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 June 30, 1997
[ ] 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 August 13, 1997
Common Stock, $.004 par value 16,570,008 shares
<PAGE>
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance
Sheets as of June 30,
1997 and December 31, 1996
Consolidated Statements of Operations for the six
months ended June 30, 1997 and 1996
Consolidated Statements of
Operations for the six months
ended June 30, 1997 and 1996
Consolidated Statements of
Cash Flows for the six
months ended June 30,
1997 and 1996
Consolidated Statements of
Stockholders' Equity for
the six months ended
June 30, 1997
Notes to Consolidated
Financial Statements
Item 2 Management's Discussion and
Analysis of Results of
Operations and Financial
Condition
PART II OTHER INFORMATION
Signature Page
<PAGE>
Item 1. Financial Statements
Shared Technologies Fairchild Inc.
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
(in thousands)
(unaudited)
June 30, 1997 December 31, 1996
ASSETS
CURRENT ASSETS:
Cash $ 1,783 $ 2,703
Accounts receivable, less allowance
for doubtful accounts of $361
in 1997 and $611 in 1996 33,356 32,563
Inventories 4,063 1,976
Other current assets 2,660 1,853
Total current assets 41,862 39,095
Equipment:
Property & Equipment 102,942 95,934
Accumulated depreciation (34,112) (28,169)
68,830 67,765
Other Assets:
Investments in affiliates 651 457
Intangible assets 258,779 261,842
Deferred income taxes - -
Other 326 407
259,756 262,706
Total assets $ 370,448 $ 369,566
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Balance Sheets
June 30, 1997 and March 31, 1996
(in thousands)
(unaudited)
June 30, 1997 December 31, 1996
Liabilities and Stockholders' Equity CURRENT LIABILITIES:
Current portion of long-term debt and capital
lease obligations $ 15,374 $ 13,576
Accounts payable 17,596 17,356
Accrued expenses 8,339 9,558
Accrued dividends 843 435
Advanced billings 6,720 6,935
Total current liabilities 48,872 47,860
Long-Term Debt and Capital Lease Obligations less current portion
239,988 238,261
Redeemable Put Warrant 816 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 14,757 14,167
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
25,000 shares:
Series C, outstanding 428 shares in 1997 and
1996 4 4
Series D, outstanding 441 shares in 1997 and
1996 4 4
Common stock; $.004 par value, 50,000 shares
authorized, outstanding 15,840 shares in 1997
and 15,682 shares in 1996 63 63
Additional paid-in capital 76,379 76,054
Accumulated deficit (35,435) (32,916)
Total stockholders' equity 41,015 43,209
Total liabilities and stockholders' equity $370,448 $ 369,566
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statements of Operations
For the Six Months Ended
June 30, 1997 and 1996
(in thousands except per share data)
(unaudited)
June 30, 1997 June 30, 1996
Revenue:
Shared telecommunications services $ 55,602 $ 41,926
Telecommunications systems 40,016 21,846
Total Revenue 95,618 63,772
Cost of Revenue:
Shared telecommunications services 26,211 21,090
Telecommunications systems 20,419 13,718
Total Cost of Revenue 46,630 34,808
Gross Margin 48,988 28,964
Selling, General & Administrative
Expenses: 34,334 22,856
Operating Income 14,654 6,108
Other income (expense):
Equity in loss of affiliate (186) (1,699)
Net interest expense (14,480) (8,251)
(14,666) (9,950)
Income (loss) before income taxes and extraordinary items
(12) (3,842)
Income tax (208) (40)
Income (loss) before extraordinary item (220) (3,882)
Extraordinary item, loss on early
retirement of debt - (310)
Net Income(loss) (220) (4,192)
Preferred Stock Dividends (2,299) (601)
Net income (loss) applicable to
common stock $ (2,519) $ (4,793)
Net (loss) per common share:
Income (loss) before extraordinary
item $ (0.16) $ (0.37)
Extraordinary item - (.02)
Net income (loss) $ (0.16) $(0.39)
Weighted Average Shares Outstanding 15,788 12,433
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statements of Operations
For the Three Months Ended
June 30, 1997 and 1996
(in thousands except per share data)
(unaudited)
June 30, 1997 June 30, 1996
Revenue:
Shared telecommunications services $ 27,963 $ 28,696
Telecommunications systems 21,025 16,894
Total Revenue 48,988 45,590
Cost of Revenue:
Shared telecommunications services 13,092 14,664
Telecommunications systems 10,885 9,707
Total Cost of Revenue 23,977 24,371
Gross Margin 25,011 21,219
Selling, General & Administrative
Expenses: 17,475 16,073
Operating Income 7,536 5,146
Other income (expense):
Equity in loss of affiliate (78) (741)
Net interest expense (7,805) (6,992)
(7,883) (7,733)
Income (loss) before income taxes
and extraordinary items
(347) (2,587)
Income tax (102) (19)
Income (loss) before extraordinary item (449) (2,606)
Extraordinary item, loss on early
retirement of debt - -
Net Income(loss) (449) (2,606)
Preferred Stock Dividends (1,223) (515)
Net income (loss) applicable
to common stock $ (1,672) $ (3,121)
Net (loss) per common share:
Income (loss) before
extraordinary item $ (0.11) $ (0.21)
Extraordinary item - -
Net income (loss) $ (0.11) $(0.21)
Weighted Average Shares Outstanding 15,814 14,900
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended
June 30, 1997 and 1996
(in thousands)
(unaudited)
June 30, 1997 June 30, 1996
Cash Flows Used in Operating Activities:
Net Income (loss) $ (220) $ (4,192)
Adjustments:
Extraordinary loss on early retirement of
debt - 310
Depreciation & amortization 9,423 7,056
Accretion of put warrant (253) -
Equity in loss of subsidiary (194) 1,699
Accretion on 12 1/4% bonds 7,750 4,227
Change in Assets and Liabilities:
Accounts receivable (793) 174
Inventory (2,087) -
Other current assets (636) (352)
Other assets 81 1,158
Accounts payable 240 1,532
Accrued expenses (811) 1,220
Advanced billings (215) (765)
Net cash provided by operating
activities 12,285 12,067
Cash Flows Used in Investing Activities
Purchases of equipment (7,008) (3,931)
Investments in subsidiaries - (493)
Acquisitions, net of cash acquired - (3,766)
Net cash used in investing
activities (7,008) (8,190)
Cash Flows From Financing Activities:
Preferred stock dividends (2,299) (601)
Repayments of notes payable, long-term
debt and capital lease obligations (6,225) (190,016)
Borrowings under notes payable and long-term debt
2,000 244,999
Payments to affiliate - (8,407)
Deferred finance costs (588) (9,271)
Proceeds from sales of common stock 325 354
Repayment of FII preferred stock 590 (40,581)
Net cash provided by (used in)financing activities
(6,197) (3,523)
Net increase (decrease) in cash (920) 354
Cash, Beginning of Period 2,703 476
Cash, End of Period $ 1,783 $ 830
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest $ 6,395 $ 2,419
Income taxes 208 45
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.
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended June 30, 1997
(in thousands)
Series C Series D
Preferred Stock Preferred Stock
Sharess Amount Shares Amount
Balance, January 1, 1997 428 $ 4 441 $ 4
Preferred stock dividends - - - -
Dividend accretion of special
preferred stock - - - -
Exercise of common stock
options and warrants - - - -
Issuance of common stock
for 401k plan match
- - - -
Net income - - - -
Balance, June 30, 1997 428 $ 4 441 $ 4
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended June 30, 1997
(in thousands)
Additional
Common Stock Paid-in
Shares Amount Capital
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
140 - 199
Issuance of common stock for 401k
plan match 18 - 126
Net income
Balance, June 30, 1997 15,840 $ 63 $ 76,379
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Consolidated Statement of Stockholders' Equity
For the period ended June 30, 1997
(in thousands)
Total
Accumulated Stockholders'
Deficit Equity
Balance, January 1, 1997 (32,916) 43,209
Preferred stock dividends (1,709) (1,709)
Dividend accretion of special
preferred stock
(590) (590)
Exercise of common stock options
and warrants 199
Issuance of common stock for 401k
plan match 126
Net loss (220) (220)
Balance, June 30, 1997 ($35,435) $ 41,015
The accompanying notes are an integral part of these financial statements
<PAGE>
Shared Technologies Fairchild Inc.
Notes to Consolidated Financial Statements
June 30, 1997
(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 June 30, 1997 the Company had an
ownership interest of approximately 35.7% in STC. Summarized balance sheet and
statement of operations information for STC as of, and for the six months ended,
June 30, 1997 is as follows:
Summarized Balance Sheet
Current assets $ 3,050
Property and equipment, net 1,904
Other assets 9,829
Total assets $ 14,783
Current liabilities $ 10,374
Note payable 1,154
Total liabilities 11,528
Stockholders' equity 3,255
Total liabilities and stockholders' equity $ 14,783
Summarized Statement of Operations
Revenues $ 12,867
Gross margin 5,608
Operating loss (229)
Net loss (370)
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 presently are convertible into 833
shares of common stock at the Company's option. In addition, upon conversion of
such STC preferred stock, the Company shall receive a warrant to purchase an
additional 833 shares of STC common stock, subject to adjustment.
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 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 six
months ended June 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 $ 91,055
Cost of revenues 49,151
Gross margin 41,904
Selling, general and
administrative expenses 31,767
Operating income 10,137
Equity in loss of subsidiary (1,699)
Interest expense, net (13,471)
Loss before income tax expense
and extraordinary item (5,033)
Income taxes (30)
Loss before extraordinary item (5,063)
Extraordinary item. loss on early
retirement of debt (332)
Net Loss (5,395)
Preferred stock dividends (1,476)
Loss applicable to common stock $ (6,871)
Net loss per common share $ (.46)
Weighted average number of common
shares outstanding 14,900
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.
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).
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. These
subsidiaries are guarantors on the 12 1/4% Senior Subordinated Notes due 2006.
Shared Technologies Fairchild Inc.
Eliminating Consolidated
STFTI STFCC STFI Entries STFI
------------------------------------------------------------------
Assets
Current Assets:
Cash and cash
equivalents $1,782 $1 $1,783
Accounts
receivable, net 33,314 42 33,356
Inventories 4,063 4,063
Other current
assets 2,660 2,660
-----------------------------------------------------------------------
Total current
assets 41,819 0 43 0 41,862
-----------------------------------------------------------------------
Equipment:
Property &
Equipment 102,942 102,942
Accumulated
depreciation (34,112) (34,112)
-----------------------------------------------------------------------
68,830 0 0 0 68,830
-----------------------------------------------------------------------
Other Assets:
Investment in
affiliates 136 84,800 82,359 (166,644) 651
Intangible
assets 250,857 7,922 258,779
Note Receivable 140,780 (140,780) -
Deferred income
taxes -
Other 326 326
----------------------------------------------------------------------
251,319 233,502 82,359 (307,424) 259,756
-----------------------------------------------------------------------
Total
assets $ 361,968 $ 233,502 $82.402 (307,424) 370,448
=================================================================
Liabilities and
Stockholders' Equity
Current Liabilities:
Current portion of
long term debt and
capital lease oblig. $15,374 15,374
Accounts payable 17,596 17,596
Accrued expenses 8,368 (29) 8,339
Accrued dividends 843 843
Advanced billings 6,720 6,720
-----------------------------------------------------------------------
Total current
liabilities 32,684 15,374 814 0 48,872
------------------------------------------------------------------
Long-term debt,
less current
portion 140,780 239,988 (140,780) 239,988
----------------------------------------------------------------
Redeemable put
warrant 816 816
-----------------------------------------------------------------------
Convertible preferred
stock $.01 par value authorized
250 shares in 1997
and 1996 25,000 25,000
-----------------------------------------------------------------------
Special preferred stock 14,757 14,757
$.01 par value, authorized 20
shares in 1997 and 1996
-------------------------------------------------------------
Stockholders' equity:
Preferred Stock,
Series C 4 4
Preferred Stock
Series D 4 4
Common Stock 63 63
Additional paid-in capital 76,379 76,379
Accumulated deficit 25,214 (21,860) (35,435) (3,354) (35,435)
Intercompany 163,290 (163,290) -
-----------------------------------------------------------
Total stockholders'
equity 188,504 (21,860) 41,015 (166,644) 41,015
-------------------------------------------------------------------
Total liabilities
and stockholders'
equity 361,968 233,502 82,402 (307,424) 370,448
=============================================================
$ - $- $ - $- $-
REVENUE
total revenue 87,485 8,133 95,618
total cost of
revenue 46,630 46,630
--------------------------------------------------------------------
Gross margin 40,855 - 8,133 - 48,988
46.70% 100% 51.23%
-----------------------------------------------------------------------
Selling, general &
administrative
expenses 34,151 183 34,334
-----------------------------------------------------------------------
Operating Income 6,704 - 7,950 - 14,654
Other income (expense):
Equity in loss of
affiliate (8,427) 8,241 (186)
interest expense,
net (6,319) (4,295) 257 (14,480)
-------------------------------------------------------------------
(6,319) (4,295) (8170) 8,241 (14,666)
-------------------------------------------------------------------
Income (loss) before
income taxes and
extraordinary item 385 (8,418) (220) 8,241 (12)
Income tax (208) (208)
-----------------------------------------------------------------------
Income (loss)
before
extraordinary item 177 (8,418) (220) 8,241 (220)
Extraordinary item,
loss on early
retirement of
debt - - - - -
-----------------------------------------------------------------
Net income
(loss) 177 (8,418) (220) 8,241 (220)
Preferred stock
dividends (2,229) (2,299)
--------------------------------------------------------------------
Net income
(loss)
applicable to
common stock 177 (8,418) (2,519) 8,241 (2,519)
========================================================
9. Subsequent Event. On July 16, 1997, Shared Technologies Fairchild Inc.
(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.
<PAGE>
Item 2.
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations:
Six Months Ended June 30, 1997 compared to June 30, 1996
Revenues
STFI's revenues rose to $95.6 million in 1997, an increase of 49.9% over
1996 revenues of $63.8 million. This increase was principally due to the March
13, 1996 merger with Fairchild Industries Inc. ("FII"). Shared
Telecommunications Service ("STS") revenue increased $13.7 million, or 32.6%,
and Telecommunications Systems ("Systems") revenue increased $18.2 million, or
83.2%.
Approximately $7.5 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.
Gross Margin
Gross margin increased to 51.2% of revenues for 1997, from 45.4% 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, of $7.5 million, were included in Systems
revenue. Costs associated with this revenue is not material and as a result have
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 six
months ended June 30, 1997 as a factor of sales percentage and gross margin
percentage per line of business: Weighted Division Sales GM GM
STS 58.2% 52.9% 30.7%
Systems 41.8% 49.0% 20.5%
Company Total 100.0% 51.2%
As shown above, the 1997 gross margin was a mix of STS gross margin of
52.9% and Systems gross margin of 49.0%. In 1996, the Company's gross margin was
a combination of STS gross margin of 32.7% and Systems gross margin of 12.7%.
Selling, general and administrative Expenses
Selling, general and administrative (SG&A) expenses increased $11.5 million
to $34.3 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 changed only slightly from 35.8% in 1996 to
35.9% in 1997.
Operating Income
Operating income increased by $8.5 million to $14.7 million in 1997 from
$6.1 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 $6.2 million for the
six months ended June 30, 1997 over the six months ended June 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 six months ended
June 30, 1997 decreased $4.0 million to $.2 million, compared to a net loss of
$4.2 million in the six months ended June 30, 1996.
Three Months Ended June 30, 1997 Compared to June 30, 1996
Revenues
STFI's revenues increased to $49.0 million in 1997, an increase of 7.4%
over 1996 revenues of $45.6 million. STS revenue decreased $.7 million from
$28.7 million in the three months ended June 30, 1996 to $28.0 in the three
months ended June 30, 1997. This slight decrease was due to the increasing
competition in the telecommunications marketplace. Systems revenue increased
$4.1 million in 1997 over 1996. Of this increase, $3.5 was attributable to the
management fees generated from ICS and ResCom.
Gross Margin
Gross margin increased to 51.1% of revenues for 1997, from 46.5% for 1996.
The following table sets forth the components of the Company's overall gross
margin ("GM") for the three months ended June 30, 1997 as a factor of sales
percentage and gross margin percentage per line of business:
Weighted
Division Sales GM GM
STS 57.1% 53.2% 30.4%
Systems 42.9% 48.2% 20.7%
Company Total 100.0% 51.1%
As shown above, the 1997 gross margin was a mix of the STS gross margin of
53.2% and Systems gross margin of 48.2%. In 1996, the Company's gross margin was
a combination of STS gross margin of 48.9%, and Systems gross margin of 42.5%. A
significant portion of the gross margin increase in 1997 was due to the $3.5
million of ICS and ResCom management fees.
Selling, General and Administrative Expenses
SG&A as a percentage of revenue stayed fairly consistent in the three
months ended June 30, 1997 compared to the three months ended June 30, 1996, as
they were 35.7% and 35.3% respectively.
Operating Income
Operating income increased to $7.5 million in 1997 from $5.1 million in
1996. This increase was mainly the result of the FII merger.
Interest Expense
Interest expense net of interest income increased by $.8 million for the
three months ended June 30, 1997 over the three months ended June 30, 1996. This
was attributable to an increase in the accretion on the Company's books of $.5
million with the remaining amount resulting from an increase in the outstanding
revolving loan facility.
Net Income
As a result of the factors listed above, a net loss for the three months
ended June 30, 1997 of $.4 million was recorded, compared to a net loss of $2.6
million for the three months ended June 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
June 30, 1997 the Company had $370 million in assets, $255 million in various
long and short-term debt and capital lease obligations, and $39.8 million in
recently issued preferred stock. The balance sheet at June 30, 1997 showed a
working capital deficit of $7.0, compared to a deficit of $20.4 million at June
30, 1996. As of June 30, 1997 the Company had available for future borrowings
approximately $11 million on a credit facility. Cash provided by operations was
$12.3 million for the six months ended June 30, 1997, compared to $12.1 million
for the six months ended June 30, 1996.
The Company invested $7.0 million in equipment purchases in the six months
ended June 30, 1997, compared to $3.9 million in the six months ended June 30,
1996. These expenditures were used to grow additional business and sustain the
Company's underlying revenue stream.
Financing activities for the period ended June 30, 1997 involved principal
payments on the Company's debt of $6.2 million, offset by a $2.0 million take
down on the Company's revolver availability.
Cash requirements for 1997 will be 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 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.
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.
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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 23, 1997.
Four matters of business were held to vote for the following purposes: (1) one
election of three directors of the Company for ensuing three-year terms
("Proposal 1"); (2) to ratify certain amendments to the 1997 Equity Incentive
Plan ("Proposal 2"); (3) to approve the material terms of the performance goals
for the fiscal 1997 incentive compensation awards for certain executives of the
Company ("Proposal 3"); and (4) to ratify the grant of certain warrants to
non-employee Directors ("Proposal 4");
Proposal 1
Directors For Withheld
Anthony A. Autorino 9,946,634 244,067
Thomas H. Decker 8,913,534 1,277,167
Vincent DiVincenzo 9,946,634 244,067
Proposal 2
For Against Abstain
9,933,829 280,324 954
Proposal 3
For Against Abstain
9,932,779 282,128 250
<PAGE>
Proposal 4
For Against Abstain
9,920,826 287,781 6,500
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.
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
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: August 13, 1997
<PAGE>
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