-----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, PNGMeTGZWrlaw9pLS4o6DSoAM8harGpNnfQTh/5c1hUpsZ2H3Tt3XbSJWT6VRZBW LyDDAGARzfmttU6DbMxXpg== 0000817632-97-000006.txt : 19970814 0000817632-97-000006.hdr.sgml : 19970814 ACCESSION NUMBER: 0000817632-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 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: 1934 Act SEC FILE NUMBER: 000-17366 FILM NUMBER: 97658654 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 JUNE 30, 1997 10Q Form 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarterly Period Ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 August 13, 1997 Common Stock, $.004 par value 16,570,008 shares PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the six months ended June 30, 1997 Notes to Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition PART II OTHER INFORMATION Signature Page Item 1. Financial Statements Shared Technologies Fairchild Inc. Consolidated Balance Sheets June 30, 1997 and December 31, 1996 (in thousands) (unaudited) June 30, 1997 December 31, 1996 ASSETS CURRENT ASSETS: Cash $ 1,783 $ 2,703 Accounts receivable, less allowance for doubtful accounts of $361 in 1997 and $611 in 1996 33,356 32,563 Inventories 4,063 1,976 Other current assets 2,660 1,853 Total current assets 41,862 39,095 Equipment: Property & Equipment 102,942 95,934 Accumulated depreciation (34,112) (28,169) 68,830 67,765 Other Assets: Investments in affiliates 651 457 Intangible assets 258,779 261,842 Deferred income taxes - - Other 326 407 259,756 262,706 Total assets $ 370,448 $ 369,566 The accompanying notes are an integral part of these financial statements Shared Technologies Fairchild Inc. Consolidated Balance Sheets June 30, 1997 and March 31, 1996 (in thousands) (unaudited) June 30, 1997 December 31, 1996 Liabilities and Stockholders' Equity CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 15,374 $ 13,576 Accounts payable 17,596 17,356 Accrued expenses 8,339 9,558 Accrued dividends 843 435 Advanced billings 6,720 6,935 Total current liabilities 48,872 47,860 Long-Term Debt and Capital Lease Obligations less current portion 239,988 238,261 Redeemable Put Warrant 816 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 14,757 14,167 STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value, authorized 25,000 shares: Series C, outstanding 428 shares in 1997 and 1996 4 4 Series D, outstanding 441 shares in 1997 and 1996 4 4 Common stock; $.004 par value, 50,000 shares authorized, outstanding 15,840 shares in 1997 and 15,682 shares in 1996 63 63 Additional paid-in capital 76,379 76,054 Accumulated deficit (35,435) (32,916) Total stockholders' equity 41,015 43,209 Total liabilities and stockholders' equity $370,448 $ 369,566 The accompanying notes are an integral part of these financial statements Shared Technologies Fairchild Inc. Consolidated Statements of Operations For the Six Months Ended June 30, 1997 and 1996 (in thousands except per share data) (unaudited) June 30, 1997 June 30, 1996 Revenue: Shared telecommunications services $ 55,602 $ 41,926 Telecommunications systems 40,016 21,846 Total Revenue 95,618 63,772 Cost of Revenue: Shared telecommunications services 26,211 21,090 Telecommunications systems 20,419 13,718 Total Cost of Revenue 46,630 34,808 Gross Margin 48,988 28,964 Selling, General & Administrative Expenses: 34,334 22,856 Operating Income 14,654 6,108 Other income (expense): Equity in loss of affiliate (186) (1,699) Net interest expense (14,480) (8,251) (14,666) (9,950) Income (loss) before income taxes and extraordinary items (12) (3,842) Income tax (208) (40) Income (loss) before extraordinary item (220) (3,882) Extraordinary item, loss on early retirement of debt - (310) Net Income(loss) (220) (4,192) Preferred Stock Dividends (2,299) (601) Net income (loss) applicable to common stock $ (2,519) $ (4,793) Net (loss) per common share: Income (loss) before extraordinary item $ (0.16) $ (0.37) Extraordinary item - (.02) Net income (loss) $ (0.16) $(0.39) Weighted Average Shares Outstanding 15,788 12,433 The accompanying notes are an integral part of these financial statements Shared Technologies Fairchild Inc. Consolidated Statements of Operations For the Three Months Ended June 30, 1997 and 1996 (in thousands except per share data) (unaudited) June 30, 1997 June 30, 1996 Revenue: Shared telecommunications services $ 27,963 $ 28,696 Telecommunications systems 21,025 16,894 Total Revenue 48,988 45,590 Cost of Revenue: Shared telecommunications services 13,092 14,664 Telecommunications systems 10,885 9,707 Total Cost of Revenue 23,977 24,371 Gross Margin 25,011 21,219 Selling, General & Administrative Expenses: 17,475 16,073 Operating Income 7,536 5,146 Other income (expense): Equity in loss of affiliate (78) (741) Net interest expense (7,805) (6,992) (7,883) (7,733) Income (loss) before income taxes and extraordinary items (347) (2,587) Income tax (102) (19) Income (loss) before extraordinary item (449) (2,606) Extraordinary item, loss on early retirement of debt - - Net Income(loss) (449) (2,606) Preferred Stock Dividends (1,223) (515) Net income (loss) applicable to common stock $ (1,672) $ (3,121) Net (loss) per common share: Income (loss) before extraordinary item $ (0.11) $ (0.21) Extraordinary item - - Net income (loss) $ (0.11) $(0.21) Weighted Average Shares Outstanding 15,814 14,900 The accompanying notes are an integral part of these financial statements Shared Technologies Fairchild Inc. Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1997 and 1996 (in thousands) (unaudited) June 30, 1997 June 30, 1996 Cash Flows Used in Operating Activities: Net Income (loss) $ (220) $ (4,192) Adjustments: Extraordinary loss on early retirement of debt - 310 Depreciation & amortization 9,423 7,056 Accretion of put warrant (253) - Equity in loss of subsidiary (194) 1,699 Accretion on 12 1/4% bonds 7,750 4,227 Change in Assets and Liabilities: Accounts receivable (793) 174 Inventory (2,087) - Other current assets (636) (352) Other assets 81 1,158 Accounts payable 240 1,532 Accrued expenses (811) 1,220 Advanced billings (215) (765) Net cash provided by operating activities 12,285 12,067 Cash Flows Used in Investing Activities Purchases of equipment (7,008) (3,931) Investments in subsidiaries - (493) Acquisitions, net of cash acquired - (3,766) Net cash used in investing activities (7,008) (8,190) Cash Flows From Financing Activities: Preferred stock dividends (2,299) (601) Repayments of notes payable, long-term debt and capital lease obligations (6,225) (190,016) Borrowings under notes payable and long-term debt 2,000 244,999 Payments to affiliate - (8,407) Deferred finance costs (588) (9,271) Proceeds from sales of common stock 325 354 Repayment of FII preferred stock 590 (40,581) Net cash provided by (used in)financing activities (6,197) (3,523) Net increase (decrease) in cash (920) 354 Cash, Beginning of Period 2,703 476 Cash, End of Period $ 1,783 $ 830 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for - Interest $ 6,395 $ 2,419 Income taxes 208 45 Non cash transactions- Issuance of common stock to acquire FII - 27,750 Issuance of preferred stock to acquire FII - 45,000 The accompanying notes are an integral part of these financial statements. Shared Technologies Fairchild Inc. Consolidated Statement of Stockholders' Equity For the period ended June 30, 1997 (in thousands) Series C Series D Preferred Stock Preferred Stock Sharess Amount Shares Amount Balance, January 1, 1997 428 $ 4 441 $ 4 Preferred stock dividends - - - - Dividend accretion of special preferred stock - - - - Exercise of common stock options and warrants - - - - Issuance of common stock for 401k plan match - - - - Net income - - - - Balance, June 30, 1997 428 $ 4 441 $ 4 The accompanying notes are an integral part of these financial statements Shared Technologies Fairchild Inc. Consolidated Statement of Stockholders' Equity For the period ended June 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 140 - 199 Issuance of common stock for 401k plan match 18 - 126 Net income Balance, June 30, 1997 15,840 $ 63 $ 76,379 The accompanying notes are an integral part of these financial statements Shared Technologies Fairchild Inc. Consolidated Statement of Stockholders' Equity For the period ended June 30, 1997 (in thousands) Total Accumulated Stockholders' Deficit Equity Balance, January 1, 1997 (32,916) 43,209 Preferred stock dividends (1,709) (1,709) Dividend accretion of special preferred stock (590) (590) Exercise of common stock options and warrants 199 Issuance of common stock for 401k plan match 126 Net loss (220) (220) Balance, June 30, 1997 ($35,435) $ 41,015 The accompanying notes are an integral part of these financial statements Shared Technologies Fairchild Inc. Notes to Consolidated Financial Statements June 30, 1997 (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 June 30, 1997 the Company had an ownership interest of approximately 35.7% in STC. Summarized balance sheet and statement of operations information for STC as of, and for the six months ended, June 30, 1997 is as follows: Summarized Balance Sheet Current assets $ 3,050 Property and equipment, net 1,904 Other assets 9,829 Total assets $ 14,783 Current liabilities $ 10,374 Note payable 1,154 Total liabilities 11,528 Stockholders' equity 3,255 Total liabilities and stockholders' equity $ 14,783 Summarized Statement of Operations Revenues $ 12,867 Gross margin 5,608 Operating loss (229) Net loss (370) 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 presently are convertible into 833 shares of common stock at the Company's option. In addition, upon conversion of such STC preferred stock, the Company shall receive a warrant to purchase an additional 833 shares of STC common stock, subject to adjustment. 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 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 six months ended June 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 $ 91,055 Cost of revenues 49,151 Gross margin 41,904 Selling, general and administrative expenses 31,767 Operating income 10,137 Equity in loss of subsidiary (1,699) Interest expense, net (13,471) Loss before income tax expense and extraordinary item (5,033) Income taxes (30) Loss before extraordinary item (5,063) Extraordinary item. loss on early retirement of debt (332) Net Loss (5,395) Preferred stock dividends (1,476) Loss applicable to common stock $ (6,871) Net loss per common share $ (.46) Weighted average number of common shares outstanding 14,900 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 in the discovery process. 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). 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. These subsidiaries are guarantors on the 12 1/4% Senior Subordinated Notes due 2006. Shared Technologies Fairchild Inc. Eliminating Consolidated STFTI STFCC STFI Entries STFI ------------------------------------------------------------------ Assets Current Assets: Cash and cash equivalents $1,782 $1 $1,783 Accounts receivable, net 33,314 42 33,356 Inventories 4,063 4,063 Other current assets 2,660 2,660 ----------------------------------------------------------------------- Total current assets 41,819 0 43 0 41,862 ----------------------------------------------------------------------- Equipment: Property & Equipment 102,942 102,942 Accumulated depreciation (34,112) (34,112) ----------------------------------------------------------------------- 68,830 0 0 0 68,830 ----------------------------------------------------------------------- Other Assets: Investment in affiliates 136 84,800 82,359 (166,644) 651 Intangible assets 250,857 7,922 258,779 Note Receivable 140,780 (140,780) - Deferred income taxes - Other 326 326 ---------------------------------------------------------------------- 251,319 233,502 82,359 (307,424) 259,756 ----------------------------------------------------------------------- Total assets $ 361,968 $ 233,502 $82.402 (307,424) 370,448 ================================================================= Liabilities and Stockholders' Equity Current Liabilities: Current portion of long term debt and capital lease oblig. $15,374 15,374 Accounts payable 17,596 17,596 Accrued expenses 8,368 (29) 8,339 Accrued dividends 843 843 Advanced billings 6,720 6,720 ----------------------------------------------------------------------- Total current liabilities 32,684 15,374 814 0 48,872 ------------------------------------------------------------------ Long-term debt, less current portion 140,780 239,988 (140,780) 239,988 ---------------------------------------------------------------- Redeemable put warrant 816 816 ----------------------------------------------------------------------- Convertible preferred stock $.01 par value authorized 250 shares in 1997 and 1996 25,000 25,000 ----------------------------------------------------------------------- Special preferred stock 14,757 14,757 $.01 par value, authorized 20 shares in 1997 and 1996 ------------------------------------------------------------- Stockholders' equity: Preferred Stock, Series C 4 4 Preferred Stock Series D 4 4 Common Stock 63 63 Additional paid-in capital 76,379 76,379 Accumulated deficit 25,214 (21,860) (35,435) (3,354) (35,435) Intercompany 163,290 (163,290) - ----------------------------------------------------------- Total stockholders' equity 188,504 (21,860) 41,015 (166,644) 41,015 ------------------------------------------------------------------- Total liabilities and stockholders' equity 361,968 233,502 82,402 (307,424) 370,448 ============================================================= $ - $- $ - $- $- REVENUE total revenue 87,485 8,133 95,618 total cost of revenue 46,630 46,630 -------------------------------------------------------------------- Gross margin 40,855 - 8,133 - 48,988 46.70% 100% 51.23% ----------------------------------------------------------------------- Selling, general & administrative expenses 34,151 183 34,334 ----------------------------------------------------------------------- Operating Income 6,704 - 7,950 - 14,654 Other income (expense): Equity in loss of affiliate (8,427) 8,241 (186) interest expense, net (6,319) (4,295) 257 (14,480) ------------------------------------------------------------------- (6,319) (4,295) (8170) 8,241 (14,666) ------------------------------------------------------------------- Income (loss) before income taxes and extraordinary item 385 (8,418) (220) 8,241 (12) Income tax (208) (208) ----------------------------------------------------------------------- Income (loss) before extraordinary item 177 (8,418) (220) 8,241 (220) Extraordinary item, loss on early retirement of debt - - - - - ----------------------------------------------------------------- Net income (loss) 177 (8,418) (220) 8,241 (220) Preferred stock dividends (2,229) (2,299) -------------------------------------------------------------------- Net income (loss) applicable to common stock 177 (8,418) (2,519) 8,241 (2,519) ======================================================== 9. Subsequent Event. On July 16, 1997, Shared Technologies Fairchild Inc. (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. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations: Six Months Ended June 30, 1997 compared to June 30, 1996 Revenues STFI's revenues rose to $95.6 million in 1997, an increase of 49.9% over 1996 revenues of $63.8 million. This increase was principally due to the March 13, 1996 merger with Fairchild Industries Inc. ("FII"). Shared Telecommunications Service ("STS") revenue increased $13.7 million, or 32.6%, and Telecommunications Systems ("Systems") revenue increased $18.2 million, or 83.2%. Approximately $7.5 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. Gross Margin Gross margin increased to 51.2% of revenues for 1997, from 45.4% 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, of $7.5 million, were included in Systems revenue. Costs associated with this revenue is not material and as a result have 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 six months ended June 30, 1997 as a factor of sales percentage and gross margin percentage per line of business: Weighted Division Sales GM GM STS 58.2% 52.9% 30.7% Systems 41.8% 49.0% 20.5% Company Total 100.0% 51.2% As shown above, the 1997 gross margin was a mix of STS gross margin of 52.9% and Systems gross margin of 49.0%. In 1996, the Company's gross margin was a combination of STS gross margin of 32.7% and Systems gross margin of 12.7%. Selling, general and administrative Expenses Selling, general and administrative (SG&A) expenses increased $11.5 million to $34.3 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 changed only slightly from 35.8% in 1996 to 35.9% in 1997. Operating Income Operating income increased by $8.5 million to $14.7 million in 1997 from $6.1 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 $6.2 million for the six months ended June 30, 1997 over the six months ended June 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 six months ended June 30, 1997 decreased $4.0 million to $.2 million, compared to a net loss of $4.2 million in the six months ended June 30, 1996. Three Months Ended June 30, 1997 Compared to June 30, 1996 Revenues STFI's revenues increased to $49.0 million in 1997, an increase of 7.4% over 1996 revenues of $45.6 million. STS revenue decreased $.7 million from $28.7 million in the three months ended June 30, 1996 to $28.0 in the three months ended June 30, 1997. This slight decrease was due to the increasing competition in the telecommunications marketplace. Systems revenue increased $4.1 million in 1997 over 1996. Of this increase, $3.5 was attributable to the management fees generated from ICS and ResCom. Gross Margin Gross margin increased to 51.1% of revenues for 1997, from 46.5% for 1996. The following table sets forth the components of the Company's overall gross margin ("GM") for the three months ended June 30, 1997 as a factor of sales percentage and gross margin percentage per line of business: Weighted Division Sales GM GM STS 57.1% 53.2% 30.4% Systems 42.9% 48.2% 20.7% Company Total 100.0% 51.1% As shown above, the 1997 gross margin was a mix of the STS gross margin of 53.2% and Systems gross margin of 48.2%. In 1996, the Company's gross margin was a combination of STS gross margin of 48.9%, and Systems gross margin of 42.5%. A significant portion of the gross margin increase in 1997 was due to the $3.5 million of ICS and ResCom management fees. Selling, General and Administrative Expenses SG&A as a percentage of revenue stayed fairly consistent in the three months ended June 30, 1997 compared to the three months ended June 30, 1996, as they were 35.7% and 35.3% respectively. Operating Income Operating income increased to $7.5 million in 1997 from $5.1 million in 1996. This increase was mainly the result of the FII merger. Interest Expense Interest expense net of interest income increased by $.8 million for the three months ended June 30, 1997 over the three months ended June 30, 1996. This was attributable to an increase in the accretion on the Company's books of $.5 million with the remaining amount resulting from an increase in the outstanding revolving loan facility. Net Income As a result of the factors listed above, a net loss for the three months ended June 30, 1997 of $.4 million was recorded, compared to a net loss of $2.6 million for the three months ended June 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 June 30, 1997 the Company had $370 million in assets, $255 million in various long and short-term debt and capital lease obligations, and $39.8 million in recently issued preferred stock. The balance sheet at June 30, 1997 showed a working capital deficit of $7.0, compared to a deficit of $20.4 million at June 30, 1996. As of June 30, 1997 the Company had available for future borrowings approximately $11 million on a credit facility. Cash provided by operations was $12.3 million for the six months ended June 30, 1997, compared to $12.1 million for the six months ended June 30, 1996. The Company invested $7.0 million in equipment purchases in the six months ended June 30, 1997, compared to $3.9 million in the six months ended June 30, 1996. These expenditures were used to grow additional business and sustain the Company's underlying revenue stream. Financing activities for the period ended June 30, 1997 involved principal payments on the Company's debt of $6.2 million, offset by a $2.0 million take down on the Company's revolver availability. Cash requirements for 1997 will be 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 in the discovery process. 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. 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 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held on May 23, 1997. Four matters of business were held to vote for the following purposes: (1) one election of three directors of the Company for ensuing three-year terms ("Proposal 1"); (2) to ratify certain amendments to the 1997 Equity Incentive Plan ("Proposal 2"); (3) to approve the material terms of the performance goals for the fiscal 1997 incentive compensation awards for certain executives of the Company ("Proposal 3"); and (4) to ratify the grant of certain warrants to non-employee Directors ("Proposal 4"); Proposal 1 Directors For Withheld Anthony A. Autorino 9,946,634 244,067 Thomas H. Decker 8,913,534 1,277,167 Vincent DiVincenzo 9,946,634 244,067 Proposal 2 For Against Abstain 9,933,829 280,324 954 Proposal 3 For Against Abstain 9,932,779 282,128 250 Proposal 4 For Against Abstain 9,920,826 287,781 6,500 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. 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 None. 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 hereunto duly authorized. SHARED TECHNOLOGIES FAIRCHILD INC. By: /s/ Vincent DiVincenzo Vincent DiVincenzo Senior Vice President-Finance and Administration, Treasurer, Chief Financial Officer Date: August 13, 1997 EX-27 2 ART.5 FINANCIAL DATA SCHEDULE FOR QUARTER END 10-Q
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1783 0 33717 361 4063 41862 102942 34112 370448 48872 0 0 8 63 0 370448 95618 95618 46630 46630 34334 0 14480 (12) (208) (220) 0 0 0 (220) (0.16) 0 -----END PRIVACY-ENHANCED MESSAGE-----