<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 JUNE 30, 2000
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)
<TABLE>
<S> <C>
Delaware 06-1386411
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
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 ___
As of August 11, 2000, there were 13,386,590 shares outstanding of the
registrant's Common Stock, $.01 par value
<PAGE> 2
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited).
Report of Independent Public Accountants 3
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 4
Consolidated Statements of Operations for the Six Months Ended
June 30, 2000 and 1999 5
Consolidated Statements of Operations for the Three Months Ended
June 30, 2000 and 1999 6
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 13-19
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 20
Item 4. Submission of Matters to Vote of Security Holders. 20-21
Item 6. Exhibits and Reports on Form 8-K. 21
SIGNATURE 22
</TABLE>
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<PAGE> 3
Independent Accountants' Report
To the Shareholders and Board of Directors of
Shared Technologies Cellular, Inc.
We have reviewed the accompanying consolidated balance sheet and statements of
operations and cash flows of Shared Technologies Cellular, Inc. and Subsidiaries
as of June 30, 2000, and for the three-month and six-month periods then ended.
These consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
Roseland, New Jersey /s/ Rothstein, Kass & Company, P.C.
August 9, 2000
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<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 179,000 $ 1,635,000
Accounts receivable, less allowance for doubtful accounts
of $559,000 and $495,000 in 2000 and 1999 2,482,000 3,612,000
Carrier commissions receivable, net 148,000 178,000
Inventories 1,704,000 2,316,000
Prepaid expenses and other current assets 3,990,000 4,526,000
------------ ------------
Total current assets 8,503,000 12,267,000
------------ ------------
TELECOMMUNICATIONS AND OFFICE EQUIPMENT, NET 1,303,000 1,514,000
------------ ------------
OTHER ASSETS:
Intangible assets, net 5,977,000 6,289,000
Deposits and other 745,000 1,515,000
------------ ------------
Total other assets 6,722,000 7,804,000
------------ ------------
$ 16,528,000 $ 21,585,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 873,000 $ 535,000
Accounts payable 8,233,000 8,580,000
Accrued expenses and other current liabilities 10,529,000 7,045,000
Deferred revenues 4,882,000 4,355,000
------------ ------------
Total current liabilities 24,517,000 20,515,000
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION 626,000 2,492,000
------------ ------------
REDEEMABLE PUT WARRANT 200,000 200,000
------------ ------------
SERIES C AND D REDEEMABLE PREFERRED STOCK, issued and
outstanding 14,100 shares in 2000 and 20,100 shares in 1999 14,629,000 20,861,000
------------ ------------
STOCKHOLDERS' DEFICIT:
Preferred Stock,$.01 par value, authorized 5,000,000 shares
Common Stock, $.01 par value, authorized 30,000,000 shares,
issued and outstanding 10,564,000 shares in 2000
and 8,452,000 in 1999 106,000 85,000
Capital in excess of par value 37,057,000 28,437,000
Accumulated deficit (60,607,000) (51,005,000)
------------ ------------
Total stockholders' deficit (23,444,000) (22,483,000)
------------ ------------
$ 16,528,000 $ 21,585,000
============ ============
</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 Six Months Ended June 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES $ 17,929,000 $ 12,082,000
COST OF REVENUES 15,029,000 9,421,000
------------ ------------
GROSS MARGIN 2,900,000 2,661,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,443,000 9,672,000
BAD DEBT EXPENSE 399,000 669,000
------------ ------------
LOSS FROM OPERATIONS (8,942,000) (7,680,000)
INTEREST EXPENSE, NET (126,000) (249,000)
------------ ------------
LOSS BEFORE INCOME TAXES (9,068,000) (7,929,000)
INCOME TAXES (5,000) (7,000)
------------ ------------
NET LOSS (9,073,000) (7,936,000)
PREFERRED STOCK DIVIDENDS (529,000) (4,381,000)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK ($ 9,602,000) ($12,317,000)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE ($ 1.01) ($ 1.60)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,554,000 7,682,000
============ ============
</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 Operations (Unaudited)
For the Three Months Ended June 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES $ 8,185,000 $ 6,461,000
COST OF REVENUES 6,952,000 4,829,000
------------ ------------
GROSS MARGIN 1,233,000 1,632,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,578,000 4,869,000
BAD DEBT EXPENSE 191,000 289,000
------------ ------------
LOSS FROM OPERATIONS (4,536,000) (3,526,000)
INTEREST EXPENSE, NET (49,000) (55,000)
------------ ------------
LOSS BEFORE INCOME TAXES (4,585,000) (3,581,000)
INCOME TAXES 0 0
------------ ------------
NET LOSS (4,585,000) (3,581,000)
PREFERRED STOCK DIVIDENDS (222,000) (227,000)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK ($ 4,807,000) ($ 3,808,000)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE ($ 0.47) ($ 0.49)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,333,000 7,739,000
============ ============
</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)
For the Six Months Ended June 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss, before preferred stock dividend ($ 9,073,000) ($ 7,936,000)
Adjustments to reconcile net loss to net cash
used in operating activities;
Accretion of interest 50,000 31,000
Depreciation and amortization 1,929,000 587,000
Common stock issued for compensation
and services 58,000 71,000
Change in assets and liabilities:
Accounts receivable 1,113,000 (594,000)
Carrier commissions receivable 30,000 581,000
Inventories 612,000 (502,000)
Prepaid expenses and other current assets (22,000) (879,000)
Accounts payable and other current liabilities 3,139,000 326,000
Deferred revenues 527,000 (437,000)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,637,000) (8,752,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in deposits 2,000 11,000
Purchases of equipment (113,000) (200,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (111,000) (189,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from financial facility 549,000 0
Repayments of long-term debt and capital lease obligations (377,000) (4,268,000)
Payments to former parent 0 (1,411,000)
Proceeds from issuance of preferred stock 0 14,506,000
Proceeds from exercise of warrants and options 120,000 1,200,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 292,000 10,027,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (1,456,000) 1,086,000
CASH, BEGINNING OF PERIOD 1,635,000 229,000
------------ ------------
CASH, END OF PERIOD $ 179,000 $ 1,315,000
============ ============
</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
Consolidated Statements of Cash Flows (Unaudited) (continued)
For the Six Months Ended June 30,
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 131,000 $ 318,000
========== ==========
Income taxes $ 5,000 $ 7,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of warrants in connection with issuance of
preferred stock $ 0 $ 75,000
========== ==========
Redeemable preferred stock issued as preferred
stock dividends and beneficial conversion feature $ 519,000 $4,154,000
========== ==========
Conversion of convertible notes into common stock $1,700,000 $ 0
========== ==========
Conversion of convertible preferred stock into common stock $6,762,000 $ 0
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE> 9
Shared Technologies Cellular, Inc. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2000 (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 are
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's December 31, 1999 report on Form 10-K. Certain
reclassifications to prior year financial statements were made in order to
conform to the 2000 presentation. The consolidated financial statements included
herein are not necessarily indicative of the results for the fiscal year ending
December 31, 2000.
2. 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.
3. 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 activation revenues are
recognized as the services are provided.
4. LOSS PER COMMON SHARE. 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 was the same as basic loss per common
share for the three and six-month periods ended June 30, 2000 and 1999 because
all other securities would have been antidilutive as a result of the Company's
losses.
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<PAGE> 10
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS. Prepaid expenses and other current
assets consist of the following at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Prepaid consulting agreement $1,969,000 $2,492,000
Prepaid telephone line charges 735,000 695,000
Prepaid access fees 456,000 672,000
Note receivable 500,000 500,000
Other 331,000 167,000
---------- ----------
$3,990,000 $4,526,000
</TABLE>
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES. Accrued expenses and other
current liabilities consist of the following at June 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Sales and other taxes $ 6,025,000 $ 5,512,000
Payroll and payroll taxes 247,000 200,000
Commissions 0 178,000
Carrier usage 2,936,000 672,000
Other 1,321,000 483,000
----------- -----------
$10,529,000 $ 7,045,000
</TABLE>
7. REVOLVING CREDIT FACILITY. In July 1999, as amended in August 2000, the
Company entered into a $2,500,000 two-year revolving credit facility with
Citizens Bank of Massachusetts. The availability of the credit facility is based
on a percentage of eligible receivables and includes covenants requiring certain
levels of debit customers and operating results through the term of the
agreement. At June 30, 2000, the Company had $549,000 in direct borrowings
outstanding under the facility and had $825,000 in standby letters of credit to
certain vendors that were collateralized by the credit facility. At June 30,
2000, the Company was not in compliance with certain loan covenants. However,
such covenant violations were waived pursuant to the August 2000 amendment. Such
amendment also modified the termination date of the facility to December 29,
2000 and imposed a requirement that the Company obtain additional capital and
equity contributions of $5 million by August 31, 2000.
8. 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. 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
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<PAGE> 11
due to SmarTalk's impaired financial condition and the number and value of
claims from unsecured creditors, the amount of any recovery against SmarTalk is
questionable. The Company may have some exposure to a preference claim with
respect to certain payments received by the Company from SmarTalk prior to its
bankruptcy filing, although the Company intends to aggressively defend against
any such claim.
The Company is not involved in any other 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.
9. LIQUIDITY. Cash requirements for the foreseeable future will include funds
needed to sustain operations and for existing obligations. Management believes
that an infusion of cash from debt or equity financing is required. In August
2000, the Company raised approximately $2.7 million through a private placement
of equity. See "Note 11. Subsequent Events" for a detailed description. The
Company is currently in discussions with various financial institutions to raise
the additional funding that the Company believes is required. Pursuant to the
August 2000 amendment to the Company's credit facility with Citizens Bank of
Massachusetts, the Company has committed to raise a total of $5,000,000 of such
funding by August 31, 2000. The Company is also seeking other opportunities to
improve operations through strategic business alliances.
10. SEGMENT INFORMATION. Segment information listed below reflects the three
principal business units of the Company. Each segment is managed according to
the products that 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 six-month periods ended June 30, 2000 and
1999 is summarized as follows:
<TABLE>
<CAPTION>
Debit Rental Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
2000
Revenues $ 12,307,000 $ 5,410,000 $ 212,000 $ 17,929,000
------------ ------------ ------------ ------------
Income (loss) before
income taxes $ (6,569,000) $ 299,000 $ 21,000 $ (2,819,000) $ (9,068,000)
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Debit Rental Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 5,095,000 $ 6,443,000 $ 544,000 $ 12,082,000
------------ ------------ ------------ ------------
Income (loss) before
income taxes $ (5,351,000) $ 221,000 $ (28,000) $ (2,770,000) $ (7,929,000)
------------ ------------ ------------ ------------ ------------
</TABLE>
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<PAGE> 12
Operating segment information for the three-month periods ended June 30, 2000
and 1999 is summarized as follows:
<TABLE>
<CAPTION>
Debit Rental Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
2000
Revenues $ 5,284,000 $ 2,815,000 $ 86,000 $ 8,185,000
----------- ----------- ----------- -----------
Income (loss) before
income taxes $(3,495,000) $ 337,000 $ 6,000 $(1,433,000) $(4,585,000)
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Debit Rental Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 2,874,000 $ 3,313,000 $ 274,000 $ 6,461,000
----------- ----------- ----------- -----------
Income (loss) before
income taxes $(2,511,000) $ 277,000 $ 25,000 $(1,372,000) $(3,581,000)
----------- ----------- ----------- ----------- -----------
</TABLE>
11. SUBSEQUENT EVENTS. In August 2000, the Company raised approximately $2.7
million through a private placement of equity with various investors. Such
financing included the exchange of certain outstanding shares of Series D
Convertible Preferred Stock for Common Stock, in conjunction with the purchase
of new shares of Common Stock by such Series D holders, as well as the exercise
of certain outstanding warrants for Common Stock. Upon completion of such
financing, the Company will file a report on Form 8-K detailing such
transactions.
See Item 6 (b) "Reports on Form 8-K", regarding the July 31, 2000 delisting of
the Company's Common Stock from the Nasdaq National Market to the OTC Bulletin
Board.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
Revenues for the first half of 2000 were $17,929,000, compared to $12,082,000
for the first half of 1999, an increase of $5,847,000 or 48%. The net loss
applicable to Common Stock for 2000 was $9,602,000, or $1.01 per share, compared
to $12,317,000, or $1.60 per share, for 1999. The net loss applicable to Common
Stock for 1999 included a one-time non-cash preferred stock dividend of
$4,018,000, $.52 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.
Revenues
Debit, or prepaid, operations had revenues of $12,307,000 for the first half of
2000, compared to $5,095,000 for the first half of 1999. The increase in
revenues of $7,212,000 (142%) was due to the continued growth of the private
label program, which is co-branded with MCI WorldCom and the Company's CellEase
brand name. 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. Subsequently, the Company worked closely with MCI
WorldCom to significantly increase its number of prepaid cellular customers.
Debit revenues for the first six months of 2000 also included the sale of
approximately 44,000 prepaid cellular phones for $2,341,000, compared to the
sale of approximately 9,000 prepaid cellular phones for $768,000, in the first
six months of 1999. Fiscal 1999 debit revenues were negatively impacted by the
Company's termination of its relationship with SmarTalk TeleServices, Inc.
("SmarTalk") in December 1998 (see "Legal Proceedings"). Throughout the first
half of 1999, the Company's prepaid cellular customer base deteriorated, as
customers were unable to purchase debit cards from retailers previously
associated with SmarTalk.
The Company's cellular telephone rental operations had revenues of $5,410,000
for the first half of 2000, compared to $6,443,000 for the first half of 1999.
The decrease of $1,033,000 (16%) was attributable to a drop of 23% in the number
of rental agreements to 43,000, partially offset with an increase in the average
revenue per rental agreement to $125 for 2000, from $115 for 1999. During the
first half of 2000, the Company converted its cellular phone inventory to a
Nextel product, which required a partial reallocation of sales resources. In
addition, during the first half of 1999, the Company ran various special
promotions, such as "first 10 minutes free", that increased sales for that
period.
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<PAGE> 14
The Company's cellular activation operations had revenues of $212,000 for the
first half of 2000, compared to $544,000 for the first half of 1999. The
decrease of $332,000 (61%) was mainly attributable to the loss of revenues from
the Connecticut activation location, which had revenues of $193,000 in the first
half of 1999 and was closed in November 1999. The balance of the decrease in
revenues was attributable to the de-emphasis on activations related to the MOVE
program, such program was discontinued in the second quarter of 2000. The MOVE
program provided cellular service activations for customers who move from one
cellular market to another.
Gross Margin
Gross margin was 16% of revenues for the first half of 2000, compared to 22% for
the first half of 1999. The decrease in gross margin was mainly due to a change
in the revenue mix, with debit revenues significantly surpassing rental
revenues, and the improvement of gross margin for debit operations. The
following table summarizes the change in the revenue mix and the corresponding
gross margins for the two periods:
<TABLE>
<CAPTION>
2000 1999
Revenues Gross margin Revenues Gross margin
<S> <C> <C> <C> <C>
Debit 69% (5%) 42% (28%)
Rental 30% 63% 53% 60%
Activation 1% 31% 5% 39%
100% 16% 100% 22%
</TABLE>
Gross margin for debit operations improved significantly in the first half of
2000, compared to the first half of 1999. The first half of 1999 was negatively
impacted by the termination of the Company's relationship with SmarTalk, in
December 1998. As a result of this termination, during most of fiscal 1999 the
Company had a significant gap between lines under contract with carriers and
such carriers' lines that were active with customers, resulting in higher than
normal carrier access charges during that period. Gross margin for the first
half of 2000 was negatively impacted by a per minute rate reduction offered to
customers. Effective mid-December 1999, the Company reduced its prepaid cellular
rate from $.79 per minute to rates as low as $.39 per minute, depending on the
denomination of the debit card redeemed. The negative impact on gross margin of
the price decrease is expected to be offset by increased usage by customers and
by continued reductions in carrier charges.
Gross margin for the portable cellular rental operations increased slightly in
the first half of 2000, compared to the first half of 1999, due to lower carrier
charges. Gross margin for the activation operations decreased in the first half
of 2000, compared to the first half of 1999, due to the national MOVE program
representing all of the activation revenues in 2000, compared to 64% in 1999.
The MOVE program historically has had lower gross margins than the Connecticut
activation program.
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<PAGE> 15
Selling, General & Administrative Expenses
Selling, general and administrative expenses (SG&A) were $11,443,000 for the
first half of 2000, compared to $9,672,000 for the first half of 1999, an
increase of $1,771,000 (18%). As a percentage of revenues, SG&A decreased to 64%
for the first half of 2000, compared to 80% for the first half of 1999. The
decrease, or improvement, was attributable to several factors. SG&A for the
first half of 1999, as a percentage of revenues, were negatively impacted by
SmarTalk. The Company added a new call center in Hartford and expanded its
existing call center in St. Louis in the fourth quarter of 1998, in anticipation
of the significant growth the Company expected from its SmarTalk relationship.
As previously discussed, the significant growth did not occur. Consequently,
SG&A, as a percentage of revenues, increased dramatically in the first half of
1999 compared to the corresponding period in the prior year. As revenues
increased throughout the remainder of 1999 and the first half of 2000, the
Company was able to improve, or reduce, SG&A as a percentage of revenues. The
$1,771,000 increase in SG&A included $1,103,000 related to the services
agreement with Retail Distributors, Inc. entered into in early 1999 and the
balance was mainly attributable to additional personnel in the call centers to
accommodate the additional call volume.
Bad Debt Expense
Bad debt expense was $399,000 for the first half of 2000, compared to $669,000
for the first half of 1999, a decrease of $270,000 (40%). As a percentage of
revenues, bad debt expense decreased to 2% for the first half of 2000, compared
to 6% for the first half of 1999. The decrease in bad debt expense for 2000,
compared to 1999, was mainly due to an improvement in collection procedures in
cellular phone rental operations. In addition, debit operations, which had
dramatic revenue growth between the two periods compared to rental operations,
historically has had lower bad debt expense than rental operations.
Interest Expense
Interest expense was $126,000 for the first half of 2000, compared to $249,000
for the first half of 1999. Interest expense for the first half of 2000 was
mainly due to the Company's revolving credit facility with Citizens Bank of
Massachusetts and debt from acquisitions made in the prior years. Interest
expense for the first half of 1999 was mainly due to debt from acquisitions made
in prior years, debt to the Company's former parent, and debt financing
completed in May 1998. In February 1999, the Company used a portion of the $15
million private equity placement proceeds to repay $1,411,000 of the debt to its
former parent debt and approximately $4 million of the May 1998 debt.
Preferred Stock Dividend
Preferred stock dividends were $529,000 for the first half of 2000, compared to
$4,381,000 for the first half of 1999. Preferred stock dividends for the first
half of 2000 represented the 6% premium on the outstanding Series C and D
Shares. As of June 30, 2000, approximately 49% of the Series C
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<PAGE> 16
Shares had been converted into Common Shares. Preferred stock dividends for the
first half of 1999 represented the 6% premium on the Series C Shares and the
$4,018,000 beneficial conversion feature associated with the Series C Shares. In
accordance with Emerging Issues Task Force Topic D-60, the Company recognized a
beneficial conversion feature as a one-time non-cash preferred stock dividend.
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 June 30, 2000 compared to Three Months Ended June 30, 1999
Revenues for the second quarter of 2000 were $8,185,000, compared to $6,461,000
for the second quarter of 1999, an increase of $1,724,000 (27%). The net loss
applicable to Common Stock for 2000 was $4,807,000, compared to $3,808,000 for
1999. The net loss per Common Stock was $0.47 for the second quarter of 2000,
compared to $0.49 for the second quarter of 1999.
Revenues
In the second quarter, the Company's debit operations had revenues of $5,284,000
for 2000, compared to $2,874,000 for 1999. The increase in revenues of
$2,410,000 (84%) was due to the growth of the private label program, which is
co-branded with MCI WorldCom and the Company's CellEase brand name.
In the second quarter, the Company's cellular telephone rental operations had
revenues of $2,815,000 for 2000, compared to $3,313,000 for 1999. The decrease
of $498,000 (15%) was attributable to a drop of 22% in the number of rentals,
partially offset by an increase in the average revenue per rental to $131 for
2000, from $120 for 1999. During the first half of 1999, the Company ran various
special promotions, such as "first 10 minutes free", which increased the number
of rentals, but also reduced the revenue per rental.
In the second quarter, the Company's cellular activation operations had revenues
of $86,000 for 2000, compared to $274,000 for 1999. The decrease of $188,000
(68%) was partially attributable to the loss of revenues from the Connecticut
activation location, which had revenues of $89,000 in the first half of 1999 and
was closed in November 1999. The balance of the decrease was related to the MOVE
activation program, which the Company discontinued in the second quarter of
2000.
Gross Margin
In the second quarter, gross margin was 15% of revenues for 2000, compared to
25% for 1999. The decrease in gross margin was mainly due to a change in the
revenue mix, with debit revenues significantly surpassing rental revenues. The
following table summarizes the revenues by segment and the corresponding gross
margins for the two periods:
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<PAGE> 17
<TABLE>
<CAPTION>
2000 1999
Revenues Gross margin Revenues Gross margin
<S> <C> <C> <C> <C>
Debit 65% (12%) 45% (19%)
Rental 34% 66% 51% 63%
Activation 1% 29% 4% 38%
100% 15% 100% 25%
</TABLE>
In the second quarter, gross margin for the debit operations was negatively
impacted by the per minute rate reduction previously discussed and by debit
phones sales subsidies to stimulate sales during the historically slow summer
months. The gross margin for the portable cellular rental operations improved
due to lower carrier charges. The 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 second quarter, SG&A were $5,578,000 for 2000, compared to $4,869,000 for
1999, an increase of $709,000 (15%). As a percentage of revenues, SG&A decreased
to 68% for 2000, compared to 75% for 1999. The decrease, or improvement, was
mainly attributable to the combination of the significant growth in debit
revenues together with better expense controls. The $709,000 increase in SG&A
included $480,000 related to the services agreement with Retail Distributors,
Inc. entered into in early 1999 and the balance was mainly attributable to
additional personnel in the call centers to accommodate the additional call
volume.
Bad Debt Expense
In the second quarter, bad debt expense was $191,000 for 2000, compared to
$289,000 for 1999, a decrease of $98,000 (34%). As a percentage of revenues, bad
debt expense decreased to 2% for 2000, compared to 4% for 1999. The decrease in
bad debt expense was due to an improvement in collection procedures in cellular
phone rental operations.
Interest Expense
In the second quarter, interest expense was $49,000 for 2000, compared to
$55,000 for 1999. Interest expense for 2000 was mainly due to the Company's
revolving credit facility with Citizens Bank of Massachusetts and debt from
acquisitions made in the prior years. Interest expense for 1999 was mainly due
to debt from acquisitions made in prior years, debt to the Company's former
parent, and debt financing completed in May 1998.
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<PAGE> 18
Preferred Stock Dividend
In the second quarter, preferred stock dividends were $222,000 for 2000,
compared to $227,000 for 1999. Preferred stock dividends for 2000 represented
the 6% premium on the outstanding Series C and D Shares. Preferred stock
dividends for 1999 represented the 6% premium on the outstanding Series C
Shares.
LIQUIDITY AND CAPITAL RESOURCES:
The Company had a working capital deficit of $16,014,000 at June 30, 2000,
compared to a deficit of $8,248,000 at December 31, 1999. Stockholders' deficit
at June 30, 2000 was $23,444,000, compared to a deficit of $22,483,000 at
December 31, 1999.
Net cash used in operations for the six-month period ended June 30, 2000 was
$1,637,000. This was mainly due to the operating loss for the period, offset by
a $3,139,000 increase in accounts payable and other current liabilities as the
Company delayed the payment to vendors beyond the normal 30 day terms, a
$1,113,000 decrease in receivables, and a $612,000 reduction in the debit
cellular phones inventory. For the six-month period ended June 30, 1999 net cash
used in operations was $8,752,000. This was primarily due to the operating loss
for the period.
Net cash used in investing activities for the six-month period ended June 30,
2000 was $111,000. This was mainly for the purchase of computers and related
accessories. For the six-month period ended June 30, 1999, net cash used in
investing activities was $189,000. This was mainly attributable to the purchase
of computer equipment to handle the CellEase program.
During the six-month period ended June 30, 2000, the Company received $120,000
from the exercise of 24,000 warrants. The Company also borrowed $549,000 under
its revolving credit facility with Citizens Bank of Massachusetts. The Company
continued to make required payments on its existing debt. For the six-month
period ended June 30, 1999, the Company raised $14,506,000, net of expenses, in
a private equity placement. The Company used a portion of the proceeds to repay
the debt owed to its former parent and approximately $4,000,000 of a
debt-financing package that was completed in May 1998. In addition,
approximately 275,000 warrants were exercised, raising another $1,200,000.
Cash requirements for the foreseeable future will include funds needed to
sustain operations and for existing obligations. Management believes that an
infusion of cash from debt or equity financing is required. In August 2000, the
Company raised approximately $2.7 million through a private placement of equity.
See "Note 11. Subsequent Events" for a detailed description. The Company is
currently in discussions with various financial institutions to raise the
additional funding the Company believes is required. Pursuant to the August 2000
amendment to the Company's credit facility with Citizens Bank of Massachusetts,
the Company has committed to raise a total of $5,000,000 of such funding by
August 31, 2000. The Company is also seeking other opportunities to improve
operations through strategic business alliances.
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<PAGE> 19
"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.
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<PAGE> 20
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 June 28, 2000. A
total of 5,408,047 votes were cast, out of a total of 10,556,620 potential
votes. The following proposals were adopted by the margins indicated:
1. To elect the following directors:
<TABLE>
<CAPTION>
NUMBER OF SHARES
Director FOR WITHHELD
<S> <C> <C>
Anthony D. Autorino 5,268,422 139,625
David L. Bogue 5,268,422 139,625
Bruce Carswell 5,268,422 139,625
Thomas H. Decker 5,268,422 139,625
William A. DiBella 5,268,422 139,625
Vincent DiVincenzo 5,268,422 139,625
Ajit G. Hutheesing 5,268,422 139,625
Nicholas E. Sinacori 5,268,422 139,625
</TABLE>
2. To approve an amendment to the Company's Second Restated Certificate of
Incorporation to increase the authorized shares of the Company's Common
Stock from 20 million to 30 million shares.
<TABLE>
<S> <C>
For 5,330,537
Against 74,510
Abstain 3,000
</TABLE>
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<PAGE> 21
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 1,325,000
to 2,250,000 shares.
<TABLE>
<S> <C>
For 5,283,611
Against 121,770
Abstain 2,666
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
3.(i) Certificate of Amendment of Certificate of Incorporation, dated June
30, 2000.
4.1 Third Amendment to Loan Agreement by and between the Company and
Citizens Bank of Massachusetts dated August 8, 2000.
27. Financial Data Schedule (filed only electronically with the SEC)
(B) REPORTS ON FORM 8-K
On July 31, 2000, the Company filed a report on Form 8-K, Item 5,
concerning the Company's notification by The Nasdaq Stock Market, Inc.
that beginning July 31, 2000, its common stock was no longer listed on
The Nasdaq Stock Market due to the Company's failure to satisfy the
minimum $50,000,000 market capitalization requirement for continued
listing on The Nasdaq National Market or the minimum $35,000,000 market
capitalization requirement for listing on The Nasdaq SmallCap Market.
The Company's common stock was transferred to the OTC Bulletin Board
System, and the shares began trading in this system beginning on July
31, 2000 under the "STCL" symbol.
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<PAGE> 22
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.
<TABLE>
SHARED TECHNOLOGIES CELLULAR, INC.
<S> <C>
Date: August 13, 2000 By: /s/ Vincent DiVincenzo
Vincent DiVincenzo
Chief Financial Officer
(Chief Accounting Officer and
Duly Authorized Officer)
</TABLE>
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