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, 1995
_ _ _ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _ _ _ TO _ _
Commission File Number 0-17366
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SHARED TECHNOLOGIES FAIRCHILD INC.
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(Exact name of registrant as specified in its charter)
Delaware 87-0424558
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(State or other jurisdiction of Incorporation (I.R.S. Employer
or organization) Identification No.)
100 Great Meadow Road, Suite 104
Wethersfield, Connecticut 06109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 258-2400
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.004 par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_ _ X _ _ No _ _ _ _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
nonaffiliates as of March 25, 1995 was approximately $17,400,000, based on the
average of the closing bid and asked prices as reported on such date in the
over-the-counter market.
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock, as of March 29, 1996
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14,709,946 shares of Common Stock
$.004 par value
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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 10, 1996 and filed with the Securities and
Exchange Commission in definitive form on April 23, 1996.
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PART I
Item 1.
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Business
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(a) General Development of Business - Shared Technologies Fairchild
Inc., which was incorporated as Shared Technologies Inc. on January 30, 1986,
its subsidiaries and affiliated partnerships (collectively, the "Company") are
engaged in providing shared telecommunications services ("STS") and
telecommunication systems ("Systems") to tenants of modern, multi-tenant office
buildings. As an STS provider, the Company generally obtains the exclusive right
from a building owner (the Owner/Developer") to install an on-site
communications system, called a private branch exchange ("PBX"), or an off-site
communications system, called centrex, and to market telecommunications and
office automation services and equipment to tenants.
In May 1991, the Company acquired the stock of Boston
Telecommunications Company (BTC), a provider of STS in the Boston area. The
Company paid $1,097,000 consisting of acquisition cost less cash received of
$197,000, stock purchase warrants valued at $300,000 and a $600,000 promissory
note payable. In May 1989, the Company acquired interests in four entities
providing STS in the greater Chicago area from Shared Services, Inc. and I.S.E.,
Inc. for $180,000. Additionally, in February 1989, the Company purchased the
stock of Multi-Tenant Services, Inc. (MTS) a former division of BellSouth
Corporation for $4,048,000 of which $391,000 was paid in cash and in payment of
the balance the Company assumed existing lease obligations. MTS was a provider
of STS in nine metropolitan areas.
During 1992, the Company completed a restructuring due to its working
capital deficit and the maturity of its principal financing arrangements which
were due to the FDIC, as receiver for the Company's principal lender. The
restructuring included Shared Technologies Inc. and all of its subsidiaries. The
restructuring resulted in the Company recording a gain of $5,162,000 before
related expenses of $1,361,000 for consulting fees related to the restructuring
and income taxes of $45,000. As a result of the restructuring, approximately
$900,000 of vendor payables and $1,500,000 of capital lease obligations were
forgiven and $3,300,000 of vendor payables were converted to three year
non-interest bearing notes payable (see Note 7 of Notes to Consolidated
Financial Statements). Additionally, a settlement agreement was entered into
with the Federal Deposit Insurance Corporation ("FDIC") as receiver for the
Company's principal lender which resulted in the Company paying off its term
loan and revolving credit arrangements and recognizing a gain of approximately
$2,700,000. In April 1994 the Company entered into a settlement agreement which
provides for the payment of $750,000 plus interest at 10% which resulted in an
accrued extraordinary loss of $150,000 in 1993.
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In connection with the restructuring, the Company also raised equity
capital of approximately $5,780,000 from certain institutional investors, net of
expenses. A firm, one of whose principals is a director and stockholder of the
Company served as underwriter for the offering. The Company paid this firm
underwriting commissions and expenses totaling $446,750 for the offering. No
other parties to the restructuring were affiliated with the Company. The Company
also entered into agreements with Series A and B Preferred Stockholders to
convert their holdings, including $327,920 of the accrued dividends related
thereto, into Series C Preferred Stock. As part of this conversion, $40,990 of
the accrued dividends was forgiven by the stockholders.
In September 1992 the Company effected a one-for-four reverse stock
split of Common Stock and increased the par value of Common Stock from $.001 to
$.004 per share. All per share amounts contained herein have been retroactively
adjusted to reflect this split.
In December and October 1993 the Company commenced management and
subsequently completed the acquisition of certain assets and liabilities of Road
and Show South, Ltd. and Road and Show Cellular East, Inc., respectively. The
purchase price for South was $1,261,611 which represents $46,111 cash and an
obligation to issue 272,763 shares of the Company's common stock. The purchase
price for East was $750,245 which represents $209,245 cash and an obligation to
issue 121,403 shares of the Company's common stock.
In June 1994, Shared Technologies Inc., completed its acquisition of
the partnership interests of Access Telecommunication Group, L. P. ("Access")
for $9,000,000, subject to certain post closing adjustments. The $9,000,000
includes $4,000,000, paid at closing with the proceeds from the private
placement sale of approximately 1,062,000 shares of the Company's Common Stock,
and the issuance to the sellers of $400,000 shares of Preferred E stock, valued
at $1,500,000 and 700,000 shares of Preferred F stock valued at $3,500,000.
In April 1995, the Company's subsidiary, Shared Technologies Cellular,
Inc., ("STC") completed an initial public offering. Prior to this date, STC was
approximately an 86% owned subsidiary of the Company. STC sold 950,000 shares of
common stock at $5.25 per share which generated net proceeds of approximately
$3,274,000 after underwriters's commissions and offering expenses. The net
effect of the public offering on the Company's consolidated financial statements
was a gain of approximately $1,375,000.
On June 30, 1995, the Company purchased all of the outstanding capital
stock of Office Telephone Management ("OTM"). OTM provides telecommunication
management services primarily to businesses located in executive office suites.
The purchase price was $2,135,000, of which $1,335,000 was paid in cash, and the
balance through the issuance of a $800,000 note, including interest at 8.59% per
annum, through June 30, 2005.
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During December 1995, STC affected a private placement of approximately
$3,000,000 in Series A voting preferred stock to third parties. Although the
Company's ownership percentage of common stock of 59.3% did not change, the
voting rights assigned to the preferred stock reduced the Company's voting
interest in STC to 42.7%, resulting in the Company's loss of voting control of
STC. Accordingly, as a result of this stock issuance, the Company has accounted
for STC on an equity basis with all assets and liabilities of STC eliminated and
a non-current asset recorded to reflect the Company's equity investment in STC.
In March 1996, the Company's stockholders approved and the Company
consummated a merger with Fairchild Industries, Inc. ("FII") with and into the
Company. The Company simultaneously changed its name to Shared Technologies
Fairchild Inc. ("STFI"). In connection with the merger, the Company issued
6,000,000 shares of common stock, 250,000 shares of cumulative convertible
preferred stock with an initial $25,000,000 liquidation preference and 20,000
shares of special preferred stock with a $20,000,000 initial liquidation
preference. In addition the Company raised approximately $111,000,000 net of
expenses through the sale of 12 1/4% senior subordinated discount notes due
2006, and approximately $123,000,000 (of an available $145,000,000) in loans
from a credit facility with Credit Suisse, Citicorp USA, Inc. and NationsBank.
The funds were used primarily for the retirement two series of FII's preferred
stock and of certain liabilities assumed from FII in connection with the merger
and the retirement of the Company's existing credit facility. The merger was
accounted for using the purchase method of accounting. The total purchase
consideration of approximately $69,000,000 for the acquisition of FII was
allocated to the tangible and intangible assets and liabilities of FII based
upon their respective fair values.
In addition to the above transactions, the Company has continued to
pursue and achieve internal growth in its existing operations.
(b) Financial Information about Industry Segments - The Company is
engaged in one industry segment, the telecommunications industry, providing a
wide range of telecommunications and office automation services and equipment.
(c) Narrative Description of Business
(1) (i) Products and Services
Shared Telecommunication Services (STS)
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The Company provides STS to commercial tenants in office buildings in
which the Company typically has installed a dedicated private branch exchange
(PBX) switch under exclusive agreement with the building owner, thereby
permitting the Company's customers to
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obtain all their telephone and telecommunications needs from a single source and
a single point of contact. Under multi-year contracts that usually extend
through the terms of the tenants' leases, the Company offers its customers
access to services provided by regulated communications companies, such as
local, discounted long distance, international and "800" telephone services. The
Company also provides telephone switching equipment and telephones, as well as
voice mail, telephone calling cards, local area network wiring, voice and data
cable installation. Other services provided by the Company include audio
conferencing, automatic call distribution services and message center
capability. In addition, the Company's customers receive a convenient single
monthly customized invoice for all services provided by the Company.
Historically, the Company has marketed its services to small and
medium-sized (25 to 250 lines) business customers who are not otherwise able to
take advantage of economies of scale in procuring their telecommunications
services. "One-stop shopping" is provided for these customers'
telecommunications needs without the substantial initial capital costs that
would be incurred with the purchase of the same telecommunications system from
multiple suppliers. The Company offers its customers (i) services that would
otherwise not be cost-effective for, or readily available to, such customers due
to the size of their business; (ii) reduced capital expenditures and space
requirements by allowing its customers to utilize the Company's existing
infrastructure and centrally located hardware; and (iii) comprehensive
maintenance programs. Additional services are available as the customer's
business and telecommunications needs grow. The Company also provides its
customers with the benefits of responsive on-site service.
STS providers, such as the Company, negotiate and enter into long-term
telecommunications agreements with owners and developers of office buildings.
Under these agreements, the STS provider typically has the right for a period of
up to ten or more years to install switching equipment, wiring and telephones
capable of serving all of the tenants in an office building. Typically, the
right to install a dedicated PBX switch is exclusive. Such agreements provide
for the owners to assist the STS provider by identifying potential tenant
customers. Generally, an STS provider leases and pays rent to the owner for
switch room space in the building and, under certain circumstances, may agree to
provide an incentive to the owner. By contracting with an STS provider, an owner
will have the benefit of a state-of-the-art telecommunications infrastructure in
its building and be able to offer its tenants the ability to access
sophisticated telecommunications services.
Telecommunications Systems (Systems)
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Through its Systems business, the Company (i) distributes and sells
equipment, including small, medium and large capacity switches and ancillary
products, (ii) offers annual maintenance agreements under which the Company
maintains installed products either for a
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fixed annual fee for on a time and materials basis, (iii) performs systems
upgrades and expansions and moves, adds and changes of telecommunications
equipment and (iv) provides a variety of long distance services, including basic
long distance service, "800" services, calling cards, international calling and
various other network services. The Company provides telecommunications systems
to commercial customers and government agencies with Systems ranging in size
from 15 to several thousand lines.
Cellular
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The Company through its subsidiary Shared Technologies Cellular, Inc.
(STC) is involved in the cellular telephone services businesses the United
States. Since the Company does not have voting control of it has been accounted
for on an equity basis.
STC markets its cellular telephone services principally car rental
agencies, airlines and hotels. STC has agreements with the Hertz Corporate,
National Car Rental Systems, Inc., Avis Rent a Car Systems, Inc. and Budget Rent
a Car Corporation to offer its portable cellular telephones at designated car
rental locations principally at terminal airports, in approximately 65 cities
throughout the United States. Additionally, STC markets it service at
conventions and sporting events.
Through its acquisition of PTC Cellular, Inc. in November, 1995, STC
become a leading provider of in-car cellular phones. In addition, as a result of
its acquisition of Cellular Hotline, Inc. in May and June 1995 STC became the
largest provider of nationwide cellular activation services. As an activation
company STC charges a fee for this service to a national distribution partner
and collects revenue from the cellular carrier in the form of commission,
residual payments, and other payments. STC provides cellular activation and
mobile equipment sales and service. This acquisition also involved STC in debit
technology. Debit or prepaid cellular service is presented as a solution for
credit issues and for businesses requiring more control over their cellular
expenses.
For customers who require a more traditional approach to cellular
telecommunications, STC serves as an agent for select cellular carriers.
STS Buildings
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As of December 31, 1995 (prior to the merger with FII in March 1996),
the Company was providing STS to tenants in 115 buildings located in 15
metropolitan areas. In those cities where the Company provides STS to tenants in
more than one building, the Company is able to realize significant operating
economies by sharing management, administrative, sales and technical staff
across a number of buildings. The following table sets forth as of December 31,
1995, on a city-by-city basis, the Net Leaseable Square Feet and the
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Potential Lines of Service in each building where the Company provides STS to
tenants.
<TABLE>
<CAPTION>
Total Leaseable Sq. Total Lines
Location Buildings Feet in Service
<S> <C> <C> <C>
Atlanta 14 3,822,030 3,453
Birmingham 2 1,291,500 1,144
Boston 12 4,361,400 2,939
Chicago 10 3,210,300 3,322
Dallas 13 9,252,270 5,368
Hartford 6 1,624,500 1,425
Indianapolis 7 939,600 1,147
Los Angeles 10 1,674,000 622
Myrtle Beach 1 125,820 20
New Jersey 2 562,500 1,130
New Orleans 7 2,903,400 4,022
Phoenix 14 2,235,600 2,690
Seattle 8 4,033,800 3,376
Stamford 4 969,300 827
Nashville 5 1,217,340 1,342
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Totals 115 38,223,360 32,827
=== ========== ======
</TABLE>
On a post merger proforma basis Shared Technologies Fairchild Inc.
would look as follows at December 31, 1995.
<TABLE>
<CAPTION>
Total
Total Leaseable Sq. Potential Total Lines
Location Buildings Feet Lines in Service
<S> <C> <C> <C> <C>
Atlanta 42 13,739,413 45,798 11,682
Austin 5 810,000 2,700 2,503
Baltimore 1 414,000 1,380 133
Birmingham 2 1,291,500 4,305 1,144
Boston 12 4,361,400 14,538 2,939
Chicago 40 17,407,598 58,025 10,563
Dallas 35 17,728,439 59,095 14,881
Ft. Lauderdale 2 501,811 1,673 898
Hartford 6 1,624,500 5,415 1,425
Houston 20 11,317,500 37,725 3,292
Indianapolis 55 6,525,183 21,751 7,761
Los Angeles 28 7,845,108 26,150 3,556
Miami 4 2,079,999 6,933 2,054
Milwaukee 1 177,300 591 166
Minneapolis 26 4,255,708 14,186 5,852
Myrtle Beach 1 125,820 419 20
New Jersey 2 562,500 1,875 1,130
New Orleans 10 4,516,718 15,056 6,747
Orlando 1 391,500 1,305 801
Philadelphia 44 8,333,640 27,779 5,746
Phoenix 14 2,235,600 7,452 2,690
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Pittsburgh 17 5,604,519 18,682 1,758
Salt Lake City 13 1,035,000 3,450 2,425
Seattle 8 4,033,800 13,446 3,376
Stamford 4 969,300 3,231 827
Tampa 7 3,498,170 11,661 3,998
Nashville 5 1,217,340 4,058 1,342
Washington D.C. 43 14,084,100 46,947 6,151
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Totals 448 136,687,465 455,625 105,860
=== =========== ======== =======
</TABLE>
Penetration Rate* 26%
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*Penetration rate assuming a 10% National Vacancy rate. Lines in
Service/(Potential Lines x 90%).
Owner/Developer Agreements
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In most buildings where it provides STS, the Company or its assignor
has entered into a contractual agreement ("Owner/Developer Agreement") with the
building Owner/Developer. Subject to specific provisions contained in certain
Owner/Developer Agreements, the Owner/Developer Agreements generally grant the
Company the exclusive right to provide STS in the building and the
Owner/Developer is precluded from entering into a "materially similar
arrangement" with a third party. In addition, the Company is granted a right of
first refusal in the building for the offering of additional STS, such as
telephone answering services, word and data processing, telex, copier services
and certain other STS. The term of the agreement is generally for ten years with
renewal options.
The Owner/Developer Agreements generally provide for the payment of
royalties to the Owner/Developer which may be based on a percentage of gross
revenues or on a percentage of rental, sale and service income or net
long-distance revenues. Such royalty payments may commence at the initial
service date, at some later date, typically 18 to 24 months after the Company
commences to provide STS to the building, or at the time the Company achieves a
certain level of market penetration in the building.
The Company is responsible for the costs and expenses incurred in
operating and maintaining the STS equipment in the building and must obtain the
Owner/Developer's approval to make any modification in the STS equipment which
would affect the building structure. The agreement is assignable by the
Owner/Developer upon the sale of the building. Certain Owner/Developers also
have the right to purchase the Company's STS equipment in the building at a
nominal or fair market price if the agreement is terminated.
Each Owner/Developer Agreement either contains a lease, or references a
separately executed lease, for the space necessary for the Company's on-site
personnel and equipment.
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Tenant Contracts
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The Company is a party to a Master Shared Tenant Services Agreement
("Tenant Contract") with substantially all of its customers. The Tenant Contract
contains terms and conditions governing the provision of STS. Subsequent to
signing a Tenant Contract, tenants submit individual customer orders for
specific equipment rentals and STS. In addition to the typical Tenant Contracts
for STS, the Company has agreements with several tenants who have their own PBX
to maintain the system and manage the tenant's telephone call billing system,
and the Company receives a monthly fee for its services.
The Company generally signs contracts for a period of five years or a
term coterminous with the customer's lease in the building. The Company has
contracts ranging from month to month to five years. The Company feels it has
staggered the contracts such that there is no time when a material amount of
contracts come due at the same time. Additionally, the Company does not have any
individual customer contracts which are material.
(iii) Sales and Marketing
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The Company markets its services and products through a direct sales
force which is segmented into distinct geographic markets. Typically, under
agreements with the Company, the owner of a building identifies prospective and
existing tenants to the Company's local sales force. After establishing contact
with the potential customer and obtaining an understanding of the prospective
customer's telecommunications needs, the Company's local sales representative
arranges for a presentation of the Company's products and services and the cost
of potential solutions meeting the customer's requirements. After securing a
sale, members of the Company's sales force follow up with customers by offering
them new value-added services. Management believes that direct sales activities
are more effective than advertising for securing and maintaining the businesses
of small to medium-sized services customers. A significant percentage of new
Systems sales results from upgrading, enlarging or replacing systems currently
used by the Company's existing customers.
The Company strives to provide superior customer service and believes
that personal contact with potential and existing customers is a significant
factor in securing and retaining customers. Each new customer account is
processed locally at the site location that was responsible for obtaining the
account. The Company's customer service staff is dedicated to providing new
customers with a smooth transition to its services and systems. All customers'
calls for repair, move, adds, and changes are handled and processed at the local
site. Management believe that this personal and local handling of the customer
service function is very important to the customers, creating strong alliances
for the Company and encouraging repeat
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business. The Company's local offices retain total responsibility for all
aspects of their respective customers' services (including equipment, local
service and long distance). As a result, the customer only needs to place one
call to inquire about any aspect of its service. The management of each local
office site is evaluated quarterly for the quality of its customer service and
the Company's field service representatives conduct periodic audits of all of
its customers to assess their satisfaction with all aspects of service. The
Company's service contracts with STS customers are typically for a duration of
five years (or expire earlier upon termination of a customer's building lease).
Service contracts with the Company's Systems customers are typically for one to
three years duration and generally provide for automatic extensions of such
term.
Providing accurate and customized billing for customers is an integral
component of the Company's business. The Company's MIS systems process millions
of call records a month for the telecommunications services business and combine
this information with other recurring and nonrecurring customers charges to
produce monthly invoices. Tenants are quoted a monthly charge for leased
equipment which includes a rental fee for equipment, a charge for leased
equipment which includes a rental fee for equipment, a charge for access to the
PBX owned by the Company and installed in the building where such tenants are
located, and a local access charge based on the cost of the trunk lines which
connect the building to the central office of the local telephone company. In
addition, tenants are charged for special services and usage, including "800"
service, dedicated circuits, directory listing, local message units, directory
assistance, calling card services, third-party billing calls, and long-distance
at a discount from the standard rates charged by long-distance providers. The
Company believes that its detailed billing reports provide a unique service to
small and medium-sized customers allowing customers to understand and control
their telecommunications cost.
The MIS systems also track telecommunications installations and
customer requests from initial request to final collection. Each customer
request is entered into the job order system to monitor the progress of the work
as well as keep track of the time and material requisitioned for the job.
The Company's MIS systems can be expanded with minimal incremental cost
to accommodate substantially more volume. Such systems feature backup processors
and short-time response maintenance agreements and are designed to respond to
customer needs as well as support the Company's operations.
Subsequent to the March, 1996 Merger, as the nation's leading STS
provider, the Company believes it is well positioned to continue to grow through
the continued implementation of its business strategy, the key elements of which
are:
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- Increased Penetration of Existing Buildings. The Company intends to
increase its focus on generating additional revenue from the 448 buildings in
which it now provides shared telecommunications services. Although the Company
may continue to make selective acquisitions of STS providers in the future, its
principal focus will be on marketing services within its existing buildings,
both to new customers and to existing customers.
- Significant Additions of Buildings. For the three years ended
December 31, 1995, STI and FII grew internally through the addition of 26 and 36
buildings, respectively. The Company plans to take advantage of its improved
market position to aggressively pursue opportunities to add buildings to its
portfolio, in particular, through multi-building contracts with large commercial
property owners.
- Expanded Service Offerings. The Company intends to capitalize on the
growing demand for new telecommunications and information technology by
expanding its services to include high speed access to the Internet, video
teleconferencing, wireless services and the delivery of cable programming. The
Company's existing infrastructure allows for low-cost delivery of these services
at minimal incremental expense to the Company. The Company believes that many of
these services would otherwise not be readily available or affordable to its
customers.
- Cross Marketing of Services and Systems. The Company intends to
leverage its Systems business by marketing telecommunications services to its
existing Systems customer base. In addition, the Company intends increasingly to
market Systems to its STS customers relocating from existing rental space who
continue to require customized telecommunications solutions, including the
purchase or lease of equipment or the provision of long distance and other
network services offered by the Company.
(iv) Patents, Trademarks, Licenses, Franchises, Concessions
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See Item 1(d) (i) - "Owner/Developer Agreements" herein. Additionally,
Shared Technologies Inc. is a registered trademark.
(v) Seasonality
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While the Company's business is not generally seasonal, the Company has
experienced, over the last several years, a reduction in local and long distance
revenues in the month of December which is believed to be associated with the
holiday season.
(vi) Working Capital
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To date, the Company has funded its working capital shortfall through
borrowings and sales of its securities. See Item 1(a) - "General Development of
Business"; "Management's Discussion and Analysis of Results of Operations and
Financial Condition". The Company requires working to sustain its growth and
maintain its revenue base.
In March 1996, the Company's stockholders approved and the
Company consummated a merger with Fairchild Industries, Inc. ("FII") with and
into the Company. The Company simultaneously changed its name to Shared
Technologies Fairchild Inc. ("STFI"). In connection with the merger, the Company
issued 6,000,000 shares of common stock, 250,000 shares of cumulative
convertible preferred stock with an initial $25,000,000 liquidation preference
and 20,000 shares of special preferred stock with a $20,000,000 initial
liquidation preference. In addition the Company raised approximately
$111,000,000 net of expenses through the sale of 12 1/4% senior subordinated
discount notes due 2006, and approximately $123,000,000 (of an available
$145,000,000) in loans from a credit facility with Credit Suisse, Citicorp USA,
Inc. and NationsBank. The funds were used primarily for the retirement two
series of FII's preferred stock and of certain liabilities assumed from FII in
connection with the merger and the retirement of the Company's existing credit
facility. The merger was accounted for using the purchase method of accounting.
The total purchase consideration of approximately $69,000,000 for the
acquisition of FII was allocated to the tangible and intangible assets and
liabilities of FII based upon their respective fair values.
Subsequent to the March, 1996 merger the Company will have
approximately $20.5 million available under the Credit Facility to fund working
capital requirements. The Credit Facility will contain, among other things,
affirmative and negative covenants which are usual and customary with respect to
senior secured indebtedness.
The Company expects to satisfy its future cash requirements through
cash from operations and borrowings under the Credit Facility. The Company
expects that its working capital requirements will remain manageable primarily
due to the minimal capital requirements of the Systems business and, with
respect to the Services business, its ability to negotiate favorable payment
terms with its vendors and to bill its customers in advance for many recurring
services.
(vii) Dependence on a Single Customer
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No single customer or building accounts for 10% or more of the
Company's revenues. The Company's business is not dependent upon a single or a
few customers.
(viii) Backlog
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At any given period the Company maintains new contracts signed but not
yet installed due to the term of the contract which further adds to this
backlog. The number of additional lines not yet installed related to new
contracts cannot be determined due to changes that occur through the
installation date. Therefore, backlog information cannot be quantified.
(ix) Government Regulation
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The Company is subject to specific regulations in several states.
Within various states, such regulations may include limitations on the number of
lines or PBX switches per system, limitations of shared telecommunications
systems to single buildings or building complexes, requirements that such
building complexes be under common ownership or common ownership, management and
control and the imposition of local exchange access rates that may be higher
than those for similar single-user PBX systems. The transaction could trigger
the requirement to secure permission or consent from certain state regulatory
agencies. There can be no assurance that the Company can obtain such permissions
or consents, or if they can be obtained, that the process can be completed on a
timely basis.
Rates for telecommunications services are governed by tariffs filed by
certified carriers with various regulatory agencies. Future changes in the
regulatory structure under which such tariffs are filed, or material changes in
the tariffs themselves, could have a material adverse effect on the Company's
business. In addition, various state regulatory agencies are engaged in fact
gathering to examine competition and the rules which govern the provision of
intrastate services. Although the Company intends to monitor these developments,
the likelihood of any changes in such rules cannot be predicted.
The Company's Systems business is generally exempt from governmental
regulation from the standpoint of marketing and sales. However, various
regulatory bodies, including the Federal Communications Commission, require that
manufacturers of equipment obtain certain certifications.
On February 8, 1996, the Telecommunications Act of 1996
("Telecommunications Act") was enacted as Federal law. The Telecommunications
Act makes certain changes in the regulatory environment in which the Company
operates by: (i) pre-empting any State or local law or regulation that
prohibits, or has the effect of prohibiting, the ability of any entity to
provide any interstate or intrastate telecommunications service which may result
in the removal of regulatory barriers that have heretofore discouraged the
Company from expanding its business in certain States; (ii) prohibiting local
exchange telephone companies from prohibiting, or imposing unreasonable or
discriminatory conditions on, the resale of those companies' telecommunications
services which may result in the
14
<PAGE>
removal or relaxation of some of the restrictions on shared telecommunications
systems referred to above, and reduces the risk that telephone companies could
modify their tariffs to improve more restrictive terms and conditions on such
Systems; (iii) authorizing the FCC to forebear from applying any regulation to a
telecommunications carrier or class of telecommunications carriers under certain
conditions, which may result in a relaxation of the FCC's regulatory supervision
of over the Company's operations; and (iv) authorizing the Regional Bell
Operating Companies upon satisfying certain conditions, to apply for, and the
FCC to grant, authority to offer long-distance services to customers within the
States in which they offer local telephone service. This may result in more
intense competition within the markets in which the Company operates. Other
provisions of the Telecommunications Act direct the FCC to conduct rulemaking
proceedings on a variety of subjects, including interconnection, resale and
universal service, which may affect the Company. It is not possible, however, to
predict the outcome of any such proceedings.
The Telecommunications Act may greatly affect government regulation of
telecommunications, both at the state and federal level. Although the long term
goal of the legislation is deregulatory, federal and state government regulatory
agencies may create new rules to govern competition in the local exchange market
that, in the short term, could subject the Company's shared telecommunications
services to greater regulation than in the past.
(x) Competition
-----------
The Company's STS business competes with regulated major carriers that
may provide a portion of the services that the Company provides, but are
typically not structured to provide all of a customer's telecommunications
requirements. The Company also competes with small independent operators serving
regional or local markets and with other STS providers, including the Realcom
unit of MFS Communications Inc. ("MFS"). The Company also competes with
equipment manufacturers and distributors and long distance companies for the
provision of telephone and other telecommunications equipment and services to
tenants in buildings under franchise with the Company. Within the past five
years, competition has expanded to include a group of companies known as
alternate access providers, including MFS, TCG, Inc. and others. The major
competitive factors in the STS market are technology, price and service. The
Company's principal competitive advantages are its ability to provide "one-stop
shopping" for telecommunications services and site-based technical service.
The principal competitors of the Company's Systems business and, once a
building franchise has been obtained, the Company's STS business, include the
direct sales channels of manufacturers such as AT&T's Network Systems division,
Northern Telecom, Inc., NEC, other distributors of equipment manufactured by
such companies, as well as the Regional Bell Operating Companies ("RBOCs").
15
<PAGE>
On February 8, 1996, the Telecommunications Act was enacted as Federal
Law. The Telecommunications Act makes certain changes in the regulatory
environment in which the Company operates by: (i) pre-empting any State or local
law or regulation that prohibits, or has the effect of prohibiting, the ability
of any entity to provide any interstate or intrastate telecommunications
services which may result in the removal of regulatory barriers that have
heretofore discouraged the Company from expanding its business in certain
States; (ii) prohibiting local exchange telephone companies from prohibiting, or
imposing unreasonable or discriminatory conditions on, the resale of those
companies' telecommunications services which may result in the removal or
relaxation of some of the restriction on shared telecommunications Systems
referred to in the preceding paragraph, and reduces the risk that telephone
companies could modify their tariffs to impose more restrictive terms and
conditions on such Systems; (iii) authorizing the FCC to forebear from applying
any regulation to a telecommunications carrier or class of telecommunications
carriers under certain conditions, which may result in a relaxation of the FCC's
regulatory oversight over the Company's operations; (iv) authorizing the RBOCs,
upon satisfying certain conditions, to apply for, and the FCC to grant,
authority to offer long-distance services to customers within the States in
which they offer local telephone service. This may result in more intense
competition within the markets in which the Company operates. Other provisions
of the Telecommunications Act direct the FCC to conduct rulemaking proceedings
on a variety of subjects, including interconnections, resale, and universal
service, which may affect the Company, but it is not possible to predict the
outcome of any such proceedings.
The Telecommunication Act may result in greater competition for the
Company. The RBOCs are free immediately to seek authority to offer long distance
service outside their current operating areas. They will be free to offer long
distance services to customers within their current operating regions after
satisfying the law's requirements for opening their local markets to
competition. GTE and other local exchange carriers are free immediately to seek
authority to offer long distance services both within and outside their regions.
Long distance carriers also are permitted to seek authority to offer
local exchange services. The major carriers (AT&T, MCI and Sprint) will be
subject, on an interim basis, to restrictions on joint marketing of local and
long distance services.
(xiii) Employees
---------
As of March 15, 1996, STI and FII on a combined basis had approximately
774 employees, of whom several were covered by two collective bargaining
agreements. One agreement expires in 1998 and
16
<PAGE>
the other expires in 1999. Management believes that STI and FII's relations with
their respective employees are satisfactory.
Item 2.
- -------
Property
- --------
As of December 31, 1995, the Company leased real property totaling
approximately 60,000 square feet. As a result of the merger, the Company now
leases approximately 340,000 square feet. The Company does not own any real
property. Each of the leased properties is, in management's opinion, generally
well maintained, is suitable to support the Company's business and is adequate
for the Company's present needs.
The Company leases from RHI Holdings, Inc., the former parent of FII,
on an arm's-length basis, office space at Washington-Dulles International
Airport.
Item 3.
- -------
Legal Proceedings
- -----------------
The Federal Corporate Administrative Contracting Officer (the "AOC"),
based upon the advice of the United States Defense Contract Audit Agency, has
made a determination that FII did not comply with Federal Acquisition
Regulations and Cost Accounting Standards in accounting for the (i) the 1985
reversion to FII of approximately $50.0 million in excess pension funds in
connection with the termination of defined benefit pension plans, and (ii)
pension costs upon the closing of segments of FII's business. The ACO has
directed FII to prepare a cost impact proposal relating to such plan
terminations and segment closings and, following receipt of such cost impact
proposal, may seek adjustments to contract prices. The ACO alleges that
substantial amounts will be due if such adjustments are made. In connection with
the merger FII stated that it believes it has properly accounted for the asset
reversions in accordance with applicable accounting standards. FII has had
discussions with the government to attempt to resolve these pension accounting
issues.
In December 1995, Gerard Klauer Mattison & Co., LLC ("GKM"), filed suit
against the Company in U.S. District Court for the Southern District of New York
alleging breach of a letter agreement and seeking an amount in excess of $2.25
million for a commission allegedly owed to GKM as a result of GKM initiating
negotiations between the Company and FII and negotiating the Merger. GKM has
alleged that the Company entered into a fee agreement, whereby the Company
agreed to pay to GKM 0.75% of the value of the transaction as a fee. Jeffrey J.
Steiner has denied that FII at any time engaged GKM for this transaction. The
Company filed an Answer in January,
17
<PAGE>
1996, denying that any commission is owed. This litigation is in the discovery
process.
The Company is a party to other lawsuits and administrative proceedings
that arose in the ordinary course of its business. Although the final results in
all suits and proceedings cannot be predicted, the Company presently believes
that the ultimate resolution of all such other lawsuits and proceedings, after
taking into account the liabilities accrued with respect to such matters, will
not have a material adverse effect on the Company's financial condition, results
of operation or cash flows. See Note 16 to the Company's Consolidated Financial
Statements.
The Company has no other material litigation or unasserted claims, the
outcome of which would have a material impact on the Company's financial
condition, results of operations or cash flows.
In the matter of Tel-A-Booth Communications, Ltd. v. Shared
Technologies Inc. et al., Supreme Court of the State of New York, County of New
York, an Order and Judgment was entered on March 14, 1996 granting the
defendants' motion for summary judgment and dismissing the plaintiff's claims.
The case had arisen in connection with the Company's operations at the Jacob K.
Javits Convention Center in New York City.
Item 4.
- -------
Submission of Matters to a Vote of Security Holders None.
- ---------------------------------------------------------
PART II
Item 5.
- -------
Market for Registrant's Common Stock and Related Stockholder Matters
- --------------------------------------------------------------------
The Company's shares of Common Stock (trading symbol: STCH) have been
quoted and traded in the over-the-counter market since December 13, 1988.
Over-the-counter market quotations reflect interdealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. During 1994 and 1993, the quarterly high and low closing prices
were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $5 1/4 $3 1/2 $4 5/8 $2 7/8
Second Quarter 5 3/4 4 4 3 1/8
Third Quarter 5 1/4 3 7/8 5 3/8 2 1/2
Fourth Quarter 4 3/4 3 1/8 4 7/8 3 1/2
</TABLE>
18
<PAGE>
Number of beneficial holders of the Company's Common Stock as of February 1,
1996 was 1,856.
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 1992 and 1991 are not
presented in this filing. Such selected financial data were derived from audited
consolidated financial statements not included herein. The selected financial
data of the Company should be read in conjunction with the Consolidated
Financial Statements and related notes appearing elsewhere in this Form 10-K. In
September 1992 the Company effected a one-for-four reverse stock split of common
stock and increased the par value of common stock from $.001 to $.004 per share.
Weighted average common shares outstanding and per share information have been
retroactively adjusted to reflect this split. All amounts, except per share
amounts, are in thousands.
<TABLE>
<CAPTION>
Statement of Operations Data: 1995 1994 1993 1992 1991
- ------------------------------ ----- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Revenue $47,086 $45,367 $25,426 $24,077 $23,172
Gross margin 18,214 19,195 10,912 9,254 6,358
Selling, general and
administrative expenses 16,189 16,909 9,797 9,959 10,717
Business Development Expenses - - 305 - -
Operating income (loss) 2,026 2,286 810 (705) (4,359)
Interest expense, net (667) (359) (438) (290) (1,268)
Minority interest in net (inc.)
losses of subsidiaries (1,752) (128) (82) (37) 4
Gain on sale of subsidiary stock 1,375 - - - -
Extraordinary Item -
(Loss) gain on restructuring - - (150) 3,756 -
Income taxes (45) (63) - - -
Income tax benefits 550 - - -
Net income (loss) 927 2,286 140 2,724 (5,623)
Net income (loss) per
common share .06 .27 (.04) .59 (1.59)
Weighted average common
shares outstanding 8,482 6,792 5,132 4,063 3,730
Cash dividends declared
per preferred share .29 .29 .32 .30 .30
Cash dividends paid
per preferred share .29 .29 .32 .38 .18
Cash dividends declared or
paid per common share - - - - -
Balance Sheet Data:
Working capital deficit ($3,393) ($3,859) ($ 3,889) ($ 4,506) ($15,615)
Total assets 42,863 37,925 20,601 18,752 18,436
Notes payable, convertible
promissory notes payable,
other long-term debt (incl.
current portion) and
19
<PAGE>
redeemable preferred stock 6,999 4,727 3,719 4,745 10,030
Stockholders' equity (deficit) 22,845 20,881 9,302 6,034 (3,148)
</TABLE>
Item 7.
- -------
Management's Discussion and Analysis of Results of Operations and
- -----------------------------------------------------------------
Financial Condition
- --------------------
Overview and Recent Developments
- --------------------------------
STFI is a national provider of shared telecommunications services ("STS") and
telecommunications systems ("Systems") to tenants of multi-tenant commercial
office buildings. One of STFI's subsidiaries, Shared Technologies Cellular Inc.
("STC"), is a provider of short-term portable cellular telephone services.
In December 1995, STC issued approximately $3.0 million in voting preferred
stock to third parties. While STFI's ownership percentage did not change, STFI's
voting interest in STC was reduced to 42.7%, resulting in STFI's loss of voting
control. Accordingly, subsequent to this stock issuance, STC was accounted for
under the equity method; all assets and all liabilities of STC were eliminated
from STFI's consolidated balance sheet and a non-current asset was recorded to
reflect STFI's investment in STC on the equity basis. STC results of operations
adjusted for STFI's ownership interest, are reflected on the statement of
operations for the year ended December 31, 1995 per the equity method as a one
line item below operating income.
In March 1996 STFI's stockholders approved and STFI completed a merger with
Fairchild Industries, Inc.("FII") following a reorganization transferring all
non-communications assets to its parent, RHI Holding, Inc. Management believes
this merger will significantly strengthen the Company's strategic position in
the telecommunications market. In addition the merger will present opportunities
to realize significant operational and financial cost savings. The merger makes
STFI the largest provider of STS in the United States. On a pro forma basis STFI
generated $175 million in sales and $19 million in operating income for the year
ended December 31, 1995. In conjunction with the merger STFI raised
approximately $111 million after offering expenses through the issuance of 12
1/4% Senior Subordinated Notes Due 2006 and $125 million (of an available $145
million) from a credit facility with Credit Suisse, Citicorp USA, Inc. and
NationsBank. The Company anticipates repaying these borrowings over the next ten
years with cash provided by operations.
Results of Operations
- ---------------------
The following table sets forth various components of STFI's statements of
operations expressed as a percentage of revenues:
20
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues 100.00% 100.00% 100.00%
Cost of revenues 61.32% 57.69% 57.08%
--------------- --------------- ---------------
Gross Margin 38.68% 42.31% 42.92%
Selling, General and Administrative Expenses 34.38% 37.27% 39.73%
--------------- --------------- ---------------
Operating Income 4.30% 5.04% 3.19%
Interest expense (net) -1.44% -0.79% -1.72%
Minority Interest 0.00% -0.28% -0.32%
Gain on sale of subsidiary stock 2.92% 0.00% 0.00%
Equity in loss of subsidiaries -3.72% 0.00% 0.00%
Income Tax Benefit (Expense) -0.10% 1.07% 0.00%
Extraordinary Item 0.00% 0.00% -0.59%
--------------- --------------- ---------------
Net Income 1.96% 5.04% 0.56%
=============== =============== ===============
</TABLE>
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
- ---------------------------------------------------------------------
Revenues
- --------
STFI's revenues rose to a record $47.1 million in 1995 an increase of $1.7
million or 3.7% over 1994 revenues of $45.4 million. This increase occurred
despite the loss of STC revenue as STC results were recorded per the equity
method in 1995; STC accounted for $10.2 million of 1994 revenue. STS revenue
increased $6.5 million or 22.7% and Systems $5.4 million or 83.1% in 1995 over
1994 levels. Approximately $2.9 million of the growth in revenue for STS was
attributable to a full year of service at locations acquired in June 1994 with
the acquisition of Access Telecommunications Group, L.P. (Access), $1.6 million
was attributable to the June 1995 acquisition of Office Telephone Management
(OTM), the remaining increase of approximately $2.0 million was generated
through internal growth at existing and new locations. Approximately $4.7
million of the growth in Systems revenues is attributable to a full year of
activity at accounts acquired with the June 1994 acquisition of Access, the
remaining increase of $1.8 million was generated internally.
Gross margin
- ------------
Gross margin dropped to 38.7% of revenues for 1995 from 42.3% for 1994, a
reduction of 3.6%. The following table sets forth the components of the
Company's overall gross margin for 1995 as a factor of sales percentage and
gross margin percentage per line of business:
21
<PAGE>
<TABLE>
Overall
Division Sales GM GM
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STS 74.7% 44.6% 33.3%
Systems 25.3% 21.1% 5.4
Company Total 100.0% 38.7%
=============== ===============
</TABLE>
As shown above, the 1995 gross margin was a mix of STS gross margin of 44.6% and
Systems gross margin of 21.1%. In 1994 the Company's gross margin was a
combination of STS gross margin of 45.2%, Systems gross margin of 20.4% and STC
gross margin of 48.2%. STS produced slightly reduced gross margin from the 1994
level mainly due to the acquisition of OTM operations which produced gross
margin of approximately 30%. Systems experienced slightly improved gross margin
mainly due to a full year of operations obtained with the Access acquisition.
The overall decrease in the Company's gross margin was principally the result of
changes in sales mix. The change in accounting to the equity method for STC
results of operations created an overall drop in gross margin of approximately
1.7% for 1995. The drop in STS gross margin for 1995 contributed 0.4% to the
overall reduction in gross margin for 1995. The remainder of the decrease in
gross margin was generated by Systems. As noted above, Systems revenues grew at
a faster rate than STS revenues in 1995. Since Systems produces significantly
lower gross margin compared to STS, the growth in Systems sales depressed
overall gross margin for the Company 1.5%.
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A") as a percentage of
revenues decreased to 34.4% for 1995 compared to 37.3% for 1994. The Company has
reduced SG&A as a percentage of revenues by increasing revenues without adding a
comparable percentage of SG&A costs. Certain SG&A costs are essentially fixed
and do not increase significantly with revenue growth. In addition the Company
has carefully chosen to expand in locations with existing management
infrastructures already in place.
Operating income
- ----------------
Operating income decreased by $0.3 million or 11.4% to $2.0 million in 1995 from
$2.3 million in 1994. The decrease was partially the result of STC no longer a
part of the STFI consolidated group in 1995. STC contributed approximately $0.7
million to operating income in 1994. This was offset by improved STS and Systems
contribution of $0.4 million in 1995 over 1994 levels.
Gain on sale of subsidiary stock
- --------------------------------
In April 1995 the Company successfully completed a public offering of STC stock.
Following the offering the Company's percentage of ownership decreased from
approximately 86% to 60%. The accounting treatment of the sale required the
Company to record a gain of $1.4 million for the year ended December 31, 1995.
22
<PAGE>
Equity in loss of subsidiary
- ----------------------------
In December 1995, STC issued approximately $3.0 million in voting preferred
stock to third parties. While STFI's ownership percentage did not change, STFI's
voting interest in STC was reduced to 42.7%, resulting in STFI's loss of voting
control. Accordingly, subsequent to this stock issuance, STC was accounted for
under the equity method, The Company recorded an equity loss of $1.7 million as
a result of STC losses of $2.8 million for the year ended December 31, 1995
Interest expense
- ----------------
Interest expense net of interest income increased by $0.3 million for the year
ended December 31, 1995 over the year ended December 31, 1994. This is
attributable to the addition of approximately $4.4 million in interest bearing
debt during 1995. Approximately $0.3 million in non interest bearing debts were
repaid during 1995.
Income tax benefit (expense)
- ----------------------------
The Company recorded an insignificant amount of income tax expense for the year
ended December 31, 1995 compared to a net benefit of $0.5 million for the year
ended December 31, 1994. Income tax expense for 1995 was mainly the result of
state income taxes. During 1994 STFI adjusted the deferred tax asset valuation
reserve per Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" ("SFAS 109"). This adjustment resulted in a deferred tax asset of
$8.0 million, a corresponding valuation reserve of $7.4 million and a $0.6
million tax benefit for the year ended December 31, 1994. This benefit was
partially offset by state income taxes resulting in a net benefit of $0.5
million for 1994. The source of the deferred tax asset is principally the
expected future utilization on a conservative basis of net operating losses
("NOL") generated in prior years. Based on the requirements of SFAS 109 the
Company recalculated the deferred tax asset and adjusted the valuation reserve
for the year ended December 31, 1995. This adjustment resulted in no significant
impact to the Company's results of operations for the year ended December 31,
1995. At December 31, 1995 the Company's NOL carryforward for federal income tax
purposes was approximately $21.8 million.
Net income
- ----------
As a result of the factors listed above, net income for the year ended December
31, 1995 decreased by $1.4 million or 60.9% to $0.9 million from $2.3 million
for 1994.
Year Ended December 31, 1994 compared to Year Ended December 31, 1993
- ---------------------------------------------------------------------
Revenues
- --------
STFI's revenues for the year ended December 31, 1994 increased by $20.0 million,
or 78.7%, to $45.4 million compared to $25.4 million for the year ended December
31, 1993. Acquisitions were the major contributors to revenue growth in 1994.
Approximately $8.9 million of the revenue increase was attributable to the
acquisition of Access. Another $8.0 million was due to the expanded activity of
STC
23
<PAGE>
created with the 1993 acquisitions of Road and Show East and Road and Show South
nationwide rental phone businesses ("Road & Show"). The remaining revenue
increase of $3.1 million was achieved through internal growth.
Gross margin
- ------------
Gross margin dipped slightly in 1994 to 42.3% of revenue from 42.9% of revenues
in 1993. The following table sets forth the components of the Company's overall
gross margin for 1994 as a factor of sales percentage and gross margin
percentage per line of business:
<TABLE>
<CAPTION>
Overall
Division Sales GM GM
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STS 63.2% 45.2% 28.6%
Systems 14.3% 20.4% 2.9%
STC 22.5% 48.2% 10.8%
--------------- --------------- ---------------
Company Total 100.0% 42.3%
=============== ===============
</TABLE>
In 1994 the Company's gross margin was a combination of STS gross margin of
45.2%, Systems gross margin of 20.4% and STC gross margin of 48.2%. In 1993 the
Company's gross margin was a combination of STS gross margin of 46.4%, Systems
gross margin of 16.9% and STC gross margin of 27.1%. STS achieved slightly
reduced gross margin from the 1993 level mainly due to the acquisition of Access
which added several new buildings which historically have produced gross margins
of approximately 44% which is slightly lower than those at existing STS
locations. Systems experienced slightly improved gross margin mainly due to a
half year of operations obtained with the Access acquisition. STC gross margin
increased dramatically due to a full year of Road & Show operations which
historically have produced gross margins of approximately 50%. The overall
decrease in the Company's gross margin was largely the result of changes in
sales mix and the resulting effect on the Company's overall gross margin. STS
accounted for 63.2% of total revenues in 1994 versus 85.4% in 1993; Systems
revenues accounted for 14.3% of total revenues in 1994 versus 5.9% in 1993; and
STC generated 22.5% of total revenue for 1994 versus 8.7% for 1993.
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A") as a percentage of revenue
decreased to 37.4% for 1994 compared to 39.7% for 1993. This improvement was
generated mainly through the synergy's associated with the acquisition of
Access. In addition the Company has carefully chosen to grow internally only at
locations with existing management infrastructures already in place.
Operating income
- ----------------
24
<PAGE>
Operating income increased by $1.5 million or 187.5% to $2.3 million in 1994
from $0.8 million in 1993. The increase was mainly due to the growth in overall
sales combined with a reduction in SG&A as a percentage of revenue.
Interest expense
- ----------------
Interest expense net of interest income decreased by $0.1 million to $0.3
million for 1994 compared to $0.4 million in 1993. The majority of the interest
expense for 1994 was generated from the addition of $2.3 million in interest
bearing debts. The bulk of the 1993 interest expense was generated through
accruals for interest and penalty payments to taxing authorities that may arise
from late payments.
Extraordinary item - Loss on restructuring
- ------------------------------------------
An extraordinary loss of $0.2 million for 1993 was recorded to reflect the
settlement of certain obligations to lenders and other creditors related to the
1992 restructuring. No extraordinary items were recorded for 1994.
Income tax benefit
- ------------------
Effective January 1, 1993, STFI implemented SFAS 109 requiring the adoption of
an asset and liability approach to accounting for income taxes. As a result,
STFI recorded a deferred tax asset of $8.0 million, a corresponding valuation
reserve of $7.4 million and a $0.6 million tax benefit for the year ended
December 31, 1994. This benefit was partially offset by state income taxes
resulting in a net benefit of $0.5 million for 1994. The source of the deferred
tax asset is principally the expected future utilization on a conservative basis
of net operating losses ("NOL") generated in prior years.
Net income
- ----------
As a result of the factors listed above, net income for the year ended December
31, 1994 increased by $2.2 million to $2.3 million from $0.1 million for 1993.
25
<PAGE>
Liquidity and Capital Resources
- -------------------------------
During 1995 STFI continued to effectively manage a working capital deficit and
produce record earnings from operations. Net cash provided by operations reached
a record $4.9 million in 1995 compared to $3.1 million in 1994 and $2.2 million
in 1993. This helped reduce the working capital deficit to $3.4 million at
December 31, 1995 compared to $3.7 million and $3.9 million for December 31,
1994 and 1993 respectively.
The Company continued to invest significant capital towards growth internally
and through acquisition. In addition the Company has continued to invest in
upgrading telecommunication equipment at existing locations. Over the past three
years STFI has invested $8.9 million on equipment purchases. Over the same
period, the Company invested $0.8 million towards a merger with FII completed in
1996 and $5.3 million to complete two other major acquisitions; OTM in June 1995
and Access in June 1994.
Financing activities ware focused primarily on raising capital to provide cash
for investing activities. During 1995 the Company borrowed $2.7 million and
raised $1.2 million from sales of common stock to help finance the current
year's equipment purchases and the acquisition of OTM. During 1994 and 1993
approximately $6.4 million was raised from sales of common and preferred stock
to help the Company fund operations. Over the past three years the Company spent
$6.5 million to repay notes, long-term debt and capital lease obligations.
Cash requirements for 1996 will be significant due to the merger with FII
mentioned earlier. This merger was financed through a credit facility and the
sale of Senior Subordinated Notes mentioned earlier. The Company anticipates
repaying these borrowings and providing cash for operations and capital
expenditures through cash from operations. As of March 1996 the Company has a
credit facility available of approximately $20 million.
Item 8.
- -------
Financial Statements and Supplementary Data
- -------------------------------------------
Attached.
Item 9.
- -------
Changes in and Disagreements with Accountants on Accounting
- -----------------------------------------------------------
and Financial Disclosure
- ------------------------
26
<PAGE>
None.
PART III
Items 10, 11, 12 and 13.
- -----------------------
The Company incorporates by reference in response to these items its
Proxy Statement for its Annual Meeting of Stockholders to be held on May 10,
1996 (to be filed with the Securities and Exchange Commission in definitive
form on April 23, 1996).
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, 1995 and 1994.
Consolidated Statements of Operations for the years ended December 31, 1995,
1994 and 1993.
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1995, 1994 and 1993.
Consolidated Statements of Cash Flow for the years ended December 31, 1995, 1994
and 1993.
Notes to Consolidated Financial Statements
Financial Statements Schedules: Schedule VIII
(b) Reports on Form 8-K
-------------------
On November 21, 1995 the Company filed a Form 8-K Item 5 indicated that
it had entered into an agreement and Plan of Merger dated as of November 9, 1995
with Fairchild Corporation and its subsidiaries, RHI Holdings, Inc. and
Fairchild Industries, Inc. pursuant to which the Company will acquire the
telecommunications Systems and service business operated by Fairchild
Communication Services Company.
On November 22, 1995 the Company filed a Form 8-K Item 2 and 7
detailing that on November 13, 1995, the Company's cellular subsidiary, Shared
Technologies Cellular, Inc., completed its acquisition of certain assets of PTC
Cellular, Inc.
27
<PAGE>
(c) Exhibits
--------
Exhibit No. Description of Exhibit
- ----------- ----------------------
1.0 Purchase Agreement dated March 8, 1996 among the
Company, STI, the guarantors named therein and CS First
Boston Corporation and Citicorp USA, Inc. Incorporated
by reference to the Company's Form 8-K filed on March
28, 1996.
2.1 Agreement and Plan of Merger dated as of November 9,
1995 among Shared Technologies Fairchild Inc. (formerly
Shared Technologies Inc.) ("STFI"), Fairchild
Industries, Inc. ("FII"), RHI Holdings, Inc. ("RHI")
and The Fairchild Corporation ("TFA"). Incorporated by
reference to the Company's Form 8-K filed on March 28,
1996.
2.2 First Amendment to Agreement and Plan of Merger dated
as of February 2, 1996 among STFI, FII, RHI and TFC.
Incorporated by reference to the Company's Form 8-K
filed on March 28, 1996.
2.3 Second Amendment to Agreement and Plan of Merger dated
as of February 24, 1996 among STFI, RHI and TFC.
Incorporated by reference to the Company's Form 8-K
filed on March 28, 1996.
2.4 Third Amendment to Agreement and Plan of Merger dated
as of March 1, 1996 among STFI. FII, RHI and TFC.
Incorporated by reference to the Company's Form 8-K
filed on March 28, 1996.
3(i).1 Restated Certificate of Incorporation of the Company.
Incorporated by reference to the Company's Form 8-K
filed on March 28, 1996.
3(i).2 Certificate of Merger of STI and FII. Incorporated by
reference to the Company's Form 8-K filed on March 28,
1996.
3(i).3 Certificate of Incorporation of Shared Technologies
Fairchild Communications Corp. ("STAFF"). Incorporated
by reference to the Company's Form 8-K filed on March
28, 1996.
3(ii).1 Amended and Restated By-laws of STI. Incorporated by
reference to the Company's Form 8-K filed on March 28,
1996.
28
<PAGE>
3(ii).2 Amendment to Amended and Restated By-laws of STI.
Incorporated by reference to the Company's Form 8-K
filed on March 28, 1996.
3(ii).3 By-laws of STAFF. Incorporated by reference to the
Company's Form 8-K filed on March 28, 1996.
4.1 Certificate of Designations of Series G 6% Cumulative
Convertible Preferred Stock of STFI. Incorporated by
reference to the Company's Form 8-K filed on March 28,
1996.
4.2 Certificate of Designations of Series H Special
Preferred Stock of STFI. Incorporated by reference to
the Company's Form 8-K filed on March 28, 1996.
4.3 Certificate of Designations of Series I 6% Cumulative
Convertible Preferred Stock of STFI. Incorporated by
reference to the Company's Form 8-K filed on March 28,
1996.
4.4 Certificate of Designations of Series J Special
Preferred Stock of STFI. Incorporated by reference to
the Company's Form 8-K filed on March 28, 1996.
4.5 Indenture dated as of March 1, 1996 among the Company,
the guarantors named therein and United States Trust
Company of New York, as trustee. Incorporated by
reference to the Company's Form 8-K filed on March 28,
1996.
4.6 First Supplemental Indenture dated as of March 13, 1996
among the Company, the guarantors named therein and
United States Trust Company of New York, as trustee.
Incorporated by reference to the Company's Form 8-K
filed on March 28, 1996.
10.1 Registration Rights Agreement dated March 8, 1996 among
the Company, STFI, the guarantors named therein and CS
First Boston Corporation and Citicorp USA, Inc.
Incorporated by reference to the Company's Form 8-K
filed on March 28, 1996.
10.2 Registration Rights Agreement dated March 13, 1996
among STI, RHI and TFC. Incorporated by reference to
the Company's Form 8-K filed on March 28, 1996.
29
<PAGE>
10.3 Credit Agreement dated as of March 12, 1996 among the
Company, STFI, Credit Suisse, Citicorp USA, Inc.,
NationsBand and the other lenders named therein.
Incorporated by reference to the Company's Form 8-K
filed on March 28, 1996.
10.4 Security Agreement dated as of March 13, 1996 among
STAFF, STFI, each subsidiary of STAFF named therein and
Credit Suisse, as collateral agent for the secured
parties. Incorporated by reference to the Company's
Form 8-K filed on March 28, 1996.
10.5 Pledge Agreement dated as of March 13, 1996 among
STFCC, STFI, each subsidiary of STFCC named therein and
Credit Suisse, as collateral agent for the secured
parties Incorporated by reference to the Company's Form
8-K filed on March 28, 1996.
10.6 Pledge Agreement dated as of March 13, 1996 among STFI,
RHI and Gadsby & Hannah, as interim pledge agent.
Incorporated by reference to the Company's Form 8-K
filed on March 28, 1996.
10.7 Parent Guarantee Agreement dated as March 12, 1996
between STI and Credit Suisse, as collateral agent for
the secured parties. Incorporated by reference to the
Company's Form 8-K filed on March 28, 1996.
10.8 Subsidiary Guarantee Agreement dated as of March 12,
1996 among the subsidiaries of STFCC and STFI named
therein and Credit Suisse, as collateral agent for the
secured parties. Incorporated by reference to the
Company's Form 8-K filed on March 28, 1996.
10.9 Agreement to Exchange 6% Cumulative Convertible
Preferred Stock and Special Preferred Stock dated as of
March 1, 1996 among STI FII, RHI and TFC. Incorporated
by reference to the Company's Form 8-K filed on March
28, 1996.
10.10 Shareholders' Agreement dated as of March 13, 1996
among STI, RHI and Anthony D, Autorino. Incorporated by
reference to the Company's Form 8-K filed on March 28,
1996.
10.11 Tax Sharing Agreement dated as of March 13, 1996
between STI and RHI. Incorporated by reference to the
Company's Form 8-K filed on March 28, 1996.
30
<PAGE>
10.12 Indemnification Agreement dated as of March 13, 1996
between STI and Incorporated by reference to the
Company's Form 8-K filed on March 28, 1996.
10.13 Indemnification Agreement dated as of March 13, 1996
among STI, TFC and RHI. Incorporated by reference to
the Company's Form 8-K filed on March 28, 1996.
10.14 Indemnity Subrogation and Contribution Agreement dated
as of March 12, 1996 between STFCC and Credit Suisse as
collateral agent for the secured parties. Incorporated
by reference to the Company's Form 8-K filed on March
28, 1996.
21 List of subsidiaries of the Registrant.
27 Financial Data Schedule
99 Pursuant to Regulation S-X Rule 3-09 the Company is
including as an exhibit audited consolidated financial
statements for Shared Technologies Cellular, Inc.
31
<PAGE>
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 INC.
------------------------
(Registrant)
By /s/ Anthony D. Autorino
-----------------------
Anthony D. Autorino
Chairman, Chief Executive
Officer and Director
Date: March 29, 1996
By /s/ Vincent DiVincenzo
----------------------
Vincent DiVincenzo
Senior Vice President - Finance and
Administration, Treasurer, Chief
Financial Officer and Director
Date: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Anthony D. Autorino By /s/ Jeffrey J. Steiner
----------------------- ----------------------
Anthony D. Autorino Jeffrey J. Steiner
Chairman, Chief Executive Officer Vice Chairman and Director
and Director March 29, 1996
Date: March 29, 1996
By /s/ Mel D. Borer By
---------------------------------- -----------------------
Mel D. Borer, President, Chief Jo McKenzie, Director
Operating Officer and Director March , 1996
Date: March 29, 1996
By /s/ Natalia Hercot By /s/ Thomas H. Decker
----------------------- -----------------------
Natalia Hercot, Director Thomas H. Decker, Director
Date: March 29, 1996 Date: March 29, 1996
32
<PAGE>
By /s/ Ajit Hutheesing By /s/ Herbert L. Oakes, Jr.
----------------------- ------------------------
Ajit Hutheesing, Director Herbert L. Oakes, Jr.,
March 29, 1996 Director
Date: March 29, 1996
By /s/ Edward J. McCormack, Jr. By /s/ Vincent DiVincenzo
------------------------- ---------------------------
Edward J. McCormack, Jr. Vincent DiVincenzo, Director
Director Date: March 29, 1996
Date: March 29, 1996
By /s/ William A. DiBella
-----------------------
William A. DiBella, Director
Date: March 29, 1996
33
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT, Rothstein, Kass & Company, P.C. F-2
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-5-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9-23
FINANCIAL STATEMENT SCHEDULE:
Schedule VIII Valuation and Qualifying Accounts for the years
ended December 31, 1995, 1994 and 1993 S-1
</TABLE>
Notes:
(a) All other schedules are not submitted because they are not applicable,
not required or because the required information is included in the
consolidated financial statements or notes thereto.
(b) Individual financial statements of the Company have been omitted since
(1) consolidated statements of the Company and its subsidiaries are
filed, and (2) the Company is primarily an operating company and all
subsidiaries included in the consolidated financial statements filed are
majority-owned and do not have a material amount of debt to outside
persons.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Shared Technologies Fairchild Inc.
We have audited the accompanying consolidated balance sheets of Shared
Technologies Fairchild Inc. and Subsidiaries as of December 31, 1995 and 1994
and the related consolidated statements of operations, stockholders' equity and
cash flows for the three year period then ended. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shared Technologies
Fairchild Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the three year period then
ended in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
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 financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic 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 financial statements taken as a whole.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for its investment in one of its subsidiaries.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 1, 1996, except for Notes 1, 7 and 18,
as to which the date is March 13 1996
F-2
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
(In thousands except per share data)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 476 $ 172
Accounts receivable, less allowance for doubtful accounts
and discounts of $410 in 1995 and $584 in 1994 9,855 8,533
Advances to subsidiary 985
Other current assets 754 727
Deferred income taxes 550
--------- --------
Total current assets 12,070 9,982
--------- --------
Equipment:
Telecommunications 28,904 26,223
Office and data processing 6,049 4,995
--------- --------
34,953 31,218
Less accumulated depreciation and amortization 18,305 15,473
--------- --------
16,648 15,745
------ ------
Other assets:
Investment in subsidiary 1,581
Intangible assets 11,543 11,198
Deferred income taxes 560
Other 461 1,000
--------- --------
14,145 12,198
--------- --------
$ 42,863 $ 37,925
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,870 $ 1,840
Accounts payable 9,035 8,191
Accrued expenses 2,221 2,382
Advance billings 1,337 1,260
--------- --------
Total current liabilities 15,463 13,673
--------- --------
Long-term debt and capital lease obligations,
less current portion 4,128 2,886
--------- --------
Minority interests in net assets of subsidiaries 102
--------- --------
Redeemable put warrant 428 383
--------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Series C, authorized 1,500 shares, outstanding
907 shares in 1995 and 1994 9 9
Series D, authorized 1,000 shares, outstanding
457 shares in 1995 and 1994 5 5
Series E, authorized 400 shares, outstanding
no shares in 1995 and 400 shares in 1994 4
Series F, authorized 700 shares, outstanding
no shares in 1995 and 700 shares in 1994 7
Common stock, $.004 par value, authorized 20,000
shares, outstanding 8,506 shares in 1995 and
6,628 in 1994 34 27
Capital in excess of par value 44,777 41,488
Accumulated deficit (21,981) (22,465)
Obligations to issue common stock 1,806
--------- --------
Total stockholders' equity 22,844 20,881
--------- --------
$ 42,863 $ 37,925
========= ========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
(In thousands except per share data)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ --------
<S> <C> <C> <C>
Revenues:
Shared telecommunications services $ 35,176 $ 28,667 $ 21,683
Telecommunications systems 11,910 6,483 1,543
Cellular services 10,217 2,200
--------- --------- ---------
Total revenues 47,086 45,367 25,426
--------- --------- ---------
Cost of revenues:
Shared telecommunications services 19,473 15,717 11,628
Telecommunications systems 9,399 5,161 1,282
Cellular services 5,294 1,604
--------- --------- ---------
Total cost of revenues 28,872 26,172 14,514
--------- --------- ---------
Gross margin 18,214 19,195 10,912
Operating expenses, selling, general and administrative 16,188 16,909 10,102
--------- --------- ---------
Operating income 2,026 2,286 810
--------- --------- ---------
Other income (expense):
Gain on sale of subsidiary stock 1,375
Equity in loss of subsidiary (1,752)
Interest expense (882) (522) (530)
Interest income 205 163 92
Minority interest in net income of subsidiaries (128) (82)
--------- --------- ---------
(1,054) (487) (520)
--------- --------- ---------
Income before income tax (expense) benefit
and extraordinary item 972 1,799 290
Income tax (expense) benefit (45) 487
--------- --------- -------
Income before extraordinary item 927 2,286 290
Extraordinary item, loss on restructuring (150)
--------- --------- -------
Net income 927 2,286 140
Preferred stock dividends (398) (478) (345)
--------- --------- ---------
Net income (loss) applicable to common stock $ 529 $ 1,808 $ (205)
========= ========= =========
Income (loss) per common share:
Income (loss) before extraordinary item $ .06 $ .27 $ (.01)
Extraordinary item (.03)
--------- --------- ----------
Net income (loss) $ .06 $ .27 $ (.04)
========= ========= ==========
Weighted average number of common
shares outstanding 8,482 6,792 5,132
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
Series C Series D Series E
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 1,107 $ 11 $ $
Dividends on preferred stock
Proceeds from sale of Series D
Preferred Stock, net of expenses
of $412 453 5
Redemption of Series C Preferred
Stock (119) (1)
Common stock to be issued
for acquisitions
Common stock issued in lieu
of compensation
Common stock issued in lieu
of deferred financing fees
Exercise of common stock options
Net income
--------- -------- ---------- --------- ----------- -------
Balance, December 31, 1993 988 10 453 5
Preferred stock dividends
Dividend accretion of redeemable put warrant
Exercise of common stock options
and warrants
Proceeds from sale of Series D
Preferred Stock 4 400 4
Issuances for acquisitions
Proceeds from sale of common stock, net
of expenses of $371
Common stock issued in lieu of
compensation and conversion of
Series C Preferred Stock and other (81) (1)
Net income
--------- -------- ---------- --------- ----------- -------
Balance, December 31, 1994 907 9 457 5 400 4
Preferred stock dividends
Dividend accretion of redeemable put warrant
Exercise of common stock options and warrants
Issuance of common stock
Conversion of preferred stock (400) (4)
Proceeds from sale of common stock, net
of expenses of $112
Common stock issued in
lieu of compensation and payment
of accrued expenses
Net income
--------- -------- ---------- --------- ----------- -------
Balance, December 31, 1995 907 $ 9 457 $ 5 0 $ 0
========= ======== ========= ========= =========== =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Obligations
Series F Capital in to Issue Total
Preferred Stock Common Stock Excess of Accumulated Common Stockholders'
Shares Amount Shares Amount Par Value Deficit Stock Equity
------ ------ ------ ------ --------- ------- ----- ------
<C> <C> <C> <C> <C> <C> <C> <C>
$ 5,092 $ 21 $ 30,047 $ (24,043) $ $ 6,036
(345) (345)
1,737 1,742
(385) (386)
1,756 1,756
49 228 228
14 50 50
35 82 82
140 140
- ---------- ------- --------- ------- --------- --------- ---------- -----------
5,190 21 31,759 (24,248) 1,756 9,303
(478) (478)
(25) (25)
26 71 71
(1) (1)
700 7 4,989 5,000
1,329 6 4,556 4,562
83 114 50 163
2,286 2,286
- ---------- ------- --------- ------- --------- --------- ---------- -----------
700 7 6,628 27 41,488 (22,465) 1,806 20,881
(398) (398)
(45) (45)
17 70 70
405 2 1,804 (1,806)
(700) (7) 1,100 4 7
300 1 1,162 1,163
56 246 246
927 927
- ---------- ------- --------- ------- --------- --------- ---------- -----------
0 $ 0 8,506 $ 34 $ 44,777 $ (21,981) $ 0 $ 22,844
========== ======= ========= ======= ========= ========= ========== ===========
</TABLE>
F-6
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- ------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 927 $ 2,286 $ 140
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on restructuring 150
Depreciation and amortization 3,967 3,702 2,562
Provision for doubtful accounts 321 413 253
Gain on sale of subsidiary stock (1,375)
Equity in loss of subsidiary 1,752
Common stock of subsidiary issued for services 16 -
Stock options and common stock issued
in lieu of compensation and other 177 114 278
Minority interests 128 82
Gain on sale of franchise (202) -
Deferred income taxes (10) (550) -
Amortization of discount on note 90 52 -
Change in assets and liabilities, net of effect of acquisitions:
Accounts receivable (2,639) (2,147) (990)
Other current assets (52) (179) 132
Other assets (430) (244)
Accounts payable 2,208 1,629 964
Accrued expenses (556) (1,707) (1,212)
Advance billings 68 (67) 91
--------- --------- ---------
Net cash provided by operating activities 4,878 3,058 2,206
--------- --------- ---------
Cash flows from investing activities:
Purchases of equipment (3,679) (3,223) (2,035)
Acquisitions, net of cash acquired (1,382) (3,948) (255)
Deferred merger costs (750)
Other investments (106)
Long-term deposits (10) (2)
--------- --------- ---------
Net cash used in investing activities (5,927) (7,171) (2,292)
--------- --------- ---------
Cash flows from financing activities:
Repayments of long-term debt and
capital lease obligations (2,226) (2,409) (1,895)
Proceeds from borrowings 2,684 2,315 -
Proceeds from sales of common and preferred stock 1,233 4,631 1,824
Redemption of preferred stock (386)
Preferred stock dividends paid (398) (478) (345)
Cash of subsidiary previously consolidated (10)
Repayment of advances to subsidiary 70
Deferred registration costs (182) -
--------- --------- ---------
Net cash provided by (used in)
financing activities 1,353 3,877 (802)
--------- --------- ---------
Net increase (decrease) in cash 304 (236) (888)
Cash, beginning of year 172 408 1,296
--------- --------- ---------
Cash, end of year $ 476 $ 172 $ 408
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED)
Years Ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- -------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash interest paid during the years for:
Interest $ 856 $ 441 $ 386
========= ========= =========
Income taxes $ 84
=========
Supplemental disclosures of noncash investing and financing activities:
Conversion of accrued expenses to note payable
in connection with litigation settlement $ - $ - $ 460
========= ========= =========
Obligations to issue common stock in connection
with acquisitions $ - $ 50 $ 1,756
========= ========= =========
Issuance of preferred stock in connection with acquisition $ - $ 5,000 $ -
========= ========= =========
Redeemable put warrant issued in connection with
bank financing $ - $ 358 $ -
========= ========= =========
Capital lease obligations incurred for lease of new equipment $ 355 $ 64 $ -
========= ========= =========
Dividend accretion on redeemable put warrant $ 45 $ 25 $ -
========= ========= =========
Costs of intangible assets included in accounts payable $ - $ 203 $ -
========= ========= =========
Note received for sale of franchise $ - $ 202 $ -
========= ========= =========
Issuance of note relating to acquisition $ 800
=========
Issuance of common stock to settle accrued expenses $ 69
=========
Deferred merger costs included in accounts payable $ 513
=========
Reclassification of advance to subsidiary to investment in subsidiary $ 1,184
=========
See accompanying notes to consolidated financial statements.
</TABLE>
F-8
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 1 - BUSINESS AND ORGANIZATION:
On March 13, 1996, Shared Technologies Inc. merged with Fairchild
Industries, Inc. and changed its name to Shared Technologies
Fairchild Inc. (STFI) (Note 18)
STFI, together with its subsidiaries (collectively the "Company)
is in the shared telecommunications services (STS) and
telecommunications systems (Systems) industry, providing
telecommunications and office automation services and equipment to
tenants of office buildings. One of the Company's subsidiaries,
Shared Technologies Cellular, Inc.(STC), is a provider of
short-term portable cellular telephone services.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of the Company and its
wholly-owned and majority owned subsidiaries in which the Company
has a controlling interest. Investments in companies in which the
Company exercises significant influence (greater than 20%), but
not a controlling interest, are carried at equity. The effects of
all significant intercompany transactions have been eliminated.
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.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY - The Company's investment
in its unconsolidated subsidiary, STC, is accounted for under the
equity method in 1995. Prior to 1995, the majority owned
subsidiary was included on a consolidated basis (Note 3).
REVENUE RECOGNITION - Revenues are recognized as services are
performed. The Company bills customers monthly in advance for
equipment rentals and local telephone access, service and defers
recognition of these revenues until the service is provided.
Systems and equipment sales are recognized at the time of
shipment.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
EQUIPMENT - Equipment is stated at cost. Depreciation and
amortization is provided using the straight-line method over the
following estimated useful lives:
Telecommunications 8 years
Office and data processing 3-8 years
Major renewals and betterments are capitalized. The cost of
maintenance and repairs which do not materially prolong the useful
life of the assets are charged to expense as incurred.
F-9
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 balance
sheets.
INTANGIBLE ASSETS:
Goodwill - Goodwill represents the excess of the purchase price
over the fair value of the net assets of businesses acquired. The
Company monitors the profitability of the acquired businesses to
assess whether any impairment of recorded goodwill has occurred.
Goodwill is amortized over periods ranging from 5 years to 40
years.
Deferred Financing and Merger Costs - The Company has deferred
certain costs incurred in connection with the merger and related
financing (Note 18). These costs will be amortized over their
respective lives upon the completion of the merger and financing.
At December 31, 1995, approximately $1,263 of these costs are
included in intangible assets.
Other Intangible Assets - Other intangible assets are being
amortized over 5 years.
INCOME TAXES - The Company complies with Statement of Financial
Accounting Standards (SFAS No. 109), "Accounting for Income
Taxes", which requires an asset and liability approach to
financial reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between
financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future, based
on enacted tax laws and rates applicable to the periods in which
the differences are expected to effect taxable income. Valuation
allowances are established, when necessary, to reduce the deferred
income tax assets to the amount expected to be realized. The
adoption of SFAS 109 had no material impact on the Company's
financial statements since the Company fully reserved the tax
benefits flowing from its net operating losses (Note 14).
INCOME (LOSS) PER COMMON SHARE - Primary income (loss) per common
share is computed by deducting preferred stock dividends and the
accretion of the redeemable put warrant from net income. The
resulting net income is applicable to common stock, which is then
divided by the weighted average number of common shares
outstanding, including the effect of options, warrants and
obligations to issue common stock, if dilutive.
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, 1995, 1994 and 1993.
F-10
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NEWLY ISSUED ACCOUNTING STANDARDS - In March 1995, Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" was issued. The Company will
adopt SFAS No. 121 in the first quarter of 1996. The impact on the
Company's financial position and results of operations is not
expected to be material.
RECLASSIFICATIONS - Certain reclassifications to prior years
financial statements were made in order to conform to the 1995
presentation.
NOTE 3 - INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
During December 1995, STC issued approximately $3,000 in voting
preferred stock to third parties. Although the Company's ownership
percentage of 59.3% did not change, the voting rights assigned to
the preferred stock reduced the Company's voting interest in STC
to approximately 42.7%, resulting in the Company's loss of voting
control of STC. Accordingly, STC has been accounted for on the
equity method for 1995. Summarized balance sheet and statement of
operations information for STC as of, and for the year ended,
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Summarized Balance Sheet
Current assets $ 5,824
Telecommunications and
office equipment, net 2,158
Other assets 6,396
-----
Total assets $ 14,378
----------
Current liabilities $ 7,676
Note payable 1,600
----------
Total liabilities 9,276
Stockholders' equity 5,102
-----
Total liabilities and stockholders' equity $ 14,378
==========
Summarized Statement of Operations
Revenues $ 13,613
Gross margin 5,026
Operating loss 2,989
Net loss 2,848
</TABLE>
F-11
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 4 - ACQUISITIONS
In December 1993, STC completed its acquisition of certain assets
and assumed certain liabilities of Road and Show South, Ltd.
(South) and Road and Show Cellular East, Inc. (East),
respectively. The purchase price for South was $1,262, of which
$46 was paid in cash and the balance through the issuance of 221
shares of the Company's common stock valued at $1,216. The
purchase price for East was $750 of which $209 was paid in cash
and the balance through the issuance, upon demand, of 108 shares
of the Company's common stock valued at $541. The number of shares
of common stock related to these acquisitions was adjusted on
December 1, 1994, based on the price of the Company's common stock
at that date, for which an aggregate of 65 additional shares were
issued which had no effect on the purchase price of the net assets
previously recorded. The shares in connection with the South
acquisition have been issued, however only 197 shares of the
Company's common stock have been delivered by STC pending the
outcome of certain claims against, and by, the former owners of
South.
In June 1994, the Company acquired all of the partnership
interests in Access Telecommunication Group, L.P. and Access
Telemanagement, Inc. (collectively Access). The purchase price was
$9,252 of which $4,252 was paid in cash and the balance through
the issuance of 400 shares of Series E Preferred Stock valued at
$3.75 per share and 700 shares of Series F Preferred Stock valued
at $5.00 per share (Note 9).
On June 30, 1995, the Company purchased all of the outstanding
capital stock of Office Telephone Management ("OTM"). OTM provides
telecommunication management services primarily to businesses
located in executive office suites. The purchase price was $2,135
of which $1,335 was paid in cash and the balance through the
issuance of a $800 note, (discounted at 8.59%) payable through
June 30, 2005.
The 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.
The excess of cost over fair value of the net assets of businesses
acquired is recorded as goodwill in the accompanying consolidated
financial statements. Amortization of goodwill approximated $364,
$181 and $15 in 1995, 1994 and 1993, respectively.
F-12
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 4 - ACQUISITIONS (CONTINUED):
The following unaudited pro forma statements of operations for
1995 and 1994 give effect to the acquisitions and the change in
reporting of STC to the equity method (Note 3) and the pro forma
effect of STC acquisitions, as if they occurred on January 1 in
each year:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revenues $ 49,044 $ 47,785
Cost of revenues 30,105 29,573
--------- ----------
Gross margin 18,939 18,212
Selling, general and administrative expenses 16,879 16,579
--------- ----------
Operating income 2,060 1,633
Gain on sale of subsidiary stock 1,375
Equity in loss of subsidiary (2,634) (2,801)
Interest income (expense), net (901) (643)
Minority interest in net income of subsidiaries (43)
--------- ----------
Loss before income tax (expense) benefit (100) (1,854)
Income tax (expense) benefit (45) 487
--------- ----------
Net loss (145) (1,367)
Preferred stock dividends (398) (538)
--------- ----------
Loss applicable to common stock $ (543) $ (1,905)
========= ==========
Net loss per common share $ (.06) $ (.25)
========= ==========
Weighted average number of common
shares outstanding 8,482 7,753
========= ==========
</TABLE>
NOTE 5 - INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Goodwill $ 10,989 $ 11,186
Deferred financing and merger costs 1,263
Software development costs 186
Other 83 689
--------- ----------
12,335 12,061
Accumulated amortization 792 863
--------- ----------
$ 11,543 $ 11,198
========= ==========
</TABLE>
F-13
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 6 - ACCRUED EXPENSES:
Accrued expenses at December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
State sales and excise taxes $ 1,040 $ 861
Deferred lease obligations 222 150
Property taxes 150 140
Concession fees 176 102
Other 633 1,129
--------- ----------
$ 2,221 $ 2,382
========= ==========
</TABLE>
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations at December 31, 1995
and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
------- --------
<S> <C> <C>
Revolving $4,000 credit line due in
May 1997 and bearing interest at 2%
above prime rate (10.5% at December 31,
1995) (Note 8) $ 2,174 $ 1,009
Initial term loan due in quarterly
installments of $50 commencing
November 24, 1994, with final payment
of $700 due May 1996 and bearing
interest at 2% above prime rate 750 950
Term loan due in 36 monthly installments
of $37 commencing March 1995 and bearing
interest at 2% above prime rate. 950
Term loan due in 36 monthly installments
of $8 commencing July 1995 and bearing
interest at 2% above prime rate. 245
Notes payable to vendors, non-interest bearing
due in aggregate quarterly installments of
approximately $249 through June 1995 498
Promissory note payable in semi-annual
installments and bearing interest at
10% per annum 268
</TABLE>
F-14
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Promissory note, $550 original face
amount discounted at 7.75%, payable in
quarterly installments of $25 through
March 31, 1999, collateralized by
commitment to issue 88 shares of
Series C Preferred Stock 304 359
Promissory note, $450 original fac
amount, non-interest bearing, payable in
quarterly installments of $16 through
June 30, 1999 225 289
Promissory note, $1,200 original face
amount discounted at 8.59%, payable in
quarterly installments of $30 through
June 2005 and collateralized by standby
letter of credit 774
Promissory note, $50 original face
amount bearing interest at 7.18% per
annum, payable in monthly installments
of $2 through October 1997 32
Capital lease obligations, collateralized
by related telecommunications and data
processing equipment and all assets
acquired from Access (Note 4) 1,544 1,353
--------- ----------
6,998 4,726
Less current portion 2,870 1,840
--------- ----------
$ 4,128 $ 2,886
========= ==========
</TABLE>
In May 1994, the Company entered into a $5,000 financing agreement
with a bank collateralized by certain assets of the Company. The
agreement provides for a revolving credit line for a maximum, as
defined, of $4,000 to be used for expansion in the shared
telecommunications services business and a $1,000 term loan.
Aggregate drawings on the line convert semi-annually, through May
1996, to three year term loans. The agreement provides for, among
other things, the Company to maintain certain financial covenants.
As of December 31, 1995, the Company was in violation of certain
of these covenants and on March 13, 1996, the Company replaced
this financing agreement with a long term facility (Note 18), and
therefore continues to classify the debt on a long-term basis.
F-15
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED):
Scheduled aggregate payments on long-term debt and capital lease
obligations are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASE
YEAR ENDING DECEMBER 31: LONG-TERM DEBT OBLIGATIONS
<S> <C> <C>
1996 $ 2,230 $ 754
1997 1,470 540
1998 1,105 349
1999 128 88
2000 77 20
---------- -------
$ 5,010 1,751
==========
Less amount representing interest 206
---
Present value of future payments,
including current portion of $640 $ 1,545
=======
</TABLE>
Telecommunications and data processing equipment includes assets
acquired under capital leases with a net book value of
approximately $2,333 and $1,534 as of December 31, 1995 and 1994,
respectively.
NOTE 8 - REDEEMABLE PUT WARRANT:
In connection with the bank financing agreement, the Company
issued the bank a redeemable put warrant for a number of common
shares equal to 2.25% of the Company's outstanding common stock,
subject to anti-dilution adjustments. The warrant is redeemable at
the Company's option prior to May 1996, and at the bank's option
at any time after May 1997. As defined in the agreement, the
Company has guaranteed the bank a minimum of $500 upon redemption
of the warrant, and therefore, has valued the warrant at the
present value of the minimum guarantee discounted at 11.25%. The
discount is being amortized on a straight-line basis over four
years, the anticipated term of the loan at inception.
NOTE 9 - STOCKHOLDERS' EQUITY
The Company is authorized to issue 10,000 shares of preferred
stock, issuable from time to time in one or more series with such
rights, preferences, privileges and restrictions as determined by
the directors. In 1994, the Company increased its authorized
number of shares of common stock to 20,000.
In 1992, the Company issued Series C Preferred Stock, which is
non-voting and entitled to a liquidation value of $4 per share and
dividends of $.32 per share per annum payable, quarterly in
arrears. These shares are convertible into common stock, at the
holder's option, on a one share of common stock for two shares of
Series C Preferred Stock basis, at any time, subject to certain
anti-dilution protection for the Preferred Stockholders. At the
Company's option, the Series C Preferred Stock is redeemable, in
whole or in part, at any time after June 30, 1993, at $6 per share
plus all accrued dividends.
F-15
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED):
In December 1993, the Company commenced a private placement to
sell to certain investors units consisting of one share of Series
D Preferred Stock and one warrant to purchase one share of common
stock. As of December 31, 1995, the Company had sold 457 units
for net proceeds of $1,740, after deducting expenses of $430.
Series D Preferred Stock is entitled to dividends of 5% per
annum, payable quarterly, and may be redeemed for $7 per share,
plus all accrued dividends, at the option of the Company. The
shares are non-voting and are convertible into shares of the
Company's common stock on a one-for-one basis at the holder's
option. The shares rank senior to all shares of the Company's
common stock and junior to Series C Preferred Stock. The common
stock purchase warrants are exercisable at a per share price of
$5.75. In connection with the offering, the investment banking
firm received warrants to purchase 16 shares of the Company's
common stock at an exercise price of $5.75 per share. The Company
has the right to require the holder to exercise the warrants, and
if not exercised, they will expire in the event that the
Company's common stock trades at or above $8.50 per share. As of
December 31, 1995, no warrants had been exercised.
In May and June 1994, the Company sold, through a private
placement to certain investors, 1,329 shares of common stock and
an equal number of warrants, for net proceeds of $4,562, after
deducting expenses of $371. The warrants are exercisable prior to
June 26, 1999 at a per share price of $4.25, subject to certain
anti-dilution protection. As of December 31, 1995, no warrants
had been exercised. The proceeds from this offering were used for
the Access acquisition (Note 4).
In June 1994, the Company issued 400 shares of Series E Preferred
Stock, $.01 par value, and 700 shares of Series F Preferred
Stock, $.01 par value, in connection with the Access acquisition.
Series E Preferred Stock is entitled to a liquidation value of
$3.75 per share and dividends of $.30 per share per annum,
payable cumulatively in the form of cash or the Company's common
stock, and the shares are non-voting. The Series E Preferred
Stock previously issued was converted into 400 shares of common
stock in January 1995. In addition, the holders received
warrants, which expire on December 31, 1999, to purchase 175
shares of the Company's common stock, at an exercise price of
$4.25 per share, subject to certain anti-dilutive provisions.
Series F Preferred Stock is entitled to a liquidation value of
$5.00 per share and no dividends. These shares were converted on
August 1, 1995 into 700 shares of common stock. On March 1, 1996,
an additional 111 shares of the Company's common stock was issued
in connection with the provisions of conversion of the Series F
Preferred Stock, as defined.
Additionally, the Company issued warrants to the sellers of
Access to purchase 225 shares of the Company's common stock at an
exercise price of $4.25 per share, subject to certain
anti-dilution adjustments.
F-16
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED):
During January 1995, the Company completed a private placement to
sell to a certain investor 300 shares of common stock at $4.25
per share, pursuant to Regulation S of the Securities Act of
1933. The Company received $1,163, after deducting expenses of
$112, including an underwriter commission of $102 paid to a firm
in which one of the principals is a director and stockholder of
the Company. In addition, the underwriter was granted a five year
common stock purchase warrant to acquire 30 shares of the
Company's common stock for $5.00 per share.
The following table summarizes the number of common shares
reserved for issuance as of December 31, 1995. There were no
preferred shares reserved for issuance.
Common stock purchase warrants 2,958
Preferred stock conversions 1,165
-----
4,123
=====
NOTE 10 - GAIN ON SALE OF SUBSIDIARY COMMON STOCK:
In April 1995, STC completed its SB-2 filing with the Securities
and Exchange Commission and became a public company. Prior to
this date, STC was approximately an 86% owned subsidiary of the
Company. STC sold 950 shares of common stock at $5.25 per share,
which generated net proceeds of approximately $3,274 after
underwriters' commissions and offering expenses. The net effect
of the public offering on the consolidated financial statements
was a gain of approximately $1,375.
NOTE 11 - STOCK OPTION PLANS:
The Company has non-qualified stock option plans which provide
for the grant of common stock options to officers, directors,
employees and certain advisors and consultants, at the discretion
of the Board of Directors (Committee). All options granted are
exercisable at a minimum price equal to the fair market value of
the Company's common stock at the date of grant, with a term of
five to ten years and are exercisable in accordance with vesting
schedules set individually by the Committee. As of December 31,
1995, approximately 1,000 shares of common stock are available
for options. The activity in the plans was as follows:
<TABLE>
<CAPTION>
Number Exercise Price Per Share
of Weighted
Options Range Average
------- ----- -------
<S> <C> <C> <C>
Balance outstanding, January 1, 1993 354 $ 1.72-12.00 $ 3.77
Granted 174 4.00- 5.50 5.32
Expired (29) 2.84-12.00 10.19
Exercised (35) 1.72- 2.84 2.36
----- -------------- --------
Balance outstanding, December 31, 1993 464 1.72-11.00 4.06
Granted 317 3.25-4.50 3.60
Expired (59) 4.00-5.50 5.43
Exercised (25) 2.84 2.84
----- -------------- ---------
Balance outstanding, December 31, 1994 697 1.72-11.00 3.78
Granted 40 4.13 4.13
Expired (2) 5.00-5.72 5.16
Exercised (2) 2.28-2.84 2.58
------ -------------- --------
Balance outstanding, December 31, 1995 733 $ 1.72-11.00 $ 3.79
====== ============== =========
</TABLE>
F-17
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 11 - STOCK OPTION PLANS (CONTINUED):
At December 31, 1995, options to purchase 449 shares of common
stock were exercisable.
In September 1994, the Board of Directors adopted the 1994
Director Option Plan (the Director Plan) pursuant to which 250
shares of 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 non-statutory options to purchase 15 shares
of common stock at an exercise price equal to the fair market
value of such shares at the date of grant. Each option shall vest
over a three year period, but generally may not be exercised more
than 90 days after the date an optionee ceases to serve as a
director of the Company, and expires after ten years from date of
grant. As of December 31, 1995, options to purchase an aggregate
of 115 shares of common stock have been granted at an exercise
price range of $4.13 to $4.38.
NOTE 12 - RETIREMENT AND SAVINGS PLAN:
On March 3, 1989, the Company adopted a savings and retirement
plan (the Plan), which covers substantially all of the Company's
employees. Participants in the Plan may elect to make
contributions up to a maximum of 20% 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. The Company's expense relating to the matching
contributions was approximately $199, $163, and $116 for 1995,
1994 and 1993, respectively. At December 31, 1995, and 1994, the
plan owned 134 and 93 shares, respectively of the Company's
common stock.
NOTE 13 - EXTRAORDINARY ITEM
At December 31, 1993, the Company recorded a loss relating to the
settlement of a $600 promissory note (Note 7), in connection with
its 1992 restructuring, by issuance of a $750 promissory note.
NOTE 14 - INCOME TAXES:
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ (10) $ $
State and local (45) (63)
--------- --------- -----
(55) (63) -
--------- --------- -----
Deferred
Federal $ 10 $ 550 $
State and local
--------- -------- -----
10 550 -
--------- -------- -----
Total (expense) benefit $ (45) $ 487 $ -
========= ========= =====
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, income
taxes computed at the statutory federal rate differ from the
Company's effective rate primarily due to the availability of net
operating losses ("NOL").
F-18
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 14 - INCOME TAXES (CONTINUED):
The components of deferred income tax assets (liabilities) as of
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Tax effect of net operating loss carryforwards 8,641 $ 9,011
Equity in loss of subsidiary 104
Financial reserves not yet tax deductible 164 233
Equipment (1,218) (1,200)
Goodwill (183) (107)
---------- --------
Deferred income tax asset 7,508 7,937
Valuation allowance (6,948) (7,387)
---------- --------
Net deferred tax asset $ 560 $ 550
========= ========
</TABLE>
At December 31, 1995 and 1994, the Company recorded deferred tax
assets of $7,508 and $7,937, respectively, and corresponding
valuation allowances of $ 6,948 and $7,387, respectively. The
valuation allowances were decreased by $439, $1,418 and $211
respectively, for the years ended December 31, 1995, 1994 and
1993.
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. While
management believes that the total deferred tax asset will be
fully realized by future operating results, together with tax
planning opportunities, the uncertainty relating to the future
tax effects of the merger (Note 18), and a desire to be
conservative make it appropriate to record a valuation allowance.
At December 31, 1995, the Company's NOL carryforward for federal
income tax purposes is approximately $21,800, expiring between
2001 and 2007. NOL's available for state income tax purposes are
less than those for federal purposes and generally expire earlier
limitations will apply to the use of NOL's in the event certain
changes in Company ownership occur in the future, (Note 18).
NOTE 15 - COMMITMENTS AND CONTINGENCIES:
CONTINGENCIES - The Company had been the provider of
telecommunications services at the Jacob K. Javitts Convention
Center (the Center) in New York City. Effective January 1, 1992,
as a result of a contractual dispute with the New York Convention
Center Operating Corporation (CCOC), the Company no longer
provided services at the Center. While providing services at the
Center, the Company licensed the right to provide certain public
pay telephone services at the Center to Tel-A-Booth
Communications, Ltd. (Tel-A-Booth). Tel-A-Booth has filed a claim
against the Company which seeks $10,000 in damages for which no
amounts have been provided in the accompanying consolidated
financial statements. Tel-A-Booth is in the process of
liquidation in bankruptcy, and its counsel has withdrawn without
replacement. The Company has filed, and the Court has issued, an
order for dismissal of this case, which is expected to be signed
prior to April 15, 1996.
F-19
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
In December 1995, a suit was filed against the Company alleging a
breach of a letter agreement and seeking an amount in excess of
$2,250 for a commission allegedly owed in connection with the
merger with FII (Note 18). The Company denies that the claimant
at any time was engaged in connection with the merger. The
Company filed an answer in January 1996, denying that any
commission is owed. This litigation is in the discovery process.
While any litigation contains an element of uncertainty,
management is of the opinion that the ultimate resolution of this
matter should not have a material adverse effect upon results of
operations, cash flows or financial position of the Company.
The Company's sales and use tax returns in certain jurisdictions
are currently under examination. Management believes these
examinations will not result in a material change from
liabilities provided.
In addition to the above matters, the Company is a party to
various legal actions, the outcome of which, in the opinion of
management, will not have a material adverse effect on results of
operations, cash flows or financial position of the Company.
COMMITMENTS - The Company has entered into operating leases for
the use of office facilities and equipment, which expire through
2005. Certain of the leases are subject to escalations for
increases in real estate taxes and other operating expenses. Rent
expense amounted to approximately $2,200 $1,856 and $1,700 for
the years ended December 31, 1995, 1994 and 1993, respectively.
Aggregate approximate future minimum rental payments under these
operating leases are as follows:
YEAR ENDING DECEMBER 31:
1996 $ 1,631
1997 1,349
1998 1,232
1999 1,027
2000 622
Thereafter 1,349
----------
$ 7,210
==========
In January 1994, the Company entered into a consulting agreement
for financial and marketing services, which expires in November
1996. The agreement provides for the following compensation; $30
upon signing, $6 per month retainer, and $150 upon the attainment
of a specific financial ratio, which as of December 31, 1995 had
been attained. In addition, the consultant was issued a three
year warrant to purchase 300 shares of the Company's common stock
at a purchase price of $5.75 per share and a five year warrant to
purchase 250 shares of the Company's common stock at a purchase
price of $7.00 per share. The consultant may not compete with the
Company during the term of this agreement and for two years
thereafter.
F-20
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
In connection with the Access acquisition, the Company assumed a
certain contract for telecommunications services requiring annual
minimal usage of approximately $4.5 million through October 1998.
In connection with the OTM acquisition, a standby letter of
credit was issued collateralizing a promissory note of $821 at
December 31, 1995.
In November 1995, the Company entered into a three year
consulting agreement with a financial advisor requiring annual
compensation of $250.
In December 1995, the Company granted options to employees of the
Company, STC, and certain members of the Board of Directors of
the Company and STC, to purchase an aggregate of 350 shares of
STC common stock, held by the Company.
The options are excersable for five years, at $2.50 per share.
NOTE 16 - RELATED PARTY TRANSACTIONS:
As of December 31, 1993, the company paid approximately $288 of
life insurance premiums on behalf of the Company's president,
which was to be repaid from the proceeds of a $2,500 face value
life insurance policy owned by the president. In January 1994,
the beneficiary on the policy was changed to the Company in order
to reduce the premium payments required by the Company. As of
December 31, 1995, the amount due to the Company for premiums
paid exceeded the cash surrender value of the policy by
approximately $130. Accordingly, the President has agreed to
reimburse the Company for this amount. The receivable and cash
surrender value are reflected in other assets in the accompanying
consolidated balance sheets.
NOTE 17 - QUARTERLY INFORMATION:
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ -------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
1995
Revenues (A) $ 10,816 $ 11,604 $ 12,095 $ 12,571
Gross margin (A) 4,131 4,458 4,827 4,798
Net income (loss) 285 1,597 192 (1,147)
Net income (loss) per
common share 0.02 0.17 0.01 (0.14)
1994
Revenues $ 7,896 $ 9,125 $ 14,493 $ 13,853
Gross margin 3,469 4,222 5,833 5,671
Net income 257 703 603 723
Net income per common share 0.03 0.11 0.07 0.06
(A) Quarterly amounts adjusted to reflect equity method reporting for STC
</TABLE>
F-21
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share data)
NOTE 18 - SUBSEQUENT EVENTS
On March 13, 1996, the Company increased its authorized number of
shares of preferred stock $.01 par value and common stock $.004
par value, to 25,000 and 50,000, respectively.
On March 13, 1996, the Company's stockholders approved and the
Company consummated its merger with Fairchild Industries, Inc.
("FII"), following a reorganization transferring all
non-communication assets to its parent, RHI Holding, Inc.
("RHI"). The Company changed its name to Shared Technologies
Fairchild Inc. ("STFI"). Under the merger agreement, STFI issued
to RHI, 6,000 shares of common stock, 250 shares of convertible
preferred stock with a $25,000 liquidation preference and 20
shares of special preferred stock with a $20,000 initial
liquidation preference. In addition the Company raised in the
capital market approximately $111,000, after offering expenses,
through the issuance of 12 1/4% Senior Subordinated Notes Due
2006 and approximately $125,000 (of an available $145,000) in
loans from a credit facility with financial institutions. The
funds were used primarily for the retirement of certain
liabilities assumed from FII in connection with the merger, and
the retirement of the Company's existing credit facility. In
connection with the merger, the Company entered into two year
employment agreements with key employees for annual compensation
aggregating $1,250, and adopted the 1996 Equity Incentive Plan.
The merger will be accounted for using the purchase method of
accounting. The total purchase consideration of approximately
$69,000, will be allocated to the net tangible and intangible
assets of FII based upon their respective fair values. The
allocation of the aggregate purchase price included in the
following pro forma financial statements is preliminary, and does
not reflect the immediate retirement of FII long-term debt, FII
Series A Preferred Stock, and FII Series C Preferred Stock,
however, the Company does not expect that the final allocation of
the purchase price will materially differ from the preliminary
allocation that follows:
<TABLE>
<S> <C>
Assets
Accounts receivable $ 23,036
Other current assets 2,773
Equipment 51,010
Other assets 7,184
Goodwill 240,105
-------------
Total Assets 324,108
=============
Liabilities and stockholders' equity
Notes payable, current $ 514
Accounts payable 14,068
Accrued expenses 6,213
Accrued acquisition costs 7,000
Advance billings 3,581
Long term debt, less current portion 180,501
Post retirement benefits 104
Stockholders' equity
FII Series A preferred stock 19,112
STFI Convertible preferred stock 25,000
STFI special preferred stock 20,000
FII Series C preferred stock 24,015
STFI common stock 24,000
-------------
Total liabilities and stockholders equity $ 324,108
=============
</TABLE>
F-22
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except for per share date)
NOTE 18 - SUBSEQUENT EVENTS (CONTINUED):
The following unaudited pro forma statements of operations for
1995 and 1994 give effect to the merger, acquisitions of STI and
FII prior to the merger, the change of reporting of STC to the
equity method and the pro forma effect of STC acquisitions, as if
they occurred on January 1, 1994:
<TABLE>
<CAPTION>
1995 1994
---------- -------
<S> <C> <C>
Revenues $ 174,852 $ 175,247
Gross margin 78,491 71,185
Operating income 19,367 16,443
Gain on sale of subsidiary stock 1,375
Equity in loss of subsidiary (2,634) (1,696)
Interest expense, net (26,983) (27,110)
Net loss $ (8,875) $ (11,813)
========== ===========
Net loss applicable to common stock $ (12,778) $ (15,851)
========== ===========
Net loss per share $ (.88) $ (1.15)
========== ===========
Weighted average number of common shares outstanding 14,482 13,753
========== ===========
</TABLE>
F-23
<PAGE>
SCHEDULE VIII
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994 AND
1993
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
Beginning Cost and to Other at End
Description of Year Expenses Accounts Deductions(1) of Year
----------- ------------ ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1993:
Allowance for doubtful
accounts and discounts 297 253 240 310
DECEMBER 31, 1994:
Allowance for doubtful
accounts and discounts 310 413 139 584
DECEMBER 31, 1995:
Allowance for doubtful
accounts and discounts 584 321 130 625 (2) 410
</TABLE>
(1) Represents write off of uncollectible accounts, net of recoveries.
(2) Includes $242 due to the change in accounting, to the equity method for one
of the Company's subsidiaries
S-1
EXHIBIT 21
The following table indicates the subsidiaries and partnerships owned
by the Company.
<TABLE>
<CAPTION>
<S> <C>
Shared Technologies Fairchild Communications Corp. ++........... a Delaware corporation
Shared Technologies Cellular, Inc. ****......................... a Delaware corporation
Multi-Tenant Services, Inc. +................................... a Delaware corporation
Financial Place Communications Company *....................... an Illinois general partnership
Boston Telecommunications Group, Inc. +
d/b/a Boston Telecommunications Company................. a Massachusetts corporation
STI Cellular Franchise Corp.**.................................. a Delaware corporation
Access Telecommunication Group, L.P. +++........................ a Texas limited partnership
Access Telemanagement, Inc. + .................................. a Texas corporation
Access Network Services, Inc. ***............................... a Texas corporation
STI International, Inc. + ...................................... a Delaware corporation
Shared Technologies of Canada ++++ .............................
Office Telephone Management + .................................. a California corporation
</TABLE>
- --------------------------
+ a wholly-owned subsidiary of Shared Technologies Fairchild
Communications Corp.
++ a wholly-owned subsidiary of Shared Technologies Fairchild Inc.
* 99% owned by the Company
** a wholly-owned subsidiary of Shared Technologies Cellular, Inc.
+++ The Company is the sole limited partner and Shared Technologies
Fairchild Communications Corp. is the 100% owner of the
corporate general partner, Access Telemanagement, Inc.
*** a wholly-owned subsidiary of Access Telecommunication
Group, L.P.
++++ STI International, Inc. owns a 50% equity interest, the other
50% is owned by O&Y Telecom, Inc.
**** The Company owns 59.3% of the Common Stock, however, it does
not have voting control due to the issuance of voting preferred
stock and is, therefore, reported on an equity basis.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 476
<SECURITIES> 0
<RECEIVABLES> 10265
<ALLOWANCES> 440
<INVENTORY> 0
<CURRENT-ASSETS> 12070
<PP&E> 34953
<DEPRECIATION> 18305
<TOTAL-ASSETS> 42863
<CURRENT-LIABILITIES> 15463
<BONDS> 0
0
14
<COMMON> 34
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 42863
<SALES> 47086
<TOTAL-REVENUES> 47086
<CGS> 28872
<TOTAL-COSTS> 28872
<OTHER-EXPENSES> 1054
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 882
<INCOME-PRETAX> 972
<INCOME-TAX> 45
<INCOME-CONTINUING> 927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 927
<EPS-PRIMARY> .06
<EPS-DILUTED> 0
</TABLE>
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
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-8-20
FINANCIAL STATEMENT SCHEDULE:
Schedule VIII - Valuation and Qualifying Accounts for the
Years Ended December 31, 1995, 1994 and 1993 S-1
NOTE:
(a) All other schedules are not submitted because they are not applicable, not
required or because the required information is included in the
consolidated financial statements or notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Shared Technologies Cellular, Inc.
We have audited the accompanying consolidated balance sheets of Shared
Technologies Cellular, Inc. and Subsidiaries as of December 31, 1995 and 1994
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1995, 1994 and 1993. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Shared
Technologies Cellular, Inc. and Subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for the years ended
December 31, 1995, 1994 and 1993, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
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 financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic 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 financial statements taken as a whole.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 6, 1996
F-2
<PAGE>
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
--------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 2,541,827 $ 10,233
Accounts receivable, less allowance for doubtful
accounts of $684,875 in 1995 and $242,680 in 1994 1,172,671 1,354,289
Carrier commissions receivable, less unearned income 452,610
Inventories 49,076 30,701
Note receivable 59,136 32,546
Prepaid expenses and other current assets 471,356 100,048
Receivable due from sale of assets 1,077,856
--------------- --------------
Total current assets 5,824,532 1,527,817
--------------- --------------
Telecommunications and office equipment, less
accumulated depreciation 2,157,685 995,909
--------------- --------------
Other assets:
Intangible assets, less accumulated amortization 6,129,101 2,396,119
Deferred registration costs 182,135
Deposits 142,080 89,559
Note receivable, net of current portion 124,407 169,487
Due from affiliate 90,796
--------------- --------------
6,395,588 2,928,096
--------------- --------------
$ 14,377,805 $ 5,451,822
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 400,000 $
Accounts payable and other current liabilities 5,838,718 2,422,345
Commissions payable 452,611
Due to parent 984,592
Advance billings 26,128
--------------- --------------
Total current liabilities 7,675,921 2,448,473
--------------- --------------
Note payable, less current portion 1,600,000
Due to parent --------------- --------------
2,434,137
Commitments and contingencies --------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value, Series A Convertible,
authorized, issued and outstanding 300,000 shares 3,000
Common stock, $.01 par value, authorized 10,000,000
shares, issued and outstanding 3,089,189 shares in
1995 and 2,070,570 shares in 1994 30,892 20,706
Common stock subscription 5,000 5,000
Capital in excess of par value 9,172,583 1,804,636
Accumulated deficit (4,104,591) (1,256,130)
Note receivable arising from stock purchase agreement (5,000) (5,000)
--------------- --------------
Total stockholders' equity 5,101,884 569,212
--------------- --------------
$ 14,377,805 $ 5,451,822
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------------- ------------------ ---------------
<S> <C> <C> <C>
Revenues $ 13,613,161 $ 10,217,300 $ 2,199,727
Cost of revenues 8,587,272 5,293,845 1,604,040
------------------- ------------------ ----------------
Gross margin 5,025,889 4,923,455 595,687
Selling, general and administrative
expenses 8,015,184 4,272,786 1,462,548
------------------ ------------------ ----------------
Income (loss) from operations (2,989,295) 650,669 (866,861)
------------------ ------------------ ----------------
Other income (expense):
Interest income (expense), net (136,395) (48,659) 7,429
Gain on sale of assets 689,480
Loss on discontinued affiliate (364,327)
------------------ ------------------ ----------------
188,758 (48,659) 7,429
------------------ ------------------ ----------------
Net income (loss) before income taxes (2,800,537) 602,010 (859,432)
Income taxes (47,924)
------------------ ------------------ -----------------
Net income (loss) $ (2,848,461) $ 602,010 $ (859,432)
=================== ================== ==============
Income (loss) per common share $ (1.04) $ .28 $ (.39)
=================== ================== =================
Weighted average number of
common shares outstanding 2,748,288 2,185,000 2,185,000
================== ================== =================
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
------------------ ------------------------ Common
Stock Capital in Total
Subscrip- Excess of Accumulated Note Stockholders'
Shares Amount Shares Amount tions Par Value Deficit Receivable Equity
------- -------- ----------- ---------- --------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
January 1, 1993 - $ - 67,973 $ 680 $ - $ - $ (998,708) $ - $ (998,028)
Net loss (859,432) (859,432)
------- -------- ----------- ---------- --------- ---------- ----------- ---------- ------------
Balances,
December 31, 1993 67,973 680 (1,858,140) (1,857,460)
Common stock
issued for services 207,119 2,071 14,429 16,500
Transfer of investment
to parent 108,136 108,136
Issuance of common
stock 1,795,478 17,955 (17,929) 26
Contribution to
capital by parent 1,700,000 1,700,000
Common stock
subscription 5,000 (5,000)
Net income 602,010 602,010
------- -------- ----------- ---------- --------- ---------- ----------- ---------- -----------
Balances,
December 31, 1994 2,070,570 20,706 5,000 1,804,636 (1,256,130) (5,000) 569,212
Issuance of stock 300,000 3,000 950,000 9,500 6,084,633 6,097,133
Contribution to
capital by parent 1,184,000 1,184,000
Issuance of common
stock for acquisitions 150,000 1,500 473,500 475,000
Repurchase of common
stock (81,381) (814) (374,186) (375,000)
Net loss (2,848,461) (2,848,461)
------- -------- ----------- ---------- --------- ---------- ----------- ---------- -----------
Balances, December 31,
1995 300,000 $ 3,000 3,089,189 $ 30,892 $ 5,000 $9,172,583 $(4,104,591) $ (5,000) $ 5,101,884
======= ======== =========== ========== ========= ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,848,461) $ 602,010 $ (859,432)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,085,685 578,843 98,465
Provision for doubtful accounts 1,248,620 307,617 228,791
Common stock issued for services 16,500
Gain on sale of franchise (202,033)
Gain on sale of assets (689,480)
Loss on discontinued affiliate 364,327
Change in assets and liabilities net of effect of acquisitions:
Accounts receivable (1,409,378) (1,170,369) (444,214)
Inventories (51,375) (3,706) 619
Commissions receivable 13,259
Prepaid expenses (238,867) (68,859) (22,651)
Accounts payable and other current liabilities 1,775,093 1,636,493 177,080
Commissions payable (21,209)
Advance billings (26,128) 772 7,325
--------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (797,914) 1,697,268 (814,017)
--------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses (1,046,993)
Purchases of equipment (342,314) (726,507) (47,196)
Payments for deposits (52,521) (17,684) (20,590)
Payments for intangible assets (612,346) (527,366) (8,825)
Collections on note receivable 18,490
--------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (2,035,684) (1,271,557) (76,611)
--------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (175,595) (1,500)
Payments on note payable (86,250) (20,207)
Advances from (payments to) parent (265,545) 115,626 816,339
Deferred registration costs (182,135)
Advances to affiliate (273,531) (90,796)
Issuance of common and preferred stock 6,279,268
Repurchase of common stock (375,000)
--------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 5,365,192 (419,150) 794,632
--------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 2,531,594 6,561 (95,996)
Cash, beginning of year 10,233 3,672 99,668
--------------- ------------- -------------
Cash, end of year $ 2,541,827 $ 10,233 $ 3,672
=============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- ------------- -------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 75,620 $ 65,372 $ 2,716
=============== ============= =============
Income taxes $ 47,924 $ - $ -
=============== ============= =============
SUPPLEMENTAL SCHEDULES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of net assets of certain businesses
through the issuance of debt to parent $ - $ - $ 2,068,856
=============== ============= =============
Cost of intangible assets included in accounts
payable $ 203,074 $ 202,985 $ -
=============== ============= =============
Capital lease obligations incurred for
leases for new equipment $ - $ - $ 232,917
=============== ============= =============
Transfer of investment to parent $ - $ 108,136 $ -
=============== ============= =============
Contribution to capital in excess of par value
of due to parent $ 1,184,000 $ 1,700,000 $ -
=============== ============= =============
Note received for sale of franchise $ - $ 202,033
=============== =============
Note received for sale of assets $ 1,077,856
===============
Issuance of common stock for acquisitions $ 475,000
===============
Note payable incurred for acquisition of assets $ 2,000,000
===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND ORGANIZATION
Shared Technologies Cellular, Inc. (STC) together with its
subsidiaries (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 preempted the
regulatory jurisdiction of state agencies, although certain
states in which the Company operates have petitioned the FCC for
continued jurisdiction over cellular communications.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of STC
and its wholly-owned subsidiaries. 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.
Revenue Recognition
Revenues are recognized as services are performed. Initial
franchise fee revenue will be recognized once all material
services or conditions relating to the sale of a franchise have
been substantially performed.
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 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.
F-8
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Carrier Commissions Receivable
Carrier commissions receivable are due from cellular carriers for
commissions on 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 a provision for
unearned income equal to 9% of the gross carrier commissions
receivable for cancellations of cellular service by the user,
prior to the end of the aforementioned vesting period.
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
years to 20 years from the respective acquisition dates. The
Company monitors the profitability of the acquired operations to
assess whether any impairment of recorded goodwill has occurred.
Franchise costs relate to costs associated with the start-up of a
franchised short-term cellular telephone rental operation. These
costs are amortized over a 5 years.
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 15 months.
The covenant not to compete is being amortized on the
straight-line basis over the life of the agreement, approximately
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.
F-9
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 will 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 annually for differences between the
financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future, based
on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce the
deferred tax assets to the amount expected to be realized. The
adoption of SFAS No. 109 had no material impact on the Company's
financial statements since the Company fully reserved the tax
benefits flowing from its operating losses.
Impairment on Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" was issued.
The Company will adopt SFAS No. 121 in the first quarter of 1996.
The impact on the Company's financial position and results of
operations is not expected to be material.
Income (Loss) Per Common Share
Income (loss) per share of common stock is based upon the
weighted average number of shares outstanding after giving effect
to the stock splits referred to in Note 9. 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 9) and those issued through the
Company's Stock Option Plan, at a price less than the public
offering price.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-10
<PAGE>
NOTE 3 - Acquisitions:
In October 1993, the Company commenced management of, and
subsequently acquired certain assets and assumed certain
liabilities of, Road and Show Cellular East, Inc. (East), a
short-term portable cellular telephone service provider. The
purchase price was $750,245, of which $209,245 was paid in cash
by its parent, Shared Technologies Fairchild Inc. (STFI)
(formerly Shared Technologies Inc.). The Company recorded a
liability due to its parent for the cash payment and the balance
of $541,000, resulting from the obligation of STFI to issue
108,200 ($5.00 per share) shares of its common stock to the
seller. In 1995, STFI issued 121,403 shares, which was adjusted
to give effect to the change in market price of the STFI stock on
the date of issuance.
In December 1993, the Company completed the acquisitions of
certain assets and assumed certain liabilities of both Road and
Show South, Ltd. (South) and Road and Show Pennsylvania, Inc.
(Pennsylvania), short-term portable cellular telephone service
providers. The purchase prices for South and Pennsylvania were
$1,261,611 and $57,000, respectively, of which $46,111 and
$7,000, respectively, was paid in cash by STFI. The Company
recorded an aggregate liability of $1,265,500 due to its parent,
which represented the balance of the purchase prices resulting
from the obligation of STFI to issue an aggregate of 286,499
shares (at $5.00 and $3.64 per share, respectively) of its common
stock. STFI became obligated to issue additional shares to South
since the market price of STFI common stock dropped below
specified levels. However, the Company did not incur any
additional liability to STFI. The shares in connection with the
South acquisition have been issued, however, only approximately
197,000 shares of STFI's common stock have been delivered. The
balance of the shares will be delivered pending the outcome of
certain claims against, and by, the former owners of South (Note
14).
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 $367,000
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 from them 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 those Shares. 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. In addition, the agreement provides for additional
payments based upon attaining certain levels of activation
revenues, as defined, over a one year period.
In November 1995, STC completed its acquisition of substantially
all of the assets of PTC Cellular, Inc. (PTCC). The purchase
price was $3,800,000, comprised of $300,000 in cash, the
assumption of $1,200,000 of accounts payable, a promissory note
of $2,000,000 and the issuance of 100,000 shares of the Company's
common stock. 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. Also, STC has
committed to PTCC to obtain financing in the amount of $7,000,000
within six months of the acquisition date.
F-11
<PAGE>
NOTE 3 - ACQUISITIONS (CONTINUED):
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:
<TABLE>
<CAPTION>
Hotline PTCC
---------- -------------
<S> <C> <C>
Cash $ 19,462 $ -
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
Intangibles 520,000
Accounts payable and other current liabilities (238,206)
Commissions payable (473,820)
------------
$ (93,264) $ 2,388,390
============ ==============
</TABLE>
The following unaudited pro forma combined statements of
operations for 1995 and 1994 give effect to the acquisitions of
Hotline and PTCC, as if they had occurred on January 1, 1994.
<TABLE>
<CAPTION>
1995 1994
-------------- ---------------
<S> <C> <C>
Revenues $ 21,329,344 $ 25,092,877
Cost of revenues 15,793,816 17,746,810
-------------- ---------------
Gross margin 5,535,528 7,346,067
Selling, general and administrative expenses 9,910,680 10,408,185
-------------- ---------------
Loss from operations (4,375,152) (3,062,118)
Interest expense, net (343,955) (199,934)
Other income 325,149
-------------- ---------------
Net loss before income taxes (4,393,958) (3,262,052)
Income taxes (47,924)
--------------- ---------------
Net loss $ (4,441,882) $ (3,262,052)
============== ===============
Loss per common share $ (1.56) $ (1.40)
=============== ===============
Weighted average number of
common shares outstanding 2,847,948 2,335,000
=============== ===============
</TABLE>
F-12
<PAGE>
NOTE 4 - TELECOMMUNICATIONS AND OFFICE EQUIPMENT:
Telecommunications and office equipment consist of the following
at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------------- ---------------
<S> <C> <C>
Telecommunications equipment $ 2,611,128 $ 1,167,103
Office equipment 503,126 248,357
-------------- ---------------
3,114,254 1,415,460
Accumulated depreciation 956,569 419,551
-------------- ---------------
$ 2,157,685 $ 995,909
============== ===============
</TABLE>
Depreciation for the years ended December 31, 1995, 1994 and 1993
was $537,018, $327,543 and $76,872, respectively.
NOTE 5 - INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
-------------- ---------------
<S> <C> <C>
Goodwill $ 5,023,920 $ 2,204,350
Franchise costs 75,573 75,573
Deferred start-up costs 617,500 390,000
Covenant not to compete 142,373 22,373
Rental car agreement 520,000
Capitalized software development costs 594,579
-------------- ---------------
6,973,945 2,692,296
Accumulated amortization 844,844 296,177
-------------- ---------------
$ 6,129,101 $ 2,396,119
============== ===============
</TABLE>
Amortization for the years ended December 31, 1995, 1994 and 1993
was $548,667, $258,805 and $28,473, respectively.
NOTE 6 - NOTE RECEIVABLE:
The note receivable (face amount of $250,000) resulted from the
sale of a franchise and is due in monthly installments of $5,000
through April 1, 1999. In discounting the note to $202,033,
interest has been imputed at 10% per annum.
F-13
<PAGE>
NOTE 7 - ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES:
Accounts payable and other current liabilities consist of the
following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------------- --------------
<S> <C> <C>
Trade $ 4,465,198 $ 1,521,514
Sales and other taxes 668,610 547,870
Payroll and payroll taxes 110,290 77,072
Other 594,620 275,889
------------- -------------
$ 5,838,718 $ 2,422,345
============= =============
</TABLE>
NOTE 8 - NOTE PAYABLE:
The promissory note bears interest at 8% per annum and is payable
in semi-annual principal installments of $200,000 through
November 2000. The note is collateralized by substantially all of
the assets acquired from PTCC.
NOTE 9 - STOCKHOLDERS' EQUITY:
On January 1, 1994, the Company issued an aggregate of 175,737
shares of its common stock to certain officers and a consultant.
The value ascribed to these shares, $14,000 ($.08 per share), has
been included in general and administrative expenses for the year
ended December 31, 1994.
On January 1, 1994, the Company transferred its 65% ownership in
Safecall to STFI. In connection with this transaction, $108,136
was recorded in 1994 as capital in excess of par value.
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).
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 have been
restated to reflect these stock splits.
F-14
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED):
During October 1994, the Company's certificate of incorporation
was amended whereby the authorized number of shares of the
Company's common stock was increased to 10,000,000 and 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 directors.
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 have been restated to reflect
this stock
split.
In April 1995, the Company completed its initial public offering
of 950,000 shares of its common stock at $5.25 per share.
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
these shares.
In December 1995, the Company sold 300,000 shares of Series A
Convertible Preferred Stock 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, which is payable in additional shares of Series A
Preferred Stock. Thereafter, at the Company's option, dividends
are payable at 6% per annum in cash or 10% per annum if paid with
additional shares of Series A Preferred Stock. The shares are
currently convertible into a maximum of 1,200,000 shares of the
Company's common stock, subject to certain adjustments. Series A
Preferred Stock has voting rights equivalent to common stock, in
an amount equal to the current conversion rate. The Company has
the right to require the conversion of the Series A Preferred
Stock into the common stock, at any time after one year, provided
that the Company maintains a certain market value of its common
stock, as defined. In addition, the Company paid an advisory fee
of $300,000 and issued warrants to purchase 150,000 shares of its
common stock, at an exercise price of $2.50, to a firm, one of
whose principals is a director of the Company.
As of December 31, 1995, the Company was approximately 59% owned
by STFI. Subsequent to the issuance of Series A Preferred Stock,
STFI's voting control of the Company decreased to approximately
43%.
F-15
<PAGE>
NOTE 10 - 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. The activity
in the Plan was as follows:
<TABLE>
<CAPTION>
Exercise Price Per Share
------------------------
Number of Weighted
Options Range Average
------------- ------------- ----------
<S> <C> <C> <C>
Granted in 1994 171,048 $ 3.68 $ 3.68
------------- ------------- ----------
Balance outstanding December 31, 1994 171,048 3.68 3.68
Granted 91,000 2.38-3.68 3.12
Expired (34,715) 3.68 3.68
------------- ------------- ----------
Balance outstanding December 31, 1995 227,333 $ 2.38-3.68 $ 3.45
============= ============= ==========
</TABLE>
At December 31, 1995, options to purchase 82,111 shares of common
stock were exercisable.
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, after having served as a
director for one year, automatically receive nonstatutory options
to annually 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,
1995, options to purchase 4,000 shares of the Company's common
stock at a price of $3.125 per share were outstanding.
F-16
<PAGE>
NOTE 11 - RELATED PARTY TRANSACTIONS:
STFI has provided the Company with various general and
administrative services. Charges for these services by STFI
approximated $nil, $55,000, and $291,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. Subsequent to
1993, the Company provided more of its own direct general and
administrative services, thereby reducing the services previously
provided by STFI.
The Company entered into a one year agreement, effective January
1, 1996, whereby the Company will pay a fee of $25,000 per month
for certain services to be performed by STFI. Per the agreement,
the fee will not (i) be payable in any month in which there is a
pre-tax loss, (ii) exceed pre-tax profit (prior to the fee, in
any month), or (iii) exceed $200,000. In addition, STFI agrees to
provide telecommunications services, as may be requested by the
Company, including local access and long distance service, at a
price not to exceed STFI's cost for such services plus twenty
percent. This agreement is cancelable by the Company on thirty
days notice to STFI.
Amounts due to parent are due on demand, are unsecured and
non-interest bearing.
NOTE 12 - INCOME TAXES:
A reconciliation of income tax expense (credit), to the federal
statutory rate follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Income tax expense (credit) on reported pretax
income (loss) at federal statutory rate (34.0)% 34.0 % (34.0)%
State income tax, net of federal benefit (1.7) 5.3 (5.3)
Net operating loss carryforward (utilized) 34.0 (39.3) 39.3
------------ ------------ ------------
Income taxes 1.7 % -0-% -0-%
============ =========== ============
</TABLE>
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, 1995, 1994 and 1993, the Company recorded
deferred tax assets of approximately $1,104,000, $110,000 and
$180,000, respectively, and valuation allowances in the same
amounts.
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-17
<PAGE>
NOTE 12 - INCOME TAXES (CONTINUED):
The net deferred tax asset includes deferred tax assets and
liabilities as of December 31, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
1995 1994
--------------- --------------
<S> <C> <C>
Deferred tax asset $ 1,214,000 $ 111,000
Deferred tax liability (110,000) (1,000)
Valuation allowances for deferred tax asset (1,104,000) (110,000)
--------------- --------------
Net deferred tax asset $ - $ -
=============== ==============
</TABLE>
The components of deferred income tax assets (liabilities) as of
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------------- --------------
<S> <C> <C>
Net operating loss carryforward $ 945,000 $ -
Depreciation (97,000) (1,000)
Allowance for doubtful accounts 269,000 95,000
Intangible assets (13,000) 16,000
--------------- --------------
1,104,000 110,000
Valuation allowance for deferred tax asset (1,104,000) (110,000)
--------------- --------------
$ - $ -
=============== ==============
</TABLE>
At December 31, 1995, the Company has a federal net operating
loss carryforward of approximately $2,405,000, which can be
utilized against future taxable income and expires in the year
2010. Net operating losses available for state income tax
purposes are less than those for federal purposes and generally
expire earlier.
NOTE 13 - SAVINGS AND RETIREMENT PLAN:
The Company participates in a savings and retirement plan (the
Plan) maintained by STFI, 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 STFI's common stock and are vested at the rate of 33%
per year. For the years ended December 31, 1995, 1994 and 1993,
the Company's matching contributions were approximately $24,900,
$17,500 and $5,100, respectively.
F-18
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
In connection with the acquisition of East, the Company entered
into a three year consulting agreement with the former owner,
providing that during the first two years of the agreement the
former owner is to be paid an annual consulting fee equal to 3%
of total cellular telephone rental revenues in excess of
$4,000,000. In addition, an annual bonus of $100,000 is payable
if total cellular telephone rental revenues exceed $5,000,000 per
annum. The former owner may not engage in any business competing
with the Company, within a certain geographical area. Fees for
the years ended December 31, 1995 and 1994 were approximately
$158,000 and $188,000, respectively.
The Company leases office facilities, which expire in various
years through December 1999. Future minimum aggregate annual
rental payments as of December 31, 1995 are as follows:
Year Ending December 31:
1996 $ 214,000
1997 150,000
1998 121,000
1999 97,000
Rent expense for the years ended December 31, 1995, 1994 and 1993
was approximately $256,000, $155,000 and $24,000, respectively.
On January 27, 1995, South commenced an action against the
Company alleging, among other things, that the Company's failure
to deliver to South the STFI common stock under the asset
purchase agreement constituted a breach of contract and fraud.
South is seeking unspecified actual and punitive damages of not
less than $10 million. The Company sought a stay of this action.
The parties have agreed to attempt to settle through mediation or
arbitration. Management believes that in the event such claims
are resolved against the Company, they would not, in the
aggregate, have a material adverse effect on financial condition,
results of operations or cash flows.
The Company entered into a two year consulting agreement,
expiring December 31, 1998, providing for annual compensation of
$180,000. In addition, the agreement provides for additional
payments based upon attainment of certain levels of revenues, as
defined. 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.
F-19
<PAGE>
NOTE 15 - DEPENDENCE UPON KEY RELATIONSHIPS MAJOR CUSTOMERS:
Approximately 25%, 29% and 27% of the Company's revenues for the
years ended December 31, 1995, 1994 and 1993, 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,
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 16 - GAIN ON SALE OF ASSETS:
On December 26, 1995, the Company sold its cellular mobile
telephone customer base of its resale business and substantially
all of the related accounts receivable. The Company realized a
gain of approximately $689,000.
NOTE 17 - LOSS ON DISCONTINUED AFFILIATE:
During 1995, the Company's affiliate, Safecall, Inc., ceased its
operations. Amounts previously advanced to this affiliate were
written off.
NOTE 18- SUBSEQUENT EVENTS:
In February 1996, the Company issued a letter of intent to
acquire substantially all of the assets of its only franchisee,
for approximately $3,400,000. The purchase price will be paid in
cash, issuance of debt and issuance of shares of the Company's
common stock.
F-20
<PAGE>
SCHEDULE VIII
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
Beginning Cost and to Other at End
Description of Year Expenses Accounts Deductions (1) of Year
----------- ------------ ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1993:
Allowance for doubtful
accounts and discounts 13,928 228,791 198,182 44,537
December 31, 1994:
Allowance for doubtful
accounts and discounts 44,537 307,617 109,474 242,680
December 31, 1995:
Allowance for doubtful
accounts and discounts 242,680 1,248,620 806,425 684,875
</TABLE>
(1) Represents write off of uncollectible accounts, net of recoveries.
S-1
