Form 10-Q
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15d
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-17366
SHARED TECHNOLOGIES FAIRCHILD INC.
(exact name of registrant as specified
in its charter)
Delaware 87-0424558
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
100 Great Meadow Road, Suite 104
Wethersfield, CT 06109
(Address of principal executive offices)
(860) 258-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the latest practicable date.
Class Outstanding at November 14, 1996
Common Stock, $.004 par value 15,103,427 shares
<PAGE>
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance
Sheets as of September 30,
1996 and December 31, 1995 3-4
Consolidated Statements of
Operations for the nine months
ended September 30, 1996 and 1995 5
Consolidated Statements of
Operations for the three
months ended September 30,
1996 and 1995 6
Consolidated Statements of
Cash Flows for the nine
months ended September 30,
1996 and 1995 7
Consolidated Statements of
Stockholders' Equity for
the nine months ended
September 30, 1996 8
Notes to Consolidated
Financial Statements 9-11
Item 2 Management's Discussion and
Analysis of Results of
Operations and Financial
Condition 12-13
PART II OTHER INFORMATION 14
Signature Page 15
<PAGE>
Item 1. Financial Statements
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
(In thousands except per share data)
(unaudited)
September 30, 1996 December 31, 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 545 $ 476
Accounts receivable, less allowance
for doubtful accounts of $637
in 1996 and $410 in 1995 35,277 9,855
Advances to subsidiary 56 985
Inventories 1,755 -
Other current assets 1,666 754
Total current assets 39,299 12,070
Equipment:
Property & Equipment 93,816 34,953
Accumulated depreciation (25,789) (18,305)
68,027 16,648
Other Assets:
Investment in subsidiaries 2,325 1,581
Intangible assets 263,282 11,543
Deferred income taxes 560 560
Other 558 461
266,725 14,145
----------- -----------
Total assets $374,051 $ 42,863 The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
(In thousands except per share data)
(unaudited)
September 30, December 31
1996 1995
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt and capital
lease obligations $ 22,765 $ 2,870
Accounts payable 21,258 9,035
Accrued expenses 11,007 2,221
Advanced billings 6,967 1,337
Total current liabilities 61,997 15,463
Long-Term Debt and Capital Lease Obligations
less current portion 228,303 4,128
Redeemable Put Warrant 465 428
Convertible preferred stock, $.01 par value,
authorized 250 shares, outstanding 250 shares
in 1996 and no shares in 1995 25,000 -
Special preferred stock, $.01 par value,
authorized 200 shares, outstanding 200 shares in 1996 and no shares in
1995 13,881 -
STOCKHOLDERS' EQUITY:
Preferred $.01 par value, authorized 25,000 shares:
Series C, outstanding 428 shares in 1996 and
907 shares in 1995 4 9
Series D, outstanding 457 shares in 1996 and
1995 5 5
Common Stock; $.004 par value, 50,000 shares
authorized, outstanding 15,103 shares in 1996
and 8,506 shares in 1995 60 34
Additional paid-in capital 73,113 44,777
Accumulated deficit (28,777) (21,981)
Total stockholders' equity 44,405 22,844
Total liabilities and
stockholders' equity $ 374,051 $42,863
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Statements of Operations
(In thousands except per share data)
For the Nine Months Ended September 30, 1996 and 1995
(unaudited)
September 30, September 30,
1996 1995
<S> <C> <C>
Revenue:
Shared telecommunications services $ 69,310 $ 25,248
Telecommunications systems 41,585 9,266
Cellular services - 9,160
Total revenue 110,895 43,674
Cost of revenue:
Shared telecommunications services 34,233 13,934
Telecommunications systems 25,019 7,164
Cellular services - 5,530
Total cost of revenue 59,252 26,628
Gross Margin 51,643 17,046
Selling, general & administrative 39,118 16,086
Expenses
Operating Income 12,525 960
Other income (expense):
Gain on sale of subsidiary stock - 1,375
Equity in loss of subsidiary (2,009) -
Interest expense (15,246) (444)
Minority interest in net (income)
loss of subsidiaries - 213
(17,255) 1,144
Income (loss) before income taxes
and extraordinary item (4,730) 2,104
Income tax (74) (30)
Income (loss) before extraordinary item (4,804) (2,074)
Extraordinary item, loss on early retirement of debt
(310) -
Net income (loss) (5,114) 2,074
Dividend accretion on redeemable put warrant (37) (33)
Dividend accretion on special preferred stock (612) -
Preferred stock dividends (1,033) (299)
Net Income (loss) applicable to common stock $(6,796) $ 1,742
Income (loss) per common share
Income (loss) before extraordinary item $ (0.49) 0.20
Extraordinary item (0.02) -
Net income (loss) $ (0.51) $ 0.20
Weighted average shares outstanding 13,316 8,698
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Statements of Operations
For the Nine Months Ended September 30, 1996 and 1995
(In thousands except per share data)
(unaudited)
September 30, 1996 September 30, 1995
<S> <C> <C>
Revenue:
Shared telecommunications services $27,384 $8,178
Telecommunications systems 19,739 3,917
Cellular services - 3,870
Total revenue 47,123 15,965
Cost of revenue:
Shared telecommunications services 13,143 4,354
Telecommunications systems 11,301 2,914
Cellular services - 2,452
Total cost of revenue 24,444 9,720
Gross margin 22,679 6,245
Selling, general & administrative 16,262 5,977
Expenses
Operating income 6,417 268
Other income (expense):
Equity in loss of subsidiary (310) -
Interest expense (6,995) (186)
Minority interest in net (income) loss
of subsidiaries - 125
7,305 (61)
Income (loss) before income taxes (888) 207
Income tax (34) (15)
Net income (loss) (922) 192
Dividend accretion on redeemable put warrant (13) (11)
Dividend accretion on special preferred stock(612) -
Preferred stock dividends (456) (100)
Net income (loss) applicable to
common stock $ (2,003) $ 81
Income (loss) per common share:
Net Income (loss) $ (0.13) $ 0.01
Weighted average shares outstanding 15,066 8,751
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1996 and 1995
(In thousands except per share data)
(unaudited)
September 30, 1996 September 30, 1995
--------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net Income, (loss) $(5,114) $ 2,074
Adjustments:
Gain on sale of subsidiary stock - (1,375)
Depreciation & amortization 11,525 3,266
Loss on early retirement of debt 310 -
Accretion on Senior
Subordinated Notes 7,803 -
Provision for doubtful accounts 25 -
Equity in loss of subsidiary 2,009 -
Amortization of discount on note 14 -
Minority interest in net income of
subsidiaries - (213)
Change in assets and liabilities:
Accounts receivable (1,056) (2,407)
Other current assets (627) (594)
Other assets 1,732 (310)
Accounts payable 646 1,541
Accrued expenses 2,039 (57)
Advanced billings (472) (47)
------------------------------------
Net cash provided by operating activities 18,834 1,878
----------------------------------------
Cash flows from investing activities:
Acquisitions (net of cash acquired) (4,011) (2,483)
Capital expenditures (7,092) (3,099)
Investment in subsidiaries (1,468) -
----------------------------------------
-----------------------------------------
Net cash used in investing activities (12,571) 5,582
----------------------------------
Cash flows from financing activities:
Preferred stock dividends (1,033) (299)
Net proceeds from sale of
subsidiary stock - 2,899
Proceeds from borrowings 244,999 2,929
Repayments of notes payable, long-term
debt and capital lease obligations (192,004) (1,751)
Payments to affiliate (8,407) -
Deferred finance costs (9,416) -
Repayment of FII preferred stock (40,706) -
Proceeds from issuance of common stock 373 1,164
-------------------------------------
Net cash provided by (used in) financing (6,194) 4,942
activities
---------------------------------
Net increase (decrease) in cash 69 1,238
Cash, Beginning of Period 476 172
--------------------------------------
Cash, End of Period $545 $1,410
======================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest $6,300 $569
Income taxes 119 74
Supplemental Disclosures of Noncash Investing and Financing Activities:
Obligations to issue common stock in
connection with acquisitions $- $1,806
Issuance of common stock in
connection with acquisitions 27,750 -
Issuance of preferred stock in
connection with acquisition 38,269 -
Dividend accretion on redeemable put warrant 37 33
Dividend accretion of special preferred stock 612 -
Issuance of common stock to settle accrued
expenses 237 67
</TABLE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1996
(in thousands)
(unaudited)
<S> <C> <C> <C> <C>
Series C Series D
Preferred Sto Preferred Stock
Shares Amount Shares Amount
Balance, January 1, 1996 907 $ 9 457 $ 5
Preferred stock dividends
Dividend accretion of
redeemable put warrant
Dividend accretion of special preferred stock
Issuance of Common Stock
Conversions of Preferred Stock (479) (5)
Exercise of common stock
options and warrants
Issuance of common stock to 401k plan
Net loss
Balance, September 30, 1996 428 $ 4 457 $ 5
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1996
(in thousands)
(unaudited)
<S> <C> <C> <C>
Additional
Common Stock Paid-in
Shares Amount Capital
Balance, January 1, 1996
8,506 $ 34 $ 44,777
Preferred stock dividends
Dividend accretion of
redeemable put warrant
Dividend accretion of special preferred stock
Issuance of Common Stock
6,000 24 27,726
Conversions of Preferred Stock
426 2 3
Exercise of common stock
126 - 373
options and warrants
Issuance of common stock to 401k plan
44 - 234
Net income
Balance, September 30, 1996
15,102 $ 60 $73,113
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1996
(in thousands)
(unaudited)
<S> <C> <C>
Accumulated Total Stockholders'
Deficit Equity
Balance, January 1, 1996 $(21,981) $ 22,844
Preferred stock dividends (1,033) (1,033)
Dividend accretion of redeemable
put warrant (37) (37)
Dividend accretion of special
preferred stock (612) (612)
Issuance of Common Stock 27,750
Conversions of Preferred Stock -
Exercise of common stock
options and warrants 373
Issuance of common stock to
401k plan 234
Net loss (5,114) (5,114)
Balance, September 30, 1996 $ (28,777) $ 44,405
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
==================================================================
Shared Technologies Fairchild Inc.
==================================================================
Notes to Consolidated Financial Statements
September 30, 1996
(In thousands except for per share data)
(Unaudited)
1. Basis of Presentation: ------------------------- The consolidated
financial statements included herein have been prepared by Shared Technologies
Fairchild Inc. (the Company) pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary to present a fair statement of the results for interim periods.
Certain information and footnote disclosures have been omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's December 31, 1995 report on Form 10-K. Certain reclassifications to
prior year financial statements were made in order to conform to the 1996
presentation.
2. Investment in Unconsolidated Subsidiary
The Company's investment in its Unconsolidated subsidiary, Shared
Technologies Cellular, Inc. (STC), is accounted for under the equity method.
Prior to December 1995, the majority owned subsidiary was included on a
consolidated basis. During December 1995, STC issued approximately $3,000 in
voting preferred stock to third parties. Although the Company's ownership
percentage of approximately 58% did not change, the voting rights assigned to
the preferred stock reduced the Company's voting interest in STC, resulting in
the Company's loss of voting control of STC. Accordingly, STC has been accounted
for on the equity method for 1996. At September 30, 1996 the Company had an
ownership interest of approximately 40% in STC. Summarized balance sheet and
statement of operations information for STC as of, and for the three and
nine months ended, September 30, 1996 is as follows:
Summarized Balance Sheet
Current assets $ 3,026
Property and equipment, net 3,608
Other assets 9,827
Total assets $ 16,461
Current liabilities $ 9,187
Note payable 342
Total liabilities 9,529
Stockholders' equity 6,932
Total liabilities and stockholders' equity $ 16,461
Summarized Statement of Operations Three Nine
months ended months ended
Revenues $ 6,854 16,228
Gross margin 2,732 6,113
Operating loss (827) (3,722)
Net loss (960) (3,984)
In August 1996 the Company reached an agreement with STC to purchase $2,500
in STC preferred stock. This investment was financed through the conversion of
existing advances owed by STC to the Company in the amount of $1,200 and a cash
payment of $1,300. The STC preferred stock converts into 833 shares of STC
common stock at the Company's option.
3. Acquisitions:
On June 30, 1995, the Company purchased all of the outstanding capital
stock of Office Telephone Management("OTM"). OTM provides shared
telecommunication services primarily to businesses located in executive office
suites. The purchase price was $2,135 of which $1,335 was paid in cash and the
balance through the issuance of an $800 note, (discounted at 8.59%) payable
through June 30, 2005. The excess of cost over fair value of the net assets was
recorded as goodwill.
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"). Pursuant to 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 was accounted for using the purchase method of
accounting. The total purchase consideration of approximately $71,581 was
allocated to the net tangible and intangible assets of FII based upon their
respective fair market values as follows:
Assets
Cash $ 1,551
Accounts receivable 24,747
Other current assets 2,572
Equipment 51,532
Goodwill 248,008
Total Assets 328,410
Liabilities and stockholders' equity
Capital lease obligations $ (262)
Accounts payable (11,577)
Accrued expenses (6,981)
Advanced billings (6,102)
Due to affiliated company (8,407)
Long term debt (182,794)
FII preferred stock (40,706)
Net purchase price $ 71,581
The following unaudited pro forma statements of operations for the nine
months ended September 30, 1996 and 1995 give effect to the above acquisitions
and the change in reporting of STC to the equity method (Note 2) and the pro
forma effect of STC acquisitions, as if they occurred on January 1, 1995:
1996 1995
Revenues $ 138,178 $136,400
Cost of revenues 70,968 75,764
Gross margin 67,211 60,636
Selling, general and
administrative expenses 50,310 44,665
Operating income 16,901 15,971
Equity in loss of subsidiary (2,009) 372
Interest expense, net (20,594) (19,846)
Loss before income tax expense
and extraordinary item (5,702) (3,503)
Income taxes (64) (5)
Extraordinary item, loss on early
retirement of debt (332) (450)
Net Loss (6,098) (3,958)
Preferred stock dividends (2,196) (2,924)
Loss applicable to common stock $ (8,294) $ (6,882)
Net loss per common share $ (.56) $ (.47)
Weighted average number of common
shares outstanding 14,849 14,698
4. Contingencies:
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 3). 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 the financial
position of the Company.
5. Income Taxes:
The Company and its subsidiaries file a consolidated federal income tax
return but generally file separate state income tax returns. As of September 30,
1996 the Company recorded a deferred tax asset of $7,508 and a corresponding
valuation allowances of $ 6,948. 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
and a desire to be conservative make it appropriate to record a valuation
allowance.
At September 30, 1996, the Company's NOL carryforward for federal income
tax purposes was approximately $57,000, 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 apply to the use of NOL's due to
changes in Company ownership which occured in the merger with FII.
6. Extraordinary Item:
At September 30, 1996, the Company recorded an extraordinary loss of $310
relating to the early retirement of a $5,000 credit facility. The early
retirement took place as a result of requirements in the merger agreement with
FII (Note 3).
7. Consolidating Financial Statements:
The following unaudited statements separately show Shared Technologies
Fairchild Inc. and the subsidiaries of Shared Technologies Fairchild Inc. These
statements are provided to fulfill SEC reporting requirements. These
subsidiaries are guarantors on the 12 1/4% Senior Subordinated Notes due 2006.
<TABLE>
<CAPTION>
Consolidating Balance Sheets as of September 30, 1996
<S> <C> <C> <C> <C> <C> <C>
BTC MTS OTM STI Int'l STFTI
------------------------------------------------------------------
Assets
Current Assets:
Cash - - - - $ 539
- - - - 35,333
Accounts receivable
Advances to
- - - - -
subsidiaries
Other current
assets - - - - 3,421
-------------------------------------------------------
Total current
assets - - - - 39,293
-----------------------------------------------------------
Equipment:
- - - - 93,816
Property & Equipment
Accumulated - - - - (25,789)
depreciation
-----------------------------------------------------------------
68,027
-------------------------------------------------------------
Other Assets:
Investments in- - - - -
subsidiaries
- - - - 254,512
Intangible assets
560
Deferred income taxes
Other 558
--------------------------------------------------------------------
255,630
-----------------------------------------------------------
Total assets 362,950
=================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of
long term debt and
capital lease - - - - -
obligations
- - - - 21,258
Accounts payable
- - - - 10,897
Accrued expenses
- - - - 293,963
Due to affiliate
- - - - 6,967
Advanced billings
---------------------------------------
Total current - - - - 333,085
liabilities
---------------------------------------------------------
Long-term debt, less
- - - - -
current portion
---------------------------------------------------------
- - - - -
Redeemable put warrant
----------------------------------------------------------
Convertible preferred
- - - - -
stock
---------------------------------------------------
Special preferred
- - - - -
stock
--------------------------------------------------------
Stockholders' equity:
- - - - -
Preferred stock - - - - -
series C
Preferred stock
- - - - -
series D
- - - - -
Common stock
Additional paid-in
- - - - -
capital
- - - - 29,865
Accumulated deficit
------------------------------------------------------
Total stockholders'
- - - - 29,865
equity
--------------------------------------------------------
Total liabilities and
- - - - 362,950
stockholders' equity
=======================================================
- - - - -
=========================================================
Eliminating Consolidated
STFCC STFI Entries STFI
---------------------------------------------------------
Assets
Current Assets:
Cash - $ 6 - $ 545
- - - 35,333
Accounts receivable
227,044 66,919 (293,963) -
Advances to subsidiaries
- - - 3,421
Other current assets
---------------------------------------------------------
227,044 66,925 (293,963) 39,299
Total current assets
---------------------------------------------------------
Equipment:
- - - 93,816
Property & Equipment
- - - (25,789)
Accumulated depreciation
----------------------------------------------------
- - - 68,027
------------------------------------------------------
Other Assets:
14,611 16,936 (29,222) 2,325
Investments in subsidiaries
8,770 - - 263,282
Intangible assets
- - - 560
Deferred income taxes
- - - 558
Other
-------------------------------------------------------------
23,381 16,936 (29,222) 266,725
-----------------------------------------------------
250,425 83,861 (323,185) 374,051
Total assets
=========================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of long term debt and
capital lease obligations
22,765 - - 22,765
- - - 21,258
Accounts payable
- 110 - 11,007
Accrued expenses
- - (293,963) -
Due to affiliate
- - - 6,967
Advanced billings
----------------------------------------------------------------
22,765 110 (293,963) 61,997
Total current liabilities
----------------------------------------------------------------
Long-term debt, less current
portion 228,303 - - 228,303
----------------------------------------------------------------
- 465 - 465
Redeemable put warrant
--------------------------------------------------------------
- 25,000 - 25,000
Convertible preferred stock
---------------------------------------------------------------
- 13,881 - 13,881
Special preferred stock
---------------------------------------------------------------
Stockholders' equity:
- 4 - 4
Preferred stock series C
- 5 - 5
Preferred stock series D
- 60 - 60
Common stock
- 73,113 - 73,113
Additional paid-in capital
(643) (28,777) (29,222) (28,777)
Accumulated deficit
----------------------------------------------------------------
(643) 44,405 (29,222) 44,405
Total stockholders' equity
-------------------------------------------------------------
Total liabilities and
250,425 83,861 (323,185) 374,051
stockholders' equity
================================================================
Consolidating Statements of Operations for the Nine Months Ended September
30, 1996
BTC MTS OTM STI Int'l STFTI
-------------------------------------------------------------
Revenue 3,455 7,861 888 - 96,691
Cost of Revenue 2,013 4,063 738 - 52,369
-------------------------------------------------------
1,442 3798 150 - 44,322
Gross margin
------------------------------------------------------------
Selling, general 859 1,879 318 - 36,062
& administrative expenses
--------------------------------------------------------------------
583 1,919 (168) - 8,260
Operating Income
Other income (expense):
- - - - -
Equity in loss of subsidiary
Net interest expense -
--------------------------------------------------------------------
--------------------------------------------------------------------
Income (loss) before income
taxes and extraordinary item
583 1,919 (168) - 8,260
- - - - (74)
Income tax
--------------------------------------------------------------------
Income (loss) before 583 1,919 (168 - 8,186
extraordinary item
Extraordinary item,
loss on - - - - (310)
early retirement of debt
------------------------------------------------------------
Net income (loss) 583 1,919 (168) - 7,876
Preferred stock
dividends - - - - -
------------------------------------------------------------
Net income (loss)
applicable to
common 583 1,919 (168) - 7,876
stock
====================================================================
Consolidating Statements of Operations for the Nine Months
Ended September 30, 1996
Consolidated
Eliminating
STFCC STFI Entries STFI
------------------------------------------------------------------
- 2,000 - 110,895
Revenue
- 69 - 59,252
Cost of Revenue
----------------------------------------------------------
- 1,931 - 51,643
Gross margin
------------------------------------------------------------------
Selling, general & - - - 39,118
administrative expenses
------------------------------------------------------------------
- 1,931 - 12,525
Operating Income
Other income (expense):
Equity in loss of subsidiary
(5,044) (7,053) 10,088 (2,009)
(15,254) 8 - (15,246)
Net interest expense
------------------------------------------------------------------
(20,298) (7,045) 10,088 (17,255)
------------------------------------------------------------------
Income (loss) before income
taxes and extraordinary item
(20,298) (5,114) 10,088 (4,730)
Income tax - - - (74)
-------------------------------------------------------------
Income (loss) before
(20,298) (5,114) 10,088 (4,804)
extraordinary item
Extraordinary item,
loss on - - - (310)
early retirement of debt
--------------------------------------------------------
(20,298) (5,114) 10,088 (5,114)
Net income (loss)
Preferred stock dividends
- (1,682) - (1,682)
------------------------------------------------------------------
Net income (loss) applicable
to (20,298) (6,796) 10,088 (6,976)
common stock
==================================================================
BTC = Boston Telecommunications Group, Inc.
MTS = Multi-Tenant Services, Inc.
OTM = Office Telephone Management
STI Int'l = STI International, Inc.
STFTI = Shared Technologies Fairchild Telecom, Inc.
STFCC = Shared Technologies Fairchild Communications Corp.
STFI = Shared Technologies Fairchild Inc.
<PAGE>
Item 2.
- -------
Management's Discussion and Analysis of Results of Operations and
- -----------------------------------------------------------------
Financial Condition
- -------------------
Results of Operations:
- -----------------------
Nine Months Ended September 30, 1996 compared to September 30, 1995
Revenues STFI's revenues rose to a record $110.9 million in 1996 an
increase of 153.8% over 1995 revenues of $43.7 million. This increase occurred
mainly as a result of the March 13, 1996 merger with Fairchild Industries Inc.
("FII"). Shared Telecommunications Service ("STS") revenue increased $44.1
million or 175.0% and Telecommunications Systems ("Systems") revenue increased
$32.3 million or 347.3%.
Gross margin Gross margin increased to 46.6% of revenues for 1996 from
39.1% for 1995. The change in gross margin is mainly the result of changes in
sales mix. The following table sets forth the components of the Company's
overall gross margin ("GM") for the nine months ended September 30, 1996 as a
factor of sales percentage and gross margin percentage per line of business:
Overall Division Sales GM GM
- -------------------------------------------------------------------------
STS 62.5% 50.7% 31.7%
Systems 37.5% 39.9% 14.9%
Company Total 100.0% 46.6%
============= ===============
As shown above, the 1996 gross margin was a mix of STS gross margin of
50.7% and Systems gross margin of 39.9%. In 1995 the Company's gross margin was
a combination of STS gross margin of 44.8%, Systems gross margin of 22.6% and
Cellular Services ("STC") gross margin of 40.2%. Changes in gross margin for STS
and Systems year to year were mainly the result of the acquisition of FII.
Selling, general and administrative expenses Selling, general and
administrative expenses ("SG&A") as a percentage of revenues decreased to 35.3%
for 1996 compared to 36.8% for 1995. SG&A improved slightly due to the merger
with FII which resulted in certain synergy's. This was somewhat offset by
increased goodwill amortization expense.
Operating income Operating income increased to $12.5 million in 1996 from
$1.0 million in 1995. The increase was mainly the result of the FII acquisition
mentioned earlier.
Interest expense Interest expense net of interest income increased by $14.8
million for the nine months ended September 30, 1996 over the nine months ended
September 30, 1995. This was attributable to the addition of approximately $245
million in new debt on March 13, 1996.
Extraordinary Item. In connection with the acquisition of FII the Company
was required to repay all outstanding amounts on their existing credit facility.
This early repayment resulted in a loss of $0.3 million which was recorded as an
extraordinary item for the nine months ended September 30, 1996.
Net income As a result of the factors listed above, a net loss for the nine
months ended September 30, 1996 of $5.1 million was recorded compared to net
income of $2.1 million for the nine months ended September 30, 1995.
Three Months Ended September 30, 1996 compared to September 30, 1995
Revenues STFI's revenues rose to a record $47.1 million in 1996 an increase
of 194.4% over 1995 revenues of $16.0 million. STS revenue increased $19.2
million or 234.2% and Systems revenue increased $15.8 million or 405.1% over
1995 levels. The majority of the increase was attributable to the March 13, 1996
acquisition of FII.
Gross margin Gross margin increased to 48.2% of revenues for 1996 from
38.8% for 1995. The change in gross margin is mainly the result of changes in
sales mix. The following table sets forth the components of the Company's
overall gross margin ("GM") for the three months ended September 30, 1996 as a
factor of sales percentage and gross margin percentage per line of business:
Overall Division Sales GM GM
- -------------------------------------------------------------------------
STS 58.2% 52.2% 30.4%
Systems 41.8% 42.6% 17.8%
Company Total 100.0% 48.2%
============== ===============
As shown above, the 1996 gross margin was a mix of STS gross margin of
52.2% and Systems gross margin of 42.6%. In 1995 the Company's gross margin was
a combination of STS gross margin of 46.3%, Systems gross margin of 25.6% and
STC gross margin of 38.5%.
Selling, general and administrative expenses SG&A as a percentage of
revenues decreased to 34.6% for 1996 compared to 37.5% for 1995. SG&A improved
slightly due to the merger with FII which resulted in certain synergy's. This
was largely offset by increased goodwill amortization expense.
Operating income Operating income increased to 6.4 million in 1996 from
$0.3 million in 1995. The increase was mainly the result of the FII acquisition
mentioned earlier.
Interest expense Interest expense net of interest income increased by $6.8
million for the three months ended September 30, 1996 over the three months
ended September 30, 1995. This is attributable to the addition of approximately
$245 million in new debt on March 13, 1996.
Net income As a result of the factors listed above, a net loss for the
three months ended September 30, 1996 of $0.9 million was recorded compared to
net income of $0.2 million for the three months ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES ------------------------------- At
September 30, 1996 the Company had $374 million in assets, $251 million in
various long term debt and capital lease obligations, $39 million in new
preferred stock, and $44 million in stockholder's equity. The balance sheet at
September 30, 1996 shows a working capital deficit of $22.7 million compared to
a deficit of $2.1 million at September 30, 1995. The Company has available for
future borrowings approximately $13 million on a credit facility at September
30, 1996. Cash provided by operations was $18.8 million for the nine months
ended September 30, 1996 compared to $3.4 million for the year ended
December 31, 1995. Cash from operations continues to be sufficient to fund
ongoing operations, capital expenditures and required principal and interest
payments on the Company's notes and capital lease obligations.
The Company invested significant capital towards growth internally and
through acquisition. $7.1 million was spent on equipment purchases, $1.5 million
on additional investments in subsidiaries, and $4.0 million to consummate the
merger with FII during the nine months ended September 30, 1996.
Financing activities ware focused primarily on raising capital to repay
$223.5 million in various debt and preferred stock associated with the merger
with FII and approximately $5 million on a pre-existing credit facility. The
Company raised approximately $111 million in the capital market, through the
issuance of 12 1/4% Senior Subordinated Notes Due 2006 and approximately $130
million (of an available $145 million) in loans from a credit facility with
financial institutions. In addition the Company paid $9.4 million in fees and
costs to obtain this capital. $8.4 million was paid to an affiliate related to
the merger with FII.
Cash requirements for the remainder of 1996 will be significant due to
required principal and interest payments on the credit facility mentioned
earlier. The Company anticipates repaying these borrowings and providing cash
for capital expenditures with cash from operations.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
=================================================================
================================================================
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SHARED TECHNOLOGIES FAIRCHILD INC.
By: /s/ Vincent DiVincenzo
Vincent DiVincenzo
Senior Vice President-Finance
and Administration, Treasurer,
Chief Financial Officer
Date: November 14, 1996
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