<PAGE> 1
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, 1998
OR
[ ] 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
12, 1998 was 7,525,352
<PAGE> 2
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited).
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 3-4
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1998 and 1997 5
Consolidated Statements of Operations for the Three Months Ended
September 30, 1998 and 1997 6
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 7-8
Notes to Consolidated Financial Statements 9-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURE 17
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
Shared Technologies Cellular, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 868,000 $ 294,000
Accounts receivable, less allowance for doubtful accounts
of $895,000 and $991,000 in 1998 and 1997 5,095,000 1,637,000
Carrier commissions receivable, less unearned income 1,598,000 163,000
Inventories 120,000 131,000
Current portion of note receivable 107,000
Prepaid expenses and other current assets 2,630,000 127,000
----------- -----------
Total current assets 10,311,000 2,459,000
----------- -----------
TELECOMMUNICATIONS AND OFFICE EQUIPMENT,
less accumulated depreciation 1,066,000 985,000
----------- -----------
OTHER ASSETS:
Intangible assets, less accumulated amortization 7,066,000 7,551,000
Deposits 649,000 326,000
Note receivable, less current portion 62,000
Assets held for disposition 153,000 153,000
----------- -----------
Total other assets 7,868,000 8,092,000
----------- -----------
$19,245,000 $11,536,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
<PAGE> 4
Shared Technologies Cellular, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 4,506,000 $ 530,000
Accounts payable and other current liabilities 11,082,000 7,666,000
Commissions payable 199,000 166,000
Due to former parent 1,411,000 1,052,000
------------ ------------
Total current liabilities 17,198,000 9,414,000
------------ ------------
Notes payable, less current portion 3,094,000 957,000
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, authorized 5,000,000
shares, no shares issued and outstanding -- --
Common Stock, $.01 par value, authorized 20,000,000 shares,
issued and outstanding 7,420,000 shares in 1998
and 7,216,000 in 1997 74,000 72,000
Capital in excess of par value 17,624,000 17,801,000
Accumulated deficit (18,745,000) (16,708,000)
------------ ------------
Total stockholders' equity (deficit) (1,047,000) 1,165,000
------------ ------------
$ 19,245,000 $ 11,536,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
<PAGE> 5
Shared Technologies Cellular, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES $ 20,746,000 $ 19,089,000
COST OF REVENUES 12,286,000 10,659,000
------------ ------------
GROSS MARGIN 8,460,000 8,430,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,096,000 8,902,000
------------ ------------
LOSS FROM OPERATIONS (1,636,000) (472,000)
INTEREST EXPENSE, NET (398,000) (197,000)
------------ ------------
LOSS BEFORE INCOME TAXES (2,034,000) (669,000)
INCOME TAXES (3,000) (1,000)
------------ ------------
NET LOSS $(2,037,000) $(670,000)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $(0.28) $(0.12)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,331,503 5,458,224
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
<PAGE> 6
Shared Technologies Cellular, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended September 30,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES $ 8,639,000 $ 6,222,000
COST OF REVENUES 5,135,000 3,401,000
----------- -----------
GROSS MARGIN 3,504,000 2,821,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 4,311,000 3,064,000
----------- -----------
LOSS FROM OPERATIONS (807,000) (243,000)
INTEREST EXPENSE, NET (214,000) (56,000)
----------- -----------
LOSS BEFORE INCOME TAXES (1,021,000) (299,000)
INCOME TAXES 0 (1,000)
----------- -----------
NET LOSS $(1,021,000) $(300,000)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $(0.14) $(0.05)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,405,570 6,238,883
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
<PAGE> 7
Shared Technologies Cellular, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,037,000) $(670,000)
Adjustments to reconcile net loss to net cash
used in operating activities;
Depreciation and amortization 889,000 935,000
Common stock issued for compensation
and services 85,000 46,000
Accretion of interest on notes payable 18,000
Interest receivable (8,000)
Change in assets and liabilities:
Accounts receivable (3,458,000) (227,000)
Carrier commissions receivable (1,435,000) (216,000)
Inventories 11,000 (29,000)
Prepaid expenses and other current assets (2,503,000) (90,000)
Accounts payable and other current liabilities 3,985,000 (1,144,000)
Commissions payable 33,000 262,000
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (4,430,000) (1,123,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets (301,000) (55,000)
Purchases of equipment (507,000) (188,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (808,000) (243,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 6,400,000
Payments on notes payable (485,000) (839,000)
Advances from (payment to) former parent (210,000) 949,000
Issuance of common stock 107,000 1,953,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,812,000 2,063,000
----------- -----------
NET INCREASE IN CASH 574,000 697,000
CASH, BEGINNING OF PERIOD 294,000 144,000
----------- -----------
CASH, END OF PERIOD $ 868,000 $ 841,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-7-
<PAGE> 8
Shared Technologies Cellular, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (continued)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $346,000 $317,000
======== ========
Income taxes $ 3,000 $ 1,000
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Cancellation of common stock to settle
outstanding receivables $367,000 $ 0
======== ========
Cashless exercise of 500,000 Common Stock warrants
into 250,519 shares of the Company's Common Stock $ 3,000 $ 0
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-8-
<PAGE> 9
Shared Technologies Cellular, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1998 (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 financial position, results of operations and cash flows
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, 1997 report on Form 10-K. Certain
reclassifications to prior year financial statements were made in order to
conform to the 1998 presentation. The consolidated financial statements included
herein are not necessarily indicative of the results for the fiscal year ending
December 31, 1998.
2. LOSS PER COMMON SHARE. Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings
Per Share." SFAS No. 128 requires dual presentation of basic and diluted
earnings per share for all periods presented. Basic earnings per share excludes
dilution and is computed by dividing the loss available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock and then shared in
the earnings of the entity. Prior period loss information has been restated as
required by SFAS No. 128. Diluted loss per common share is the same as basic
loss per common share for the three and nine month periods ended September 30,
1998 and 1997. Unexercised options to purchase 697,000 and 365,000 shares of the
Company's common stock as of September 30, 1998 and 1997, respectively, and
common stock warrants to purchase 3,445,000 and 3,518,000 shares of the
Company's common stock as of September 30, 1998 and 1997, respectively, were not
included in the computation of diluted earnings per share because their effect
would have been antidilutive as a result of the Company's losses.
-9-
<PAGE> 10
3. LITIGATION. 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
material adverse effect on the Company's financial condition, results of
operations, or cash flows.
4. LIQUIDITY. The Company has incurred losses during the three most recent
fiscal years, as well as the nine-month period ended September 30, 1998 and has
a working capital deficit of $6,887,000 and a stockholders' deficit of
$1,047,000 at September 30, 1998. The Company's liquidity is dependent on its
ability to obtain long-term financing and attain profitable operations.
-10-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS:
Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30,
1997
Revenues for 1998 were $20,746,000, compared to $19,089,000 for 1997, an
increase of 1,657,000 (9%). The net loss for 1998 was $2,037,000, compared to a
net loss of $670,000 for 1997. The net loss per common share was $0.28 for 1998,
compared to $0.12 for 1997.
Revenues
Cellular telephone rental operations had revenues of $10,613,000 for 1998,
compared to $11,829,000 for 1997. The decrease in revenues of $1,216,000 (10%)
was attributable to several factors. During 1998 the Company de-emphasized the
Special Events and Airlines programs due to local competition and the costs to
generate revenues from such operations. In addition, the Company closed various
locations during late 1997 that did not meet established profit criteria.
Furthermore, all of the Company's car rental partners continued to go through
management transformations throughout 1998 that may have negatively impacted
their ability to focus on the Company's cellular rental program. The Company
believes that, in the long term, these changes should have a positive impact on
both the Company's cellular rental revenues and gross margins.
Debit operations had revenues of $8,996,000 for 1998, compared to $5,133,000 for
1997. The increase in revenues of $3,863,000 (75%) was due to a new end-user
program being marketed under the CellEase brand name. The Company has
experienced significant revenue growth from CellEase beginning in April 1998.
The increase in the CellEase program was partially offset by a reduction in
revenues from a major distributor due to a rate adjustment given in order to
keep the distributor competitive with the CellEase program. In addition, the
distributor has begun to transition its prepaid cellular phone business
customers over to the Company's CellEase end-user program, which also has
negatively impacted revenues.
Activation operations had revenues of $1,137,000 for 1998, compared to
$2,127,000 for 1997. The decrease of $990,000 (47%) was attributable to the
discontinuance of operations at military bases in late 1997. In addition, the
Company closed its Texas activation location in November 1997.
-11-
<PAGE> 12
Gross Margin
Gross margin was 41% of revenues for 1998, compared to 44% of revenues for 1997.
The gross margin for portable cellular rental operations improved slightly due
to the closure of various unprofitable locations, as discussed above. The gross
margin for the debit operations decreased as a result of a rate adjustment given
to a major distributor and due to the end-user CellEase program having a lower
margin than the distributor program. The gross margin for the activation
operations improved significantly due to a change in the product mix to more
retail activations, which generally have higher commission amounts than
activations performed at the military bases.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("S,G&A") were $10,096,000 for
1998, compared to $8,902,000 for 1997, an increase of $1,194,000. As a
percentage of revenues, S,G&A increased to 49% for 1998, compared to 47% for
1997. The increase was substantially attributable to additional corporate
overhead incurred following the March 1998 acquisition of Shared Technologies
Fairchild Inc. ("STF") by Intermedia Communications, Inc. STF, the former parent
of the Company, had been providing certain support and management services to
the Company under a management agreement. Such additional expenses included
payroll for certain former employees of STF who had not previously received
direct compensation from the Company.
Interest Expense
Interest expense, was $398,000 for 1998, compared to $197,000 for 1997. Interest
expense was mainly due to debt from acquisitions made in prior years, the
conversion of the amount due to STF into an interest bearing note payable in May
1998, and a new debt financing completed in May 1998.
Three Months Ended September 30, 1998 compared to Three Months Ended September
30, 1997
Revenues for the third quarter of 1998 were $8,639,000, compared to $6,222,000
for the third quarter of 1997, an increase of $2,417,000 (39%). The net loss for
1998 was $1,021,000, compared to a net loss of $300,000 for 1997.
-12-
<PAGE> 13
Revenues
In the third quarter of 1998, the Company's cellular telephone rental operations
had revenues of $3,832,000, compared to $4,124,000 for 1997. The decrease of
$292,000 (7%) was attributable to the de-emphasis on the Special Events and
Airlines programs, as previously discussed.
In the third quarter of 1998, the Company's debit operations had revenues of
$4,466,000, compared to $1,455,000 for 1997. The increase of $3,011,000 (207%)
was due to the introduction of the CellEase end-user program in April 1998.
In the third quarter of 1998, the Company's activation operations had revenues
of $341,000, compared to $643,000 for 1997. The decrease of $302,000 (47%) was
due to the closure of various retail locations at military bases in late 1997.
Gross Margin
The overall gross margin was 41% of revenues for 1998, compared to 45% of
revenues for 1997. The gross margin for the portable cellular rental operations
was flat between the two periods. The gross margin for the debit operations
decreased due to a rate adjustment given to a major distributor and the lower
margin experienced in the CellEase end-user program. The gross margin for the
activation operations improved significantly due to the elimination of
activations with very low margins at military bases in late 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("S,G&A") increased $1,247,000,
from $3,064,000 in 1997 to $4,311,000 in 1998. As a percentage of revenues,
S,G&A expenses increased slightly from 49% in 1997 to 50% in 1998. This increase
in expenses, as a percentage of revenues, was attributable to additional
corporate overhead incurred following the March 1998 acquisition of STF, as
previously discussed.
Interest Expense
Interest expense was $214,000 in 1998, compared to $56,000 in 1997. Interest
expense was mainly due to debt from acquisitions made in prior years, the
conversion of the amount due to STF into an interest bearing note payable in May
1998, and a new debt financing completed in May 1998.
-13-
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES:
The Company had a working capital deficit of $6,887,000 at September 30, 1998,
compared to a deficit of $6,955,000 at December 31, 1997. Stockholders' deficit
at September 30, 1998 was $1,047,000, compared to stockholders' equity of
$1,165,000 at December 31, 1997.
Net cash used in operations for the nine-month period ended September 30, 1998
was $4,430,000. This was mainly due to the operating loss for the period,
approximately $1,300,000 in prepaid line commissions on debit phones shipped to
retailers and end users, and approximately $2,800,000 in accounts receivable
from the Company's CellEase distributors, partially offset by an increase in
accounts payable. For the nine-month period ended September 30, 1997, net cash
used in operations was $1,123,000. This was primarily due to the reduction in
accounts payable as a result of an improvement in the timeliness of payments to
carriers and other vendors.
Net cash used in investing activities for the nine-month period ended September
30, 1998 was $808,000. This was mainly attributable to the purchase of cellular
phones for rental operations and computer equipment to handle the CellEase
program, as well as deposit requirements by carriers for additional lines. For
the nine-month period ended September 30, 1997, net cash used in investing
activities was $243,000. This was primarily due to the purchase of computers and
related accessories.
During the nine-month period ended September 30, 1998, the Company received
$6,400,000 of debt financing. The Company continued to make required payments on
its existing debt. For the nine-month period ended September 30, 1997, the
Company raised cash of $1,953,000, net of expenses, through the sale of 656,667
Units. 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 Company also
borrowed $949,000 from its former parent, STF.
Management believes that the Company's current cash position is insufficient to
meet the requirements of the Company's operations and to sustain continued
growth of such operations. The Company is actively pursuing sources of funding
to meet such cash requirements. However, there can be no assurance that such
efforts will be successful.
-14-
<PAGE> 15
YEAR 2000
The Company has conducted a review of its computer systems and believes that the
majority of its systems are properly adapted to avoid a Year 2000 problem. The
Company believes that all its computer systems will be Year 2000 compliant by
April 1999. The expense incurred by the Company to achieve compliance has not
been material. The Company is currently working with outside vendors to obtain
assurances that they are Year 2000 compliant. However, there can be no assurance
that all of the Company's vendors, including carriers, will achieve compliance
on a timely basis. In the event of any such noncompliance by vendors, a material
adverse effect on the Company's operations could result. The Company has not
developed any contingency plan to address the possibility of vendor-related Year
2000 problems.
"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, the Year 2000 issue, and dependence on major customers
and relationships.
-15-
<PAGE> 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 material
adverse effect on the Company's financial condition, results of operations, or
cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27. Financial Data Schedule (filed only electronically with the SEC)
(b) REPORTS ON FORM 8-K
None
-16-
<PAGE> 17
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.
Date: November 12, 1998 By: /s/ Vincent DiVincenzo
Vincent DiVincenzo
Chief Financial Officer
(Chief Accounting Officer and
Duly Authorized Officer)
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 868
<SECURITIES> 0
<RECEIVABLES> 5990
<ALLOWANCES> 895
<INVENTORY> 120
<CURRENT-ASSETS> 10311
<PP&E> 3694
<DEPRECIATION> 2628
<TOTAL-ASSETS> 19245
<CURRENT-LIABILITIES> 17198
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0
0
<COMMON> 74
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<TOTAL-LIABILITY-AND-EQUITY> 19245
<SALES> 20746
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<CGS> 12286
<TOTAL-COSTS> 12286
<OTHER-EXPENSES> 10096
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</TABLE>
