<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A NO. 2
_ X _ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT Of 1934
For the fiscal year ended December 31, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
100 Great Meadow Road, Suite 104
Wethersfield, Connecticut 06109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(860) 258-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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 _ _ _ _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's Common Stock held by
nonaffiliates as of March 29, 1999 was approximately $51,060,000 based on the
average of the closing bid and asked prices as reported on such date in the
over-the-counter market.
The number of shares outstanding of the registrant's common stock as of March
29, 1999 was 7,650,107.
<PAGE> 2
PART II
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION:
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues for 1998 were $28,200,000, compared to $24,198,000 for 1997, an
increase of $4,002,000 (17%). This increase was due to the expansion of the
debit (prepaid) services, which grew by over 100%. The loss from operations,
excluding non-recurring charges, was $4,194,000 in 1998 and $1,416,000 in 1997.
The net loss for 1998 was $11,646,000, compared to a net loss of $3,695,000 for
1997. The basic and diluted loss per common share was $1.58 for 1998, compared
to $0.63 for 1997.
Revenues
Debit, or prepaid, operations had revenues of $12,737,000 for 1998, compared to
$6,299,000 for 1997. The increase in revenues of $6,438,000 (102%) was due to a
new end-user program being marketed under the CellEase brand name. The Company
experienced significant revenue growth from CellEase beginning in April 1998.
The increase in the CellEase program was partially offset by a $2,796,000
reduction in revenues from a major distributor due to a price reduction given in
order to keep the distributor competitive with the CellEase program. In
addition, during the fourth quarter of 1998, the distributor transitioned its
prepaid cellular phone business customers over to the Company's CellEase
end-user program, which negatively impacted revenues.
For the fourth quarter of 1998, revenues from the CellEase program were below
Company expectations. This was a direct result of the deterioration of the
Company's relationship with its main distributor, SmarTalk TeleServices, Inc.
("SmarTalk"). In the fourth quarter, SmarTalk introduced a new prepaid cellular
phone to retailers that did not utilize the Company's' cellular service, which
the Company has alleged in a lawsuit against SmarTalk was in violation of
SmarTalk's contract with STC (see "Legal Proceedings"). Retailers were confused
by conflicting directives, resulting in significant lost revenues to the
Company, which was particularly detrimental to the Company's sales for the
year-end holiday period. In January 1999, SmarTalk filed for bankruptcy.
Cellular telephone rental operations had revenues of $14,037,000 for 1998,
compared to $15,242,000 for 1997. The decrease in revenues of $1,205,000 (8%)
was attributable to the Company de-emphazising the Special Events and Airlines
programs due to local competition and the high costs to generate revenues from
such operations. Revenues from the car rental companies were flat for the two
years. However, during the second half of 1998, the Company changed its emphasis
to be more of a sales-oriented business and less of a service-oriented business.
As a result, revenues from the car rental companies for the last six months of
1998, compared to the last six months of 1997, increased 6%.
Activation operations had revenues of $1,426,000 for 1998, compared to
$2,657,000 for 1997. The decrease of $1,231,000 (46%) was mainly attributable to
the discontinuance of operations at military bases in late 1997. In addition,
the Company closed its Texas activation location in November 1997.
Gross Margin
Gross margin was 38% of revenues for 1998, compared to 44% of revenues for 1997.
The decrease in gross margin was mainly due to a change in the revenue mix. The
following table summarizes the change in the revenue mix and the corresponding
gross margin for the two years:
<PAGE> 3
<TABLE>
<CAPTION>
1998 1997
Revenues Gross margin Revenues Gross margin
<S> <C> <C> <C> <C>
Debit 45% 27% 26% 43%
Rental 50% 48% 63% 46%
Activation 5% 45% 11% 37%
100% 38% 100% 44%
</TABLE>
The gross margin for the debit operations decreased as a result of a price
reduction given to a major distributor and due to the end-user CellEase program
having a lower margin than the distributor program. The distributor program
accounted for most of the 1997 debit revenues. The gross margin for portable
cellular rental operations improved slightly due to a slight reduction in
carrier costs. The gross margin for the activation operations improved
significantly due to a change in the product mix to more retail activations,
which generally provided higher commissions to the Company than activations
performed at the military bases.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("S,G&A") were $15,029,000 for
1998, compared to $12,083,000 for 1997, an increase of $2,946,000. As a
percentage of revenues, S,G&A increased to 53% for 1998, compared to 50% for
1997. Revenues increased by $4,002,000 from fiscal 1997 to fiscal 1998. S,G&A,
as a percentage of such revenues, would have remained constant, but for the fact
that the Company's expenses increased by approximately $800,000 as a result of
the acquisition of Shared Technologies Fairchild Inc. ("STFI"), the former
parent of the Company, by Intermedia Communications, Inc., and the subsequent
termination of a management agreement with STFI. STFI had been providing certain
support and management services to the Company under this management agreement.
Such additional expenses included payroll for certain former employees of STFI
who had not previously received direct compensation from the Company. Therefore,
of the $2,946,000 increase in S,G&A, approximately $2,146,000 represented the
amount of S,G&A increase unrelated to the STFI transaction. The majority of the
$2,146,000 increase was in field S,G&A, which,as a percentage of revenues,
increased slightly to 41% in 1998, compared to 39% in 1997. As previously
discussed, the Company did not achieve the anticipated fourth quarter 1998
CellEase revenues, even though the Company increased its field S,G&A in
anticipation of the additional revenues. Bad debt expense, as a percentage of
revenues, was 6% for 1998 and 1997. The majority of the bad debt expense related
to the cellular rental business. The predominant amount of these sales are paid
by credit card. Historically, the Company has experienced an amount of credit
card charges that it is not able to collect. In addition, the Company receives
some customer requests for amounts charged to be reversed for a variety of
reasons. The Company diligently investigates these occurrences. However, the
Company still experiences a large percentage of bad debt write-offs, as it
continues to make efforts to address this problem. The Company therefore
maintains a large allowance for doubtful accounts against its receivable
balance, representing the unpaid accounts under investigation, and upon final
resolution of the account, the amount is either collected or written off against
the allowance. The investigation process is time consuming; documentation
(typically itemized call detail for the rental period) must be generated and
provided to the credit card processing company prior to the reversal of the
claim. The Company regularly reviews the allowance for the amounts that are
deemed truly uncollectable and writes them off against the allowance. The
allowance represents only those receivables generated within the current
operating cycle and does not have any amounts that are aged in excess of a
12-month period.
Loss on Distributor Contract
In December 1998 the Company terminated its relationship with SmarTalk and filed
a lawsuit against SmarTalk (see "Legal Proceedings"). SmarTalk subsequently
filed for bankruptcy protection. As a result, the Company recognized a one-time
$6,494,000 charge related to the termination of its agreement with SmarTalk. The
charge included approximately $1,975,000 of receivables owed by SmarTalk. An
additional $3,121,000 pertains to the unamortized portion of prepaid assets
relating to a subsidy the Company paid SmarTalk for cellular phone sales to
retailers. The Company had been amortizing the subsidy against future revenues
generated from end users. An additional $1,398,000 related to expenses incurred
by the Company in the fourth quarter of 1998 in connection with the Company's
contract with SmarTalk, including the addition of a new call center in Hartford
and expansion of the existing call center in St. Louis. In addition, the Company
purchased several thousand new cellular lines in anticipation of an increase in
<PAGE> 4
volume. Most of the new lines required significant minimum commitment periods.
The Company also incurred losses from the cost of lines for existing customers
that could not purchase airtime as a result of the problems with SmarTalk.
Interest Expense
Interest expense was $952,000 for 1998, compared to $232,000 for 1997. Interest
expense was mainly due to debt from acquisitions made in prior years, debt to
STFI, and debt financing completed in May 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for 1997 were $24,198,000, an increase of $3,284,000 (16%) over
revenues for 1996. This increase was primarily due to the expansion of the debit
business and the April 1996 purchase of the operations of the Company's sole
franchisee, both of which were partially offset by the elimination of the in-car
cellular rental operations. The loss from operations, excluding non-recurring
charges, was $1,416,000 in 1997 and $6,888,000 in 1996. The net loss for 1997
was $3,695,000, compared to a net loss of $8,796,000 for 1996. The improvement
was a result of the change in the revenue mix to more profitable lines of
business and a reduction in operating expenses. The basic and diluted loss per
common share was $0.63 for 1997, compared to $2.18 for 1996.
Revenues
The cellular telephone rental operations had revenues of $15,242,000 for 1997,
compared to $16,339,000 for 1996. The decrease of $1,097,000 (7%) was
attributable to two non-recurring sources of revenue in 1996. In 1996, the
in-car operation generated revenues of $3,143,000; such line of business was
discontinued in 1997. In the third quarter of 1996, the Company generated
revenues of $1,434,000 from the summer's Olympic Games. These decreases for 1997
were offset by $2,259,000 in additional revenues in 1997 from the Summit
acquisition. The remaining balance of the increase was mainly due to the
addition of Avis, which allowed the Company to increase its penetration within
existing portable cellular rental market areas.
The debit operations had revenues of $6,299,000 for 1997, compared to $1,516,000
for 1996. This significant increase was due to the rapid expansion into the
debit business in the first quarter of 1997. The Company increased the number of
cellular prepaid lines with Rent A Center from 5,000 to 15,000 during that
period.
The activation operations had revenues of $2,657,000 for 1997, compared to
$3,059,000 for 1996. This decrease was mainly due to a reduction in activation
revenues by the Company's Texas location that was closed in November 1997. In
addition, several national retailers ceased to offer cellular telephone
activations through the Company in 1996. These revenue losses were offset by
activations done at various retail locations.
Gross Margin
Gross margin increased to 44% of revenues for 1997, from 35% of revenues for
1996. This improvement was mainly due to significant changes in revenue mix. The
in-car operations represented 15% of 1996 revenues but had no gross margin,
compared to no revenues in 1997. As previously discussed, the in-car operations
were discontinued in 1997. The gross margin for both the portable cellular
rental and the debit operations improved due to a reduction in carrier costs as
a result of better line management and lower carrier usage costs. As a
percentage of revenue, the debit business increased from 7% in 1996 to 26% in
1997. The activation operations had a small 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 $2,090,000
(15%), to $12,083,000 for 1997 from $14,173,000 for 1996. As a percentage of
revenues, SG&A decreased to 50% for 1997, compared to 68% 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 business, it
transitioned its in-car cellular telephone rental operation to its portable
cellular telephone rental business, and implemented other cost-cutting measures,
such as staff reductions, office closings and travel restrictions that resulted
in
<PAGE> 5
an overall decrease in SG&A. The Company was also able to include the revenues
from the Summit acquisition with minimal amounts of additional SG&A, which
helped to reduce SG&A as a percentage of revenues.
Loss on Discontinued Product Line
During 1997, the Company completed the transition of its in-car rental accounts
to portable rentals. In conjunction with this transition, the Company attempted
to develop alternate uses for the in-car cellular telephones, as well as the
capitalized software development costs associated with the in-car cellular
rental business. Although management believes that there are viable uses for
such assets, the probability that such usage will be successful is not known. As
a result, the Company recognized a $2,037,000 writedown to reduce the in-car
cellular phones and the capitalize software development costs to net realizable
value and classified them on the balance sheet as assets held for disposition.
Interest Expense
Interest expense was $232,000 for 1997, compared to $906,000 for 1996. Interest
expense in 1997 was mainly due to debt relating to 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 $16,099,000 at December 31, 1998,
compared to a deficit of $6,955,000 at December 31, 1997. Stockholders' deficit
at December 31, 1998 was $10,095,000, compared to stockholders' equity of
$1,165,000 at December 31, 1997.
Net cash used in operations for the year ended December 31, 1998 was $4,941,000.
This was mainly due to the operating loss for the period, offset by delayed
payments to carriers and other vendors. Carrier commissions receivable mainly
pertain to commissions the Company is entitled to receive for carrier lines the
Company activates. During fiscal 1998, the Company activated 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 $1.4 million was collected as of December
31, 1998. The provision for uncollectible accounts, as it relates to these
carrier commissions, is not material. The Company deferred the recognition of
the carrier commissions over a 12-month period, the expected customer life. As
of December 31, 1998, the Company had approximately $1,189,000 of such carrier
commissions that had not yet been recognized
Net cash used in investing activities for the year ended December 31, 1998 was
$1,133,000. This was mainly attributable to the purchase of cellular phones for
rental operations, computer and office equipment to support the CellEase
program, and deposit requirements by carriers for additional lines.
During the year ended December 31, 1998, the Company received $6,400,000 of debt
financing, as previously discussed. The Company continued to make required
payments on its existing debt.
The Company will require additional funds in order to satisfy existing
obligations arising from completed acquisitions, and to fund current expansion
plans. In February 1999, the Company closed on a $15 million private placement
of 15,000 shares of Series C Preferred Stock ("Series C Shares"). Each purchaser
of the Series C Shares has the right, upon the occurance 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 will not be reflected in stockholders'
equity (deficit). See Note 19 - Subsequent Event, for an in-depth discussion of
the terms of the Series C Shares, including the purchaser's conversion rights.
The funds will be used to repay approximately $5.5 million of outstanding
indebtedness, improve the Company's working capital and for general corporate
purposes. The Company will recognize a preferred stock dividend of approximately
$229,000 per quarter related to the Series C Shares. Also, in March 1999, the
Company signed a letter of intent with a financial institution the Company
currently does business with to establish a $10 million credit facility, subject
to the financial institution's satisfactory completion of a due diligence review
of the Company. The $10 million credit facility will be for a period of two
years and will be used for working capital and general corporate purposes. The
availability of the credit facility will be based on a percentage of
receivables, with approximately $3 million immediately available, and will
include covenants requiring certain levels of prepaid lines and operating
results over time. The Company believes the Series C Shares and the $10 million
credit facility should allow the Company to maintain good relations
<PAGE> 6
with its suppliers and give the Company the ability to expand rapidly and meet
its current obligations. Management believes that ongoing operations, together
with the equity financing and the credit facility, will provide the Company with
sufficient funds to finance operations and planned expansion for at least the
next 12 months, and long-term liquidity will depend on the Company's ability to
attain profitable operations.
YEAR 2000 COMPLIANCE:
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
the end of the second quarter of 1999. The Company further intends to conduct
extensive testing of its systems to assure that it is Year 2000 compliant by the
end of the second quarter. 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 not developed any contingency plan to
address the possibility of vendor-related Year 2000 problems.
1999 COMPANY OUTLOOK
The Company expects to show revenue growth in each of its operations in 1999.
The wireless industry continues to diversify and expand with abundant
opportunities. PCS, GSM and other wireless carriers are now entering the
marketplace. Subscription growth continues to be double-digit as new products
and services, such as pre-paid cellular, have been launched. The Company
believes it is positioned to take advantage of these opportunities; offering
travelers a communication device throughout the United States, offering pre-paid
cellular and activation services through national retailers, and working with
wireless carriers to offer their customers, who are relocating, a more
economical activation process.
The debit operations are expected to show considerable revenue growth in 1999.
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.
The cellular phone rental operations are expected to have moderate revenue
growth in 1999. To achieve this, STC intends to refocus the car rental partner's
efforts in soliciting more customers through training and improved policies and
procedures, by improving awareness through marketing programs, and by
penetrating the premiere traveler programs (e.g. Avis Preferred, Hertz Gold). In
addition, the Company is in the process of analyzing a new product (handset),
pricing structure and partner contribution in the solicitation of the cellular
rental program.
The activation operations are expected to have moderate revenue growth. The
Company is working with various carriers to implement its MOVE/Customer
Retention Program, which provides activation services for carriers' customers
who are in the process of relocating. The Company has automated the activation
process by establishing an activation Internet site, which should make the
Program more attractive to carriers.
"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, DEPENDENCE ON MAJOR CUSTOMERS AND RELATIONSHIPS,
DEPENDENCE ON RELATIONSHIPS WITH TECHNOLOGY LICENSORS 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.
<PAGE> 7
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached.
<PAGE> 8
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE (ITEM 8)
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Statements:
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficiency) F-5
Consolidated Statements of Cash Flows F-6-7
Notes to Consolidated Financial Statements F-8-24
Financial Statement Schedule (a):
Schedule II - Valuation and Qualifying Accounts for the
Years Ended December 31, 1998, 1997 and 1996 S-1
</TABLE>
NOTE:
(a) All other schedules are not submitted because they are either not
applicable, not required or the required information is included in the
consolidated financial statements or notes thereto.
<PAGE> 9
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Shared Technologies Cellular, Inc.
We have audited the accompanying consolidated balance sheets of Shared
Technologies Cellular, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows and financial statement schedule for each of the
three years in the period ended December 31, 1998. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Shared
Technologies Cellular, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 5, 1999
F-2
<PAGE> 10
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 229,000 $ 294,000
Accounts receivable, less allowance for doubtful
accounts of $896,000 in 1998 and $991,000 in 1997 1,169,000 1,637,000
Carrier commissions receivable, less unearned income 992,000 163,000
Inventories 234,000 131,000
Current portion of note receivable 107,000
Prepaid expenses and other current assets 2,030,000 127,000
------------------ ------------------
Total current assets 4,654,000 2,459,000
------------------ ------------------
TELECOMMUNICATIONS AND OFFICE EQUIPMENT, net 1,125,000 985,000
------------------ ------------------
OTHER ASSETS:
Intangible assets, net 6,993,000 7,551,000
Deposits 715,000 326,000
Note receivable, less current portion 62,000
Assets held for disposition 153,000
------------------ ------------------
7,708,000 8,092,000
------------------ ------------------
$ 13,487,000 $ 11,536,000
================== ==================
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable $ 5,913,000 $ 530,000
Accounts payable 7,439,000 3,876,000
Accrued expenses and other current liabilities 6,153,000 3,912,000
Deferred revenues 1,248,000 44,000
Due to former parent 1,052,000
------------------ ------------------
Total current liabilities 20,753,000 9,414,000
------------------ ------------------
NOTES PAYABLE, less current portion 2,829,000 957,000
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $.01 par value, authorized 5,000,000
shares, no shares issued or outstanding
Common stock, $.01 par value, authorized 20,000,000
shares, issued and outstanding 7,567,000 shares in
1998 and 7,216,000 shares in 1997 76,000 72,000
Capital in excess of par value 18,183,000 17,801,000
Accumulated deficit (28,354,000) (16,708,000)
------------------ ------------------
Total stockholders' equity (deficiency) (10,095,000) 1,165,000
------------------ ------------------
$ 13,487,000 $ 11,536,000
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 11
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ------------------
<S> <C> <C> <C>
REVENUES $ 28,200,000 $ 24,198,000 $ 20,914,000
COST OF REVENUES 17,365,000 13,531,000 13,629,000
------------------- ------------------ ------------------
GROSS MARGIN 10,835,000 10,667,000 7,285,000
------------------- ------------------ ------------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 13,450,000 10,742,000 12,401,000
BAD DEBT EXPENSE 1,579,000 1,341,000 1,772,000
LOSS ON DISCONTINUED PRODUCT LINE 2,037,000
LOSS ON DISTRIBUTOR CONTRACT 6,494,000
------------------- ------------------ ------------------
21,523,000 14,120,000 14,173,000
------------------- ------------------ ------------------
LOSS FROM OPERATIONS (10,688,000) (3,453,000) (6,888,000)
------------------- ------------------ ------------------
OTHER INCOME (EXPENSE):
Interest expense (952,000) (232,000) (906,000)
Loss on contract cancellation (980,000)
------------------- ------------------ ------------------
(952,000) (232,000) (1,886,000)
------------------- ------------------ ------------------
LOSS BEFORE INCOME TAXES (11,640,000) (3,685,000) (8,774,000)
INCOME TAXES (6,000) (10,000) (22,000)
------------------- ------------------ ------------------
NET LOSS (11,646,000) (3,695,000) (8,796,000)
PREFERRED STOCK DIVIDENDS (112,000)
------------------- ------------------ ------------------
NET LOSS APPLICABLE TO COMMON STOCK $ (11,646,000) $ (3,695,000) $ (8,908,000)
=================== ================== ==================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.58) $ (0.63) $ (2.18)
=================== ================== ==================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,375,000 5,900,000 4,082,000
=================== ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 12
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
----------------------------- ---------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
-------------- ------------- -------------- ------------ --------------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1996 300,000 $ 3,000 - $ - 3,089,000 $ 31,000
ISSUANCE OF COMMON STOCK 264,000 3,000
ISSUANCE OF PREFERRED STOCK 500,000 5,000
PREFERRED STOCK DIVIDEND 11,000
CONVERSION OF PREFERRED STOCK (311,000) (3,000) 1,147,000 11,000
ISSUANCE OF COMMON STOCK FOR ACQUISITIONS 300,000 3,000
COMMON STOCK SUBSCRIPTION 63,000 1,000
NET LOSS
-------------- ------------- -------------- ------------ --------------- ---------
BALANCES, December 31, 1996 - - 500,000 5,000 4,863,000 49,000
ISSUANCE OF COMMON STOCK 686,000 7,000
CONVERSION OF PREFERRED STOCK (500,000) (5,000) 1,667,000 16,000
NET LOSS
-------------- ------------- -------------- ------------ --------------- ---------
BALANCES, December 31, 1997 - - - - 7,216,000 72,000
ISSUANCES OF COMMON STOCK AND WARRANTS 271,000 3,000
EXERCISE OF WARRANTS AND OPTIONS 180,000 2,000
CANCELLATION OF COMMON STOCK (100,000) (1,000)
NET LOSS
-------------- ------------- -------------- ------------ --------------- ---------
BALANCES, December 31, 1998 - $ - - $ - 7,567,000 $76,000
============== ============= ============== ============ =============== =========
</TABLE>
<TABLE>
<CAPTION>
Total
Common Capital in Stockholders'
Stock Excess of Accumulated Note Equity
Subscription Par Value Deficit Receivable (Deficiency)
------------- ----------------- ------------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1996 $ 5,000 $ 9,173,000 $ (4,105,000) $ (5,000) $ 5,102,000
ISSUANCE OF COMMON STOCK 760,000 763,000
ISSUANCE OF PREFERRED STOCK 4,828,000 4,833,000
PREFERRED STOCK DIVIDEND 112,000 (112,000) -
CONVERSION OF PREFERRED STOCK (8,000) -
ISSUANCE OF COMMON STOCK FOR ACQUISITIONS 947,000 950,000
COMMON STOCK SUBSCRIPTION (5,000) 4,000 5,000 5,000
NET LOSS (8,796,000) (8,796,000)
------------- ------------------ ------------------- ------------- --------------------
BALANCES, December 31, 1996 - 15,816,000 (13,013,000) - 2,857,000
ISSUANCE OF COMMON STOCK 1,996,000 2,003,000
CONVERSION OF PREFERRED STOCK (11,000) -
NET LOSS (3,695,000) (3,695,000)
------------- ------------------ ------------------- ------------- --------------------
BALANCES, December 31, 1997 - 17,801,000 (16,708,000) - 1,165,000
ISSUANCES OF COMMON STOCK AND WARRANTS 201,000 204,000
EXERCISE OF WARRANTS AND OPTIONS 547,000 549,000
CANCELLATION OF COMMON STOCK (366,000) (367,000)
NET LOSS (11,646,000) (11,646,000)
------------- ------------------ ------------------- ------------- --------------------
BALANCES, December 31, 1998 $ - $ 18,183,000 $ (28,354,000) $ - $ (10,095,000)
============= ================== =================== ============= ====================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 13
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,646,000) $ (3,695,000) $ (8,796,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Accretion of interest on notes payable 75,000 30,000
Write-off of assets held for disposition 153,000 2,037,000
Depreciation and amortization 1,332,000 1,292,000 1,684,000
Common stock issued for compensation
and services 104,000 71,000 40,000
Accrued interest, note receivable (11,000)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 468,000 (16,000) (429,000)
Carrier commissions receivable (829,000) (110,000) 400,000
Inventories (103,000) (51,000) (31,000)
Prepaid expenses and other current assets (1,903,000) 6,000 339,000
Accounts payable and other current liabilities 6,204,000 (980,000) 2,124,000
Deferred revenues 1,204,000 44,000 (404,000)
------------------- ------------------ ------------------
NET CASH USED IN OPERATING ACTIVITIES: (4,941,000) (1,413,000) (5,043,000)
------------------- ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses (336,000)
Purchases of equipment (744,000) (318,000) (953,000)
Payments for intangible assets (514,000)
(Increase) decrease in deposits (389,000) 47,000 (231,000)
Collection of receivable from sale of assets 1,078,000
Collections of note receivable 45,000
------------------- ------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (1,133,000) (271,000) (911,000)
------------------- ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 6,400,000
Payments for debt issuance costs (171,000)
Payments on notes payable (530,000) (1,091,000) (1,080,000)
Advances from (payments to) former parent (239,000) 993,000 274,000
Issuance of common and preferred stock 1,932,000 4,362,000
Exercise of warrants and options 549,000
------------------- --------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,009,000 1,834,000 3,556,000
------------------- ------------------ ------------------
NET INCREASE (DECREASE) IN CASH (65,000) 150,000 (2,398,000)
CASH, beginning of year 294,000 144,000 2,542,000
------------------- ------------------ ------------------
CASH, end of year $ 229,000 $ 294,000 $ 144,000
=================== ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 14
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED) Years Ended December 31,
1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 863,000 $ 379,000 $ 280,000
=================== ================== ==================
Income taxes $ 6,000 $ 10,000 $ 20,000
=================== ================== ==================
SUPPLEMENTAL SCHEDULES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Cost of intangible assets included in accounts
payable $ - $ - $ 88,000
=================== ================== ==================
Issuance of common stock for acquisitions $ - $ - $ 950,000
=================== ================== ==================
Note payable incurred for acquisition of assets $ - $ - $ 1,139,000
=================== ================== ==================
Issuance of Series B Convertible Preferred Stock in
exchange for amount due to parent $ - $ - $ 1,200,000
=================== ================== ==================
Preferred stock issued for preferred stock dividend $ - $ - $ 112,000
=================== ================== ==================
Cancellation of common stock to settle
outstanding receivable $ 367,000 $ - $ -
=================== ================== ==================
Issuance of warrants in connection with certain
promissory notes $ 100,000 $ - $ -
=================== ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 15
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
Shared Technologies Cellular, Inc. (STC) together with its
subsidiary (collectively the "Company") is a national cellular
service provider offering rental, prepaid and activation services
in over 690 of approximately 750 Cellular Geographical Service
Areas within the United States. The Company rents cellular
telephones to business and leisure travelers and to individuals at
sporting events or in government agencies. As a reseller or agent
for cellular and PCS carriers, the Company offers cellular service
to approximately 96% of the U. S. population. STC also performs
nationwide cellular activation services through a variety of
retail and commercial outlets. The Company has expanded the scope
of its prepaid (debit) cellular service to include a national
activation, customer service and collection service operation
through major mass merchants..
The Company's operations are subject to regulation by the Federal
Communications Commission (FCC), which has generally preempted the
regulatory jurisdiction of state agencies with respect to the
business in which the Company is engaged.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of STC
and its wholly-owned subsidiary. All material intercompany
accounts and transactions have been eliminated in consolidation.
Cash
The Company maintains its cash in bank deposit accounts which at
times may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
subject to any significant credit risk on cash.
Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities which
qualify as financial instruments under Statement of Financial
Accounting Standards No. 107 approximates the carrying amounts
presented in the consolidated balance sheets.
Inventories
Inventories, consisting of telecommunications equipment and parts
expected to be sold to customers, are valued at the lower of cost,
on the first-in, first-out (FIFO) method, or market.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, such as
telecommunications and office equipment, identifiable intangibles
and goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine the recoverability of its
long-lived assets, the Company evaluates the probability that
future undiscounted net cash flows will be less than the carrying
amount of the assets. Impairment is the amount by which the
carrying value of the asset exceeds its fair value.
F-8
<PAGE> 16
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Telecommunications and Office Equipment
Telecommunications and office equipment are stated at cost. The
Company records depreciation on the straight-line method over the
estimated useful lives of the assets as follows:
Telecommunications equipment 2-5 years
Office equipment 3-5 years
Intangible Assets
Goodwill represents the excess of cost over the fair market value
of net assets of acquired businesses and is amortized over periods
ranging from 15 to 20 years from the respective acquisition dates.
The Company monitors the cash flows of the acquired operations to
assess whether any impairment of recorded goodwill has occurred.
The Company amortizes the cost to obtain exclusive agreements to
provide cellular telephone rentals at specific locations on the
straight-line basis over the life of the respective agreements,
generally five to six years.
Debt Issuance Costs
Costs incurred relating to the issuance of debt are deferred and
are being amortized over the life of the related debt. The
amortization of debt issuance costs included in interest expense
was $83,000, nil and nil in 1998, 1997 and 1996, respectively.
Revenue Recognition
Revenues related to providing short-term cellular phone rental
services are recognized as the service is provided. Debit card
revenue is recognized over the estimated period in which the
Company provides debit, or prepaid, cellular service to its
customers. Customers purchase debit cellular service by buying
debit cards 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 their 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
$30 debit card expires after 60 days. However, most of the airtime
is used within the first 30 days of redemption. Carrier
commissions related to activation revenues are due from cellular
carriers for new cellular telephone line activations done by the
Company. The commissions are earned only after the cellular
telephone user has remained on the cellular telephone network for
a specified period of time (vesting period). The Company records
an allowance, as a reduction to carrier commissions receivable,
for estimated cancellations of cellular service by the user prior
to the end of the aforementioned vesting period. Although there is
a short-term vesting period for which the Company must wait in
order to receive its commission, the Company believes that the
revenue process has been completed and recognizes the revenue over
the estimated life of the phone line, typically twelve months.
F-9
<PAGE> 17
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company expenses costs of advertising and promotions as
incurred. Advertising expenses included in selling, general and
administrative expenses for the years ended December 31, 1998,
1997 and 1996 were approximately $308,000, $132,000 and $153,000,
respectively.
Income Taxes
The Company filed its federal income tax returns on a consolidated
basis with its former parent through April 1995, the date of its
initial public offering ("IPO"). Subsequent to April 1995, the
Company's income tax returns are being filed separately.
The Company complies with Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes",
which requires an asset and liability approach to financial
reporting for income taxes. Deferred income tax assets and
liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future, based on enacted
tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce the deferred
tax assets to the amount expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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
loss applicable 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 that 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 years ended December
31, 1998, 1997 and 1996. Unexercised stock options to purchase
699,000, 365,000 and 281,000 shares of the Company's common stock
as of December 31, 1998, 1997 and 1996, respectively, were not
included in the computations of diluted earnings per share because
their effect would have been antidilutive as a result of the
Company's losses.
F-10
<PAGE> 18
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LIQUIDITY
The Company has incurred cumulative net losses of approximately
$28,350,000 through December 31, 1998 and has a working capital
deficit of approximately $16,100,000 at December 31, 1998. In
February 1999, the Company completed a $15,000,000 private
placement of equity issuing an aggregate of 15,000 shares of
Series C Convertible Preferred Stock (Note 19). Long-term
liquidity is dependent on the Company's ability to attain
profitable operations.
NOTE 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 its subsidiaries and affiliates
(Summit). The purchase price was $3,563,000, comprised of $335,000
in cash, the assumption of $669,000 of accounts payable and
$656,000 of notes payable, the issuance of a promissory note for
$953,000, the issuance of 300,000 shares of the Company's common
stock valued at fair market value of $3.125 per share and warrants
to purchase an aggregate of 300,000 shares of the Company's common
stock at prices of $3.00, $4.00 and $5.00 per share, respectively,
for each 100,000 shares. These warrants were valued at $13,000,
which represents the excess of the fair market value of the common
stock over the exercise price on the date of issuance. The
warrants vested immediately and expire in 2000.
In 1998, the Company received 100,000 shares of its common stock
which was issued in the Summit acquisition and assumed a $150,000
liability of Summit, in payment for the remaining balance of the
note receivable from Summit. In addition, the Company issued to
Summit a warrant for the purchase of 100,000 shares exercisable at
$5 per share and expiring in 2001.
The following unaudited pro forma condensed consolidated statement
of operations for 1996 gives effect to the acquisition of Summit
as if it had occurred on January 1, 1996:
<TABLE>
<CAPTION>
<S> <C>
Revenues $ 21,784,000
=============
Net loss $ (9,269,000)
==============
Net loss applicable to common stockholders $ (9,382,000)
==============
Basic and diluted loss per common share $ (2.25)
==============
</TABLE>
NOTE 5 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current asset consist of the following
at December 31, 1998 and 1997:
<TABLE>
1998 1997
---------- ----------
<S> <C> <C>
Prepaid telephone line charges $ 732,000 $ 88,000
Prepaid access fees 878,000 33,000
Marketable securities 408,000
Other 12,000 6,000
---------- ----------
$2,030,000 $ 127,000
========== ==========
</TABLE>
F-11
<PAGE> 19
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - TELECOMMUNICATIONS AND OFFICE EQUIPMENT
Telecommunications and office equipment consist of the following
at December 31, 1998 and 1997:
<TABLE>
1998 1997
---------- ----------
<S> <C> <C>
Telecommunications equipment $2,504,000 $2,341,000
Office equipment 1,411,000 835,000
---------- ----------
3,915,000 3,176,000
Accumulated depreciation 2,790,000 2,191,000
---------- ----------
$1,125,000 $ 985,000
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997
and 1996 was $604,000, $650,000 and $902,000, respectively.
NOTE 7 - INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1998
and 1997:
<TABLE>
1998 1997
---------- ----------
<S> <C> <C>
Goodwill $8,426,000 $8,426,000
Covenant not to compete 142,000 142,000
Rental car agreement 520,000 520,000
Debt issuance costs 171,000
---------- ----------
9,259,000 9,088,000
Accumulated amortization 2,266,000 1,537,000
---------- ----------
$6,993,000 $7,551,000
========== ==========
</TABLE>
Amortization expense for the years ended December 31, 1998, 1997
and 1996 was $619,000, $642,000 and $782,000, respectively.
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the
following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Sales and other taxes $4,428,000 $3,174,000
Payroll and payroll taxes 124,000 137,000
Commissions 222,000 166,000
Other 1,379,000 435,000
---------- ----------
$6,153,000 $3,912,000
========== ==========
</TABLE>
F-12
<PAGE> 20
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - NOTES PAYABLE
Notes payable consist of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
<S> <C> <C>
Promissory note bearing interest at 8% per
annum and payable in semi-annual
principal installments of $225,000 through
May 2000. The note is collateralized by
certain of the Company's assets. $ 675,000 $ 1,125,000
Promissory notes bearing interest at 10%
per annum and payable in monthly installments
of $8,500 through March 2002. 281,000 362,000
Promissory notes bearing interest at prime rate
(7.75% at December 31, 1998) plus 2.50% per
annum and payable on or before July 1, 1999.
The notes include warrants to purchase
400,000 shares of the Company's common
stock at $5.00 per share through April 2003. 3,975,000
Convertible debt bearing interest at 5% per
annum. Interest is payable quarterly, with
principal, due in May 2005. The debt may be
converted into shares of the Company's common
stock, at $5.00 per share. 2,400,000
Promissory note, to former parent, bearing
interest at Prime (7.75% at December 31, 1998)
plus 2% per annum payable quarterly, with
principal, due in November 1999. 1,411,000 -
------------------ -------------------
8,742,000 1,487,000
Less current portion 5,913,000 530,000
------------------ -------------------
$ 2,829,000 $ 957,000
================== ===================
</TABLE>
F-13
<PAGE> 21
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - NOTES PAYABLE (CONTINUED)
Aggregate future principal payments are as follows:
<TABLE>
Year Ending December 31,
<S> <C>
1999 $5,913,000
2000 310,000
2001 94,000
2002 25,000
2003
Thereafter 2,400,000
----------
$8,742,000
==========
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIENCY)
The Company has reserved for issuance 3,316,000 shares of its
common stock relating to common stock purchase warrants
outstanding as of December 31, 1998, at prices ranging from $2.50
to $7.09 per share.
In August and September 1997, the Company sold an aggregate of
407,000 units, at $3.00 per unit, through a private placement that
included various members of the Company's management. Each unit
consists of one share of common stock and one warrant to purchase
one share of common stock at $3.00 per share. During December
1996, the Company entered into an agreement to sell an aggregate
of 500,000 units, at $3.00 per unit, through a private placement.
In December 1996, 250,000 units were sold, and the remaining
250,000 units were sold in January 1997.
In August 1996, the Company sold 500,000 shares of Series B
Convertible Preferred Stock (Series B) for $10 per share through a
private placement, including 250,000 shares purchased by its
former parent, Shared Technologies Fairchild Inc. (STFI). Each
share of Series B, which pays no dividends was convertible into a
minimum of 2.50 shares and a maximum of 3.33 shares of the
Company's common stock, subject to certain adjustments. In
addition, in 1996, the Company paid $125,000 and issued warrants
to purchase 240,000 shares of common stock, at an exercise price
of $3.00 per share, to a firm which provided advisory services to
the Company. This advisory firm in which two of its principals are
directors of the Company, was a party to the sale of 250,000
shares of Series B. During 1997, the Series B stockholders
converted their shares into an aggregate of 1,667,000 shares of
the Company's common stock. Upon conversion of the Series B
shares, the holders received one warrant per common share to
purchase an additional share of the Company's common stock at an
exercise price of $3.00 per share.
F-14
<PAGE> 22
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLANS
The Board of Directors adopted, and the Company's stockholders
approved, as amended, a stock option plan (the Plan) pursuant to
which 825,000 shares of the Company's common stock are reserved
for issuance upon the exercise of options granted to officers,
employees, consultants and directors of the Company. Options
issued under the Plan are nonqualified stock options (NSO's) and
the Board of Directors (Committee) will grant NSO's at an exercise
price which is not less than the fair market value on the date
such options are granted. The Plan further provides that the
maximum period in which stock options may be exercised will be
determined by the Committee, except that they may not be
exercisable after ten years from the date of grant. At December
31, 1998, options to purchase 657,000 shares of common stock were
outstanding.
The Board of Directors adopted, and the stockholders approved, the
Company's 1994 Director Option Plan (the Director Plan), as
amended, pursuant to which 100,000 shares of the Company's common
stock are reserved for issuance upon the exercise of options to be
granted to non-employee directors of the Company. Under the
Director Plan, an eligible director will automatically receive, at
the commencement of the Director's one-year term, nonstatutory
options to purchase 4,000 shares of the Company's common stock at
an exercise price equal to the fair market value of such shares at
the time of grant. Each such option vests ratably over a one-year
period following the grant and is exercisable within the ten years
from the date of grant, but generally may not be exercised more
than 90 days after the date the director ceases to serve as a
director of the Company. At December 31, 1998, options to purchase
42,000 shares of the Company's common stock were outstanding under
the Director Plan.
The activity in the Plan and the Director Plan are as follows:
<TABLE>
<CAPTION>
Exercise Price Per Share
Number of Weighted
Options Range Average
-----------------------------------------------------------
<S> <C> <C> <C>
Balance outstanding, January 1, 1996 231,000 $ 1.63-5.00 $ 3.45
Granted 55,000 2.75-4.75 3.69
Expired (5,000) 3.68 3.68
---------------------------------------------------------
Balance outstanding, December 31, 281,000 1.63-5.00 3.33
1996
Granted 93,000 2.13-2.50 2.15
Expired (9,000) 3.68-5.00 4.22
---------------------------------------------------------
Balance outstanding, December 31, 365,000 1.63-4.75 3.01
1997
Granted 380,000 5.56-7.13 5.60
Exercised (28,000) 2.13-4.75 2.75
Expired (18,000) 2.13-6.50 4.10
---------------------------------------------------------
Balance outstanding, December 31, 699,000 $ 1.63-7.13 $ 4.38
1998
=========================================================
Exercisable, December 31, 1998 292,000 $ 1.63-7.13 $ 3.36
=========================================================
</TABLE>
F-15
<PAGE> 23
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLANS (CONTINUED)
The Company has adopted the disclosure requirements of Statement
of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation". The Company applies
Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. Had compensation cost
for the Company's stock-based compensation plans been determined
based on the fair value at the grant dates, consistent with SFAS
No. 123, the Company's net loss and net loss per share would have
been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported $ (11,646,000) $(3,695,000) $(8,908,000)
Pro forma (12,009,000) (3,770,000) (8,920,000)
Net loss per share applicable to common
stockholders:
As reported (1.58) (.63) (2.18)
Pro forma (1.63) (.64) (2.19)
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1998,
1997 and 1996, respectively: risk-free interest rate of 5%, 6% and
6%, respectively; no dividend yield; expected lives of 3 to 10
years; and expected volatility of 91%, 64% and 62%, respectively.
NOTE 12 - LOSS ON DISCONTINUED PRODUCT LINE
During 1997, the Company completed the transition of the existing
in-car rental accounts to portable rentals. In conjunction with
this transition, the Company attempted to develop alternate uses
for the in-car cellular telephones as well as the capitalized
software associated with the in-car cellular rental business.
Although management believes that there are viable uses for such
assets, the probability that such uses will be successful is not
known. As a result, the Company reduced the in-car cellular phones
and the capitalized software to net realizable value and
classified them on the balance sheet as assets held for
disposition. The company wrote-off the balance of the in-car
cellular phones during the year ended December 31, 1998.
NOTE 13 - SAVINGS AND RETIREMENT PLAN
In June 1996, the Company formed a savings and retirement plan
(the Plan) which covers substantially all eligible employees.
Participants in the Plan may elect to make contributions up to a
maximum of 20% of their compensation. For each participant, the
Company will make a matching contribution of one-half of the
participant's contributions, up to 5% of the participant's
compensation. Matching contributions may be made in the form of
the Company's common stock and are vested at the rate of 33% per
year based on years of employment. Prior to the formation of the
Plan, the Company participated in a plan maintained by its former
parent STFI. Matching contributions in STFI's plan were made in
STFI common stock. For the years ended December 31, 1998, 1997 and
1996, the Company's matching contributions were $104,000, $71,000
and $40,000, respectively.
F-16
<PAGE> 24
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - INCOME TAXES
A reconciliation of income tax benefit, to the federal statutory
rate follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
Income tax benefit on reported pretax
<S> <C> <C> <C>
loss at federal statutory rate (34.0)% (34.0)% (34.0)%
State net operating losses (6.0) (6.0) (6.0)
Net operating loss carryforward not 40.0 40.0 40.0
recognized ---- ---- ----
Income taxes 0.0% 0.0% 0.0%
==== ==== ====
</TABLE>
At December 31, 1998 and 1997, the Company recorded net deferred
tax assets of approximately $9,702,000 and $5,511,000,
respectively, and valuation allowances in the same amounts. The
valuation allowances were increased by $4,191,000, $1,111,000 and
$3,296,000, respectively, for the years ended December 31, 1998,
1997 and 1996, respectively. SFAS No. 109 requires that the
Company record a valuation allowance when it is "more likely than
not that some portion or all of the deferred tax asset will not be
realized". The ultimate realization of the deferred tax asset
depends on the Company's ability to generate sufficient taxable
income.
The net deferred tax assets and liabilities as of December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 9,289,000 $ 5,164,000
Allowance for doubtful accounts 367,000 390,000
Asset basis difference, intangible assets 57,000
--------------------------- ---------------------------
9,713,000 5,554,000
--------------------------- ---------------------------
Deferred tax liabilities, asset basis
difference for equipment and intangible assets (11,000) (43,000)
--------------------------- ---------------------------
Deferred tax asset, net 9,702,000 5,511,000
Valuation allowance for deferred tax asset (9,702,000) (5,511,000)
--------------------------- ---------------------------
$ - $ -
=========================== ===========================
</TABLE>
At December 31, 1998, the Company has federal net operating loss
carryforwards of approximately $23,223,000, which can be utilized
against future taxable income and expire through the year 2018.
Net operating losses available for state income tax purposes are
less than those for federal purposes and generally expire earlier.
F-17
<PAGE> 25
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - COMMITMENTS AND CONTINGENCIES
The Company has leases for office facilities and equipment, which
expire in various years through December 2002. Future aggregate
minimum annual rental payments as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Year ending December 31
<S> <C>
1999 $ 696,000
2000 688,000
2001 662,000
2002 112,000
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996
was approximately $558,000, $352,000 and $418,000, respectively.
Leased equipment expense for the year ended December 31, 1998 was
approximately $61,000.
The Company, in the ordinary course of business, is a party to
various legal actions, the outcome of which, in the opinion of
management, will not have a material adverse effect on results of
operations, cash flows or financial position of the Company.
In connection with a vendor's requirement, the Company has a
standby letter of credit with a bank in the amount of $400,000.
This letter of credit expires March 29, 1999 and is collateralized
by certain assets of the Company.
NOTE 16 - DEPENDENCE UPON KEY RELATIONSHIPS AND MAJOR CUSTOMERS
Approximately 24% and 12%, related to the debit segment, and 19%
and 10%, related to the rental segment, of the Company's revenues
for 1998 were attributable to four customers. Approximately 26%,
related to the debit segment, and 24%, 13% and 11%, related to the
rental segment, of the Company's revenues for 1997 were
attributable to four customers. Approximately 21%, 16%, and 13%,
related to the rental segment of the Company's revenues for 1996
were attributable to three customers. The agreements with these
companies are terminable with cause and require written
notification, typically effective upon relatively short notice.
The termination of any one of these agreements would have a
material adverse effect on the Company. In 1998, certain of the
agreements relating to 36% and 26% of the Company's revenues in
1998 and 1997, respectively, were terminated.
NOTE 17 - LOSS ON CONTRACT CANCELLATION
In 1996, in connection with the transition of the in-car cellular
phone service to portable rentals, the Company recognized a loss
of approximately $980,000 relating to the cancellation of a
contract for the production of certain in-car telecommunications
equipment.
F-18
<PAGE> 26
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - LOSS ON DISTRIBUTOR CONTRACT
During 1998, the Company entered into an agreement with SmarTalk
TeleServices, Inc. ("SmarTalk") which designated the Company as
the exclusive nationwide cellular service provider for SmarTalk's
prepaid cellular phone program with respect to certain retail
distributor channels, including nationwide retail stores and
television infomercials. The agreement required SmarTalk to
provide the cellular phone to the customer and the Company to
provide all services relating to the activation of the phone,
including, but not limited to, the maintenance of all individual
phone lines. Subsequent to the inception of the nationwide
program, SmarTalk incurred financial difficulties and eventually
filed for bankruptcy protection. Prior to the filing, STC entered
into a new agreement (the "Transition Agreement") pursuant to
which the Company and SmarTalk agreed to terminate their
relationship through a brief transition period.
Subsequent to signing of the Transition Agreement, SmarTalk failed
to pay to the Company all amounts due under such agreement. As a
result of its problems with SmarTalk, the Company elected to take
a write-off of certain assets in 1998. In addition, the Company
reclassified expenses incurred during the fourth quarter of 1998,
in connection with the SmarTalk problems.
NOTE 19 - SUBSEQUENT EVENT
On February 5, 1999, the Company closed a $15 million private
placement of equity with 20 investors, led by Marshall Capital
Management, Inc., an affiliate of Credit Suisse First Boston, and
a number of European-based institutional investors. Oakes,
Fitzwilliams & Co. S.A. of London acted as placement agent for the
Company in connection with the sales to the European investors.
Pursuant to a Securities Purchase Agreement entered into between
the Company and the investors (the "Securities Purchase
Agreement"), the Company issued an aggregate of 15,000 shares of a
new Series C Convertible Preferred Stock, $.01 per share, and
Warrants to purchase an aggregate of 300,000 shares of Common
Stock, $.01 par value, of the Company. These Warrants were valued
at $75,000, the value will be treated as a "discount" to the
Series C Shares and such discount will be accreted as a preferred
stock dividend over the five year term of the Warrants. Each share
of Series C 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
to repay approximately $5.5 million of outstanding indebtedness
and for general corporate purposes.
Description of Series C Convertible Preferred Stock. The following
description of the rights and preferences of the Series C
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 C Convertible
Preferred Stock (the "Certificate of Designation").
Voting. The holders of shares of Series C 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 C Convertible Preferred Stock
are outstanding, the following matters, however, will require the
approval of the holders of at least two-thirds of the
then-outstanding shares of Series C Convertible Preferred Stock:
(i) altering, changing, modifying or amending the terms
of the Series C Convertible Preferred Stock or the
terms of any other stock of the Company so as to
adversely affect the Series C Convertible Preferred
Stock;
F-19
<PAGE> 27
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SUBSEQUENT EVENT (CONTINUED)
(ii) creating any new class or series of capital stock
having a preference over or ranking pari passu with
the Series C 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
C Convertible Preferred Stock;
(iv) reissuing any shares of Series C 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 C 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 C
Convertible Preferred Stock as to the distribution of
assets upon liquidation, dissolution or winding up of
the Company; and
(vii) issuing any Series C Convertible Preferred Stock
except pursuant to the terms of the Securities
Purchase Agreement.
Dividends. The Series C Convertible Preferred Stock will not bear
dividends, but will accrue a "Premium" payable upon conversion or
liquidation as described below.
Liquidation. Upon the liquidation, dissolution or winding up of
the Company, the holders of Series C 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 Premium
(defined below) accrued on its Series C Convertible Preferred
Stock in accordance with the terms of the Certificate of
Designation (the "Liquidation Preference").
Conversion. Each share of Series C 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 C Convertible Preferred Stock through
and including the date of conversion, and is 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 preferred stock dividend. The anticipated impact of the
preferred stock dividend on the Company's financial statements is
expected to be approximately $225,000 per quarter, until
conversion. The "Conversion Price" is equal to the lesser of $7
and the Variable Conversion Price. The "Variable
F-20
<PAGE> 28
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SUBSEQUENT EVENT (CONTINUED)
Conversion Price" is equal to the average of the lowest Closing
Bid Prices (as defined in the Certificate of Designation) for the
Common Stock of the Company on any five (5) consecutive trading
days during the period of fifteen (15) trading days immediately
prior to the conversion date. If the Company's Common Stock trades
above $11 per share (subject to adjustment upon the occurrence of
certain events, including but not limited to a stock split or
dividend or a merger or consolidation of the Company) for ten (10)
consecutive days, and if at all times during such period, certain
conditions set forth in the Certificate of Designation are
satisfied, the Conversion Price will be equal to $7 thereafter.
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 C Convertible Preferred Stock).
On February 5, 2004, all shares of Series C Convertible Preferred
Stock then outstanding will be automatically converted into shares
of Common Stock at the then-prevailing Conversion Price.
Conversion Limitations. The number of shares of Common Stock
issued upon conversion of all outstanding shares of Series C
Convertible Preferred Stock may not exceed the following amounts
during the periods specified (each, a "Conversion Limit Amount"),
and the Conversion Limit Amount is subject to adjustment in
accordance with the terms of the Certificate of Designation.
<TABLE>
<CAPTION>
Conversion
Period Limit Amount
------ ------------
<S> <C>
During the 1st Year Following the Issue Date 3,975,000
During the 2nd Year Following the Issue Date 4,200,000
During the 3rd Year Following the Issue Date 4,425,000
During the 4th Year Following the Issue Date 4,650,000
Following the 4th Anniversary of the Issue Date 4,875,000
</TABLE>
No purchaser of the Series C Convertible Preferred stock may be
issued, upon conversion of such stock, shares of Common Stock in
an amount greater than the product of (i) the applicable
Conversion Limit Amount times (ii) a fraction, the numerator of
which is the number of shares of Series C Convertible Preferred
Stock issued to such purchaser pursuant to the Securities Purchase
Agreement and the denominator of which is the aggregate amount of
all of the shares of Series C Convertible Preferred Stock issued
to the purchasers pursuant to the Securities Purchase Agreement,
subject to certain adjustments set forth in the Certificate of
Designation. In addition, until the Company obtains the approval
of the holders of a majority of the Company's Common Stock, the
number of shares of Common Stock issued upon conversion of Series
C Convertible Preferred Stock or exercise of the Warrants may not
exceed 19.99% of the number of shares of Common Stock outstanding
on February 5, 1999, or 1,512,661 shares. The Company has agreed
to seek such stockholder approval (the "Stockholder Approval") at
a meeting of stockholders to be held no later than May 31, 1999.
As of the date of this Current Report, but for the limitation
described in the second preceding sentence, the 15,000 shares of
Series C Convertible Preferred Stock would be convertible into
approximately 2,142,857 shares of Common Stock of the Company, or
28% of the total number of shares of Common Stock issued and
outstanding on February 5, 1999. Further, the total number of
shares of Common Stock issuable upon conversion of the Series C
Convertible Preferred Stock and exercise of the Warrants as of the
date of this Current Report, but for the aforementioned
limitation, would be approximately 2,442,857 shares, or 32% of the
total number of shares of Common Stock issued and outstanding on
February 5, 1999.
F-21
<PAGE> 29
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SUBSEQUENT EVENT (CONTINUED)
Mandatory Conversion. The Company has the right to require
conversion of all of the outstanding shares of Series C
Convertible Preferred Stock at any time after February 5, 2000 if
the Closing Bid Price for the Company's Common Stock is greater
than $15.00 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 C Convertible
Preferred Stock will have the right upon the occurrence of a
Mandatory Redemption Event (as such term is defined in the
Certificate of Designation, which term includes, among other
things, failure to receive the Stockholder Approval by May 31,
1999 ), to require the Company to redeem all or any part of such
purchaser's Series C 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 applicable
Conversion Price and the price at which the Common Stock of the
Company is then trading.
If the Corporation fails to pay the Mandatory Redemption Price
within ten (10) business days of the mandatory redemption date,
the holder of Series C 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 C 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 C
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.
Optional Redemption. The Company will have the right, upon the
satisfaction of certain Optional Redemption Conditions (as defined
in the Certificate of Designation), to redeem any Series C
Convertible Preferred Stock submitted for conversion at a
Conversion Price that is less than $7 (subject to adjustment upon
the occurrence of certain events set forth in the Certificate of
Designation) for a price equal to an amount representing an
annualized return of 110% on the Stated Value of the Series C
Convertible Preferred Stock being redeemed, plus accrued Premium.
Preemptive Rights. Pursuant to the Securities Purchase Agreement,
each purchaser of the Series C Convertible Preferred Stock will
have the right, upon the issuance of certain equity securities by
the Company, to either purchase a pro rata share of such
securities or, at the option of such purchaser, to exchange all or
any part of such purchaser's shares of Series C Convertible
Preferred Stock for an equal amount of such securities.
Description of the Warrants. Pursuant to the Securities Purchase
Agreement, each investor received a Warrant for the purchase of
20,000 shares of Common Stock of the Company for each $1 million
of Series C Convertible Preferred Stock issued. The Warrants are
exercisable at $9 per share (subject to adjustment upon the
occurrence of certain events set forth in the Warrants). The
Warrants will expire five (5) years after the date of issuance,
and are subject to mandatory exercise, subject to certain
conditions set forth therein, if the Company's Common Stock trades
at or above $18 per share (subject to adjustment upon the
occurrence of certain events set forth in the Warrants) for five
(5) consecutive trading days. Cashless exercise is permitted under
the terms of the Warrants and is required for any exercise after
February 5, 2001.
If, following exercise of the Warrants, the Company fails to
deliver shares of its Common Stock to an investor in accordance
with the terms of the Warrants, it may incur monetary and other
penalties.
F-22
<PAGE> 30
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SUBSEQUENT EVENT (CONTINUED)
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 the Company is required, within thirty (30) days after
February 5, 1999, 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 C
Convertible Preferred Stock and exercise of the Warrants. The
Company may incur monetary and other penalties (including in
certain circumstances mandatory redemption of the Series C
Convertible Preferred Stock) in the event that such registration
statement is not filed within such 30-day period or declared
effective in accordance with the terms of the Registration Rights
Agreement, or if such registration statement becomes unavailable
for the resale of shares of Common Stock of the Company and such
unavailability continues for a period set forth in the
Registration Rights Agreement.
NOTE 20 - SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards
No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise
and Related Information," effective January 1, 1998. SFAS 131
requires disclosures of segment information on the basis that is
used internally for evaluating segment performance and deciding
how to allocate resources to segments.
Segment information listed below reflects the three principal
business units of the Company (as described in Note 1). 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
data is not prepared or used by the CODM.
F-23
<PAGE> 31
NOTE 20 - SEGMENT INFORMATION (CONTINUED)
Operating segment information for 1998, 1997, and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
RENTAL DEBIT ACTIVATION CORPORATE CONSOLIDATED
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
1998
Revenues $ 14,037,000 $ 12,737,000 $ 1,426,000 $ -- $ 28,200,000
============ ============ ============ =========== ============
Depreciation/amortization $ 399,000 $ 3,000 $ 930,000 $ 1,332,000
Bad debt $ 1,441,000 $ 122,000 $ 16,000 $ -- $ 1,579,000
Operating loss $ (777,000) $ (5,942,000) $ (365,000) $ (3,604,000) $(10,688,000)
Interest expense (952,000) (952,000)
------------ ------------ ------------ ----------- ------------
Loss before
income taxes $ (777,000) $ (5,942,000) $ (365,000) $ (4,556,000) $ (11,640,000)
============ ============ ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
RENTAL DEBIT ACTIVATION CORPORATE CONSOLIDATED
------------ ------------ ------------ ----------- ------------
1997
<S> <C> <C> <C> <C> <C>
Revenues $ 15,242,000 $ 6,299,000 $ 2,657,000 $ -- $ 24,198,000
============ ============ ============ ============= ============
Depreciation/amortization $ 495,000 $ 14,000 $ 783,000 $ 1,292,000
Bad debt $ 1,309,000 $ 8,000 $ 24,000 $ -- $ 1,341,000
Operating income (loss) $ (965,000) $ 1,471,000 $ 86,000 $ (4,045,000) $ (3,453,000)
Interest expense (232,000) (232,000)
------------ ------------ ------------ ----------- ------------
Income (loss) before
income taxes $ (965,000) $ 1,471,000 $ 86,000 $ (4,277,000) $ (3,685,000)
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
RENTAL DEBIT ACTIVATION CORPORATE CONSOLIDATED
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
1996
Revenues $ 16,339,000 $ 1,516,000 $ 3,059,000 $ -- $ 20,914,000
============ ============ ============ ============ ============
Depreciation/amortization $ 953,000 $ 12,000 $ 719,000 $ 1,684,000
Bad debt $ 1,568,000 $ -- $ 204,000 $ -- $ 1,772,000
Operating loss $ (2,920,000) $ (96,000) $ (160,000) $ (3,712,000) $ (6,888,000)
Interest expense (906,000) (906,000)
Other expense (980,000) (980,000)
------------ ------------ ------------ ----------- ------------
Loss before
income taxes $ (3,900,000) $ (96,000) $ (160,000) $ (4,618,000) $ (8,774,000)
============ ============ ============ ============ ============
</TABLE>
F-24
<PAGE> 32
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End
Description of Year Expenses Deductions (1) of Year
----------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts $ 991,000 $ 1,579,000 $ 1,674,000 $ 896,000
=============== =============== =============== ===============
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 1,392,000 $ 1,341,000 $ 1,742,000 $ 991,000
=============== =============== =============== ===============
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts $ 685,000 $ 1,772,000 $ 1,065,000 $ 1,392,000
=============== =============== =============== ===============
</TABLE>
(1) Represents write off of uncollectible accounts, net of recoveries.
S-1
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHARED TECHNOLOGIES CELLULAR, INC.
(Registrant)
By
\ s\ Anthony D. Autorino
Anthony D. Autorino
Chief Executive Officer and Director
Date: May 21, 1999
By
\ s\ Vincent DiVincenzo
Vincent DiVincenzo
Chief Financial Officer and Director
Date: May 21, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
By: /s/Anthony D. Autorino By: William A. DiBella* By:
Anthony D. Autorino William A. DiBella Bruce Carswell
Chief Executive Officer Director Director
and Director Date: May 21, 1999 Date: May , 1999
Date: May 21, 1999
By: By: Thomas H. Decker*
Ajit G. Huthessing Thomas H. Decker
Director Director
Date: May , 1999 Date: May 21, 1999
By: /s/ Vincent DiVincenzo By: Nicholas E. Sinacori*
Vincent DiVincenzo Nicholas E. Sinacori
Chief Financial Officer Director
and Director Date: May 21, 1999
Date: May 21, 1999
* By: /s/Anthony D. Autorino
Anthony D. Autorino
Attorney-in-fact
</TABLE>
