<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, 1999
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 104, 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, 1999 was 8,432,630
<PAGE> 2
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited).
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1999 and 1998 4
Consolidated Statements of Operations for the Three Months Ended
September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 6-7
Notes to Consolidated Financial Statements
8-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 15-22
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 4. Submission of Matters to Vote of Security Holders. 23-24
Item 6. Exhibits and Reports on Form 8-K. 25-26
SIGNATURE 27
</TABLE>
<PAGE> 3
Item 1. Financial Statements
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
ASSETS
Current assets:
<S> <C> <C>
Cash $ 325,000 $ 229,000
Accounts receivable, less allowance for doubtful accounts
of $761,000 and $896,000 in 1999 and 1998 3,359,000 1,169,000
Carrier commissions receivable, less unearned income 408,000 992,000
Inventories 657,000 234,000
Prepaid expenses and other current assets 2,092,000 2,030,000
------------------ ----------------
Total current assets 6,841,000 4,654,000
------------------ ----------------
Telecommunications and office equipment, net 1,111,000 1,125,000
------------------ ----------------
Other assets:
Intangible assets, net 10,075,000 6,993,000
Deposits 737,000 715,000
------------------ ----------------
Total other assets 10,812,000 7,708,000
------------------ ----------------
$18,764,000 $13,487,000
================== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable and bank debt $ 2,182,000 $ 5,913,000
Accounts payable 6,469,000 7,439,000
Accrued expenses and other current liabilities 8,725,000 6,153,000
Deferred revenues 1,010,000 1,248,000
-------------- ----------------
Total current liabilities 18,386,000 20,753,000
-------------- ----------------
Notes payable, less current portion 2,340,000 2,829,000
-------------- ----------------
Series C redeemable preferred stock, issued
and outstanding 15,000 shares in 1999 14,820,000
-------------- ----------------
Stockholders' deficit:
Preferred Stock,$.01 par value, authorized 5,000,000 shares
Common Stock, $.01 par value, authorized 20,000,000 shares,
issued and outstanding 8,279,000 shares in 1999
and 7,567,000 in 1998 83,000 76,000
Capital in excess of par value 23,430,000 18,183,000
Accumulated deficit (40,295,000) (28,354,000)
-------------- ----------------
Total stockholders' deficit (16,782,000) (10,095,000)
-------------- ----------------
$18,764,000 $13,487,000
============= ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 4
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Revenues $19,975,000 $20,746,000
Cost of revenues 15,052,000 12,286,000
------------- --------------
Gross margin 4,923,000 8,460,000
Selling, general and administrative expenses 14,931,000 9,182,000
Bad debt expense 906,000 914,000
------------- --------------
Loss from operations (10,914,000) (1,636,000)
Interest expense, net (424,000) (398,000)
------------- --------------
Loss before income taxes (11,338,000) (2,034,000)
Income taxes (7,000) (3,000)
------------- --------------
Net loss (11,345,000) (2,037,000)
Preferred stock dividends (4,614,000) 0
------------- --------------
Net loss applicable to common stock ($15,959,000) ($2,037,000)
============= ==============
Basic and diluted loss per common share ($2.04) ($0.28)
============= ==============
Weighted average number of common shares
outstanding 7,839,159 7,331,503
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 5
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended September 30,
<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
Revenues $7,893,000 $8,639,000
Cost of revenues 5,631,000 5,135,000
------------- -----------
Gross margin 2,262,000 3,504,000
Selling, general and administrative expenses 5,259,000 3,955,000
Bad debt expense 237,000 356,000
------------- -----------
Loss from operations (3,234,000) (807,000)
Interest expense, net (175,000) (214,000)
------------- -----------
Loss before income taxes (3,409,000) (1,021,000)
Income taxes 0 0
------------- -----------
Net loss (3,409,000) (1,021,000)
Preferred stock dividends (233,000) 0
------------ -----------
Net loss applicable to common stock ($3,642,000) ($1,021,000)
============== ===========
Basic and diluted loss per common share ($0.45) ($0.14)
============= ===========
Weighted average number of common shares outstanding 8,148,113 7,405,570
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 6
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss, before preferred stock dividend ($11,345,000) ($2,037,000)
Adjustments to reconcile net loss to net cash
used in operating activities;
Accretion of interest 42,000
Depreciation and amortization 1,010,000 889,000
Common stock issued for compensation
and services 129,000 85,000
Change in assets and liabilities:
Accounts receivable (2,190,000) (3,458,000)
Carrier commissions receivable 584,000 (1,435,000)
Inventories (423,000) 11,000
Prepaid expenses and other current assets (62,000) (2,503,000)
Accounts payable and other current liabilities 1,602,000 3,985,000
Deferred revenue (238,000) 33,000
-------------- -------------
Net cash used in operating activities (10,891,000) (4,430,000)
-------------- -------------
Cash flows from investing activities:
Increase in deposits (22,000) (301,000)
Purchases of equipment (391,000) (507,000)
Payments for intangible assets (855,000)
------------ -----------
Net cash used in investing activities (1,268,000) (808,000)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 6,400,000
Borrowings from financial facility 1,831,000
Payments on notes payable (4,282,000) (485,000)
Payments to former parent (1,411,000) (210,000)
Issuance of common and preferred stock 14,499,000
Exercise of warrants and options 1,618,000 107,000
------------ -----------
Net cash provided by financing activities 12,255,000 5,812,000
------------ -----------
Net increase in cash 96,000 574,000
Cash, beginning of period 229,000 294,000
------------ -----------
Cash, end of period $325,000 $868,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 7
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) (continued)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest $516,000 $346,000
========= ========
Income taxes $7,000 $3,000
========= ========
Supplemental disclosure of noncash investing
and financing activities:
Cancellation of common stock to settle
outstanding receivable $0 $367,000
========= ========
Issuance of warrants in connection with certain
promissory notes $0 $100,000
========= ========
Cashless exercise of 500,000 Common Stock warrants
into 250,519 shares of the Company's Common Stock $0 $3,000
========= ========
Cashless conversion of 200 shares of Series C Preferred Stock
into 29,595 shares of the Company's Common Stock $207,000 $0
========== ========
Cashless conversion of $200,000 of 5% Convertible Notes Payable
into 40,000 shares of the Company's Common Stock $200,000 $0
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 8
Shared Technologies Cellular, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999 (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, 1998 report on Form 10-K. Certain
reclassifications to prior year financial statements were made in order to
conform to the 1999 presentation. The consolidated financial statements included
herein are not necessarily indicative of the results for the fiscal year ending
December 31, 1999.
2. REVENUE RECOGNITION. Debit, or prepaid, card revenue is recognized over the
estimated period in which the Company provides debit cellular service to its
customers. Customers purchase debit cellular service by buying debit cards at
various national retailers and calling the Company to activate, or redeem, the
debit cards. Customers may also call the Company directly to purchase debit
cellular service. The Company gives the customer a series of numeric codes that
are input into the customer's phone that allow it to be activated for a specific
number of minutes and days. The actual number of minutes will vary based upon
the denomination of the card and the type of calls made (local or roaming). A
typical debit card with a face value of $30 expires 60 days after redemption.
However, the Company's experience indicates that most of the airtime is used
within the first 30 days of redemption. Rental and activations revenues are
recognized as the services are provided.
3. SERIES C PREFERRED STOCK. In February 1999, the Company completed a $15
million private placement of 15,000 shares of Series C Convertible Preferred
Stock ("Series C Shares"). Each purchaser of the Series C Shares has the right,
upon the occurrence of certain events, to require the Company to redeem all or
any part of such purchaser's Series C Shares. Therefore, the Series C Shares
have not been reflected in Stockholders' Deficit. The number of shares of Common
Stock issuable upon the conversion of the Series C Shares includes a premium of
6%, per annum. The Company accounted for the premium of 6% as a preferred stock
dividend. The Series C private placement also included Warrants to purchase an
aggregate of 300,000 shares of common stock of the Company ("Common Stock"). The
Warrants were valued at $75,000 and the value was treated as a "discount" to the
Series C Shares and such discount is being accreted as a preferred stock
dividend over the five-year term of the Warrants. In accordance with Emerging
Issues Task Force Topic D-60, the Company recognized a beneficial conversion
feature in the amount of $4,018,000 as a one-time non-cash preferred stock
dividend in the first quarter of 1999. The amount represented the difference
between the conversion price of $7 per share at the date of issuance of the
Series C Shares, February 5, 1999, and the $8 7/8 market price of Common Stock
at that date.
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<PAGE> 9
4. REVOLVING CREDIT FACILITY. In July 1999, the Company entered into a $10
million two-year revolving credit facility with State Street Bank and Trust
Company (the "Bank"). The availability of the credit facility is based on a
percentage of eligible receivables and includes covenants requiring certain
levels of prepaid lines and operating results over time. Advances under the loan
are to be used for working capital and general corporate purposes. The loan is
secured by substantially all of the Company's assets. As of September 30, 1999,
the Company had approximately $4,640,000 available under the terms of the credit
facility; of which $1,831,000 was outstanding and an additional $750,000 was
committed to support various letters of credit. In connection with the loan, the
Company issued to the Bank a ten-year warrant for the purchase of 150,000 shares
of Common Stock at an exercise price of $10 per share, subject to certain
adjustments. The warrant is redeemable by the Bank any time after July 7, 2002
for a minimum redemption price of $200,000. The Company accounted for the
$200,000 as additional interest and the amount will be accreted as interest over
the two-year term of the credit facility.
5. ACQUISITION OF RETAIL CELLULAR, INC. In July 1999, the Company completed the
acquisition of all of the issued and outstanding capital stock of Retail
Cellular, Inc. ("RCI"), for a purchase price of 150,000 shares of Common Stock.
RCI became a wholly-owned subsidiary of the Company. The transaction enhanced
the Company's sales capabilities, particularly in connection with the
distribution of the Company's prepaid cellular services. The Company purchased
RCI from Retail Distributors, Inc. ("RDI"), the chief executive officer of which
is Victor Grillo, Sr., who was elected to the Company's Board of Directors on
July 7, 1999 at the annual meeting of the Company's stockholders. As part of the
acquisition transaction, the Company entered into a Services Agreement with RDI,
pursuant to which RDI provides certain services relating to the marketing and
distribution of the Company's prepaid cellular services. Pursuant to terms of
the Services Agreement, which was retroactive to February 8, 1999, the Company
paid RDI approximately $843,000 and issued to RDI 118,194 shares of Common
Stock. Additional compensation, exclusive of expenses, is performance based,
payable through the issuance of Common Stock purchase warrants. Also, RCI
entered into a Consulting Agreement with RDI, expiring March 31, 2001, pursuant
to which RDI provides certain sales and marketing services.
6. 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. Diluted loss per common share is the same as basic
loss per common share for the nine-month periods ended September 30, 1999 and
1998. The Company had issued and outstanding unexercised options to purchase
1,131,000 and 697,000 shares of Common Stock as of September 30, 1999 and 1998,
respectively, and Common Stock warrants to purchase 3,345,000 and 3,445,000
shares of Common Stock as of September 30, 1999 and 1998, respectively. The
Company also had issued and outstanding 5%
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<PAGE> 10
convertible notes which are convertible at any time at the option of the
noteholders into 440,000 and 480,000 shares of the Company's Common Stock as of
September 30, 1999 and 1998, respectively. In addition, as of September 30,
1999, the Company had issued and outstanding 14,800 shares of Series C Shares,
which are currently convertible into approximately 2,207,000 shares of Common
Stock. Basic and diluted earnings per share computations were the same because
all other securities would have been antidilutive as a result of the Company's
losses.
7. LITIGATION. In January 1999, the Company filed a lawsuit against SmarTalk
TeleServices, Inc. ("SmarTalk") and certain individuals in the U.S. District
Court for the District of Connecticut. SmarTalk was the main distributor of the
Company's end-user debit program marketed under the CellEase brand name. The
Company's complaint includes allegations of breach of contract and fraud in
connection with various agreements between SmarTalk and the Company. SmarTalk
subsequently filed for federal bankruptcy protection. The Company's complaint
seeks recovery of $25 million in damages, and the Company has filed a proof of
claim with the bankruptcy court (U.S. Bankruptcy Court, District of Delaware)
for $14.4 million. The Company intends to aggressively prosecute its claim,
although due to SmarTalk's impaired financial condition, the amount of any
recovery against SmarTalk is questionable.
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.
8. LIQUIDITY. The Company incurred losses during the four most recent fiscal
years, as well as the nine-month period ended September 30, 1999, and had a
working capital deficit of $11,545,000 at September 30, 1999. In October 1999,
the Company raised $6.1 million through a private placement of equity (See "Item
10. Subsequent Event" below). The Company's liquidity is dependent on its
ability to attain profitable operations in a timely manner or raise additional
financing.
9. SEGMENT INFORMATION. Segment information listed below reflects the three
principal business units of the Company. Each segment is managed according to
the products which are provided to the respective customers and information is
reported on the basis of reporting to the Company's Chief Operating Decision
Maker ("CODM"). The Company's CODM uses segment information relating to the
operations of each segment. However, a segment balance sheet is not prepared or
used by the CODM.
Operating segment information for the nine-month periods ended September 30,
1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
Rental Debit Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
1999
Revenues $9,902,000 $9,212,000 $861,000 $19,975,000
---------- ---------- -------- -----------
Income (loss) before
income taxes $558,000 $(7,391,000) $(16,000) $(4,489,000) $(11,338,000)
-------- ------------ --------- ------------ -------------
</TABLE>
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<PAGE> 11
<TABLE>
<CAPTION>
Rental Debit Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
1998
Revenues $10,613,000 $8,996,000 $1,137,000 $20,746,000
----------- ---------- ---------- -----------
Income (loss) before
income taxes $(319,000) $1,295,000 $(259,000) $(2,751,000) $(2,034,000)
---------- ---------- ---------- ------------ -----------
</TABLE>
Operating segment information for the three-month periods ended September 30,
1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
Rental Debit Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
1999
Revenues $3,459,000 $4,117,000 $317,000 $7,893,000
---------- ---------- -------- ----------
Income (loss) before
income taxes $319,000 $(2,112,000) $5,000 $(1,621,000) $(3,409,000)
-------- ------------ ------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Rental Debit Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
1998
Revenues $3,832,000 $4,466,000 $341,000 $8,639,000
---------- ---------- -------- ----------
Income (loss) before
income taxes $(76,000) $501,000 $(107,000) $(1,339,000) $(1,021,000)
--------- -------- ---------- ------------ -----------
</TABLE>
10. SUBSEQUENT EVENT. In October 1999, the Company closed a $6.1
million private placement of equity with three investors, led by SIB Investment
Holdings Limited, a wholly owned subsidiary of Saudi International Bank.
International Capital Partners, LLC of Stamford, Connecticut and Oakes,
Fitzwilliams & Co. S.A. of London acted as placement agents for the Company in
connection with this private placement.
Pursuant to a Securities Purchase Agreement entered into between the
Company and the investors (the "Securities Purchase Agreement"), the Company
issued an aggregate of 6,100 shares of a new Series D Convertible Preferred
Stock, $.01 per share. Each share of Series D Convertible Preferred Stock is
convertible into Common Stock of the Company in accordance with the formula
described below. The Company intends to use the proceeds from the offering for
general corporate purposes.
Description of Series D Convertible Preferred Stock. The following
description of the rights and preferences of the Series D Convertible Preferred
Stock is a summary, and is qualified in its entirety by reference to the entire
text of the Certificate of Designations, Preferences and Rights of the Series D
Convertible Preferred Stock (the "Certificate of Designation"), which was
attached as an exhibit to the Form 8-K filed on October 12, 1999.
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<PAGE> 12
Voting. The holders of shares of Series D Convertible
Preferred Stock are not entitled to vote with respect to the business,
management or affairs of the Company.
For so long as any shares of Series D Convertible Preferred
Stock are outstanding, the following matters, however, will require the approval
of the holders of a majority of the outstanding shares of Series D Convertible
Preferred Stock:
i. altering, changing, modifying or amending the terms of the
Series D Convertible Preferred Stock or the terms of any other
stock of the Company so as to adversely affect the Series D
Convertible Preferred Stock;
ii. creating any new class or series of capital stock having a
preference over or ranking pari passu with the Series D
Convertible Preferred Stock as to redemption or distribution
of assets upon a Liquidation Event (as defined in the
Certificate of Designation) or any other liquidation,
dissolution or winding up of the Company;
iii. increasing the authorized number of shares of Series D
Convertible Preferred Stock;
iv. reissuing any shares of Series D Convertible Preferred
Stock which have been converted or redeemed in accordance with
the terms of the Certificate of Designation;
v. issuing any Pari Passu Securities or Senior Securities
(each as defined in the Certificate of Designation) (other
than non-convertible debt securities or debt securities which
are convertible into or exchangeable for Common Stock of the
Company or any other equity or convertible security of the
Company junior to the Series D Convertible Preferred Stock);
vi. redeeming, declaring, paying or making any provision for
any dividend or distribution with respect to the Common Stock
of the Company or any other capital stock of the Company
ranking junior to the Series D Convertible Preferred Stock as
to the distribution of assets upon liquidation, dissolution or
winding up of the Company; and
vii. issuing any Series D Convertible Preferred Stock except
pursuant to the terms of the Securities Purchase Agreement, a
copy of which was attached as an exhibit to Form 8-K, filed by
the Company with the Securities and Exchange Commission on
October 12, 1999.
Dividends. The Series D Convertible Preferred Stock will not
bear dividends.
Liquidation. Upon the liquidation, dissolution or winding up
of the Company, the holders of Series D Convertible Preferred Stock, before any
distribution to the holders of Junior Securities (as defined in the Certificate
of Designation) but after payment to holders of Senior Securities, will be
entitled to receive an amount equal to the Stated Value (defined below) plus the
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<PAGE> 13
Premium (defined below) accrued on its Series D Convertible Preferred Stock in
accordance with the terms of the Certificate of Designation (the "Liquidation
Preference"). Any liquidation payments to the holders of the Series D
Convertible Preferred Stock will be made pari passu with liquidation payments to
the holders of the Company's Series C Convertible Preferred Stock.
Conversion. Each share of Series D Convertible Preferred Stock
is convertible into shares of Common Stock of the Company in accordance with the
following formula:
Number of Shares of = Stated Value plus accrued Premium
Common Stock Issuable Conversion Price
The "Stated Value" is equal to $1,000 per share. The "Premium" is equal to 6%
per annum of the Stated Value, accruing from the date of issuance of the Series
D Convertible Preferred Stock through and including the date of conversion,
payable in Common Stock or cash, at the Company's option (subject to certain
conditions), upon conversion. The Premium will be accounted for as a non-cash
preferred stock dividend. The anticipated impact of the preferred stock dividend
on the Company's financial statements is expected to be approximately $ 92,000
per quarter, until conversion. The "Conversion Price" is $8.875 (subject to
adjustment for anti-dilution events), which was the market price for the
Company's Common Stock on October 1, 1999, the effective date of the sale of the
Series D Convertible Preferred Stock.
If, following conversion, the Company fails to deliver shares
of its Common Stock to an investor in accordance with the Certificate of
Designation, it may incur monetary and other penalties (including, in certain
circumstances, mandatory redemption of the Series D Convertible Preferred
Stock).
On October 1, 2004, all shares of Series D Convertible
Preferred Stock then outstanding will be automatically converted into shares of
Common Stock at the then-prevailing Conversion Price.
Mandatory Conversion. The Company has the right to require
conversion of all of the outstanding shares of Series D Convertible Preferred
Stock at any time after October 1, 2000 if the closing sale price for the
Company's Common Stock, as reported by the principal securities exchange or
trading market where the Common Stock is listed or traded, is greater than
$18.00 for fifteen (15) consecutive trading days, subject to satisfaction of
certain conditions set forth in the Certificate of Designation.
Mandatory Redemption. Each purchaser of Series D Convertible
Preferred Stock has the right, upon the occurrence of a Mandatory Redemption
Event (as such term is defined in the Certificate of Designation), to require
the Company to redeem all or any part of such purchaser's Series D Convertible
Preferred Stock for a price (the "Mandatory Redemption Price") equal to the
greater of (a) the Liquidation Preference of the shares being redeemed
multiplied by 115% and (b) an amount calculated on the basis of the Conversion
Price and the price at which the Common Stock of the Company is then trading.
Therefore, the Series D Convertible Preferred Stock will not be reflected in
Stockholders' Deficit in the Company's financial statements.
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<PAGE> 14
If the Corporation fails to pay the Mandatory Redemption Price
within ten (10) business days of the mandatory redemption date, the holder of
Series D Convertible Preferred Stock shall have the right to regain its rights
as such a holder and, upon written notice to such effect from the holder, the
Company shall return to such holder the certificates representing the Series D
Convertible Preferred Stock delivered to the Company in connection with the
mandatory redemption. In such event, the Conversion Price otherwise applicable
to future conversions of the Series D Convertible Preferred Stock shall be
reduced by one percent for each day beyond such tenth business day in which the
failure to pay continued, until the date of such notice, but the maximum
reduction of the Conversion Price shall be fifty percent.
Description of the Registration Rights Agreement. In
accordance with the Securities Purchase Agreement, the Company entered into a
Registration Rights Agreement with the investors, pursuant to which at any time
from and after January 1, 2000 until October 1, 2004, and upon the written
request of one or more of the investors holding in the aggregate at least fifty
(50%) of the registrable securities held by the investors, the Company is
required to file with the Securities and Exchange Commission a registration
statement on Form S-3 covering the resale of the Common Stock issuable upon
conversion of the Series D Convertible Preferred Stock. The Registration Rights
Agreement also provides the investors with piggy-back registration rights in the
event the Company at any time prior to October 1, 2004 proposes to register any
of its securities for an underwritten offering.
Placement Agent Fees and Warrants. In consideration for their
private placement services, the Company paid to the placement agents cash
commissions equal to 5% of the aggregate purchase price paid by the investors
for the Series D Convertible Preferred Stock. In further consideration for their
placement services, the Company issued to the placement agents five-year
warrants to purchase up to an aggregate of 122,000 shares of the Company's
Common Stock at an exercise price of $11.09 per share, which price was 25%
greater than the Conversion Price of the Series D Convertible Preferred Stock.
The placement fee and warrants will be treated as a "discount" to the Series D
Convertible Preferred Stock and such discount will be accreted as interest
expense over time.
-14-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Nine Months Ended September 30, 1999 compared to Nine Months Ended September 30,
1998
Revenues for 1999 were $19,975,000, compared to $20,746,000 for 1998, a decrease
of $771,000. The net loss applicable to Common Stock for 1999 was $15,959,000,
compared to $2,037,000 for 1998. The net loss applicable to Common Stock for
1999 included a one-time non-cash preferred stock dividend of $4,018,000, $0.51
per share, attributable to the beneficial conversion feature in connection with
the Company's issuance of its Series C Convertible Preferred Stock, in February
1999. The net loss per Common Stock was $2.04 for 1999, which included such
one-time charge, compared to a net loss of $0.28 for 1998.
Revenues
Debit, or prepaid, operations had revenues of $9,212,000 for 1999, compared to
$8,996,000 for 1998. The increase in revenues of $216,000 (2%) was due to growth
of the co-branded end-user program with MCI WorldCom marketed under the
Company's CellEase brand name. The CellEase program, which was introduced in
April 1998, generated most of the 1999 debit revenues, with 59% more revenues in
1999, compared to 1998. Revenues from the CellEase program for 1998 were
$5,728,000. The balance of the 1998 debit revenues ($3,268,000) were from a
major distributor which discontinued its prepaid cellular phone business and
transitioned a small portion of its customers over to the Company's CellEase
end-user program in the fourth quarter of 1998.
In February 1999, the Company signed an agreement with MCI WorldCom for the
retail distribution of the Company's prepaid cellular services under the MCI
WorldCom brand name, utilizing MCI WorldCom's extensive network of retail
distribution locations. In July 1999, the Company purchased Retail Cellular,
Inc. ("RCI") from Retail Distributors, Inc. ("RDI") and entered into a Services
Agreement with RDI for support in the marketing, sale and distribution of the
Company's debit cellular services. See "Item 5. Acquisition of Retail Cellular,
Inc.".
The Company's cellular phone rental operations had revenues of $9,902,000 for
1999, compared to $10,613,000 for 1998. The decrease of $711,000 (7%) was
attributable to a drop in the average revenue per rental agreement to $116 for
1999, from $138 for 1998. Such decrease in revenue per rental agreement was due
to price discounts offered in connection with market testing of the price
elasticity of the Company's product offering. During 1999, the Company ran
various special promotions, such as "first 10 minutes free". Such promotions
were primarily responsible for the number of rental agreements increasing by 9%,
to 83,000 for 1999. Based on the success of such promotions, the Company, in
August 1999, entered into an agreement with Nextel Communications naming the
Company as an authorized representative for Nextel products and services. In
mid-August 1999, the Company and Nextel introduced a digital phone program on a
regional basis, with a national rollout planned for the first quarter of 2000.
Under the program, rental car customers will be able to rent Nextel's
feature-rich i1000plus or i500plus digital phones, with an option to purchase
such phones.
-15-
<PAGE> 16
The Company's cellular activation operations had revenues of $861,000 for 1999,
compared to $1,137,000 for 1998. The decrease of $276,000 (24%) was mainly
attributable to $260,000 in revenues in 1998 related to a test program with a
national retailer that was terminated in September 1998. The balance of the
decrease was due to the Connecticut activation location generating lower
revenues due to a cutback in the sales staff. The Company closed the Connecticut
activation location in November 1999, due to a reduction in the activation
commission offered by the local cellular carrier.
Gross Margin
Gross margin was 25% of revenues for 1999, compared to 41% for 1998. The
decrease in gross margin was mainly due to a change in the revenue mix together
with a deterioration of gross margin for the debit operations. The following
table summarizes the change in the revenues mix and the corresponding gross
margins for the two periods:
<TABLE>
<CAPTION>
1999 1998
Revenues Gross margin Revenues Gross margin
<S> <C> <C> <C> <C>
Debit 46% (15%) 43% 33%
Rental 50% 60% 51% 47%
Activation 4% 35% 6% 46%
100% 25% 100% 41%
</TABLE>
As anticipated, gross margin for the debit operations for 1999 was disappointing
due to problems associated with SmarTalk TeleServices, Inc. ("SmarTalk"). In
December 1998, the Company's relationship with SmarTalk was terminated and,
subsequently the Company filed a lawsuit against SmarTalk (see "Legal
Proceedings"). Prior to the termination of its relationship with SmarTalk, the
Company was anticipating an increase in volume in the fourth quarter of 1998. By
the middle of the fourth quarter of 1998, the Company had approximately 63,000
active customers and was experiencing a growth rate of over 15% per month. To
help facilitate the rapid growth, the Company maintained a reserve of
approximately one month's line requirement. As a result of the termination of
the SmarTalk relationship, the Company did not maintain its growth rate and, in
addition, the Company's customer base began to deteriorate due to the lack of
availability of prepaid usage cards needed for existing customers to maintain
service. Consequently, a significant gap was created between active lines with
customers, as compared to committed lines with carriers. In January 1999, the
Company signed a letter of intent with MCI WorldCom for the retail distribution
of the Company's prepaid cellular service. As a result, the Company made the
decision to maintain many of its existing lines with carriers, in an effort to
minimize line termination fees, in anticipation of the launch of the MCI
WorldCom program in the second quarter of 1999. As of September 30, 1999, the
Company had reduced the significant gap between active lines and committed lines
by adding new customers and returning some excess lines to carriers. As a
result, the gross margin percentage for the third quarter of 1999 was
significantly better than for the first and second quarters of 1999.
-16-
<PAGE> 17
Gross margin for the cellular phone rental operations increased by 20% in 1999,
compared to 1998, due to lower carrier charges. In addition, the Company was
able to improve its gross margin by passing on certain charges it was previously
incurring. Gross margin for the activation operations decreased in 1999 due to
the national MOVE program making up a larger portion of the activation revenues.
The MOVE program historically has had lower gross margins than the Connecticut
activation program. The MOVE program provides cellular service activations for
customers who move from one cellular market to another.
Selling, General & Administrative Expenses
Selling, general and administrative expenses (SG&A) were $14,931,000 for 1999,
compared to $9,182,000 for 1998, an increase of $5,749,000 (63%). As a
percentage of revenues, SG&A increased to 75% for 1999, compared to 44% for
1998. The increase was attributable to several factors. The Company incurred
additional corporate overhead following the March 1998 acquisition of Shared
Technologies Fairchild Inc. ("STFI") by Intermedia Communications, Inc. STFI,
the former parent of the Company, had been providing certain support and
management services to the Company under a management agreement. Such expenses
included payroll for certain employees of STFI who had not previously received
direct compensation from the Company. Field SG&A, as a percentage of revenues,
increased significantly to 54% for 1999, compared to 33% for 1998. During the
fourth quarter of 1998, the Company added a new call center in Hartford,
expanded its existing call center in St. Louis and continued to invest in its
corporate support in anticipation of the significant growth the Company expected
from the debit operations, which did not occur, as previously discussed. Also,
in February 1999, the Company signed a letter of intent with RDI for support in
the marketing, sale and distribution of the Company's debit cellular services.
The Company had incurred expenses in anticipation of its entry into a services
agreement with RDI, which agreement was signed in July 1999 as part of the
Company's acquisition of RCI. The Company anticipates an increase in revenues
from debit operations and an improvement in SG&A, as a percentage of revenues,
as a result of the MCI WorldCom program and the Company's relationship with RDI.
Bad Debt Expense
Bad debt expense was $906,000 for 1999, compared to $914,000 for 1998, a
decrease of $8,000 (1%). As a percentage of revenues, bad debt expense was
approximately 5% for 1999 and 1998. The decrease in bad debt expense for 1999,
compared to 1998, was due to an improvement in the collection procedures in the
Rental Division. The Company records an allowance for uncollectible receivables
from revenues related to third parties generated through the ordinary course of
business. The Company regularly reviews uncollected receivables and writes off
any that are deemed uncollectible against the allowance.
-17-
<PAGE> 18
Interest Expense
Interest expense was $424,000 for 1999, compared to $398,000 for 1998. Interest
expense was mainly due to debt from acquisitions made in prior years, debt to
STFI, debt financing completed in May 1998 and the revolving credit facility
with State Street Bank and Trust Company established in July 1999. In February
1999, the Company used a portion of the $15 million private equity placement
proceeds to repay $1,411,000 of the STFI debt and $4 million of the May 1998
debt.
Preferred Stock Dividend
In February 1999, the Company completed a $15 million private placement of
15,000 shares of Series C Convertible Preferred Stock ("Series C Shares"). The
number of shares of Common Stock issuable upon the conversion of the Series C
Shares includes a premium of 6%, per annum, payable in cash or shares of Common
Stock at the option of the Company. The Company accounted for the premium of 6%
as a non-cash preferred stock dividend. The Series C Shares also included
Warrants to purchase an aggregate of 300,000 shares of Common Stock. The
Warrants were valued at $75,000 and the value was treated as a "discount" to the
Series C Shares and such discount is being accreted as a preferred stock
dividend over the five-year term of the Warrants. The anticipated impact of the
non-cash 6% preferred stock dividend on the Company's financial statements is
expected to be approximately $227,000 per quarter. In accordance with Emerging
Issues Task Force Topic D-60, the Company recognized a beneficial conversion
feature in the amount of $4,018,000 as a one-time non-cash preferred stock
dividend in the first quarter of 1999. The amount represented the difference
between the conversion price of $7 per share at the date of the issuance of the
Series C Shares, February 5, 1999, and the $8 7/8 market price of the Common
Stock at that date.
Three Months Ended September 30, 1999 compared to Three Months Ended September
30, 1998
Revenues for the third quarter of 1999 were $7,893,000, compared to
$8,639,000 for the second quarter of 1998, a decrease of $746,000 (9%). The net
loss applicable to Common Stock for 1999 was $3,642,000, compared to $1,021,000
for 1998.
Revenues
In the third quarter, the Company's debit operations had revenues of $4,117,000
for 1999, compared to $4,466,000 for 1998. The decrease in revenues of $349,000
(8%) was due to a loss of revenues from a major distributor who discontinued its
prepaid cellular phone business and transitioned a small portion of its
customers over to the Company's CellEase end-user program in the fourth quarter
of 1998. During the third quarter of 1998, the distributor had revenues of
approximately $895,000.
-18-
<PAGE> 19
In the third quarter, the Company's cellular phone rental operations had
revenues of $3,459,000 for 1999, compared to $3,832,000 for 1998. The decrease
of $373,000 (10%) was attributable to a drop in the average revenue per rental
agreement to $121 for 1999, from $141 for 1998. Such decrease in revenue per
rental agreement was due to price discounts offered in connection with market
testing of the price elasticity of the Company's product offering. During 1999,
the Company ran various special promotions, such as "first 10 minutes free".
Such promotions were primarily responsible for the number of rental agreements
increasing slightly in the third quarter of 1999, compared to the third quarter
of 1998.
In the third quarter, the Company's cellular activation operations had revenues
of $317,000 for 1999, compared to $341,000 for 1998. The decrease of $24,000
(7%) was attributable to $54,000 in revenues in the third quarter of 1998
related to a test program with a national retailer that was terminated in
September 1998.
Gross Margin
In the third quarter, gross margin was 29% of revenues for 1999, compared to 41%
for 1998. The decrease in gross margin was mainly due to a deterioration of
gross margin for the debit operations. The following table summarizes the
revenues by segment and the corresponding gross margins for the two periods:
<TABLE>
<CAPTION>
1999 1998
Revenues Gross margin Revenues Gross margin
<S> <C> <C> <C> <C>
Debit 44% 2% 45% 34%
Rental 52% 60% 50% 48%
Activation 4% 28% 5% 47%
100% 29% 100% 41%
</TABLE>
Gross margin for the debit operations was disappointing due to problems
associated with SmarTalk, as previously discussed. Gross margin for the cellular
phone rental operations improved due to lower carrier charges. In addition, the
Company was able to improve its gross margin by passing on certain charges it
was previously incurring. Gross margin for the activation operations decreased
due to the national MOVE program making up a larger portion of the activation
revenues. The MOVE program historically has had lower gross margins than the
Connecticut activation program.
Selling, General & Administrative Expenses
In the third quarter, SG&A were $5,259,000 for 1999, compared to $3,955,000 for
1998, an increase of $1,304,000 (33%). As a percentage of revenues, SG&A
increased to 67% for 1999, compared to 46% for 1998. In February 1999, the
Company signed a letter of intent with RDI for support in the marketing, sale
and distribution of the Company's debit cellular services. The Company had
incurred expenses in anticipation of its entry into a definitive agreement with
RDI,
-19-
<PAGE> 20
which agreement was signed in July 1999 as part of the Company's acquisition of
RCI. In addition, during the fourth quarter of 1998, the Company added a new
call center in Hartford, expanded its existing call center in St. Louis and
continued to invest in its corporate support in anticipation of the significant
growth the Company expected from the debit operations, which did not occur, as
previously discussed. The Company anticipates an increase in revenues from debit
operations and an improvement in SG&A, as a percentage of revenues, as a result
of the MCI WorldCom program and the Company's relationship with RDI.
Bad Debt Expense
In the third quarter, bad debt expense was $237,000 for 1999, compared to
$356,000 for 1998, a decrease of $119,000 (33%). As a percentage of revenues,
bad debt expense was 3% for 1999, compared to 4% for 1998. The improvement was
mainly due to better collection procedures in the Rental Division.
Interest Expense
In the third quarter, interest expense was $175,000 for 1999, compared to
$214,000 for 1998. Interest expense was mainly due to debt from acquisitions
made in prior years, debt to STFI, debt financing completed in May 1998 and the
revolving credit facility established with State Street Bank and Trust Company
in July 1999. In February 1999, the Company used a portion of the $15 million
private equity placement proceeds to repay $1,411,000 of the STFI debt and $4
million of the May 1998 debt.
Preferred Stock Dividend
In the third quarter, the Company recognized a $233,000 non-cash preferred stock
dividend due to the 6% premium and the accretion of the warrants related to the
Series C Shares issued in February 1999.
LIQUIDITY AND CAPITAL RESOURCES:
The Company had a working capital deficit of $11,545,000 at September 30, 1999,
compared to a deficit of $16,099,000 at December 31, 1998. Stockholders' deficit
at September 30, 1999 was $16,782,000, compared to a deficit of $10,095,000 at
December 31, 1998.
Net cash used in operations for the nine-month period ended September 30,1999
was $10,891,000. This was mainly due to the operating loss for the period and
approximately $2,938,000 in additional accounts receivable from the Company's
CellEase distributors, partially offset by an $807,000 decrease in cellular
rental receivables and an increase in accounts payable. Carrier commissions
receivable mainly pertains to commissions the Company is entitled to receive for
carrier lines the Company activates. During fiscal 1998, the Company added over
60,000 new carrier lines and was entitled to a commission on a small portion of
those new lines. The Company recorded approximately $2.2 million of carrier
commissions in fiscal 1998, of which approximately $2.0 million was collected as
of September 30, 1999. The Company defers the recognition of the
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<PAGE> 21
carrier commissions over a 12-month period, the estimated average customer life.
For the nine-month period ended September 30, 1998 net cash used in operations
was $4,430,000. This was primarily due to the operating loss for period as well
as approximately $1,300,000 in additional prepaid line activation commissions on
debit phones shipped to retailers and end users, and approximately $2,800,000 in
additional accounts receivable from the Company's CellEase distributors,
partially offset by an increase in accounts payable.
Net cash used in investing activities for the nine-month period ended September
30, 1999 was $1,268,000. This included payments of $855,000 related to the
acquisition of RDI, and $391,000 for the purchase of computers and related
accessories. For the nine-month period ended September 30, 1998, net cash used
in investing activities was $808,000. This was mainly attributable to the
purchase of computer equipment to handle the CellEase program and security
deposit requirements by carriers for additional lines.
During the nine-month period ended September 30, 1999, the Company raised
$14,499,000, net of expenses, in a private equity placement of Series C Shares
and related Common Stock purchase warrants. In addition, approximately 355,000
unrelated warrants and options were exercised, raising an additional $1,618,000.
The Company used a portion of these proceeds to repay $1,411,000 of debt owed to
its former parent, STFI, and $4,000,000 of debt financing raised in May 1998.
The Company continued to make required payments on its existing debt. For the
nine-month period ended September 30, 1998, the Company received $6,400,000 of
debt financing that was completed in May 1998.
In October 1999, the Company raised $6.1 million through a private placement of
Series D Convertible Preferred Stock, the proceeds from which were to be used
for general corporate purposes. See "Item 10. Subsequent Event" for a detailed
description. In addition, the Company has a $10 million two-year revolving
credit facility, the availability of which is based on a percentage of eligible
receivables. See "Item 4. Revolving Credit Facility" for a detailed description.
Management believes that ongoing operations, together with the existing
financing, should provide the Company with sufficient funds to finance
operations for at least the next 12 months. However, the Company's long-term
liquidity is dependent on its ability to attain profitable operations in a
timely manner or its ability to continue to raise capital, as necessary.
YEAR 2000 COMPLIANCE:
The Company believes that all key systems are properly adapted to avoid a Year
2000 problem. 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 to the Company's operations and financial results could occur.
The Company has a contingency plan in place to address the possibility of a Year
2000 related problem.
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<PAGE> 22
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: 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, DEPENDENCE ON MAJOR CUSTOMERS AND RELATIONSHIPS,
DEPENDENCE ON RELATIONSHIPS WITH TECHNOLOGY LICENSERS AND TELECOMMUNICATIONS
CARRIERS, AND THE COMPANY'S ABILITY TO EFFECTIVELY EXECUTE ITS BUSINESS PLAN
WITH RESPECT TO SIGNIFICANT PROJECTED GROWTH IN ITS DEBIT SERVICES DIVISION, IN
PARTICULAR, WITH RESPECT TO ITS VENTURE WITH MCI WORLDCOM.
-22-
<PAGE> 23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In January 1999, the Company filed a lawsuit against SmarTalk TeleServices, Inc.
("SmarTalk") and certain individuals in the U.S. District Court for the District
of Connecticut. The Company's complaint includes allegations of breach of
contract and fraud in connection with various agreements between SmarTalk and
the Company. SmarTalk subsequently filed for federal bankruptcy protection. The
Company's complaint seeks recovery of $25 million in damages, and the Company
has filed a proof of claim with the bankruptcy court (U.S. Bankruptcy Court,
District of Delaware) for $14.4 million. The Company intends to aggressively
prosecute its claim, although due to SmarTalk's impaired financial condition,
the amount of any recovery against SmarTalk is questionable.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on July 7, 1999. A
total of 5,037,469 votes were cast, out of a total of 7,820,707 potential votes.
The following proposals were adopted by the margins indicated:
1. To approve an amendment to the Company's Restated Certificate of
Incorporation establishing a classified Board of Directors and to make
certain necessary conforming changes to the Company's Amended and Restated
Bylaws.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
4,269,153 739,101 2,215
</TABLE>
2. To elect the following directors:
<TABLE>
<CAPTION>
Director FOR WITHHELD
<S> <C> <C>
Anthony D. Autorino 5,036,169 1,300
Bruce Carswell 5,036,169 1,300
Thomas H. Decker 5,036,169 1,300
William A. DiBella 5,036,169 1,300
Vincent DiVincenzo 5,036,169 1,300
Victor Grillo, Sr. 5,036,169 1,300
Ajit G. Hutheesing 5,036,169 1,300
Nicholas E. Sinacori 4,998,304 39,165
</TABLE>
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<PAGE> 24
3. To approve an amendment to the 1994 Stock Option Plan to increase the
number of shares of the Company's Common Stock available for awards from
825,000 to 1,325,000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
4,343,544 691,600 2,325
</TABLE>
4. To approve amendments to the 1994 Director Option Plan to increase the
number of shares of the Company's Common Stock available for awards from
100,000 to 200,000; to increase the number of shares issuable to
non-employee directors from 4,000 annually to 15,000 per three-year term;
and to provide that the options vest pro rata at the rate of 1/36 per full
month of service.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
5,016,306 19,203 1,960
</TABLE>
5. To approve the issuance of twenty percent (20%) or more of the outstanding
shares of the Company's Common Stock upon the conversion of the Series C
Convertible Preferred Stock of the Company and the exercise of certain
Warrants to purchase Common Stock of the Company by the holders thereof,
which approval was necessary in order to comply with the corporate
governance rules of the NASDAQ SmallCap Market.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
5,025,860 9,684 1,925
</TABLE>
6. To ratify the reappointment of the Company's independent auditors,
Rothstein, Kass & Company, P.C. for the 1999 fiscal year.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
5,030,544 5,100 1,825
</TABLE>
-24-
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
4.1 Loan Agreement dated as of July 7, 1999 by and between Shared
Technologies Cellular, Inc. and State Street Bank and Trust Company.
Incorporated by Reference from Exhibit 4.1 to the Company's Form 8-K
dated July 7, 1999 and filed July 16, 1999.
4.2 Security Agreement and Assignment dated as of July 7, 1999 by and
between Shared Technologies Cellular, Inc. and State Street Bank and
Trust Company. Incorporated by Reference from Exhibit 4.2 to the
Company's Form 8-K dated July 7, 1999 and filed July 16, 1999.
4.3 Warrant to Purchase Common Stock of Shared Technologies Cellular, Inc.
issued to State Street Bank and Trust Company dated as of July 7, 1999.
Incorporated by Reference from Exhibit 4.3 to the Company's Form 8-K
dated July 7, 1999 and filed July 16, 1999.
10.1 Stock Purchase Agreement dated as of July 15, 1999 by and between
Shared Technologies Cellular, Inc. and Retail Distributors, Inc.
Incorporated by Reference from Exhibit 10.1 to the Company's Form 8-K
dated July 20, 1999 and filed July 22, 1999.
10.2 Services Agreement dated as of July 15, 1999 by and between Shared
Technologies Cellular, Inc. and Retail Distributors, Inc., including
form of Warrant to Purchase Common Stock of the Company issuable to
Retail Distributors, Inc., attached as Exhibit A thereto. Incorporated
by Reference from Exhibit 10.2 to the Company's Form 8-K dated July 20,
1999 and filed July 22, 1999.
10.3 Consulting Agreement dated as of July 15, 1999 by and between Retail
Cellular, Inc. and Retail Distributors, Inc. Incorporated by Reference
from Exhibit 10.3 to the Company's Form 8-K dated July 20, 1999 and
filed July 22, 1999.
10.4 Registration Rights Agreement dated as of July 15, 1999 by and between
Shared Technologies Cellular, Inc. and Retail Distributors, Inc.
Incorporated by Reference from Exhibit 10.4 to the Company's Form 8-K
dated July 20, 1999 and filed July 22, 1999.
27. Financial Data Schedule (filed only electronically with the SEC)
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<PAGE> 26
(B) REPORTS ON FORM 8-K
On July 16, 1999, the Company filed a report on Form 8-K,
concerning the Company's entry into a $10 million two-year revolving
credit facility on July 7, 1999 with State Street Bank and Trust
Company (the "Bank"). The availability of the credit facility is based
on a percentage of eligible receivables and includes covenants
requiring certain levels of prepaid lines and operating results over
time. Advances under the loan are to be used for working capital and
general corporate purposes. The loan is secured by substantially all of
the Company's assets. In connection with the loan, the Company issued
to the Bank a ten-year warrant for the purchase of 150,000 shares of
Common Stock at an exercise price of $10 per share, subject to certain
adjustments. The warrant is redeemable by the Bank any time after July
7, 2002 for a minimum redemption price of $200,000.
The Company included Exhibits 4.1, 4.2 and 4.3, in accordance
with Form 8-K, Item 5. The exhibits included the Loan Agreement,
Security Agreement and Assignment, and Warrant to Purchase Common Stock
of the Company, all dated July 7, 1999.
On July 22, 1999, the Company filed a report on Form 8-K,
concerning the Company's acquisition of all of the issued and
outstanding capital stock of Retail Cellular, Inc. ("RCI") on July 20,
1999, with an effective date as of July 15, 1999, for a purchase price
of 150,000 shares of Common Stock. RCI became a wholly-owned subsidiary
of the Company. The transaction enhanced the Company's sales
capabilities, particularly in connection with the distribution of the
Company's prepaid cellular services. The Company purchased RCI from
Retail Distributors, Inc. ("RDI"), the chief executive officer of which
is Victor Grillo, Sr., who was elected to the Company's Board of
Directors on July 7, 1999 at the annual meeting of the Company's
stockholders. As part of the acquisition transaction, the Company
entered into a Services Agreement with RDI, pursuant to which RDI
provides certain services relating to the marketing and distribution of
the Company's prepaid cellular services. Pursuant to terms of the
Services Agreement, which was retroactive to February 8, 1999, the
Company paid RDI approximately $843,000 and issued to RDI 118,194
shares of Common Stock. Additional compensation, exclusive of expenses,
is performance based, payable through the issuance of Common Stock
purchase warrants. Also, RCI entered into a Consulting Agreement with
RDI, expiring March 31, 2001, pursuant to which RDI provides certain
sales and marketing services.
The Company included Exhibits 10.1, 10.2, 10.3 and 10.4, in
accordance with Form 8-K, Item 5. The exhibits included the Stock
Purchase Agreement, Services Agreement, Consulting Agreement and
Registration Rights Agreement, all dated July 15, 1999.
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<PAGE> 27
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, 1999 By: /s/ Vincent DiVincenzo
Vincent DiVincenzo
Chief Financial Officer
(Chief Accounting Officer and
Duly Authorized Officer)
-27-
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