<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)
Delaware 06-1386411
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Great Meadow Road, Suite 104, Wethersfield, Connecticut 06109
(Address of principal executive office) (Zip Code)
(860) 258-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 10, 2000, there were 13,811000 shares outstanding of the
registrant's Common Stock, $.01 par value
<PAGE> 2
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 September 30, 2000 and
December 31, 1999 4
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2000 and 1999 5
Consolidated Statements of Operations for the Three Months Ended
September 30, 2000 and 1999 6
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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 2. Changes in Securities and Use of Proceeds. 20
Item 6. Exhibits and Reports on Form 8-K. 20
SIGNATURE 21
</TABLE>
<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 September 30, 2000, and for the three-month and nine-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.
As discussed in Note 9, certain conditions indicate that the Company may be
unable to continue as a going concern. The consolidated financial statements do
not include any adjustments that might be necessary should the Company be
unable to continue as a going concern.
Roseland, New Jersey /s/ Rothstein, Kass & Company, P.C.
November 6, 2000
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 512,000 $ 1,635,000
Accounts receivable, less allowance for doubtful accounts
of $644,000 and $495,000 in 2000 and 1999 1,895,000 3,612,000
Carrier commissions receivable, net 110,000 178,000
Inventories 1,031,000 2,316,000
Prepaid expenses and other current assets 3,413,000 4,526,000
------------------- -----------------
Total current assets 6,961,000 12,267,000
------------------- -----------------
TELECOMMUNICATIONS AND OFFICE EQUIPMENT, NET 1,213,000 1,514,000
------------------- -----------------
OTHER ASSETS:
Intangible assets, net 5,822,000 6,289,000
Deposits and other 617,000 1,515,000
------------------- -----------------
Total other assets 6,439,000 7,804,000
------------------- -----------------
$14,613,000 $21,585,000
=================== =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $331,000 $535,000
Accounts payable 9,163,000 8,580,000
Accrued expenses and other current liabilities 9,247,000 7,045,000
Deferred revenues 4,822,000 4,355,000
------------------- -----------------
Total current liabilities 23,563,000 20,515,000
------------------- -----------------
LONG-TERM DEBT, LESS CURRENT PORTION 541,000 2,492,000
------------------- -----------------
REDEEMABLE PUT WARRANT 200,000 200,000
------------------- -----------------
SERIES C AND D REDEEMABLE PREFERRED STOCK, issued and
outstanding 7,800 shares in 2000 and 20,100 shares in 1999 8,531,000 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 13,797,000 shares in 2000
and 8,452,000 in 1999 138,000 85,000
Capital in excess of par value 46,388,000 28,437,000
Accumulated deficit (64,748,000) (51,005,000)
------------------- -----------------
Total stockholders' deficit (18,222,000) (22,483,000)
------------------- -----------------
$14,613,000 $21,585,000
=================== =================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
<PAGE> 5
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
REVENUES $26,236,000 $19,975,000
COST OF REVENUES 22,056,000 15,052,000
------------- -------------
GROSS MARGIN 4,180,000 4,923,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 16,462,000 14,931,000
BAD DEBT EXPENSE 583,000 906,000
------------- -------------
LOSS FROM OPERATIONS (12,865,000) (10,914,000)
INTEREST EXPENSE, NET (181,000) (424,000)
------------- -------------
LOSS BEFORE INCOME TAXES (13,046,000) (11,338,000)
INCOME TAXES (8,000) (7,000)
------------- -------------
NET LOSS (13,054,000) (11,345,000)
PREFERRED STOCK DIVIDENDS (689,000) (4,614,000)
------------- -------------
NET LOSS APPLICABLE TO COMMON STOCK ($13,743,000) ($15,959,000)
============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE ($1.31) ($2.04)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,501,000 7,839,000
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
<PAGE> 6
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended September 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES $8,307,000 $7,893,000
COST OF REVENUES 7,027,000 5,631,000
------------ ------------
GROSS MARGIN 1,280,000 2,262,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,019,000 5,259,000
BAD DEBT EXPENSE 184,000 237,000
------------ ------------
LOSS FROM OPERATIONS (3,923,000) (3,234,000)
INTEREST EXPENSE, NET (55,000) (175,000)
------------ ------------
LOSS BEFORE INCOME TAXES (3,978,000) (3,409,000)
INCOME TAXES (3,000) 0
------------ ------------
NET LOSS (3,981,000) (3,409,000)
PREFERRED STOCK DIVIDENDS (160,000) (233,000)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK ($4,141,000) ($3,642,000)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE ($0.33) ($0.45)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 12,375,000 8,148,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
<PAGE> 7
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss, before preferred stock dividend ($13,054,000) ($11,345,000)
Adjustments to reconcile net loss to net cash
used in operating activities;
Accretion of interest 72,000 42,000
Depreciation and amortization 2,872,000 1,010,000
Common stock issued for compensation
and services 218,000 129,000
Change in assets and liabilities:
Accounts receivable 1,695,000 (2,190,000)
Carrier commissions receivable 68,000 584,000
Inventories 1,285,000 (423,000)
Prepaid expenses and other current assets (85,000) (917,000)
Accounts payable and other current liabilities 2,785,000 1,602,000
Deferred revenues 467,000 (238,000)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (3,677,000) (11,746,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in deposits 127,000 (22,000)
Purchases of equipment (185,000) (391,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (58,000) (413,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from financial facility 0 1,831,000
Repayments of long-term debt and capital lease obligations (455,000) (4,282,000)
Payments to former parent 0 (1,411,000)
Proceeds from issuance of common and preferred stock 1,472,000 14,499,000
Proceeds from exercise of warrants and options 1,595,000 1,618,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,612,000 12,255,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (1,123,000) 96,000
CASH, BEGINNING OF PERIOD 1,635,000 229,000
------------ ------------
CASH, END OF PERIOD $ 512,000 $ 325,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-7-
<PAGE> 8
Shared Technologies Cellular, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) (continued)
For the Nine Months Ended September 30,
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 213,000 $ 516,000
=========== ===========
Income taxes $ 9,000 $ 7,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of common stock in connection
with Services Agreement $ 0 $ 2,832,000
=========== ===========
Issuance of warrants in connection with certain debt
instruments and preferred stock $ 0 $ 275,000
=========== ===========
Redeemable preferred stock issued as preferred
stock dividends and beneficial conversion feature $ 689,000 $ 4,614,000
=========== ===========
Conversion of convertible notes into common stock $ 1,700,000 $ 200,000
=========== ===========
Conversion of redeemable preferred stock into common stock $13,019,000 $ 207,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-8-
<PAGE> 9
Shared Technologies Cellular, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 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 cellular 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 nine-month periods ended September 30, 2000 and 1999
because all other securities would have been antidilutive as a result of the
Company's losses.
-9-
<PAGE> 10
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS. Prepaid expenses and other current
assets consist of the following at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Prepaid consulting agreement $1,346,000 $2,492,000
Prepaid telephone line charges 735,000 695,000
Prepaid access fees 366,000 672,000
Note receivable 500,000 500,000
Other 466,000 167,000
---------- ----------
$3,413,000 $4,526,000
</TABLE>
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES. Accrued expenses and other
current liabilities consist of the following at September 30, 2000 and December
31, 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Sales and other taxes $6,297,000 $5,512,000
Payroll and payroll taxes 374,000 200,000
Commissions 0 178,000
Carrier usage 1,790,000 672,000
Other 786,000 483,000
---------- ----------
$9,247,000 $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 September 30, 2000, the Company had no direct borrowings
outstanding under the facility and had $775,000 in standby letters of credit to
certain vendors that were collateralized by the credit facility. At September
30, 2000, the Company was not in compliance with certain loan covenants and had
not asked for a waiver. The August 2000 amendment also modified the termination
date of the credit facility to December 29, 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 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 approximately $847,000 in payments received
-10-
<PAGE> 11
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 consolidated financial condition,
results of operations or cash flows.
9. LIQUIDITY. The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company has
suffered significant losses from operations and has a working capital deficit.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. An immediate infusion of cash from debt or equity financing
is required to meet the Company's short-term and long-term liquidity
requirements.
10. DELISTING OF THE COMPANY'S COMMON STOCK. On July 31, 2000, the Company was
notified by The Nasdaq Stock Market, Inc. that beginning July 31, 2000, its
common stock would no longer be 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 on July 31, 2000 under the symbol: STCL.OB.
11. 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 nine-month periods ended September 30,
2000 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
Debit Rental Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
2000
Revenues $ 17,873,000 $ 8,147,000 $ 216,000 $ 26,236,000
------------ ------------ ------------ ------------
Income (loss) before
income taxes $ (9,655,000) $ 756,000 $ 22,000 $ (4,169,000) $(13,046,000)
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Debit Rental Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 9,212,000 $ 9,902,000 $ 861,000 $ 19,975,000
------------ ------------ ------------ ------------
Income (loss) before
income taxes $ (7,391,000) $ 558,000 $ (16,000) $ (4,489,000) $(11,338,000)
------------ ------------ ------------ ------------ ------------
</TABLE>
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<PAGE> 12
Operating segment information for the three-month periods ended September 30,
2000 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
Debit Rental Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
2000
Revenues $ 5,566,000 $ 2,737,000 $ 4,000 $ 8,307,000
----------- ----------- ----------- -----------
Income (loss) before
income taxes $(3,086,000) $ 459,000 $ 1,000 $(1,352,000) $(3,978,000)
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Debit Rental Activation Corporate Consolidated
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 4,117,000 $ 3,459,000 $ 317,000 $ 7,893,000
----------- ----------- ----------- -----------
Income (loss) before
income taxes $(2,112,000) $ 319,000 $ 5,000 $(1,621,000) $(3,409,000)
----------- ----------- ----------- ----------- -----------
</TABLE>
12. SUBSEQUENT EVENTS. On September 7, 2000, the Company announced its entry
into a letter of intent with SATX, Inc. contemplating the acquisition of the
Company by SATX through a merger of the two companies. As of the date of this
filing, a definitive plan and agreement of merger has been substantially
negotiated but not yet executed. Furthermore, while SATX diligently and actively
continues to pursue the necessary financing for the proposed transaction, it has
not yet obtained such financing. Accordingly, there can be no assurance that the
proposed transaction will be consummated.
-12-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Nine Months Ended September 30, 2000 compared to Nine Months Ended September 30,
1999
Revenues for the first nine months of 2000 were $26,236,000, compared to
$19,975,000 for the first nine months of 1999, an increase of $6,261,000 or 31%.
The net loss applicable to Common Stock for 2000 was $13,743,000, or $1.31 per
share, compared to $15,959,000, or $2.04 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 $17,873,000 for the first nine
months of 2000, compared to $9,212,000 for the first nine months of 1999. The
increase in revenues of $8,661,000 (94%) 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 nine months of 2000 also included the sale of
approximately 77,000 prepaid cellular phones for $3,543,000, compared to the
sale of approximately 31,000 prepaid cellular phones for $2,170,000, in the
first nine 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 $8,147,000
for the first nine months of 2000, compared to $9,902,000 for the first nine
months of 1999. The decrease of $1,755,000 (18%) was attributable to a drop of
27% in the number of rental agreements to 83,000, partially offset with an
increase in the average revenue per rental agreement to $134 for 2000, from $119
for 1999. The decrease in the number of rentals is due to several factors.
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 second quarter of 2000, one of the Company's
car rental partners decided to discontinue offering cellular telephone rentals.
-13-
<PAGE> 14
The Company's cellular activation operations had revenues of $216,000 for the
first nine months of 2000, compared to $861,000 for the first nine months of
1999. The decrease of $645,000 (75%) was mainly attributable to the loss of
revenues from the Connecticut activation location, which had revenues of
$277,000 in the first nine months 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 nine months of 2000, compared to
25% for the first nine months 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 68% (6%) 46% (15%)
Rental 31% 64% 50% 60%
Activation 1% 31% 4% 35%
100% 16% 100% 25%
</TABLE>
Gross margin for debit operations improved significantly in the first nine
months of 2000, compared to the first nine months of 1999. 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
nine months 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. The Company is
currently working with its various carriers to significantly reduce line
charges. Gross margin for 2000 was also negatively impacted by subsidies offered
by the Company on the sale of prepaid cellular phones.
Gross margin for the portable cellular rental operations increased slightly in
the first nine months of 2000, compared to the first nine months of 1999, due to
lower carrier charges. Gross margin for the activation operations decreased in
the first nine months of 2000, compared to the first nine months 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 $16,462,000 for the
first nine months of 2000, compared to $14,931,000 for the first nine months of
1999, an increase of $1,531,000 (10%). The $1,531,000 increase in SG&A included
$1,529,000 related to the services agreement with Retail Distributors, Inc.
entered into in early 1999. The services agreement, as amended, was valued at
approximately $5.5 million and is being amortized over the life of the services
agreement. As a percentage of revenues, SG&A decreased to 63% for the first nine
months of 2000, compared to 75% for the first nine months of 1999. Excluding the
charge related to the services agreement, SG&A decreased to 54% of revenues for
the first nine months of 2000, compared to 71% of revenues for the first nine
months of 1999. The decrease, or improvement, was attributable to several
factors. SG&A for the first nine months 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 1999 compared to the prior year. As revenues increased through
the latter part of 1999 and the first nine months of 2000, the Company was able
to improve, or reduce, SG&A as a percentage of revenues. Early in the third
quarter of 2000, the Company implemented a 10% SG&A cost reduction and
anticipates implementing a slightly larger cost reduction in the fourth quarter
of 2000. The combination of both cost reductions is expected to reduce SG&A by
approximately $400,000 (14%) per month.
Bad Debt Expense
Bad debt expense was $583,000 for the first nine months of 2000, compared to
$906,000 for the first nine months of 1999, a decrease of $323,000 (36%). As a
percentage of revenues, bad debt expense decreased to 2% for the first nine
months of 2000, compared to 5% for the first nine months 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 $181,000 for the first nine months of 2000, compared to
$424,000 for the first nine months of 1999. Interest expense for the first nine
months 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 nine months 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.
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Preferred Stock Dividend
Preferred stock dividends were $689,000 for the first nine months of 2000,
compared to $4,614,000 for the first nine months of 1999. Preferred stock
dividends for the first nine months of 2000 represented the 6% premium on the
outstanding Series C and D Shares. As of September 30, 2000, approximately 49%
of the Series C Shares and 98% of the Series D Shares had been converted into
Common Shares. Preferred stock dividends for the first nine months 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 September 30, 2000 compared to Three Months Ended September
30, 1999
Revenues for the third quarter of 2000 were $8,307,000, compared to $7,893,000
for the third quarter of 1999, an increase of $414,000 (5%). The net loss
applicable to Common Stock for 2000 was $4,141,000, compared to $3,642,000 for
1999. The net loss per Common Stock was $0.33 for the third quarter of 2000,
compared to $0.45 for the third quarter of 1999.
Revenues
In the third quarter, the Company's debit operations had revenues of $5,566,000
for 2000, compared to $4,117,000 for 1999. The increase in revenues of
$1,449,000 (35%) 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 third quarter, the Company's cellular telephone rental operations had
revenues of $2,737,000 for 2000, compared to $3,459,000 for 1999. The decrease
of $722,000 (21%) was attributable to a drop of 35% in the number of rentals,
partially offset by an increase in the average revenue per rental to $154 for
2000, from $126 for 1999. The decrease in the number of rentals is due to
several factors. 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 second quarter of 2000,
one of the Company's car rental partners decided to discontinue offering
cellular telephone rentals.
In the third quarter, the Company's cellular activation operations had revenues
of $4,000 for 2000, compared to $317,000 for 1999. The decrease was attributable
to the closure in November 1999 of the Connecticut activation location and the
discontinuation of the MOVE activation program in the second quarter of 2000.
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Gross Margin
In the third quarter, gross margin was 15% of revenues for 2000, compared to 29%
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:
<TABLE>
<CAPTION>
2000 1999
Revenues Gross margin Revenues Gross margin
<S> <C> <C> <C> <C>
Debit 67% (9%) 52% 2%
Rental 33% 65% 44% 60%
Activation 0% 47% 4% 28%
100% 15% 100% 29%
</TABLE>
In the third quarter, gross margin for the debit operations was negatively
impacted by the per minute rate reduction previously discussed and by debit
phones sales subsidies offered by the Company. The gross margin for the portable
cellular rental operations improved due to lower carrier charges.
Selling, General & Administrative Expenses
In the third quarter, SG&A were $5,019,000 for 2000, compared to $5,259,000 for
1999, a decrease of $240,000 (5%). Included in SG&A for 2000 is $773,000,
compared to $300,000 for 1999, related to the services agreement with Retail
Distributors, Inc., as previously discussed. As a percentage of revenues, SG&A
decreased to 60% for 2000, compared to 67% for 1999. Excluding the charge
related to the services agreement, SG&A decreased to 51% of revenues for 2000,
compared to 63% of revenues for 1999. The decrease, or improvement, was mainly
attributable to the combination of the significant growth in debit revenues
together with a 10% cost reduction initiated in the beginning of the third
quarter.
Bad Debt Expense
In the third quarter, bad debt expense was $184,000 for 2000, compared to
$237,000 for 1999, a decrease of $53,000 (23%). As a percentage of revenues, bad
debt expense decreased to 2% for 2000, compared to 3% 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 third quarter, interest expense was $55,000 for 2000, compared to
$175,000 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 the revolving credit facility, debt from acquisitions made in prior years,
and debt financing completed in May 1998.
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Preferred Stock Dividend
In the third quarter, preferred stock dividends were $160,000 for 2000, compared
to $233,000 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 $16,602,000 at September 30, 2000,
compared to a deficit of $8,248,000 at December 31, 1999. Stockholders' deficit
at September 30, 2000 was $18,222,000, compared to a deficit of $22,483,000 at
December 31, 1999.
Net cash used in operations for the nine-month period ended September 30, 2000
was $3,677,000. This was mainly due to the operating loss for the period, offset
by a $2,785,000 increase in accounts payable and other current liabilities as
the Company delayed the payment to vendors beyond normal terms, a $1,650,000
decrease in debit operations receivables, and a $1,285,000 reduction in the
debit cellular phones inventory. For the nine-month period ended September 30,
1999 net cash used in operations was $11,746,000. This was mainly due to the
operating loss for the period and approximately $2,938,000 in additional
accounts receivable from the Company's CellEase distributors, partially offset
by an $807,000 decrease in cellular rental receivables and an increase in
accounts payable.
Net cash used in investing activities for the nine-month period ended September
30, 2000 was $58,000. This was mainly for the purchase of Nextel cellular
phones, computer equipment and related accessories, partially offset by a
reduction in deposits. For the nine-month period ended September 30, 1999, net
cash used in investing activities was $413,000. This was mainly attributable to
the purchase of computer equipment and related accessories to handle the
CellEase program.
During the nine-month period ended September 30, 2000, the Company raised
$2,947,000, net of expenses, 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 (see "Item 2. Changes
in Securities and Use of Proceeds" for a detailed discussion). In addition, the
Company received $120,000 from the exercise of 24,000 unrelated warrants. The
Company continued to make required payments on its existing debt. For the
nine-month period ended September 30, 1999, the Company raised $14,466,000, 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 355,000 warrants and options were exercised, raising
another $1,618,000.
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The Company has suffered significant losses from operations and has a working
capital deficit. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. An immediate infusion of cash from debt
or equity financing is required to meet the Company's short-term and long-term
liquidity requirements.
"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 consolidated financial condition, results of
operations or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In August 2000, the Company raised $2,975,000 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. The Company raised $1,500,000 with the sale of 600,000 new shares of
Common Stock and the exchange of 6,000 shares of Series D Convertible Preferred
Stock into 1,577,000 shares of Common Stock. An additional $1,500,000 was raised
through the exercise of 1,008,000 warrants into Common Stock. The proceeds were
used to meet working capital requirements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27. Financial Data Schedule (filed only electronically with the SEC)
(b) REPORTS ON FORM 8-K
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 would no longer be
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 on July 31, 2000 under the symbol: STCL.OB.
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<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
SHARED TECHNOLOGIES CELLULAR, INC.
Date: November 13, 2000 By: /s/ Vincent DiVincenzo
Vincent DiVincenzo
Chief Financial Officer
(Chief Accounting Officer and
Duly Authorized Officer)
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