UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 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 1-13732
SHARED TECHNOLOGIES CELLULAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1386411
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Great Meadow Road, Suite 102 Wethersfield, Connecticut 06109
(Address of principal executive office) (Zip Code)
(860) 258-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes __X___ No ___
The number of shares outstanding of the registrant's common stock as of
November 10, 1997 was 7,210,301
PART 1 FINANCIAL INFORMATION PAGE
Item 1.
Financial Statements
Consolidated Balance
Sheets as of September 30,
1997 and December 31, 1996 3-4
Consolidated Statements of Operations
for the nine months ending September 30,1997
and 1996 5
Consolidated Statements of Operations
for the three months ending September 30,
1997 and 1996 6
Consolidated Statements of
Cash Flows for the nine
months ended September 30, 1997 and 1996 7-8
Consolidated Statements of
Stockholders' Equity for
the nine months ended September 30, 1997 9
Notes to Consolidated Financial Statements 10-11
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-15
PART II OTHER INFORMATION
Item 1.
Legal Proceedings 16
Item 6.
Exhibits and reports on Form 8-K 16
Signature Page 17
Item 1. Financial Statements
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 December 31, 1996
(unaudited)
ASSETS
Current Assets:
Cash $840,533 $143,621
Accounts receivable, less allowance
for doubtful accounts of $680,999
and $1,392,176 in 1997 and 1996 1,847,778 1,621,317
Carrier commissions receivable,
less unearned income 269,295 52,967
Inventories 108,640 79,529
Current portion of note receivable 89,726 39,474
Prepaid expenses and other
current assets 223,190 132,813
Total current assets 3,379,162 2,069,721
Telecommunications and office
equipment, less accumulated
depreciation 1,843,633 2,130,713
Other assets:
Intangible assets, less accumulated
amortization 8,858,849 9,322,373
Deposits 431,345 373,074
Note receivable, less current portion 76,722 118,994
Assets held for disposition 247,418 247,418
Total other assets 9,614,334 10,061,859
TOTAL ASSETS $14,837,129 $14,262,293
The accompanying notes are an integral part of these financial statements.
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, 1997 December 31, 1996
(unaudited)
Current liabilities:
Current portion of notes payable $546,099 $2,218,406
Accounts payable and other current
liabilities 7,593,179 8,718,814
Commissions payable 310,140 48,441
Due to affiliate 1,007,573 58,809
Total current liabilities 9,456,991 11,044,470
Notes payable, less current portion 1,193,455 360,417
Stockholders' equity:
Preferred stock, $.01 par value,
Series B Convertible, authorized,
1,250,000 shares, issued and
outstanding 0 shares in 1997
and 500,000 shares in 1996 - 5,000
Common stock, $.01 par value,
authorized 20,000,000 shares,
issued and outstanding 7,210,301
shares in 1997 and 4,862,737 shares
in 1996 72,103 48,628
Capital in excess of par value 17,797,598 15,816,979
Accumulated deficit (13,683,018) (13,013,201)
Total stockholders' equity 4,186,683 2,857,406
Total liabilities and
stockholders' equity $14,837,129 $14,262,293
The accompanying notes are an integral part of these financial statements.
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
For the Nine Months Ended September 30,
1997 1996
Revenues:
Rental 11,829,192 $12,929,942
Debit 5,132,996 856,397
Activations 2,126,715 2,457,067
Total Revenues 19,088,903 16,243,406
Cost of revenues:
Rental 6,456,199 7,959,765
Debit 2,767,115 666,050
Activations 1,435,126 1,509,132
Total cost of revenues 10,658,440 10,134,947
Gross margin 8,430,463 6,108,459
Selling, general and administrative
expenses:
Field 7,543,812 7,948,884
Corporate 1,357,919 1,881,590
8,901,731 9,830,474
Loss from operations (471,268) (3,722,015)
Interest expense (net) (197,281) (262,256)
Net loss before income taxes (668,549) (3,984,271)
Income taxes (1,268) -
Net loss ($669,817) ($3,984,271)
Net loss per common share ($0.12) ($1.02)
Weighted average number of common
shares outstanding 5,458,224 3,909,656
The accompanying notes are an integral part of these financial statements.
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
For the Three Months Ended September 30,
1997 1996
Revenues:
Rental $4,123,892 $5,798,395
Debit 1,454,202 395,137
Activations 643,891 675,942
Total revenues 6,221,985 6,869,474
Cost of revenues:
Rental 2,112,980 3,385,357
Debit 892,820 338,110
Activations 394,212 418,998
Total cost of revenues 3,400,012 4,142,465
Gross margin 2,821,973 2,727,009
Selling, general and administrative
expenses:
Field 2,556,566 3,060,013
Corporate 507,683 494,334
3,064,249 3,554,347
Loss from operations (242,276) (827,338)
Interest expense (net) (56,065) (132,418)
Net loss before income taxes (298,341) (959,756)
Income taxes (1,268) -
Net loss ($299,609) ($959,756)
Net loss per common share ($0.05) ($0.21)
Weighted average number of common
shares outstanding 6,238,883 4,598,487
The accompanying notes are an integral part of these financial statements.
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
For The Nine Months Ended September 30,
1997 1996
Cash flows from operating activities:
Net loss ($669,817) ($3,984,271)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 935,237 1,248,943
Provision for doubtful accounts 965,785 900,359
Common stock issued for compensation
and services 46,039 26,646
Accretion of interest on notes payable 18,300
Note receivable (7,980)
Change in assets and liabilities
Accounts receivable (1,192,246) (2,116,787)
Carrier commissions receivable (216,328)
Inventories (29,111) (41,912)
Prepaid expenses and other current
assets (90,377) 154,637
Accounts payable and other current
liabilities (1,143,935) 208,740
Commissions payable 261,699
Net cash used in operating activities (1,122,734) (3,603,645)
Cash flows from investing activities:
Acquisition of businesses (290,407)
Other assets (55,000) (178,195)
Purchase of equipment (187,904) (2,062,170)
Collection of receivable from sale of assets 1,077,856
Payments for intangible assets (347,731)
Net cash used in investing activities (242,904) (1,800,647)
Cash flows from financing activities:
Payments on notes payable (839,269) (985,967)
Advances from affiliate 948,764 263,907
Issuance of common and preferred stock 1,953,055 3,638,649
Net cash provided by financing
activities 2,062,550 2,916,589
Net increase (decrease) in cash 696,912 (2,487,703)
Cash, beginning of period 143,621 2,541,827
Cash, end of period $840,533 $54,124
The accompanying notes are an integral part of these financial statements.
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) (continued)
For The Nine Months Ended September 30,
1997 1996
Supplemental disclosure of cash flow
information:
Cash paid during the period for -
Interest $316,845 $213,498
Income taxes $1,268 $0
Supplemental schedules of noncash
investing and financing activities:
Issuance of common stock for acquisitions $0 $950,000
Notes payable incurred for acquisition
of assets $0 $1,139,000
Issuance of Series B Convertible Preferred
Stock in exchange for amount due parent $0 $1,200,000
The accompanying notes are an integral part of these financial statements.
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (unaudited)
For The Nine Months Ended September 30, 1997
Series B
Preferred
Stock Common Stock
Shares Amount Shares Amount
Balances, December 31, 1996 500,000 $5,000 4,862,737 $48,628
Issuance of common stock - - 680,897 6,809
Conversion of preferred stock (500,000)($5,000)1,666,667 16,666
Net loss - - - -
Balances, September 30,1997 0 $0 7,210,301$72,103
Capital in Total
Excess of Accumulated Stockholders'
Par Value Deficit Equity
Balances, December 31, 1996 $15,816,979 ($13,013,201) $2,857,406
Issuance of common stock 1,992,285, - $1,999,094
Conversion of preferred stock (11,666) - $0
Net loss - (669,817) ($669,817)
Balances, September 30,1997 $17,797,598 ($13,683,018) $4,186,683
The accompanying notes are an integral part of these financial statements.
Shared Technologies Cellular, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
1. Basis of Presentation: The consolidated financial statements
included herein have been prepared by Shared Technologies Cellular,
Inc. ("STC" or 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 financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's December 31,
1996 report on Form 10-K. Certain reclassifications to prior year
financial statements were made in order to conform to the 1997
presentation.
2. Earnings per share: Primary income (loss) per common share is computed
by deducting preferred stock dividend from net income (loss),if any. The
resulting net income (loss) is applicable to common stock, which is then
divided by the weighted average number of common shares outstanding.
Fully diluted income (loss) per common share is computed by dividing the
income applicable to common stock by the weighted average number of
common and common equivalent shares and the effect of preferred stock
conversions, if dilutive. Fully diluted income (loss) per common share
is substantially the same as primary income (loss) per common share.
3. Litigation: On July 28, 1997, the Company entered into a settlement
agreement to resolve certain litigation with PTC Cellular, Inc.("PTC")
concerning an alleged default by the Company on payments under a
promissory note delivered to PTC in connection with the Company's 1995
purchase of certain assets from PTC (the "Note"). Pursuant to the
settlement agreement, the Company paid PTC an aggregate of $400,000,
representing settlement of the claimed arrearages due under the Note.
Thereafter, the Company has agreed to pay future installments under
the Note in accordance with the original terms on the Note.
The Company is not involved in any litigation which, individually
or in the aggregate, if resolved against the Company would be likely to
have a materially adverse effect on the Company's financial condition,
results of operations, or cash flows.
4. Acquisitions: In April 1996, the Company completed its acquisition of
substantially all of the assets of its only franchisee, Summit Assurance
Cellular, Inc. and certain other parties (collectively "Summit"). The
purchase price was $3,562,662, comprised of $335,415 in cash, the
assumption of $668,564 of accounts payable and $665,822 of notes payable,
the issuance of a promissory note for $952,861, the issuance of 300,000
shares of the Company's common stock valued at $3.125 per share, and
three-year warrants each to purchase 100,000 shares of the Company's
common stock at prices of $3.00, $4.00, and $5.00 per share,
respectively. These warrants were valued at $12,500.
The acquisition was accounted for as a purchase, and the purchase price
was allocated on the basis of the relative fair market values of the net
assets acquired and net liabilities assumed, as follows:
Cash $20,000
Equipment 169,600
Excess of cost over net
assets acquired 3,373,062
$3,562,662
The following unaudited pro forma condensed combined statement of
operations for the nine-month period ended September 30, 1996 gives effect
to the acquisition of Summit as if it had occurred on January 1, 1996.
1996
Revenues $17,112,956
Net loss ($4,456,745)
Loss per common share ($1.10)
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 for 1997 were $19,089,000, an increase of $2,845,000 (18%) over
revenues for 1996. This increase was primarily due to the expansion of
the debit, or prepaid, business and the April 1996 purchase of
the operations of the Company's sole franchisee, offset by the elimination
of the in-car cellular rental operation. The net loss for 1997 was
$700,000, compared to a net loss of $ 3,984,000 for 1996. The improvement
was a result of the increase in revenues, together with an improvement in
the gross margin and a reduction in operating expenses. The net loss per
common share was $0.12 for 1997, compared to $1.02 for 1996.
Revenues
The cellular telephone rental business had revenues of $11,829,000 for
1997, compared to $12,930,000 for 1996. This decrease was due to a
reduction of $3,061,000 in revenues for 1997 as a result of the
elimination of the in-car cellular telephone rental operation in the
fourth quarter of 1996. The in-car operation was eliminated due to
unacceptable operating losses. The portable cellular telephone rental
business continued to show good revenue growth for 1997. Revenues for
1997 were $11,829,000, compared to $9,869,000 for 1996. This increase
of $1,960,000 was attributable to several factors. The April 1996
Summit acquisition accounted for $2,084,000 of additional revenues in
1997. However, this increase was offset by $1,419,000 in nonrecurring
revenues generated in the third quarter of 1996 from the summer's
Olympic Games. The balance was mainly due to increased penetration
within existing portable cellular rental locations, as well as the
transition of in-car rental accounts to portable rental accounts.
The debit, or prepaid, business had revenues of $5,125,000 for 1997,
compared to $856,000 for 1996. This significant increase was due to
the rapid expansion into the debit business in the first quarter
of 1997. Such expansion was represented by one primary account.
The activation business had revenues of $2,127,000 for 1997, compared
to $2,457,000 for 1996. This decrease was mainly due to a reduction in
activation revenues by the Company's Texas operation.
Gross Margin
Gross margin increased to 44% of revenues for 1997, from 38% for 1996.
This improvement was mainly due to significant changes in revenue mix,
as previously discussed. The following table summarizes the impact of
these changes on gross margins for 1997 and 1996:
1997 1996
Revenues Gross Margin Revenues Gross Margin
Portable rentals 62% 45% 61% 45%
In-car rentals - - 19% 19%
Debit 27% 46% 5% 22%
Activations 11% 33% 15% 39%
Total 100% 44% 100% 38%
The gross margin for the debit operation improved due to a reduction in carrier
costs as a result of better line management and lower carrier usage cost.
The activations operation showed a reduction in gross margin due to lower
activation commissions received from carriers.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") decreased $927,000
(9%), to $8,903,000 for 1997 from $9,830,000 for 1996. As a percentage
of revenues, SG&A decreased to 47% for 1997, compared to 61% for 1996.
This decrease was due to several factors. In the latter part of fiscal
year 1996, the Company made a concerted effort to reduce its operating
expenses. The Company consolidated its Special Events operation into its
portable rental operation. It also transitioned its in-car cellular
telephone rental operation to its portable cellular telephone rental
operation. The Company also implemented other cost-cutting measures, such
as staff reductions, office closings and travel restrictions that resulted
in an overall decrease in SG&A. Another factor that helped reduce SG&A
as a percentage of revenues was the acquisition of certain assets of
Summit. The Company was able to reduce expenses through certain synergies.
Interest Expense
Interest expense net of interest income was $197,000 for 1997, compared
to $262,000 for 1996. Interest expense was mainly due to debt issued in
conjunction with the PTC acquisition in November 1995 and the Summit
acquisition in April 1996.
Three Months Ended September 30, 1997 compared to September 30, 1996
Revenues were $6,222,000 for the third quarter of 1997, a decrease of
$648,000 (9%) over revenues for the third quarter of 1996. This
decrease was primarily due to revenues recognized from the Summer Olympics
in the third quarter of 1996 and the elimination of the in-car cellular
rental operation, offset by increased revenues from the expansion of the
debit, or prepaid, business. The net loss for the third quarter of 1997
was $300,000, compared to a net loss of $ 960,000 for the third quarter
of 1996. This improvement was a result of an increase in gross margin
and a reduction in operating expenses. The net loss per common share was
$0.05 for 1997, compared to $0.21 for 1996.
Revenues
The cellular telephone rental business had revenues of $4,124,000 for 1997,
compared to $5,798,000 for 1996. This decrease was partially due to a
reduction of $555,000 in revenues for 1997 resulting from elimination of
the in-car cellular telephone rental operation in the fourth quarter of 1996.
Portable cellular telephone rental revenues for 1997 were $4,124,000,
compared to $5,243,000 for 1996. This decrease was due to $1,419,000 in
nonrecurring revenues generated in the third quarter of 1996 from the
summer's Olympic Games.
The debit, or prepaid, business had revenues of $1,454,000 for 1997, compared
to $395,000 for 1996. This significant increase was due to the expansion
into the debit business in the first quarter of 1997. Such expansion was
represented by one primary account.
The activation business had revenues of $643,000 for 1997, compared to $676,000
for 1996. This decrease was mainly due to a reduction in activation revenues
by the Company's Texas operation. The decrease in revenues from the Texas
operation was partially offset by revenues generated from a pilot program
started in the third quarter with a major national retailer.
Gross Margin
Gross margin increased to 45% of revenues for 1997, from 40% for 1996. This
improvement was mainly due to significant changes in revenue mix, as
previously discussed. The following table summarizes the impact of these
changes on gross margins for 1997 and 1996:
1997 1996
Revenues Gross Margin Revenues Gross Margin
Portable rentals 67% 49% 76% 45%
In-car rentals - - 8% -12%
Debit 23% 39% 6% 14%
Activations 10% 39% 10% 38%
Total 100% 45% 100% 40%
The gross margins for both the portable rental operation and the debit
operation improved due to a reduction in carrier costs as a result of better
line management and lower carrier usage charges.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $489,000 (14%),
to $3,066,000 for 1997, from $3,554,000 for 1996. As a percentage of revenues,
SG&A decreased to 49% for 1997, compared to 52% for 1996. This decrease
was due to cost cutting measures implemented by the Company in the latter
part of fiscal year 1996. See the previous SG&A discussion for a detailed
explanation.
Interest Expense
Interest expense, net of interest income, was $56,000 for 1997, compared to
$132,000 for 1996. Interest expense was mainly due to debt issued in
conjunction with the PTCC acquisition in November 1995 and the Summit
acquisition in April 1996.
Liquidity and Capital Resources:
The Company had a working capital deficit of $6,078,000 at September 30, 1997,
compared to a deficit of $8,975,000 at December 31, 1996. Stockholders'
equity at September 30, 1997 was $4,187,000, compared to $2,857,000 at
December 31, 1996.
Net cash used in operations for the nine-month period ended September 30, 1997
was $1,123,000. During this period, the Company improved the timeliness of
its payments to carriers and other vendors. The Company used a portion of
the proceeds from the sale of Units (discussed below) for this purpose. For
the nine-month period ended September 30, 1996 the net cash used in
operating activities was $3,604,000. This was mainly due to the operating
loss for the period.
Net cash used in investing activities for the nine-month period ended
September 30, 1997 was $243,000. This was mainly attributable to the
purchase of portable cellular equipment and accessories as well as the
updating of computer equipment. For the nine-month period ended September
30, 1996, the Company focused its investing activities on the purchase of
portable and in-car cellular telephone equipment.
Financing activities were focused primarily on raising capital to meet the
obligations incurred with previously mentioned acquisitions and for working
capital. During the nine-month period ended September 30, 1997 the Company
raised cash equity of $1,953,000, net of expenses, through the sale of 656,667
Units. These Units were sold as follows, 250,000 Units were sold in January
1997 and 406,667 Units were sold in the August 1997 and September 1997
period. Each Unit consisted of one share of the Company's common stock, and
one warrant to purchase an additional share of such common stock. The Units
were priced at $3.00 each, and the warrants had an exercise price of $3.00
per share. The Company used a portion of the proceeds to make scheduled
payments on various notes payable issued in conjunction with the PTC and
Summit acquisitions. The Company also borrowed $949,000 from its former
parent, Shared Technologies Fairchild Inc. (STFI).
Cash from operations has been sufficient to fund ongoing operations. However,
additional funds will be needed to satisfy existing obligations arising from
completed acquisitions and prior year losses. Management believes that an
additional infusion of cash from debt or equity financing is required.
Management does not believe that, at this time, existing operations can
generate sufficient cash to sustain operations as well as meet its existing
obligations. In order to address its cash needs, on September 19, 1997 the
Company signed an engagement letter with an investment banking firm to arrange
and underwrite $20 million of senior secured financing.
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995: The Management's Discussion and Analysis may include forward-looking
statements with respect to the Company's future financial performance. These
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those in any forward-
looking statement. Such risks and uncertainties may include, without
limitation, technological obsolescence, price and industry competition,
financing capabilities, and dependence on major customers and relationships.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 28, 1997, the Company entered into a settlement
agreement to resolve certain litigation with PTC Cellular, Inc. ("PTC")
concerning an alleged default by the Company on payments under a
promissory note delivered to PTC in connection with the Company's 1995
purchase of certain assets from PTC (the "Note"). Pursuant to the
settlement agreement, the Company paid PTC an aggregate on $400,000,
representing settlement of the claimed arrearages due under the Note.
Thereafter, the Company has agreed to pay future installments under the
Note in accordance with the original terms on the Note.
The Company is not involved in any litigation which, individually
or in the aggregate, if resolved against the Company would be likely to
have a materially adverse effect on the Company's financial condition,
results of operations, or cash flows.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit
27 Financial Data Schedule (filed only electronically with the SEC)
(b) Reports on Form 8-K
None
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 and thereunto duly authorized.
SHARED TECHNOLOGIES CELLULAR, INC.
November 14, 1997 By: /s/ Vincent DiVincenzo
Vincent DiVincenzo
Chief Financial Officer
(Chief Accounting Officer and
Duly Authorized Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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