 43% 54% 43% In Car Rental 15% (1%) 7% 28% Debit 7% 20% 0% 0% Activation 8% 23% 19% 25% Agency 7% 67% 5% 68% CT Resale 0% 0% 15% 23% Total 100% 35% 100% 37%
Gross margin decreased in 1995 to 37% of revenues from 48% of revenues in 1994. The decrease was the result of significant changes in the Company's revenue mix in 1995 as a result of the Hotline and PTCC in-car acquisitions in 1995. Both the Hotline and the in-car operations achieved lower gross margins (approximately 25% and 28% respectively) than the portable rental operation. In addition, in 1994 the World Cup generated higher than normal gross margins as compared to other short-term cellular telephone rentals. Operating Expenses Operating expenses increased to $14,172,000 for the year ended December 31, 1996 compared to $8,015,000 for the year ended December 31, 1995. As a percentage of revenues, operating expenses increased to 68% for the year ended 1996 from 59% for the year ended 1995. Part of this increase as a percentage of revenue was due to the conversion of the resale operation into an agency operation at the beginning of 1996. Although operating expenses for this group were similar for the two years, as a percentage of revenues, the expenses went from 19% in 1995 to 47% in 1996. However, due to better margins in the agency operations, the group generated more operating profits in 1996 than in 1995. If the resale operation had been converted into an agency business at the beginning of 1995, operating expenses for the Company in 1995 would have been 65% of revenues, making the 1996 percentage in line with the prior year. However, had the Company not had several extraordinary operating expenses in 1996, which should not be repeated in 1997, the 1996 percentage would have dropped to approximately 52%. The following are the extraordinary operating expenses incurred by the Company in 1996. The Company's events division rents cellular telephones on a short-term basis at special events such as conventions and sporting events. Due to the significant overhead requirements for this division, the Company decided to consolidate the division into its existing portable rental operations at mid year. Operating expenses for the events division were approximately $1,300,000 in 1996, representing over 120% of the revenues generated. Prior to the consolidation, the events division had approximately 30 employees, most of which were terminated in the consolidation. Consequently, the majority of the operating expenses incurred in 1996 should not be repeated in 1997. Operating expenses in 1996 included over $1,000,000 related to the in-car operation. As previously discussed, the Company began transitioning the existing in-car accounts to portable rentals and discontinued offering in-car rentals in the fourth quarter of 1996 and terminated the approximately 20 employees and substantially all of the related expenses associated with the in- car operation. The Company also invested approximately $600,000 in the expansion of the portable rental operation into the international airlines business. These expenses were incurred in an effort to start-up and market its rental services through various worldwide airlines, primarily focusing on international travelers who cannot use their cellular phones in the United States. The Company was successful in obtaining contract with two (2) major international airlines during 1996, and should start to generate substantial revenues in 1997. These significant costs should not be repeated in 1997, and, as revenues from the airlines business begin to increase in 1997, operating expenses should become a significantly smaller percentage of revenues. Operating expenses in 1996 include approximately $500,000 related to the start up and expansion of debit or prepaid cellular services. Due to the dramatic sales growth of this operation, 5,000 lines activated through the end of 1996 with an additional 9,000 lines on backorder, the significant increase in operating expenses incurred in 1996 are expected to continue into 1997. However, the Company has created an infrastructure which can accommodate significant revenue growth without the addition of significant operating costs. These benefits should be realized in 1997. Another significant operating expense incurred by the Company was the provision for bad debts. The bad debt expense was $1,772,000 in 1996, $1,249,000 in 1995 and $308,000 in 1994. As a percentage of revenues, the provision was 8% in 1996, 9% in 1995 and 3% in 1994. The significant increase from 1994 to 1995 in bad debts as a percentage of revenues was due to a change in the Company's marketing approach. The Company negotiated with various car rental companies to allow the car rental company employees to deal directly with the Company's customers. This allowed the Company to significantly expand the number of locations renting its cellular telephones, thereby increasing the Company's revenues. However, as a result of the change in the marketing approach, the Company was exposed to an increased level of credit risk which resulted in an increase in bad debts realized during 1996 and 1995. The Company continues to work closely with its car rental company partners to improve the integration of specific information between the Company and the car rental companies computer systems, in an effort to reduce the credit risk. In general, the Company is anticipating additional revenues in 1997 from the transition of the in-car accounts into portable rental outlets, the expansion of the airline business and the rapid growth of the debit cellular service. Those additional revenues, together with the above-mentioned reductions in operating expenses should reduce operating expenses as a whole, as well as, operating expenses as a percentage of revenues in 1997. Operating expenses increased to $8,015,000 for the year ended December 31, 1995, compared to $4,273,000 for the year ended December 31, 1994. As a percentage of revenue, operating expenses increased to 59% for the year ended December 31, 1995, compared to 42% for the year ended 1994. The increase in operating expense can be attributed to several factors. One reason is the acquisitions completed in 1995. In May 1995, the Company acquired Hotline which allowed STC to enter the activation and debit cellular business. STC incurred approximately $772,000 in operating expenses in 1995 related to Hotline. In November 1995, the Company acquired certain assets of PTCC, one of the largest in-car cellular telephone providers. The Company incurred an additional $542,000 in operating expenses in 1995 with the in-car operation. In addition to investing in the acquisitions, during 1995 the Company also invested in the expansion of its existing businesses. Operating expenses in the portable rental operations more than doubled from the prior year, to $2,883,000, as a result of an increase in the number of car rental outlets from which it rents phones. The events division incurred approximately $1,040,000 in operating expenses in its attempt to increase short-term rentals at special events such as conventions and sporting events. In addition, the Company made significant investments in its infrastructure to ensure long-term growth and stability. In general, the Company increased the number of employees from approximately 88 at the beginning of 1995 to approximately 200 employees at the end of 1995. Interest Expense Interest expense increased significantly to $906,000 for the year ended December 31, 1996 compared to $136,000 for the year ended December 31, 1995. This increase was mainly due to debt incurred as a result of the acquisition of certain assets from PTCC and Summit. In addition, the Company recorded a $491,000 accrual related to estimated interest payments to taxing authorities that may arise from certain taxes that are in arrears. Loss on Contract Cancellation As part of the acquisition of certain assets of PTCC, the Company made a commitment to make an investment in the new telephone technology for the in-car business. Consequently, the Company entered into a contract with a vendor to build new in-car cellular telephones with the revised state of the art technology developed by the Company. When the Company determined that the in-car business could not justify the significant investment needed to purchase the next generation of in-car cellular telephones, the Company negotiated with the vendor to terminate the contract. Gain or Sale of Assets Effective December 26, 1995, the Company sold its resale business to SNET Mobility, Inc. (` `Mobility' '). 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. The Company realized a gain on the sale of approximately $689,000. Subsequent to the sale of the resale business, the Company entered into an agreement with a local cellular carrier to serve as an agent, providing cellular activations as well as mobile equipment sales and service. Loss of Discontinued Affiliate In December 1995, the Company's affiliate, SafeCall, Inc., ceased its operations. Amounts previously advanced to the affiliate were written off. Preferred Stock Dividends In 1996, the Company issued preferred stock dividends totaling $112,603 to the shareholders of the Series A Stock, payable in 11,260 additional shares of Series A Stock. The outstanding Series A Stock as of May 14, 1996 was converted into 1,146,450 shares of the Company's Common Stock. Liquidity and Capital Resources The Company had a working capital deficit of $8,975,000 as of December 31, 1996, compared to a deficit of $1,851,000 as of December 31, 1995. Stockholders' equity at December 31, 1996 was $2,857,000, compared to $5,102,000 at December 31, 1995. Net cash used in operations increased to $5,043,000 for the year ended December 31, 1996, compared to $798,000 for the year ended December 31, 1995. This increase in cash used in operations was mainly due to the $8,796,000 net loss incurred during 1996 offset by noncash items, such as depreciation and amortization, and provision for bad debts. The cash used in operations for 1995 was mainly due to the $2,848,000 net loss and $364,000 loss on discontinued affiliates, offset by the $689,000 gain on the sale of the resale business and such noncash items as depreciation and amortization, and provision for bad debts. The Company continued to focus its investment activities on the purchase and enhancements of its equipment, and on growth through acquisitions. During the year ended December 31, 1996, the Company invested $953,000 in the purchase of equipment. The Company also paid $335,000 at the closing of the Summit acquisition. In addition, the Company invested approximately $329,000 in enhancements to the cellular telephone software which the Company will be able to utilize for various applications, such as remote retail activations. The Company also invested approximately $230,000 to sign long-term contracts with various airline companies. These amounts were partially offset by $1,078,000 received on the note receivable from the sale of the resale business. In 1995, the Company invested approximately $1,047,000 to complete the Hotline and PTCC acquisitions in May 1995 and November 1995, respectively. The Company also invested $342,000 in the purchase of portable cellular equipment. Financing activities were primarily focused on raising capital to meet the obligations incurred with the various acquisitions and for working capital. The Company issued 380,000 shares of Series B Stock through a private placement, which generated net proceeds of approximately $3,633,000, in addition to the exchange of $1,200,000 of amounts previously advanced from STFI for an additional 120,000 shares of Series B Stock. In addition, the Company raised $730,000, net of expenses, through the sale of 250,000 Units. A portion of the proceeds from both financing activities was used to repay some of the obligations incurred from the acquisition of certain assets of both PTCC and Summit. In 1995, the Company raised cash of approximately $3,591,000, net of expenses, with the completion of its initial public offering in April 1995, and $2,686,000, net of expenses, with the private placement of Series A Preferred Stock in December 1995. Cash requirements for the foreseeable future will include funds needed to sustain the cash used in operations and for existing obligations arising from completed acquisitions. Subsequent to year end, the Company raised $750,000 as a result of the sale of an additional 250,000 of the aforementioned Units. The Company is currently in default on payments to PTCC for the principal on the promissory note issued in conjunction with the acquisition. The balance at March 27, 1996 on this note is approximately $1,700,000. Management believes that an additional infusion of cash via either debt or equity will be necessary. Management does not believe that, at this time, existing operations can generate sufficient cash to sustain operations as well as meet its existing obligations. Item 8. Financial Statements and Supplementary Data Attached. Item 9. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure. None 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 F-5 Consolidated Statements of Cash Flows F-6-7 Notes to Consolidated Financial Statements F-8-21 Financial Statement Schedule: Schedule VIII - Valuation and Qualifying Accounts for the Years Ended December 31, 1996, 1995 and 1994 S-1 Note: (a) All other schedules are not submitted because they are not applicable, not required or the required information is included in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Shared Technologies Cellular, Inc. We have audited the accompanying consolidated balance sheets of Shared Technologies Cellular, Inc. and Subsidiary as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Shared Technologies Cellular, Inc. and Subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company's significant operating losses, default on a promissory note, and working capital deficits raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index on Page F-1 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ROTHSTEIN, KASS & COMPANY, P.C. Roseland, New Jersey March 11, 1997 F-2 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
ASSETS 1996 1995 Current Assets: Cash $143,621 $2,541,827 Accounts receivable less allowance for doubtful accounts of $1,392,176 in 1996 and $684,875 in 1995 1,621,317 1,172,671 Carrier commissions receivable, less unearned income 52,967 452,610 Inventories 79,529 49,076 Current portion of note receivable 39,474 59,136 Prepaid expenses and other current assets 132,813 471,356 Receivable from sale of assets - 1,077,856 Total current assets 2,069,721 5,824,532 Telecommunications and office equipment, less accumulated depreciation 2,130,713 2,157,685 Other assets: Intangible assets, less accumulated amortization 9,322,373 6,129,101 Deposits 373,074 142,080 Note receivable, less current portion 118,994 124,407 Assets held for disposition 247,418 - 10,061,859 6,395,588 $14,262,293 $14,377,805 LIABILITY AND STOCKHOLDERS' EQUITY: Current liabilities: Current portion of notes payable $2,218,406 $400,000 Accounts payable and other current liabilities 8,718,814 5,838,718 Commissions payable 48,441 452,611 Due to parent 58,809 984,592 Total current liabilities 11,044,470 7,675,921 Notes payable, less current portion 360,417 1,600,000 Commitments and Contingencies Stockholders' Equity: Preferred stock, $.01 par value, Series A Convertible, authorized, issued and outstanding none and 300,000 shares - 3,000 Preferred stock, $.01 par value, Series B Convertible, authorized 1,250,000 shares, issued and outstanding 500,000 shares and none 5,000 - Common stock, $.01 par value, authorized 20,000,000 shares, issued and outstanding 4,862,737 shares and 3,089,189 shares 48,628 30,892 Common stock subscription 5,000 Capital in excess of par value 15,816,979 9,172,583 Accumulated deficit (13,013,201) (4,104,591) Note receivable arising from stock purchase agreement - (5,000) Total Stockholders' Equity 2,857,406 5,101,884 $14,262,293 $14,377,805
See accompanying notes to consolidated financial statements F-3 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 Revenues $20,913,969 $13,613,161 $10,217,300 Cost of 13,629,248 8,587,272 5,293,845 revenues Gross margin 7,284,721 5,025,889 4,923,455 Selling, general and administrative 14,172,415 8,015,184 4,272,786 expenses Income (loss) from operations (6,887,694) (2,989,295) 650,669 Other income (expense): Interest (906,385) (136,395) (48,659) expense Gain on sale of assets - 689,480 - Loss on discontinued - (364,327) - affiliate Loss on contract (979,631) - - cancellation (1,886,016) 188,758 (48,659) Income (loss) before income (8,773,710) (2,800,537) 602,010 taxes Income taxes (22,297) (47,924) - Net income (8,796,007) (2,848,461) 602,010 (loss) Preferred stock dividends (112,603) - - Net income (loss) applicable to $(8,908,610) $(2,848,461) $602,010 common stock Income (loss) per common $(2.18) $(1.04) $.28 share Weighted average number of common 4,082,000 2,748,000 2,185,000 shares outstanding
See accompanying notes to consolidated financial statements F-4 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Series A Series B Series B Preferred Preferred Preferred Preferred Stock Stock Stock Stock Shares Amount Shares Amount Balances, January 1, 1994 - $ - $ Common stock issued for services Transfer of investment of parent Issuance of common stock Contribution to capital by parent Common stock subscription Net income Balances, December 31, 1994 - - - - Issuance of stock 300,000 3,000 Contribution to capital by parent Issuance of common stock for acquisitions Acquisition of common stock Net loss Balances, December 31, 1995 300,000 3,000 - - Issuance of stock 500,000 5,000 Preferred stock dividend 11,260 113 Conversion of preferred stock (311,260) (3,113) Issuance of common stock for acquisitions Common stock subscriptions Net loss Balances, December 31, 1996 - $- 500,000 $5,000
See accompanying notes to consolidated financial statements F-5 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common Common Capital in Stock Stock Stock Excess Shares Amount Subscrip of Par tion Value Balances, January 1, 1994 67,973 $680 $- $- Common stock issued for services 207,119 2,071 14,429 Transfer of investment of parent 108,136 Issuance of (17,929) common stock 1,795,478 17,955 Contribution to capital by parent 1,700,000 Common stock subscription 5,000 Net income Balances, December 31, 1994 2,070,570 20,706 5,000 1,804,636 Issuance of stock 950,000 9,500 6,084,633 Contribution to capital by parent 1,184,000 Issuance of common stock for 150,000 1,500 473,500 acquisitions Acquisition of common stock (81,381) (814) (374,186) Net loss Balances, December 31, 1995 3,089,189 30,892 5,000 9,172,583 Issuance of stock 264,335 2,643 5,588,886 Preferred stock dividend 112,490 Conversion of preferred stock 1,146,450 11,465 (8,352) Issuance of common stock for 300,000 3,000 947,000 acquisitions Common stock subscriptions 62,763 628 (5,000) 4,372 Net loss: Balances, December 31, 1996 4,862,737 $48,628 $15,816,979
See accompanying notes to consolidated financial statements F-5 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Note Total Deficit receivab Stockholders le ' Equity Balances, January 1, 1994 $(1,858,140) $- $(1,857,460) Common stock issued for 16,500 services Transfer of investment of 108,136 parent Issuance of common stock 26 Contribution to capital by parent 1,700,000 Common stock subscription (5,000) Net income 602,010 602,010 Balances December 31, 1994 (1,256,130) (5,000) 569,212 Issuance of stock 6,097,133 Contribution to capital by parent 1,184,000 Issuance of common stock for 475,000 acquisitions Acquisition of common stock (375,000) Net loss (2,848,461) (2,848,461) Balances, December 31, 1995 (4,104,591) (5,000) 5,101,884 Issuance of stock - 5,596,529 Preferred stock dividend (112,603) - Conversion of preferred stock - - Issuance of common stock for - 950,000 acquisitions Common stock subscriptions - 5,000 5,000 Net loss (8,796,007) (8,796,007) Balances, December 31, 1996 $(13,013,201) $- $2,857,406
See accompanying notes to consolidated financial statements F-5 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1995 AND 1994.
1996 1995 1994 Cash flows from operating activities: Net income loss) $(8,796,077) $(2,848,461) $602,010 Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,683,938 1,085,685 578,843 Provision for doubtful 1,771,918 1,248,620 307,617 accounts Common stock issued for compensation and 39,821 16,500 services Accretion of interest on 30,231 notes payable Gain on sale of franchise (202,033) Gain on sale of assets (689,480) Loss on discontinued 364,327 affiliate Changes in assets and liabilities, net of effect of acquisitions: Accounts (2,200,564) (1,409,378) (1,170,369) receivable Inventories (30,453) (51,375) (3,706) Carrier commissions 399,643 13,259 receivable Prepaid expenses and other 338,543 (238,867) (68,859) current assets Accounts payable and other current 2,124,032 1,748,965 1,637,265 liabilities Commissions (404,170) (21,209) payable Net cash provided by (used in) (5,043,068) (797,914) 1,697,268 operating activities Cash flows from investing activities: Acquisitions of businesses (335,415) (1,046,933) Purchases of equipment (953,260) (342,314) (726,507) Payments for deposits (230,994) (52,521) (17,684) Payments for intangible (514,234) (612,346) (527,366) assets Collection of receivable from sale of assets 1,077,856 Collections of note receivable 45,000 18,490 Net cash used in investing (911,047) (2,035,684) (1,271,557) activities Cash flows from financing activities: Payments on capital lease (175,595) obligations Payments on notes payable (1,080,016) (86,250) Advances from (payments to) 274,217 (265,545) 115,626 parent Deferred registration (182,135) costs Payments to (273,531) (90,796) affiliate Issuance of common and 4,361,708 6,279,268 preferred stock Acquisition of common stock (375,000) Net cash provided by (used in) 3,555,909 5,365,192 (419,150) financing activities Net increase (decrease) in (2,398,206) 2,531,594 6,561 cash Cash, beginning of year 2,541,827 10,233 3,672 Cash,end of year $143,621 $2,541,827 $10,233
See accompanying notes to consolidated financial statements F-6 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years Ended December 31, 1996, 1995 AND 1994.
1996 1995 1994 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $280,468 $75,620 $65,372 Income taxes $20,322 $47,924 $- Supplemental schedules of noncash investing and financing activities: Transfer of investment to $- $- $108,136 parent Note received for sale of franchise $- $- $202,033 Contribution to capital in excess of par value of due $- $1,184,000 $1,700,000 to parent Cost of intangible assets included in accounts payable $87,500 $203,074 $202,985 Note received for sale of assets $- $1,077,856 $- Issuance of common stock for $950,000 $475,000 $- acquisitions Note payable incurred for $1,139,000 $2,000,000 $- acquisitions of assets Issuance of Series B Convertible Preferred Stock in exchange for amount $1,200,000 $- $- due to parent Preferred stock issued for preferred stock $112,603 $- $- dividend
See accompanying notes to consolidated financial statements F-7 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 which the Company is engaged in. 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 approximate the carrying amounts presented in the consolidated balance sheets. 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 method (FIFO), or market. Carrier Commissions Receivable Carrier commissions receivable are due from cellular carriers for new cellular telephone line activations. 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. F-8 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 -Summary of Significant Accounting Policies (Continued) 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 recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. Impairment is measured at fair value. 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 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. Deferred start-up costs relate to costs associated with the opening of new cellular telephone rental locations throughout the United States. These costs are amortized on a straight-line basis over 12 months. Certain agreements are amortized on the straight-line basis over the life of the respective agreements, ranging from five to six years. Capitalized Software Development Costs Capitalized software development costs, including significant product enhancements incurred subsequent to establishing technological feasibility in the process of software production are capitalized according to Statement of Financial Accounting Standards No. 86. Costs incurred prior to the establishment of technological feasibility are charged to research, product development, and support expenses. Capitalized software development costs are amortized using the straight-line method over a five year period. F-9 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 -Summary of Significant Accounting Policies (Continued) Advertising Costs The Company generally expenses costs of advertising and promotions as incurred. Advertising expenses included in selling, general and administrative expenses for the years ended December 31, 1996, 1995 and 1994 were approximately $153,000, $137,000 and $113,000, respectively. Income Taxes The Company filed its federal income tax returns on a consolidated basis with its parent through April 1995, the date of its initial public offering ("IPO"). Subsequent to April 1995, the Company's income tax returns are being be filed on a separate return basis. 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 basis 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. Income (Loss) Per Common Share Primary income (loss) per common share is computed by deducting preferred stock dividends from net income (loss). The resulting net income (loss) is applicable to common stock, which is then divided by the weighted average number of common shares outstanding after giving effect to the stock splits referred to in Note 11. The weighted average for all periods prior to the IPO include shares issued within the twelve month period of the IPO, including those issued through the subscription agreement (Note 11) and those issued through the Company's Stock Option Plan, at a price less than the public offering price. Fully diluted income (loss) per common share is computed by dividing net income applicable to common stock by the weighted average number of common and common equivalent shares and the effect of preferred stock conversions, if dilutive. Fully diluted income (loss) per common share is substantially the same as primary income (loss) per common share for the years ended December 31, 1996, 1995 and 1994. F-10 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 -Summary of Significant Accounting Policies (Continued) Use of Estimates The preparation of the consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Newly Issued Accounting Standard On March 3, 1997, the Financial Accounting Standards Board released Statement No.128 (SFAS No. 128), "Earnings Per Share". SFAS No. 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement for all periods presented. Basic earnings per share excludes dilution and is computed by dividing income available 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. Diluted earnings per share is computed similarly to fully diluted earnings per share pursuant to Accounting Principles Board Opinion No. 15. SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and when adopted, it will require restatement of prior years' earnings per share. Since the effect of outstanding options is antidilutive, they have been excluded from the Company's computation of net income (loss) per share. Accordingly, management does not believe that SFAS No. 128 will have a material impact upon historical net income (loss) per share as reported. NOTE 3 - Uncertainty - Ability to Continue as a Going Concern The Company's consolidated financial statements have been prepared on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses of approximately $8,796,000 and $2,848,000 for the years ended December 31, 1996 and 1995, respectively, is in default of a promissory note with a balance due of $1,800,000, and has a working capital deficit of approximately $8,975,000 at December 31, 1996. The Company is in the process of seeking additional equity or debt financing. Continuation of the Company as a going concern is dependent on its ability to resolve its liquidity problem, obtain credit and attain profitable operations. The financial statements do not include any adjustments that might result from this uncertainty. F-11 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 subsidiaries and affiliates (SAC). The purchase price was $3,562,662, comprised of $335,415 in cash, the assumption of $668,564 of accounts payable and $655,822 of notes payable, the issuance of a promissory note for $952,861, the issuance of 300,000 shares of the Company's common stock valued at $3.125 per share and warrants 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, valued at $12,500, vest immediately and expire in three years. In November 1995, STC completed its acquisition of substantially all of the assets of PTC Cellular, Inc. (PTCC). The purchase price was $3,725,000, comprised of $300,000 in cash, the assumption of $1,200,000 of accounts payable, the issuance of a promissory note of $2,000,000 and the issuance of 100,000 shares of the Company's common stock valued at $2.25 per share. The agreement provides for a maximum of $2,500,000 of royalty payments, computed at 3% of quarterly revenues generated from certain of the acquired assets. 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 $617,000, comprised of $217,000 in cash, the assumption of $150,000 of certain indebtedness and the balance through the issuance of 50,000 shares of the Company's common stock (Shares) valued at $5.00 per share. The former Hotline stockholders had the right to require the Company to repurchase all or a portion of the Shares for $5.00 per share. In September 1995, the former Hotline stockholders exercised their put option and the Company purchased all the Shares and subsequently retired them. In connection with the acquisition, the Company issued the former Hotline stockholders a three year option to purchase an aggregate of 50,000 shares of the Company's common stock at a price of $7.50 per share. These acquisitions were accounted for as purchases, and the purchase prices were allocated on the basis of the relative fair market values of the net assets acquired and net liabilities assumed, as follows:
Hotline PTCC SAC Cash $19,462 $- $20,000 Accounts receivable 13,000 Commissions receivable,net 465,869 Prepaid expenses and other current assets 70,431 61,910 Equipment 50,000 1,806,480 169,600 Intangibles 520,000 Excess of cost over net assets acquired 710,264 1,336,610 3,373,062 Accounts payable and other current liabilities (238,206) Commissions payable (473,820) $617,000 $3,725,000 $3,562,662
F-12 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - Acquisitions (Continued) The following unaudited pro forma condensed combined statements of operations for 1996 and 1995 give effect to the acquisitions of SAC, PTCC and Hotline as if they had occurred on January 1 of each year.
1996 1995 Revenues $21,783,519 $24,828,724 Net loss $(9,269,212) $(4,580,591) Net loss applicable to common stockholders $(9,381,815) $(4,580,591) Loss per common share $(2.25) $(1.46)
NOTE 5 - Telecommunications and Office Equipment Telecommunications and office equipment consist of the following at December 31, 1996 and 1995:
1996 1995 Telecommunications equipment $3,298,110 $2,611,128 Office equipment 635,494 503,126 3,933,604 3,114,254 Accumulated 1,802,891 956,569 depreciation $2,130,713 $2,157,685
Depreciation for the years ended December 31, 1996, 1995 and 1994 was $902,413, $537,018 and $327,543, respectively. F-13 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - Intangible Assets Intangible assets consist of the following at December 31, 1996 and 1995:
1996 1995 Goodwill $8,417,581 $5,023,920 Franchise costs 75,573 Deferred start-up costs 902,660 617,500 Covenant not to compete 142,373 142,373 Rental car agreement 520,000 520,000 Capitalized software development costs 890,555 594,579 10,873,169 6,973,945 Accumulated amortization 1,550,796 844,844 $9,322,373 $6,129,101
Amortization for the years ended December 31, 1996, 1995 and 1994 was $781,525, $548,667 and $258,805, respectively. NOTE 7 - Note Receivable In connection with the acquisition of SAC (Note 4), the unpaid balance of a note receivable from SAC of $180,000 was renegotiated to a three year non-interest bearing note, due in monthly installments of $5,000 through February 2000. In discounting the note to $158,468, interest has been imputed at 10% per annum. NOTE 8 - Assets Held For Disposition In connection with the Company's discontinuance of providing In-Car cellular phone services, the Company has recorded, as assets held for disposition, certain telecommunications equipment at its net book value, which approximates fair market value. NOTE 9 - Accounts Payable and Other Current Liabilities Accounts payable and other current liabilities consist of the following at December 31, 1996 and 1995:
1996 1995 Trade $6,227,304 $4,465,198 Sales and other taxes 1,684,714 668,610 Payroll and payroll taxes 194,315 110,290 Other 612,418 594,620 $8,718,814 $5,838,718
F-14 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - Notes Payable Notes payable consist of the following at December 31, 1996 and 1995:
1996 1995 Promissory note $2,000,000 original face amount, bearing interest at 8% per annum and payable in semi- annual principal installments of $225,000 through May 2000. The note is collateralized by $1,800,000 $2,000,000 substantially all of the assets acquired from PTCC Promissory note for the purchase of SAC, non- interest bearing and payable in installments through 292,345 February 1997 Promissory notes, bearing interest at 10% per annum and payable in monthly installments aggregating 486,478 $24,727 through March 2002 2,578,823 2,000,000 Less current portion 2,218,406 400,000 $360,417 $1,600,000
The Company is currently in default in its payments under the $2,000,000 promissory note and has classified the entire balance due as current (Note 16). Aggregate future principal payments for the next five years are as follows: Year Ending December 31 1997 $2,218,406 1998 79,079 1999 77,085 2000 85,158 2001 94,075 NOTE 11 - Stockholders' Equity During December 1996, the Company entered into an agreement to issue an aggregate of 500,000 units, at $3.00 per unit, through a private placement. Each unit consists of one share of common stock and one warrant to purchase one share of common stock at $3.00 per share. As of December 31, 1996, 250,000 units have been issued, and the remaining 250,000 units were issued in January 1997. The Company has the option to repurchase the units sold, at any time prior to May 31, 1997, at a price of $3.45 per unit. F-15 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - Stockholders' Equity (Continued) During August 1996, the Company's certificate of incorporation was amended whereby the authorized number of shares of the Company's common stock was increased to 20,000,000. In addition, the Company was authorized to issue 5,000,000 shares of preferred stock at $.01 par value, issuable from time to time in one or more series with such rights, preferences, privileges and restrictions as determined by the Board of Directors. As of December 31, 1996, the Company authorized 1,250,000 shares of $.01 par value Series B Convertible Preferred Stock (Series B). On August 19, 1996, the Company sold 500,000 shares of 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 is 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, Series B stock pays no dividends. Upon conversion of the Series B shares, the holder shall receive a warrant to purchase an additional share of the Company's common stock at an exercise price of $3.00 per share. Each share of Series B has voting rights equivalent to four shares of common stock. The Company has the right to require the conversion of the Series B into common stock, at any time after one year, provided that the Company maintains a certain market value of its common stock, as defined. In the event that the Company does not meet certain financial criteria by December 31, 1997, each holder of Series B shall have the right to require the Company to redeem such holder's shares at a per share price equal to the original issue price, plus a rate of return equal to 12% per annum. In addition, the Company paid an advisory fee of $125,000 and issued warrants to purchase 240,000 shares of common stock, at an exercise price of $3.00 per share, for certain financial advisory services rendered by a firm, who was a party to the sale of 250,000 shares of Series B, in which one of its principals is a director of the Company. In December 1995, the Company sold 300,000 shares of Series A Convertible Preferred Stock (Series A) at $10 per share through a private placement. Each preferred stockholder is entitled to receive dividends equal to 10% per annum for the first twelve month period, payable in additional shares of Series A. The Company paid an advisory fee of $300,000 and issued warrants to purchase 150,000 shares of common stock, at an exercise price of $2.50, to a firm, in which one of its principals is a director of the Company. During 1996, the Series A stockholders converted all their shares, including 11,260 shares received as dividends, into 1,146,450 shares of the Company's common stock. In June 1995, in connection with a consulting agreement, the Company issued warrants to purchase 95,000 shares of its common stock, at an exercise price of $6.00 per share, subject to certain anti-dilutive provisions. In May 1995, the Company purchased 31,381 shares of its common stock for $125,000 from a consultant and subsequently retired the shares. In April 1995, the Company completed its initial public offering of 950,000 shares of its common stock at $5.25 per share. On March 23, 1995, the Board of Directors adopted a resolution to effect a reverse stock split of two for three. Accordingly, all number of shares and per share data presented in these consolidated financial statements have been restated to reflect this stock split. F-16 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - Stockholders' Equity (Continued) In September 1994, the Board of Directors approved a resolution to effect a stock split of 1,083 shares for 1. In addition, during December 1994, the Board of Directors adopted a resolution to effect a reverse stock split of 1 share for 1.0622 shares. Accordingly, all number of shares and per share data presented in these consolidated financial statements have been restated to reflect these stock splits. In January 1994, the Company entered into a stock subscription agreement to issue 62,763 shares of its common stock for $5,000 ($.08 per share). On January 1, 1994, the Company transferred its 65% ownership in a company to STFI. In connection with this transaction, $108,136 was recorded in 1994 as capital in excess of par value. On January 1, 1994, the Company issued an aggregate of 207,119 shares of its common stock to certain officers and consultants. The value ascribed to these shares, $16,500 ($.08 per share), has been included in general and administrative expenses for the year ended December 31, 1994. NOTE 12 - Stock Option Plans The Board of Directors adopted, and the Company's stockholders approved, a stock option plan (the Plan) pursuant to which 274,797 shares of the Company's common stock were reserved for issuance upon the exercise of options granted to officers, employees, consultants and directors of the Company. Options issued under the Plan are non-qualified stock options (NSO's) and the Board of Directors (Committee) may 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, 1996, options to purchase 266,999 shares of common stock are outstanding. The Board of Directors adopted, and the stockholders approved, the Company's 1994 Director Option Plan (the Director Plan) pursuant to which 33,333 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 2,000 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 is immediately exercisable for ten years from the date of grant, but generally may not be exercised more than 90 days after the date an optionee ceases to serve as a director of the Company. At December 31, 1996, options to purchase 14,000 shares of the Company's common stock were outstanding under the Director Plan. F-17 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Stock Option Plans (Continued) The activity in the Plan and the Director Plan are as follows:
Exercise Exercise Price Per Price Per Share Share Number of Range Weighted options Average Granted in 1994 and balance outstanding, 171,048 $3.68 $3.68 December 31, 1994 Granted 95,000 2.38-5.00 3.15 Expired (34,715) 3.68 3.68 Balance outstanding, December 31, 231,333 2.38-5.00 3.45 1995 Granted 55,000 2.25-4.75 3.69 Expired (5,334) 3.68 3.68 Balance outstanding, December 31, 280,999 $2.25-5.00 $3.36 1996 Exercisable, December 31, 168,332 $2.25-5.00 $3.60 1996
The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", effective for the December 31, 1996 financial statements. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, compensation cost has been recognized for its stock plans based on the intrinsic value of the stock option at date of grant (the difference between the exercise price and the fair value of the common stock). Had compensation cost for the Company's stock- based compensation plans been determined based on the fair value at the grant dates, consistent with the method of SFAS No. 123, the Company's net loss and loss per share would have been adjusted to the pro forma amounts indicated below:
1996 1995 Net loss applicable to common shareholders: As reported $(8,908,610) $(2,848,461) Pro forma (8,919,610) (2,854,461) Loss per common share: As reported (2.18) (1.04) Pro forma (2.19) (1.04)
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 1996 and 1995, respectively: risk- free interest rate of 6%; no dividend yield; expected lives of 3 to 10 years; and expected volatility of 62%. F-18 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - Related Party Transactions The Company entered into an agreement, effective January 1, 1996, whereby the Company will pay a fee of $25,000 per month not to exceed $200,000 annually, for certain services to be performed by STFI. The fee is not payable in any month in which there is a pre-tax loss and cannot exceed pre-tax profit prior to the fee. No payments were due under the agreement for the year ended December 31, 1996. In addition, STFI agrees to provide telecommunications services, as may be requested, including local access and long distance service, at a price not to exceed STFI's cost for such services plus 20%. This agreement is cancelable by the Company on thirty days notice to STFI. Amounts due to parent are due on demand, unsecured and non-interest bearing. NOTE 14 - 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. Prior to the formation of the Plan, the Company participated in a plan maintained by STFI. Matching contributions in STFI's plan were made in STFI common stock. For the years ended December 31, 1996, 1995 and 1994, the Company's matching contributions were approximately $40,000, $24,900 and $17,500, respectively. NOTE 15 - Income Taxes A reconciliation of income tax expense (credit), to the federal statutory rate follows:
Years Ended Years Ended Years December 31, December Ended 1996 31, 1995 December 31, 1994 Income tax expense (credit) on reported pretax income (loss) at federal statutory (34.0)% (34.0)% 34.0% rate State income tax, net of federal benefit - (1.7) 5.3 Net operating loss carryforward 34.0 34.0 (39.3) (utilized) Income taxes 0% 1.7% 0%
In accordance with the tax sharing arrangement it had with STFI in effect through April 1995, the Company utilized net operating loss carryforwards generated in prior years. At December 31, 1996 and 1995, the Company recorded deferred tax assets of approximately $4,400,000 and $1,104,000, respectively, and valuation allowances in the same amounts. The valuation allowances were increased by $3,296,000, $994,000 and $110,000, respectively, for the years ended December 31, 1996, 1995 and 1994. SFAS No. 109 requires that the Company record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax asset will not be realized". The ultimate realization of this deferred tax asset depends on the ability to generate sufficient taxable income in the future. F-19 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - Income Taxes (continued) The net deferred tax assets and liabilities as of December 31, 1996 and 1995 are as follows:
1996 1995 Deferred tax assets: Net operating loss $3,940,000 $945,000 carryforwards Allowance for doubtful accounts 550,000 269,000 Asset basis difference, 10,000 - intangible assets 4,500,000 1,214,000 Deferred tax liabilities: Asset basis difference, fixed (100,000) (97,000) assets Asset basis difference, (13,000) intangible assets (100,000) (110,000) Deferred tax 4,400,000 1,104,000 asset, net Valuation allowance for (4,400,000) (1,104,000) deferred tax asset $- $-
At December 31, 1996, the Company has federal net operating loss carryforwards of approximately $10,115,000, which can be utilized against future taxable income and expire through the year 2011. Net operating losses available for state income tax purposes are less than those for federal purposes and generally expire earlier. NOTE 16 - Commitments and Contingencies The Company leases office facilities, which expire in various years through December 2001. Future aggregate minimum annual rental payments as of December 31, 1996 are as follows: Year Ending December 31 1997 $202,000 1998 135,000 1999 127,000 2000 47,000 2001 35,000 Rent expense for the years ended December 31, 1996, 1995 and 1994 was approximately $418,000, $256,000 and $155,000, respectively. The Company is a defendant to a claim arising out of the breach of terms of a promissory note having a $2,000,000 face value, which was issued in connection with the Company's acquisition of the assets of PTCC. The breach is due to the Company's inability to make certain required principal payments under the note. PTCC is seeking payment of unpaid principal of $1,800,000, in addition to unpaid interest and fees. The Company is actively seeking a settlement agreement with PTCC. F-20 SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - Commitments and Contingencies (Continued) On October 1, 1996, the Company entered into a one year consulting agreement for $385,000, of which $222,500 was earned upon the signing of the contract. During the term of the agreement and for two years thereafter, the consultant may not compete with the Company in the business of renting cellular telephones anywhere in the United States, Mexico and Canada. In connection with the Hotline acquisition, the Company entered into employment agreements, effective June 20, 1995, with two former Hotline stockholders. The agreements expire in June 1997, and provide for annual compensation of $165,000. The former Hotline stockholders may not compete with the Company in certain businesses, as defined, anywhere in the United States. NOTE 17 - Dependence Upon Key Relationships and Major Customers Approximately 20% and 12%, 22% and 16%, and 18% and 11% of the Company's revenues for 1996, 1995 and 1994, respectively, were attributable to cellular telephone rentals made to customers of two national car rental companies. The agreements with these companies are terminable on 120 days and 90 days notice with cause, respectively. The termination of either of these agreements would have a material adverse effect on the Company. In addition, for the year ended December 31, 1994, the Company received approximately 18% of its revenues from one special event. NOTE 18 - Loss on Contract Cancellation In connection with the discontinuance of the In-Car cellular phone service, the Company recognized a loss of approximately $980,000 relating to the cancellation of a certain contract for the production of certain in-car telecommunications equipment. F-21 SCHEDULE VIII SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1996, 1995 and 1994
Descripti Balance at Charged to Charged Deductions Balance at on Beginning Cost and to Other (1) End of Year of Year Expenses Accounts December 31, 1996: Allowance for doubtful accounts $684,875 $1,771,918 $- $1,064,617 $1,392,176 and discounts December 31, 1995: Allowance for doubtful accounts $242,680 $1,248,620 $- $806,425 $684,875 and discounts December 31, 1994 Allowance for doubtful accounts $44,537 $307,617 $- $109,474 $242,680 and discounts
(1) Represents write off of uncollectible accounts, net of recoveries. S-1 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 23, 1997 (to be filed with the Securities and Exchange Commission on or before April 30, 1997). PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 10-K (a) Financial Statements Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1996 and 1995. Consolidated Statements of Operations for the years ended December 31, 1996, 1995, and 1994. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flow for the years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Financial Statement Schedules: Schedule VIII. (b) Reports on Form 8-K On January 22, 1997 the Company filed a Form 8-K Item 5 detailing that the Company entered into an agreement on December 27, 1996 to sell up to 1,500,000 common stock Units for an aggregate purchase price of $4,500,000. (c) Exhibits Exhibit No. Description of Exhibit 3. (i) Amended and Restated Certificate of Incorporation. Incorporated by reference from Exhibit 3.1 of the Company's Registration Statement on Form SB-2 dated December 8, 1994. 3. (ii) By-laws. Incorporated by reference from Exhibit 3.1 of the Company's Registration Statement on Form SB-2 dated December 8, 1994. 4.1 Specimen of Common Stock Certificate. Incorporated by reference from exhibit 4.2 of 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 of 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 of 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 of 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 of the Company's Form 8-K dated December 27, 1996, and filed January 22, 1997. 10.1 Agreement by and between the Hertz Corporation and the Company dated October 1, 1996. 10.2 Agreement by and between National Car Rental System, Inc. and the Company dated July 1, 1996. 10.3 Lease Agreement by and between Putnam Park Associated and the Company dated January 1, 1995. Incorporated by reference from Exhibit 10.10 of the Company's Registration Statement on Form SB-2 filed with Amendment No. 1 to such Registration Statement dated January 4, 1995. 10.4 1994 Stock Option Plan. Incorporated by reference from Exhibit 10.10 of the Company's Registration Statement on Form SB-2 dated December 9, 1994. 10.5 1994 Director Option Plan, as amended. 10.6 Management Agreement by and between the Company and Shared Technologies Fairchild Inc., dated January 1, 1996. Incorporated by reference from Exhibit 10.13 of the Company's Form 10-K dated March 23, 1996 10.7 Employment Agreement by and between Sean P. Hayes and the Company dated October 1, 1994. Incorporated by reference from Exhibit 10.14 of the Company's Registration Statement on Form SB-2 filed with Amendment No. 1 to such Registration Statement dated January 4, 1995. 10.8 Sample Customer Service Agreement. Incorporated by reference from Exhibit 10.15 of the Company's Registration Statement on Form SB-2 filed with Amendment No. 1 to such Registration Statement dated January 4, 1995. 10.9 Sample Customer Service Agreement. Incorporated by reference from Exhibit 10.16 of the Company's Registration Statement on Form SB-2 filed with Amendment No. 1 to such Registration Statement dated January 4, 1995. 10.10 Stock Purchase Agreement by and between the stockholders of The Cellular Hotline, Inc. and the Company dated June 11, 1995. Incorporated by reference from Exhibit 10.1 of the Company's Form 8-K dated June 19, 1995 and filed June 30, 1995. 10.11 Asset Purchase Agreement by and between Peoples Telephone Company, Inc., PTC Cellular, Inc. and the Company dated November 1, 1995. Incorporated by reference from Exhibit 10.1 of the Company's Form 8-K dated November 13, 1995 and filed November 22, 1995. 10.12 Consulting Agreement between Vertical Financial Holding and the Company dated June 21, 1995. Incorporated by reference from Exhibit 10.19 of the Company's Form 10-K dated March 28, 1996. 10.13 Employment Agreement by and between Jon Sorenson and the Company dated October 1, 1996. 10.14 Asset Purchase Agreement by and between Summit, et al. the Company dated April 27, 1996. Incorporated by reference from Exhibit 10.1 of the Company's Form 8-K dated April 27, 1996 and filed May 9, 1996. 10.15 Shared Technologies Cellular, Inc Savings and Retirement Plan Effective as of April 1, 1996. 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 ---------------------------------- Anthony D. Autorino Chief Executive Officer and Director March 27, 1997 By ---------------------------------- Vincent DiVincenzo Chief Financial Officer and Director Date: March 27, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: __________________ By: _____________________ Anthony D. Autorino William A. DiBella Chief Executive Officer Director and Director Date:________________ Date:_________________ By: __________________ By: _____________________ Ajit G. Huthessing Thomas H. Decker Director Director Date:_________________ Date:________________ By: __________________ By: _____________________ Vincent DiVincenzo Nicholas E. Sinacori Chief Financial Officer Director and Director Date:________________ Date:_________________ By:___________________ Craig A. Marlar Director Date:_________________ [TYPE] EX-27 [DESCRIPTION] ART. 5 FDS FOR YEAR END 10-K [ARTICLE] 5 [MULTIPLIER] 1000 [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1996 [PERIOD-START] JAN-01-1996 [PERIOD-END] DEC-31-1996 [CASH] 144 [SECURITIES] 0 [RECEIVABLES] 3013 [ALLOWANCES] 1392 [INVENTORY] 80 [CURRENT-ASSETS] 2070 [PP&E] 3934 [DEPRECIATION] 1802 [TOTAL-ASSETS] 14362 [CURRENT-LIABILITIES] 11044 [BONDS] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 5 [COMMON] 49 [OTHER-SE] 0 [TOTAL-LIABILITY-AND-EQUITY] 14262 [SALES] 20914 [TOTAL-REVENUES] 20914 [CGS] 13629 [TOTAL-COSTS] 27801 [OTHER-EXPENSES] 950 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 906 [INCOME-PRETAX] (8774) [INCOME-TAX] 22 [INCOME-CONTINUING] (8796) [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] (3907) [EPS-PRIMARY] (2.18) [EPS-DILUTED] (2.18) Exhibit 21 Subsidiary of Shared Technologies Cellular, Inc. 1. Cellular Hotline, Inc. Exhibit 10.1 AGREEMENT BETWEEN SHARED TECHNOLOGIES CELLULAR, INC. AND THE HERTZ CORPORATION This Agreement (the "Agreement") is made as of the ___ day of _________________, 1996 (the "Effective Date"), by and between Shared Technologies Cellular, Inc., a Delaware corporation, having offices at 100 Great Meadow Road, Wethersfield, CT 06109, ("STC"), and The Hertz Corporation, a Delaware corporation, having its principal office at 225 Brae Boulevard, Park Ridge, NJ 07656-0713 ("Hertz"). WHEREAS, Hertz is in the business of renting vehicles to the traveling public from various locations throughout the United States; and WHEREAS, STC is in the business of providing portable cellular telephones including all accessories (the "Equipment") for short- term use; and WHEREAS, STC and Hertz desire to enter into this Agreement to allow STC the non-exclusive right to provide Equipment rentals to Hertz customers at those locations identified in the attached Exhibit A (the "Location Schedule"), which may be amended from time to time to add or delete locations by written mutual consent of the parties. 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. Term and Termination. (a) This non-exclusive Agreement shall have a term of two (2) years, commencing as of the date first written above, subject to the following. This Agreement shall be renewed only by the written mutual agreement of the parties. This Agreement may be terminated for cause in accordance with Paragraph 10 below. From and after the first anniversary of the Effective Date of this Agreement, either party may terminate this Agreement at any time with ninety (90) days written notice to the other party. (b) Notwithstanding anything contained in this Agreement to the contrary, STC will have the right to immediately terminate this Agreement upon written notice to Hertz, if (1) the Federal Communications Commission or any other regulatory agency promulgates any rule, regulation, or order which i) in effect or application substantially impedes STC from fulfilling its obligations hereunder, or ii) materially or adversely affects STC's ability to conduct its business, or (2) Hertz fails to maintain in full force and effect any license, permit or approval required for the conduct of its business. (c) Notwithstanding anything contained in this Agreement to the contrary, upon furnishing Hertz with reasonable evidence that the continuation of the Equipment rentals at any location identified in the Location Schedule is not or is not likely to become a profitable business in the then foreseeable future, STC may terminate the Equipment rental program at such location(s). In such event, Hertz shall have the right to engage a third party to replace STC as provider of Equipment rentals at such location(s). (d) Notwithstanding anything contained in this Agreement to the contrary, upon furnishing Hertz with reasonable evidence that STC's losses due to fraud or Equipment theft are so great that it is no longer economically practical to operate at a location identified in the Location Schedule, STC may terminate the Equipment rental program at such location(s). In such event, Hertz shall have the right to engage a third party to replace STC as provider of Equipment rentals at such location(s). 2. Appointment. (a) Hertz hereby grants to STC the non-exclusive right to provide Equipment on a rental basis to Hertz customers at those Hertz corporate locations in the United States identified in the Location Schedule. (b) Notwithstanding anything contained in this Agreement to the contrary, Hertz agrees that STC shall have a right of first refusal to provide Equipment rentals at any Hertz corporate location in the United States where Hertz desires to offer Equipment rentals to Hertz customers. In the event that during the term of this Agreement Hertz desires to expand the Equipment rental program to additional Hertz corporate locations within the United States other than the locations identified in the Location Schedule, Hertz shall notify STC in writing and STC shall have a right of first refusal to provide Equipment rentals to Hertz customers at the locations designated by Hertz in such written notice on the same terms and conditions set forth herein. STC shall have up to thirty (30) days to exercise such right of first refusal. If STC exercises such right of first refusal, STC shall have up to ninety (90) days from the date of the notice from Hertz to implement an Equipment rental program at the locations identified in such notice. In the event that STC does not exercise such right of first refusal as provided above, Hertz may contract with third parties to provide cellular phone rentals at the locations designated by Hertz in its written notice to STC. (c) Upon request by STC, Hertz agrees to approach any third party who operates a car rental business pursuant to a grant of a franchise or license from Hertz (a "Hertz Licensee") to promote STC as Hertz's preferred cellular phone rental services provider and to assist STC in securing an agreement with such Hertz Licensee for an Equipment rental program. 3. Responsibilities of Hertz. (a) Hertz acknowledges that all Equipment delivered under this Agreement is the property of STC. Upon termination of this Agreement for any reason whatsoever or the termination of the rental program at any individual location, STC may remove its Equipment from Hertz's premises during normal business hours. If STC does not remove its Equipment within forty-five (45) days from the termination date of this Agreement, then Hertz may dispose of such Equipment in any manner it may choose. (b) With respect to each location identified on the Location Schedule, Hertz agrees to: i) Provide a safe and secure area for the storage and recharging of Equipment; ii) Designate a responsible individual who will interface with STC on the day to day Equipment rental business; iii) Inform each of its renting customers of the Equipment rental program and the opportunity to rent a portable cellular telephone from STC; iv) Solicit orders for Equipment rentals by asking each Hertz customer at the time the customer rents a vehicle from Hertz if such customer wants to rent Equipment from STC; v) Display marketing and promotional materials, including signs mutually agreed to by the parties, point-of-sale posters and rate cards, where not prohibited at Hertz counters. vi) Develop cooperative marketing programs and promotional materials with STC to maximize revenue potential at all locations. All promotional materials developed on a cooperative basis will require the prior approval of both Hertz and STC and each party will mutually agree to its share of the cost of such cooperative marketing materials in advance; vii) Report all malfunctions, improper operation, damage, theft or other loss of Equipment to STC; and viii) Be responsible for the Equipment rental and return functions during STC's unstaffed hours of operation. (c) Hertz shall be solely responsible for obtaining any permits, licenses, consents or other authorizations as required by any airport authority or other governmental entity having jurisdiction over Hertz's operations at any location identified on the Location Schedule to conduct the Equipment rental program with STC. In the event that an airport authority refuses to authorize Hertz to conduct the business provided hereunder, such airport location will be deemed to be deleted from the Location Schedule. 4. Responsibilities of STC. (a) For those locations identified on the Location Schedule, STC agrees to maintain a supply of Equipment that is sufficient to meet customer demand, but in no event less than five (5) cellular phones for each location (or such number of phones mutually agreed upon by Hertz and STC for an individual location). (b) STC will provide staff ranging from full time rental agents, who will complete the entire rental and return process, to support staff only, who will train and assist Hertz employees in completing the rental and return process, as more fully described in the attached Exhibit B. (c) STC will provide the following monthly management reports for each location identified on the Location Schedule: i) A detailed revenue and utilization analysis; and ii) Commission reports, which STC will provide to Hertz within twenty (20) days of the end of each month for the applicable reporting period. (d) With respect to each location identified on the Location Schedule, STC agrees to: i) Train local Hertz personnel in the use of the Equipment, STC's pre-packaged telephone kits, and STC's sales materials. STC will inform all Hertz employees that they are not authorized to use Equipment without completing a rental agreement and paying all normal charges for such use. Hertz employees will be billed directly by STC for any charges for such use; ii) Establish call restrictions and all rates to be charged for Equipment rental and metered airtime usage. STC has the right to offer special promotions or rate changes as it deems proper. Such promotions or rate changes will remain competitive with the industry. STC will provide Hertz with point of sales materials that reflect such promotions or rate changes; iii) Be responsible for billing all charges to each customer for the rental of Equipment and the provision of service; iv) Be responsible for resolving all customer billing inquiries. In the event of an irreconcilable billing dispute between STC and a customer, STC will notify Hertz. Upon such notification, Hertz will have the right to intervene in the dispute and attempt to bring about a reasonable solution; v) Be responsible for administrative paperwork, battery charging, equipment maintenance, and inventories associated with the Equipment rental program. All repairs and maintenance of the Equipment will be at the expense of STC, except any repairs caused by the negligence of Hertz and its employees or agents; and vi) Provide and produce point-of-sales materials (counter signs and quick contracts only). Notwithstanding the foregoing, if the parties develop promotional materials on a cooperative basis, then such materials will require the prior approval of both Hertz and STC and each party will mutually agree to its share of the cost of such cooperative marketing materials in advance; (e) STC shall allow Hertz, upon reasonable prior notice and at the sole cost and expense of Hertz, to inspect the books and records of STC during normal business hours, as such records pertain to Hertz. 5. Compensation. (a) STC agrees to pay Hertz a monthly commission ("Commission") in the amount of twenty-five percent (25%) of the Gross Revenues (as hereinafter defined) billed by STC for Equipment rentals provided at each Hertz location identified on the Location Schedule for the applicable month. Gross Revenues shall mean the total amount of airtime revenues billed by STC for Equipment rentals provided at the applicable Hertz locations; provided, however, that Gross Revenues shall exclude all customer credits issued by STC other than credits for bad debt. Commissions shall be payable on a location by location basis. STC shall pay Commissions to Hertz within twenty (20) days after the end of each month in which such compensation is earned. (b) In addition to the commissions payable by STC pursuant to Paragraph 5(a), STC agrees that Hertz employees shall be eligible for incentives as provided by the STC Commission Incentive Program attached hereto as Exhibit C and made a part hereof. The parties acknowledge and agree that payments for any commissions payable to Hertz employees hereunder will be made in accordance with the following procedures (the "Commission Incentive Procedures"): (i) On or before the 20th of each month during the term hereof, STC will send a commission report to Hertz for commissions earned by Hertz employees for the prior month. Such monthly commission reports shall be in magnetic tape form and shall identify the following information for each Hertz employee who earned commissions in the prior month: Hertz employee number, Hertz location number and commissions earned for the prior month. (ii) Hertz, through its payroll department, shall process the monthly commission reports received from STC by verifying the Hertz employee number and location number stated therein. Hertz shall make commission payments by the last Thursday of each month to each employee identified in such monthly reports, provided that the Hertz employee number and location number for a particular Hertz employee are supported by Hertz's records. (iii) STC shall reimburse Hertz monthly for commissions earned by Hertz employees hereunder. Such commission payments shall be due and payable on or before the 20th of each month. Payment shall be made to Hertz at the address provided in Paragraph 12. (c) STC agrees to pay Hertz an annual bonus commission ("Annual Bonus") in accordance with the following schedule, so long as during each Contract Year (as hereinafter defined) STC has operated at all Hertz corporate locations in the United States (other than any location where STC has determined that it is not economically feasible to operate its Equipment rental business). Such Annual Bonus will be based on the indicated percentage of Gross Revenues billed by STC during each Contract Year for Equipment rentals provided by STC for the applicable Contract Year at all Hertz corporate locations in the United States. Contract Year shall mean each successive period of one (1) year during the term of this Agreement, ending on the same day and month, but not year, as the day and month on which the Effective Date occurs. The Annual Bonus shall be payable by STC within ninety (90) days of the end of each Contract Year. Once a higher percentage becomes applicable, it applies to all lower threshold levels for a particular Contract Year. Total Gross Revenues Billed by STC for Percentage of Gross All Hertz Locations for Revenues for Annual Applicable Contract Year Bonus Calculation 0 to $4,500,000 0% $4,500,000.01 to $5,000,000 1% $5,000,000.01 to $5,500,000 2% $5,500,000.01 to $6,000,000 3% $6,000,000.01 to $6,500,000 4% $6,500,000.01 and greater 5% 6. Indemnification. (a) Hertz shall defend, indemnify and hold STC and its officers, directors, employees and agents harmless from and against all claims, damages and liabilities arising from Hertz's negligence or other wrongful acts or omissions arising in any way out of this Agreement or Hertz's performance hereunder. (b) STC shall defend, indemnify and hold Hertz and its officers, directors, employees and agents harmless from and against all claims, damages and liabilities arising from STC's negligence or other wrongful acts or omissions arising in any way out of this Agreement or STC's performance hereunder. 7. Risk of Loss. (a) Hertz acknowledges that all Equipment provided to it in connection with the performance of this Agreement is the property of STC. Hertz shall be responsible for the safekeeping of all Equipment delivered to it by STC and shall bear the risk of loss of or damage to, or theft of, such Equipment. However, STC shall bear the risk of loss or damage to, or theft of, the Equipment in the possession of a customer, provided that such Equipment left the possession of Hertz pursuant to a rental agreement signed by a customer and in accordance with STC's instructions, policies and procedures, as provided to Hertz by STC from time to time (the "Procedures"). (b) Hertz understands that in the event of loss of or damage to, or theft of, Equipment (other than Equipment that left the possession of Hertz in accordance with the Procedures), Hertz shall be responsible for the replacement cost of the Equipment and for all charges attributable to the use of the Equipment, subject to the following. STC agrees that the replacement cost of the Equipment shall not exceed $500 per cellular phone and that the usage charges shall be billed to Hertz on the basis of STC's actual cost for cellular airtime. In addition, STC agrees that Hertz shall not be responsible for usage charges after one (1) business day has elapsed from the date STC receives a report from Hertz, in a form reasonably specified by STC, of the loss or theft of a cellular phone. In the event that Hertz incurs any payment obligation to STC for lost, damaged or stolen Equipment, then STC shall have the right to withhold such amounts from any commissions owed to Hertz under this Agreement. 8. Confidentiality. Each party shall maintain the confidentiality of, and shall not disclose to any third party, any confidential or proprietary information concerning the other party, including, without limitation, customer lists and financial information. This Paragraph shall remain in effect for a period of two (2) years following the termination of this Agreement. 9. Trademarks. Neither party shall use any trademarks or tradenames of the other party in any manner, except as expressly authorized by the other party. Upon termination of this Agreement, Hertz shall return to STC all marketing and sales materials then in the possession of Hertz. 10. Default. In the event either party fails to perform any of its obligations under this Agreement and such failure continues for more than thirty (30) days following written notice of such default, then the non-defaulting party shall have the right to terminate this Agreement, without limiting any other remedies available hereunder or at law or equity. However, if such breach cannot be cured within said thirty (30) day period, then, if the breaching party has commenced to cure within such period and diligently pursues the cure, such party shall not be in default hereunder as long as it continues to diligently pursue such cure, but in no event for a period in excess of sixty (60) days from the initial notice date. 11. Relationship of the Parties. (a) STC shall at all times hereunder be deemed to be an independent contractor of Hertz. Nothing in this Agreement is intended to constitute either party as a joint venturer, partner, agent, dealer, franchisee or employee of the other for any purpose whatsoever. (b) Hertz's employees will not be or be deemed to be STC employees or joint employees. Hertz assumes full responsibility for the acts of its employees and for their supervision, daily direction and control. STC will not be responsible for workers compensation premiums, disability benefits, withholding taxes, social security, unemployment insurance or any other taxes or benefits of Hertz or Hertz's employees. (c) Neither party shall have any authority to enter into or bind the other party in contract, nor make any unauthorized representations or warranties concerning the other party's products or services. 12. Notice. All notices required or permitted to be given hereunder shall be deemed to have been given when deposited in the mail (certified and postage prepaid) or delivered in hand to the applicable address set forth below. Either party may change its notice address by so notifying the other in writing. If to STC: Shared Technologies Cellular, Inc. 100 Great Meadow Road Suite 104 Wethersfield, CT 06109 Attn: Legal Department If to Hertz: The Hertz Corporation P.O. Box 25722 Oklahoma City, OK 73125-0722 Attn: Robert J. Bailey, Sr. VP, Quality Assurance & Administration 13. Limitation of Liability. Notwithstanding any other provision of this Agreement, neither party shall be liable to the other, either directly or through the operation of any indemnification or hold harmless provision of this Agreement, for any consequential (including lost profits), incidental, indirect, special or punitive damages arising in any way out of this Agreement. 14. General. (a) Each party hereto represents and warrants to the other that this Agreement will not conflict with or violate any prior commitment, agreement or understanding that it has with any third party and that the person signing this Agreement on its behalf has been properly authorized and empowered to enter into this Agreement. (b) This agreement shall be governed by the laws of the State of Connecticut. (c) This Agreement 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. No modification or addition to this Agreement shall be valid unless in writing signed by the parties hereto. (d) 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. (e) 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. (f) 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. (g) The parties acknowledge that they have each read this Agreement in its entirety, understand it and agree to be bound by the terms and conditions contained herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. Shared Technologies The Hertz Corporation Cellular, Inc. By:__________________________ By:__________________________ Its:_________________________ Its:_________________________ Date:________________________ Date:________________________ EXHIBIT A HERTZ LOCATIONS Locations Locations Albuquerque, NM New York, JFK Albany, NY* New York, LaGuardia Amarillo, TX* New York, Manhattan Anaheim, CA Newark, NJ Atlanta, GA Oakland, CA Austin, TX* Oklahoma City, OK Baltimore-BWI, MD Ontario, CA Birmingham, AL* Orange County, CA Boston-Downtown, MA Orlando, FL Boston-Logan, MA Palm Springs, CA Buffalo, NY Pensacola, FL Burbank, CA Philadelphia, PA Canada Phoenix, AZ Toronto Pittsburgh, PA Winnipeg Portland, ME* Ottawa Portland, OR Vancouver Providence, RI Halifax Raleigh, NC Calgary Richmond, VA* Montreal Roanoke, VA* Charleston, SC Rochester, NY Charlotte, NC Sacramento, CA Chicago Midway, IL Salt Lake City, UT* Chicago O'Hare, IL San Antonio, TX* Cincinnati, OH San Diego, CA Cleveland, OH San Francisco, CA Colorado Springs, CO San Jose, CA Dallas, TX Sarasota, FL* Dayton, OH Savannah, GA Denver, CO Seattle, WA Detroit, MI St. Louis, MO Fresno, CA Syracuse, NY Ft Lauderdale, FL Tallahassee, FL Ft Myers, FL Toronto, ONT* Grand Rapids, MI Tucson, AZ Hartford, CT Tulsa, OK Honolulu, HI Vancouver, BC* Houston, TX Washington, DC Dulles Indianapolis, IN Washington, DC Natl Kansas City, MO West Palm Beach, FL Las Vegas, NV Los Angeles, CA Louisville, KY Maui, HI Miami, FL Milwaukee, WI Minneapolis, MN Monterey, CA Nashville, TN New Orleans, LA * Hertz locations that STC intends to use reasonable efforts to open within 6 months from the effective date of the Agreement. EXHIBIT B Hertz Locations Job Title % Time * Albany, NY Area Manager 25% Albuquerque, NM Area Manager 34% Anaheim, CA Area Manager 100% Atlanta, GA Area Manager 50% Atlanta, GA CSR 50% Atlanta, GA CSR 50% Baltimore-BWI, MD Area Manager 30% Baltimore-BWI, MD CSR 30% Boston-Downtown, MA Area Manager 10% Boston-Logan, MA Area Manager 50% Boston-Logan, MA CSR 50% Boston-Logan, MA CSR 50% Buffalo, NY Area Manager 100% ^ Burbank, CA CSR 38% Charleston, SC Area Manager 33% Charlotte, NC Area Manager 60% Chicago , IL Area Manager 50% Chicago Midway, IL Area Manager 33%. ^ Chicago O'Hare, IL CSR 100% Cincinnati, OH Area Manager 38% Cleveland, OH Area Manager 42% Colorado Springs, CO Area Manager 92% Dallas, TX Area Manager 33% Dallas/Fort Worth, TX CSR 33% Dallas/Fort Worth, TX CSR 33% Dayton, OH Area Manager 26% Denver, CO Area Manager 50% Denver, CO CSR 50% Detroit, MI Area Manager 47% Detroit, MI CSR 47% Fresno, CA Area Manager 60% Ft Lauderdale, FL CSR 50% Ft Myers, FL Area Manager 25% Grand Rapids, MI Area Manager 10% Hartford, CT Area Manager 55% Honolulu, HI TBD 50% Houston, TX Area Manager 33% Houston, TX CSR 33% Houston, TX CSR 75% Indianapolis, IN CSR TBD Kansas City, MO Area Manager 60% Las Vegas, NV Area Manager 40% Las Vegas, NV CSR 40% Los Angeles, CA Area Manager 60% Los Angeles, CA CSR 100% Louisville, KY Area Manager 70% ^ Maui, HI TBD 50% Miami, FL Area Manager 40% Miami, FL CSR 100% Milwaukee, WI Area Manager 50% ^ Minneapolis, MN Area Manager 33% Monterey, CA Area Manager 33% Nashville, TN Area Manager 33% New Orleans, LA Area Manger 40% New York, Manhattan NYC Manager 66% New York, Manhattan CSR 66% New York, JFK CSR 48% New York, LaGuardia CSR 50% Newark Area Manager 52% Newark, NJ CSR 52% Oakland, CA Area Manager 40% Oklahoma City, OK Area Manager 30% Ontario, CA Area Manager 60% Orange County, CA Area Manager 25% Orlando, FL Area Manager 33% Orlando, FL CSR 75% Palm Springs, CA Area Manager 60% Pensacola, FL Area Manager 33% Philadelphia, PA CSR 50% Philadelphia, PA CSR 50% Phoenix, AZ Area Manager 50% Pittsburgh, PA CSR 50% Portland, ME CSR 10% Portland, OR Area Manager 80% Providence, RI Area Manager 60% Raleigh, NC Area Manager TBD Richmond, VA Area Manager TBD Roanoke, VA Area Manager TBD Rochester, NY Area Manager 50% ^ Sacramento, CA Area Manager 36% San Diego, CA Area Manager 50% San Francisco, CA Area Manager 70% San Francisco, CA CSR 100% San Jose, CA Area Manager 45% Savannah, GA Area Manager 33% Seattle, WA Area Manager 33% St. Louis, MO Area Manager 100% Syracuse, NY Area Manager 60% ^ Tallahassee, FL Area Manger 33% Tucson, AZ Area Manager 100% Tulsa, OK Area Manager 33% ^ Washington, DC Area Manager 50% Washington, DC Dulles CSR 50% Washington, DC Natl CSR 33% West Palm Beach, FL Area Manager 40% * The percentage of time, based on a forty (40) work week, that a STC employee will spend at a particular Hertz location. ^ STC Employee who is a commission only Sales Agent TBD= To be determined STC reserves the right to change staffing and necessary. STC will provide requirements as it deems Hertz with a 30 day advance written notice of such changes. If Hertz objects to such change, Hertz will notify STC within 10 days of its objection. STC will then cancel its planned staffing change(s), or Hertz at its option may delete such location(s) from this EXHIBIT C STC COMMISSION INCENTIVE PROGRAM STC agrees to pay a one-time commission in the amount of $3.00 for each Equipment rental that is procured solely by the efforts of a Hertz employee from the Effective Date through December 31, 1996. Such one-time commission will be increased by $1.00 for the period January 1, 1997 through the termination date of the Agreement. The basis for the Hertz employee compensation will be receipt of an Equipment rental application completed by the Hertz employee. The order must be signed by the Customer and must designate the Hertz location number and the Hertz employee as the source of the sale. Payment will be made in accordance with the Commission Incentive Procedures adopted by Hertz and STC. Exhibit 10.2 AGREEMENT BETWEEN SHARED TECHNOLOGIES CELLULAR, INC. AND NATIONAL CAR RENTAL SYSTEM, INC. This Agreement (the "Agreement") is made as of the 1st day of July, 1996 (the "Effective Date"), by and between Shared Technologies Cellular, Inc., a Delaware corporation, having offices at 100 Great Meadow Road, Wethersfield, CT 06109, ("STC"), and National Car Rental System, Inc., a Delaware corporation, having offices at 7700 France Avenue South, Minneapolis, MN 55435 ("National"). WHEREAS, National is in the business of renting vehicles to the traveling public from various rental locations throughout the United States; and WHEREAS, STC is in the business of providing portable cellular telephones including all accessories (the "Equipment") for short- term use; and WHEREAS, National and STC desire to enter into this Agreement to allow STC the right to provide Equipment rentals to National customers at those locations identified in the attached Exhibit A (the "Location Schedule"), which may be amended from time to time to add or delete locations by written mutual consent of the parties hereto. 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. Term and Termination. (a) This Agreement shall have a term of three (3) years, commencing as of the date first written above, subject to the following. The term hereof shall automatically renew for successive one (1) year terms, unless terminated by either party by written notice given to the other party at least ninety (90) days prior to the end of the initial term or any term then in effect. (b) Notwithstanding anything contained in this Agreement to the contrary, STC will have the right to immediately terminate this Agreement upon written notice to National specifying the reason for termination pursuant to this Paragraph 1(b), if the Federal Communications Commission or any other regulatory agency promulgates any rule, regulation, or order which i) in effect or application substantially impedes STC from fulfilling its obligations hereunder, or ii) materially or adversely affects STC's ability to conduct its business. For the purposes of this Agreement, a regulatory rule, regulation or order will be deemed to "substantially impede" STC from fulfilling its obligations hereunder if STC must significantly alter the manner in which it provides cellular phone rentals to end users. (c) Notwithstanding anything contained in this Agreement to the contrary, within thirty (30) days after furnishing National with reasonable evidence that the continuation of the Equipment rentals at any location identified in the Location Schedule is not or is not likely to become a profitable business in the then foreseeable future, STC may terminate the Equipment rental program at such location(s). In such event, National shall have the right to engage a third party to replace STC as provider of Equipment rentals at such location(s). (d) Notwithstanding anything contained in this Agreement to the contrary, within thirty (30) days after furnishing National with reasonable evidence that STC's losses due to fraud or Equipment theft are so great that it is no longer economically practical to operate at a location identified in the Location Schedule, STC may terminate the Equipment rental program at such location(s). In such event, National shall have the right to engage a third party to replace STC as provider of Equipment rentals at such location(s). (e) Notwithstanding anything contained in this Agreement to the contrary, in the event that the cellular phone rental program is terminated at an individual National corporate location in accordance with Paragraph 3(c) or Paragraph 3(d) below and the average monthly gross revenues received by STC from the Equipment rentals made at such location are at least $7,500, then National and STC shall enter into good faith negotiations to reduce the Minimum Commission and the Annual Bonus payments payable by STC pursuant to Paragraph 5 of this Agreement. 2. Appointment. (a) National hereby grants to STC the exclusive right to provide Equipment on a rental basis to National customers at all of National's corporate locations in the United States, which locations are identified on the Location Schedule. Notwithstanding the foregoing, National shall have a period of sixty (60) days from the Effective Date to wind down and terminate its cellular phone rental program with a third party vendor at each of those corporate locations identified on the Location Schedule as a location where a third party vendor is operating on the Effective Date. In the event that National closes its car rental operations at a corporate location during the term of this Agreement, National shall provide STC with at least thirty (30) days prior written notice and upon the expiration of such 30-day period, the closed corporate location shall be deemed to be deleted from the Location Schedule. The addition of new corporate car rental locations shall be governed by Paragraph 2(c) below. (b) Upon request by STC, National agrees to approach any third party who operates a car rental business pursuant to a grant of a franchise or license from National (a "National Licensee") to promote STC as National's exclusive cellular phone rental services provider. If STC enters into an agreement with a National Licensee for the provision of cellular telephone rentals as a result of the contact and promotion by National, then STC agrees that the gross collected airtime revenues received by STC from a cellular phone rental program conducted with such National Licensee shall be included in the calculation of the Annual Bonus described in Paragraph 5(e) below. (c) In the event that during the term of this Agreement National opens additional corporate locations in the United States, National shall notify STC in writing and STC shall have the right of first refusal to provide Equipment to National customers at the additional locations on the same terms and conditions set forth herein. STC shall have up to thirty (30) days to exercise its right of first refusal. In the event STC does not exercise its right of first refusal as provided above, National may negotiate with third parties to provide cellular phone rentals at the locations designated by National in its written notice to STC. In the event that STC exercises its right of first refusal, the Location Schedule shall be modified to include the corporate location(s) designated by National in its written notice to STC. (d) STC reserves the right to grant licenses and/or award franchises to a third party to operate an Equipment rental business in those cities identified on the Location Schedule, and National agrees that in such event STC's licensee or franchisee shall have the right to provide Equipment rentals in accordance with the terms of this Agreement. 3. Responsibilities of National. (a) National acknowledges that all Equipment delivered under this Agreement is the property of STC. Upon termination of this Agreement for any reason whatsoever or the termination of the rental program at any individual location, STC may remove its Equipment from National's premises. (b) With respect to each location identified on the Location Schedule, National agrees to: i) Provide a safe and secure area for the storage and recharging of Equipment. National shall be responsible for locking unused inventory in the boxes provided by STC pursuant to Paragraph 4(d) during any hours of operation that an STC employee is not staffing a particular National location; ii) Designate a responsible individual who will interface with STC on the day to day Equipment rental business; iii) Inform each of its customers of the Equipment rental program and the opportunity to rent a portable cellular telephone from STC; iv) Solicit orders for Equipment rentals by asking each National customer at the time the customer reserves a vehicle from National if such customer wants to rent Equipment from STC; v) Display marketing and promotional materials, including point-of-sale posters and rate cards provided by STC, where not prohibited at National counters; vi) Develop cooperative marketing programs and promotional materials with STC to maximize revenue potential at all locations; vii) Report all malfunctions, improper operation, damage, theft or other loss of Equipment to STC; and viii) Be responsible for the Equipment rental and return functions during STC's unstaffed hours of operation. (c) National shall be solely responsible for obtaining any permits, licenses, consents or other authorizations as required by any federal, state or local law or by any airport authority or other governmental entity having jurisdiction over National's operations at any location identified on the Location Schedule to conduct the Equipment rental program with STC. In the event that an airport authority refuses to authorize National to conduct the business provided hereunder, such airport location will be deemed to be deleted from the Location Schedule and National and STC agree to use their best efforts to develop a mutually acceptable proposal to address the concerns of such airport authority so that such location may be included in the cellular phone rental program at a later date. (d) National frequently leases its facilities and operates its car rental business under grant from various state and local governmental and airport entities (which grants and leases are hereby referred to as "Concession Agreements"). The parties acknowledge and agree that this Agreement is entirely separate and distinct from and independent of National's Concession Agreements. Consequently, National shall be solely responsible for the performance or non-performance of any of its obligations under its Concession Agreements, including, without limitation, the payment of any applicable airport concession fees. In the event that an airport authority or other governmental entity with jurisdiction over an individual location identified on the Location Schedule advises National that the rental of cellular phones constitutes a violation of National's Concession Agreement for such location or that the airport authority has promulgated a rule that prohibits cellular phone rental vendors from operating at such location, then STC agrees to cooperate with National to terminate the cellular phone rental program at such location. 4. Responsibilities of STC. (a) For those locations identified on the Location Schedule, STC agrees to maintain a supply of Equipment that is sufficient to meet customer demand. STC agrees to maintain a sufficient inventory for each location identified on the Location Schedule such that the average daily utilization (rental) level of inventory assigned to a particular location will not exceed sixty percent (60%). (b) STC will provide staff ranging from full time rental agents, who will complete the entire rental process, to support staff only, who will train and assist National employees in completing the rental process. STC employees shall conduct themselves in a professional and courteous manner at all times hereunder. (c) STC will provide the following monthly management reports for each location identified on the Location Schedule: i) A detailed revenue report, which will include market area rankings and utilization analysis; and ii) Commission reports, which will include an explanation of any offsets that STC is entitled to hereunder. In addition, STC will provide a year end statement to National, which will include a summary of all monthly commission payments made by STC during the prior calendar year. (d) At its sole cost, STC will provide National with a sufficient number of storage boxes containing a lock mechanism to be used for storing and securing Equipment in inventory. (e) With respect to each location identified on the Location Schedule, STC agrees to: i) Train National personnel in the use of the Equipment, STC's pre-packaged telephone kits, and STC's sales materials. STC will inform all National employees that they are not authorized to use Equipment without completing a rental agreement and paying all normal charges for such use. National employees will be billed directly by STC for any charges for such use; ii) Establish call restrictions and all rates to be charged for Equipment rental and metered airtime usage. STC has the right to offer special promotions or rate changes as it deems proper. Such promotions or rate changes will remain competitive with the industry. STC will provide National with point of sales materials that reflect such promotions or rate changes; iii) Be responsible for billing all charges to each customer for the rental of Equipment and the provision of service; iv) Be responsible for resolving all customer billing inquiries. In the event of an irreconcilable billing dispute between STC and a customer, STC will notify National. Upon such notification, National will have the right to intervene in the dispute and attempt to bring about a reasonable solution; v) Be responsible for administrative paperwork, battery charging, equipment maintenance, and inventories associated with the Equipment rental program during any hours of operation that an STC employee is staffing a particular National location. All repairs and maintenance of the Equipment will be at the expense of STC, except any repairs caused by the negligence of National and its employees or agents; and vi) Provide and produce collateral materials, including without limitation, point-of-sales materials. (f) STC shall allow National, upon reasonable prior notice and at the sole cost and expense of National, to inspect the books and records of STC during normal business hours, as such records pertain to National. If audit results reveal a discrepancy of more than three percent (3%), STC agrees to bear the expense of the audit. (g) STC shall have the sole responsibility for complying with any law, rule, order or regulation of the Federal Communications Commission or a state Public Utility or Service Commission having jurisdiction over STC's cellular phone rental business. 5. Compensation. (a) Unless otherwise designated on the Location Schedule, STC agrees to pay National a commission (the "Commission") in the amount of twenty-five percent (25%) of the monthly collected gross revenues received by STC for airtime usage and equipment rental charges in connection with Equipment rentals made at each National corporate location identified on the Location Schedule. For the purposes of determining Commissions hereunder, the term "gross revenues" shall exclude any state, federal or local taxes. Commissions shall be paid by STC monthly in arrears within thirty (30) days after the end of each month in which such compensation is earned. (b) In addition to the Commissions payable by STC pursuant to Paragraph 5(a), STC agrees to pay incentives to National employees as provided by the STC Commission Incentive Program attached hereto as Exhibit B and made a part hereof. (c) Notwithstanding anything contained in this Agreement to the contrary, STC agrees that the aggregate Commission payments made to National pursuant to Paragraph 5(a) during each full calendar year of this Agreement shall not be less than $500,000 ("Minimum Commission"), so long as STC has the exclusive right to provide Equipment rentals at all National corporate locations in the United States and subject to the following. Such Minimum Commission shall be prorated for any partial calendar year. Annually within ninety (90) days of the end of each calendar year, the parties shall reconcile the Minimum Commission with the actual Commission payments made during the calendar year. Any sum due National as a result of such reconciliation shall be paid within said ninety (90) days. (d) In the event that on or before August 15, 1996, National incorporates STC's Equipment rental program into National's electronic car rental reservation system, including, but not limited to the EDS rental counter system at each National corporate location, then STC will increase the Minimum Commission to $600,000. (e) STC agrees to pay National an annual bonus commission ("Annual Bonus") in accordance with the following schedule, based on the indicated percentage of total gross revenues received by STC during each contract year during the term for airtime usage and equipment rental charges in connection with Equipment rentals made at all National corporate locations identified on the Location Schedule and at all locations operated by a National Licensee, subject to the following. Contract year shall mean each successive period of one (1) year during term of this Agreement, ending on the same day and month, but not year, as the day and month on which the Effective Date occurs. Gross revenues shall exclude any state, federal or local taxes, refunds issued to customers, credits, bad debt incurred or the like. Total Gross Revenues Received During Percentage of Applicable Contract Year Gross Revenues $2,500,000 - $3,249,999.99 1% $3,250,000 - $3,749,999.99 2% $3,750,000 - $4,249,999.99 3% $4,250,000 - $4,749,999.99 4% $4,750,000 and greater 5% The Annual Bonus shall be payable within ninety (90) days of the end of each contract year during the term of this Agreement. 6. Indemnification. (a) National shall defend, indemnify and hold STC and its officers, directors, employees and agents harmless from and against all claims, damages and liabilities arising from National's negligence or other wrongful acts or omissions arising in any way out of this Agreement or National's performance hereunder. (b) STC shall defend, indemnify and hold National and its officers, directors, employees and agents harmless from and against all claims, damages and liabilities arising from STC's negligence or other wrongful acts or omissions arising in any way out of this Agreement or STC's performance hereunder. (c) To induce National to provide the credit card information contained in rental profiles, STC agrees to defend, indemnify and hold National harmless from and against any and all claims, demands or liabilities of whatever kind and nature, imposed on, incurred by or asserted against National in any way caused by or proximately relating to or arising out of any use or misuse of any customer credit card information by STC. This indemnity is in addition to and not in substitution of any other indemnity in this Agreement. 7. Insurance. STC shall obtain and provide evidence of coverage of insurance satisfactory to National including general comprehensive liability insurance of One Million Dollars ($1,000,000) on which National shall be named as additional insured. STC shall carry all other insurance required by the states in which STC does business, including worker's compensation. 8. Risk of Loss. (a) National acknowledges that all Equipment provided to it in connection with the performance of this Agreement is the personal property of STC. National shall be responsible for the safekeeping of all Equipment delivered to it by STC and shall bear the risk of loss or damage to, or theft of, such Equipment. However, STC shall bear the risk of loss or damage to, or theft of, the Equipment in the possession of a customer, provided that such Equipment left the possession of a National employee pursuant to a rental agreement signed by a customer and in accordance with STC's instructions, policies and procedures, as provided to National by STC from time to time (the "Procedures"). (b) National understands that in the event of loss or damage to, or theft of, Equipment (other than Equipment that left the possession of National in accordance with the Procedures), National shall be responsible for the replacement cost of the Equipment and for all charges attributable to the use of the Equipment until such loss or theft has been reported to STC. In the event that National incurs any payment obligation to STC for lost, damaged or stolen Equipment, then STC shall have the right to withhold such amounts from any commissions owed to National hereunder. STC agrees to include an explanation in its monthly commission report to National for any amounts withheld from commissions owed to National. 9. Default. In the event either party fails to perform any of its obligations under this Agreement and such failure continues for more than thirty (30) days following written notice of such default, then the non-defaulting party shall have the right to terminate this Agreement, without limiting any other remedies available at law or in equity. However, if such breach cannot be cured within said thirty (30) day period, then, if the breaching party has commenced to cure within such period and diligently pursues the cure, such party shall not be in default hereunder as long as it continues to diligently pursue such cure, but in no event for a period in excess of ninety (90) days from the initial notice date. 10. Confidentiality. Each party shall maintain the confidentiality of, and shall not disclose to any third party, any confidential or proprietary information concerning the other party, including, without limitation, customer lists and financial information. This Paragraph shall remain in effect for a period of two (2) years following the termination of this Agreement. 11. Trademarks. Neither party shall use any trademarks or tradenames of the other party in any manner, except as expressly authorized by the other party. Upon termination of this Agreement, National shall return to STC all marketing and sales materials then in the possession of National. 12. Relationship of the Parties. (a) STC shall at all times hereunder be deemed to be an independent contractor of National. Nothing in this Agreement is intended to constitute either party as a joint venturer, partner, agent, dealer, franchisee or employee of the other for any purpose whatsoever. (b) National's employees will not be or be deemed to be STC employees or joint employees. National assumes full responsibility for the acts of its employees and for their supervision, daily direction and control. STC will not be responsible for workers compensation premiums, disability benefits, withholding taxes, social security, unemployment insurance or any other taxes or benefits of National or National's employees. (c) Neither party shall have any authority to enter into or bind the other party in contract, nor make any unauthorized representations or warranties concerning the other party's products or services. 13. Notice. All notices required or permitted to be given hereunder shall be deemed to have been given when deposited in the mail (certified and postage prepaid) or delivered in hand to the applicable address set forth below. Either party may change its notice address by notifying the other in writing. If to STC: Shared Technologies Cellular, Inc. 100 Great Meadow Road Suite 104 Wethersfield, CT 06109 Attn: Legal Department If to National: National Car Rental System, Inc. World Headquarters 7700 France Avenue South Minneapolis, MN 55435 Attn: Properties Legal Department Mary F. Zeise, Legal Assistant 14. Limitation of Liability. Notwithstanding any other provision of this Agreement, neither party shall be liable to the other, either directly or through operation of any indemnification or hold harmless provision of this Agreement, for any consequential (including lost profits), incidental, indirect, special or punitive damages arising in any way out of this Agreement. 15. Most Favored Nations. As part of the inducement to National for this Agreement, STC represents and agrees that, as of the Effective Date, STC will not provide portable cellular rental services to any car rental firm on terms more favorable to such firm than those being granted to National under this Agreement. 16. General. (a) Each party hereto represents and warrants to the other that this Agreement will not conflict with or violate any prior commitment, agreement or understanding that it has with any third party. (b) This agreement shall be governed by the laws of the State of Connecticut. However, any dispute arising out of this Agreement which solely effects the operation of the Equipment rental program at a particular location identified on the Location Schedule shall be resolved in accordance with the applicable laws of the state governing such location. (c) This Agreement 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. No modification or addition to this Agreement shall be valid unless in writing signed by the parties hereto. (d) 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. (e) 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. (f) 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. (g) The parties acknowledge that they have each read this Agreement in its entirety, understand it and agree to be bound by the terms and conditions contained herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. Shared Technologies National Car Rental Systems, Cellular, Inc. Inc. By:_________________________ By:_________________________ Jon Sorenson Jeffrey Panell Its:_________________________ Its: Executive Vice President Date:_________________________ Date:_________________________ (6/12/96) EXHIBIT A LOCATION SCHEDULE National Locations Albuquerque, NM Atlanta, GA Baltimore, MD Birmingham** Boston, MA Buffalo, NY Burbank, CA Charleston, SC Charlotte, NC Chicago, IL Chicago, O'Hare Chicago, Midway Cincinnati, OH Cleveland, OH Dallas, Love Dallas, North Dallas, South Dayton, OH Denver, CO Detroit, MI Fresno, CA Ft. Lauderdale, FL Ft. Meyers, FL Ft. Walton Beach, FL Grand Rapids, MI Greensboro, NC Gulfport-Biloxi** Harlingen** Hartford, CT Honolulu, HI Houston, Hobby Houston, IAH Huntsville, AL** Jacksonville, FL Kansas City, MO Las Vegas, NV Long Beach, CA Los Angeles, LAX Louisville, KY Manhattan, NY McAllen** Memphis, TN** Miami, FL Milwaukee, WI Minneapolis, MN Mobile, AL** Monterey, CA Naples, FL Nashville, TN** New Orleans, LA New York, JFK New York, LaGuardia Newark, NJ Newport/Orange County, CA Oakland, CA Ontario, CA Orlando, FL* Panama City, FL Pensacola, FL Philadelphia, PA Phoenix, AZ Pittsburgh, PA Portland, OR Raleigh, NC Reno, NV** Richmond, VA Rochester, NY Sacramento, CA San Diego, CA San Francisco, DT San Francisco, SFO San Jose, CA Savannah, GA Seattle, WA Syracuse, NY Tallahassee, FL Tulsa, OK Washington DC Washington, DC National Washington, DC Dulles West Palm Beach, FL All applicable corporate locations where both parties mutually agree. Shared Technologies Cellular, Inc. National Car Rental System, Inc. By: By: Its: Its: Date: Date: *The commission rate for this location shall be thirty percent (30%) for the purposes of calculating commissions payable by STC pursuant to Paragraph 5(a) of the Agreement. **On the Effective Date of this Agreement, National has a third party vendor providing cellular phone rentals at this location. Pursuant to Section 2(a) of the Agreement, National has sixty (60) days from the Effective Date to wind down and terminate its cellular phone rental program with such third party vendor. Shared Technologies National Car Rental Systems, Cellular, Inc. Inc. By:_________________________ By:_________________________ Its:_________________________ Its:_________________________ Date:_________________________ Date:_________________________ Exhibit B STC Incentive Program 1. STC agrees to pay a one-time commission in the amount of Four Dollars ($4) for each Equipment rental order that is procured solely by the efforts of a National car rental agent employee, subject to the following. Such one-time commission will be increased by One Dollar ($1) for each customer who accepts STC's theft protection pursuant to an Equipment rental order procured by a National car rental agent employee. The basis for the one- time commission payable to an individual National employee will be the receipt by STC of an Equipment rental application completed by the National car rental agent employee. Such application must be signed by the customer and must designate the National location and the National car rental agent employee as the source of the sale. Generally, the one-time commission will be paid by STC to individual National car rental employees on a weekly basis. STC will issue individual National car rental employees a Form 1099 in accordance with applicable IRS requirements. 2. Notwithstanding anything contained in Paragraph 1 above, if a National bus driver employee assists a National car rental agent employee in procuring an Equipment rental order, then the one- time commission payable by STC pursuant to Paragraph 1 above shall be shared on an equal basis between such National employees. Exhibit 10.5 SHARED TECHNOLOGIES CELLULAR, INC. 1994 DIRECTOR OPTION PLAN 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 50,000 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"). 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, including a director serving in that capacity on the effective date of the Plan, will automatically receive an option to purchase 2,000 thousand shares after having served, from and after September 20, 1994, one (1) year as a director. Thereafter, each eligible director will automatically receive an option to purchase an additional 2,000 shares upon commencement of each subsequent year of service as an eligible director. All options granted under the Plan will be immediately exercisable after six (6) months from the date of grant. (b) Option Exercise Price. The option exercise price per share for each option granted under the Plan shall be equal: (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) 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. 6. ASSIGNMENTS 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 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 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. Exhibit 10.13 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made as of October 1, 1996 by and between SHARED TECHNOLOGIES CELLULAR, INC., a Delaware corporation (the "Company") and JON F. SORENSON ("Employee"). WITNESSETH WHEREAS, the Company desires to obtain the services of Employee in accordance with the terms, conditions and provisions of the Agreement; WHEREAS, Employee desires to provide services to the Company in accordance with the terms, conditions and provisions of the Agreement; and WHEREAS, each of the Company and Employee agree that the terms, conditions and provisions of the Agreement are fair and reasonable and are necessary to protect the legitimate business interests of each other. NOW THEREFORE, the parties hereto agree as follows: 1. Employment. The Company hereby employs Employee, and Employee hereby accepts such employment and agrees to perform his duties and responsibilities hereunder, in accordance with the terms and conditions hereinafter set forth. 2. Employment Term. The employment term of the Agreement shall commence as of October 1, 1996 (the "Effective Date") and shall expire September 30, 1997, unless earlier terminated in accordance with Section 9 of the Agreement; provided that the Agreement will renew automatically for additional consecutive one-year periods, and otherwise upon the same terms and conditions hereof, unless either party hereto shall have notified the other party in writing at least 60 days prior to the end of the initial one-year term or any subsequent one-year term that the Agreement will be terminated effective as of the end of such term. The initial term of the Agreement, and any subsequent term hereof, through the termination of the Agreement in accordance with the provisions hereof, shall hereinafter be referred to as the "Employment Term". 3. Duties and Responsibilities. During the Employment Term, Employee shall be employed as President of the Company's Rental Division, and Employee shall perform those duties normally associated with that position, subject to such policies, guidelines and directions consistent therewith as may be established from time to time by the Chief Executive Officer or the Board of Directors of the Company. Without limiting the generality of the foregoing, Employee's duties and responsibilities hereunder shall include management responsibility for the operations of the Company's Rental Division, subject to the direction of the Chief Executive Officer of the Company, to whom Employee shall report. The Company shall propose to its Board of Directors that the Employee be appointed to serve as an officer of the Company in his capacity as President - Rental Division. 4. Extent of Services. During the Employment Term, Employee will utilize a hands-on management approach and will devote his full time, attention and energies to the business of the Company, and will perform and discharge his duties and responsibilities under Section 3 hereof faithfully, diligently, to the best of his efforts and abilities and in a manner consistent with any and all policies, guidelines and directions, consistent with those duties normally associated with the Employee's position, as may be established from time to time by the Chief Executive Officer of the Company. Except as provided in Section 8 hereof, the foregoing shall not be construed as preventing Employee from making investments in other businesses or enterprises not competitive with the Company (as defined in Section 8(a) hereof), provided that Employee agrees not to become engaged in any other business activity which may interfere with his ability to discharge his duties and responsibilities hereunder. Employee further agrees not to work either on a part time or independent contracting basis for any other business or enterprise without the prior written consent of the Company as may be provided in its sole discretion. 5. Compensation, Benefits and Expenses. (a) Salary. The Company shall pay to Employee a salary at the rate of Ninety-five Thousand Dollars ($95,000) per annum, less deduction and withholding required by applicable law, payable in arrears in accordance with the Company's regular payroll schedule. The parties intend to review and reevaluate such salary rate at year end. (b) Bonuses. In addition to the salary set forth in Section 5(a) hereof, during the Employment Term, Employee shall be eligible to receive the following bonuses in accordance with the terms hereinafter set forth: (i) Post-financing Bonus. The Company is currently in discussions to secure debt and/or equity financing. Upon funding of a minimum of $1,000,000 of such financing, the Company shall pay to Employee a bonus of $2,500; (ii) Performance Bonus. For each fiscal year in which this Agreement is in effect, the Company's Chief Executive Officer shall establish, in writing, performance objectives for Employee for the purpose of enabling Employee to earn a year-end performance-based bonus. (iii) Discretionary Bonus. Employee also shall be entitled to receive a year-end discretionary bonus, subject to the discretion of the Company's Chief Executive Officer. (iv) The foregoing notwithstanding, if the Employment Term should terminate during any fiscal year, in lieu of the payment of any performance-based bonus for said fiscal year, the Company shall pay to the Employee such bonus on a pro rata basis (herein referred to as a "Final Performance Bonus"), such that the amount of the Final Performance Bonus shall equal the amount of the performance-based bonus that would otherwise have been payable multiplied by a fraction, the numerator of which is the number of days in the applicable fiscal year that this Agreement was in effect and the denominator of which is 365. The foregoing notwithstanding, in the event that the Employee voluntarily leaves the employment of the Company prior to the expiration of the Employment Term, or is terminated for Cause, as defined in Section 9 hereof, the Company shall not be required to pay to Employee, and Employee shall not be entitled to receive, any Final Performance Bonus. All bonuses payments shall be subject to withholding and deductions as required by applicable law. (c) Automobile. In recognition of Employee's need for an automobile for business purposes commensurate with Employee's position, the Company shall pay to Employee during the Employment Term a car allowance of Four Hundred Dollars ($400) per month, adjusted as hereinafter set forth, and payable in accordance with the customary practices of the Company in effect from time to time. In addition, the Company shall maintain at its expense a insurance coverage for such automobile, in such amounts as reasonably determined by the Company. Employee may participate in any automobile lease program established by the Company. (d) Expenses. During the Employment Term, the Company shall reimburse Employee monthly for his travel and other reasonable business expenses incurred in connection with his services under this Agreement during the preceding month upon submission of written receipts substantiating such expenses and otherwise in accordance with the Company's expense reimbursement policies. (e) Vacation and Personal Days. During the Employment Term, Employee shall be entitled to paid time off for vacation and personal days in accordance with the Company's vacation policy. (f) Other Employee Benefits. During the Employment Term, the Company shall provide to Employee such fringe benefits, including without limitation paid sick leave, paid holidays, participation in health, dental, disability and life insurance plans, and other employee benefit plans which may be regularly maintained by the Company for its employees, in accordance with the policies of the Company in effect from time to time, it being acknowledged that the maintenance of such plans shall be in the Company's sole discretion. In addition, Employee shall receive supplemental disability coverage and $500,000 of term life insurance during the term hereof. 6. Confidential Information. (a) Employee acknowledges and agrees that all customer, supplier and distributor lists; trade secrets; plans; manufacturing techniques; sales, marketing and expansion strategies; technology and processes; products; services; methods of production; product development activities; procurement and sales activities and procedures; promotion and pricing techniques; and credit, financial and other proprietary data and information of the Company (collectively, "Confidential Information") are valuable, special and unique assets of the Company. Employee acknowledges his access to and knowledge of the Confidential Information is essential to the performance of his duties for the Company. In light of the competitive nature of the industry in which the business of the Company is conducted, Employee agrees that all knowledge and information about the Confidential Information known or in the future obtained by Employee in connection with the performance of the duties of his employment with the Company will be considered Confidential Information. In recognition of this, Employee represents and agrees that except as specifically authorized in writing by the Chief Executive Officer of the Company or in connection with the performance of the duties of his employment with the Company, Employee will not either during or after the Employment Term (i) disclose any Confidential Information to any person or entity for any purpose whatsoever, or (ii) make use of any Confidential Information for his own purposes or for the benefit of any other person or entity, other than the Company. (b) Employee acknowledges and agrees that all manuals, drawings, blueprints, letters, notes, notebooks, reports, books, procedures, forms, documents, records or papers, or copies thereof, pertaining to the operations or business of the Company made or received by Employee or made known to him in any way in connection with his employment and any other Confidential Information are and will be the exclusive property of the Company. Employee agrees not to copy or remove any of the above from the premises and custody of the Company, or disclose the contents thereof to any other person or entity, or make use thereof for his own purposes or for the benefit of any other person or entity, except as specifically authorized in writing by the Chief Executive Officer of the Company or in connection with the performance of his duties under the Agreement. Employee acknowledges that all such papers and records will at all times be subject to the control of the Company, and Employee agrees to surrender and return the same to the Company upon request of the Company, and in any event will surrender and return such no later than the termination of the Employment Term, whether voluntary or involuntary. The Company may notify anyone employing Employee at any time of the provision of the Agreement. The obligations of this Section 6 shall survive the termination of the Agreement. 7. Inventions and Discoveries. Employee hereby assigns, transfers and conveys to the Company all of the Employee's right, title and interest to, and shall promptly disclose to the Chief Executive Officer of the Company, all ideas, inventions, discoveries or improvements (whether or not patentable) conceived or developed solely, or jointly with others by Employee during the Employment Term and for six (6) months thereafter (a) which relate directly or indirectly to the business of the Company as conducted at any time during the Employment Term; (b) which relate to the actual or anticipated research or development activities of the Company; (c) which result from any work performed or managed by Employee for the Company; or (d) for which equipment, supplies, facilities or Confidential Information of the Company was used (collectively "Discoveries"). Upon the request of the Company, Employee shall execute and deliver to the Company any and all instruments, documents and papers, give evidence and do any and all other acts which the Company deems necessary or desirable to document such assignment transfer and conveyance or to enable the Company to file and prosecute applications for and to acquire, maintain and enforce any and all patents, trademark registrations or copyrights under United States or foreign law with respect to the Discoveries or to obtain any extension, validation, reissue, continuance or renewal of any such patent, trademark or copyright. The Company will be responsible for the preparation of any such instruments, documents and papers and shall reimburse Employee for all reasonable expenses incurred by him in compliance with the provisions of this Section 7; provided, Employee shall not be entitled to any further compensation or consideration for performance of his obligations under this Section 7. The obligations of Employee under this Section 7 shall survive the termination of the Agreement. 8. Restrictive Covenant. During the Employment Term, and if Employee leaves the employ of the Company or otherwise terminates the Agreement prior to the termination of the Employment Term, or is terminated for Cause, as defined in Section 9, or notifies Employer in accordance with Section 2 of this Agreement of his decision not to renew this Agreement, for a period of one (1) year after the termination or expiration thereof, Employee shall not, directly or indirectly, either as an individual or as an employee, partner, officer, owner, director, shareholder, advisor or consultant, or in any other capacity whatsoever, of any person, firm, corporation or partnership: (a) conduct or assist others in conducting or be involved or interested in any manner in any business relating to the rental of cellular telephones; (b) recruit, solicit or hire, or assist any other person or party in recruiting, soliciting or hiring any Employee (as hereinafter defined), or induce or attempt to induce or assist any other person or entity in inducing or attempting to induce any Employee to terminate or alter his relationship with the Company (collectively "Recruiting Activity"). For the purposes of this Section 8(b), the term "Employee" shall mean any person who is, or within the twelve (12) month period preceding the date of any such Recruiting Activity was, an employee or consultant of the Company; or (c) solicit any Customer (as hereinafter defined), or induce, attempt to induce or assist any other person or entity in inducing or attempting to induce any Customer to discontinue or alter its relationship with the Company (collectively "Solicitation Activity"). For the purposes of this Section 8(c), the term "Customer" shall mean any individual, firm, partnership, corporation or other entity which is, or within the twelve (12) month period immediately preceding the date of such Solicitation Activity was, a customer, distributor, dealer or independent salesperson of the Company. It is understood and agreed that the business(es) of the Company are or will be international in scope, and that geographical limitations on the covenants set forth in this Section 8 are therefore not appropriate. It is expressly understood and agreed that the scope of each of the covenants contained in this Section 8 are reasonable as to time, affected persons, scope of activities and geographic area and are necessary to protect the legitimate business interests of the Company. It is further agreed that such covenants will be regarded as divisible and if any such covenant is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or persons or in too broad a geographic area, it shall be interpreted to extend over the maximum period of time, range of activities or persons, or geographic area as to which it may be enforceable. The provisions of this Section 8 shall survive the termination of the Agreement. 9. Termination. (a) This Agreement shall terminate if Employee is discharged by the Company for Cause (as hereinafter defined). For the purposes of this Section 9(a), the term "Cause" shall mean: (i) the willful and continued failure by Employee after written notice from his superior to substantially perform his duties hereunder, (ii) any act of dishonesty by Employee involving or affecting the Company, (iii) any misappropriation by Employee of any asset of the Company, (iv) the intentional engaging by Employee in conduct which is materially injurious to the business or reputation of the Company, monetarily or otherwise, (v) gross negligence or recklessness by Empoloyee in the performance of his duties huereunder, (vi) the conviction or indictment of Employee of a crime, (vii) any breach by Employee of his obligations under Sections 6, 7 or 8 hereof, (viii) the engagement in conduct which involves a significant conflict of interest between Employee and the Company, unless such conduct has been disclosed to and approved in writing by the Company's Chairman or Chief Executive Officer, (ix) abuse of alcohol or other substances so as to interfere with the performance of Emoployee's duties hereunder or, (x) the material violation of any Company policy by Employee. (b) The Company will give prior written notice to Employee of such discharge specifying the effective date of the discharge and the cause of the discharge. (c) This Agreement shall terminate upon the death or, at the option of the Company, upon the Disability (as hereinafter defined) of Employee. For the purposes of this Section 9, the term "Disability" shall mean that, as a result of Employee's incapacity due to physical or mental illness or disability, Employee is unable to perform his duties under this Agreement for sixty (60) consecutive days or sixty (60) days in the aggregate in any one hundred twenty (120) day period. (d) Upon the termination of this Agreement, all rights and obligations of the parties under the Agreement, except those rights and obligations set forth in Sections 6, 7 and 8 hereof, shall terminate, except as otherwise required by law. The provisions of Sections 6, 7 and 8 hereof shall survive any termination of the Agreement, and Employee acknowledges that the Agreement and the compensation and benefits payable hereunder are fair and adequate consideration, in part, for the covenants of Employee under Sections 6, 7 and 8 and the survival of such covenants after the termination of the Agreement. (e) In the event of termination of this Agreement by the Company without Cause, Employee shall receive severance pay in an amount equal to six (6) months' salary, payable in lump sum within 15 days of the effective date of such termination. 10. Stock Options. The Company agrees to cause to be issued to Employee stock options (the "Options") to purchase 20,000 shares of the common stock of the Company, $.01 par value. Such Options shall be issued as of October 1, 1996 and shall have an exercise price of $2.75 per share. The Options shall vest at the rate of one-third (1/3) per year of employment. In the event of termination of this Agreement, such Options shall be exercisable for a period of thirty (30) days following the date of termination of this Agreement, after which they shall expire. Absent such termination, the Options shall have a term of five (5) years from the issuance date thereof. The exercise price shall be due and payable in cash to the Company upon the exercise of the Options, in part or in whole, which shall be exercised if at all by written notice delivered to the Company, which shall indicate the number of shares to be purchased. 11. Injunctive Relief. Employee acknowledges that a remedy at law for any breach or attempted breach of Sections 6, 7 and 8 of this Agreement would be inadequate, and agrees that the Company will be entitled to specific performance and injunctive and other equitable relief in case of any breach or attempted breach and agrees not to use as a defense that any party has an adequate remedy at law. Sections 6,7 and 8 of this Agreement shall be enforceable in a court of equity, or other tribunal with jurisdiction, by a decree of specific performance, and appropriate injunctive relief may be applied for and granted in connection herewith. Such remedy shall not be exclusive and shall be in addition to any other remedies now or hereafter existing at law or in equity, by statute or otherwise. No delay or omission in exercising any right or remedy set forth in this Agreement shall operate as a waiver thereof or of any right or remedy and no single or partial exercise thereof shall preclude any other or further exercise thereof or the exercise of any other right or remedy. 12. Compliance With Other Agreements. Employee represents and warrants that the execution and delivery of this Agreement and the performance of the obligations hereunder have been duly authorized by all appropriate action, and will not conflict with, result either in the breach of any provisions or the termination of, or constitute a default under, any agreements to which he is or may be bound. Employee agrees that he is not presently bound by, nor will he enter into any agreement, either written or oral, in conflict with this Agreement. 13. Binding Effect. This Agreement shall inure to the benefit of, and shall be binding upon, each of the parties hereto and his or its respective executors, administrators, heirs, personal representatives, successors and assigns; provided that (a) Employee may not assign or in any way transfer any of its rights hereunder without the prior written consent of the Company; provided, that in the event of such assignment, Employee, together with such assignee, shall remain legally bound and liable, in accordance with the terms of the Agreement, to the same extent and with the same effect as if such assignment had not been made, and (b) the Company shall be permitted to assign or otherwise transfer any or all of its rights hereunder to any affiliate or to a successor to its business. 14. Severability. If any provision of this Agreement is declared or found to be illegal, unenforceable or void, in whole or in part, then both parties will be relieved of all obligations arising under such provision, but only to the extent it is illegal, unenforceable or void. The intent and agreement of the parties to the Agreement is that this Agreement will be deemed amended by modifying any such illegal, unenforceable or void provision to the extent necessary to make it legal and enforceable while preserving its intent, or if such is not possible, by substituting therefor another provision that is legal and enforceable and achieves the same objectives. Notwithstanding the foregoing, if the remainder of this Agreement will not be affected by such declaration or finding and is capable of substantial performance, then each provision not so affected will be enforced to the extent permitted by law. 15. Waiver. Any delay or omission by either party to this Agreement in exercising any right or power under this Agreement will not impair such right or power or be construed as a waiver thereof. A waiver by either party to this Agreement of any of the covenants to be performed by the other or any breach thereof will not be construed to be a waiver of any succeeding breach thereof or of any other covenant contained in this Agreement. All remedies provided for in this Agreement will be cumulative and in addition to and not in lieu of any other remedies available to either party, in equity, or otherwise. 16. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of Connecticut without giving effect to any principle of conflict-of-laws that would require the application of the law of any other jurisdiction. 17. Notices. All notices required or permitted hereunder shall be delivered by hand or sent registered or certified mail, return receipt requested to the parties as follows: If to the Company: Shared Technologies Cellular, Inc. 100 Great Meadow Road Wethersfield, CT 06109 Attn: Legal Department If to Employee: Jon F. Sorenson 439 Round Hill Road Fairfield, CT 06430 18. Entire Agreement. This Agreement constitutes the entire agreement between the parties to this Agreement with respect to the subject matter of this Agreement and there are no understandings or agreements relative to this Agreement which are not fully expressed in this Agreement. All prior agreements with respect to the subject matter of this Agreement are expressly superseded by this Agreement. No amendment to or waiver or discharge of this Agreement will be valid unless in writing and signed by each of the parties hereto. 19. Section Headings and Recitals. The section headings and recitals in this Agreement are for reference only and shall not limit or control the meaning or interpretation of this Agreement. 20. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 21. Gender. Words of number or gender may be read as singular or plural, or masculine, feminine or neuter, as required by the context. IN WITNESS WHEREOF, the parties to this Agreement have executed and delivered the Agreement on the date first above written. SHARED TECHNOLOGIES CELLULAR, INC.: By:______________________________ Anthony D. Autorino Its: Chairman and Chief Executive Officer EMPLOYEE: _________________________________ Jon F. Sorenson Exhibit 10.15 SHARED TECHNOLOGIES CELLULAR, INC. SAVINGS AND RETIREMENT PLAN EFFECTIVE AS OF APRIL 1, 1996 WHEREAS, Shared Technologies Cellular, Inc. (hereinafter sometimes referred to as the "Company") desires to adopt the Shared Technologies Cellular, Inc. Savings and Retirement Plan (hereinafter referred to as the "Plan"), effective as of April 1, 1996, which is to be funded through the medium of a Trust Fund; and WHEREAS, the Company desires to adopt the Plan in compliance with the Tax Reform Act of 1986, the Omnibus Reconciliation Acts of 1986 and 1987, the Revenue Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, the Omnibus Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of 1993 and subsequent legislation and regulations; NOW, THEREFORE, the Company hereby adopts the Plan, effective April 1, 1996, with such Plan to be known as the Shared Technologies Cellular, Inc. Savings and Retirement Plan as follows: TABLE OF CONTENTS ARTICLE PAGE I DEFINITIONS 1 II PARTICIPATION AND ENTRY DATE 17 III CONTRIBUTIONS 19 IV ADMINISTRATION OF FUNDS 37 V RETIREMENT BENEFITS 44 VI DEATH BENEFITS 47 VII VESTING AND SEPARATION FROM SERVICE 49 VIII WITHDRAWALS AND LOANS 51 IX ADMINISTRATION 56 X AMENDMENT, TERMINATION AND MERGERS 59 XI MISCELLANEOUS PROVISIONS 63 XII TOP-HEAVY PROVISIONS 66 ARTICLE I DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS DEFINITIONS 1.01 "Account" shall mean with respect to a Participant all of the various accounts maintained to define such Participant's proportionate interest in the Trust Fund as follows: (a) A "Salary Deferral Contribution Account" shall be maintained for each Participant which includes the Salary Deferral Contributions made on behalf of the Participant, and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (b) An "After-Tax Contribution Account" shall be maintained for each Participant which includes the Participant's After-Tax Contributions, and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (c) A "Matching Employer Contribution Account" shall be maintained for each Participant which reflects the Matching Employer Contributions allocated to the Participant and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (d) A "Discretionary Employer Contribution Account" shall be maintained for each Participant which reflects the Discretionary Employer Contributions allocated to the Participant and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (e) A "Rollover Contribution Account" shall be maintained for each Participant which reflects any rollover contribution made in accordance with Section 3.12 and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. 1.02 "Affiliated Organization" shall mean (i) any corporation on or after the date it becomes a member of a controlled group of corporations which includes the Company, as determined under the provisions of Section 414(b) of the Code, (ii) any trade or business, whether or not incorporated, on or after it comes under common control with the Company, as determined under Section 414(c) of the Code, (iii) any organization which is an affiliated service organization within the meaning of Section 414(m) of the Code, and (iv) any other entity required to be aggregated pursuant to regulations under Section 414(o) of the Code. 1.03 "Age" or "age" shall mean the chronological age attained by the Participant at his most recent birthday or as of such other date of reference as set forth in this Plan. 1.04 "Board of Directors" shall mean the board of directors of the Company. 1.05 "Break-in-Service" shall mean a Plan Year during which an Employee has not completed more than five hundred (500) Hours of Service. 1.06 "Code" means the Internal Revenue Code of 1986 as the same presently exists, and as it may hereafter be amended or clarified by regulations, rulings, notices or other publications of the Internal Revenue Service having legal effect. 1.07 "Compensation" shall mean, for any applicable period, the total earnings of a Participant including bonuses, overtime, commissions and any Salary Deferral Contribution made on behalf of the Participant under this Plan, and any contributions made by salary reduction to a plan established in accordance with Section 125 or 129 of the Code. Compensation shall exclude severance pay, reimbursements for expenses and any other fringe benefits. Compensation shall not exceed $200,000, or such other maximum amount as set forth under Section 401(a)(17) of the Code, adjusted at the same time and in the same manner as under Section 415(d) of the Code, except that the dollar increase in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effected on January 1, 1990. If Compensation is determined over a Plan Year that contains fewer than 12 calendar months, the annual compensation limit is an amount equal to the annual compensation limit for the calendar year in which the compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost-of-living in accordance with Section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. Any reference in this Plan to the limitation under Section 401(a)(17) of the Code shall mean OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. In determining the Compensation of a Participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year. 1.08 "Contribution" shall mean any or all of the various types of contributions made under the Plan by Participants or the Employer, as described below: (a) "Salary Deferral Contribution" shall mean that portion of the Contribution made to the Plan on behalf of a Participant by his Employer through a salary reduction agreement, as described under Section 3.01. (b) "After-Tax Contribution" shall mean that portion of a Participant's Contribution to the Plan which he elects to make independent of a salary reduction agreement, as described under Section 3.02. (c) "Matching Employer Contribution" shall mean a Contribution made by an Employer based on a Participant's After- Tax Contribution or Salary Deferral Contribution as described under Section 3.04. (d) "Discretionary Employer Contribution" shall mean a Contribution made by an Employer which is unrelated to any Participant Contributions, as described under Section 3.05. (e) "Qualified Non-elective Contribution" shall mean a Contribution made by an Employer (other than those listed above) in order that the Plan will satisfy the requirements of Section 3.06 for a Plan Year. The allocation may be made to all Active Participants who are not Highly-Paid Employees or, with respect to satisfaction of the ADP test, only to those Active Participants who have made Salary Deferral Contributions for a Plan Year and who are not Highly-Paid Employees. Such Contributions shall be treated as Salary Deferral Contributions for all purposes under the Plan. 1.09 "Contribution Percentage" shall mean the percentage determined by dividing (i) the sum of the Salary Deferral Contribution, After-Tax Contribution, Matching Employer Contribution and any Qualified Non-elective Contribution used to satisfy the non-discrimination requirements of Section 3.06 or any combination of such Contributions, whichever is applicable, made by or on behalf of a Participant for the applicable period by (ii) his compensation as defined under Code Section 414(s). 'ADP' shall sometimes be used herein to refer to the average Contribution Percentage with respect to Salary Deferral Contributions or amounts treated as Salary Deferral Contributions. 'ACP' shall sometimes be used herein to refer to the average Contribution Percentage with respect to Matching Employer Contributions and After-Tax Contributions, if applicable. 1.10 "Date of Employment" shall mean the first date on which an Employee is credited with an Hour of Service for the Employer. 1.11 "Disability" shall mean a physical or mental condition of such severity and probable prolonged duration as to cause the Participant to be unable to continue his duties as an Employee. The existence of any Disability shall be determined by a physician chosen by the Plan Administrator, based on medical evidence of a physical or mental impairment that can be expected to last more than 12 months or result in death, or on other uniform and non-discriminatory criteria as established by the Plan Administrator. Notwithstanding the foregoing, eligibility for Social Security Disability benefits or for long term disability benefits under an insured plan sponsored by the Employer shall be deemed conclusive proof of disability. 1.12 "Effective Date" of this Plan shall mean April 1, 1996. 1.13 "Eligible Employee" shall mean any Employee who has completed three (3) months of service and has attained age twenty-one (21), excluding any person whose terms and conditions of employment are determined by collective bargaining with a third party and with respect to whom inclusion in this Plan has not been provided for in the collective bargaining agreement setting forth those terms and conditions of employment. The term "Eligible Employee" also shall not include any independent contractor, leased employee, or a non-resident alien who receives no United States source income. For purposes of this Section 1.13, an Eligible Employee will be deemed to have completed three (3) months of service if he is in the employ of the Employer at any time three (3) months after his Date of Employment. 1.14 "Employee" shall mean any employee of the Employer or an Affiliated Organization, including a leased employee as defined under Section 414(n) of the Code. The term "leased employee" means any person (other than an employee of the recipient organization) who pursuant to an agreement between the recipient organization and any other person ("leasing organization") has performed services for the recipient organization (including related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for at least one (1) year, and such services are of a type historically performed by employees in the business field of the recipient organization. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A leased employee shall not be considered an employee of the recipient organization if: (i) such employee is covered by a money purchase pension plan providing immediate participation, full and immediate vesting and a nonintegrated employer contribution rate of at least ten (10%) percent of compensation (as defined in Section 415(c)(3) of the Code, but including amounts contributed by the employer pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(a)(8), Section 401(h) or Section 403(b) of the Code). Also, the leased employees must not constitute more than twenty percent (20%) of the recipient organization's nonhighly compensated workforce. 1.15 "Employer" shall mean Shared Technologies Cellular, Inc. (hereinafter sometimes referred to as the "Company"), and its subsidiaries and affiliates and any successor entities thereto which adopt this Plan and join in the corresponding Trust. The term "Employer" shall also include any other entity which, with the consent of the Plan Administrator, adopts this Plan and joins in the corresponding Trust. The term "Employer" shall not include any subsidiary affiliate of the Company unless such subsidiary or affiliate is specifically designated as an Employer in this Plan or subsequently adopts this Plan and joins in the corresponding Trust. "Employer Securities" shall mean shares of common stock of Shared Technologies Cellular, Inc. traded on NASDAQ (Small Cap) under the symbol STCL. "Employer Securities" shall also mean shares of common stock of Shared Technology Fairchild Inc. traded on NASDAQ under the symbol STCH, which shall be liquidated and invested pursuant to Participant investment elections during 1997, in accordance with Article IV of the Plan. 1.16 "Entry Date" shall mean April 1, 1996, October 1, 1996 and each January 1st, April 1st, July 1st and October 1st after the Effective Date during which the Plan remains in effect. 1.17 "ERISA" means the Employee Retirement Income Security Act of 1974 (P.L. 93-406), including all amendments thereto. 1.18 "Fund" or "Trust Fund" shall mean all of the assets of the Plan held by the Trustees (or any nominees thereof) at any time under the Trust Agreement. 1.19 "Highly-Paid Employee" shall mean any Employee who during the current or preceding Plan Year (`determination year' and `look back year', respectively): (a) was at any time a 5% owner of the Employer or an Affiliated Organization; or (b) received compensation for such Plan Year in excess of $75,000 or such higher amount as provided under Section 414(q) of the Code, as adjusted at the same time and in the same manner as under Section 415(d) of the Code; or (c) received compensation for such Plan Year in excess of $50,000 or such higher amount as provided under Section 414(q) of the Code, as adjusted at the same time and in the same manner as under Section 415(d) of the Code, provided such compensation exceeded that of 80% of all Employees for the applicable Plan Year; or (d) was at any time an officer of the Employer or an Affiliated Organization, and received compensation for such Plan Year in excess of $45,000, as adjusted at the same time and in the same manner as under Section 415(d) of the Code (or, if higher, 50% of the amount in effect under Section 415(b)(1)(A) of the Code for such Plan Year). For each Plan Year for which a determination in accordance with the above paragraph is being made, any individual not described in subparagraph (b), (c) or (d) for the preceding Plan Year (without regard to this paragraph) shall not be treated as described in subparagraph (b), (c) or (d) for the current Plan Year unless such individual is among the one-hundred (100) highest paid Employees for the current Plan Year. In no event shall the number of officers taken into account under subparagraph (d) exceed the lesser of (i) fifty (50), and (ii) the greater of (A) three or (B) 10% of the total Employees. Furthermore, if no officer of the Employer or an Affiliated Organization is described in subparagraph (d) for a Plan Year, then the highest paid officer shall be treated as described in subparagraph (d) for such Plan Year. The term "Highly-Paid Employee" shall include any highly paid former employee who separated from service (or was deemed to have separated) prior to the determination year, performs no service for the Employer during the determination year, and was a Highly-Paid Employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. Effective January 1, 1997, this paragraph shall be null and void for all Plan Years commencing on and after January 1, 1997. If an Employee is, during a determination year or look- back year, a family member of either a five percent (5%) owner who is an active or former Employee or a Highly-Paid Employee who is one of the ten (10) most highly compensated Employees ranked on the basis of Compensation paid by the Employer during such year, then the family member and the five percent (5%) owner or top-ten Highly-Paid Employee shall be aggregated. In such case, the family member and five percent (5%) owner or top-ten Highly- Paid Employee shall be treated as a single Employee receiving compensation and plan contributions or benefits equal to the sum of such compensation and contributions or benefits of the family member and five percent owner or top-ten Highly-Paid Employee. For purposes of this Section, family member includes the spouse, lineal ascendants and descendants of the Employee or former Employee and the spouses of such lineal ascendants and descendants. The determination of who is a Highly-Paid Employee, including the determinations of the number and identity of Employees in the top-paid group, the top one hundred (100) Employees, the number of Employees treated as officers and the compensation that is considered, will be made in accordance with Section 414(q) of the Code. In determining the identity of Highly-Paid Employees for a determination year, the Company may make the calendar year election provided for in Answer 14(b) of Treasury Reg. Section 1.414(q)-IT. 1.20 "Hour of Service" shall mean the following: (a) An Hour of Service is each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer or an Affiliated Organization during the Plan Year. (b) An Hour of Service is each hour for which an Employee is paid, or entitled to payment, (either directly or indirectly), by the Employer or an Affiliated Organization on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), lay-off, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence: (i) No more than 501 Hours of Service shall be credited under this paragraph (b) to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single Plan Year) except as the following provisions may result in a credit of more than 501 Hours of Service: (1) If an Employee receives full pay during any authorized leave of absence, and he returns to work after such absence, he shall be credited with an Hour of Service for each hour for which he was paid. (2) If an Employee is on a paid sick leave, he shall receive an Hour of Service for each hour that he would have normally worked during such leave. (3) If an Employee is absent in military service, and he retained re-employment rights under the law, and he completed requirements under the law as to re-employment and was re-employed, he shall be credited with an Hour of Service for each hour that he would have normally worked had he not entered military service solely for purposes of determining his vested rights; and (4) If an Employee transfers to an employment status which is ineligible to participate in this Plan, he will continue to be credited with Hours of Service as described above, for purposes of determining his vested rights. However, he will receive no Hours of Service for purposes of determining his right to receive a Contribution to his Account after the date of his change in employment status. ( ii) An hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed, is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workers compensation, unemployment compensation or disability insurance laws; and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. (c) An hour worked at overtime or premium pay will count as only one Hour of Service under the Plan. (d) An Hour of Service is each hour for which back pay, irrespective of mitigation of damages, is either awarded to or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (d). Crediting of Hours of Service for each pay awarded shall be subject to the limitations set forth in paragraphs (a), (b) and (c). (e) An Hour of Service shall also be credited for reasons other than the performance of duties in accordance with Department of Labor Regulations, Section 2530.200b-2(b). Further, the computation periods used for purposes of crediting Hours of Service shall be in accordance with Department of Labor Regulations, Section 2530.200b-2(c). If an Employer does not maintain hourly records with respect to any Employee, such Employee shall be credited with forty-five (45) Hours of Service for each week in which he is entitled to be credited with an Hour of Service. 1.21 "Named Fiduciary" shall mean the Employer, the Trustee(s) and the Plan Administrator. Each named Fiduciary shall have only those particular powers, duties, responsibilities and obligations as are specifically given him under the Plan and/or the Trust Agreement. 1.22 "Normal Retirement Date" shall mean the Participant's attainment of Age 65. 1.23 "Participant" shall mean any person who is eligible to receive benefits under the Plan. The term "Participant" shall include an Active Participant (each Eligible Employee who has satisfied the participation requirements of Section 2.01 as of an applicable Entry Date or who has made a Rollover Contribution), Terminated Vested Participants (former Employees who are entitled at some future date to the distribution of benefits from this Plan), and Inactive Participants (former Participants who are not Terminated Vested Participants and who continue to be employed in a non-covered class by an Employer or by an Affiliated Organization). 1.24 "Plan" shall mean the Shared Technologies Cellular, Inc. Savings and Retirement Plan as set forth herein, and as the same may from time to time hereafter be amended. 1.25 "Plan Administrator" or "Administrator" shall mean the Employer, or the persons or committee named as such pursuant to the provisions of Article IX hereof. 1.26 "Plan Year" shall mean the nine (9) month period beginning on April 1, 1996 and ending on December 31, 1996. Thereafter, "Plan Year" shall mean a twelve (12) month period beginning on January 1st and ending on each December 31st. 1.27 "Qualified Spouse" shall mean a spouse to whom the Participant is married at his date of death and to whom the Participant has been married for at least one year. 1.28 "Trust Agreement" shall mean the Shared Technologies Cellular, Inc. Savings and Retirement Plan Trust Agreement as the same presently exists and as it may from time to time hereafter be amended. 1.29 "Trustees" shall mean the party or parties so designated pursuant to the Trust Agreement. 1.30 "Valuation Date" shall mean the last day of each Plan Year and any other date as of which the Plan Administrator elects to make a valuation of Plan Accounts. 1.31 "Wage Base" shall mean the amount of compensation with respect to which old age and survivors insurance benefits would be provided for a Participant under the Social Security Act, as in effect for the calendar year in which the Plan Year commences. 1.32 "Year of Service" shall mean a Plan Year in which an Employee has completed at least one thousand (1,000) Hours of Service. Years of Service credited under the Shared Technologies, Inc. Savings and Retirement Plan shall be credited as Years of Service under this Plan through March 31, 1996. All Years of Service shall be counted regardless of whether or not such years are continuous. ARTICLE II PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE PARTICIPATION AND ENTRY DATE 2.01 Initial Eligibility. Each Employee who is a Participant in the Shared Technologies, Inc. Savings and Retirement Plan immediately prior to the Effective Date of this Plan shall be eligible to participate in this Plan as of such Effective Date. Each other Employee shall be eligible to become a Participant on the Entry Date coincident with or next following the date he first becomes an Eligible Employee. 2.02 Plan Participation. Each Employee who is eligible to participate in accordance with Section 2.01 shall complete such forms and provide such data as are reasonably required by the Plan Administrator as a precondition to Plan participation. In order to receive a Salary Deferral Contribution, a Participant must enter into a salary reduction agreement to be effective as of an Entry Date, electing to reduce his salary by an amount equal to his Salary Deferral Contribution. A Participant's Salary Deferral Contribution for any Plan Year shall not exceed the lesser of (i) 15% of his Compensation for the Plan Year or portion of such Plan Year during which he was an Active Participant, subject to the limitations set forth in Article III, and (ii) $9,500, or such higher maximum contribution for a taxable year as may be permitted under Section 402(g) of the Code. The Plan Administrator shall determine the minimum and/or maximum permitted salary reduction for any applicable period. Any maximum permitted salary reduction may apply to all Participants or solely to those Participants who are Highly-Paid Employees. Participants shall make separate elections with respect to Salary Deferral and After-Tax Contributions, and the election of either type of contribution shall not, in any way, be contingent upon any other election made under the Plan. By becoming a Participant, an Employee shall for all purposes be deemed conclusively to have assented to the provisions of the Plan, the corresponding Trust Agreement and to all amendments to such instruments. 2.03 Reemployment. In the event an Employee terminates employment, and is reemployed, he shall be eligible to be admitted or readmitted as an Active Participant coincident with or next following the date he becomes an Eligible Employee. 2.04 Change in Status. In the event that a person who has been an Employee in an employment status not eligible for participation in this Plan subsequently becomes eligible by reason of a change in status, he shall be eligible to become a Participant on the Entry Date coincident with or next following the date on which he becomes an Eligible Employee. ARTICLE III CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS 3.01 Salary Deferral Contributions. The Employer will make a Salary Deferral Contribution to the Plan for each Active Participant who has entered into a salary reduction agreement, in accordance with Section 2.02, as determined by such salary reduction agreement. In addition, for any Plan Year, an Employer may elect to make a Qualified Non- elective Contribution (including a qualified matching Contribution) allocable only to those Participants who are not Highly-Paid Employees, in order that the Plan will satisfy requirements of Section 3.06 for such Plan Year. Any Contribution made in accordance with the preceding sentence shall be allocated among applicable Participants in proportion to the ratios of each such Participant's Compensation or, with respect to satisfaction of the ADP test, only to those Participants who have made Salary Deferral Contributions (under the same allocation procedure used for Matching Employer Contributions or pro-rata). Matching Employer Contributions used to satisfy the test described under Section 3.06 must comply with the Regulations under Code Section 1.401(k)-1(b)(3). "Excess Elective Deferrals" shall mean any Salary Deferral Contributions which exceed the dollar limitation under Code Section 402(g). Such Excess Elective Deferrals shall be treated as annual additions under the Plan unless they are distributed in accordance with this Article. A Participant may assign to this Plan any Excess Elective Deferrals made during a taxable year of the Participant by providing fifteen (15) days written notification to the Administrator of the amount of the Excess Elective Deferrals to be assigned to this Plan. Such notice shall be provided no later than the first March 1st following the close of the individual's tax year. Excess Elective Deferrals with respect to the combination of Excess Elective Deferrals and deferrals under another plan of deferred compensation of an Employer or an Affiliated Organization may automatically be returned to the Participant. Notwithstanding any other provision of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15th to any Participant to whose Account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. Excess Elective Deferrals shall be adjusted for any income or loss. The income or loss allocable to Excess Elective Deferrals is the income or loss allocable to the Participant's Account for the taxable year multiplied by a fraction, the numerator of which is such Participant's Excess Elective Deferrals for the year and the denominator of which is the Participant's Salary Deferral Contribution Account without regard to any income or loss occurring during such taxable year. 3.02 After-Tax Contributions. Participants may elect to make After-Tax Contributions to the Trust for each Plan Year in amounts not less than one percent (1%) of Compensation provided that the combined total percentage of Compensation of the Salary Deferral Contributions and After-Tax Contributions elected by a Participant for a Plan Year does not exceed 20% of a Participant's Compensation for a Plan Year or any applicable period. 3.03 Method of Contribution. Salary Deferral and After-Tax Contributions may be made by periodic payroll deductions or on such other basis as shall be determined from time to time by the Plan Administrator. Nothing contained herein shall preclude the Plan Administrator from not allowing Salary Deferral or After-Tax Contributions to be made by any Participant in accordance with Section 3.06 or from limiting the number of payroll periods in a Plan Year during which such Contributions are permitted. A Participant may elect an increase or decrease in his Salary Deferral Contribution(s) or After-Tax Contributions, provided that written notice of such change (including amendment of a salary reduction agreement, if applicable) is submitted to the Plan Administrator at least fifteen (15) days in advance of the effective date, which date shall be the first day of a calendar quarter. A Participant may cease Contributions as of any payroll period upon fifteen (15) days written notice. No contributions may be made by or on behalf of any Participant during any period that he is receiving long term disability benefits, worker's compensation benefits or while the Participant is on a leave of absence for which no Compensation is being paid from the Employer. 3.04 Matching Employer Contributions. The Employer may elect, in its sole discretion, to make Matching Employer Contributions in cash or in shares of Shared Technologies Cellular, Inc. stock for a Plan Year for each Active Participant on whose behalf Salary Deferral Contributions and After-Tax Contributions have been made during the Plan Year. For any Plan Year, the Matching Employer Contributions shall be allocated to the Account of each Active Participant. The allocation shall be fifty percent (50%) (or such other percentage as determined by the Board of Directors for a Plan Year) of the total amount of After-Tax Contributions and Salary Deferral Contributions not in excess of ten percent (10%) of each Participant's Compensation for each Active Participant for such Plan Year. 3.05 Discretionary Employer Contributions. For any Plan Year, an Employer may elect, in its sole discretion, to make a Discretionary Employer Contribution. If a Discretionary Employer Contribution is made, then it shall be allocated as of the last day of the Plan Year to the Account of each Active Participant who is actively employed as of such date. Any individual who is terminated prior to the last day of a Plan Year but who is receiving severance pay as of such date, shall not be deemed to be actively employed as of the last day of a Plan Year. The Discretionary Employer Contribution amount allocated to each such Participant shall be an amount chosen by the Company to be allocated under (a) below. If any Discretionary Employer Contribution remains, such amount shall be allocated in accordance with (b) below. (a) An amount shall be allocated equal to a percentage of each such Participant's Compensation earned while a Participant for such Plan Year, plus the same percentage of the excess of (i) such Participant's Compensation earned while a Participant for the Plan Year above (ii) the Wage Base for such Plan Year. However, the percentage of Compensation used for allocations above the Wage Base shall not exceed 5.7% or such other percentage which equals the maximum percentage permitted under Code Section 401(l). (b) Any remaining Discretionary Employer Contribution shall be allocated to each such Participant in proportion to the ratio that each such Participant's Compensation earned while a Participant bears to such eligible Compensation of all eligible Participants for the Plan Year. 3.06 Non-Discrimination Test. For any Plan Year, the average Contribution Percentage for Highly-Paid Employees determined based on Salary Deferral Contributions (ADP) and separately based on the sum of After-Tax Contributions and any Matching Employer Contributions (ACP) shall not exceed the greater of: (a) 1.25 multiplied by the average Contribution Percentage for all Eligible Employees who are not Highly-Paid Employees; or (b) the lesser of ( i) twice the average Contribution Percentage for all Eligible Employees who are not Highly-Paid Employees; and (ii) the average Contribution Percentage for all Eligible Employees who are not Highly-Paid Employees, plus two percent (2%). If the limitation described under subsection (b) above is applied with respect to Salary Deferral Contributions, it shall not be applied with respect to the sum of After-Tax Contributions and Matching Employer Contributions, and vice-versa, except as otherwise permitted under the following Definitions and Special Rules Section describing the multiple use test. For purposes of this Section, an Excess Contribution shall mean the excess of a Highly-Paid Employee's Salary Deferral Contribution (or amounts treated as Salary Deferral Contributions) over the maximum amount of such Contributions as provided under the above test. For purposes of this Section, Excess Aggregate Contributions shall mean the excess of the aggregate amount of After-Tax Contributions and Matching Employer Contributions which were made on behalf of Highly-Paid Employees for any Plan Year, over the maximum amount of such Contributions as provided under the above test. The Excess Contributions or Excess Aggregate Contributions, whichever is applicable, shall be allocated by reducing the actual Contribution Percentage of the Highly-Paid Employee with the highest actual Contribution Percentage. Such Contribution Percentage shall be reduced until the Highly-Paid Employee with the highest actual Contribution Percentage is equal to that of the Highly-Paid Employee with the next highest actual Contribution Percentage or until the above test is passed. This process shall be repeated until the test is passed and such leveling method shall determine the amount of Excess Contributions attributable to each Highly-Paid Employee. The Excess Aggregate Contribution amount shall be determined after any Salary Deferral Contributions are recharacterized as After- Tax Contributions. Definitions and Special Rules: "Aggregate Limit" shall mean the sum of (i) 125 percent of the greater of the ADP of the Non-Highly-Paid Employees for the Plan Year or the ACP of Non-Highly-Paid Employees under the Plan subject to Code Section 401(m) for the Plan Year beginning with or within the Plan Year of the cash or deferred arrangement (`CODA') and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP. `Lesser' is substituted for `greater' in (i) above and `greater' is substituted for `lesser' after `two plus the' in (ii) if it would result in a larger Aggregate Limit. A multiple use method may be used in order to satisfy the non-discrimination test if one or more Highly-Paid Employees participate in both a CODA and a plan maintained by the Employer subject to the ACP test. If the sum of the ADP and ACP of those Highly-Paid Employees subject to either or both tests exceeds the Aggregate Limit, then the ACP of those Highly-Paid Employees who also participate in a CODA will be reduced (beginning with such Highly-Paid Employee whose ACP is the highest) so that the limit is not exceeded. The amount by which each Highly-Paid Employee's Contribution Percentage amount is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly- Paid Employees are determined after any corrections required to meet the ADP and ACP tests. Multiple use does not occur if both the ADP and ACP of the Highly-Paid Employees does not exceed 1.25 multiplied by the ADP and ACP of the Non-Highly Paid Employees. For purposes of determining the Contribution Percentage test, After-Tax Contributions are considered to have been made in the Plan Year in which contributed to the trust. Salary Deferral Contributions, Matching Employer Contributions and Qualified Non- elective Contributions will be considered made for a Plan Year only if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. The Employer shall maintain records sufficient to demonstrate satisfaction of the above tests and the amount of Qualified Non-elective Contributions, including qualified matching Contributions, if applicable, used in the test. The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. A Participant may treat his Excess Contributions under Section 3.01 as an amount distributed to the Participant and then contributed by such Participant to the Plan. Such recharacterized amounts will remain nonforfeitable and subject to the same distribution requirements as Salary Deferral Contributions. Amounts may not be recharacterized by a Highly- Paid Employee to the extent that such amount, in combination with other After-Tax Contributions made by that Employee, would exceed any stated limit under the Plan on After-Tax Contributions. Recharacterization must occur no later than two and one-half months after the last day of the Plan Year in which such Excess Contributions arose and is deemed to occur no earlier than the date the last Highly-Paid Employee is informed in writing of the amount recharacterized and the consequences thereof. Recharacterized amounts will be taxable to the Participant for the Participant's tax year in which the Participant would have received them in cash. Prior to January 1, 1997, if a Highly-Paid Employee is subject to the family aggregation rules of the Code, the combined actual Contribution Percentage (based on Salary Deferral Contributions and separately based on After-Tax Contributions and Matching Employer Contributions) for the family group shall be treated as one Highly-Paid Employee. The combined actual Contribution Percentage shall be determined as the combined actual Contribution Percentage of all eligible family members. The Excess Contributions or Excess Aggregate Contributions for the family members shall be allocated in proportion to the ratio of such Contributions for each family member. Any distribution or forfeiture of Excess Contributions or Excess Aggregate Contributions for any Plan Year shall be made based on the respective portions of such amounts attributable to each Highly-Paid Employee. Excess Contributions or Excess Aggregate Contributions shall be adjusted for any income or loss. The income or loss allocable to such Contributions is the income or loss allocable to the Participant's Account for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Contributions or Excess Aggregate Contributions for the year and the denominator is the Participant's Account attributable to satisfaction of ADP and ACP test (as applicable) without regard to any income or loss occurring during such Plan Year. Notwithstanding the preceding paragraph, any other reasonable method for computing the income allocable to Excess Contributions or Excess Aggregate Contributions may be used, provided that the method is non-discriminatory, is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and is used by the Plan for allocating income to Participants' Accounts. Excess Contributions and Excess Aggregate Contributions shall be forfeited, or if not forfeitable, distributed from the Participant's various Accounts in proportion to the ratio of such Participant's applicable Accounts. Excess Contributions shall be distributed from the Participant's Qualified Non-elective Contribution Account only to the extent that such Excess Contributions exceed the balance in the Participant's Salary Deferral Account and Matching Contribution Account. Forfeitures of Excess Aggregate Contributions shall be applied to reduce Employer Contributions in accordance with Section 3.07. Excess Contributions or Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose Accounts such Contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten percent (10%) excise tax will be imposed on the Employer maintaining the Plan with respect to such amounts to the extent required by law. In the event that this Plan satisfies the requirements of Sections 401(k), 401(m), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this Plan, then this Section 3.06 shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(k) or 401(m) of the Code only if they have the same Plan Year. The ADP for any Participant who is a Highly-Paid Employee for the Plan Year and who is eligible to have Salary Deferral Contributions (or amounts treated as Salary Deferral Contributions for purposes of the ADP test) allocated to his or her accounts under two or more arrangements described in Section 401(k) of the Code that are maintained by the Employer, shall be determined as if such Contributions were made under a single arrangement. If a Highly-Paid Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. In the event that any provisions of this Section 3.06 are no longer required or applicable for qualification of the Plan under the Code, then any applicable provisions of this Section 3.06 shall thereupon be void. 3.07 Forfeitures. As of the end of each Plan Year, any forfeitures occurring during such Plan Year resulting from an Employee's termination of employment and election to receive a distribution prior to being one hundred percent (100%) vested in accordance with Section 7.01 shall first be applied to restore the previously forfeited accounts, if applicable, of former Terminated Vested Participants who have been reemployed. If a Participant elects to defer his distribution the resulting forfeiture (subject to Section 7.03) shall occur after a one year Break-in-Service. Any remaining portion of the total forfeiture not applied in accordance with the preceding paragraph shall be used to reduce a Matching Employer Contribution or Discretionary Employer Contributions. Should a Participant who is 0% vested in his Matching Employer Contribution and Discretionary Employer Contribution Accounts under Section 7.01 terminate employment, he shall cease to be a Participant (unless reemployed) and the resulting forfeiture of his Matching and Discretionary Employer Contribution Accounts shall be deemed a full distribution of such Accounts. If a terminated Participant who was 0% vested in his Matching Employer Contribution and Discretionary Employer Contribution Accounts and was deemed to have received a distribution is subsequently reemployed by the Employer prior to the occurrence of five consecutive one year Breaks-in-Service after the date of his termination of employment, any amount forfeited shall be reinstated to his Account. 3.08 Maximum Employer Contributions. Notwithstanding the above, the total amount of Salary Deferral Contributions, Matching Employer Contributions and Discretionary Employer Contributions for any Plan Year shall not exceed an amount equal to fifteen percent (15%) of the total compensation of all Participants for such Plan Year. Prior to January 1, 1998, such compensation shall be reduced by any Salary Deferral Contributions made by the Participant and also reduced by any contributions made by salary reduction to a plan established in accordance with Sections 125 or 129 of the Code. 3.09 Time of Payment. Matching Employer Contributions and Discretionary Employer Contributions may be made at any time on or before the date required for deduction of such Contributions on the Employer's Federal income tax return. 3.10 Annual Additions Limitation. Defined contribution dollar limitation: $30,000 or if greater, one-fourth of the defined benefit dollar limitation set forth in Section 415(b)(1) of the Code as in effect for the limitation year. Notwithstanding the above provisions of this Article, in no event shall the annual additions to a Participant's Account exceed the maximum amount permitted under Section 415 of the Code, and all provisions of such Section are hereby incorporated in the Plan by reference. The term "limitation year", as defined under the Code, shall mean the Plan Year. The term Defined Contribution Fraction shall mean a fraction, the numerator of which is the sum of the annual additions to the Participant's Account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior limitation years (including the annual additions attributable to the Participant's nondeductible employee contributions to all defined benefit plans maintained by the Employer, whether or not terminated, and the annual additions attributable to all welfare benefits funds, as defined in Section 419(e) of the Code, and individual medical accounts, as defined in Section 415(1)(2) of the Code, maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior limitation years of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any limitation year is the lesser of 125 percent of the dollar limitation determined under Sections 415(b) and (d) of the Code in effect under Section 415(c)(1)(A) of the Code or 35 percent of the Participant's compensation for such year. If the Employee was a participant as of the end of the first day of the first limitation year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 5, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last limitation year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first limitation year beginning on or after January 1, 1987. The term "Defined Benefit Fraction" shall mean a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the limitation year under Sections 415(b) and (d) of the Code or 140 percent of the highest average compensation, including any adjustments under Section 415(b) of the Code. Notwithstanding the above, if the Participant was a participant as of the first day of the first limitation year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 5, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the participant had accrued as of the close of the last limitation year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of section 415 for all limitation years beginning before January 1, 1987. As soon as administratively feasible after the end of the limitation year, the maximum permissible amount for the limitation year will be determined on the basis of the Participant's actual compensation for the limitation year. If due to the maximum permitted above or as a result of the allocation of forfeitures there is an excess amount, the excess will be disposed of as follows: (1) Any After-Tax Contributions, to the extent they would reduce the excess amount, will be returned to the Participant; (2a) If an excess amount still exists, and the Participant is covered by the Plan at the end of the limitation year, the excess amount in the Participant's Account will be used to reduce Employer Contributions (including any allocation of forfeitures) for such Participant in the next limitation year, and each succeeding limitation year if necessary; or (2b) If an excess amount still exists, and the Participant is not covered by the Plan at the end of a limitation year, the excess amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer Contributions for all remaining Participants in the next limitation year, and each succeeding limitation year if necessary. If a suspense account is in existence at any time during a limitation year pursuant to this Section, such account will not receive an allocation of the trust's investment gains and losses. If a suspense account is in existence at any time during a particular limitation year, all amounts in the suspense account must be allocated and reallocated to Participant's Accounts before any Employer or any employee contributions may be made to the Plan for that limitation year. Excess amounts may not be distributed to Participants or former Participants, except as provided below. Notwithstanding the method for disposing of excess amounts as indicated above, in the case where a reasonable error is made so that the limitations of Section 415 are violated, the Plan may distribute Salary Deferral Contributions (within the meaning of Section 402(g)(3) of the Code) to the extent that the distribution would reduce the excess amounts in the Participant's Account. These amounts are disregarded for purposes of the ADP and ACP tests. 3.11 Return of Contribution. Except as provided in Section 3.10 and paragraphs (a), (b), (c), (d), (e) and (f) of this Section, and notwithstanding any other provision of this Plan or of the Trust Agreement, the Employer irrevocably divests itself of any interest or reversion whatsoever in any sums contributed by it to the Trust Fund, and it shall be impossible for any portion of the Trust Fund to be used for, or diverted to, any purpose other than for the exclusive benefit of Participants or their Beneficiaries. (a) If a contribution by the Employer is conditioned upon initial qualification of the Plan or any amendment thereto under Section 401 of the Code and the Plan or amendment does not so qualify, the contribution shall be returned to the Employer within one year of the date of denial of such qualification or of the failure to qualify. (b) If a contribution made by the Employer is based upon a good faith mistake of fact, the contribution shall be returned to the Employer within one year after the payment of the contribution. (c) If a contribution which is intended to be deductible for Federal income tax purposes is determined to not be deductible and part or all of the deduction is disallowed, the contribution, to the extent disallowed, shall be returned to the Employer within one year after the disallowance of the deduction. (d) Earnings attributable to any mistaken or non- deductible contribution may not be returned to the Employer, but losses attributable thereto must reduce the amount to be so returned. (e) If the withdrawal of the amount attributable to the mistaken or nondeductible contribution would cause the balance of the individual Account of any Participant to be reduced to less than the balance which would have been in the Account had the mistaken or nondeductible amount not been contributed, then the amount to be returned to the Employer must be limited so as to avoid such reduction. In the case of a reversion due to initial disqualification of the Plan, the entire assets of the Plan attributable to Employer contributions may be returned to the Employer. (f) A contribution may be returned to the Employer or an Employee, whichever is applicable, in order to satisfy the requirements of Section 3.06. 3.12 Rollover Contributions. (a) Direct Inter -Plan Transfers. Any Employee (including Employees who are not yet Eligible Employees) may, no less than 15 days following written notification to the Plan Administrator of such action, direct the appropriate funding agency of any qualified retirement plan of the Employer, a former employer, or of an Individual Retirement Account (IRA) which was established solely as a repository for a distribution from a qualified plan of a former employer (provided the Employee certifies that he made no contributions to such IRA) to distribute directly to the Trustee such Participant's entire interest in the distributing plan or IRA, exclusive of any after- tax contributions made by the Participant as an employee or participant thereunder, provided that the transferor plan or IRA is not subject to the requirements of Section 401(a)(11) of the Code. Any amount presented by a Participant to the Trustees within sixty (60) days of the receipt shall be treated, upon receipt by the Trustee, as having been received directly from the appropriate officer or fiduciary of the distributing plan or IRA. (b) Cash Transfers. Only cash may be transferred in accordance with paragraph (a) of this Section. Property other than cash cannot be transferred. (c) Investment of Rollover Contribution Accounts. Rollover Contribution Accounts shall be invested as provided under Section 4.01 of the Plan. (d) Direct Rollovers. This paragraph applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this paragraph, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. Such distribution may commence less than 30 days after the notice required under Section 1.411(a)-1(k) of the Income Tax Regulations is given, provided that (i) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (ii) the Participant, after receiving the notice, affirmatively elects a distribution. For purposes of this Section, the following definitions shall apply: Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. Distributee: A distributee includes an Employee or former employee. In addition, the Employee's or former employee's surviving spouse and the Employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. Direct rollover: A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. ARTICLE IV ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS ADMINISTRATION OF FUNDS 4.01 Investment of Funds. Participant Accounts will be invested as determined by the Plan Trustee, unless the Plan Administrator elects to permit Plan Participants to direct the investment of all or a portion of their Accounts and directs the Trustees accordingly, in which event such Participant Accounts will be invested as described below and in Section 4.02 and 4.03. Should individual investment elections be permitted under the Plan, then the available investment alternatives may include any or all of the alternatives described below: (a) Common or capital stocks (including shares of qualifying employer securities within the meaning of Section 407(d)(5)), bonds, convertible debentures or preferred stocks, money market investments and other short term corporate and government investments and fixed debt obligations of corporations and of the Federal, state and local government, or any pooled or mutual fund invested in such instruments. (b) One or more guaranteed interest funds which shall be invested under a contract (or contracts) with a bank, or an insurance company licensed in the state in which an office of the Employer is domiciled and whereby terms of such contract guarantee both the repayment of principal and the payment of interest at a pre- determined minimum rate for a fixed period of time. Any such contract is subject to approval of the Plan Administrator and may be renewed or discontinued in its discretion. Should such contract be discontinued and should the Plan Administrator not enter into or instruct the Trustee to enter into a successor contract providing similar guarantees as to principal and interest, then any Participant whose Account was invested under the contract shall be given the opportunity to make a new investment election. (c) Any other managed fund which the Plan Administrator deems appropriate for investment of plan assets. (d) A fund invested in shares of common stock of the Company. Any dividends received on such shares shall be reinvested in this fund. Contributions designated for the fund, or dividends paid on shares held in the fund, shall be temporarily invested in a short-term investment fund while the Trustee awaits the opportunity to purchase additional shares. The shares of common stock of the Company from time to time required to be acquired for the purposes of this Plan shall be acquired by the Trustees by purchase in the open market at prevailing prices, or, if directed by the Company, by contribution in kind or by purchase privately from the Company or any other person at a price per share equal to the closing market price per share at which the shares of common stock of the Company were sold on the last business day preceding the day of the purchase; it being understood that shares purchased from the Company may be either treasury shares or authorized but unissued shares, if the Company shall make such shares available for that purpose. The Plan Administrator may, in its discretion, discontinue the use of any investment alternatives maintained under the Plan, without obligation to substitute new alternatives, provided that Participants with Accounts invested in a discontinued investment alternative are given an opportunity to make an election to transfer the affected portion of their Accounts to another investment alternative permitted under the Plan. The Plan Administrator may, in its discretion, offer a mechanism with respect to transfers out of a fund invested in Employer Securities, provided that such rights are made available and applicable in a non-discriminatory manner to all Participants in similar circumstances. 4.02 Investment Elections. If investment elections are permitted, then each Participant will designate in which investment alternative or combination of alternatives he desires his Account and Contributions to be invested; provided, however, that the portion invested in any alternative which he elects shall be 1% or any multiple thereof, or such other percentage as designated by the Plan Administrator, subject to the maximum of 100%. 4.03 Change of Elections. Changes in investment elections shall (subject to Section 4.04) be permitted effective as of the first day of any quarter in each calendar year or such other period as specified by the Plan Administrator, in the manner described below: (a) Any Participant may, by written request filed with the Plan Administrator by a specified number of days prior to the effective date of the change, or under any other method as prescribed by the Plan Administrator, alter his election with respect to the investment of his future contributions. (b) Any Participant may, by written request filed with the Plan Administrator by a specified number of days prior to the effective date of the change, or under any other method as prescribed by the Plan Administrator, alter his election with respect to the investment alternatives in which his prior contributions have been invested and may direct the Trustee to transfer all or any portion of the balance in his Account to any investment alternative or combination of alternatives. 4.04 Restrictions on Changes. The Plan Administrator may, in its sole discretion, establish restrictions, limitations or prohibitions with respect to changes in investment elections, or transfers, permitted under the Plan. Any such restrictions, limitations or prohibitions which may apply to elections related to, or transfers among, any or all investment funds maintained under the Plan, shall be communicated in advance of their applicability to Plan Participants, and shall apply in a non-discriminatory manner to all Participants in similar circumstances. 4.05 Allocation of Contributions. As of each Valuation Date, the Plan Administrator shall allocate the Salary Deferral Contributions, Matching Employer Contributions, Discretionary Employer Contributions and After-Tax Contributions to the Account of each Participant. 4.06 Valuation of Assets. As of each Valuation Date, the assets of the Trust shall be valued at fair market value and any gains or losses shall be allocated to the same investment alternatives in which they arose. 4.07 Voting of Shares. Before each annual or special meeting of shareholders of the Company, the Company shall cause the Trustee to send to each Participant whose Account is invested in common stock of the Company, a copy of the proxy solicitation material therefor, together with a form providing confidential instructions to the Trustee on how to vote the shares of Company stock held within the Participant's Account. Upon receipt of such instructions in conformance with said proxy solicitation material, the Trustee shall vote the shares of Company stock as instructed. Instructions received from individual Participants by the Trustee shall be held in strictest confidence and shall not be divulged or released to any person, including officers or Employees of an Employer. The Trustees shall vote the shares of the Company stock for which no instructions have been received in the same proportion as the shares for which instructions have been received. 4.08 Tender Offer Procedure. In the event an offer is received by the Trustee (including, but not limited to, a tender offer or exchange offer) to purchase any shares of Company stock held by the Trustee in the Trust, the Company shall cause the Trustee to send to each Participant whose Account is invested in Company stock such information as will be distributed to shareholders of the Company in connection with such offer, and to notify each Participant in writing of the number of shares of Company stock which are then credited to such Participant's Account. The Trustee shall provide to each Participant a form requesting confidential directions as to the manner in which the Trustee is to respond to the offer with respect to shares of Company stock allocated to such Participant's Account. Upon timely receipt of such directions, the Trustee shall respond as directed with respect to the tender or exchange of such shares. Instructions received from individual Participants by the Trustee shall be held in the strictest confidence and shall not be divulged or released to any person, including officers or Employees of an Employer. The Trustee shall not tender or exchange shares of Company stock allocated to a Participant's Account for which the Trustee has not received directions from the Participant. A Participant who has directed the Trustee to tender or exchange shares of Company stock allocated to such Participant's Account may, at any time prior to the offer withdrawal date, direct the Trustee to withdraw such shares from the offer prior to the withdrawal deadline, in which case the Trustee shall carry out such directive. In the event that shares of Company stock held in a Participant's Account are tendered or exchanged pursuant to this Section 4.08, the proceeds received upon the acceptance of such tender or exchange shall be credited to such Participant's Account, and shall be invested in the manner determined by the Company or as otherwise provided in the Plan. 4.09 ERISA Section 404(c) Plan. The Plan is intended to constitute a plan described in Section 404(c) of ERISA and shall be administered in accordance with such intent with respect to all Contributions other than Matching Employer Contributions if such Contributions are invested in Employer Securities by the Trustee. The Plan shall be administered in compliance with Department of Labor Regulations Section 2550.440c-1. 4.10 Confidentiality. Information relating to the purchase, holding, and sale of Company stock in a Participant's Account and the exercise of voting, tender, and similar rights with respect to such stock by Participants and their beneficiaries shall be maintained in accordance with such procedures as the Administrator shall establish designed to safeguard the confidentiality of such information, except to the extent necessary to comply with Federal laws or state laws not preempted by ERISA. 4.11 Fiduciary Designation. The Administrator is designated as the Plan fiduciary responsible for ensuring that the procedures implemented pursuant to Section 4.10 are sufficient to safeguard the confidentiality of information described in that Section, that such procedures are being followed, and that an independent fiduciary is appointed to carry out activities which the Administrator determines involve a potential for undue influence by any Employer upon Participants and beneficiaries with regard to the direct or indirect exercise of shareholder rights with respect to Company stock. ARTICLE V RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS RETIREMENT BENEFITS 5.01 Normal Retirement Benefit and Early Retirement Benefit. A Normal Retirement Benefit shall be payable with respect to any Participant retiring at his Normal Retirement Date, and shall be equal to the Participant's Account as of the Valuation Date coincident with or next following the Participant's Normal Retirement Date. Payment shall commence no later than sixty (60) days following the last day of the Plan Year in which the Participant's Normal Retirement Date occurs. 5.02 Deferred Retirement Benefit. A Deferred Retirement Benefit shall be payable with respect to any Participant retiring after his Normal Retirement Date and shall be equal to the Participant's Account as of the Valuation Date coincident with or immediately following the Participant's actual retirement. Any Contribution to such Participant's Account after he has attained age 70 1/2 shall be taken into consideration in determining the minimum distribution requirements of Section 5.04. 5.03 Disability Retirement Benefit. A Disability Retirement Benefit shall be payable with respect to any Participant who has suffered a Disability and who retires from service of the Employer by reason of such Disability, and shall be equal to the Participant's Account as of the Valuation Date coincident with or next following the date of the Participant's termination due to Disability. Such a Participant may also elect to be paid in accordance with the provisions of Section 7.02. 5.04 Payment of Benefits. Any benefit under this Article shall be made in a lump sum payment no later than sixty days following the close of the Plan Year in which the Participant's retirement occurs. If, after a Participant terminates employment, the total value of his vested Account is $3,500 or less, the Administrator shall direct the Trustees to cash-out the Participant's benefit in a single lump sum after any Valuation Date coincident with or following the date of his or her termination of employment, without any requirement for the consent of a Participant or a Qualified Spouse. For Active Participants, benefit payments as mandated by Code Section 401(a)(9) shall not commence later than the April 1st following the calendar year in which the Participant attains age 70 1/2 or such later date as permitted under the Code, unless the Participant was over age 70 1/2 before January 1, 1988 and was not a 5% owner of the Employer during the Plan Year ending within the calendar year in which the Participant attained age 66 1/2, or any subsequent year, in which event benefit payments may commence after the April 1st following the calendar year in which the Participant reaches age 70 1/2, but as soon after the Participant terminates employment as is practical. All distributions required under this Section shall be determined and made in accordance with the proposed or, if applicable, final regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed or final regulations. Pension benefits shall be payable over a period equal to (i) the life of the Participant, (ii) the lives of the Participant and his spouse or his other named Beneficiary, if any, (iii) a fixed period not extending beyond the life expectancy of the Participant, or (iv) a fixed period not extending beyond the joint life expectancy of the Participant and his spouse or other named Beneficiary, if any. Life expectancy may be recalculated no more frequently than annually, but the life expectancy of a non-spouse Beneficiary or contingent annuitant may not be recalculated. 5.05 Additional Allocations on Retirement. Any allocation for a Participant, made as of a Valuation Date subsequent to the date of his retirement shall be paid to such Participant, or his beneficiary, as soon after such Valuation Date as is practical. 5.06 Crediting of Investment Earnings. Investment earnings shall be credited to a Participant's Account through the Valuation Date coincident with or preceding the date that distribution of the Account is made. No earnings shall be credited after such Valuation Date. 5.07 Company Stock. A Participant may elect to have the portion, if any, of his vested Account attributable to a fund invested in common stock of the Company distributed all in cash or all in kind. In the case of an in-kind distribution, the value of fractional shares shall be paid in cash. Shares of Shared Technologies Cellular, Inc. common stock shall be valued, to the extent practicable, as of the date of distribution. ARTICLE VI DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS DEATH BENEFITS 6.01 Death Benefits. In the event of the death of an Active Participant or of a Terminated Vested Participant who has not yet received payment of his Account, the Account shall be paid to his Beneficiary in a single lump sum. Any payment under this Section shall be paid as soon as practicable at the Beneficiary's election and no later than five (5) years after the Participant's death. The distribution shall be equal to the Participant's vested Account as of the Valuation Date coincident with or immediately preceding the date of payment. 6.02 Additional Allocations on Death. Any allocation for a Participant, made as of a Valuation Date subsequent to the date of his death, shall be paid to such Participant's Beneficiary as soon after such Valuation Date as is practical. 6.03 Beneficiary Designation. "Beneficiary" shall mean the person or persons named to receive any death benefits which may become payable under the Plan, and shall include any contingent beneficiary. If a Participant has a Qualified Spouse, then such spouse shall automatically be the Beneficiary eligible to receive the Account of the Participant pursuant to the Participant's death, unless the Participant names an alternate Beneficiary, and the Qualified Spouse consents in writing to the Participant's naming of an alternate Beneficiary, which consent must acknowledge the effect of such designation and be witnessed by a representative of the Plan Administrator, or attested to by a notary public. Each Participant shall have the right by written notice to the Plan Administrator, in the form prescribed by the Plan Administrator, to designate, and from time to time to change the designation of, one or more Beneficiaries and contingent beneficiaries to receive any benefit which may become payable under the Plan pursuant to his death, provided his Qualified Spouse, if any, consents to the designation of an alternate Beneficiary as set forth in the preceding sentence. A Qualified Spouse may also expressly permit a Participant to subsequently change an alternative beneficiary designation without any further spousal consent. If it is established to the satisfaction of a Plan representative that there is no Qualified Spouse or that such spouse cannot be located, an alternative beneficiary designation will be deemed a proper election without any spousal consent. Any consent by a Qualified Spouse obtained under this provision (or establishment that the consent of a Qualified Spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designations by the Participant without any requirement of further consent by the Qualified Spouse must acknowledge that such spouse has the right to limit consent to a specific beneficiary, and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior beneficiary designation may be made by a Participant without the consent of the Qualified Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. In the event that a Participant who does not have a Qualified Spouse as described above fails to designate a Beneficiary to receive a benefit under the Plan that becomes payable pursuant to his death, or in the event that the Participant is pre-deceased by all automatic or designated primary and contingent beneficiaries, the death benefit shall be payable to the Participant's estate. ARTICLE VII VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE VESTING AND SEPARATION FROM SERVICE 7.01 Vesting of Accounts. A Participant shall at all times be fully (100%) vested in his Salary Deferral Contribution Account, After-Tax Contribution Account, Rollover Contribution Account and in any restoration contributions made pursuant to Section 7.03. A Participant shall be vested in his Matching Employer Contribution Account and his Discretionary Employer Contribution Account based on his Years of Service in accordance with the following table: Years of Service Vesting Percentage Less than 1 0% 1 but less than 2 33 1/3% 2 but less than 3 66 2/3% 3 or more 100% Notwithstanding the foregoing, an Active Participant shall be 100% vested in his Account at his Normal Retirement Date, the date of his retirement due to Disability or the date of his death. 7.02 Payment of Benefits. An Active Participant who is vested in his Account and terminates employment prior to his Normal Retirement Date shall be deemed a Terminated Vested Participant. Payment of his vested Account shall be made in a single lump sum no later than sixty (60) days following the Valuation Date coincident with or next following the Participant's Normal Retirement Date. However, any such Participant may elect that payment of his vested Account be made as of any Valuation Date coincident with or following the date of his termination of employment, provided that he makes such election on or before the applicable Valuation Date. The failure of a Participant to waive distribution of a benefit prior to his Normal Retirement date is deemed to be an election to defer commencement of benefits. A Terminated Vested Participant's Account shall continue to be credited with investment earnings through the last Valuation Date coincident with or immediately preceding the date that payment of the Account is made. No earnings shall be credited after such Valuation Date. If, after a Participant terminates employment, the total value of his vested Account is $3,500 or less, the Administrator may direct the Trustee to cash-out the Participant's benefit in a single lump sum after the Valuation Date coincident with or following the date of his or her termination of employment, without any requirement for such Participant's consent. 7.03 Reemployment After Distribution and Restoration Contributions. Any former Participant who once again qualifies as an Active Participant and who has received a distribution of any portion of his vested Account attributable to his prior participation in this Plan may restore to the Trustee the full amount of the distribution he previously received which was derived from Employer Contributions. In order to reinstate his full Matching or Discretionary Employer Contribution Account, a reemployed Participant must repay the full amount of the distribution from such Accounts prior to the earlier of (i) the fifth anniversary of the date such participant is reemployed or (ii) five consecutive one year Breaks-in- Service after the date of distribution. Any Participant who fails to make his restoration contribution within such time period shall waive his right to the portion of his Account which was not vested when he received his distribution. ARTICLE VIII WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS WITHDRAWALS AND LOANS 8.01 Withdrawals While Employed. In-service withdrawals shall be made upon 15 days written notice in the following order: (a) A Participant may withdraw all or any portion of his After-Tax Contribution Account. Such withdrawal shall come first from After-Tax Contributions made prior to January 1, 1987. Next, such withdrawal shall be allocated proportionately between the Participant's After-Tax Contributions made after December 31, 1986 and the investment earnings on such Contributions. A Participant may then withdraw the investment earnings on his After-Tax Contributions made prior to January 1, 1987. (b) A Participant may withdraw any portion of his Rollover Contribution Account upon attainment of Age 59/ or in the event of a financial hardship as described below. (c) A Participant may withdraw his Salary Deferral Contribution Account for any reason after he has attained Age 59/ and prior to Age 59/ solely in the event of a financial hardship, and solely to the extent required to satisfy the hardship. The amount that may be distributed due to a hardship may include the amount necessary to pay income taxes or penalties resulting from the distribution. Such hardship must be an immediate and heavy financial need of the Participant where such Participant lacks other available resources. The following conditions would automatically be deemed an immediate and heavy financial need: ( i) medical expenses as described under Code Section 213(d) incurred by the Participant, his spouse or his dependents; ( ii) costs directly related to the purchase of a primary residence (excluding mortgage payments); (iii) payment of tuition or related educational fees for the next twelve months of post-secondary education for the Employee, his spouse or his dependents; ( iv) payment to prevent eviction of the Participant from a primary residence or foreclosure of mortgage on his primary residence; and ( v) any other occurrence as authorized by the IRS through Regulations, Rulings, Notices and other documents of general applicability. A Participant must submit a written certification on the form prescribed by the Plan Administrator that the hardship distribution is necessary to satisfy an immediate and heavy financial need. The written certification must indicate that the need cannot reasonably be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the employee's assets, by cessation of Salary Deferral Contributions or After-Tax Contributions (if applicable) under the Plan or by other distributions or nontaxable loans from plans maintained by the Employer or any other employer, or by borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the need. The Employer must not have actual knowledge to the contrary that the need cannot reasonably be relieved as described above. A Participant may not withdraw any investment earnings included in his Salary Deferral Contribution Account which were accumulated after December 31, 1988, or any Qualified Non- elective Contributions (including investment earnings), unless he has attained Age 59/. A Participant may not withdraw any portion of his Matching Employer Contribution Account or Discretionary Employer Contribution Account for any reason prior to his retirement or other termination of employment. In no event will any hardship withdrawal of Salary Deferral Contributions be granted until any applicable distributions and loans have been taken from this Plan and from all other qualified retirement plans of the Employer. 8.02 Loans. (a) Upon 30 days written notice, loans to Active Participants may be made from their Accounts (excluding balances invested in common stock of the Company) in amounts of not less than $1,000. No more than one Plan loan may be outstanding to each Participant at any time. (b) No Participant shall, under any circumstances, be entitled to loans in excess of the lesser of (i) 50% of his vested Account as of the Valuation Date coincident with or immediately preceding the date on which the loan is made, and (ii) $50,000 less the highest outstanding loan balance over the 12-month period immediately preceding the issuance of the loan. For purposes of this paragraph, all outstanding loans to a Participant under this Plan or any other qualified retirement plan of the Employer shall be aggregated. (c) Any loan to a Participant shall be evidenced by the Participant's promissory note and secured by the pledge of the Participant's Account in the Trust Fund and by the pledge of such further collateral as the Trustee deems necessary or desirable to assure repayment of the borrowed amount and all interest payable thereon in accordance with the terms of the loan. Notwithstanding the foregoing, the amount of a Participant's Account that may be used as security shall be limited to fifty (50%) of such Participants vested Account balance. (d) Interest shall be charged at an annual rate equal to the prime interest rate in effect as of the first day of the month in which the loan is processed, plus two percent (2%). The Administrator shall have sole discretion in determining the interest rate, and its decision shall be final and binding. Principal repayments and interest payments shall be credited to the Account of the Participant to whom the loan was made in accordance with his investment elections as in effect at such time as the loan repayments are made. (e) Loans shall be for such term as the Participant elects, except that loans shall not be for a period in excess of five (5) years unless they are made for the purposes of purchasing the primary residence of the Participant in which case such loans can be made for a period not in excess of ten (10) years. (f) Loans shall be repaid in approximately level installments made no less frequently than quarterly. The Plan Administrator may require that loans be repaid by payroll deduction or any other convenient manner. The manner and frequency of payment shall be determined by the Plan Administrator. A loan may be repaid in full at any time. (g) If not repaid in full, the unpaid portion of any outstanding loans (including interest thereon) shall be deducted at retirement, death, disability or other termination of employment from any benefit to which a Participant (or his beneficiary) is entitled under this Plan, and any other security pledge shall be sold as soon as is practicable after such default by the Trustee at private or public sale. The proceeds of such sale shall be applied first to pay the expenses of conducting the sale, including reasonable attorney's fees, and then to pay any sums due from the borrower to the Trust Fund, with such payment to be applied first to accrued interest and then to principal. The Participant shall remain liable for any deficiency, and any surplus remaining shall be paid to the Participant. (h) If a required periodic payment is not made within 90 days of the date it was due, this shall be deemed a default and foreclosure on the note and attachment of security will not occur until a distributable event occurs in the Plan. ARTICLE IX ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION ADMINISTRATION 9.01 Plan Administrator. The Plan shall be administered by the Employer in ac- cordance with its provisions and for purposes of such Plan administration the Employer is hereby deemed to be Plan Administrator within the meaning of ERISA. All aspects of Plan administration shall be the responsibility of the Plan Administrator except those specifically delegated to the Trustees or other parties in accordance with provisions of the Plan or Trust Agreement. 9.02 Administrative Procedures. The Administrator shall have discretionary authority based on a reasonable interpretation of the Plan to determine the eligibility for benefits and the benefits payable under the Plan, and shall have discretionary authority to construe all terms of the Plan, including uncertain terms, to determine questions of fact and law arising under the Plan and make such rules as may be necessary for the administration of the Plan. Any determination by the Plan Administrator shall be given deference in the event it is subject to judicial review, and shall be overturned only if it is arbitrary and capricious or an abuse of discretion. The Administrator may require Participants to apply in writing for benefits hereunder and to furnish satisfactory evidence of their date of birth and such other information as may from time to time be deemed necessary. The Plan Administrator shall appoint the Trustees, in- vestment managers, or any other professional advisors as the Administrator, in its sole discretion, deems necessary or appropriate. 9.03 Other Plan Administrator. Anything to the contrary notwithstanding, the Employer may appoint a committee or an individual or individuals, whether or not employed by the Employer, to carry out any of the duties of the Plan Administrator. Such duties may include, but are not limited to, determining the eligibility of any Employee for any benefits and the amount of such benefits under the Plan, main- taining custody of all documents and elections made by an Employee, directing the investment of any payment made by an Employer within any limits which may be imposed by the Employer, and retaining suitable agents and advisors. Any committee or individual shall be considered an agent of the Employer with respect to the Plan and shall be indemnified by the Employer against any and all claims, losses, damages, expenses and liabilities arising from any action or failure to act, except when the same is determined to be due to the gross negligence or willful misconduct of such individual or a member of a committee. 9.04 Claims Procedures. (a) If a Participant or Beneficiary (hereinafter referred to as "Claimant") is denied any vested benefits under this Plan, either partially or in total, the Plan Administrator shall advise the Claimant of the method of computation of his benefit, if any, and the specific reason for the denial. The Administrator shall also furnish the Claimant at that time with: ( i) a specific reference to pertinent Plan provisions, ( ii) a description of any additional material or information necessary for the Claimant to perfect his claim, if possible, and an explanation of why such material or information is needed, and (iii) an explanation of the Plan's claim review procedure. (b) Within 60 days of receipt of the information stated in (a) above, the Claimant shall, if he desires further review, file a written request for reconsideration with the Administrator. (c) So long as the Claimant's request for review is pending (including the 60 day period in (b) above), the Claimant or his duly authorized representative may review pertinent Plan documents and may submit issues and comments in writing to the Administrator. (d) A final and binding decision shall be made by the Administrator within 60 days of the filing by the Claimant of his request for reconsideration, provided, however, that if the Administrator, in its discretion, determines that a hearing with the Claimant or his representative present is necessary or desirable, this period shall be extended an additional 60 days. (e) The Administrator's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, with specific references to the pertinent Plan provisions on which the decision is based. 9.05 Expenses. Expenses of the Plan shall be paid from the Trust Fund unless the Employer elects to pay such expenses. ARTICLE X AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS AMENDMENT, TERMINATION AND MERGERS 10.01 Amendment. The provisions of this Plan may be amended at any time and from time to time by the Board of Directors, provided, however, that: (a) no amendment shall increase the duties or liabilities of the Plan Administrator or of the Trustee without the consent of such party; (b) no amendment shall deprive any Participant or beneficiary of a deceased Participant of any of the benefits to which he is entitled under this Plan with respect to contributions previously made, nor shall any amendment decrease the balance in any Participant's Account. For purposes of this paragraph, a plan amendment which has the effect of decreasing the balance of a Participant's Account or eliminating an optional form of benefit with respect to benefits attributable to service before the amendment shall be treated as reducing an accrued benefit; (c) no amendment shall provide for the use of funds or assets held to provide benefits under this Plan other than for the benefit of Employees and their beneficiaries or provide that funds may revert to the Employer except as permitted by law; and (d) no amendment may change the vesting schedule with respect to any Participant, unless each Participant with three or more Years of Service is permitted to elect to have the vesting schedule which was in effect before the amendment used to determine his vested benefit. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of: (1) 60 days after the amendment is adopted; (2) 60 days after the amendment becomes effective; or (3) 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator. In the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such Employee's right to his Employer-derived accrued benefit will not be less than his percentage computed under the Plan without regard to such amendment. Each amendment shall be approved by the Board of Directors by resolution and shall be filed with the Trustee. 10.02 Plan Termination. (a) Right Reserved . While it is the Employer's intention to continue the Plan indefinitely the right is, nevertheless, reserved to terminate the Plan in whole or in part by action of the Board of Directors. Termination or partial termination of the Plan shall result in full and immediate vesting of each affected Participant in his entire Account, and there shall not thereafter be any forfeitures with respect to any Participant for any reason. Notwithstanding any other provision of this Plan, complete or partial termination of the Plan shall not be conditioned solely upon any resolution or other action of the Company, the Board of Directors or any other party. (b) Effect on Retired Persons, etc . Termination of the Plan shall have no effect upon payment of benefits due to former Participants, their beneficiaries and their estates. The Trustee shall retain sufficient assets to complete any such payments due and shall have the right, upon direction by the Employer, to make such payments as of the effective date of the Plan termination. (c) Effect on Remaining Participants, etc . The Employer shall instruct the Trustees either (i) to continue to manage and administer the assets of the Trust for the benefit of the Participants and their beneficiaries pursuant to the terms and provisions of the Trust Agreement, or (ii) to pay over to each Participant (and vested former Participant) the value of his vested account, and to thereupon dissolve the Trust. Upon termination of this Plan, if the Employer or any entity within the same controlled group as the employer does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), the Participant's Account may, without the Participant's consent, be distributed to the Participant. However, if any entity within the same controlled group as the Employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), then the Participant's Account will be transferred, without the Participant's consent, to the other plan if the Participant does not consent to an immediate distribution. 10.03 Complete Discontinuance of Employer Contributions. While it is the Employer's intention to make substantial and recurrent contributions to the Trust Fund pursuant to the provisions of this Plan, the right is, nevertheless, reserved to at any time completely discontinue Employer contributions. Such complete discontinuance shall be established by resolution of the Board of Directors and shall have the effect of a termination of the Plan, except that the Trustee shall not have authority to dissolve the Trust Fund except upon adoption of a further resolution by the Board of Directors to the effect that the Plan is terminated and upon receipt from the Employer of instructions to dissolve the Trust Fund pursuant to Section 10.02(c) hereof. 10.04 Suspension of Employer Contributions. The Employer shall have the right at any time, and from time to time, to suspend Employer contributions to the Trust Fund pursuant to this Plan. Such suspension shall have no effect on the operation of the Plan unless the Board of Directors determines by resolution that such suspension shall be permanent. A permanent discontinuance of contributions will be deemed to have occurred as of the date of such resolution or such earlier date as is therein specified. 10.05 Mergers and Consolidations of Plans. In the event of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Parti- cipant shall have a benefit in the surviving or transferee plan (determined as if such plan were then terminated immediately after such merger, etc.) that is equal to or greater than the benefit he would have been entitled to receive immediately before such merger, etc., in the Plan in which he was then a Participant (had such Plan been terminated at that time). For the purposes hereof, former Participants and beneficiaries shall be considered Participants. ARTICLE XI MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS MISCELLANEOUS PROVISIONS 11.01 Non-Alienation of Benefits. None of the payments, benefits or rights of any Parti- cipant or beneficiary shall be subject to any claim of any cre- ditor, and in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attach- ment, garnishment, trustee's process, or any other legal or equi- table process available to any creditor of such Participant or beneficiary. Notwithstanding the foregoing, the Plan Administra- tor shall assign or recognize an alternate payee with respect to all or a portion of a Participant's benefit, as may be required in accordance with a Qualified Domestic Relations Order, as such term is defined and as such action by the Plan Administrator may be required under Section 414 of the Code and regulations issued pursuant thereto. The Administrator shall develop such guidelines and procedures as it deems appropriate to determine, in accordance with Section 414 of the Code, and regulations issued pursuant thereto, whether, and in what manner, to comply with any document it receives which is intended to be a Qualified Domestic Relations Order. No Participant or beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he may expect to receive, contingently or otherwise, under this Plan, except the right to designate a beneficiary or beneficiaries as hereinbefore provided. 11.02 No Contract of Employment. Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Participant or Employee, or any person whomsoever, the right to be retained in the service of the Employer, and all Participants and other Employees shall remain subject to discharge to the same extent as if the Plan had never been adopted. 11.03 Severability of Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. 11.04 Heirs, Assigns and Personal Representatives. This Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant and beneficiary, present and future. 11.05 Headings and Captions. The headings and captions herein are provided for refe- rence and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 11.06 Gender and Number. Except where otherwise clearly indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice-versa. 11.07 Funding Policy. The Plan Administrator, in consultation with the Employer, shall establish and communicate to the Trustees a funding policy consistent with the objectives of this Plan and of the corresponding Trust. Such policy shall reflect due regard for the emerging liquidity needs of the Trust. Such funding policy shall also state the general investment objectives of the Trust and the philosophy upon which maintenance of the Plan is based. 11.08 Title to Assets. No Participant or beneficiary shall have any right to, or interest in, any assets of the Trust Fund upon termination of his employment or otherwise, except as provided from time to time under this Plan, and then only to the extent of the benefits payable under the Plan to such Participant out of the assets of the Trust Fund. All payments of benefits as provided for in this Plan shall be made from the assets of the Trust Fund, and neither the Employer nor any other person shall be liable therefor in any manner. 11.09 Payment to Minors, etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Trustees, the Plan Administrator, the Employer and all other parties with respect thereto. 11.10 Situs. This Plan shall, to the extent not pre-empted by ERISA or other Federal law, be construed according to the laws of the state where the principal office of the Company is domiciled, where such state statutes may be applicable to an employee benefit plan. ARTICLE XII TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS TOP-HEAVY PROVISIONS 12.01 Top-Heavy Plan. For any Plan Year commencing in 1984 or thereafter, the Plan shall be a Top-Heavy Plan, as such term is defined under Section 416 of the Internal Revenue Code, if the Value of Accumulated Benefits for Key Employees under all Aggregated Plans exceeds 60% of the Value of Accumulated Benefits for all Group Participants under all Aggregated Plans, determined as of the Determination Date immediately preceding such Plan Year. If the Plan is a Top-Heavy Plan for a Plan Year and, as of the Determination Date immediately preceding such Plan Year, the Value of Accumulated Benefits for Key Employees under all Aggregated Plans exceeds 90% of the Value of Accumulated Benefits for all Group Participants under all Aggregated Plans, then the Plan shall be a Super Top-Heavy Plan for such Plan Year. For such purposes, the terms "Key Employees" and "Group Participants" shall include all persons who are or were Key Employees or Group Participants during the Plan Year ending on such Determination Date or during any of the four (4) immediately preceding Plan Years. The value of Accounts and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Section 416 of the Code for the first and second plan years of a defined benefit plan. The Accounts and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one Hour of Service with any Employer maintaining the Plan at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the top-heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Section 416 of the Code. Deductible employee contributions will not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans the value of Accounts and accrued benefits will be calculated with reference to the determination dates that fall within the same calendar year. The accrued benefit of a participant other than a Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(1)(c) of the Code. For purposes of this Article, the following definitions shall apply in addition to those set forth in Article I: "Affiliated Employer Group" shall mean the Employer and each other employer which must be aggregated with the Employer for purposes of Sections 414(b), 414(c) or 414(m) of the Code. "Aggregated Plans" shall mean (i) all plans of the Employer or an Affiliated Employer Group which are required to be aggregated with the Plan, and (ii) all plans of the Employer or an Affiliated Employer Group which are permitted to be aggregated with the Plan and which the Plan Administrator elects to aggregate with the Plan, for purposes of determining whether the Plan is a Top-Heavy Plan. A plan shall be required to be aggregated with the Plan if such plan includes as a participant a Key Employee (and the beneficiary of such employee) or if such plan enables any plan of the Employer or of a member of the Affiliated Employer Group in which a Key Employee participates to qualify under Section 401(a)(4) or Section 410 of the Code. A plan of the Employer or the Affiliated Employer Group shall be permitted to be aggregated with the Plan if such plan satisfies the requirements of Sections 401(a)(4) and 410 of the Code, when considered together with the Plan and all plans which are required to be aggregated with the Plan. No plan shall be aggregated with the Plan unless it is a qualified plan under Section 401 of the Code. The required aggregation group shall include plans terminated within the five year period ending on the Determination Date. "Annual compensation" shall mean compensation as defined in Section 415(c)(3) of the Code but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code. "Determination Date" shall mean the date as of which it is determined whether a plan is a Top-Heavy Plan or Super Top-Heavy Plan for the Plan Year immediately following such Determination Date. The Determination Date for the Plan shall be: (a) in the case of a defined benefit plan, the date as of which the actuarial valuation of the Plan, as used for determination of minimum funding standards under Section 412 of the Code, is performed; and (b) in the case of a defined contribution plan, the last day of the Plan Year. "Group Participant" shall mean anyone who is or was a participant in any plan included in the Aggregated Plans during the Plan Year which includes the Determination Date or any of the four (4) immediately preceding Plan Years, and who received compensation from an Employer during the five (5) year period ending on the Determination Date. Any beneficiary of a Group Participant who has received, or is expected to receive, a benefit from a plan included in the Aggregated Plans shall be considered a Group Participant solely for purposes of determining whether the Plan is a Top-Heavy Plan or Super Top-Heavy Plan. "Key Employee" shall mean any employee or former employee of the Employer or of an Affiliated Employer Group who during the Plan Year which includes the Determination Date, or during any of the four (4) Plan Years immediately preceding such Plan Year, was: (a) an officer of the Employer whose compensation is at least $45,000 (or such higher amount as is permitted in accordance with the Code); or (b) a five percent (5%) owner of the Employer; or (c) a one percent (1%) owner of the Employer whose total annual compensation from the Affiliated Employer Group exceeds $150,000; or (d) an employee whose compensation equals or exceeds $30,000 (or such higher amount as may be defined under Section 415(c)(1)(A) of the Code), and whose ownership interest in the Affiliated Employer Group is among the ten largest. In no event shall a partner of an unincorporated employer be considered an officer under paragraph (a) above. Further, the number of officers counted under (a) above as of any Determination Date shall not exceed the lesser of: (1) the greater of (i) ten percent (10%) of the total number of employees of the Affiliated Employer Group, and (ii) three (3); and (2) fifty (50). If the application of the preceding paragraph results in a reduction in the number of officers to be included as Key Employees, then individuals who are officers shall be eliminated from the group of Key Employees beginning with the individual who had the lowest one-year compensation in the five (5) year period including the Plan Year which includes the Determination Date, and the four (4) immediately preceding Plan Years, and eliminating each individual with the next higher one-year compensation in such period, until the maximum number of officers remain in the Key Employee group. In addition, the beneficiary of a Key Employee shall be deemed to be a Key Employee. "Non-Key Employee" shall mean an Employee who is not a Key Employee. An Employee who was a Key Employee in a previous Plan Year but who is no longer a Key Employee in the current Plan Year, shall not be considered a Non-Key Employee for the current Plan Year. "Value of Accumulated Benefits" shall mean (a) in the case of a Group Participant or beneficiary covered under a defined benefit plan, the sum of ( i) the present value of the accrued pension benefit (as such term is defined under the applicable plan) of the Group Participant or beneficiary determined as of the Determination Date using reasonable actuarial assumptions as to interest and mortality, and taking into account any non-proportional subsidies in accordance with regulations issued by the Secretary of the Treasury; plus (ii) the sum of any amounts distributed to the Group Participant and his beneficiary during the plan year ending on the Determination Date and during the four (4) immediately preceding plan years. (b) in the case of a Group Participant or beneficiary covered under a defined contribution plan, the sum of the accounts of the Group Participant or beneficiary under the plan as of the plan's Determination Date derived from: (1) employee contributions credited to such accounts and investment earnings thereon; and (2) employer contributions credited to such accounts and investment earnings thereon; and (3) rollover contributions made prior to January 1, 1984, and investment earnings thereon; and (4) any contributions which would have been credited to such accounts on or before the Determination Date, but which were waived as provided under the Code and resulted in a funding deficiency; and (5) any amount distributed from the accounts described in (1) through (4) above during the Plan Year ending on the Determination Date, and the four (4) immediately preceding Plan Years. If the Plan is determined to be a Top-Heavy Plan or Super Top-Heavy Plan as of any Determination Date, then it shall be subject to the rules set forth in the remainder of this Article for the Plan Year next following such Determination Date. If, as of a subsequent Determination Date, the Plan is determined to no longer be a Top-Heavy Plan or Super Top-Heavy Plan, then the rules set forth in the remainder of this Article shall no longer apply, except where expressly indicated otherwise. Notwithstanding the foregoing, if the Plan changes from being a Super Top-Heavy Plan to a Top-Heavy Plan, the rules applicable to a Top-Heavy Plan shall apply. "Year of Super Top-Heavy Service" shall mean a Year of Service of a Participant which commenced in a Plan Year during which the Plan was a Super Top-Heavy Plan. "Year of Top-Heavy Service" shall mean a Year of Service of a Participant which commenced in a Plan Year during which the Plan was a Top-Heavy Plan. 12.02 Minimum Contributions or Benefits. For any Plan Year in which the Plan is a Top-Heavy Plan the minimum rate of contributions and forfeitures allocated to the account of any Participant shall be the lesser of: ( i) The highest rate of employer contributions and forfeitures (determined as a percentage of compensation as defined under Section 415 of the Code) allocated to the account of any Key Employee; and (ii) 3% of such compensation. Notwithstanding the above paragraph, if a Participant is also a participant in another defined contribution plan of the Affiliated Employer Group, all or a portion of the minimum allocation described above may be provided under such other plan and the minimum allocation provided under this Plan shall be eliminated or reduced accordingly. If the Employee is a Participant in one or more defined benefit plans of the Affiliated Employer Group, all or a portion of the minimum required benefits or allocations under Section 416 of the Code may be provided under such plans as set forth in regulations issued by the Secretary of the Treasury, and the minimum allocation provided in the preceding paragraph shall be eliminated or reduced accordingly. Employer contributions resulting from a salary reduction election by an Employee shall not be counted toward meeting the minimum required allocations under this Section. Matching Employer Contributions may be used to satisfy the minimum required allocations under this Section, if such contributions are not counted under the ACP test described in Section 3.06. Participants who are Non-Key Employees and who are not separated from service as of the last day of the Plan Year, and who have (1) failed to complete 1000 Hours of Service (or the equivalent), (2) declined to make mandatory contributions to the Plan, or (3) been excluded from the Plan because such individual's compensation is less than a stated amount, are considered Participants solely for purposes of this Section. The minimum allocation required [to the extent required to be nonforfeitable under Section 416(b)] may not be forfeited under Section 411(a)(3)(B) or 411 (a)(3)(D). 12.03 Adjustment to Maximum Benefits. If the Plan is a Top-Heavy Plan for any Plan Year, then the maximum benefit which can be provided under Section 3.10 shall be determined by substituting "1.00" for "1.25" in the applicable fractions. However, if the Plan is not a Super Top-Heavy Plan for such Plan Year, than the preceding sentence shall not apply provided that "4%" (or such higher rate as is required by Internal Revenue Service Regulations) is substituted for "3%" in the first paragraph of Section 12.02, and a paired defined benefit plan provides an additional minimum accrual of 1% per year up to an additional 10% or this Plan provides a minimum allocation of 7.5% of compensation. 12.04 Minimum Vesting If the Plan is determined to be a Top-Heavy Plan for any Plan Year, then an Active Participant's vested interest in his Account determined as of the first day of such Plan Year, and determined as of any future date while the Plan continues to be a Top-Heavy Plan, shall be no less than as determined under the following Table: Years of Service Vesting Percentage Less than 2 years None 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 years or more 100% If the Plan subsequently is determined to no longer be a Top-Heavy Plan, then the above minimum vesting schedule shall not apply to any portion of a Participant's Account which is accrued after the first day of the first Plan Year in which the Plan is no longer a Top-Heavy Plan, provided that the Account for any Participant with three (3) or more Years of Service as the first date as of which the Plan is no longer a Top-Heavy Plan shall continue to be vested in accordance with a schedule not less than the minimum vesting schedule applicable during the period that the Plan was a Top-Heavy Plan. The minimum vesting schedule applies to all benefits within the meaning of Section 411(a)(7) of the Code except those attributable to employee contributions, including benefits accrued before the effective date of Section 416 and benefits accrued before the Plan became top-heavy. 12.05 Discontinuance of Article. In the event that the provisions of this Article are no longer required to qualify the Plan under the Code, then this Article XII shall thereupon be void without the necessity of further amendment of the Plan. IN WITNESS WHEREOF, and as evidence of the adoption of the foregoing, the Company has caused this instrument to be executed by a duly authorized officer as of this_________________day of________________, 1996. SHARED TECHNOLOGIES CELLULAR, INC. By: ____________________________________ ____________________________________ Title sharddoc.002 -----END PRIVACY-ENHANCED MESSAGE-----