SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE (ITEM 8)
PAGE
FINANCIAL STATEMENTS:
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6-7
Notes to Consolidated Financial Statements F-8-20
FINANCIAL STATEMENT SCHEDULE:
Schedule VIII - Valuation and Qualifying Accounts for the
Years Ended December 31, 1995, 1994 and 1993 S-1
NOTE:
(a) All other schedules are not submitted because they are not applicable, not
required or because the required information is included in the
consolidated financial statements or notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Shared Technologies Cellular, Inc.
We have audited the accompanying consolidated balance sheets of Shared
Technologies Cellular, Inc. and Subsidiaries as of December 31, 1995 and 1994
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1995, 1994 and 1993. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Shared
Technologies Cellular, Inc. and Subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for the years ended
December 31, 1995, 1994 and 1993, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index on Page
F-1 is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 6, 1996
F-2
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
1995 1994
--------------- --------------
ASSETS
Current assets:
Cash $ 2,541,827 $ 10,233
Accounts receivable, less allowance for doubtful
accounts of $684,875 in 1995 and $242,680 in 1994 1,172,671 1,354,289
Carrier commissions receivable, less unearned income 452,610
Inventories 49,076 30,701
Note receivable 59,136 32,546
Prepaid expenses and other current assets 471,356 100,048
Receivable due from sale of assets 1,077,856
--------------- --------------
Total current assets 5,824,532 1,527,817
--------------- --------------
Telecommunications and office equipment, less
accumulated depreciation 2,157,685 995,909
--------------- --------------
Other assets:
Intangible assets, less accumulated amortization 6,129,101 2,396,119
Deferred registration costs 182,135
Deposits 142,080 89,559
Note receivable, net of current portion 124,407 169,487
Due from affiliate 90,796
--------------- --------------
6,395,588 2,928,096
--------------- --------------
$ 14,377,805 $ 5,451,822
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 400,000 $
Accounts payable and other current liabilities 5,838,718 2,422,345
Commissions payable 452,611
Due to parent 984,592
Advance billings 26,128
--------------- --------------
Total current liabilities 7,675,921 2,448,473
--------------- --------------
Note payable, less current portion 1,600,000
Due to parent --------------- --------------
2,434,137
Commitments and contingencies --------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value, Series A Convertible,
authorized, issued and outstanding 300,000 shares 3,000
Common stock, $.01 par value, authorized 10,000,000
shares, issued and outstanding 3,089,189 shares in
1995 and 2,070,570 shares in 1994 30,892 20,706
Common stock subscription 5,000 5,000
Capital in excess of par value 9,172,583 1,804,636
Accumulated deficit (4,104,591) (1,256,130)
Note receivable arising from stock purchase agreement (5,000) (5,000)
--------------- --------------
Total stockholders' equity 5,101,884 569,212
--------------- --------------
$ 14,377,805 $ 5,451,822
=============== ==============
See accompanying notes to consolidated financial statements
F-3
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------------- ------------------ ---------------
Revenues $ 13,613,161 $ 10,217,300 $ 2,199,727
Cost of revenues 8,587,272 5,293,845 1,604,040
------------------- ------------------ ----------------
Gross margin 5,025,889 4,923,455 595,687
Selling, general and administrative
expenses 8,015,184 4,272,786 1,462,548
------------------ ------------------ ----------------
Income (loss) from operations (2,989,295) 650,669 (866,861)
------------------ ------------------ ----------------
Other income (expense):
Interest income (expense), net (136,395) (48,659) 7,429
Gain on sale of assets 689,480
Loss on discontinued affiliate (364,327)
------------------ ------------------ ----------------
188,758 (48,659) 7,429
------------------ ------------------ ----------------
Net income (loss) before income taxes (2,800,537) 602,010 (859,432)
Income taxes (47,924)
------------------ ------------------ -----------------
Net income (loss) $ (2,848,461) $ 602,010 $ (859,432)
=================== ================== ==============
Income (loss) per common share $ (1.04) $ .28 $ (.39)
=================== ================== =================
Weighted average number of
common shares outstanding 2,748,288 2,185,000 2,185,000
================== ================== =================
See accompanying notes to consolidated financial statements
F-4
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
Series A
Preferred Stock Common Stock
------------------ ------------------------ Common
Stock Capital in Total
Subscrip- Excess of Accumulated Note Stockholders'
Shares Amount Shares Amount tions Par Value Deficit Receivable Equity
------- -------- ----------- ---------- --------- ---------- ----------- ---------- ------------
Balances,
January 1, 1993 - $ - 67,973 $ 680 $ - $ - $ (998,708) $ - $ (998,028)
Net loss (859,432) (859,432)
------- -------- ----------- ---------- --------- ---------- ----------- ---------- ------------
Balances,
December 31, 1993 67,973 680 (1,858,140) (1,857,460)
Common stock
issued for services 207,119 2,071 14,429 16,500
Transfer of investment
to parent 108,136 108,136
Issuance of common
stock 1,795,478 17,955 (17,929) 26
Contribution to
capital by parent 1,700,000 1,700,000
Common stock
subscription 5,000 (5,000)
Net income 602,010 602,010
------- -------- ----------- ---------- --------- ---------- ----------- ---------- -----------
Balances,
December 31, 1994 2,070,570 20,706 5,000 1,804,636 (1,256,130) (5,000) 569,212
Issuance of stock 300,000 3,000 950,000 9,500 6,084,633 6,097,133
Contribution to
capital by parent 1,184,000 1,184,000
Issuance of common
stock for acquisitions 150,000 1,500 473,500 475,000
Repurchase of common
stock (81,381) (814) (374,186) (375,000)
Net loss (2,848,461) (2,848,461)
------- -------- ----------- ---------- --------- ---------- ----------- ---------- -----------
Balances, December 31,
1995 300,000 $ 3,000 3,089,189 $ 30,892 $ 5,000 $9,172,583 $(4,104,591) $ (5,000) $ 5,101,884
======= ======== =========== ========== ========= ========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
---------------- ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,848,461) $ 602,010 $ (859,432)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,085,685 578,843 98,465
Provision for doubtful accounts 1,248,620 307,617 228,791
Common stock issued for services 16,500
Gain on sale of franchise (202,033)
Gain on sale of assets (689,480)
Loss on discontinued affiliate 364,327
Change in assets and liabilities net of effect of acquisitions:
Accounts receivable (1,409,378) (1,170,369) (444,214)
Inventories (51,375) (3,706) 619
Commissions receivable 13,259
Prepaid expenses (238,867) (68,859) (22,651)
Accounts payable and other current liabilities 1,775,093 1,636,493 177,080
Commissions payable (21,209)
Advance billings (26,128) 772 7,325
--------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (797,914) 1,697,268 (814,017)
--------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses (1,046,993)
Purchases of equipment (342,314) (726,507) (47,196)
Payments for deposits (52,521) (17,684) (20,590)
Payments for intangible assets (612,346) (527,366) (8,825)
Collections on note receivable 18,490
--------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (2,035,684) (1,271,557) (76,611)
--------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (175,595) (1,500)
Payments on note payable (86,250) (20,207)
Advances from (payments to) parent (265,545) 115,626 816,339
Deferred registration costs (182,135)
Advances to affiliate (273,531) (90,796)
Issuance of common and preferred stock 6,279,268
Repurchase of common stock (375,000)
--------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 5,365,192 (419,150) 794,632
--------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 2,531,594 6,561 (95,996)
Cash, beginning of year 10,233 3,672 99,668
--------------- ------------- -------------
Cash, end of year $ 2,541,827 $ 10,233 $ 3,672
=============== ============= =============
See accompanying notes to consolidated financial statements.
F-6
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1995, 1994 AND 1993
1995 1994 1993
--------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 75,620 $ 65,372 $ 2,716
=============== ============= =============
Income taxes $ 47,924 $ - $ -
=============== ============= =============
SUPPLEMENTAL SCHEDULES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of net assets of certain businesses
through the issuance of debt to parent $ - $ - $ 2,068,856
=============== ============= =============
Cost of intangible assets included in accounts
payable $ 203,074 $ 202,985 $ -
=============== ============= =============
Capital lease obligations incurred for
leases for new equipment $ - $ - $ 232,917
=============== ============= =============
Transfer of investment to parent $ - $ 108,136 $ -
=============== ============= =============
Contribution to capital in excess of par value
of due to parent $ 1,184,000 $ 1,700,000 $ -
=============== ============= =============
Note received for sale of franchise $ - $ 202,033
=============== =============
Note received for sale of assets $ 1,077,856
===============
Issuance of common stock for acquisitions $ 475,000
===============
Note payable incurred for acquisition of assets $ 2,000,000
===============
See accompanying notes to consolidated financial statements.
F-7
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND ORGANIZATION
Shared Technologies Cellular, Inc. (STC) together with its
subsidiaries (collectively the "Company") is a nationwide
provider of short-term cellular telephone services, activation
services and debit telephone services in the United States.
The Company's operations are subject to regulation by the Federal
Communications Commission (FCC), which has preempted the
regulatory jurisdiction of state agencies, although certain
states in which the Company operates have petitioned the FCC for
continued jurisdiction over cellular communications.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of STC
and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Cash
The Company maintains its cash in bank deposit accounts, which at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
subject to any significant credit risk on cash.
Revenue Recognition
Revenues are recognized as services are performed. Initial
franchise fee revenue will be recognized once all material
services or conditions relating to the sale of a franchise have
been substantially performed.
Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities which
qualify as financial instruments under Statement of Financial
Accounting Standards No. 107 approximate the carrying amounts
presented in the balance sheets.
Inventories
Inventories consisting of telecommunications equipment and parts
expected to be sold to customers, are valued at the lower of
cost, on the first-in, first-out method (FIFO), or market.
F-8
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Carrier Commissions Receivable
Carrier commissions receivable are due from cellular carriers for
commissions on new cellular telephone line activations. The
commissions are earned only after the cellular telephone user has
remained on the cellular telephone network for a specified period
of time (vesting period). The Company records a provision for
unearned income equal to 9% of the gross carrier commissions
receivable for cancellations of cellular service by the user,
prior to the end of the aforementioned vesting period.
Telecommunications and Office Equipment
Telecommunications and office equipment are stated at cost. The
Company records depreciation on the straight line method over the
estimated useful lives of the assets as follows:
Telecommunications equipment 2-5 years
Office equipment 3-5 years
Intangible Assets
Goodwill represents the excess of cost over the net assets of
acquired businesses and is amortized over periods ranging from 15
years to 20 years from the respective acquisition dates. The
Company monitors the profitability of the acquired operations to
assess whether any impairment of recorded goodwill has occurred.
Franchise costs relate to costs associated with the start-up of a
franchised short-term cellular telephone rental operation. These
costs are amortized over a 5 years.
Deferred start-up costs relate to costs associated with the
opening of new cellular telephone rental locations throughout the
United States. These costs are amortized on a straight-line basis
over 15 months.
The covenant not to compete is being amortized on the
straight-line basis over the life of the agreement, approximately
six years.
Capitalized Software Development Costs
Capitalized software development costs, including significant
product enhancements incurred subsequent to establishing
technological feasibility in the process of software production
are capitalized according to Statement of Financial Accounting
Standards No. 86. Costs incurred prior to the establishment of
technological feasibility are charged to research, product
development, and support expenses.
F-9
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income Taxes
The Company filed its federal income tax returns on a
consolidated basis with its parent through April 1995, the date
of its initial public offering ("IPO"). Subsequent to April 1995,
the Company's income tax returns will be filed on a separate
return basis.
The Company complies with Statement of Financial Accounting
Standards No. 109 (SFAS No.109), "Accounting for Income Taxes",
which requires an asset and liability approach to financial
reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future, based
on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce the
deferred tax assets to the amount expected to be realized. The
adoption of SFAS No. 109 had no material impact on the Company's
financial statements since the Company fully reserved the tax
benefits flowing from its operating losses.
Impairment on Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" was issued.
The Company will adopt SFAS No. 121 in the first quarter of 1996.
The impact on the Company's financial position and results of
operations is not expected to be material.
Income (Loss) Per Common Share
Income (loss) per share of common stock is based upon the
weighted average number of shares outstanding after giving effect
to the stock splits referred to in Note 9. The weighted average
for all periods prior to the IPO include shares issued within the
twelve month period of the IPO, including those issued through
the subscription agreement (Note 9) and those issued through the
Company's Stock Option Plan, at a price less than the public
offering price.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-10
NOTE 3 - Acquisitions:
In October 1993, the Company commenced management of, and
subsequently acquired certain assets and assumed certain
liabilities of, Road and Show Cellular East, Inc. (East), a
short-term portable cellular telephone service provider. The
purchase price was $750,245, of which $209,245 was paid in cash
by its parent, Shared Technologies Fairchild Inc. (STFI)
(formerly Shared Technologies Inc.). The Company recorded a
liability due to its parent for the cash payment and the balance
of $541,000, resulting from the obligation of STFI to issue
108,200 ($5.00 per share) shares of its common stock to the
seller. In 1995, STFI issued 121,403 shares, which was adjusted
to give effect to the change in market price of the STFI stock on
the date of issuance.
In December 1993, the Company completed the acquisitions of
certain assets and assumed certain liabilities of both Road and
Show South, Ltd. (South) and Road and Show Pennsylvania, Inc.
(Pennsylvania), short-term portable cellular telephone service
providers. The purchase prices for South and Pennsylvania were
$1,261,611 and $57,000, respectively, of which $46,111 and
$7,000, respectively, was paid in cash by STFI. The Company
recorded an aggregate liability of $1,265,500 due to its parent,
which represented the balance of the purchase prices resulting
from the obligation of STFI to issue an aggregate of 286,499
shares (at $5.00 and $3.64 per share, respectively) of its common
stock. STFI became obligated to issue additional shares to South
since the market price of STFI common stock dropped below
specified levels. However, the Company did not incur any
additional liability to STFI. The shares in connection with the
South acquisition have been issued, however, only approximately
197,000 shares of STFI's common stock have been delivered. The
balance of the shares will be delivered pending the outcome of
certain claims against, and by, the former owners of South (Note
14).
In May 1995, the Company commenced management of, and
subsequently acquired the outstanding capital stock of, Cellular
Hotline, Inc. (Hotline), a cellular telephone activation service
provider. The purchase price was $617,000 comprised of $367,000
in cash, the assumption of $150,000 of certain indebtedness and
the balance through the issuance of 50,000 shares of the
Company's common stock (Shares) valued at $5.00 per share. The
former Hotline stockholders had the right to require the Company
to repurchase from them all or a portion of the Shares for $5.00
per share. In September 1995, the former Hotline stockholders
exercised their put option and the Company purchased all the
Shares and subsequently retired those Shares. In connection with
the acquisition, the Company issued the former Hotline
stockholders a three year option to purchase an aggregate of
50,000 shares of the Company's common stock at a price of $7.50
per share. In addition, the agreement provides for additional
payments based upon attaining certain levels of activation
revenues, as defined, over a one year period.
In November 1995, STC completed its acquisition of substantially
all of the assets of PTC Cellular, Inc. (PTCC). The purchase
price was $3,800,000, comprised of $300,000 in cash, the
assumption of $1,200,000 of accounts payable, a promissory note
of $2,000,000 and the issuance of 100,000 shares of the Company's
common stock. The agreement provides for a maximum of $2,500,000
of royalty payments, computed at 3% of quarterly revenues
generated from certain of the acquired assets. Also, STC has
committed to PTCC to obtain financing in the amount of $7,000,000
within six months of the acquisition date.
F-11
NOTE 3 - ACQUISITIONS (CONTINUED):
These acquisitions were accounted for as purchases, and the
purchase prices were allocated on the basis of the relative fair
market values of the net assets acquired and net liabilities
assumed, as follows:
Hotline PTCC
---------- -------------
Cash $ 19,462 $ -
Accounts receivable 13,000
Commissions receivable, net 465,869
Prepaid expenses and other current assets 70,431 61,910
Equipment 50,000 1,806,480
Intangibles 520,000
Accounts payable and other current liabilities (238,206)
Commissions payable (473,820)
------------
$ (93,264) $ 2,388,390
============ ==============
The following unaudited pro forma combined statements of
operations for 1995 and 1994 give effect to the acquisitions of
Hotline and PTCC, as if they had occurred on January 1, 1994.
1995 1994
-------------- ---------------
Revenues $ 21,329,344 $ 25,092,877
Cost of revenues 15,793,816 17,746,810
-------------- ---------------
Gross margin 5,535,528 7,346,067
Selling, general and administrative expenses 9,910,680 10,408,185
-------------- ---------------
Loss from operations (4,375,152) (3,062,118)
Interest expense, net (343,955) (199,934)
Other income 325,149
-------------- ---------------
Net loss before income taxes (4,393,958) (3,262,052)
Income taxes (47,924)
--------------- ---------------
Net loss $ (4,441,882) $ (3,262,052)
============== ===============
Loss per common share $ (1.56) $ (1.40)
=============== ===============
Weighted average number of
common shares outstanding 2,847,948 2,335,000
=============== ===============
F-12
NOTE 4 - TELECOMMUNICATIONS AND OFFICE EQUIPMENT:
Telecommunications and office equipment consist of the following
at December 31, 1995 and 1994:
1995 1994
-------------- ---------------
Telecommunications equipment $ 2,611,128 $ 1,167,103
Office equipment 503,126 248,357
-------------- ---------------
3,114,254 1,415,460
Accumulated depreciation 956,569 419,551
-------------- ---------------
$ 2,157,685 $ 995,909
============== ===============
Depreciation for the years ended December 31, 1995, 1994 and 1993
was $537,018, $327,543 and $76,872, respectively.
NOTE 5 - INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1995
and 1994:
1995 1994
-------------- ---------------
Goodwill $ 5,023,920 $ 2,204,350
Franchise costs 75,573 75,573
Deferred start-up costs 617,500 390,000
Covenant not to compete 142,373 22,373
Rental car agreement 520,000
Capitalized software development costs 594,579
-------------- ---------------
6,973,945 2,692,296
Accumulated amortization 844,844 296,177
-------------- ---------------
$ 6,129,101 $ 2,396,119
============== ===============
Amortization for the years ended December 31, 1995, 1994 and 1993
was $548,667, $258,805 and $28,473, respectively.
NOTE 6 - NOTE RECEIVABLE:
The note receivable (face amount of $250,000) resulted from the
sale of a franchise and is due in monthly installments of $5,000
through April 1, 1999. In discounting the note to $202,033,
interest has been imputed at 10% per annum.
F-13
NOTE 7 - ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES:
Accounts payable and other current liabilities consist of the
following at December 31, 1995 and 1994:
1995 1994
------------- --------------
Trade $ 4,465,198 $ 1,521,514
Sales and other taxes 668,610 547,870
Payroll and payroll taxes 110,290 77,072
Other 594,620 275,889
------------- -------------
$ 5,838,718 $ 2,422,345
============= =============
NOTE 8 - NOTE PAYABLE:
The promissory note bears interest at 8% per annum and is payable
in semi-annual principal installments of $200,000 through
November 2000. The note is collateralized by substantially all of
the assets acquired from PTCC.
NOTE 9 - STOCKHOLDERS' EQUITY:
On January 1, 1994, the Company issued an aggregate of 175,737
shares of its common stock to certain officers and a consultant.
The value ascribed to these shares, $14,000 ($.08 per share), has
been included in general and administrative expenses for the year
ended December 31, 1994.
On January 1, 1994, the Company transferred its 65% ownership in
Safecall to STFI. In connection with this transaction, $108,136
was recorded in 1994 as capital in excess of par value.
In January 1994, the Company entered into a stock subscription
agreement to issue 62,763 shares of its common stock for $5,000
($.08 per share).
In September 1994, the Board of Directors approved a resolution
to effect a stock split of 1,083 shares for 1. In addition,
during December 1994, the Board of Directors adopted a resolution
to effect a reverse stock split of 1 share for 1.0622 shares.
Accordingly, all number of shares and per share data have been
restated to reflect these stock splits.
F-14
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED):
During October 1994, the Company's certificate of incorporation
was amended whereby the authorized number of shares of the
Company's common stock was increased to 10,000,000 and the
Company was authorized to issue 5,000,000 shares of preferred
stock at $.01 par value, issuable from time to time in one or
more series with such rights, preferences, privileges and
restrictions as determined by the directors.
On March 23, 1995, the Board of Directors adopted a resolution to
effect a reverse stock split of two for three. Accordingly, all
number of shares and per share data have been restated to reflect
this stock
split.
In April 1995, the Company completed its initial public offering
of 950,000 shares of its common stock at $5.25 per share.
In connection with a consulting agreement, the Company issued
warrants to purchase 95,000 shares of its common stock at an
exercise price of $6.00 per share, subject to certain
anti-dilutive provisions.
In May 1995, the Company purchased 31,381 shares of its common
stock for $125,000 from a consultant and subsequently retired
these shares.
In December 1995, the Company sold 300,000 shares of Series A
Convertible Preferred Stock at $10 per share through a private
placement. Each preferred stockholder is entitled to receive
dividends equal to 10% per annum for the first twelve month
period, which is payable in additional shares of Series A
Preferred Stock. Thereafter, at the Company's option, dividends
are payable at 6% per annum in cash or 10% per annum if paid with
additional shares of Series A Preferred Stock. The shares are
currently convertible into a maximum of 1,200,000 shares of the
Company's common stock, subject to certain adjustments. Series A
Preferred Stock has voting rights equivalent to common stock, in
an amount equal to the current conversion rate. The Company has
the right to require the conversion of the Series A Preferred
Stock into the common stock, at any time after one year, provided
that the Company maintains a certain market value of its common
stock, as defined. In addition, the Company paid an advisory fee
of $300,000 and issued warrants to purchase 150,000 shares of its
common stock, at an exercise price of $2.50, to a firm, one of
whose principals is a director of the Company.
As of December 31, 1995, the Company was approximately 59% owned
by STFI. Subsequent to the issuance of Series A Preferred Stock,
STFI's voting control of the Company decreased to approximately
43%.
F-15
NOTE 10 - STOCK OPTION PLANS:
The Board of Directors adopted, and the Company's stockholders
approved, a stock option plan (the Plan) pursuant to which
274,797 shares of the Company's common stock were reserved for
issuance upon the exercise of options granted to officers,
employees, consultants and directors of the Company. Options
issued under the Plan are non-qualified stock options (NSO's) and
the Board of Directors (Committee) may grant NSO's at an exercise
price which is not less than the fair market value on the date
such options are granted. The Plan further provides that the
maximum period in which stock options may be exercised will be
determined by the Committee, except that they may not be
exercisable after ten years from the date of grant. The activity
in the Plan was as follows:
Exercise Price Per Share
------------------------
Number of Weighted
Options Range Average
------------- ------------- ----------
Granted in 1994 171,048 $ 3.68 $ 3.68
------------- ------------- ----------
Balance outstanding December 31, 1994 171,048 3.68 3.68
Granted 91,000 2.38-3.68 3.12
Expired (34,715) 3.68 3.68
------------- ------------- ----------
Balance outstanding December 31, 1995 227,333 $ 2.38-3.68 $ 3.45
============= ============= ==========
At December 31, 1995, options to purchase 82,111 shares of common
stock were exercisable.
The Board of Directors adopted, and the stockholders approved,
the Company's 1994 Director Option Plan (the Director Plan)
pursuant to which 33,333 shares of the Company's common stock are
reserved for issuance upon the exercise of options to be granted
to non-employee directors of the Company. Under the Director
Plan, an eligible director will, after having served as a
director for one year, automatically receive nonstatutory options
to annually purchase 2,000 shares of the Company's common stock
at an exercise price equal to the fair market value of such
shares at the time of grant. Each such option is immediately
exercisable for ten years from the date of grant, but generally
may not be exercised more than 90 days after the date an optionee
ceases to serve as a director of the Company. At December 31,
1995, options to purchase 4,000 shares of the Company's common
stock at a price of $3.125 per share were outstanding.
F-16
NOTE 11 - RELATED PARTY TRANSACTIONS:
STFI has provided the Company with various general and
administrative services. Charges for these services by STFI
approximated $nil, $55,000, and $291,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. Subsequent to
1993, the Company provided more of its own direct general and
administrative services, thereby reducing the services previously
provided by STFI.
The Company entered into a one year agreement, effective January
1, 1996, whereby the Company will pay a fee of $25,000 per month
for certain services to be performed by STFI. Per the agreement,
the fee will not (i) be payable in any month in which there is a
pre-tax loss, (ii) exceed pre-tax profit (prior to the fee, in
any month), or (iii) exceed $200,000. In addition, STFI agrees to
provide telecommunications services, as may be requested by the
Company, including local access and long distance service, at a
price not to exceed STFI's cost for such services plus twenty
percent. This agreement is cancelable by the Company on thirty
days notice to STFI.
Amounts due to parent are due on demand, are unsecured and
non-interest bearing.
NOTE 12 - INCOME TAXES:
A reconciliation of income tax expense (credit), to the federal
statutory rate follows:
Years Ended December 31,
------------------------
1995 1994 1993
----------- ----------- ----------
Income tax expense (credit) on reported pretax
income (loss) at federal statutory rate (34.0)% 34.0 % (34.0)%
State income tax, net of federal benefit (1.7) 5.3 (5.3)
Net operating loss carryforward (utilized) 34.0 (39.3) 39.3
------------ ------------ ------------
Income taxes 1.7 % -0-% -0-%
============ =========== ============
In accordance with the tax sharing arrangement it had with STFI
in effect through April 1995, the Company utilized net operating
loss carryforwards generated in prior years.
At December 31, 1995, 1994 and 1993, the Company recorded
deferred tax assets of approximately $1,104,000, $110,000 and
$180,000, respectively, and valuation allowances in the same
amounts.
SFAS No. 109 requires that the Company record a valuation
allowance when it is "more likely than not that some portion or
all of the deferred tax asset will not be realized". The ultimate
realization of this deferred tax asset depends on the ability to
generate sufficient taxable income in the future.
F-17
NOTE 12 - INCOME TAXES (CONTINUED):
The net deferred tax asset includes deferred tax assets and
liabilities as of December 31, 1995 and 1994 as follows:
1995 1994
--------------- --------------
Deferred tax asset $ 1,214,000 $ 111,000
Deferred tax liability (110,000) (1,000)
Valuation allowances for deferred tax asset (1,104,000) (110,000)
--------------- --------------
Net deferred tax asset $ - $ -
=============== ==============
The components of deferred income tax assets (liabilities) as of
December 31, 1995 and 1994 are as follows:
1995 1994
--------------- --------------
Net operating loss carryforward $ 945,000 $ -
Depreciation (97,000) (1,000)
Allowance for doubtful accounts 269,000 95,000
Intangible assets (13,000) 16,000
--------------- --------------
1,104,000 110,000
Valuation allowance for deferred tax asset (1,104,000) (110,000)
--------------- --------------
$ - $ -
=============== ==============
At December 31, 1995, the Company has a federal net operating
loss carryforward of approximately $2,405,000, which can be
utilized against future taxable income and expires in the year
2010. Net operating losses available for state income tax
purposes are less than those for federal purposes and generally
expire earlier.
NOTE 13 - SAVINGS AND RETIREMENT PLAN:
The Company participates in a savings and retirement plan (the
Plan) maintained by STFI, which covers substantially all eligible
employees. Participants in the Plan may elect to make
contributions up to a maximum of 20% of their compensation. For
each participant, the Company will make a matching contribution
of one-half of the participant's contributions, up to 5% of the
participant's compensation. Matching contributions may be made in
the form of STFI's common stock and are vested at the rate of 33%
per year. For the years ended December 31, 1995, 1994 and 1993,
the Company's matching contributions were approximately $24,900,
$17,500 and $5,100, respectively.
F-18
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
In connection with the acquisition of East, the Company entered
into a three year consulting agreement with the former owner,
providing that during the first two years of the agreement the
former owner is to be paid an annual consulting fee equal to 3%
of total cellular telephone rental revenues in excess of
$4,000,000. In addition, an annual bonus of $100,000 is payable
if total cellular telephone rental revenues exceed $5,000,000 per
annum. The former owner may not engage in any business competing
with the Company, within a certain geographical area. Fees for
the years ended December 31, 1995 and 1994 were approximately
$158,000 and $188,000, respectively.
The Company leases office facilities, which expire in various
years through December 1999. Future minimum aggregate annual
rental payments as of December 31, 1995 are as follows:
Year Ending December 31:
1996 $ 214,000
1997 150,000
1998 121,000
1999 97,000
Rent expense for the years ended December 31, 1995, 1994 and 1993
was approximately $256,000, $155,000 and $24,000, respectively.
On January 27, 1995, South commenced an action against the
Company alleging, among other things, that the Company's failure
to deliver to South the STFI common stock under the asset
purchase agreement constituted a breach of contract and fraud.
South is seeking unspecified actual and punitive damages of not
less than $10 million. The Company sought a stay of this action.
The parties have agreed to attempt to settle through mediation or
arbitration. Management believes that in the event such claims
are resolved against the Company, they would not, in the
aggregate, have a material adverse effect on financial condition,
results of operations or cash flows.
The Company entered into a two year consulting agreement,
expiring December 31, 1998, providing for annual compensation of
$180,000. In addition, the agreement provides for additional
payments based upon attainment of certain levels of revenues, as
defined. During the term of the agreement and for two years
thereafter, the consultant may not compete with the Company in
the business of renting cellular telephones anywhere in the
United States, Mexico and Canada.
In connection with the Hotline acquisition, the Company entered
into employment agreements, effective June 20, 1995, with two
former Hotline stockholders. The agreements expire in June 1997,
and provide for annual compensation of $165,000. The former
Hotline stockholders may not compete with the Company in certain
businesses, as defined, anywhere in the United States.
F-19
NOTE 15 - DEPENDENCE UPON KEY RELATIONSHIPS MAJOR CUSTOMERS:
Approximately 25%, 29% and 27% of the Company's revenues for the
years ended December 31, 1995, 1994 and 1993, respectively, were
attributable to cellular telephone rentals made to customers of
two national car rental companies. The agreements with these
companies are terminable on 120 days and 90 days notice,
respectively. The termination of either of these agreements would
have a material adverse effect on the Company. In addition, for
the year ended December 31, 1994, the Company received
approximately 18% of its revenues from one special event.
NOTE 16 - GAIN ON SALE OF ASSETS:
On December 26, 1995, the Company sold its cellular mobile
telephone customer base of its resale business and substantially
all of the related accounts receivable. The Company realized a
gain of approximately $689,000.
NOTE 17 - LOSS ON DISCONTINUED AFFILIATE:
During 1995, the Company's affiliate, Safecall, Inc., ceased its
operations. Amounts previously advanced to this affiliate were
written off.
NOTE 18- SUBSEQUENT EVENTS:
In February 1996, the Company issued a letter of intent to
acquire substantially all of the assets of its only franchisee,
for approximately $3,400,000. The purchase price will be paid in
cash, issuance of debt and issuance of shares of the Company's
common stock.
F-20
SCHEDULE VIII
SHARED TECHNOLOGIES CELLULAR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994 AND 1993
Balance at Charged to Charged Balance
Beginning Cost and to Other at End
Description of Year Expenses Accounts Deductions (1) of Year
----------- ------------ ------------- ------------ ----------- ---------
December 31, 1993:
Allowance for doubtful
accounts and discounts 13,928 228,791 198,182 44,537
December 31, 1994:
Allowance for doubtful
accounts and discounts 44,537 307,617 109,474 242,680
December 31, 1995:
Allowance for doubtful
accounts and discounts 242,680 1,248,620 806,425 684,875
(1) Represents write off of uncollectible accounts, net of recoveries.
S-1