-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BQv7+5g96bIww2iGJ0GymfK5IgHsWFMJus3GTfRlcdKrqHGgvXF86sxi49skfMFV YmJxUdBynd8Y+rbQCMEYow== 0000817632-97-000012.txt : 19971117 0000817632-97-000012.hdr.sgml : 19971117 ACCESSION NUMBER: 0000817632-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHARED TECHNOLOGIES FAIRCHILD INC CENTRAL INDEX KEY: 0000817632 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 870424558 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17366 FILM NUMBER: 97717590 BUSINESS ADDRESS: STREET 1: 100 GREAT MEADOW RD STREET 2: STE 104 CITY: WETHERSFIELD STATE: CT ZIP: 06109 BUSINESS PHONE: 8602582400 MAIL ADDRESS: STREET 1: 100 GREAT MEADOW ROAD SUITE 104 STREET 2: 100 GREAT MEADOW ROAD SUITE 104 CITY: WETHERSFIELD STATE: CT ZIP: 06109 FORMER COMPANY: FORMER CONFORMED NAME: SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP /CT DATE OF NAME CHANGE: 19960430 FORMER COMPANY: FORMER CONFORMED NAME: SHARED TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 SEPTEMBER 30, 1997 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarterly Period Ended September 30, 1997 [ ] 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 0-17366 SHARED TECHNOLOGIES FAIRCHILD INC. (exact name of registrant as specified in its charter) Delaware 87-0424558_____ (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 100 Great Meadow Road, Suite 104 Wethersfield, CT 06109 (Address of principal executive offices) (860) 258-2400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date. Class Outstanding at November 14, 1997 Common Stock, $.004 par value 17,174,622shares PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1996 Consolidated Statements of Operations for the three months ended September 30, 1997 and 1996 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 1997 Notes to Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations PART II OTHER INFORMATION Item 1 Legal Proceedings Item 6 Exhibits and Reports on Form 8-K Signature Page Item 1. Financial Statements Shared Technologies Fairchild Inc. Consolidated Balance Sheets September 30, 1997 and December 31, 1996 (in thousands)
September 30,1997 December 31, 1996 ASSETS (unaudited) CURRENT ASSETS: Cash $ 178 $ 2,703 Accounts receivable, less allowance for doubtful accounts of $300 in 1997 and $611 in 1996 34,155 32,563 Inventories 4,735 1,976 Other current assets 3,961 1,853 Total current assets 43,029 39,095 Equipment: Property & Equipment 105,302 95,934 Accumulated depreciation (37,234) (28,169) 68,068 67,765 Other Assets: Investments in affiliates 754 457 Intangible assets 258,075 261,842 Deferred income taxes - - Other 316 407 259,145 262,706 Total assets $ 370,242 $ 369,566 The accompanying notes are an integral part of these financial statements
Shared Technologies Fairchild Inc. Consolidated Balance Sheets September 30, 1997 and December 31, 1996 (in thousands)
September 30,1997 December 31, 1996 (unaudited) Liabilities and Stockholders' Equity CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 16,083 $ 13,576 Accounts payable 18,394 17,356 Accrued expenses 7,948 9,558 Accrued dividends 1,555 435 Advanced billings 7,079 6,935 Total current liabilities 51,059 47,860 Long-Term Debt and Capital Lease Obligations less current portion 239,633 238,261 Redeemable Put Warrant 887 1,069 Convertible preferred stock $.01 par value, authorized 250 shares, outstanding 250 shares in 1997 and 1996 25,000 25,000 Special preferred stock $.01 par value, authorized 200 shares, outstanding 200 shares in 1997 and 1996 15,061 14,167 STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value, authorized 25,000 shares: Series C, outstanding no shares in 1997 and 428 shares in 1996 - 4 Series D, outstanding 58 shares in 1997 and 441 shares in 1996 1 4 Common stock; $.004 par value, 50,000 shares authorized, outstanding 17,186 shares in 1997 and 15,682 shares in 1996 69 63 Additional paid-in capital 78,137 76,054 Accumulated deficit (39,605) (32,916) Total stockholders' equity 38,602 43,209 Total liabilities and stockholders' equity $ 370,242 $ 369,566 The accompanying notes are an integral part of these financial statements
Shared Technologies Fairchild Inc. Consolidated Statements of Operations For the Nine Months Ended September 30, 1997 and 1996 (in thousands except per share data) (unaudited)
September 30, 1997 September 30, 1996 Revenue: Shared telecommunications services $ 82,539 $ 69,310 Telecommunications systems 59,240 41,585 Total Revenue 141,779 110,895 Cost of Revenue: Shared telecommunications services 39,272 34,233 Telecommunications systems 31,853 25,019 Total Cost of Revenue 71,125 59,252 Gross Margin 70,654 51,643 Selling, General & Administrative Expenses: 51,536 39,118 Operating Income 19,118 12,525 Other income (expense): Equity in loss of affiliate (210) (2,009) Net interest expense (21,694) (15,246) (21,904) (17,255) Income (loss) before income taxes and extraordinary items (2,786) (4,730) Income tax (214) (74) Income (loss) before extraordinary item (3,000) (4,804) Extraordinary item, loss on early retirement of debt - (310) Net Income(loss) (3,000) (5,114) Preferred Stock Dividends (3,689) (1,682) Net income (loss) applicable to common stock $ (6,689) $ (6,796) Net (loss) per common share: Income (loss) before extraordinary item $ (0.42) $ (0.49) Extraordinary item - (.02) Net income (loss) $ (0.42) $(0.52) Weighted Average Shares Outstanding 16,039 13,316 The accompanying notes are an integral part of these financial statements
Shared Technologies Fairchild Inc. Consolidated Statements of Operations For the Three Months Ended September 30, 1997 and 1996 (in thousands except per share data) (unaudited)
September 30, 1997 September 30, 1996 Revenue: Shared telecommunications services $ 26,937 $ 27,384 Telecommunications systems 19,224 19,739 Total Revenue 46,161 47,123 Cost of Revenue: Shared telecommunications services 13,061 13,143 Telecommunications systems 11,434 11,301 Total Cost of Revenue 24,495 24,444 Gross Margin 21,666 22,679 Selling, General & Administrative Expenses: 17,202 16,262 Operating Income 4,464 6,417 Other income (expense): Equity in loss of affiliate (24) (310) Net interest expense (7,214) (6,995) (7,238) (7,305) Income (loss) before income taxes and extraordinary items (2,774) (888) Income tax (6) (34) Income (loss) before extraordinary item (2,780) (922) Extraordinary item, loss on early retirement of debt - - Net Income(loss) (2,780) (922) Preferred Stock Dividends (1,390) (1,081) Net income (loss) applicable to common stock $ (4,170) $ (2,003) Net (loss) per common share: Income (loss) before extraordinary item $ (0.25) $ (0.13) Extraordinary item - - Net income (loss) $ (0.25) $(0.13) Weighted Average Shares Outstanding 16,531 15,066 The accompanying notes are an integral part of these financial statements
Shared Technologies Fairchild Inc. Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 1997 and 1996 (in thousands) (unaudited)
September 30,1997 September 30,1996 Cash Flows Used in Operating Activities: Net Income (loss) $ (3,000) $(5,114) Adjustments: Extraordinary loss on early retirement of debt - 310 Depreciation & amortization 14,294 11,525 Accretion of put warrant (182) - Equity in loss of subsidiary 210 2,009 Accretion on 12 1/4% bonds 11,782 7,803 Amortization of discount on note 14 Change in Assets and Liabilities: Accounts receivable (1,592) (1,031) Inventory (2,759) - Other current assets (2,369) (627) Other assets 1,016 1,732 Accounts payable 1,038 646 Accrued expenses (490) 2,039 Advanced billings 144 (472) Net cash provided by operating activities 18,092 18,834 Cash Flows Used in Investing Activities Purchases of equipment (9,368) (7,092) Investments in subsidiaries (507) (1,494) Acquisitions, net of cash acquired (1,240) (4,011) Net cash used in investing activities (11,115) (12,597) Cash Flows From Financing Activities: Preferred stock dividends (3,689) (1,007) Repayments of notes payable, long-term debt and capital lease obligations (9,903) (192,004) Borrowings under notes payable and long- 2,000 244,999 term debt Payments to affiliate - (8,407) Deferred finance costs (886) (9,416) Proceeds from sales of common stock 2,082 373 Repayment of FII preferred stock 894 (40,706) Net cash provided by (used in)financing activities (9,502) (6,168) Net increase (decrease) in cash (2,525) 69 Cash, Beginning of Period 2,703 476 Cash, End of Period $ 178 $ 545 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for - Interest $12,908 $ 6,300 Income taxes 214 119 Non cash transactions- Issuance of common stock to acquire FII - 27,750 Issuance of preferred stock to acquire FII - 38,269 The accompanying notes are an integral part of these financial statements.
Shared Technologies Fairchild Inc. Consolidated Statement of Stockholders' Equity For the period ended September 30, 1997 (in thousands)
Series C Series D Preferred Stock Preferred Stock Shares Amount Shares Amount Balance, January 1,1997 428 $ 4 441 $ 4 Preferred stock dividends - - - - Dividend accretion of specia - - - - preferred stock Exercise of common stock - - - - options and warrants Issuance of common stock for 401(k) plan match - - - - Preferred stock converted to common stock (428) (4) (383) (3) Net loss - - - - Balance, September 30,1997 - $ - 58 $ 1 The accompanying notes are an integral part of these financial statements
Shared Technologies Fairchild Inc. Consolidated Statement of Stockholders' Equity For the period ended September 30, 1997 (in thousands)
Additional Common Stock Paid-in Shares Amount Capital Balance, January 1, 1997 15,682 $ 63 $ 76,054 Preferred stock dividends Dividend accretion of special preferred stock Exercise of common stock options and warrants 724 3 1,498 Issuance of common stock 82 - 580 for 401(k)plan match Preferred stock converted 698 3 5 to common stock Net Loss Balance, September 30, 1997 17,186 $ 69 $78,137 The accompanying notes are an integral part of these financial statements
Shared Technologies Fairchild Inc. Consolidated Statement of Stockholders' Equity For the period ended September 30, 1997 (in thousands)
Total Accumulated Stockholders' Deficit Equity Balance, January 1, 1997 (32,916) 43,209 Preferred stock dividends (2,795) (2,795) Dividend accretion of special preferred stock (894) (894) Exercise of common stock options and 1,501 warrants Issuance of common stock for 401(k) plan 580 match Preferred stock converted to common stock 1 Net loss (3,000) (3,000) Balance, September 30, 1997 ($39,605) $ 38,602 The accompanying notes are an integral part of these financial statements
Shared Technologies Fairchild Inc. Notes to Consolidated Financial Statements September 30, 1997 (in thousands) (Unaudited) 1. Basis of Presentation: The consolidated financial statements included herein have been prepared by Shared Technologies Fairchild Inc. (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 results for interim periods. Certain information and footnote disclosures have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's December 31, 1996 report on Form 10-K. 2. Investment in Unconsolidated Subsidiary The Company's investment in its unconsolidated subsidiary, Shared Technologies Cellular, Inc. (STC), is accounted for under the equity method. Prior to December 1995, STC was a majority-owned subsidiary and was included on a consolidated basis. During December 1995, STC issued approximately $3,000 in voting preferred stock to third parties. Although the Company's ownership percentage of approximately 58% did not change, the voting rights assigned to the preferred stock reduced the Company's voting interest in STC, resulting in the Company's loss of voting control of STC. Accordingly, STC has been accounted for on the equity method since 1996. At September 30, 1997 the Company had an ownership interest of approximately 25.4% in STC. Summarized balance sheet and statement of operations information for STC as of, and for the nine months ended, September 30, 1997 is as follows: Summarized Balance Sheet Current assets $ 3,379 Property and equipment, net 1,844 Other assets 9,614 Total assets $ 14,837 Current liabilities $ 9,457 Note payable 1,193 Total liabilities 10,650 Stockholders' equity 4,187 Total liabilities and stockholders' equity $ 14,837 Summarized Statement of Operations Revenues $ 19,089 Gross margin 8,430 Operating loss (471) Net loss (670) In August 1996 the Company reached an agreement with STC to purchase $2,500 in STC preferred stock. This investment was financed through the conversion of existing advances owed by STC to the Company in the amount of $1,200 and a cash payment of $1,300. The STC preferred stock was convertible into 833 shares of common stock at the Company's option. In addition, upon conversion of such STC preferred stock, the Company would receive a warrant to purchase an additional 833 shares of STC common stock, subject to adjustment. Subsequently, in August 1997, the Company sold such preferred stock to a third party investor for $250 and recorded a gain of $20. 3. Acquisitions: On March 13, 1996, the Company's stockholders approved and the Company consummated its merger with Fairchild Industries, Inc.("FII"), following a reorganization transferring all non-communication assets to FII's parent, RHI Holding, Inc. ("RHI"). The Company changed its name to Shared Technologies Fairchild Inc.("STFI"). Pursuant to the merger agreement, STFI issued to RHI, 6,000 shares of common stock, 250 shares of convertible preferred stock with a $25,000 liquidation preference and 20 shares of special preferred stock with a $20,000 initial liquidation preference. In addition the Company raised in the capital market approximately $111,000 after offering expenses, through the issuance of 12 1/4% Senior Subordinated Notes Due 2006 and approximately $125,000 (of an available $145,000) in loans from a credit facility with financial institutions. The funds were used primarily for the retirement of certain liabilities assumed from FII in connection with the merger, and the retirement of the Company's existing credit facility. In connection with the merger, the Company entered into two year employment agreements with key employees for initial annual compensation aggregating $1,250, and adopted the 1996 Equity Incentive Plan. The merger was accounted for using the purchase method of accounting. The total purchase consideration of approximately $71,581 was allocated to the net tangible and intangible assets of FII based upon their respective fair market values as follows: Assets Cash $ 1,551 Accounts receivable 24,747 Other current assets 2,572 Equipment 51,532 Goodwill 248,008 Total Assets 328,410 Liabilities and stockholders' equity Capital lease obligations $ (262) Accounts payable (11,577) Accrued expenses (6,981) Advanced billings (6,102) Due to affiliated company (8,407) Long term debt (182,794) FII preferred stock (40,706) Net purchase price $ 71,581 The following unaudited pro forma statements of operations for the nine months ended September 30, 1996 give effect to the above acquisitions and the change in reporting of STC to the equity method (Note 2) and the pro forma effect of STC acquisitions, as if they occurred on January 1, 1996: 1996 Revenues $ 138,178 Cost of revenues 70,968 Gross margin 67,211 Selling, general and administrative expenses 50,310 Operating income 16,901 Equity in loss of subsidiary (2,009) Interest expense, net (20,594) Loss before income tax expense and extraordinary item (5,702) Income taxes (64) Extraordinary item. loss on early retirement of debt (332) Net Loss (6,098) Preferred stock dividends (2,196) Loss applicable to common stock $ (8,294) Net loss per common share $ (.56) Weighted average number of common shares outstanding 14,849 4. Contingencies: In December 1995, a suit was filed against the Company alleging a breach of a letter agreement and seeking an amount in excess of $2,250 for a commission allegedly owed in connection with the merger with FII (Note 3). The Company denies that the claimant at any time was engaged in connection with the merger. The Company filed an answer in January 1996, denying that any commission is owed. This litigation is schedules for trial in December 1997. While any litigation contains an element of uncertainty, management is of the opinion that the ultimate resolution of this matter should not have a material adverse effect upon results of operations, cash flows or financial position of the Company. On July 31, 1997 the Company was served with a purported shareholder class action complaint in an action commenced in the Delaware Chancery Court in New Castle County. The Company and its directors are named as defendants. The complaint seeks injunctive relief, costs and attorneys' fees with respect to the proposed merger of the Company and Tel-Save Holdings, Inc. which was announced on July 17, 1997 (See Note 9). As of October 27, 1997, an agreement in principal had been reached between the Company and counsel for the plaintiff class, which agreement, subject to court approval, would result in dismissal of the Complaint with prejudice and release of all claims of the plaintiff class relating to the merger. The Company's sales and use tax returns in certain jurisdictions are currently under examination. Management believes these examinations will not result in a material change from liabilities provided. In addition to the above matters, the Company 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. 5. Income Taxes: The Company accounts for income taxes under Statement of Financial Accounting Standards ("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 annually for differences between 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 effect taxable income. Valuation allowances are established, when necessary, to reduce the deferred income tax assets to the amount expected to be realized. 6. Extraordinary Item: At June 30, 1996, the Company recorded an extraordinary loss of $310 relating to the early retirement of a $5,000 credit facility. The early retirement took place as a result of requirements in the merger agreement with FII (Note 3). 7. Earnings per Share: Statement of Financial Accounting Standards No. 128, "Earnings per Share" changes the reporting requirements for earnings per share ("EPS") for publicly traded companies by replacing primary EPS with basic EPS and changing the disclosures associated with this change. The Company is required to adopt this standard for its December 31, 1997 year-end and is currently evaluating the impact of this standard. 8. Consolidating Financial Statements: The following unaudited statements separately show Shared Technologies Fairchild Inc. and the subsidiaries of Shared Technologies Fairchild Inc. These statements are provided to fulfill SEC reporting requirements. All of Shared Technologies Fairchild Inc.'s subsidiaries are wholly owned and are full guarantors on the 12 1/4% Senior Subordinated Notes due 2006. Shared Technologies Fairchild Inc. September 30, 1997 Eliminating Consolidated STFTI STFCC STFI Entries STFI -------------------------------------------------- Assets Current Assets: Cash and cash equivalents 150 28 178 Accounts receivable, net 33,766 389 34,155 Inventories 4,735 4,735 Other current assets 3,961 3,961 -------------------------------------------------- Total current assets 42,612 0 417 0 43,029 -------------------------------------------------- Equipment: Property & Equipment 105,302 105,302 Accumulated depreciation(37,234) (37,234) -------------------------------------------------- New Property & Equip. 68,068 0 0 0 68,068 -------------------------------------------------- Other Assets: Investment in affiliates 382 47,540 55,174 (102,342) 754 Intangible assets 7,627 250,448 258,075 Note Receivable 144,173 (144,173) - Intercompany Receivable 143,322 228,866 (372,188) - Deferred income taxes - Other 316 316 -------------------------------------------------- Total Other Assets 144,020 428,206 305,622 (618,703) 259,145 ---------------------------------------------- Total assets $254,700 $428,206 306,039 (618,703) 370,242 ================================================== Liabilities and Stockholders' Equity Current Liabilities: Current portion of long term debt and capital lease obligations 16,083 16,083 Accounts payable 18,394 18,394 Accrued expenses 7,488 460 7,948 Accrued dividends 1,555 1,555 Advanced billings 7,079 7,079 ---------------------------------------------- Total current liabilities 32,961 16,083 2,015 0 51,059 -------------------------------------------------- Long-term debt, and current lease obligations less current portion 144,173 239,633 (144,173) 239,633 -------------------------------------------------- Redeemable put warrant 887 887 -------------------------------------------------- Convertible preferred stock 25,000 25,000 -------------------------------------------------- Special preferred stock 15,061 15,061 -------------------------------------------------- Stockholders' equity: Preferred Stock, Series C - - Preferred Stock, Series D 1 1 Common Stock 1 1 69 (2) 69 Additional paid-in capital 47,538 54,802 78,137 (102,340) 78,137 Accumulated deficit 30,027 (25,635) (43,997) (39,605) Intercompany 143,322 228,866 (372,188) - -------------------------------------------------- Total stockholders' 77,566 172,490 263,076 (474,530) 38,602 equity ------------------------------------------------- Total liabilities and $254,700 428,206 306,039 (618,703) 370,242 stockholders' equity ================================================== Shared Technologies Fairchild Inc. Consolidated Financial Statements (continued) STFTI STFCC STFI Entries STFI -------------------------------------------------- REVENUE Total revenue 131,980 9,799 141,779 Total cost of revenue 71,125 71,125 ------------------------------------------------ Gross margin 60,855 - 9,799 - 70,654 Gross margin % 46.11% 100% 49.83% -------------------------------------------------- Selling, general & administrative expenses 45,941 5,595 51,536 -------------------------------------------------- Operating Income 14,914 - 4,204 - 19,118 Other income (expense): Equity in loss of affiliate (11,806) 11,596 (210) interest expense, net (9,712) (12,192) 210 (21,694) -------------------------------------------------- (9,712) (12,192) (11,596) 11,596 (21,904) -------------------------------------------------- Income(loss)before income taxes and extraordinary item 5,202 (7,392) 11,596 (2,786) (12,192) Income tax (214) (214) -------------------------------------------------- Income (loss) before extraordinary item 4,988 (12,192) (7,392) 11,596 (3,000) Extraordinary item, loss on early retirement of debt - - - - - -------------------------------------------------- Net income (loss) 4,988 (12,192) (7,392) 11,596 (3,000) Preferred stock dividends (3,689) (3,689) Income (loss)applicable to comon stock 4,988 (12,192) (11,081) 11,596 (6,689) ----------------------------------------------------- 9. Merger Agreement. On July 16, 1997, the Company, Tel-Save Holdings Inc. ("Tel-Save"), and TSHCo, Inc. ("Merger Sub"), a wholly owned subsidiary of Tel-Save, entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement the Company shall be merged (the "Merger") with and into Merger Sub and each common stock holder of the Company shall receive for each share of the Company's common stock $11.25 worth of shares of common stock of Tel-Save based upon the average closing price of Tel-Save common stock for the 15 trading days ending on the third business day prior to the closing of the Merger. Holders of Series C and Series D preferred stock of the Company will receive preferred stock in Tel-Save with substantially identical terms to the series C and D preferred stock of the Company. The Merger is intended to be a tax-free exchange of shares and is expected to qualify for pooling of interests accounting treatment. The Merger is subject to approval of stockholders of both companies and other customary closing conditions. In connection with the Merger Agreement, the Company has entered into a Stock Option Agreement with Tel-Save pursuant to which Tel-Save has the option (the "Option") to acquire 3,000,000 shares of common stock of the Company upon the termination of the Merger Agreement under certain circumstances (a "Purchase Event"). The Option expires on the earlier of (a) consummation of the Merger, (b) January 15, 1998 or (c) the termination of the Merger Agreement other than pursuant to a Purchase Event (as such term is defined in the Stock Option Agreement). In addition, the Company has entered into a Voting Agreement with Daniel Borislow, the Chairman and Chief Executive Officer of Tel-Save, pursuant to which Mr. Borislow has agreed to vote his shares of Tel-Save common stock in favor of the Merger and the Merger Agreement. On October 30, 1997, the Tel-Save Holdings, Inc. and Shared Technologies Fairchild Inc. Joint Proxy Statement was filed with the Securities and Exchange Commission giving notice of each company's special meeting of stockholders to be held on December 1, 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations: Nine Months Ended September 30, 1997 compared to September 30, 1996 Revenues STFI's revenues rose to $141.8 million in 1997, an increase of 27.8% over 1996 revenues of $110.9 million. This increase was principally due to the March 13, 1996 merger with Fairchild Industries, Inc. ("FII"). Shared Telecommunications Service ("STS") revenue increased $13.2 million, or 19.1%, and Telecommunications Systems ("Systems") revenue increased $17.6 million, or 42.5%. Approximately $7.0 million of the increase in the Systems revenue was due to the inclusion of management fees from ICS Communications, Inc. ("ICS") and GE Capital-ResCom, L.P. ("ResCom"). During this period, the Company operated as the manager of each of these businesses. These management agreements terminated during the third quarter of 1997. Gross Margin Gross margin increased to 49.8% of revenues for 1997, from 46.6% for 1996. The change in gross margin was mainly the result of changes in sales mix and the merger with FII. In addition, the revenues generated from the management agreements with ICS and ResCom were included in Systems revenue. Since the associated cost for this revenue of approximately $9.0 million was in selling, general and administrative expense, it had no material adverse effect on Systems gross margin. The following table sets forth the components of the Company's overall gross margin (GM) for the nine months ended September 30, 1997 as a factor of sales percentage and gross margin percentage per line of business: Weighted Division Sales GM GM STS 58.2% 52.4% 30.5% Systems 41.8% 46.2% 19.3% Company Total 100.0% 49.8% As shown above, the 1997 gross margin was a mix of STS gross margin of 52.4% and Systems gross margin of 46.2%. In 1996, the Company's gross margin was a combination of STS gross margin of 31.1% and Systems gross margin of 14.9%. Selling, general and administrative Expenses Selling, general and administrative (SG&A) expenses increased $12.4 million to $51.5 million, due entirely to the merger with FII and the associated increased headcount, goodwill amortization and other general overhead expenses. SG&A as a percentage of revenue increased from 35.3% in 1996 to 36.3% in 1997. Operating Income Operating income increased by $6.6 million to $19.1 million in 1997 from $12.5 million in 1996. The increase was mainly the result of the FII merger mentioned earlier. Interest Expense Interest expense net of interest income increased by $6.5 million for the nine months ended September 30, 1997 over the nine months ended September 30, 1996. This was attributable to the addition of approximately $245 million in new debt on March 13, 1996 in connection with the FII merger. Net Income (Loss) As a result of the factors listed above, net loss for the nine months ended September 30, 1997 decreased $2.1 million to $3.0 million, compared to a net loss of $5.1 million in the nine months ended September 30, 1996. Three Months Ended September 30, 1997 Compared to September 30, 1996 Revenues STFI's revenues decreased to $46.2 million in 1997, a decrease of 2.0% compared to 1996 revenues of $47.1 million. STS revenue decreased $.5 million from $27.4 million in the three months ended September 30, 1996 to $26.9 in the three months ended September 30, 1997. This slight decrease was due to the increasing competition in the telecommunications marketplace. Systems revenue decreased $.5 million in 1997 over 1996. Gross Margin Gross margin decreased to 46.9% of revenues for 1997, from 48.1% for 1996. The following table sets forth the components of the Company's overall gross margin ("GM") for the three months ended September 30, 1997 as a factor of sales percentage and gross margin percentage per line of business: Weighted Division Sales GM GM____ STS 58.4% 51.5% 30.1% Systems 41.6% 40.5% 16.8% Company Total 100.0% 46.9% As shown above, the 1997 gross margin was a mix of the STS gross margin of 51.5% and Systems gross margin of 40.5%. In 1996, the Company's gross margin was a combination of STS gross margin of 30.2%, and Systems gross margin of 17.9%. The gross margin decrease was due to the increasing competition in the telecommunications market place. Selling, General and Administrative Expenses SG&A as a percentage of revenue increased to 37.3% in the three months ended September 30, 1997 compared to 34.5% for the three months ended September 30, 1996. Operating Income Operating income decreased to $4.5 million in 1997 from $6.4 million in 1996. Interest Expense Interest expense net of interest income had a slight increase of $.2 million for the three months ended September 30, 1997 over the three months ended September 30, 1996. Net Income As a result of the factors listed above, a net loss for the three months ended September 30, 1997 of $2.8 million was recorded, compared to a net loss of $.9 million for the three months ended September 30, 1996. Liquidity and Capital Resources Due to the merger with FII and the associated borrowings of $245 million, the Company's liquidity and capital resources were significantly changed. At September 30, 1997 the Company had $370 million in assets, $256 million in various long and short-term debt and capital lease obligations, and $40.1 million in recently issued preferred stock. The balance sheet at September 30, 1997 showed a working capital deficit of $8.0 million, compared to a deficit of $22.7 million at September 30, 1996. As of September 30, 1997 the Company had available for future borrowings approximately $11 million on a credit facility. Cash provided by operations was $18.1 million for the nine months ended September 30, 1997, compared to $12.1 million for the nine months ended September 30, 1996. The Company invested $9.4 million in equipment purchases in the nine months ended September 30, 1997, compared to $7.1 million in the nine months ended September 30, 1996. These expenditures were used to grow additional business and sustain the Company's underlying revenue stream. Financing activities for the period ended September 30, 1997 involved principal payments on the Company's debt of $9.9 million, offset by a $2.0 million take down on the Company's revolver availability. Subsequent to quarter end, the Company has drawn down an additional $5 million on its revolver bringing it to 17 million and leaving $6 million still available (net of cash set aside for letters of credit). Cash requirements for 1997 have been significant due to the acquisition of FII and associated new debt mentioned earlier. The Company anticipates to continue repaying these borrowings and providing cash for operations and capital expenditures through cash from operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings In December 1995, a suit was filed against the Company alleging a breach of a letter agreement and seeking an amount in excess of $2,250 for a commission allegedly owed in connection with the merger with FII (Note 3). The Company denies that the claimant at any time was engaged in connection with the merger. The Company filed an answer in January 1996, denying that any commission is owed. This litigation is scheduled for trial in December 1997. While any litigation contains an element of uncertainty, management is of the opinion that the ultimate resolution of this matter should not have a material adverse effect upon results of operations, cash flows or financial position of the Company. On July 31, 1997 the Company was served with a purported shareholder class action complaint in an action commenced in the Delaware Chancery Court in New Castle County. The Company and its directors are named as defendants. The complaint seeks injunctive relief, costs and attorneys' fees with respect to the proposed merger of the Company and Tel-Save Holdings, Inc. which was announced on July 17, 1997. As of October 27, 1997, an agreement in principal had been reached between the Company and counsel for the plaintiff class, which agreement, subject to court approval, would result in dismissal of the Complaint with prejudice and release of all claims of the plaintiff class relating to the Merger. The Company's sales and use tax returns in certain jurisdictions are currently under examination. Management believes these examinations will not result in a material change from liabilities provided. In addition to the above matters, the Company 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. Item 5. Other Information On November 13, 1997 the Company signed an agreement whereby Tel-Save Holdings, Inc. will become the exclusive provider of its long-distance services. The rates to be paid by the Company under this contract are significantly lower than rates currently paid to its existing long-distance providers. Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits 10.1 Agreement and Plan of Merger by and among Shared Technologies Fairchild Inc., Tel-Save Holdings Inc., and TSHCo, Inc., dated July 16, 1997. Incorporated by reference to the Company's Form 8-K filed on July 21, 1997. 10.2 Stock Option Agreement between Shared Technologies Fairchild Inc. and Tel-Save Holdings Inc. dated July 16, 1997. Incorporated by reference to the Company's Form 8-K filed on July 21, 1997. 10.3 Voting Agreement between Shared Technologies Fairchild Inc. and Daniel Borislow dated July 16, 1997. Incorporated by reference to the Company's Form 8-K filed on July 21, 1997. 10.4 Tel-Save Holdings, Inc. and Shared Technologies Fairchild Inc. Joint Proxy Statement filed as part of S-4 registration of Tel-Save Holdings, Inc. (Reg # 333-38943)incorporated hereby by reference. 27 Financial Data Schedule 99 Press Release dated July 17, 1997. Incorporated by reference to the Company's Form 8-K filed July 21, 1997. 99 Complaint filed by Bernard Zicherman dated July 1997. Incorporated by reference to the Company's Form 8-K filed on August 4, 1997. 99 Press Release dated August 1, 1997. Incorporated by reference to the Company's Form 8-K filed on August 4, 1997. (b) Reports on Form 8-K On July 21, 1997 the Company filed a Form 8-K, date of report July 16, 1997, in which the Company disclosed that the Company, Tel-Save Holdings, Inc. and TSHCo, Inc., a wholly owned subsidiary of Tel-Save Holdings, Inc. had entered into an Agreement and Plan of Merger. On August 4, 1997, the Company filed a Form 8-K, date of report July 31, 1997, in which the Company disclosed that is was served with a purported shareholder class action complaint in an action commenced in the Delaware Chancery Court in New Castle County. 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 thereunto duly authorized. SHARED TECHNOLOGIES FAIRCHILD INC. By: /s/ Vincent DiVincenzo Vincent DiVincenzo Senior Vice President-Finance and Administration, Treasurer, Chief Financial Officer Date: November 14, 1997 EX-27 2 ART.5 FINANCIAL DATA SCHEDULE FOR QUARTER END 10-Q
5 1000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 178 0 34455 300 4735 43029 105302 37234 370242 51059 0 0 1 69 0 370242 141779 141779 71125 71125 51536 0 21694 (2786) (214) (3000) 0 0 0 (3000) (0.42) 0
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