UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission File Number 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, 1997
Common Stock, $.004 par value 17,174,622shares
<PAGE>
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996
Consolidated Statements of Operations for the nine
months ended September 30, 1997 and 1996
Consolidated Statements of Operations for the three
months ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 1997
Notes to Consolidated
Financial Statements
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 6 Exhibits and Reports on Form 8-K
Signature Page
<PAGE>
Item 1. Financial Statements
Shared Technologies Fairchild Inc.
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
September 30,1997 December 31, 1996
<S> <C> <C>
ASSETS (unaudited)
CURRENT ASSETS:
Cash $ 178 $ 2,703
Accounts receivable, less allowance
for doubtful accounts of $300
in 1997 and $611 in 1996 34,155 32,563
Inventories 4,735 1,976
Other current assets 3,961 1,853
Total current assets 43,029 39,095
Equipment:
Property & Equipment 105,302 95,934
Accumulated depreciation (37,234) (28,169)
68,068 67,765
Other Assets:
Investments in affiliates 754 457
Intangible assets 258,075 261,842
Deferred income taxes - -
Other 316 407
259,145 262,706
Total assets $ 370,242 $ 369,566
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
September 30,1997 December 31, 1996
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity CURRENT LIABILITIES:
Current portion of long-term
debt and capital lease obligations $ 16,083 $ 13,576
Accounts payable 18,394 17,356
Accrued expenses 7,948 9,558
Accrued dividends 1,555 435
Advanced billings 7,079 6,935
Total current liabilities 51,059 47,860
Long-Term Debt and Capital Lease
Obligations less current
portion 239,633 238,261
Redeemable Put Warrant 887 1,069
Convertible preferred stock
$.01 par value, authorized 250 shares,
outstanding 250 shares in 1997 and 1996 25,000 25,000
Special preferred stock
$.01 par value, authorized 200 shares,
outstanding 200 shares in 1997 and 1996 15,061 14,167
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
25,000 shares:
Series C, outstanding no shares in 1997 and
428 shares in 1996 - 4
Series D, outstanding 58 shares in 1997 and
441 shares in 1996 1 4
Common stock; $.004 par value, 50,000 shares
authorized, outstanding 17,186 shares in 1997
and 15,682 shares in 1996 69 63
Additional paid-in capital 78,137 76,054
Accumulated deficit (39,605) (32,916)
Total stockholders' equity 38,602 43,209
Total liabilities and
stockholders' equity $ 370,242 $ 369,566
The accompanying notes are an integral part of these financial statements
</TABLE>
Shared Technologies Fairchild Inc.
Consolidated Statements of Operations
For the Nine Months Ended
September 30, 1997 and 1996
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
<S> <C> <C>
Revenue:
Shared telecommunications services $ 82,539 $ 69,310
Telecommunications systems 59,240 41,585
Total Revenue 141,779 110,895
Cost of Revenue:
Shared telecommunications services 39,272 34,233
Telecommunications systems 31,853 25,019
Total Cost of Revenue 71,125 59,252
Gross Margin 70,654 51,643
Selling, General & Administrative Expenses: 51,536 39,118
Operating Income 19,118 12,525
Other income (expense):
Equity in loss of affiliate (210) (2,009)
Net interest expense (21,694) (15,246)
(21,904) (17,255)
Income (loss) before income taxes and
extraordinary items (2,786) (4,730)
Income tax (214) (74)
Income (loss) before extraordinary item (3,000) (4,804)
Extraordinary item, loss on early retirement
of debt - (310)
Net Income(loss) (3,000) (5,114)
Preferred Stock Dividends (3,689) (1,682)
Net income (loss) applicable to
common stock $ (6,689) $ (6,796)
Net (loss) per common share:
Income (loss) before extraordinary item $ (0.42) $ (0.49)
Extraordinary item - (.02)
Net income (loss) $ (0.42) $(0.52)
Weighted Average Shares Outstanding 16,039 13,316
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statements of Operations
For the Three Months Ended
September 30, 1997 and 1996
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, 1997 September 30,
1996
<S> <C> <C>
Revenue:
Shared telecommunications
services $ 26,937 $ 27,384
Telecommunications systems 19,224 19,739
Total Revenue 46,161 47,123
Cost of Revenue:
Shared telecommunications services 13,061 13,143
Telecommunications systems 11,434 11,301
Total Cost of Revenue 24,495 24,444
Gross Margin 21,666 22,679
Selling, General & Administrative Expenses: 17,202 16,262
Operating Income 4,464 6,417
Other income (expense):
Equity in loss of affiliate (24) (310)
Net interest expense (7,214) (6,995)
(7,238) (7,305)
Income (loss) before income taxes and
extraordinary items (2,774) (888)
Income tax (6) (34)
Income (loss) before extraordinary item (2,780) (922)
Extraordinary item, loss on early retirement
of debt - -
Net Income(loss) (2,780) (922)
Preferred Stock Dividends (1,390) (1,081)
Net income (loss) applicable to
common stock $ (4,170) $ (2,003)
Net (loss) per common share:
Income (loss) before extraordinary item $ (0.25) $
(0.13)
Extraordinary item - -
Net income (loss) $ (0.25) $(0.13)
Weighted Average Shares Outstanding 16,531 15,066
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1997 and 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30,1997 September 30,1996
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net Income (loss) $ (3,000) $(5,114)
Adjustments:
Extraordinary loss on early retirement of
debt - 310
Depreciation & amortization 14,294 11,525
Accretion of put warrant (182) -
Equity in loss of subsidiary 210 2,009
Accretion on 12 1/4% bonds 11,782 7,803
Amortization of discount on note 14
Change in Assets and Liabilities:
Accounts receivable (1,592) (1,031)
Inventory (2,759) -
Other current assets (2,369) (627)
Other assets 1,016 1,732
Accounts payable 1,038 646
Accrued expenses (490) 2,039
Advanced billings 144 (472)
Net cash provided by operating activities 18,092 18,834
Cash Flows Used in Investing Activities
Purchases of equipment (9,368) (7,092)
Investments in subsidiaries (507) (1,494)
Acquisitions, net of cash acquired (1,240) (4,011)
Net cash used in investing activities (11,115) (12,597)
Cash Flows From Financing Activities:
Preferred stock dividends (3,689) (1,007)
Repayments of notes payable, long-term
debt and capital lease obligations (9,903) (192,004)
Borrowings under notes payable and long- 2,000 244,999
term debt
Payments to affiliate - (8,407)
Deferred finance costs (886) (9,416)
Proceeds from sales of common stock 2,082 373
Repayment of FII preferred stock 894 (40,706)
Net cash provided by (used in)financing
activities (9,502) (6,168)
Net increase (decrease) in cash (2,525) 69
Cash, Beginning of Period 2,703 476
Cash, End of Period $ 178 $ 545
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest $12,908 $ 6,300
Income taxes 214 119
Non cash transactions-
Issuance of common stock to acquire FII - 27,750
Issuance of preferred stock to acquire FII - 38,269
The accompanying notes are an integral part of these financial statements.
</TABLE>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Series C Series D
Preferred Stock Preferred Stock
<S> <C> <C> <C> <C>
Shares Amount Shares Amount
Balance, January 1,1997 428 $ 4 441 $
4
Preferred stock dividends - - - -
Dividend accretion of specia - - - -
preferred stock
Exercise of common stock - - - -
options and warrants
Issuance of common stock for 401(k)
plan match - - - -
Preferred stock converted to common
stock (428) (4) (383) (3)
Net loss - - - -
Balance, September 30,1997 - $ - 58 $ 1
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in
Shares Amount Capital
<S> <C> <C> <C>
Balance, January 1, 1997 15,682 $ 63 $ 76,054
Preferred stock dividends
Dividend accretion of special
preferred stock
Exercise of common stock options
and warrants 724 3 1,498
Issuance of common stock 82 - 580
for 401(k)plan match
Preferred stock converted 698 3 5
to common stock
Net Loss
Balance, September 30, 1997 17,186 $ 69 $78,137
The accompanying notes are an integral part of these
financial statements
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
<S> <C> <C>
Balance, January 1, 1997 (32,916) 43,209
Preferred stock dividends (2,795) (2,795)
Dividend accretion of special preferred
stock (894) (894)
Exercise of common stock options and 1,501
warrants
Issuance of common stock for 401(k) plan 580
match
Preferred stock converted to common stock 1
Net loss (3,000) (3,000)
Balance, September 30, 1997 ($39,605) $ 38,602
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Notes to Consolidated Financial Statements
September 30, 1997
(in thousands)
(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, 1996 report on Form 10-K.
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, STC was a majority-owned subsidiary and 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 since 1996. At September 30, 1997 the Company had an
ownership interest of approximately 25.4% in STC. Summarized balance sheet and
statement of operations information for STC as of, and for the nine months
ended, September 30, 1997 is as follows:
Summarized Balance Sheet
Current assets $ 3,379
Property and equipment, net 1,844
Other assets 9,614
Total assets $ 14,837
Current liabilities $ 9,457
Note payable 1,193
Total liabilities 10,650
Stockholders' equity 4,187
Total liabilities and stockholders' equity $ 14,837
Summarized Statement of Operations
Revenues $ 19,089
Gross margin 8,430
Operating loss (471)
Net loss (670)
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 was convertible into 833 shares of
common stock at the Company's option. In addition, upon conversion of such STC
preferred stock, the Company would receive a warrant to purchase an additional
833 shares of STC common stock, subject to adjustment. Subsequently, in August
1997, the Company sold such preferred stock to a third party investor for $250
and recorded a gain of $20.
3. Acquisitions:
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 FII's 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 initial 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 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, 1996:
1996
Revenues $ 138,178
Cost of revenues 70,968
Gross margin 67,211
Selling, general and
administrative expenses 50,310
Operating income 16,901
Equity in loss of subsidiary (2,009)
Interest expense, net (20,594)
Loss before income tax expense
and extraordinary item (5,702)
Income taxes (64)
Extraordinary item. loss on early
retirement of debt (332)
Net Loss (6,098)
Preferred stock dividends (2,196)
Loss applicable to common stock $ (8,294)
Net loss per common share $ (.56)
Weighted average number of common
shares outstanding 14,849
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 schedules for trial in December 1997. 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.
On July 31, 1997 the Company was served with a purported shareholder class
action complaint in an action commenced in the Delaware Chancery Court in New
Castle County. The Company and its directors are named as defendants. The
complaint seeks injunctive relief, costs and attorneys' fees with respect to the
proposed merger of the Company and Tel-Save Holdings, Inc. which was announced
on July 17, 1997 (See Note 9).
As of October 27, 1997, an agreement in principal had been reached between
the Company and counsel for the plaintiff class, which agreement, subject to
court approval, would result in dismissal of the Complaint with prejudice and
release of all claims of the plaintiff class relating to the merger.
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 accounts for income taxes under 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.
6. Extraordinary Item:
At June 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. Earnings per Share:
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
changes the reporting requirements for earnings per share ("EPS") for publicly
traded companies by replacing primary EPS with basic EPS and changing the
disclosures associated with this change. The Company is required to adopt this
standard for its December 31, 1997 year-end and is currently evaluating the
impact of this standard.
8. 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. All of Shared
Technologies Fairchild Inc.'s subsidiaries are wholly owned and are full
guarantors on the 12 1/4% Senior Subordinated Notes due 2006.
Shared Technologies Fairchild Inc.
September 30, 1997 Eliminating Consolidated
STFTI STFCC STFI Entries STFI
--------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents
150 28 178
Accounts receivable, net 33,766 389 34,155
Inventories 4,735 4,735
Other current assets 3,961 3,961
--------------------------------------------------
Total current assets 42,612 0 417 0 43,029
--------------------------------------------------
Equipment:
Property & Equipment 105,302 105,302
Accumulated depreciation(37,234) (37,234)
--------------------------------------------------
New Property & Equip. 68,068 0 0 0 68,068
--------------------------------------------------
Other Assets:
Investment in affiliates 382 47,540 55,174 (102,342) 754
Intangible assets 7,627 250,448 258,075
Note Receivable 144,173 (144,173) -
Intercompany Receivable 143,322 228,866 (372,188) -
Deferred income taxes
-
Other 316 316
--------------------------------------------------
Total Other Assets 144,020 428,206 305,622 (618,703) 259,145
----------------------------------------------
Total assets $254,700 $428,206 306,039 (618,703) 370,242
==================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of
long term debt and
capital lease obligations 16,083 16,083
Accounts payable 18,394 18,394
Accrued expenses 7,488 460 7,948
Accrued dividends 1,555 1,555
Advanced billings 7,079 7,079
----------------------------------------------
Total current liabilities 32,961 16,083 2,015 0 51,059
--------------------------------------------------
Long-term debt, and current
lease obligations
less current portion 144,173 239,633 (144,173) 239,633
--------------------------------------------------
Redeemable put warrant 887 887
--------------------------------------------------
Convertible preferred stock 25,000 25,000
--------------------------------------------------
Special preferred stock 15,061 15,061
--------------------------------------------------
Stockholders' equity:
Preferred Stock, Series C - -
Preferred Stock, Series D 1 1
Common Stock 1 1 69 (2) 69
Additional paid-in capital 47,538 54,802 78,137 (102,340) 78,137
Accumulated deficit 30,027 (25,635) (43,997) (39,605)
Intercompany 143,322 228,866 (372,188) -
--------------------------------------------------
Total stockholders' 77,566 172,490 263,076 (474,530) 38,602
equity
-------------------------------------------------
Total liabilities and $254,700 428,206 306,039 (618,703) 370,242
stockholders' equity
==================================================
Shared Technologies Fairchild Inc.
Consolidated Financial Statements
(continued)
STFTI STFCC STFI Entries STFI
--------------------------------------------------
REVENUE
Total revenue 131,980 9,799 141,779
Total cost of revenue 71,125 71,125
------------------------------------------------
Gross margin 60,855 - 9,799 - 70,654
Gross margin % 46.11% 100% 49.83%
--------------------------------------------------
Selling, general & administrative
expenses 45,941 5,595 51,536
--------------------------------------------------
Operating Income 14,914 - 4,204 - 19,118
Other income (expense):
Equity in loss of
affiliate (11,806) 11,596 (210)
interest expense, net (9,712) (12,192) 210 (21,694)
--------------------------------------------------
(9,712) (12,192) (11,596) 11,596 (21,904)
--------------------------------------------------
Income(loss)before income
taxes and extraordinary
item 5,202 (7,392) 11,596 (2,786) (12,192)
Income tax (214) (214)
--------------------------------------------------
Income (loss) before
extraordinary item 4,988 (12,192) (7,392) 11,596 (3,000)
Extraordinary item, loss on early
retirement of debt - - - - -
--------------------------------------------------
Net income (loss) 4,988 (12,192) (7,392) 11,596 (3,000)
Preferred stock dividends (3,689) (3,689)
Income (loss)applicable
to comon stock 4,988 (12,192) (11,081) 11,596 (6,689)
-----------------------------------------------------
9. Merger Agreement. On July 16, 1997, the Company, Tel-Save Holdings Inc.
("Tel-Save"), and TSHCo, Inc. ("Merger Sub"), a wholly owned subsidiary of
Tel-Save, entered into an Agreement and Plan of Merger (the "Merger Agreement").
Pursuant to the Merger Agreement the Company shall be merged (the "Merger") with
and into Merger Sub and each common stock holder of the Company shall receive
for each share of the Company's common stock $11.25 worth of shares of common
stock of Tel-Save based upon the average closing price of Tel-Save common stock
for the 15 trading days ending on the third business day prior to the closing of
the Merger. Holders of Series C and Series D preferred stock of the Company will
receive preferred stock in Tel-Save with substantially identical terms to the
series C and D preferred stock of the Company. The Merger is intended to be a
tax-free exchange of shares and is expected to qualify for pooling of interests
accounting treatment. The Merger is subject to approval of stockholders of both
companies and other customary closing conditions.
In connection with the Merger Agreement, the Company has entered into a
Stock Option Agreement with Tel-Save pursuant to which Tel-Save has the option
(the "Option") to acquire 3,000,000 shares of common stock of the Company upon
the termination of the Merger Agreement under certain circumstances (a "Purchase
Event"). The Option expires on the earlier of (a) consummation of the Merger,
(b) January 15, 1998 or (c) the termination of the Merger Agreement other than
pursuant to a Purchase Event (as such term is defined in the Stock Option
Agreement). In addition, the Company has entered into a Voting Agreement with
Daniel Borislow, the Chairman and Chief Executive Officer of Tel-Save, pursuant
to which Mr. Borislow has agreed to vote his shares of Tel-Save common stock in
favor of the Merger and the Merger Agreement.
On October 30, 1997, the Tel-Save Holdings, Inc. and Shared Technologies
Fairchild Inc. Joint Proxy Statement was filed with the Securities and Exchange
Commission giving notice of each company's special meeting of stockholders to be
held on December 1, 1997.
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations:
Nine Months Ended September 30, 1997 compared to September 30, 1996
Revenues
STFI's revenues rose to $141.8 million in 1997, an increase of 27.8% over
1996 revenues of $110.9 million. This increase was principally due to the March
13, 1996 merger with Fairchild Industries, Inc. ("FII"). Shared
Telecommunications Service ("STS") revenue increased $13.2 million, or 19.1%,
and Telecommunications Systems ("Systems") revenue increased $17.6 million, or
42.5%.
Approximately $7.0 million of the increase in the Systems revenue was due
to the inclusion of management fees from ICS Communications, Inc. ("ICS") and GE
Capital-ResCom, L.P. ("ResCom"). During this period, the Company operated as the
manager of each of these businesses. These management agreements terminated
during the third quarter of 1997.
Gross Margin
Gross margin increased to 49.8% of revenues for 1997, from 46.6% for 1996.
The change in gross margin was mainly the result of changes in sales mix and the
merger with FII. In addition, the revenues generated from the management
agreements with ICS and ResCom were included in Systems revenue. Since the
associated cost for this revenue of approximately $9.0 million was in selling,
general and administrative expense, it had no material adverse effect on Systems
gross margin. The following table sets forth the components of the Company's
overall gross margin (GM) for the nine months ended September 30, 1997 as a
factor of sales percentage and gross margin percentage per line of business:
Weighted
Division Sales GM GM
STS 58.2% 52.4% 30.5%
Systems 41.8% 46.2% 19.3%
Company Total 100.0% 49.8%
As shown above, the 1997 gross margin was a mix of STS gross margin of
52.4% and Systems gross margin of 46.2%. In 1996, the Company's gross margin was
a combination of STS gross margin of 31.1% and Systems gross margin of 14.9%.
Selling, general and administrative Expenses
Selling, general and administrative (SG&A) expenses increased $12.4 million
to $51.5 million, due entirely to the merger with FII and the associated
increased headcount, goodwill amortization and other general overhead expenses.
SG&A as a percentage of revenue increased from 35.3% in 1996 to 36.3% in 1997.
Operating Income
Operating income increased by $6.6 million to $19.1 million in 1997 from
$12.5 million in 1996. The increase was mainly the result of the FII merger
mentioned earlier.
Interest Expense
Interest expense net of interest income increased by $6.5 million for the
nine months ended September 30, 1997 over the nine months ended September 30,
1996. This was attributable to the addition of approximately $245 million in new
debt on March 13, 1996 in connection with the FII merger.
Net Income (Loss)
As a result of the factors listed above, net loss for the nine months ended
September 30, 1997 decreased $2.1 million to $3.0 million, compared to a net
loss of $5.1 million in the nine months ended September 30, 1996.
Three Months Ended September 30, 1997 Compared to September 30, 1996
Revenues
STFI's revenues decreased to $46.2 million in 1997, a decrease of 2.0%
compared to 1996 revenues of $47.1 million. STS revenue decreased $.5 million
from $27.4 million in the three months ended September 30, 1996 to $26.9 in the
three months ended September 30, 1997. This slight decrease was due to the
increasing competition in the telecommunications marketplace. Systems revenue
decreased $.5 million in 1997 over 1996.
Gross Margin
Gross margin decreased to 46.9% of revenues for 1997, from 48.1% for 1996.
The following table sets forth the components of the Company's overall gross
margin ("GM") for the three months ended September 30, 1997 as a factor of sales
percentage and gross margin percentage per line of business:
Weighted
Division Sales GM GM____
STS 58.4% 51.5% 30.1%
Systems 41.6% 40.5% 16.8%
Company Total 100.0% 46.9%
As shown above, the 1997 gross margin was a mix of the STS gross margin of
51.5% and Systems gross margin of 40.5%. In 1996, the Company's gross margin was
a combination of STS gross margin of 30.2%, and Systems gross margin of 17.9%.
The gross margin decrease was due to the increasing competition in the
telecommunications market place.
Selling, General and Administrative Expenses
SG&A as a percentage of revenue increased to 37.3% in the three months
ended September 30, 1997 compared to 34.5% for the three months ended September
30, 1996.
Operating Income
Operating income decreased to $4.5 million in 1997 from $6.4 million in
1996.
Interest Expense
Interest expense net of interest income had a slight increase of $.2
million for the three months ended September 30, 1997 over the three months
ended September 30, 1996.
Net Income
As a result of the factors listed above, a net loss for the three
months ended September 30, 1997 of $2.8 million was recorded, compared to a
net loss of $.9 million for the three months ended September 30, 1996.
Liquidity and Capital Resources
Due to the merger with FII and the associated borrowings of $245
million, the Company's liquidity and capital resources were significantly
changed. At September 30, 1997 the Company had $370 million in assets, $256
million in various long and short-term debt and capital lease obligations,
and $40.1 million in recently issued preferred stock. The balance sheet at
September 30, 1997 showed a working capital deficit of $8.0 million,
compared to a deficit of $22.7 million at September 30, 1996. As of
September 30, 1997 the Company had available for future borrowings
approximately $11 million on a credit facility. Cash provided by operations
was $18.1 million for the nine months ended September 30, 1997, compared to
$12.1 million for the nine months ended September 30, 1996.
The Company invested $9.4 million in equipment purchases in the nine
months ended September 30, 1997, compared to $7.1 million in the nine
months ended September 30, 1996. These expenditures were used to grow
additional business and sustain the Company's underlying revenue stream.
Financing activities for the period ended September 30, 1997 involved
principal payments on the Company's debt of $9.9 million, offset by a $2.0
million take down on the Company's revolver availability. Subsequent to
quarter end, the Company has drawn down an additional $5 million on its
revolver bringing it to 17 million and leaving $6 million still available
(net of cash set aside for letters of credit).
Cash requirements for 1997 have been significant due to the
acquisition of FII and associated new debt mentioned earlier. The Company
anticipates to continue repaying these borrowings and providing cash for
operations and capital expenditures through cash from operations.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 scheduled for trial
in December 1997. 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.
On July 31, 1997 the Company was served with a purported shareholder
class action complaint in an action commenced in the Delaware Chancery
Court in New Castle County. The Company and its directors are named as
defendants. The complaint seeks injunctive relief, costs and attorneys'
fees with respect to the proposed merger of the Company and Tel-Save
Holdings, Inc. which was announced on July 17, 1997.
As of October 27, 1997, an agreement in principal had been reached
between the Company and counsel for the plaintiff class, which agreement,
subject to court approval, would result in dismissal of the Complaint with
prejudice and release of all claims of the plaintiff class relating to the
Merger.
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.
Item 5. Other Information
On November 13, 1997 the Company signed an
agreement whereby Tel-Save Holdings, Inc. will become the exclusive
provider of its long-distance services. The rates to be paid by the Company
under this contract are significantly lower than rates currently paid to
its existing long-distance providers.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
10.1 Agreement and Plan of Merger by and among Shared Technologies
Fairchild Inc., Tel-Save Holdings Inc., and TSHCo, Inc., dated July 16,
1997. Incorporated by reference to the Company's Form 8-K filed on July
21, 1997.
10.2 Stock Option Agreement between Shared
Technologies Fairchild Inc. and Tel-Save Holdings Inc.
dated July 16, 1997. Incorporated by reference to the Company's Form
8-K filed on July 21, 1997.
10.3 Voting Agreement between Shared
Technologies Fairchild Inc. and Daniel Borislow dated July 16, 1997.
Incorporated by reference to the Company's Form 8-K filed on July
21, 1997.
10.4 Tel-Save Holdings, Inc. and Shared
Technologies Fairchild Inc. Joint Proxy
Statement filed as part of S-4 registration of
Tel-Save Holdings, Inc. (Reg # 333-38943)incorporated hereby by
reference.
27 Financial Data Schedule
99 Press Release dated July 17, 1997.
Incorporated by reference to the Company's Form 8-K filed
July 21, 1997.
99 Complaint filed by Bernard Zicherman
dated July 1997. Incorporated by reference to the Company's
Form 8-K filed on August 4, 1997.
99 Press Release dated August 1, 1997.
Incorporated by reference to the Company's Form 8-K filed on
August 4, 1997.
(b) Reports on Form 8-K
On July 21, 1997 the Company filed a Form 8-K, date of report
July 16, 1997, in which the Company disclosed that the Company,
Tel-Save Holdings, Inc. and TSHCo, Inc., a wholly owned
subsidiary of Tel-Save Holdings, Inc. had entered into an
Agreement and Plan of Merger.
On August 4, 1997, the Company filed a
Form 8-K, date of report July 31, 1997, in which the Company
disclosed that is was served with a purported shareholder class
action complaint in an action commenced in the Delaware Chancery
Court in New Castle County.
<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 thereunto 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, 1997
<PAGE>
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