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 March 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
Incorporation or organization) Identification No.)
100 Great Meadow Road, Suite 104
Wethersfield, CT 06109
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(Address of principal executive offices)
(860) 258-2400
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(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 _ _ _ _
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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 May 15, 1996
- ------------- ----------------------------
Common Stock, $.004 par value 14,856,913 shares
<PAGE>
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance
Sheets as of March 31,
1996 and December 31, 1995 3-4
Consolidated Statements of
Operations for the Three
Months Ended March 31,
1996 and 1995 5
Consolidated Statements of
Cash Flows for the Three
Months Ended March 31,
1996 and 1995 6
Consolidated Statements of
Stockholders' Equity for
the Three Months Ended
March 31, 1996 7
Notes to Consolidated
Financial Statements 8-11
Item 2 Managements' Discussion and
Analysis of Results of
Operations and Financial Condition 11-13
PART II OTHER INFORMATION 13
Signature Page 14
Item 1. Financial Statements
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<TABLE>
<CAPTION>
Shared Technologies Fairchild, Inc.
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995
(In thousands)
(unaudited)
March 31, December 31,
1996 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 6,169 $ 476
Accounts receivable, less allowance
for doubtful accounts of $803
in 1996 and $410 in 1995 32,763 9,855
Advances to subsidiary 1,053 985
Other current assets 3,609 754
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Total current assets 43,594 12,070
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Equipment:
Property & Equipment 89,650 34,953
Accumulated depreciation (22,107) (18,305)
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67,543 16,648
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Other Assets:
Investment in subsidiary 758 1,581
Intangible assets 270,952 11,543
Deferred income taxes 560 560
Other 461 461
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272,731 14,145
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Total assets $ 383,868 $ 42,863
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--------------- ---------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Inc.
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995
(In thousands)
(unaudited)
March 31, 1996 December 31, 1995
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt and capital
lease obligations $ 20,138 $ 2,870
Accounts payable 18,442 9,035
Accrued expenses 8,664 2,221
Due to affiliate 6,470
Advanced billings 7,389 1,337
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Total current liabilities 61,103 15,463
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Long-Term Debt and Capital Lease Obligations
less current portion 228,411 4,128
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Redeemable Put Warrant 440 428
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Convertible preferred stock, $.01 par value,
authorized 250 shares, outstanding 250 shares
in 1996 and no shares in 1995 25,000 -
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Special preferred stock, $.01 par value,
authorized 20 shares, outstanding 20 shares in
1996 and no shares in 1995 20,000 -
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STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
25,000 shares:
Series C, outstanding 907 shares in 1996 and
1995 9 9
Series D, outstanding 282 shares in 1996 and
457 in 1995 3 5
Common Stock; $.004 par value, 50,000 shares
authorized, outstanding 14,740 shares in 1996
and 8,506 shares in 1995 59 34
Additional paid-in capital 72,508 44,777
Accumulated deficit (23,665) (21,981)
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Total stockholders' equity 48,914 22,844
------------ --------------
Total liabilities and stockholders'
equity $ 383,868 $42,863
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Statements of Operations
For the Three Months Ended March 31, 1996 and 1995 (In thousands except per
share data) (unaudited)
March 31, March 31,
1996 1995
<S> <C> <C>
Revenue:
Shared telecommunications services $13,230 $8,334
Telecommunications systems 4,952 2,483
Cellular services - 2,026
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Total Revenue 18,182 12,843
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Cost of Revenue:
Shared telecommunications services 6,426 4,730
Telecommunications services 4,011 1,955
Cellular services - 1,067
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Total Cost of Revenue 10,437 7,752
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Gross Margin 7,745 5,091
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Selling, General & Administrative
Expenses: 6,783 4,657
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434
Operating Income 962
Other income (expense):
Equity in loss of subsidiary (958) -
Net Interest expense (1,259) (144)
Minority Interest In Net (Income)
Loss of Subsidiaries - 10
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Income (loss) before income taxes
and extraordinary item (1,255) 300
Income tax (21) (15)
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Income before extraordinary item (1,276) 285
Extraordinary item, loss on early
retirement of debt (310) -
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Net income (loss) (1,586) 285
Preferred stock dividends (86) (99)
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Net Income (loss) applicable to comon
stock $(1,672) $186
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---------- --------
Income (loss) per common share:
Income (loss) before extraordinary
item $(0.14) $ 0.02
Extraordinary item (0.03) -
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Net Income (loss) $(0.17) $ 0.02
======== =======
Weighted Average Shares Outstanding 9,965 8,578
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended
March 31, 1996 and 1995
(in thousands)
(unaudited)
March 31,1996 March 31, 1995
<S> <C> <C>
Cash Flows Used in Operating Activities
Net Income (loss) $(1,586) $285
Adjustments:
Extraordinary loss on early retirement of
debt 310 -
Depreciation and amortization 1,759 1,049
Provision for doubtful accounts 50 40
Equity in loss of subsidiary 958
Minority interest in net income of
subsidiaries (10)
Amortization of discount on note 14 21
Change in Assets and Liabilities
Accounts receivable 2,255 (193)
Other current assets (283) (213)
Other assets - (217)
Accounts payable (2,170) 5
Accrued expenses 205 (246)
Advanced billings (50) (32)
Net cash provided by operating
activities 1,462 489
Cash Flows Used in Investing Activities
Purchases of equipment (749) (775)
Investments in subsidiaries (203) -
Acuisitions, net of cash aquired (2,108) -
Net cash used in investing activities (3,060) (775)
Cash Flows From Financing Activities:
Preferred stock dividends (86) (97)
Repayments of notes payable, long-term
debt and capital lease obligations (187,432) (662)
Borrowings under notes payable and long-term debt
244,999 -
Payments to affiliate (1,937) -
Deferred finance costs (7,676) -
Proceeds from sales of common stock 4
Retirement FII preferred stock (40,581) 1,173
----------- -------
Net cash provided by financing activities 7,291 414
Net increase in cash 5,693 128
Cash, Beginning of Period 476 172
Cash, End of Period $6,169 $300
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest $ 443 $150
Income taxes $ 26 $33
Non cash transactions
Issuance of common stock to acquire
FII 27,750 -
Issuance of preferred stock to
acquire FII 45,000 -
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 March 31, 1996
(in thousands)
<S> <C> <C> <C> <C>
Series C Series D
Preferred Stock Preferred Stock
Shares Amount Shares Amount
Balance, January 1, 1996 907 $9 457 $5
Preferred stock dividends
Dividend accretion of - - - -
redeemable put warrant
Issuance of Common Stock - - - -
Conversions of Preferred Stock - (175) 2
Exercise of common stock - - - -
options and warrants
Net loss - - - -
Balance, March 31, 1996 907 $9 282 $3
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 March 31, 1996
(in thousands)
<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
Issuance of Common Stock 6,000 24 27,726
Conversions of Preferred Stock 227 1 1
Exercise of common stock 7 - 4
options and warrants
Net income
Balance, March 31, 1996 14,740 59 72,508
The acompanying 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 March 31, 1996
(in thousands)
<S> <C> <C>
Accumulated Total Stockholders'
Deficit Equity
Balance, January 1, 1996 (21,981) $ 22,844
Preferred stock dividends (86) (86)
Dividend accretion of redeemable put warrant
(12) (12)
Issuance of Common Stock 27,750
Conversions of Preferred Stock -
Exercise of common stock options and warrants
4
Net loss (1,586) (1,586) -
Balance, March 31, 1996 $23,665) $48,914
The acompanying notes are an integral part of these financial statements.
</TABLE>
Shared Technologies Fairchild Inc.
Notes to Consolidated Financial Statements
March 31, 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 in
1995. Prior to 1995, the majority owned subsidiary was included on a
consolidated basis(Note 3). 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 to
approximately 42%, resulting in the Company's loss of voting control of STC.
Accordingly, STC has been accounted for on the equity method for 1996.
Summarized balance sheet and statement of operations information for STC as of,
and for the three months ended, March 31, 1996 is as follows: Summarized Balance
Sheet Current assets $ 2,798 Property and equipment, net 3,077 Other assets
6,001 Total assets $ 11,876
Current liabilities $ 6,817
Note payable 1,600
Total liabilities 8,417
Stockholders' equity 3,459
Total liabilities and stockholders' equity $ 11,876
Summarized Statement of Operations
Revenues $ 4,306
Gross margin 1,530
Operating loss (1,587)
Net loss (1,647)
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"). 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 was
accounted for using the purchase method of accounting. The total purchase
consideration of approximately $77,133 was allocated to the net tangible and
intangible assets of FII based upon their respective fair market 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. Allocation of purchase price:
Assets
Cash $ 1,551
Accounts receivable 22,622
Other current assets 2,572
Equipment 51,532
Goodwill 252,938
Total Assets 331,215
Liabilities and stockholders' equity
Capital lease obligations $ (262)
Accounts payable (13,474)
Accrued expenses (8,439)
Due to affliated company (8,407)
Long term debt (182,919)
FII preferred stock (40,581)
Net purchase price $ 77,133
The following unaudited pro forma statements of operations for the three
months ended March 31, 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 in each year:
1996 1995
Revenues $ 45,465 $ 44,818
Cost of revenues 22,153 22,466
Gross margin 23,312 22,352
Selling, general and administrative
expenses 18,312 17,629
Operating income 5,000 4,723
Equity in loss of subsidiary (958) (265)
Interest expense, net (6,602) (6,327)
Loss before income tax expense
and extraordinary item (2,560) (1,869)
Income taxes (11) (5)
Loss before extraordinary item (2,571) (1,874)
Extraordinary item, loss on early
retirement of debt (332) (401)
Net Loss (2,903) (2,275)
Preferred stock dividends (647) (660)
Loss applicable to common stock $ (3,550) $ (2,935)
Net loss per common share $ (.24) $ (.20)
Weighted average number of common
shares outstanding 14,580 14,578
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 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
December 31, 1995 the Company recorded a deferred tax asset of $7,508 and a
corresponding valuation allowances of $ 6,948. The valuation allowances was
not adjusted at March 31, 1996. 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 December 31, 1995, the Company's NOL carryforward for federal
income tax purposes was 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.
6. Extraordinary Item:
At March 31, 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).
<PAGE>
Item 2.
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Managements' Discussion and Analysis of Results of Operations and
- -----------------------------------------------------------------
Financial Condition
- -------------------
Results of Operations:
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Three Months Ended March 31, 1996 compared to March 31, 1995
Revenues STFI's revenues rose to a record $18.2 million in 1996 an increase
of $5.3 million or 41.4% over 1995 revenues of $12.8 million. This increase
occurred despite the loss of STC revenue as STC results were recorded per the
equity method in 1996; STC accounted for $2.0 million of 1995 revenue. Shared
Telecommunicatioms Service (STS) revenue increased $4.9 million or 85.9% and
Telecommunications Sysytems (Systems) revenue increased $2.4 million or 8.4%
in 1996 over 1995 levels. Approximately $6.9 million of the growth in revenue
was attributable to the March 13, 1996 merger with Fairchild Industries Inc.
(FII). The remaining increase of approximately $0.5 million was generated
through internal growth at existing and new locations.
Gross margin Gross margin increased to 42.6% of revenues for 1996 from
39.6% for 1995, an increase of 3.0%. The change in gross margin is mainly the
result of changes in sales mix and the merger with FII. The following table sets
forth the components of the Company's overall gross margin (GM) for the three
months ended March 31, 1996 as a factor of sales percentage and gross margin
percentage per line of business: Overall Division Sales GM GM
- ---------------------------------------------------------------------------
STS 72.8% 51.4% 37.4%
Systems 27.2% 19.0% 5.2%
Company Total 100.0% 42.6%
============== ===============
As shown above, the 1996 gross margin was a mix of STS gross margin of
51.4% and Systems gross margin of 19.0%. In 1995 the Company's gross margin was
a combination of STS gross margin of 43.2%, Systems gross margin of 21.3% and
STC gross margin of 47.6.
Selling, general and administrative expenses Selling, general and
administrative expenses (SG&A) as a percentage of revenues increased to 37.3%
for 1996 compared to 36.3% for 1995. SG&A increased slightly due to the
merger with FII which resulted in an increased amount of goodwill
amortization.
Operating income Operating income increased by $0.5 million to
$1.0 million in 1996 from $0.5 million in 1995. The increase was mainly the
result of the FII merger mentioned earlier.
Interest expense Interest expense net of interest income increased by $1.1
million for the three months ended March 31, 1996 over the three months ended
March 31, 1995. This is 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 facilty.
This early repayment resulted in a loss of $0.3 million which was recorded as an
extraordinary item for the three months ended March 31, 1996.
Net income As a result of the factors listed above, a net loss for the
three months ended March 31, 1996 of $1.6 million was recorded compared to net
income of $0.3 million for the three months ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Due to the
merger with FII on March 13, 1996 and the associated borrowings of $245 million,
the Company's liquity and capital resources were significantly changed. At March
31, 1996 the Company has $384 million in assets, $249 million in various long
term debt and capital lease obligations and $45 million in newly issued
preferred stock. The balance sheet at March 31, 1996 shows a working capital
deficit of $17.5 compared to a deficit of $3.4 million at March 31, 1995. As of
March 31, 1996 the Company has available for future borrowings approximately $13
million on a credit facility. Cash provided by operation was $1.5 million for
the three months neded March 31, 1996 compared to $0.5 million for the three
months ended March 31, 1995.
The Company invested significant capital towards growth internally and
through acquisition. $0.7 million was spent on equipment purchases, $0.2 million
on subsidiaries, and $2.1 million to consumate the acquisition of FII during the
three months ended March 31, 1996.
Financing activities were focused primarily on raising capital to repay
$223,500 million in various debt and preferred stock obtained from the merger
with FII. The Company raised in the capital market approximately $115,000
through the issuance of 12 1/4% Senior Subordinated Notes Due 2006 and
approximately $130,000 (of an available $145,000) in loans from a credit
facility with financial institutions. In addition the Company paid $7.7 million
in fees and costs to obtain this capital.
Cash requirements for 1996 will be significant due to the acquisition of
FII and associated new debt mentioned earlier. The Company anticipates repaying
these borrowings and providing cash for operations and capital expenditures
through cash from operations.
<TABLE>
<CAPTION>
PART II. OTHER INFORMATION
<S> <C>
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
On January 30, 1996 the Company filed
a Form 8-K/A Amendment No. 2 in which
the Company amended the filing
regarding its acquisition of Road and
Show East, Inc., Road and Show South,
Ltd., and Road and Snow Pennsylvania,
Inc.
On January 30, 19965 the Company filed
a Form 8-K/A Amendment No. 1, date of
report June 19, 1995, in which, the
Company amended its report regarding
the acquisition of Cellular Hotline,
Inc. by its majority owned subsidiary
Shared Technologies Cellular, Inc
On January 31, 1996 the Company filed
a Form 8-K/A Amendment No. 4, date of
report June 27, 1994, amending its
report regarding its acquisition of
Access telecommunication Group, L.P.
On February 12, 1996 the Company filed
a Form 8-K/A Amendment No. 2 in which
the Company amended its information
regarding the acquisition of PTC
Cellular, Inc. by the Company's
subsidiary Shared Technologies
Cellular, Inc.
On March 28, 1996 the Company filed a
Form 8-K Items 2 and 7, date of report
March 13, 1996, in which the Company
announced its completed merger of
Fairchild Industries Inc. into the
Company with the surviving corporation
being renamed Shared Technologies
Fairchild Inc.
</TABLE>
<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: May 15, 1996
