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FORM 10-KSB\A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] 15, ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: 12/31/95
OR
[ ] 15, 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: 33-79678
APPLIED CELLULAR TECHNOLOGY, INC.
(Exact name of registrant as specified in charter)
Missouri 43-1641533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
James River Professional Center, Highway 160 & CC, Suite 3, Nixa, Missouri 65714
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (417) 725-9888
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for at least the past 90 days.
Yes x No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference to Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X].
The Corporation's revenues for its most recent fiscal year were $2,335,999.
As of December 31, 1995, seven market makers maintained bids in the Company's
securities. The current market value of the registrant's voting $.001 par
value common stock held by non-affiliates of the Registrant is approximately
$4,300,000.
The number of shares outstanding of registrant's only class of common stock,
as of December 31, 1995 was 2,267,749 and at March 24, 1996 was 2,332,375
shares of its $.001 par value common stock.
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No documents are incorporated into the text by reference.
Transitional Small Business Disclosure Format (check one): Yes No x
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Exhibit Index is located on Page 23.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) Business Development. The Company was originally incorporated in
1988 under the name of Axcom Computer Consultants ("Axcom") and operated as a
custom programming and systems house. In May, 1993, the Company was acquired
by Great Bay Technology, Inc. for the purpose of focusing the Company on
marketing and sales of emerging cellular data technology hardware and
proprietary software focused on the vertical markets of wholesale
distribution, manufacturing and health care. The name was subsequently
changed to Axcom Information Technology, Inc. on May 27, 1993 and then
changed again in April, 1994 to Applied Cellular Technology.
Pursuant to the original Articles of Incorporation, the Company has the
authority to issue an aggregate of Ten Million (10,000,000) common shares,
par value $1.00 per common share. In April, 1994, an amendment to the
Articles of Incorporation changed the par value to $.001 per common share.
The Company also has the authority to issue 20,000 shares of redeemable
Preferred Stock, par value $10.00.
As of December 31, 1995, there were 2,267,749 Common Shares outstanding and
2,332,375 Common Shares outstanding as of March 25, 1996 and no Preferred
Shares. There are also 200,000 Class B Warrants, 300,000 Class F Warrants and
350,000 Class H Warrants outstanding.
Subsidiaries. In November 1994, the Company formed a subsidiary, Kedwell
International, Inc., and capitalized it by issuing 180,000 common shares of
the Company's $.001 par value common stock. The name of the subsidiary was
changed to Tech Tools, Inc. on April, 1995. The subsidiary purchased
software in exchange for the 180,000 common shares of the Company and 120,000
redeemable Class E Warrants which were exercisable to acquire one common
share of the Company at the price of $7.50 per common share or one redeemable
Class A Convertible Preferred Share of the subsidiary, or if the subsidiary
becomes a public company, into an amount equal to 40% of its total
outstanding common shares. The subsidiary's redeemable Class A Convertible
Preferred was to have paid a cumulative dividend compounded annually of 8% of
the aggregate value of $600,000. The Class A Convertible Preferred would
have had cash redemption rights five years after issuance at the option of
the holder. The redemption price shall be $5.00 per preferred share. These
Class E Warrants were exercised in August, 1995 into 120,000 common shares of
the Company. The value for the purchased software was determined by the
market price at acquisition of the shares given up less a 50% discount given
to the shares due to the limited market for these shares. The warrants were
given no value because the exercise price significantly exceeded the fair
value of the underlying common shares.
On December 22, 1994, the Company acquired 570,712 shares of Cadkey, Inc., a
software technology company from an unaffiliated individual, in exchange for
456,570 shares of its common stock, resulting in a 29% investment in Cadkey,
Inc. The purchase price was determined by the current market price at
acquisition of the shares given up less a 50% discount given to the shares
due to the limited market for these shares. The remaining 71% of Cadkey
common shares are owned by the founders (18.5%) who are unaffiliated with the
Company and 25 other unaffiliated individuals or entities.
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During April, 1995, the Company formed a subsidiary, Applied Cellular
Technology Financial Corp., a Delaware corporation. The subsidiary was
formed to hold a note receivable from Cadkey, Inc. The Company purchased a
$1,000,000 note receivable in exchange for 200,000 common shares at a market
price of $5.00, with a 50% discount due to the limited market of the shares,
bringing the value down to $2.50 per share issued.
On August 9, 1995, the Company issued 124,066 shares of its common stock at
$5.50 per share to two shareholders in exchange for an amount of common
shares equal to 80% of the total outstanding common shares of Atlantic
Systems ("Atlantic"). The investment was recorded based on the $5.50 per
share market price less a 50% discount due to the limited market of these
shares. Atlantic develops and manufactures software and hardware systems for
the retail industry. Its major vertical market is retail liquor stores and
its secondary market is gift shops. Atlantic currently market in New
Jersey, where it has a 15% market share in the liquor stores with smaller
shares in New York, Connecticut and Massachusetts. The Company intends to
expand Atlantic's activities nationally either through the acquisition of
similar companies to be absorbed into Atlantic beginning in the key markets
of Atlanta, Chicago, Dallas and Los Angeles, or simply by adding marketing
personnel. For the fiscal year ended December 31, 1994, Atlantic had
revenues of $1,414,620 and earnings of $16,801. For the fiscal year ended
December 31, 1993, Atlantic had revenues of $1,162,059 and earnings of $840.
On September 6, 1995, the Company issued 102,160 shares of its common stock
at $8.94 per share to two shareholders in exchange for an 80% investment in
Elite Computer Services, Inc. ("Elite") The investment was recorded based
on the $8.94 per share market price less a 50% discount due to the limited
market of these shares. Elite's main business is the purchase of mainframe
computers which are then stripped and the parts sold. Elite's facilities
consist of 5,000 square feet of office and assembly space and are located in
Randolph, New Jersey. Elite is obligated under a five year lease that expires
May, 1996. The total lease commitment as of December 31, 1995 is $28,125.
For the fiscal year ended December 31, 1994, Elite had sales of $2,020,650
and a loss of $32,976. For the fiscal year ended December 31, 1993, Elite
had sales of $1,536,414 and a loss of $34,145.
Employees. In addition to management, the Company currently employs a
total of 35 individuals in the Company and its subsidiaries. These include
senior software developers, contract developers and a full time bookkeeper.
The Company's four subsidiaries employ a President, a Director of Marketing a
Manager of Development and a customer support technician. All software
development, customer support, accounting and administration support for the
subsidiary is provided by the Company's personnel.
Competition. The Company provides a combination of hardware technology,
proprietary vertical market application software packages, specialized
software engineering expertise and high-level consulting services. The
availability of all these capabilities from a single source makes the Company
able to serve the needs of firms of any size which are seeking to upgrade and
reintegrate their information systems.
The Company currently competes in the areas of route accounting systems,
warehouse management systems, manufacturing shop floor control systems and
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custom data collection applications. The competitive advantage in the areas
of route accounting systems, warehouse management systems and manufacturing
shop floor control systems depends on the features of the systems offered,
price, performance and reliability of the hardware components of the systems,
services and reputation of the companies. These markets are highly
competitive and the Company has no specific advantage as to price, features,
performance and reliability or reputation.
Within the area of route accounting systems, there are at least 10 major
competitors, Within the area of warehouse management systems, there are at
least 50 competitors and within the areas of manufacturing shop floor control
systems there are at least 75 competitors.
In the area of custom data collection, competitive advantage depends on
price, availability, technical expertise and reputation of the companies.
There are several hundred companies operating in the area and, although
management is of the opinion that the Company has an excellent reputation,
client list and skill set, there might be from six to 100 companies who would
be qualified to respond to a particular bid request. The Company provides a
combination of hardware technology, proprietary vertical market application
software packages, specialized software engineering expertise and high-level
consulting services. The availability of all these capabilities from a
single source makes the Company able to serve the needs of firms of any size
which are seeking to upgrade and reintegrate their information systems.
Third Party Licenses. The Company's programs for distributors include
extensive customized programming. Certain accounting and host order
processing functions are provided under license from American Business
Systems, Inc. Certain warehouse automation and manufacturing data collection
functions are provided under license from Applied Automation Techniques, Inc.
Seasonal Nature of Business Activities. The Company's business activities
are not seasonal.
(b) Business of Issuer.
General. The Company is a software development and services company which
integrates the technologies of Client-Server Computing; Object Oriented
Programming; Automated Data Collection Systems and communications systems
using radio frequency data networks and various other asynchronous and
synchronous protocols.
The Company offers custom-tailored software and hardware systems for
manufacturers, wholesalers and distributors with vehicle-based sales. The
applications offered automate various aspects of these businesses, including
order processing, inventory control, accounting, work-in-process control,
quality management and sales management. The Company operates as a
value-added reseller for several different manufacturers of computers, data
collection equipment and printers. The Company integrates this hardware with
custom-tailored software, specific for the customer's needs. The software
may be based on an existing application from a third party or may be entirely
proprietary to the Company. As a distributor, the Company's hardware sales
comprised 31.81% of total revenue for the year ended December 31, 1994 and
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54.84% of total revenue for the fiscal year ended December 31, 1995.
Current Activities. During 1992, a decision was made to wind down the
Company's sales activity on custom-written data collection systems and to
stop selling general-purpose computer hardware and accounting/inventory
control systems. Sales of this type of system accounted for about 40% of
the Company's gross revenues in 1992. The decision resulted from to
shrinking margins on this type of system and an effort to reduce the high
overhead associated with selling and supporting the general purpose computer
hardware. Fiscal 1992's results show the effects of these reduced margins
and Fiscal 1993's results show reduced revenue but improved margins as a
result of the discontinuation of the general purpose systems.
In May, 1993 the focus of the Company's business operations was changed to
marketing and sales of emerging cellular data technology hardware and
vertically-focused, proprietary software. Subsequent to the acquisition of
Axcom by Great Bay Technology Group, Axcom's former president, Larry Axon,
remained as Director of Special Projects to ensure the Company retained its
backlog of business and smoothly transitioned relationships with its key
business partners, especially Telxon. Mr. Axon has since left the Company to
pursue other interests.
For the fiscal year ended December 31, 1994, the Company principally received
revenue from programming services ($184,335), the sale of hardware products
($102,661) software licensing revenue ($29,582) and other revenue ($6,191).
For the fiscal year ended December 31, 1995, the Company principally received
revenue from programming services ($442,874), the sale of hardware products
($1,281,101) software licensing revenue ($151,229), packaged software sales
($417,600) and other revenue ($43,195).
Current Acquisitions. A major part of the Company's plan of operations is
to acquire businesses within similar industries that have a history of
profitable operations. These acquired companies may have working capital
needs which may have a negative effect on the cash flow of the Company. When
acquiring only certain assets of a Company, there is a risk that important
vendors may be overlooked or eliminated. Also, unknown obligations may exist
as well as litigation risks that may not have been disclosed. The Company
will attempt to retain current management to minimize the risks Additionally,
there can be no assurance that an acquired company will continue to have
profitable operations.
The Company shall acquire the targeted companies as subsidiaries of the
Company. Subsidiaries which compliment each other shall be integrated
together or integrated into the Company. The Company shall initially run
the targeted companies without integration into other subsidiaries or itself,
however, if there is a real compatibility with product or services of two
owned entities of the Company, the Company shall evaluate possible
integration.
On August 4, 1995, the Company, acquired certain assets of Baler Software
Corporation ("Baler") in exchange for the payment of debt of $14,000, and the
issuance of 88,009 shares of the Company's common stock at $5-1/8 to
creditors and the issuance of 25,000 shares of the Company's common stock at
$5-1/8 to one shareholder, Mr. Ron Rheiman. The aggregate value of
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consideration paid by the Company was $289,303. Mr. Rheiman is not an
affiliate of the Company and its affiliates and owns less than 5% of the
Company's common stock. The value for these shares was determined based on a
50% discount given to the market price of $5-1/8, due to the limited market
for these shares, giving them a value of $2.56 per share. The assets
purchased were the source code, inventory and manuals for a family of
software development tools (primarily Visual Baler, a spreadsheet compiler)
which are being marketed by TechTools. Selected fixtures and furnishings
were also included in the purchase. Baler was acquired and absorbed into the
current operations of the Company's subsidiary, TechTools, Inc. One Baler
technical support employee was transferred into TechTools, Inc. operations.
Founded in 1988, Baler invented the spreadsheet compiler. Its product line
compliments the current DataBoss family of software development tools.
TechTools, Inc. intends to market the Baler products through retail
distributors, direct mail catalogs and through direct sales to corporation.
For the fiscal year ended June 30, 1995, Baler had revenues of $722,442 and a
loss of $616,059. For the fiscal year ended June 30, 1994, Baler had
revenues of $818,009 and earnings of $45,461.
On February 8, 1996, the Company's subsidiary, Atlantic purchased certain
assets relating to fixture, furnishings, proprietary retail software for
liquor stores and customer lists of Quality Solutions, Inc. The sellers
did not retain any ownership in the assets. The only member in active
management of the assets previously, Mr. John Beasley, now functions as the
SouthWest District Sales Manager for Atlantic Systems. The aggregate value of
consideration paid by the Company was $225,000.
On March 7, 1996, the Company entered into an agreement to acquire 80% of
Burling Instruments, Inc. of Chatman, New Jersey ("Burling"). The Company
will purchase 80% of the outstanding common shares of Burling with the
Company's preferred stock, par value $100 with an 8% annual dividend (pending
the Company's shareholder approval of an increase in its preferred stock,
which is probable due to the fact that the majority ownership shareholders
have been involved with the acquisition negotiations in the entirety, and are
in favor of the acquisition). The aggregate value of consideration paid by
the Company is $957,600. Vern Anderson is affiliated with the Company due to
his continued position as President of Burling, retained the remaining 20% of
the Burling common stock of Burling. Burling is a fifty year old company
which manufactures digital and analog temperature control devices for home
and industry use.
There are not currently any other plans, arrangements, negotiations, or
understandings with respect to any future acquisitions.
Products.
Cellular Data Technology. The Company is a value-added reseller for
Aironet, the leading manufacturer of cellular data radio equipment. Aironet
designs and builds radio and base station components which are used to
establish wireless connections between portable computing devices and host
networks. Aironet also manufactures a line of products for connecting two or
more networks together between buildings at distances up to 6 miles. Aironet
is headquartered near Toronto, Ontario and is a subsidiary of Telxon
Corporation.
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The Company utilizes the Aironet equipment to build tailored data collection
systems which capture events at the point of transaction (shop floor,
warehouse, work yard, etc.) and connect to network databases for immediate
update. The Company can integrate these systems with a wide variety of
mainframe, mid-range and networked host computers. Installation of wireless
data collection systems into existing facilities requires adapting to the
existing network topology, communication protocols, database structures and
application procedures. The Company is providing the consulting, design,
development and implementation services. The Company does not assemble or
manufacture any of the products it distributes.
Proprietary Software Applications. Since May, 1993, the Company has
embarked on a program of development to bring five proprietary products to
market, Automated Route Management System (ARMS), Automated Distribution
Management System (ADMS), Automated Inventory Management (AIM),
Compliance-Plus UCC-128 labeling System and the TransPort/open, Universal
Communications Hub. As a single source of supply, the Company achieves
better account control, better return on sales expense and can differentiate
itself from competitors offering only a partial solution. Currently, the
ADMS, ARMS and the Compliance-Plus UCC-128 Labeling System products have
been completed. In fiscal year 1995, these products generated 28% of the
Company revenue. The TransPort/Open, Universal Communications Hub and AIM
are still in the development stage.
Route Management System (ARMS). For manufacturers and
distributors of perishable products which are sold from route trucks, the
Company offers a complete system for managing route sales. The ARMS system
makes use of hand held computers which are used at the retailer's location by
the route salesman to record the quantity of each item on hand, record the
quantity stale, display a system-calculated recommended stock level, and
enter the quantity delivered. An invoice is printed. Periodically, the
salesman's truck is replenished from a feeder truck equipped with a portable
computer. The feeder truck carries an order for the salesman which was
calculated based on the past four weeks' usage. Information on sales,
stales, promo and unsalable merchandise is downloaded from the salesman's
computer to the portable and his hand held unit is updated from the portable
for the quantity of product being loaded on his truck from the feeder truck.
The feeder truck returns to the home office where route sales, payments,
stales and unsalables information is processed and uploaded to the central
system. (Customers can choose to buy their central system from the Company
or utilize the system's generalized interfaces which the Company or the
customer can use to communicate with an existing host system.) Pertinent
reports are produced by the system to ensure proper financial controls and to
provide meaningful management information.
The Company's route management system is applicable to a wide range of
business which sell perishable products from route vehicles.
Distribution Management System. ("ADMS") ADMS includes proven
programs which the Company has installed in a number of customer sites.
Taken together, they represent an integrated system for automating all phases
of the distribution operation. Included are solutions for the following
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functional areas:
* Remote Customer Order Entry. Customers scan shelf labels
and/or an order book to enter their order into a Telxon portable
transaction computer ("PTC"). The order is then telephoned into
a central Telxon receiver PC at the warehouse. Orders are
sent from the PC receiver via TCP/IP (ethernet) to the host
system for processing.
* Order Book Processing. Order Books can be printed for a
specific customer using their contract pricing or at one of
five standard price levels (or printing with no pricing can
be selected). The books can be bar-coded or non-bar-coded.
* Customer Shelf Label Processing. Bar coded reorder shelf
labels can be printed from customer history (only the products
a customer typically buys) or for all products in a category.
The labels can show the customer's retail price, if desired.
Customers can be assessed a charge per label.
* On-Line Customer Order Services. Customers with in-store
computers can send an order to the company's Electronic Message
Center PC, located at the warehouse for processing by the
host. After an order has been invoiced, packing slip data is
automatically sent to the Message Center for downloading to
the customer's system to automatically update costs and
quantities on the in-store computer.
* Pricing, Promotions, Bulletins and Quotations. Customers
can elect a number of different pricing schemes for each or a
group of customers, including level pricing, category pricing
and contract pricing. Special promotional price contracts
can be entered which take effect and expire on a specified
date. Price contracts whose effective date falls with a
specified period can be extracted automatically and imported
to a word processor or desktop publisher for preparation of
customer promotion bulletins showing price changes,
promotions and new and obsolete products. The same features
which support pricing can be used to generate priced order
books and quotations.
* Sales Analysis. Cumulative sales information is stored for
each order, weekly salesman totals by category and product and
monthly sales totals by product for each customer. Standard
sales analysis reports include weekly sales totals by
salesman and customer monthly item movement. Special reports
can be written from any of the files using an optional report
writer.
* Inventory. Perpetual inventory balances are automatically
updated from purchase order receipts and shipping confirmation.
Multiple warehouses are supported. Cycle counts and physical
inventories are
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performed using bar code scanners. Bar code slot tags allow for
easy identification of products by pickers and to facilitate bar
code entry of cycle counts and physical inventory counts.
* Data Import/Export. Key system master files can be built
from text-format files output from other systems. This
drastically reduces the time required to convert to the new
system and reduces errors introduced by keypunching master
file data.
* Accounts Receivable. The A/R system features flexible
statement and aging parameters, cash application/reapplication,
purge paid items and customer inquiry screen.
* Accounts Payable. The A/P system features cash
requirements report, automatic distribution of expenses to
general ledger and an automatic interface to the purchase
order system.
* Purchase Orders. The Purchase Orders system features
create, edit and print purchase orders; receive all or
exceptions only receiving confirmation, automatic update of
inventory and an automatic interface to the payables system.
* General Ledger. The General Ledger system features
flexible account number and report formatting and automatic
interfaces from A/R and A/P.
Inventory Management System (AIM). In addition to the inventory
control features of the Company's system for distributors, a special set of
programs is available to manage inventory levels and assist the purchasing
department in various replenishment buying activities. AIM analyzes usage,
safety stock, lead time and order minimum data to assist the buyer in
consolidating a replenishment order for a selected vendor. By displaying
items in color (red, yellow and green), AIM alerts the buyer to items needing
attention. AIM can be interfaced to virtually any inventory control system to
achieve automatic building and balancing of orders. which saves buyers hours
of work and reduces inventory; facilitates alternate source buying,
promotional buying, forward buying, etc., easily switches items from one
vendor to another; automatic rebuilding to new specifications, allows buyers
to see the effects of proposed changes in safety stock, order frequency, etc.
and improved order fill rates and customer service levels.
Compliance-Plus UCC-128 Labeling System. For manufacturers
and distributors which supply products to larger retail chains, Compliance-
Plus provides for printing bar coded shipping labels which conform to the
formats specified by the retailers. In addition, the system allows for
verifying shipments by scanning the labels using hand held laser terminals
and comparing the scans against the customer's order. The system provides
for transferring order information into Compliance-Plus from the host order
processing system and for creating advance ship notice EDI transactions for
electronic transmission to the retailer.
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TransPort/open, Universal Communications Hub. In May, the
Company released a Unix-based communications program which management
believes has the same or better functionality than current PC-based solutions
to handle most types of one- and two-way communications between a
centrally-located host computer and portable computers and hand held
terminals. Advantages of a Unix-based system include the capability to
support large numbers of remote units simultaneously and the capacity to
support additional remote units on a single system through the upgrading of
CPU and memory capacity. The system will support communications to most
host systems including PC networks, Unix systems, IBM mainframes and
proprietary systems such as Digital Equipment Corporation VAX systems.
Automated data collection applications in manufacturing shop floor control.
The Company markets a tailored version of Applied Automation Technologies'
(Miami, Florida) Auto-Time time and attendance and job cost system which it
tailors to meet customer's requirements.
The percentage of total revenues derived from the above five software
products was .8% in Fiscal 1993, 9% in Fiscal 1994 and 28% for Fiscal 1995.
Future Products. Future products to be developed by the Company
will tend to be driven by the Company's goal to stay focused on one of the
four market sectors outlined above (Distribution, Manufacturing, Health
Care, and Information Systems). All will take advantage of or support the
emerging cellular data hand held and pen-based systems. The Company
expended $27,765 on company sponsored or customer sponsored research and
development for Fiscal 1995 compared to $27,850 for Fiscal 1994.
Other product areas being explored are:
Small, affordable automated data collection system for amusements,
theaters and hospitality businesses. These systems will be used to track
customer volume, profiles and preferences. The Company has already provided
one such system to a theme park and is working with another major national
theme park group on an RF-based system to capture data at the point of
transaction for various park attractions.
Automated data collection applications in medical cost control. With
physicians under pressure by hospitals, patients, employers, and the
government to reduce their fees, the ability to show the true cost of
procedures will be vital to every physician. The Company believes that
upcoming health care reform will create an instant demand for such systems
across the country.
Services. In addition to providing fixed-price, turnkey systems which
automate one or more functions within a business, the Company provides its
customers with consulting and support services to help ensure successful
implementation and smooth integration of each step along the customer's path
toward complete automation.
Business planning services are billed at an hourly rate and are intended to
assist the client with defining, budgeting, scheduling and measuring the
results of new systems.
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Available contract support services include data center management, data
center operation, help desk (problem resolution and product support),
disaster restart/recovery, off-site data storage, and off-site operation.
Support services billed hourly include hardware configuration and
installation, employee acquisition and training, implementation facilitation
and quality assessment.
It is expected that each system installed by the Company will require some
degree of customization - either changes to the basic package or interfacing
to an existing host computer or both. This customization (or excess
development capacity) is sold as contract services and used to provide needed
revenue to fund cash requirements. An important advantage of the contract
services is the opportunity to learn about new applications and develop
new core technologies at the customers' expense.
<TABLE>
Services are ordinarily quoted as fixed price projects and bid according to
the following schedule:
<CAPTION>
Local National
Rate Rate
<S> <C> <C>
Application Designer, Sen. Consultant: $89.50/hr $140.00/hr
Senior Systems Analyst: $59.50/hr $90.00/hr
Senior Programmer: $49.50/hr $80.00/hr
</TABLE>
Marketing and Sales. Emphasizing consultative services, proprietary
software and leading-edge hardware solutions, the Company's marketing efforts
are focused on medium to large sized corporations who have already made a
decision to upgrade and reintegrate their corporate systems. The Company's
sales activities are carried out by its President and a Sales Manager.
Telephone canvassing and seminars are used to develop new sales
opportunities. The Company also receives referrals from its business
partners. Often the Company will undertake a consulting engagement, performed
at a fee, to assist the customer in determining the need for a system, a
recommended implementation program and an expected pay back. The President
and two application engineers participate in such consulting activities.
The Company intends to expand its sales force as cash flows permit. Nine
metropolitan areas have been identified for commencing sales activities. A
team sales approach is used, wherein senior application engineers support
sales personnel with on-site evaluations. Engineers are expected to be
deployed at a ratio of one for every two or three salespeople. The nine
location sales force expansion is expected to be completed by the end of
calendar 1996.
In addition to the direct sales force, the Company will build a dealer
channel for its communications and database products as funds allow. These
will be a combination of value-added resellers, software publishers and
distributors. Management has not yet commenced building said channel and
cannot anticipate when it will be commenced or completed. This delay is due
to the decision to cultivate the alternative marketing relationship with Data
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Documents, Inc. of Omaha, Nebraska, who will market the Company's Compliance
"PLUS" product. The Company has established an informal marketing
partnership with Data Documents, Inc. ("DDI"). Under this informal
agreement, DDI (through its 100plus person sales force) has agreed to work
with the Company to identify prospects for the Company's Compliance-Plus
system and the Company's custom data collection software services. DDI
receives no remuneration in this relationship except the opportunity to sell
the customers consumable products such as labels and ribbons which are
required in the operations of the systems installed by the Company. To
date, over 30 DDI sales representatives have been trained on the Company's
products and services and the companies are jointly working on a near and
long-term customer sales opportunities.
Value-Added Reseller Relationships. Value-added reseller relationships
with major hardware and software manufacturers have allowed the Company to
keep current on hardware, databases, programming and application
technologies, while participating in selected sales opportunities referred to
the Company from these manufacturers. Reseller agreements entered into with
these manufacturers afford the Company the opportunity to sell the
manufacturer's products at a discount and often provides for technical
documentation, training and support from the manufacturer or distributor.
Some manufacturers with which the Company maintains such relationships are:
Telxon Corporation. The Company is a value-added reseller ("VAR") for
Telxon, a $350 million annual sales international manufacturer of portable
batch, RF and pen-based portable transaction computers ("PTC's"). Telxon's
share of the batch PTC market is estimated at 24%; its share of the emerging
RF PTC market is estimated at 47%. The Company has developed a strong
relationship with Telxon during its five years as a Telxon VAR. Although
Telxon has over 250 value-added resellers, Telxon selected the Company as
only one of six VAR's to hold a permanent position on its VAR Council, a
steering group which meets four times annually to review the needs of
Telxon's VAR channel, receive insider information regarding new products and
services and recommend improvements in Telxon's policies, procedures,
products and services. In addition, the Company is one of only four VAR's
selected to participate in Telxon's Software Products Committee, a steering
group tasked with determining Telxon's direction in operating systems,
communications and application software.
Telxon focuses on the manufacturing and marketing of hardware and relies upon
VAR's such as the Company to provide the application software and interface
engineering required to make Telxon's hand held units productive in the
customer's environment. Telxon has brought the Company in to assist with
implementations at such key accounts as Topco Foods, A.C. Nielsen Company,
Union Oil of California, Farmland Foods, Western Publishing Company, Land's
End, Chicago Public Schools and Kar Products. In each of these situations,
the Company provided tailored software and specialized communications
expertise to adapt the Telxon products to the customer's specific needs.
Aironet is the industry leader in micro-cellular spread spectrum RF
technology. Currently shipping over 10,000 radios per month, this division
of Telxon Corporation has an installed base greater than all of its
competition combined. The Company, as a Telxon value-added reseller, markets
<PAGE> 14
Aironet's products for building-to-building network bridge and micro-cellular
network applications.
Computer Identics manufactures intelligent fixed point scanners,
specialized networks and a windows-based data collection application
generator. The Company participates in Computer Identics' VAR council and is
a value-added reseller of Computer Identics shop floor local area network
products.
Applied Automation Techniques ("AAT") develops client-server-based
packaged solutions for use by manufacturing and distribution companies. The
Company sells and customizes versions of AAT's Auto-Track (warehouse
management), Auto-Time (time and attendance and work-in-process control),
Auto-Ship (shipping management) and Auto-Quality (ISO 9000 compliant quality
management) application systems.
The Company resells Applied Automation Techniques products under a
non-exclusive reseller agreement and also performs work-for-hire contract
programming to assist Applied Automation Techniques in its software
development and customization efforts.
United Bar Code Industries manufactures LAN-ready, industrial mount PC
workstations. These workstations are used as client data collection
terminals in industrial environments, connected to a Unix or PC-Lan server.
The Company is a value-added reseller for the United Bar Code Industries.
IBM, Hewlett Packard, NCR, Digital Equipment Corporation, Unisys and
Bull - the Company is an authorized value-added reseller for each of these
manufacturers' hardware systems.
American Business Systems ("ABS") develops and markets general business
software for distributors and manufacturers. The Company is an ABS
value-added reseller and is sometimes referred by ABS sales representatives
into customer accounts requiring customization or specialized application
software to solve specific needs which are not satisfied by the standard ABS
product offerings.
Oracle Corporation is a developer of database and application software.
The Company is an Oracle Business Alliance Partner ("BAP"). Oracle BAP's
participate in Oracle sales opportunities by being referred into Oracle
customer accounts by Oracle sales reps for programming services, specialized
hardware or software applications to solve specific needs which are not
satisfied by the standard Oracle product offerings.
Computer Associates ("CA") is a major supplier of packaged software for
mainframe and mid-range systems. The Company is a CA "Registered
Consultant" specializing in wholesale distribution and manufacturing
applications. CA refers its Registered Consultants into customer accounts
requiring software customization or specialized software to solve customer
needs not satisfied by CA's standard product offerings.
Data Documents, Inc. ("DDI") is a supplier of custom business forms and
label media. The Company consults with DDI and its customers on
warehousing, shipping and manufacturing systems which take advantage of bar
<PAGE> 15
coding and data collection technologies. There are no fees paid to DDI by
the Company for these sales referrals. DDI uses this consulting capability
to enhance its position as a full-service provider to its customers.
General. The Company is a software development and services company which
integrates the technologies of Client-Server Computing; Object Oriented
Programming; Automated Data Collection Systems and communications systems
using radio frequency data networks and various other asynchronous and
synchronous protocols.
The Company offers custom-tailored software and hardware systems for
manufacturers, wholesalers and distributors with vehicle-based sales. The
applications offered automate various aspects of these businesses, including
order processing, inventory control, accounting, work-in-process control,
quality management and sales management. The Company operates as a
value-added reseller for several different manufacturers of computers, data
collection equipment and printers. The Company integrates this hardware with
custom-tailored software, specific for the customer's needs. The software
may be based on an existing application from a third party or may be entirely
proprietary to the Company. As a distributor, the Company's hardware sales
comprised 31.81% of total revenue for the year ended December 31, 1994 and
54.84% of total revenue for the fiscal year ended December 31, 1995.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns no real property and leases all of its facilities. The
Company's executive offices of approximately 2,000 square feet are located at
James River Professional Center, Suites 2 & 3, Highway 160 & CC, Nixa,
Missouri 65802. The Company's lease is for a term of one year beginning on
July 31, 1995 at a monthly rate of $500 per month.
ITEM 3. LEGAL PROCEEDINGS
The Company knows of no material pending or threatened legal proceedings to
which the Company and its subsidiary is a party or of which any of its
properties is subject, and no such proceedings are known to the Company to be
contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1995, no
matters were submitted to a vote of the Company's security holders, through
the solicitation of proxies.
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on NASDAQ under the symbol "ACTC".
The following table sets forth the range of high and low bid quotations for
the Company's common stock for each quarter of the last two fiscal years, as
reported by the OTC Bulletin Board and NASDAQ. The Company's market makers
are Olsen Payne, Paragon, Frankel, Baron Chase, National Securities, M. H.
Myerson and NAIB. The quotations represent inter-dealer prices without
retail markup, markdown or commission, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
<S> <C> <C>
9/30/93 * *
12/31/93 * *
3/31/94 * *
6/30/94 * *
9/30/94 * *
12/31/94 2 3/4 2 1/2
3/31/95 5 1/3 5
6/30/95 5 1/3 5
9/30/95 9 8 1/8
12/31/95 7 7/8 3 1/4
</TABLE>
The Company's common stock commenced trading on the over-the-counter market
on December 5, 1994. Prior to that time, there was no market for the
securities of the Company. The Company's common stock commenced trading on
NASDAQ in August, 1995.
Current Acquisitions. The Company has acquired companies through the
issuance of common stock of the Company at the then current market value with
a 50% discount due to the limited market of the common shares. These common
shares have registration rights and subsequent sale upon registration could
have a negative impact on the market price of the Company's common stock.
Holders. The approximate number of holders of record of the Company's $.001
par value common stock, as of December 31, 1995, was 889. Currently, as of
March 20, 1996, there are 903 holders of record.
Dividends. Holders of the Company's common stock are entitled to receive
such dividends as may be declared by its Board of Directors. Other than the
distribution of warrants pursuant to the "Joint Action by Unanimous Consent
of the Board of Directors and Shareholders" dated March 25, 1994, since
inception no dividends on the Company's common stock have ever been paid, and
the Company does not anticipate that dividends will be paid on its common
stock in the foreseeable future.
<PAGE> 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Trends and Uncertainties. The Company has tried to eliminate the major
variables of interest rates and operating expense. However, as the Company
has little or no control as to the demand for its products and services,
inflation and changing prices could have a material effect on the future
profitability of the Company.
The Company had previously conducted negotiations for the purchase of Cra-Tek
Industrial Controls & Electric. The Company considered the acquisition to be
more probable than not. The Company had hoped to acquire eighty percent of
the fully diluted and outstanding classes of all authorized and outstanding
shares of Cra-Tek in exchange for restricted common shares of the Company
with demand registration rights. Cra-Tek conducts its operations in a 5,000
square foot building at 3650 51st Avenue in Sacramento, California. The
Cra-Tek acquisition negotiations were terminated, due to the fact that Cra-
Tek did not receive necessary Board approval for the purchase by the
Company. There can be no assurance that the Company will not expend its
efforts and funds in the future to pursue other acquisitions which may prove
unsuccessful.
The Company's lease in Nixa, Missouri expires at June 30, 1996, Elite's lease
expires on May 31, 1996 and Burling's lease expires on August 31, 1996. The
Company intends to negotiate a smaller space for probably less rent at the
same office complex. At the current time, Elite and Burling have conducted
preliminary discussions with its current lessor and, based on those
discussions, do not anticipate a higher lease rate upon renewal. In all three
of these locations, there are many other lease opportunities at different
facilities at similar rates. The Company does not anticipate that there shall
be any material impact on its cashflow due to the expiration of these leases
and current cashflow is sufficient to continue to pay the lease amounts.
Capital Resources and Liquidity. The Company currently has no material
commitments for capital expenditures. The Company currently has a negative
cash flow from investing activities, and operating activities, however, the
Company has positive cash flow from financing activities which is sufficient
to cover the Company's working capital needs on a short-term basis.
The Company registered outstanding Common Shares and Class A, B and C
Warrants on behalf of selling securityholders. To date, the Company received
a total of $943,046 from the exercise of its Class A Warrants and $67,500
from the exercise of its Class C Warrants. These proceeds shall be used to
increase operations, to develop new products and for working capital.
For the year ended December 31, 1995, the Company had a decrease in notes
receivable - shareholder of $108,437. Payments were received on the note
receivable from Cadkey, Inc. of $240,632. The Company had an increase in
other assets of $107,958. Payments for equipment, computer software and
leasehold improvements were made in the amount of $40,199. The Company had
payments for costs of 80% acquisitions (net of cash balances acquired) of
$183,208 and had payments for costs of the acquisitions of $119,355. The
Company made payments on its notes payable - officers of $86,849. Net cash
used in investing activities for the year ended December 31, 1995 was
$100,793.
For the year ended December 31, 1994, the Company experienced an increase in
<PAGE> 18
deposits of $450. However, an officer of the Company repaid $2,832 of the
principal and interest due on a loan received from the Company. The Company
loaned Great Bay Technology, Inc., an affiliated company an additional
$90,058 so that the affiliate could pursue negotiations on acquisitions which
may eventually be assigned to the Company. Payments for equipment and
computer software were made in the amount of $14,923. Net cash used in
investing activities for the year ended December 31, 1994 was $102,559.
The Company had an agreement with a bank for a line of credit of up to
$150,000. The agreement calls for interest to be charged at 8% and is
secured by an officer's personal property. The line of credit expired on July
6, 1995 and the Company decided not to renew said line of credit. The Company
had an outstanding balance of $137,047 and $0.00 at December 31, 1994 and
December 31, 1995, respectively. For the year ended December 31, 1995, the
Company paid $171,048 on all lines of credit and $15,318 on its capital lease
obligation. The issuance of common stock resulted in $516,778 in additional
paid-in capital. The redemption of its Class A preferred stock by Daniel E.
Penni Trust resulted in a decrease in cash flow of $147,392. All of the above
resulted in $96,171 net cash provided by financing activities for the year
ended December 31, 1995. These monies were used to continue and increase
operations.
The Company did have a line of credit for Elite Computer Systems, Inc. which
was acquired September 8, 1995 which was $29,999 at December 31, 1995.
Subsequent to year end, the line of credit was paid off and terminated.
On a long term basis, liquidity is dependent on increased revenues from
operations, additional infusions of capital and debt financing. The Company
believes that additional capital and debt financing in the short term will
allow the Company to increase its marketing and sales efforts and thereafter
result in increased revenue and greater liquidity in the long term. The
Company believes that its increased revenue from operations in addition to
proceeds received from this offering, if any, will result in sufficient
working capital and liquidity in the long term. However, there can be no
assurance that the Company will be able to obtain additional equity or debt
financing in the future, if at all.
Plan of Operation. The Company plans to increase its current revenues
and net earnings by two measures. One is to use the Company's current
industry knowledge to expand sales in high-tech areas, the other is to
acquire businesses within similar industries that have a history of
profitable operations and are managed by skilled owners or professional
managers.
<PAGE> 19
The current operating divisions of the Company, (i) TechTools, Inc., a
software development tool business, (ii) the Company's operations in Nixa,
Missouri, as a value added reseller; (iii) Atlantic Systems, a developer and
marketer of retail software and hardware systems; and (iv) Elite Computer
Systems, a purchaser of used main frames to sell for parts, generated
approximately $2,335,999 in revenues in the fiscal year 1995 and are
projected to generate approximately $5,500,000 in 1996. The Company's
operating divisions are in market segments, computer software and hardware,
that are growing. No external matters in the industry have occurred that have
effected the Company in an adverse way. The Company has not experienced any
labor difficulties or any other internal impediments.
The nature of the Company's business, computer software development and
distribution and the marketing of purchased computer hardware and hardware
components, do not require any significant ongoing capital expenditures, only
increases in working capital. Any proceeds utilized from the sale of the
common shares registered in this offering would be used primarily to fund the
increased working capital needs of the existing affiliated companies and to
retire some existing debt. If the registration was unsuccessful, management
would pursue lines of credit and increase the factoring arrangement (90% of
receivables under 60 days) at the Company or it may pursue a private sale of
its preferred stock. Management plans to establish a factoring arrangement
for TechTools, Inc. and a line of credit for Atlantic Systems, Inc. if
required.
Additional acquisitions by the Company could increase the revenue base.
Management intends to pursue a registration of 2,000,000 common shares in
1996 for the express purpose of acquiring three or four companies that would
be strategic additions to the existing core companies or divisions. The
acquisitions are part of the Company's strategy to build a major
international software, manufacturing and technology business through
strategic, consolidating acquisitions. The acquisition strategy of the
Company is to acquire companies at favorable prices with steady cash flows.
The Company plans to increase profits through the projected gross margin
objectives of 40-45% for hardware and 80-85% for software products. Broadened
product lines will allow each division to increase its customer base, which
will result in an increase in earnings. The Company's objective to increase
profitability of each division is to continue growth through 1) acquisition
of established successful business with above average expansion or growth
potential 2) internal expansion of existing businesses 3) introduction of new
products into existing sales channels and 4) the development of new ventures
and expanded market opportunities for existing products.
The investment in Cadkey has no effect on the Company's cash flow and,
consequently, does not have any effect on the Company's ability to survive.
The preliminary estimate for 1996 indicates that the Company's performance
should be able to obtain a positive cash flow in the second quarter of 1996
and that its cash flow needs can be met through current operations along with
the issuance of its common stock. Management's assessment of future
performance is limited to projections based on current conditions and does
not include any uncertainties which may arise. Potential investors should not
attribute undue certainty to management's assessment. Management does not
intend to furnish updated projections.
<PAGE> 20
Results of Operations.
Service, sales, fees, licensing and other revenue increased to $2,335,999 for
the year ended December 31, 1995 from $322,769 for the year ended December
31, 1994 mainly due to the Company's recent acquisitions which resulted in an
increase in revenue from the sale of hardware products from $102,661 to
$1,281,101 for year ended December 31, 1995 and packaged software sales of
$417,600 (received as a result of one of the recent acquisitions). Software
licensing revenue increased from $29,582 for the year ended December 31, 1994
to $151,229 for the year ended December 31, 1995 due to its change in its
business focus as described above and increased operations.
Direct costs increased from $269,868 for the year ended December 31, 1994 to
$1,186,213 for the year ended December 31, 1995 due to costs related mainly
to hardware products ($676,838) packaged software sales ($159,388), costs of
programming services ($271,174) and costs of software licensing revenue
($74,306) while operating expenses increased from $533,046 to $981,212
(mainly from an increase in administrative expenses from $421,864 to $634,376
and marketing and sales expenses from $83,326 to $346,836 for the same
periods). This resulted in operating income of $168,574 for the year ended
December 31, 1995 compared to an operating loss of $(480,145) for the year
ended December 31, 1994.
Programming services provided 57.11% of the total revenue for the year ended
December 31, 1994 as compared to 18.96% for the year ended December 31, 1995
due to the Company's change in business focus. Direct costs comprised 83.61%
of total revenue for the year ended December 31, 1994 as compared to
comprising 50.78% for the same period in 1995. The decrease in the direct
cost to revenue percentage is due to the Company's change in business focus
and its recent acquisitions. The Company received revenue of approximately
$2,335,999 in fiscal year 1995 and the Company expects the revenue level
will continue in the first quarter of 1996, and the Company will continue
its marketing efforts to obtain increased revenues.
Revenues from the Company's operations decreased significantly in fiscal year
1994 from 1993. Total Revenue was $322,769 for the year ended December 31,
1994 as compared to $410,346 for the year ended December 31, 1993 for the
combined results of Axcom and the Company for the year. Programming services
revenue decreased from $349,456 for the year ended December 31, 1993 to
$184,335 for the year ended December 31, 1994, respectively. The decrease in
programming services revenue was due entirely to a strategy direction
decision by the Company to market, through alternative channels, its
Compliance Plus proprietary software and to acquire other third party
proprietary software products, moving away from custom programming and
consulting. Although programming services decreased, revenue from hardware
products increased from $52,106 in fiscal year 1993 to $102,661 in fiscal
year 1994 and software licensing revenue increased from $3,256 in fiscal year
1993 to $29,582 in fiscal year 1994. These increases were due to the change
<PAGE> 21
of focus of the Company's business operations to marketing and sales of
cellular data technology hardware and vertically-focused, proprietary
software rather than general-purpose computer hardware and
accounting/inventory control systems. As of December 31, 1994, the Company
experienced a decrease in accounts receivable from December 31, 1993 of
$19,528, an increase in prepaid expenses of $13,780 and an increase in
accounts payable and accrued expenses of $54,062. These all related to the
Company's attempt to increase operations after the acquisition of Axcom
Computer Consultants, Inc. The Company also experienced an increase in
unbilled receivables of $3,001 which represents work in process comprised of
work for hire software services. Under the terms of the preliminary agreement
with the customer, these items are not billable until the delivery date is
formalized. All of the above items resulted in net cash used in operating
activities of $(284,983) for the period ended December 31, 1994.
The Company is seeking to reduce its operating expenses while increasing its
customer base and operating revenues. The Company is focusing on decreasing
administrative costs, however, these amounts have increased as a result of
the purchase of the software "DataBoss" in November, 1994 by the
Corporation's subsidiary Tech Tools, Inc. and the other acquisitions by the
Company. Additionally, increased marketing expenses will probably occur in
future periods as the Company attempts to further increase its marketing and
sales efforts.
Pro Forma Consolidated Results of Operations. Giving effect to the probable
acquisition of Burling Instruments, Inc. As of January 1, 1996, the proforma
March 31, 1996 net revenues increased to $1,663,498 for the three months
ended March 31, 1996 compared to $1,233,234 for that same period if the
acquisitions had not occurred as of January 1, 1996. Direct Costs increased
from $748,137 for the three months ended March 31, 1996 to $1,038,781 for the
three months ended March 31, 1996 giving effect to the probable acquisition.
As a result, gross profit for the three months ended March 31, 1996 was
$485,097 compared to the proforma amount of $624,717 for the same period.
Operating expenses increased from $438,517 to $608,452 for the three months
ended March 31, 1996 giving effect to the acquisitions. Dividends in the
amount of $18,000 reduced net income in the proforma income statement for the
three months ended March 31, 1996 giving effect to the probable acquisition,
and recording the 8% preferred stock dividend. Net income (loss) applicable
to common shareholders decreased from $39,467 to $(7,415) for the three
months ended March 31, 1996 giving effect to the probable acquisition.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
<PAGE> 22
The response to this item is being submitted as a separate section of
this report beginning on page 25.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Neither during the twenty-four months prior to the date of the Company's
financial statements included herein nor in any subsequent period thereafter
did the Company file a Form 8-K with the Securities and Exchange Commission
reporting a change of accountants involving a disagreement of any matter of
accounting principles or practices of financial statement disclosure.
<PAGE> 23
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors and Executive Officers of the Company
The following table sets forth the names and ages of all directors and
executive officers of the Company and all persons nominated or chosen to
become a director, indicating all positions and offices with the Company held
by each such person and the period during which he has served as a director:
The principal executive officers and directors of the Company are as
follows:
<TABLE>
<CAPTION>
Name Position Term(s) of Office
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard J. Sullivan, age 56. Chairman of the Since May 20, 1993
Board of Directors to present
Garrett Sullivan, age 60 Director
President, Secretary March 31, 1995
Acting Chief Financial Officer to present
Daniel E. Penni, age 48 Director March 20, 1995
present
</TABLE>
Mr. Lance McIntosh was a Director for the Company from May 20, 1993 to March
31, 1995. Mr. McIntosh resigned for personal reasons. From May 20, 1993 to
May 10, 1994, Mr. Stephen Trocke acted as Chief Financial Officer until a
full time controller was hired. Mr. Trocke left the Company for personal
reasons. Gary A. Gray was Director from May 20, 1993 to December 31, 1995 and
President and Secretary from May 30, 1993 to March 31, 1995. Mr. Gray is
President of a subsidiary of the Company and resigned to more fully pursue
his duties with the subsidiary.
Mr. Penni was appointed to the Board of Directors due to the resignation of
Mr. Gary Gray. Mr. Penni shall serve until the annual meeting of the
shareholders.
Family Relationships. Angela M. Sullivan has been nominated for Director of
the Company for election at the annual meeting on April 26, 1996. Ms.
Sullivan is married to Mr. Richard Sullivan, Chairman of the Board of
Directors. There are no other family relationships between the officers and
directors or a nominee to the Board of Directors.
Business Experience. The following is a brief account of the business
experience during at least the past five years of the directors and executive
officers, indicating their principal occupations and employment during that
period, and the names and principal businesses of the organizations in which
such occupations and employment were carried out.
Richard J. Sullivan. Mr. Sullivan is currently Chairman of Great Bay
Technology, Inc., an affiliate of the Company. From August 1989 to December
1992, Mr. Sullivan was chairman of the Board of Directors of Consolidated
Convenience Systems, Inc. in Springfield, Missouri. He has been the managing
General Partner of The Bay Group, a successful merger and acquisition firm in
New Hampshire since February, 1985. Mr. Sullivan was formerly Chairman and
Chief Executive Officer of Manufacturing Resources, Inc., an MRP II software
company in Boston, MA, and was Chairman and CEO of Encode
<PAGE> 24
Technology, a Computer-Aided Manufacturing Company, in Nashua, New Hampshire
from February, 1984 to August, 1986.
Garrett A. Sullivan. Mr. Sullivan is currently President, Secretary,
Acting Chief Financial Officer and a Director of the Company. He has been
Executive Vice President of Envirobusiness, Inc., an environmental consulting
firm since 1993. He was a partner of The Bay Group, a merger and acquisition
firm in New Hampshire from 1988-1993. From 1986 to 1988, Mr. Sullivan was
President of Granada Group PLC in Great Britain, a consulting firm which
implemented the consolidation of HT&T into Granada Hospital Group, resulting
in the world's largest hospital communications systems supplier. Mr.
Sullivan received a Bachelor of Arts degree from Boston University in 1960
and he obtained an MBA from Harvard University in 1962.
Daniel E. Penni. Mr. Penni is currently a Director of the Company. Mr.
Penni has been involved in the financing of several start up companies in the
past five years on a financial consultant basis. Mr. Penni has been
involved in the insurance business in many sales and administrative roles
since 1969. He was President of The Boston Insurance Center, Inc., an
insurance company until 1988. Mr. Penni was founder and President of BIC
Equities, Inc., a broker/dealer registered with the NASD. This firm was
involved in the sale of mutual funds and tax advantaged investments from 1978
to 1988. Mr. Penni graduated with a Bachelor of Science degree in 1969 from
the School of Management at Boston College.
Angela M. Sullivan. Ms. Sullivan is a nominee for Director of the Company.
From 1988 to present, Ms. Sullivan has been a partner in The Bay Group, a
private merger and acquisition firm, President of Great Bay Technology, Inc.,
an affiliate of the Company and President of Economy Car Care Centers, Inc.
Ms. Sullivan received a Bachelor of Science degree in Business Administration
in 1980 from Salem State College.
Identification of Certain Significant Employees. The Company does not
employ any persons who make or are expected to make significant contributions
to the business of the Company.
Directorships. No director or nominee for director holds a directorship in
any other company with a class of securities registered pursuant to Section
12 of the Securities Exchange Act of 1934 or subject to the requirements of
Section 15(d) of such Act or any company registered as an investment company
under the Investment Company Act of 1940.
ITEM 10. EXECUTIVE COMPENSATION
During fiscal 1995, and as of the date of filing this report, no compensation
has been paid, nor have there been compensation arrangements or plans, other
than what has been indicated below.
Remuneration. The following table sets forth certain summary information
concerning the total remuneration paid or accrued by the Company, to or on
behalf of the Company's Chief Executive Officer and the Company's four most
highly compensated executive officers determined as of the end of each of the
last three years.
<PAGE> 25
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
- ----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Awards SARs Outs sation
Position Year ($) ($) ($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary Gray
President, Secretary 1993 $20,999,98 -- -- -- -- -- --
Chief Financial Officer 1994 $51,346.14 -- -- -- -- -- --
1995 N/A -- -- -- -- -- --
Garrett Sullivan<F1> 1993 N/A -- -- -- -- -- --
President, Secretary 1994 N/A -- -- -- -- -- --
Acting Chief Financial
Officer 1995 $27,745.00 -- -- -- -- -- --
<FN>
<F1>Mr. Sullivan also received $29,000 in non-employee compensation and $2,337
was paid by the Company for insurance.
</TABLE>
Compensation Pursuant to Plans. Other than disclosed above, the Company has
no plan pursuant to which cash or non-cash compensation was paid or
distributed during the last fiscal year, or is proposed to be paid or
distributed in the future, to the individuals and group described above in
this Item.
Compensation of Directors. Directors of the Company who are not employees
of the Company may receive a fee of $250 per meeting for their attendance at
meetings of the Company's Board of Directors, and are entitled to
reimbursement for reasonable travel expenses.
Termination of Employment and Change of Control Arrangement. Except as
noted in the next paragraph, the Company has no compensatory plan or
arrangements, including payments to be received from the Company, with
respect to any individual named above for the latest or the next preceding
fiscal year, if such plan or arrangement results or will result from the
resignation, retirement or any other termination of such individual's
employment with the Company, or from a change in control of the Company or a
change in the individual's responsibilities following a change in control.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There were 2,267,749 Common Shares outstanding at December 31, 1995 and there
are 2,332,375 Common Shares outstanding at March 25, 1996 and no Preferred
Shares outstanding. The following tabulates holdings of shares of the
Company by each person who, subject to the above, at the date of this
Memorandum, holds of record or is known by Management to own beneficially
more than 5.0% of the Common Shares and, in addition, by all directors and
officers of the Company individually and as a group.
<PAGE> 26
<TABLE>
<CAPTION>
Amount
Name and Address of of Common Shares
Beneficial Owner Currently Owned Percent
- -------------------------------------------------------------------------
<S> <C> <C>
Great Bay Technology<F1>
Group, Inc.
19 Nathaniel Drive
Amherst, NH 03030 315,000 13.51%
Garrett Sullivan
29 Concord Avenue
Cambridge, Massachusetts 02138 0 0%
Rudolf Kunzli
Chateau Beauregard
F-39350
Pagney, France 656,570 29.07%
Daniel Penni
31 Arnold Road
Wellesley, MA 02181 65,000 2.79%
All Directors & Officers
as a group (3) 380,000 16.29%
<FN>
<F1>Angela Sullivan, Stephanie Sullivan and Richard Sullivan are the control
persons of Great Bay Technology Group, Inc.
</TABLE>
There are currently 200,000 Class B Warrants and 300,000 Class F Warrants
outstanding. The following tabulates holdings of Warrants to be distributed
and owned beneficially by all directors and officers of the Company
individually and as a group.
<TABLE>
<CAPTION>
Class and Number Percent of
Name and Address of Warrants<F1> Class
<S> <C> <C>
Richard J. Sullivan Class B<F2> - 140,000 70%
Class F<F2> - 250,000 83%
Garrett Sullivan Class B - 0 0%
Class F - 0 0%
Daniel E. Penni Class B - 0 0%
Class F - 0 0%
All Directors & Officers
as a group (3) Class B - 140,000 70%
Class F - 250,000 83.33%
<FN>
<F1>pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or shared voting
power (including the power to vote or direct the voting) and/or sole or
shared investment power (including the power to dispose or direct the
disposition) with respect to a security whether through a contract,
arrangement, understanding, relationship or otherwise. Unless otherwise
indicated, each person indicated above has sole power to vote, or dispose or
direct the disposition of all shares beneficially owned, subject to
applicable community property laws.
<F2>Represents Class B and F Warrants owned by Great Bay Technology. Angela
Sullivan, Stephanie Sullivan and Richard Sullivan are the control persons of
Great Bay Technology Group, Inc.
</TABLE>
Changes in Control. There are no arrangements, known to the Company,
including any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change of control of
the Company.
<PAGE> 27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Changes in Control. There are no arrangements, known to the Company,
including any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change of control of
the Company.
Related Party Transactions. The Company originally loaned $14,230 to one
officer for personal reasons at the interest rate of 6% with current balance
of $12,982 and amounts totaling approximately $108,437 to Great Bay
Technology, Inc. at the interest rate of 8% with a current balance of $0.00.
The loans do not have a payback term. Due to the lack of a specific payback
term, it is management's opinion that the terms of the loans are believed to
be less favorable, though not materially so, to the Company as those that
would have been entered into with unrelated parties. Management has adopted
the policy that future loans to any related parties shall be made at terms at
least as favorable to the Company as those that would have been entered into
with unrelated parties and will not be made if such loans will negatively
effect the Company's cash flow and hamper continued operations.
For services rendered in connection with the three acquisitions which took
place in the third quarter of 1995, the Company paid its affiliate company -
Great Bay Technology Group, Inc. $50,000 for each acquisition for investment
banking services and $76,500 for acquisition services rendered in the fourth
quarter for acquisitions to occur in 1996.
Consulting Agreement. The Company has entered into a consulting
agreement with Pratt, Wylce & Lords, Ltd. ("Pratt") to assist the Company in
its capitalization and the obtainment of additional financing. As partial
payment for consulting services, the Company issued 86,500 of its common
shares to Pratt, 40,000 which were distributed to Pratt shareholders pursuant
to its registration statement declared effective in August, 1994. In
addition, Pratt received cash compensation of $35,000.
Lockup Agreement. Pursuant to an oral agreement on May 15, 1994 and a
written agreement on September 14, 1994, the shareholders who received
warrants issued them pursuant to the "Joint Action by Unanimous Consent of
the Board of Directors and Shareholders" date March 25, 1994 have agreed as
follows:
In the event the shareholder exercises any warrants, the stock issued to the
shareholder pursuant to the exercise shall be locked in and restricted from
trading for a period of two years. A notice is to be placed on the face of
each stock certificate covered by the terms of the Agreement stating that the
transfer of the stock evidenced by the certificate is restricted until
twenty-four (24) months from the date of issuance. The shareholder also
agrees not to sell or otherwise transfer their interest in the warrants
except to an underwriter or other market makers in the stock once a market is
established. The shareholder further agrees that the total value in cash,
or other consideration, paid by the buyer to the seller shall not exceed
$.001 per warrant.
<PAGE> 28
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The following financial statements and schedules are filed as part
of this report:
<TABLE>
<S> <C>
Report of Independent Public Auditors .......................................... 25
Consolidated Balance Sheets..................................................... 26
Consolidated Statement of Stockholder's Equity.................................. 27
Consolidated Statement of Operations............................................ 29
Statement of Cash Flows ........................................................ 30
Notes to Financial Statements .................................................. 31
</TABLE>
Schedules Omitted: All schedules other than those shown have
been omitted because they are not applicable, not required, or the required
information is shown in the financial statements or notes thereto.
(b) List of Exhibits
The following of exhibits are filed with this report:
<TABLE>
<C> <S>
(3) Articles of Incorporation, Amendments and Bylaws incorporated by
reference to Form S-1 filed on June 3, 1994
(4) Specimen certificate for Common Stock incorporated by reference
to Amendment 2 to Form S-1 filed on August 14, 1994
(10.1) Reseller Agreement between the Company and Oracle Corporation
incorporated by reference to Amendment 1 to Form S-1 filed on
July 26, 1994.
(10.2) Vendor Services Agreement between the Company and Computer
Associates International incorporated by reference to Amendment 1
to Form S-1 filed on July 26, 1994.
(10.3) Dealer License Agreement between the Company and American Business
Systems incorporated by reference to Amendment 1 to Form S-1 filed on
July 26, 1994
(10.4) Reseller Software License Agreement between the Company and
Applied Automation Techniques, Inc. incorporated by reference to
Amendment 1 to Form S-1 filed on July 26, 1994
(10.5) Contract Programmer Agreement between the Company and Telxon
Corporation incorporated by reference to Amendment 1 to Form S-1
filed on July 26, 1994
(10.6) Agreement between Company and warrantholders incorporated by reference
to Amendment 3 to Form S-1 filed on September 16, 1994
(10.7) Joint Marketing Agreement with Data Documents - to be filed by amendment
(10.8) Purchase and Sale Agreement re: Baler Software incorporated by reference to
Form 8-K, report date August 4, 1995
(10.9) Agreement of Sale re: Atlantic Systems, Inc. incorporated by reference to Form
8-K, report date August 9. 1995
(10.10) Agreement of Sale re: Elite Computer Systems, Inc. incorporated by reference
to Form 8-K, report date September 8, 1995.
(99) Consulting Agreement with Pratt, Wylce & Lords, Ltd. incorporated by
reference to Amendment 1 of Form S-1 filed on July 26, 1994.
</TABLE>
Reports filed on Form 8-K.
The Company filed no reports on Form 8-K during the fourth quarter
of the Company's fiscal year ended December 31, 1995.
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
Board of Directors
Applied Cellular Technology, Inc. & Subsidiaries
Springfield, Missouri
We have audited the accompanying consolidated balance sheet of
Applied Cellular Technology, Inc. and subsidiaries as of December
31, 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended
December 31, 1994 and 1995. These financial statements 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 financial
position of Applied Cellular Technology, Inc. and subsidiaries as
of December 31, 1995, and the results of its operations and its
cash flows for the years ended December 31, 1994 and 1995, in
conformity with generally accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co. LLP
March 8, 1996
<PAGE> 30
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
<TABLE>
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 125,469
Accounts receivable 522,548
Unbilled receivables 104,111
Inventories 504,859
Prepaid expenses 51,840
Note receivable - officer 12,982
Note receivable - Cadkey, Inc. 87,057
-----------
TOTAL CURRENT ASSETS 1,408,866
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 138,489
INVESTMENT IN CADKEY, INC. COMMON STOCK 577,399
NOTE RECEIVABLE - CADKEY, INC. 292,627
GOODWILL 906,626
PURCHASED COMPUTER SOFTWARE 667,443
OTHER ASSETS 140,035
-----------
$ 4,131,485
-----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Note payable - line of credit $ 29,999
Notes payable - officers 280,095
Capital lease obligations - current 23,360
Accounts payable 564,692
Accrued expenses 105,146
-----------
TOTAL CURRENT LIABILITIES 1,003,292
-----------
LONG-TERM LIABILITIES
Capital lease obligations 19,251
-----------
MINORITY INTEREST 57,002
-----------
STOCKHOLDERS' EQUITY
Common stock:
Authorized 10,000,000 shares of $.001 par value; issued and
outstanding 2,267,749 shares 2,268
Additional paid-in capital 3,358,072
Retained earnings (deficit) (308,400)
-----------
TOTAL STOCKHOLDERS' EQUITY 3,051,940
-----------
$ 4,131,485
-----------
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 2
</TABLE>
<PAGE> 31
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
PAGE 1 OF 2
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------------- ------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1994 -- $ -- 487,802 $ 1,161 $ -- $ (5,306) $ (4,145)
NET LOSS -- -- -- -- -- (482,454) (482,454)
ISSUANCE OF PREFERRED STOCK 20,000 200,000 -- -- -- -- 200,000
REDUCTION OF PAR VALUE OF COMMON
STOCK -- -- -- (673) 673 -- --
ISSUANCE OF COMMON STOCK -- -- 212,378 212 279,538 -- 279,750
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 29% OF CADKEY, INC.
(AS RESTATED) -- -- 456,570 457 570,256 -- 570,713
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF PURCHASED SOFTWARE
(AS RESTATED) -- -- 180,000 180 224,820 -- 225,000
- ----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 -
CARRIED FORWARD 20,000 $ 200,000 1,336,750 $ 1,337 $ 1,075,287 $ (487,760) $ 788,864
- ----------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 3
<PAGE> 32
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
PAGE 2 OF 2
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------------- ------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 -
BROUGHT FORWARD 20,000 $ 200,000 1,336,750 $ 1,337 $ 1,075,287 $ (487,760) $ 788,864
NET INCOME -- -- -- -- -- 179,360 179,360
REDEMPTION OF PREFERRED STOCK (20,000) (200,000) 11,765 12 52,596 -- (147,392)
ISSUANCE OF COMMON STOCK -- -- 259,999 260 523,392 -- 523,652
ISSUANCE OF RESTRICTED COMMON
STOCK -- -- 200,000 200 499,800 -- 500,000
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF PURCHASED SOFTWARE -- -- 113,009 113 289,190 -- 289,303
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 80% OF ATLANTIC
SYSTEMS, INC. -- -- 124,066 124 341,058 -- 341,182
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 80% OF ELITE
COMPUTER SERVICES, INC. -- -- 102,160 102 456,553 -- 456,655
50% OF PRINCIPAL PAYMENTS RECEIVED
ON NOTE RECEIVABLE - CADKEY, INC. -- -- -- -- 120,316 -- 120,316
CLASS "E" WARRANTS REDEEMED -- -- 120,000 120 (120) -- --
- ----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 -- $ -- 2,267,749 $ 2,268 $ 3,358,072 $ (308,400) $ 3,051,940
======================================================================================================================
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 4
</TABLE>
<PAGE> 33
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------
1994 1995
---------------------------
<S> <C> <C>
REVENUES
Programming services $ 184,335 $ 442,874
Hardware products 102,661 1,281,101
Software licensing revenue 29,582 151,229
Packaged software sales -- 417,600
Other revenue 6,191 43,195
- ----------------------------------------------------------------------------------------
TOTAL REVENUES 322,769 2,335,999
- ----------------------------------------------------------------------------------------
DIRECT COSTS
Costs of programming services 192,623 271,174
Costs of hardware products 62,265 676,838
Costs of software licensing revenue 7,881 74,306
Cost of packaged software sales -- 159,388
Other costs -- 331
Royalty expense 7,099 4,176
- ----------------------------------------------------------------------------------------
TOTAL DIRECT COSTS 269,868 1,186,213
- ----------------------------------------------------------------------------------------
GROSS PROFIT 52,901 1,149,786
- ----------------------------------------------------------------------------------------
OPERATING EXPENSES
Marketing and sales 83,326 346,836
Administrative 421,864 634,376
Research and development expense 27,856 --
- ----------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 533,046 981,212
- ----------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (480,145) 168,574
INTEREST INCOME -- 74,899
INTEREST EXPENSE (2,309) (15,150)
- ----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAX AND MINORITY INTEREST (482,454) 228,323
PROVISION FOR INCOME TAX -- --
- ----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST (482,454) 228,323
MINORITY INTEREST -- (48,963)
- ----------------------------------------------------------------------------------------
NET INCOME (LOSS) $(482,454) $ 179,360
========================================================================================
NET INCOME (LOSS) PER COMMON SHARE $ (0.82) $ .10
========================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 587,797 1,792,939
========================================================================================
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 5
</TABLE>
<PAGE> 34
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
-----------------------------------
1994 1995
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (482,454) $ 179,360
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,912 132,690
Minority interest portion of income -- 48,963
Loss on sale of equipment -- 519
Registration costs - shares issued 129,750 --
Imputed interest - notes payable - officers -- 6,614
Change in assets and liabilities:
(Increase) decrease in accounts receivable 19,528 (232,980)
Increase in unbilled receivables (3,001) (94,011)
Increase in inventories -- (43,668)
Increase in prepaid expenses (13,780) (14,411)
Increase in deposits -- (4,898)
Increase in accounts payable and accrued
expenses 54,062 149,262
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (284,983) 127,440
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in notes receivable - officer 2,832 (792)
(Increase) decrease in note receivable - stockholder (90,058) 108,437
Payments received on note receivable - Cadkey, Inc. -- 240,632
Increase in other assets (450) (107,958)
Insurance proceeds on equipment theft -- 1,650
Payments for equipment and computer software (14,923) (40,199)
Payments for costs of 80% business acquisitions
(net of cash balances acquired) -- (183,208)
Payments for costs related to asset acquisitions -- (119,355)
- ----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (102,599) (100,793)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts borrowed (paid) on line of credit 37,175 (171,048)
Payments on capital lease obligations (886) (15,318)
Decrease in notes payable - officers -- (86,849)
Issuance (redemption) of preferred stock 200,000 (147,392)
Issuance of common stock 150,673 516,778
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 386,962 96,171
- ----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (620) 122,818
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,271 2,651
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,651 $ 125,469
==========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 2,309 $ 15,150
- ----------------------------------------------------------------------------------------------------------
Noncash investing and financing activities (Note 17)
- ----------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 6
</TABLE>
<PAGE> 35
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 And 1995
1. Summary Of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
Tech Tools, Inc. and ACT Financial Corp. which were formed in
November 1994 and April 1995, respectively, and its majority-
owned subsidiaries, Atlantic Systems, Inc. and Elite Computer
Services, Inc., in which an 80% interest was acquired by the
Company in August and September 1995, respectively. All
significant intercompany investments, transactions and account
balances have been eliminated in consolidation.
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 the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from
those estimates.
Cash And Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
Allowance For Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to
the estimated collection losses that will be incurred in
collection of all receivables. The estimated losses are based on
historical collection experience coupled with a review of the
current status of the existing receivables. There is no
allowance for uncollectible accounts reflected in the balance
sheet as Company management is of the opinion that no allowance
is necessary.
Unbilled Receivables
The Company records an unbilled receivable to account for
salary expenses and certain other expenses that apply to
customer projects not yet billed.
- ------------------------------------------------------------------------------
Page 7
<PAGE> 36
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Inventories
The Company's inventories consist mainly of new and used
computers, computer parts and software. The inventory is
valued at the lower of cost or market, determined by the FIFO
(first-in, first-out) method. The Company closely monitors
and analyzes inventory for potential obsolescence and slow-
moving items based upon the aging of the inventory listing and
the inventory turns by product. The Company will provide an
allowance for obsolete inventories if deemed necessary from
the analysis.
Equipment And Leasehold Improvements
Equipment and leasehold improvements are carried at cost, less
accumulated depreciation and amortization computed using
straight-line and accelerated methods. The assets are
depreciated and amortized over periods ranging from three to
seven years.
Organization Costs
Organization costs, such as legal fees and incorporation
costs, are capitalized and amortized over five years.
Loan Fees
Loan fees are capitalized using the straight-line amortization
method over the life of the loan.
Investment In Common Stock
The Company acquired a 29% interest in Cadkey, Inc. in
December 1994. The Company accounts for this investment using
the cost method. The Company does not currently, and has not
since early in 1995, exercised significant influence over Cadkey,
Inc. and therefore should not be recorded under the equity method.
Management's basis for considering that they no longer exercise
significant influence over Cadkey, Inc. stems from the fact that
the majority ownership of Cadkey is concentrated among a small
group of shareholders who operate the investee without regard to
the views of the Company, the Company had attempted to obtain interim
financial statements from Cadkey, Inc. and were refused and the
Company has tried unsuccessfully to obtain representation on Cadkey's
board of directors.
The Company's policy for making on-going determinations of the
net realizable value for the investment in Cadkey, Inc.
includes receiving quarterly unaudited financial statements
and annual audited financial statements that management uses
as an integral part of its on-going assessment. Management
also conducts an on-going review of readily available industry
statistics and compares these results to the investee
company's results to assess the investee company's operating
performance relative to other industry participants and to
assess the on-going prospects for the investee company's
industry as a whole.
- ------------------------------------------------------------------------------
Page 8
<PAGE> 37
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Note Receivable - Cadkey, Inc.
The Company's policy for making on-going determinations of the
net realizable value of the note receivable from Cadkey, Inc.
is not only to review the overall performance of Cadkey, Inc.
as discussed within the Investment in Common Stock footnote,
but also to closely monitor the note repayment schedule agreed
to by Cadkey, Inc. in order to assess the continuing
likelihood of repayment and the on-going net realizable value
of the Cadkey, Inc. note. The carrying value of the note
receivable has been reduced by 50%, as a result of the
discounting of the value of the shares exchanged to acquire
the note receivable because of the restricted nature and the
limited market of those common shares (Note 16).
Goodwill
The goodwill resulting from the purchase of 80% ownership in
Atlantic Systems, Inc. and Elite Computer Services, Inc. (Note
16) is being amortized over 10 years.
The Company's policy for making on-going determinations of the
net realizable value of the goodwill is to monitor the net
income of Atlantic Systems, Inc. and Elite Computer Services,
Inc. and to determine if the expected income levels over the
remainder of the 10 year amortization period would exceed the
carrying value of the goodwill. If impairment of the goodwill
appears likely, a reduction in the carrying value would be
recorded at that time.
Purchased Computer Software
Purchased computer software is stated at cost less accumulated
amortization. The purchased computer software is at the
stage of technological feasibility which is considered to have
occurred when a product design and working model of the
software product have been completed and the completeness of
the working model and its consistency with the product design
have been confirmed by testing. Amortization is computed over
the greater of current revenues divided by the total of
expected revenues or straight-line over the number of years
of expected revenue. The straight-line life is determined to
be 5 years. The Databoss computer software purchased by
Tech Tools, Inc. in November 1994 (Note 17) has been amortized
beginning in July 1995 when it was available for release to
customers. Amortization began for the software acquired from
Baler Software Corporation in August 1995 at the date of its
acquisition (Note 16).
- ------------------------------------------------------------------------------
Page 9
<PAGE> 38
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Revenue Recognition
For programming, consulting and software licensing services,
the Company recognizes revenue based on the percent complete
for fixed fee contracts, with the percent complete being
calculated as either the number of direct labor hours in the
project to date divided by the estimated total direct labor
hours or based upon the completion of specific task orders.
It is the Company's policy to record contract losses in their
entirety in the period in which such losses are foreseeable.
For non fixed fee jobs, the revenue is recognized based on the
actual direct labor hours in the job times the standard
billing rate and adjusted to realizable value if necessary.
For product sales, the Company recognizes revenue upon
shipment. There are no significant post contract support
obligations at the time of revenue recognition. The Company's
accounting policy regarding vendor and post-contract support
obligations is according to the customers contract, billable
upon the occurrence of the post-sale support.
The Company does not experience many product returns, and
therefore, Company management is of the opinion that no
allowance for sales returns is necessary. The Company has no
obligation for warranties on hardware sales, because the
warranty is given by the manufacturer. The Company does not
offer a warranty policy for their services to customers.
Proprietary Software In Development
In accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," the Company has
capitalized certain computer software development costs upon
the establishment of technological feasibility. Technological
feasibility is considered to have occurred upon completion of
a detailed program design which has been confirmed by
documenting and tracing the detail program design to product
specifications and has been reviewed for high-risk development
issues, or to the extent a detailed program design is not
pursued, upon completion of a working model that has been
confirmed by testing to be consistent with the product design.
Amortization of computer software costs is provided based on
the greater of the ratios that current gross revenues for a
product bear to the total of current and anticipated future
gross revenues for that product or the straight-line method
over the estimated useful life of the product. No
amortization was charged against revenue during the year ended
December 31, 1995. Amortization will begin in 1996 when the
products are ready for release to the general public.
- ------------------------------------------------------------------------------
Page 10
<PAGE> 39
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based on the
weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of convertible preferred
stock and common stock issuable upon exercise of stock options
and warrants (using the treasury stock method). Under the
rules of the Securities and Exchange Commission, common stock
issued by the Company during the 12-month period prior to the
initial public offering and stock options granted during the
same period, that had an exercise price that was less then the
IPO price, have been included in the calculation of common and
common equivalent shares using the treasury stock method as
if they were outstanding for all applicable periods (pre IPO
period only).
Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consists of taxes
currently due plus deferred taxes related primarily to
differences between the basis of goodwill, investment in 29%
owned company, equipment and leasehold improvements, and net
operating loss carryforwards for financial and income tax
reporting. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and
liabilities are recovered or settled.
The Company and its subsidiaries file consolidated tax
returns. Income taxes are paid by the parent company and
allocated to each subsidiary through intercompany charges.
2. Operations
Applied Cellular Technology, Inc. was incorporated in May 1993
under its former name, Great Bay Acquisition Company. On May
21, 1993, Great Bay Acquisition Company acquired the assets
of Axcom Computer Consultants, Inc. Effective September 1993,
Great Bay Acquisition Company changed its name to Axcom
Information Technology, Inc. and became the sole subsidiary
of Great Bay Technology Group, Inc. Effective March 1994,
Axcom Information Technology, Inc. changed its name to Applied
Cellular Technology, Inc. The Company is a software
development and services company and has applied technologies
in tailored solutions for a number of major American
corporations. The Company's market is primarily retail,
manufacturing and distribution firms and its operations are
conducted from the home office in Missouri, with customers
throughout the United States.
- ------------------------------------------------------------------------------
Page 11
<PAGE> 40
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In November 1994, the Company formed a subsidiary, Kedwell
International, Inc. by issuing 180,000 shares at $1.25 of its
$.001 par value common stock. The subsidiary purchased
software in exchange for its 180,000 shares of Applied
Cellular Technology's common stock valued at $1.25 per share
and for the issuance of 120,000 warrants at no value as
described in Note 17. Effective April 1995, Kedwell
International, Inc. changed its name to Tech Tools, Inc. Tech
Tools, Inc. is a software development and services company.
The Company's office is located in New Hampshire, with
customers throughout the United States.
During 1994, the Company acquired 570,712 shares of Cadkey,
Inc., a software technology company, in exchange for 456,570
shares of its $.001 par value common stock valued at $1.25 per
share, resulting in a 29% investment in this company.
During April 1995, the Company formed a subsidiary, ACT
Financial Corp.
In August 1995, Tech Tools, Inc. purchased software and
certain other related assets and liabilities of Baler Software
Corporation in exchange for the issuance of 113,009 shares of
common stock of Applied Cellular Technology, Inc.
Additionally, in August 1995, the Company issued 124,066
shares of its common stock in exchange for an 80% investment
in Atlantic Systems, Inc., a software support company mainly
for the liquor industry, with customers throughout the United
States.
In September 1995, the Company issued 102,160 shares of its
common stock in exchange for an 80% investment in Elite
Computer Services, Inc., a distributor of computer parts, with
customers throughout the United States.
The acquisitions of Atlantic Systems, Inc. and Elite Computer
Services, Inc. have been accounted for using the purchase
method. The results of operations of the acquired companies
are included in the accompanying financial statements since
the dates of acquisition.
3. Note Receivable - Officer
The note is unsecured, bears interest at the prime lending
rate and is due on demand.
- ------------------------------------------------------------------------------
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
4. Note Receivable - Cadkey, Inc.
The note is unsecured and bears interest at 10.5%. Principal
and interest payments of $20,483 are due monthly, with the
final payment due October 1, 1999.
The note is valued as follows:
<TABLE>
<S> <C>
Shares issued (200,000 x $5.00) $ 1,000,000
50% discount given to shares issued (Note 16) (500,000)
----------------
Original carrying value of the note receivable 500,000
50% of principal payments received 120,316
----------------
Balance at December 31, 1995 379,684
Current portion (87,057)
----------------
Long-term portion $ 292,627
================
</TABLE>
The 200,000 shares of stock issued were restricted as to
voting rights.
Due to the 50% reduction in the face value of the note, as
payments are received, 50% of the amounts are credited to the
note receivable and the remaining 50% to paid-in capital.
5. Equipment And Leasehold Improvements
Equipment and leasehold improvements consist of:
<TABLE>
<S> <C>
Furniture, fixtures and equipment $ 180,630
Computer equipment 66,909
Leased vehicles 113,210
Leasehold improvements 1,087
--------------
361,836
Less: Accumulated depreciation and
amortization 223,347
--------------
$ 138,489
==============
</TABLE>
Included above are vehicles acquired under capital lease
obligations in the amount of $113,210. Related accumulated
depreciation amounted to $42,777 at December 31, 1995.
Depreciation and amortization charged against income amounted
to $7,718 and $27,613 for the years ended December 31, 1994
and 1995, respectively.
- ------------------------------------------------------------------------------
Page 13
<PAGE> 42
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
6. Investment In Cadkey, Inc. Common Stock
Investment in Cadkey, Inc. common stock consists of:
<TABLE>
<S> <C>
Original investment:
Investment in Cadkey, Inc. common stock $ 570,713
Additional costs of acquisition 6,686
---------------
$ 577,399
===============
</TABLE>
The original investment was calculated as follows:
<TABLE>
<S> <C>
Shares issued (456,670 x $2.50) $ 1,141,425
50% discount given to shares issued (Note 16) (570,712)
---------------
$ 570,713
===============
</TABLE>
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
7. Goodwill
Goodwill consists of:
<TABLE>
<S>
Shares issued in the Atlantic Systems, Inc. <C>
80% purchase (124,066 x $5.50) $ 682,363
Shares issued in the Elite Computer Services, Inc.
80% purchase (102,160 x $8.94) 913,310
50% discount given to shares issued (Note 16) (797,836)
---------------
Net value of shares issued 797,837
Additional costs of acquisitions 173,682
80% of net book value of companies acquired (26,825)
Accumulated amortization (38,068)
---------------
Carrying value $ 906,626
===============
</TABLE>
Amortization expense amounted to $38,068 for the year ended
December 31, 1995.
8. Purchased Computer Software
Purchased computer software consists of:
<TABLE>
<S> <C>
Shares issued in the purchase of the Baler
Software Corporation net assets
(113,009 x $5.125) $ 579,171
Shares issued in the purchase of the Databoss
software (180,000 x $2.50) 450,000
Warrants issued in the purchase of the Databoss
software (120,000 x $1.50) 180,000
50% discount given to the shares issued
(Note 16) (514,586)
100% discount given to the warrants issued
(Note 16) (180,000)
---------------
Net value of shares issued 514,585
Additional costs of acquisitions 217,500
Accumulated amortization (64,642)
---------------
Carrying value $ 667,443
===============
</TABLE>
Amortization expense amounted to $64,642 for the year ended
December 31, 1995.
- ------------------------------------------------------------------------------
Page 15
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The additional costs of acquisitions include any cash payments
according to the acquisition agreements plus costs for
investment banking services, legal services and accounting
services, that were essential costs in acquiring these assets.
9. Line Of Credit
Elite Computer Services, Inc. has a $100,000 line of credit
with a bank. The credit line is secured by accounts
receivable and inventories and bears interest at the prime
rate plus 2%. Borrowings are due on demand. The line of
credit was paid and terminated in February 1996.
Interest expense on the above debt amounted to $2,309 in 1994
and $9,350 in 1995.
The weighted average dollar amount of borrowings for the year
ended December 31, 1995 was $79,979. The weighted average
interest rate paid was 9% for the year ended December 31,
1995.
10. Notes Payable - Officers
The notes are non-interest bearing, unsecured and are due on
demand. Imputed interest has been recorded at a market rate
of 7%.
11. Capital Lease Obligations
At December 31, 1995, future payments for capital lease
obligations are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------------------
<S> <C>
1996 $ 28,337
1997 15,750
1998 8,489
--------------------------------------------------------------
Total minimum lease payments 52,576
Less: Amount representing interest 9,965
--------------------------------------------------------------
Capital Lease Obligation 42,611
Less: current maturities 23,360
--------------------------------------------------------------
Long-term Capital Lease Obligation $ 19,251
==============================================================
</TABLE>
Interest expense on the capital leases amounted to $5,800 in
1995.
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Page 16
<PAGE> 45
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
12. Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the
short maturity of those instruments.
Accounts Receivable
The carrying amounts approximate fair value.
Note Receivable - Officer
The carrying amount approximates fair value because the stated
interest rate fluctuates with market rates.
Note Receivable - Cadkey, Inc.
The carrying value of the note approximates fair value because
the interest rate of the note approximates the current rate
that the Company could receive on a similar note, and also
because this agreement was renegotiated in the current year.
Note Payable - Line Of Credit
The carrying amount approximates fair value because the stated
interest rate fluctuates with current market rates.
Notes Payable - Officers
The carrying amount approximates fair value as the interest
being charged is at a current market rate.
Accounts Payable
The carrying amount approximates fair value.
- ------------------------------------------------------------------------------
Page 17
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Estimated fair values of the Company's financial instruments,
all of which are held for nontrading purposes, are as follows:
<TABLE>
<CAPTION>
1995
---------------------------
CARRYING FAIR
AMOUNT VALUE
---------------------------
<S> <C> <C>
Cash and cash equivalents $ 125,469 $ 125,469
Accounts receivable 522,548 522,548
Note receivable - officer 12,982 12,982
Note receivable - Cadkey, Inc. 379,684 379,684
Note payable - line of credit (29,999) (29,999)
Accounts payable (564,692) (564,692)
Notes payable - officers (280,095) (280,095)
</TABLE>
The estimated fair value amounts presented herein have been
determined using available market information and
appropriate valuation methodologies and are not necessarily
indicative of the amount the Company could realize in a
current market exchange.
13. Income Taxes
The Company has computed its income tax provision in
accordance with Statement of Financial Accounting Standards
No. 109 ("SFAS109"), which was effective for 1993 and years
thereafter.
The provision for income taxes includes current taxes and
deferred taxes computed on the temporary differences in the
basis of certain assets and liabilities between financial
statement and income tax reporting purposes. The principal
source of deferred income taxes as of December 31, 1995
consists of differences in the basis of goodwill and an
investment in a 29%-owned company.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1994 1995
---------------------------
<S> <C> <C>
Current taxes at statutory rates $ -- $ 80,000
Current taxes covered by net
operating loss carryforward -- (80,000)
--------------------------------------------------------------------------
Current income tax provision -- --
Deferred income taxes -- --
--------------------------------------------------------------------------
$ -- $ --
==========================================================================
</TABLE>
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Page 18
<PAGE> 47
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The components of the deferred tax asset (liability), at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
DEFERRED TAX ASSET (LIABILITY)
Goodwill basis difference $ 28,000
Cadkey, Inc. investment basis difference (23,000)
Equipment and leasehold improvements
basis differences (5,000)
Net operating loss carryforward 30,000
Valuation allowance (30,000)
---------------
NET DEFERRED TAX ASSET $ --
===============
</TABLE>
SFAS109 requires a valuation allowance be recorded when it
is "more likely than not that some portion or all of the
deferred tax assets will not be realized." At December 31,
1995, the Company has elected to record a valuation
allowance of $30,000 to offset the deferred tax asset.
The reconciliation of the effective tax rate with the
statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1994 1995
-------------------------------
% %
-------------------------------
<S> <C> <C>
Statutory rate -- 32
Surtax exemptions -- (10)
State income taxes -- 4
-------------------------------
-- 26
===============================
</TABLE>
Under the carryforward provisions of the Internal Revenue
Code and applicable state income tax law, the Company has
available for future periods the following carryforwards:
<TABLE>
<CAPTION>
YEAR YEAR OF
INCURRED EXPIRATION AMOUNT
-----------------------------------------------------
<S> <C> <C> <C>
Net operating loss 1994 2009 $ 95,000
=============
</TABLE>
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Page 19
<PAGE> 48
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
14. Commitments
The Company was obligated to pay a royalty to Axon
Investments, Inc., formerly Axcom Computer Consultants,
Inc., in the amount of 2% of gross collected revenues for
120 months beginning July 1, 1993. This royalty agreement
was terminated in July 1995. Royalty expense amounted to
$7,099 in 1994 and $4,176 in 1995.
The Company has contracted with a registered broker-dealer
to receive financial consulting and investment banking
services through September 1996. The Company must pay the
broker-dealer $5,000 each month in the form of cash or in
the form of shares of capital stock.
- ------------------------------------------------------------------------------
Page 20
<PAGE> 49
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Applied Cellular Technology, Inc. is obligated under a one-
year lease for its office space, expiring June 1996. Tech
Tools, Inc. is obligated under a one-year lease for its
office space, expiring April 1996. Elite Computer
Services, Inc. is obligated under a five-year lease for its
office space, expiring May 1996. Atlantic Systems, Inc.
is obligated under a three-year lease for its office space,
expiring December 1998. Total lease commitments are
summarized as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------
<S> <C>
1996 $ 68,305
1997 34,800
1998 36,000
---------------------------------
$ 139,105
=================================
</TABLE>
Rent expense amounted to $16,047 and $49,375 for the years
ended December 31, 1994 and 1995, respectively.
In September 1995, the Company entered into two employment
contracts with officers of Elite Computer Services, Inc.
which call for services to be provided for a period of two
years, and total annual salaries of $180,000.
15. Profit Sharing Plan
Elite Computer Services, Inc. has a qualified,
noncontributory 401(k) plan for all eligible employees.
The Company contributes, at its discretion, up to 15% of
the participant's annual compensation. Profit sharing
expense amounted to $4,659 in 1995.
Atlantic Systems, Inc. has a qualified, noncontributory
401(k) plan for all eligible employees. The amount of the
employer contribution is determined annually by the
employer at its discretion. There was no employer
contribution in 1995.
- ------------------------------------------------------------------------------
Page 21
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
16. Stockholders' Equity
The Board of Directors approved a 420-for-1 stock split
effective March 1994. The Board of Directors also approved
an increase in the number of authorized shares of common
stock to 10,000,000, with par value of .0024 per share, and
authorized the issuance of 20,000 shares of redeemable
preferred stock, par value $10 per share. In April 1994,
the Articles of Incorporation were amended to change the
par value to $.001 per common share. The preferred stock
shares were to be redeemable by the Company at any time but
were required to be redeemed by the Company at such time as
it had received a cumulative total of $500,000 in funding
or capitalization through private placement, warrant
exercise, public offering or any other such means excluding
lines of credit or revenue from sales and excluding funds
received from the sale of said preferred stock.
Subsequently the terms of the preferred stock were changed
to five-year, noncumulative, 6% redeemable shares with the
dividend and redemption solely at the option of the Board
of Directors of Applied Cellular Technology, Inc.
In March 1994, the Company received $200,000 from an
investor for the preferred stock mentioned above.
In 1995 the Company redeemed the preferred shares and
issued 11,765 shares of common stock and paid the preferred
shareholder $147,392.
Effective March 1994, the Company authorized the issuance
of common stock purchase warrants as follows: 200,000 A
warrants exercisable at a rate of 1 warrant plus $4.75 to
purchase one share of common stock and 200,000 B warrants
exercisable at 1 warrant plus $20 to purchase one share of
common stock and 45,000 class C warrants exercisable for a
period of three years from the date of issuance at the rate
of 1 warrant plus $1.50 for one share of common stock.
Both the A & B purchase warrants are effective for a period
of 4 years from the date of issuance and shall be callable
with 30 days notice for a price of $.001 per warrant.
The Company declared a dividend to the shareholders of
record effective March 21, 1994. Said dividend was in the
form of A and B common stock purchase warrants. The
dividend was at a rate of one A and one B warrant for each
.305 shares of common stock owned.
The net loss per common share and all references to the
number of shares of common stock have been restated to
reflect the aforementioned stock split.
- ------------------------------------------------------------------------------
Page 22
<PAGE> 51
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In March 1994, the Company entered into an agreement with
Pratt, Wylce & Lords, Ltd. ("Pratt"), for services to be
provided in connection with the registration (Note 19) and
other consulting services. In March 1994, the Company
issued 86,500 shares to Pratt. The shares were issued at
the fair value as of the date of issuance in direct payment
for services related to the registration. Consulting
expense at December 31, 1994 related to the registration
amounted to $129,750.
In November 1994, 120,000 redeemable E warrants were issued
as part of the acquisition of software by Tech Tools, Inc.
No value was attributed to these warrants because the
exercise price significantly exceeded the fair value of the
underlying common shares. Each warrant can be exercised,
at any time subsequent to Applied Cellular Technology's
market price reaching $7.50 per share, to acquire one
common share of Applied Cellular Technology, Inc. at the
price of $5.00 per common share, or one redeemable class A
convertible preferred share of Tech Tools, Inc. at the
price of $5.00, or, if Tech Tools, Inc. becomes a public
company, into an amount equal to 40% of its total
outstanding common shares. Tech Tools, Inc.'s preferred
stock pays a cumulative dividend, compounded annually, of
8% of the aggregate value of $600,000. The preferred stock
has cash redemption rights five years after issuance at the
option of the holder. The redemption price is $5.00 per
preferred share. In August 1995, the Class E warrants were
redeemed for 120,000 shares of Applied Cellular Technology,
Inc.
In December 1994, 300,000 class F warrants were authorized
for issuance. The class F warrants shall be exercisable
for a period of five years from the date of issuance and
shall be exercisable at the rate of 1 warrant plus $2.50
for each common share.
In March 1995, restricted common stock was issued to
purchase a note receivable. The Company issued 200,000
common shares at a market price of $5.00 with a 50%
discount, due to the limited market of the common shares,
bringing the value down to $2.50 each. The stock was
restricted as to voting rights until the bid price per
share equaled or exceeded $7.50 for a period of 48 hours or
more, which occurred in the third quarter of 1995. Due to
this discount, 50% of all principal payments being received
are recorded as additional paid-in capital. This amount
for 1995 was $120,316.
In August 1995, 350,000 class H warrants were authorized
for issuance. The class H warrants shall be exercisable
for a period of 5 years from the date of issuance and shall
be exercisable at the rate of 1 warrant plus $4.75 for each
common share.
- ------------------------------------------------------------------------------
Page 23
<PAGE> 52
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
On August 4, 1995, the Company acquired software and
related net assets of Baler Software Corporation (Baler) in
exchange for the payment of debt of $14,000, the issuance
of 88,009 shares of the Company's common stock, for full
payment of $451,046 debt of Baler's secured creditors and
the issuance of 25,000 shares of the Company's common stock
to one of Baler's shareholders in payment for the acquired
software and certain other assets and liabilities. The
then current market trading value of $5.125 a share has
been discounted by 50% due to limited market of the common
shares, resulting in a value of $2.56 a share.
On August 9, 1995, the Company issued 124,066 shares of its
common stock in exchange for an 80% investment in Atlantic
Systems, Inc. The then current market trading value of
$5.50 a share has been discounted by 50% due to the limited
market of the shares, resulting in a value of $2.75 a
share.
On September 6, 1995, the Company issued 102,160 shares of
its common stock in exchange for an 80% investment in Elite
Computer Services, Inc. The then current market trading
value of $8.94 a share has been discounted by 50% due to
the limited market of the shares, resulting in a value of
$4.47 a share.
17. Supplemental Cash Flow Information
The Company had the following noncash investing and
financing activities:
During 1994, the subsidiary purchased software through the
issuance of 180,000 shares of Applied Cellular Technology's
common stock at $1.25 per share and the issuance of 120,000
warrants, carrying no value.
During 1994, the Company acquired 570,712 shares of Cadkey,
Inc. in exchange for 456,570 shares of its common stock at
$1.25 a share, resulting in a 29% investment in this
company. The investment of $570,713 included approximately
$71,000 of goodwill which is being amortized over 7 years.
Also during 1994, the Company financed a lease for a
vehicle in the amount of $14,424.
In March 1995, the Company acquired a note receivable from
Cadkey, Inc. in exchange for the issuance of 200,000
restricted shares of its common stock valued at $2.50 each.
- ------------------------------------------------------------------------------
Page 24
<PAGE> 53
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In August 1995, the Company acquired software and related
assets from Baler Software Corporation in exchange for the
issuance of 113,009 shares of its common stock at $2.56 per
share.
In August 1995, the Company issued 124,066 shares of its
common stock at $2.75 per share in exchange for an 80%
investment in Atlantic Systems, Inc. The related goodwill
of approximately $442,000 is being amortized over 10 years.
In September 1995, the Company issued 102,160 shares of its
common stock at $4.47 per share in exchange for an 80%
investment in Elite Computer Services, Inc. The related
goodwill of approximately $503,000 is being amortized over
10 years.
In October 1995, the Company entered into two capital
leases for vehicles in the amount of $24,420.
18. Stock Registration
During 1994, the Company completed a registration regarding
distribution of its shares of common stock to shareholders
of Pratt, Wylce & Lords, Ltd., a consultant to the Company.
Additionally, the Company registered on behalf of the
selling shareholders 192,851 shares of common stock,
200,000 class A warrants, 200,000 class B warrants and
45,000 class C warrants. The class A warrants are
exercisable into one common share at the purchase price of
$4.75 and the class B warrants are exercisable into one
common share at the purchase price of $20. The class A and
class B warrants shall be effective for a period of four
years from the date of issuance and shall be redeemable by
the Company at $.001 per class A or class B warrant upon
thirty day's notice. The class C warrants were to be
exercisable for a period of three years from the date of
issuance at the rate of one warrant plus $1.50 for one
share of common stock. The class C warrants were exercised
in December 1994 for $67,500.
In connection with this registration, the Company incurred
$249,722 in stock registration costs for the year ended
December 31, 1994.
The Company is in the process of registering on Form SB-2,
1,000,000 shares of common stock, 300,000 common shares to
be issued upon exercise of the class F warrants, and
1,459,301 common shares being registered on behalf of the
selling security holders.
- ------------------------------------------------------------------------------
Page 25
<PAGE> 54
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
19. Related Party Transactions
For services rendered in connection with the three
acquisitions which took place in the third quarter of 1995,
the Company paid a shareholder, Great Bay Technology Group,
Inc., $50,000 for each acquisition for investment banking
services. These payments were included in the total cost
of assets purchased and therefore amortized over the life
of the related assets. In the fourth quarter of 1995, the
Company paid a shareholder, Great Bay Technology Group,
Inc., $76,500 for investment banking services provided for
the acquisitions noted in the subsequent events. These
costs will be capitalized as a direct acquisition cost of
the related assets and amortized over the life of the asset
beginning in 1996.
20. Subsequent Events
In January 1996, the Board of Directors authorized the
issuance of 450,000 class I warrants to certain
shareholders and officers. The warrants will be
exercisable for a period of five years from the date of
issuance at the rate of one warrant plus $2.87.
In February 1996, Atlantic Systems, Inc. purchased a liquor
store software package (with exclusive rights to sell and
support the software, hardware and software support
contracts with current customers) and certain equipment
from Quality Solutions, Inc., in consideration for cash of
$40,784 and 33,494 shares of common stock of Applied
Cellular Technology, Inc., at $5.50 per share, the then
current market trading price. This value has been
discounted 50% due to the limited market of the shares,
resulting in a value of $2.75 a share, for a total value of
$92,109. Also in February 1996, the Company entered into
an employment contract with an officer of Quality
Solutions, Inc. for a period of three years with an annual
salary of $60,000, and an additional bonus based on 10% of
gross profit of all sales closed during the fiscal year to
be paid in the form of common shares of the Corporation.
Upon issuance of these shares, officer's compensation
expense will be recorded based on the number of shares
issued times the market price of the shares. An additional
bonus may be earned in the first year of service, on sales
from $200,000 to $450,000, with a maximum amount being paid
of $25,000.
In February 1996, the Company entered into two employment
contracts with officers of Atlantic Systems, Inc. which
call for services to be provided for a period of three
years, at annual salaries of $50,000 for each officer with
an additional bonus based on 25% of quarterly earnings
before income taxes in excess of $58,400 not to exceed
$50,000 to each officer.
- ------------------------------------------------------------------------------
Page 26
<PAGE> 55
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In March 1996, the Company entered into an agreement,
pending final shareholder approval of the Company for the
authorization of the redeemable preferred shares, to purchase
80% of Burling Instruments, Inc., in exchange for 9,000 shares
of 8% redeemable preferred stock at $100 per share of Applied
Cellular Technology, Inc. for a total value of $900,000.
The Company will also pay cash of $57,600. The approval of
the redeemable preferred shares is probable, due to the fact
that the majority ownership shareholders have been involved
with the acquisition negotiations, and are in favor of the
transaction.
If and to the extent the Redeemable Preferred shares have not
been converted to Common Stock by the second anniversary of the
initial issuance of the shares, the Company shall redeem the
redeemable preferred shares by paying $100 per share. Each
holder of the redeemable preferred shares may convert their
redeemable preferred shares into Common Stock at a rate of
$5.75 per $100 of redeemable preferred stock, for two years
from the issuance date.
21. Restatement
The Company has restated its balance sheet at December 31,
1994 to reflect the adjustment of the acquisition price of
computer software acquired by Tech Tools, Inc. in exchange
for 180,000 shares of its common stock and for the issuance
of 120,000 warrants. In addition, the Company has adjusted
the value of the acquisition of its 29% investment in
Cadkey, Inc. obtained through issuance of 456,570 shares of
common stock.
The shares and warrants in connection with these
acquisitions were originally valued at $5 each resulting in
recorded acquisition amounts of $2,282,850 for Cadkey, Inc.
and $1,500,000 for the purchased software (Databoss). In
light of prevailing market values of $2.50 to $2.75 per
share during the fourth quarter of 1994 and with
consideration of a 50% discount due to the limited market
which existed for the shares at that date, the Company has
restated the valuation to $1.25 per share. No value was
given to the warrants because the exercise price exceeded
the $1.25 value.
The restatement results in a reduction of the purchase
price of the computer software by $1,275,000 to $225,000
and the investment in Cadkey, Inc. by $1,712,137 to
$570,713 with corresponding reduction in additional paid-in
capital totalling $2,987,137. There was no effect of this
restatement on operations for the year ended December 31,
1994.
The Company has restated its balance sheet and income statement for
the year ended December 31, 1995 to reflect the recording of the
investment in Cadkey, Inc. on the cost method, instead of as
previously shown under the equity method. The Company does not
currently, and has not since early in 1995, exercised significant
influence over Cadkey, Inc. and therefore should not be recorded under
the equity method. Management's basis for considering that they no
longer exercise significant influence over Cadkey, Inc. stems from the
fact that the majority ownership of Cadkey is concentrated among a
small group of shareholders who operate the investee without regard to
the views of the Company, the Company had attempted to obtain interim
financial statements from Cadkey, Inc. and were refused and the
Company has tried unsuccessfully to obtain representation on Cadkey's
board of directors.
There was no effect on the beginning retained earnings, as of December
31, 1994, as there was no equity picked up within that year.
The effect of this change was to reduce net income for the year ended
December 31, 1995 by $74,682, which reduced the net income per common
share by $.04 per share, from $.14 to $.10 per share.
- ------------------------------------------------------------------------------
Page 27
<PAGE> 56
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
22. Proforma Information (Unaudited)
The following pro forma consolidated statement of
operations of Applied Cellular Technology, Inc. and
subsidiaries for the year ended December 31, 1995
gives effect to the acquisitions of Atlantic Systems, Inc.,
Elite Computer Services, Inc., and the probable acquisition
of Burling Instruments, Inc. as though they were effective
at January 1, 1995. The statement gives effect to the
acquisitions under the purchase method of accounting and
the assumptions in the accompanying notes to the pro forma
financial statements.
In August 1995, the Company issued 124,066 shares of common
stock at $2.75 per share (which was the prevailing market
price at the time of the acquisition, net of a discount of
50% due to the limited market for the shares) for a total
of $341,182, in exchange for an 80% investment in Atlantic
Systems, Inc. The resulting goodwill of $442,000 is being
amortized over 10 years. Other acquisition costs for this
transaction have also been capitalized in the amount of
$117,523.
In September 1995, the Company issued 102,160 shares of its
common stock at $4.47 per share (which was the prevailing
market price at the time of the acquisition, net of a
discount of 50% due to the limited market for the shares)
for a total of $456,655, in exchange for an 80% investment
in Elite Computer Services, Inc. The resulting goodwill of
$502,625 is being amortized over 10 years. Other
acquisition costs for this transaction have also been
capitalized in the amount of $56,159.
In March 1996, the Company entered into an agreement,
pending final shareholder approval of the Company for the
authorization of the redeemable preferred shares, to purchase
80% of Burling Instruments, Inc., in exchange for 9,000 shares
of 8% redeemable preferred stock at $100 per share of Applied
Cellular Technology, Inc. for a total value of $900,000.
The Company will also pay cash of $57,600. The approval of
the redeemable preferred shares is probable, due to the fact
that the majority ownership shareholders have been involved
with the acquisition negotiations, and are in favor of the
transaction.
If and to the extent the Redeemable Preferred shares have not
been converted to Common Stock by the second anniversary of the
initial issuance of the shares, the Company shall redeem the
redeemable preferred shares by paying $100 per share. Each
holder of the redeemable preferred shares may convert their
redeemable preferred shares into Common Stock at a rate of
$5.75 per $100 of redeemable preferred stock, for two years
from the issuance date.
- ------------------------------------------------------------------------------
Page 28
<PAGE> 57
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The pro forma statement may not be indicative of the
results that would have actually occurred if the
acquisitions had been effective on the dates indicated or
of the results that may be obtained in the future. The pro
forma statement should be read in conjunction with the
financial statements and notes thereto of the Company.
- ------------------------------------------------------------------------------
Page 29
<PAGE> 58
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
<TABLE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------------
ELITE BURLING
ATLANTIC COMPUTER INSTRUMENTS PRO FORMA
AS REPORTED SYSTEMS SERVICES INC. DECEMBER 31,
DECEMBER 31, INC. INC. (UNAUDITED) 1995
1995 <F1> <F2> <F3> (UNAUDITED)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,335,999 $ 649,932 $ 1,255,125 $ 1,707,868 $ 5,948,924
Direct costs 1,186,213 237,298 562,417 1,021,120 3,007,048
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 1,149,786 412,634 692,708 686,748 -- 2,941,876
Operating expenses 981,212 419,768 637,821 653,694 109,688<F4> 2,802,183
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 168,574 (7,134) 54,887 33,054 (109,688) 139,693
Interest income 74,899 -- -- 511 -- 75,410
Interest expense (15,150) -- (1,417) (10,681) -- (27,248)
Minority interest (48,963) -- -- -- (13,829)<F5> (62,792)
Provision for income tax -- -- -- (74) (21,400)<F6> (21,474)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) 179,360 (7,134) 53,470 22,810 (144,917) 103,589
Dividends -- -- -- -- (72,000)<F7> (72,000)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss)
applicable to common
shareholders $ 179,360 $ (7,134) $ 53,470 $ 22,810 $ (216,917) $ 31,589
==========================================================================================================================
Net Income (Loss) Per Common Share $ 0.10 $ 0.02
==========================================================================================================================
Weighted Average Number Of
Common Shares Outstanding 1,792,939 1,898,940
==========================================================================================================================
- ------------------------------------------------------------------------------
Page 30
<PAGE> 59
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The Pro Forma Consolidated Statement of Operations gives
effect to the following pro forma adjustments:
<FN>
<F1> Represents the results of operations of Atlantic Systems,
Inc. for the period January 1, 1995 through July 31, 1995
that would have been consolidated with the Company had the
acquisition taken place on January 1, 1995.
<F2> Represents the results of operations of Elite Computer
Services, Inc. for the period January 1, 1995 through
August 31, 1995, that would have been consolidated with the
Company had the acquisition taken place on January 1, 1995.
<F3> Represents the results of operations of Burling
Instruments, Inc. for the fiscal year beginning March 1,
1995 and ended February 29, 1996 (within two months of
December 31, 1995) that would have been consolidated with
the Company if the acquisition would have taken place on
January 1, 1995.
<F4> Represents the amortization expense for the goodwill on
Burling Instruments, Inc. acquisition in the amount of
$49,580 ($495,796 divided by 10 years). Also represents the
additional amortization expense for the goodwill of
Atlantic Systems, Inc. and Elite Computer Services, Inc. in
the amounts of $24,731 and $35,377, respectively.
<F5> Represents the minority interest in the earnings of
Burling Instruments, Inc. for the year ended December 31,
1995 of $4,562. Also represents the additional minority
interest for Atlantic Systems, Inc. of $(1,427) and for
Elite Computer Services, Inc. of $10,694 respectively, for
the periods from January 1, 1995 to the actual dates of
acquisition.
<F6> Represents the additional provision for income taxes
due to the taxable income of Elite Computer Services, Inc.
<F7> Represents the payment of $72,000 of dividends on the 8%
redeemable preferred shares issued in the Burling Instruments,
Inc. acquisition.
</TABLE>
- ------------------------------------------------------------------------------
Page 31
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
Board of Directors
Atlantic Systems, Inc.
Spring Lake, New Jersey
We have audited the accompanying balance sheet of Atlantic Systems, Inc. as
of December 31, 1994 and the related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1993 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Systems, Inc. as of
December 31, 1994, and the results of its operations and its cash flows for
the years ended December 31, 1993 and 1994, in conformity with generally
accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co.
November 15, 1995
<PAGE> 61
ATLANTIC SYSTEMS, INC.
- -------------------------------------------------------------------------------
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 7,717
Accounts receivable 72,796
Inventory 45,131
----------------
TOTAL CURRENT ASSETS 125,644
EQUIPMENT AND VEHICLES 42,657
DEPOSITS 1,441
------------------
$ 169,742
==================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Capital lease obligation - current $ 20,207
Accounts payable 33,316
Accrued expenses 75,862
------------------
TOTAL CURRENT LIABILITIES 129,385
------------------
LONG-TERM LIABILITIES
Capital lease obligation 12,428
------------------
STOCKHOLDERS' EQUITY
Common stock:
Authorized 2,500 shares of no par value;
issued and outstanding 200 shares at
December 31, 1994 950
Additional paid-in capital 259,078
Retained earnings (deficit) (232,099)
------------------
TOTAL STOCKHOLDERS' EQUITY 27,929
------------------
$ 169,742
==================
- -------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 2
</TABLE>
<PAGE> 62
ATLANTIC SYSTEMS, INC.
- -------------------------------------------------------------------------------
<TABLE>
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
----------------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1992 200 $ 950 $ 201,740 $ (238,544) $ 21,484
NET INCOME -- -- -- 840 840
INCREASE IN PAID-IN CAPITAL -- -- 57,338 -- --
- ----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1993 200 950 259,078 (237,704) 22,324
NET INCOME -- -- -- 16,801 16,801
SHAREHOLDER DISTRIBUTIONS -- -- -- (11,196) (11,196)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 200 $ 950 $ 259,078 $ (232,099) $ 27,929
======================================================================================================================
- -------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 3
</TABLE>
<PAGE> 63
ATLANTIC SYSTEMS, INC.
- -------------------------------------------------------------------------------
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
-----------------------------------
1993 1994
-----------------------------------
<S> <C> <C>
SALES $ 1,162,059 $ 1,414,620
COST OF SALES 668,985 792,216
- ------------------------------------------------------------------
GROSS PROFIT 493,074 622,404
OPERATING EXPENSES 486,538 601,975
- -------------------------------------------------------------------
INCOME FROM OPERATIONS 6,536 20,429
OTHER EXPENSE (5,696) (3,628)
- -------------------------------------------------------------------
NET INCOME $ 840 $ 16,801
===================================================================
- -------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 4
</TABLE>
<PAGE> 64
ATLANTIC SYSTEMS, INC.
- -------------------------------------------------------------------------------
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
------------------------------
1993 1994
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 840 $ 16,801
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 15,768 24,908
Change in assets and liabilities:
Increase in accounts receivable (48,732) (566)
Increase in inventory (33,353) (10,203)
Increase in accounts payable and accrued
expenses 36,411 8,335
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (29,066) 39,275
------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in other assets 2,300 --
Payments for equipment and vehicles (35,740) (38,593)
- -------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (33,440) (38,593)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts paid on line of credit (51,500) (2,500)
Net proceeds on capital lease obligation 24,881 7,755
Shareholder distributions (22,367) (11,196)
Increase in additional paid-in capital 57,338 --
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,352 (5,941)
- -------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (54,154) (5,259)
CASH - BEGINNING OF YEAR 67,130 12,976
- -------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 12,976 $ 7,717
=================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 5,671 $ 3,503
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 5
</TABLE>
<PAGE> 65
ATLANTIC SYSTEMS, INC.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
The Company's inventory consists of hardware and other supplies that
will be utilized for upcoming contracts and is valued using the lower
of cost or market (first-in, first-out method).
EQUIPMENT AND VEHICLES
Equipment and vehicles are carried at cost, less accumulated
depreciation computed using straight-line and accelerated methods. The
assets are depreciated and amortized over periods of five to seven
years.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment/delivery of the product.
There are no significant post contract support obligations at the time
of revenue recognition.
INCOME TAXES
The Company is an S Corporation and therefore all income (losses) are
reported on the owner's individual returns. Accordingly, the Company
does not accrue a provision for income taxes.
2. OPERATIONS
The Company is a software development and services company that sells
software to small retailers for use in tracking sales and inventory.
Atlantic Services, Inc. develops and sells its own software and sells
hardware supplied by other manufacturers. The Company does business in
about 10 states and Canada with liquor stores as their primary market.
- -------------------------------------------------------------------------------
Page 6
<PAGE> 66
ATLANTIC SYSTEMS, INC.
- -------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
3. EQUIPMENT AND VEHICLES
Equipment and vehicles consist of:
<TABLE>
<S> <C>
Office equipment $ 62,900
Furniture and fixtures 16,559
Vehicles 67,957
Parts 38,092
-------------
185,508
Less: Accumulated depreciation and
amortization 142,851
-------------
$ 42,657
=============
</TABLE>
The vehicles under capital lease obligations in the amount of $32,635
at December 31, 1994 are included above. Related accumulated
depreciation amounted to $14,032 at December 31, 1994.
Depreciation and amortization charged against income amounted to
$15,768 in 1993 and $24,908 in 1994.
4. LINE OF CREDIT
The Company has an agreement with a bank for a line of credit of up to
$30,000. The agreement calls for interest to be charged at 7.5%, and
is secured by equipment. The line of credit expired in January 1994.
The Company had an outstanding balance of $2,500 and none at
December 31, 1993 and 1994, respectively.
Interest expense amounted to $3,800 in 1993 and none in 1994.
- -------------------------------------------------------------------------------
Page 7
<PAGE> 67
ATLANTIC SYSTEMS, INC.
- -------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
5. CAPITAL LEASE OBLIGATIONS
At December 31, 1994, future payments for capital lease obligation
are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------
<S> <C>
1995 $ 20,207
1996 12,428
--------------------------------------------------
Total capital lease obligation $ 32,635
==================================================
</TABLE>
6. LEASE COMMITMENTS
The Company leases its office space on a month-to-month basis from a
related party. In August 1995, the Company entered into a long-term
lease for this space for monthly amounts totalling $2,700. The lease
expires in December 1998.
- -------------------------------------------------------------------------------
Page: 8
<PAGE> 68
<TABLE>
Date: 01/18/96
Atlantic Systems Inc Page: 1
P R O F I T & L O S S
FROM 4/1/95 TO 6/30/95
<CAPTION>
C U R R E N T Y E A R
CURRENT PERIOD YEAR TO DATE
Amount Pct Amount Pct
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
SALES
EQUIPMENT
- LIQUOR 61,339.07 22.6 147,207.47 25.5
- OTHER RETAIL 0.0 0.0
- ALL OTHERS 4,799.50 1.8 4,799.50 0.8
- ADD ON 54,311.87 20.0 104,536.13 18.1
- SBT/TIW 0.0 0.0
SOFTWARE
- LIQUOR 23,458.93 8.6 52,413.30 9.1
- OTHER RETAIL 0.0 0.0
- ALL OTHERS 430.00 0.2 430.00 0.1
- ADD ON 10,707.03 3.9 39,484.01 6.8
- SBT/TIW 0.0 0.0
- SBT/TIW Custom 0.0 0.0
INSTALL/REPAIR - SBT/TIW 0.0 0.0
INSTALLATION SERVICES 3,153.78 1.2 5,149.16 0.9
ALPHA MICRO MAINTENANCE 18,118.26 6.7 33,022.17 5.7
SUPPLIES 12,233.40 4.5 25,524.85 4.4
PRICING SERVICES 12,740.00 4.7 26,595.84 4.6
PRODUCT MOVEMENT INFO 12,125.00 4.5 23,300.00 4.0
TRAINING/SUPPORT 58,185.75 21.4 115,041.25 19.9
TRAINING/SUPPORT - SBT 0.0 0.0
----------- ----- ----------- -----
NET SALES $271,602.59 100.0 $577,503.68 100.0
COST OF SALES
PURCHASES - EQUIPMENT
- LIQUOR 37,696.73 13.8 84,838.83 14.6
- OTHER RETAIL 0.0 0.0
- ALL OTHERS 1,941.95 0.6 1,941.95 0.2
- ADD ON 33,733.54 12.3 63,112.67 10.8
- SBT/TIW 0.0 0.0
PURCHASES - SOFTWARE
- LIQUOR 4,460.00 1.5 13,026.50 2.2
- OTHER RETAIL 0.0 0.0
- ALL OTHERS 1,091.30 0.3 1,380.09 0.1
- ADD ON 6,145.00 2.2 24,204.11 4.1
- SBT/TIW 0.0 0.0
PURCHASES - SUPPLIES 7,677.56 2.7 16,986.63 2.8
PRICING SERVICE EXPENSES 3,839.84 1.3 7,589.74 1.2
INSTALLATION EXPENSES 1,840.34 0.6 3,531.77 0.5
WARRANTY REPAIR EXPENSE 603.58 0.1 1,351.41 0.1
DISCOUNTS TAKEN (1,408.65) 0.5 (2,607.85) 0.5
----------- ----- ----------- -----
TOTAL COST OF SALES $97,621.19 35.8 $215.355.85 37.2
----------- ----- ----------- -----
GROSS PROFIT $173,981.40 64.1 $362,147.83 62.7
</TABLE>
<PAGE> 69
<TABLE>
Date: 01/18/96
Atlantic Systems Inc Page: 2
P R O F I T & L O S S
FROM 4/1/95 TO 6/30/95
<CAPTION>
C U R R E N T Y E A R
CURRENT PERIOD YEAR TO DATE
Amount Pct Amount Pct
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
OPERATING EXPENSES
PAYROLL
- EMPLOYEES 105,716.18 38.8 211,725.87 36.6
- SALES REPS 14,340.00 5.2 28,470.00 4.8
- PAYROLL TAXES 9,641.94 3.5 20,913.95 3.5
----------- ----- ----------- -----
TOTAL PAYROLL 129,698.12 47.7 261,109.82 45.1
ADVERTISING (904.11) 0.3 362.91 0.0
ADVERTISING - TRADE SHOWS 0.0 0.0
AUTO - EXPENSE 5,795.99 2.0 11,310.19 1.9
INSURANCE - AUTO 585.49 0.1 2,873.18 0.4
INSURANCE - THEFT & LIABILITY 0.0 625.00 0.0
INSURANCE - EMPLOYEE HEALTH 6,576.67 2.3 12,791.96 2.1
EMPLOYEE RETIREMENT FUND 0.0 0.0
INTEREST & BANK CHARGES 985.63 0.3 1,981.46 0.2
MISCELLANEOUS TAXES & PENALTY 11.00 0.0 (1,850.14) 0.3
MISCELLANEOUS 0.0 268.00 0.0
OFFICE SUPPLIES 5,866.46 2.1 8,247.76 1.3
POSTAGE / FREIGHT 2,250.90 0.7 4,375.21 0.7
PROFESSIONAL SERVICES 3,541.74 1.2 3,541.74 0.5
RENT 8,100.00 2.9 15,500.00 2.6
SEMINARS / SHOW ATTENDANCE 0.0 0.0
SUBSCRIPTIONS 166.74 0.0 350.04 0.0
TELEPHONE 8,151.21 2.9 17,672.77 3.0
NON EXEMPT TRAVEL & ENTERTAINMENT 641.80 0.1 1,242.01 0.1
EXEMPT TRAVEL 1,967.67 0.6 2,843.22 0.4
UTILITIES - ELECTRIC 1,054.91 0.3 1,826.27 0.2
----------- ----- ----------- -----
TOTAL OPERATING EXPENSES $174,490.22 64.1 $345,071.40 59.7
----------- ----- ----------- -----
NET OPERATING INCOME ($508.82) 0.1 $17,076.43 3.0
BAD DEBT WRITEOFF 0.0 0.0
DEPRECIATION And R & D 1,860.00 0.6 4,340.00 0.7
NJ Franchise Tax 255.00 0.0 225.00 0.0
----------- ----- ----------- -----
NET INCOME ($2,593.82) 0.9 $12,511.43 2.2
=========== ===== =========== =====
</TABLE>
<PAGE> 70
<TABLE>
Date: 01/18/96
Atlantic Systems Inc Page: 1
B A L A N C E S H E E T
AT 6/30/95
<CAPTION>
C U R R E N T P E R I O D A C T U A L
==============================================
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
CASH IN BANK - FIDELITY (5,093.09)
ACCOUNTS RECEIVABLE - TRADE 63,940.56
----------
TOTAL LIQUID ASSETS $58,847.47
INVENTORY
- COMPUTER HARDWARE 48,675.20
- SOFTWARE 6,730.01
- SUPPLIES 3,666.91
----------
TOTAL INVENTORY $59,072.12
---------- -----------
TOTAL CURRENT ASSETS $117,919.59
FIXED ASSETS
OFFICE EQUIPMENT 62,899.87
RESERVE FOR DEPRECIATION (62,899.87)
FURNITURE & FIXTURES 16,558.56
RESERVE FOR DEPRECIATION (16,558.56)
VEHICLES 72,456.71
RESERVE FOR DEPRECIATION (27,668.00)
SPARE PARTS 38,091.83
RESERVE FOR DEPRECIATION (38,091.83)
NEW PRODUCT DEVELOPMENT
R & D Amortized ----------
NET DEPRECIABLE ASSETS $44,788.71
---------- -----------
TOTAL FIXED ASSETS $44,788.71
OTHER ASSETS
PREPAID INSURANCE
REFUNDABLE DEPOSITS 1,441.42
---------- -----------
TOTAL OTHER ASSETS $1,441.42
---------- -----------
T O T A L A S S E T S $164,149.72
===========
</TABLE>
<PAGE> 71
<TABLE>
Date: 01/18/96 Atlantic Systems Inc Page: 2
B A L A N C E S H E E T
AT 6/30/95
<CAPTION>
C U R R E N T P E R I O D A C T U A L
=============================================
LIABILITIES
<S> <C> <C> <C>
ACCRUED TAXES PAYABLE
- FEDERAL WITHHOLDING
- FICA 1.00
- FUTA
- NJ WITHHOLDING 972.12
- NJ Franchise Tax Payable
- SUI 2,188.56
- SALES TAX - New Jersey 1,960.59
- SALES TAX - New York Cit 785.07
- SALES TAX - Nassau Count 250.17
- SALES TAX - Suffolk Coun 43.89
- SALES TAX - Mt. Vernon N 40.64
- SALES TAX - Orange Count
- SALES TAX - Westchester 644.50
-------------
TOTAL ACCRUED TAXES $6,886.54
NOTES PAYABLE VEHICLES 21,094.94
REVOLVING CREDIT - FIDELITY
5 Year Note - Current Ammoun
ACCOUNTS PAYABLE TRADE 34,179.04
CUSTOMER DEPOSITS
SEP-IRA Payable 57,585.00
---------------------------------
TOTAL CURRENT LIABILITIES $119,745.52
LONG TERM LIABILITIES
5 Year Note - Fidelity Bank
---------------------------------
TOTAL LONG TERM LIABILITIES
STOCKHOLDER'S EQUITY
RETAINED EARNINGS 30,942.77
YEAR TO DATE EARNINGS 12,511.43
COMMON STOCK - J. KUNISH 75.00
COMMON STOCK - J. McCARTHY 75.00
COMMON STOCK - Treasury 800.00
---------------------------------
TOTAL STOCKHOLDER'S EQUITY $44,404.20
---------------------------------
TOTAL EQUITY & LIABILITIES $164,149.72
==============
</TABLE>
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
Board of Directors
Elite Computer Services, Inc.
Randolph, New Jersey
We have audited the accompanying balance sheet of Elite Computer Services,
Inc. as of December 31, 1994 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December
31, 1993 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the financial position of Elite Computer Services,
Inc. as of December 31, 1994, and the results of its operations and its cash
flows for the years ended December 31, 1993 and 1994, in conformity with
generally accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co.
November 15, 1995
<PAGE> 73
ELITE COMPUTER SERVICES, INC.
- ------------------------------------------------------------------------------
<TABLE>
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 8,280
Accounts receivable 208,671
Inventory 161,093
--------------
TOTAL CURRENT ASSETS 378,044
BUILDING, FURNITURE, FIXTURES AND EQUIPMENT 38,298
OTHER ASSETS 50,028
--------------
$ 466,370
==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable - officers $ 366,944
Accounts payable 128,690
Accrued expenses 11,469
--------------
TOTAL CURRENT LIABILITIES 507,103
--------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock:
Authorized 1,000 shares of $2 par value;
issued and outstanding 1,000 shares at
December 31, 1994 2,000
Additional paid-in capital 26,109
Retained earnings (deficit) (68,842)
--------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (40,733)
--------------
$ 466,370
==============
- ------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 2
</TABLE>
<PAGE> 74
ELITE COMPUTER SERVICES, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE YEARS
ENDED DECEMBER 31,
-------------------------------------
1993 1994
-------------------------------------
<S> <C> <C>
REVENUES $ 1,536,419 $ 2,020,650
- --------------------------------------------------------------------------------------
DIRECT COSTS
Costs of hardware products 749,374 1,176,023
Direct labor 94,385 97,752
- --------------------------------------------------------------------------------------
TOTAL DIRECT COSTS 843,759 1,273,775
- --------------------------------------------------------------------------------------
GROSS PROFIT 692,660 746,875
- --------------------------------------------------------------------------------------
OPERATING EXPENSES
Marketing and sales 99,584 118,164
Administrative 627,221 661,687
- --------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 726,805 779,851
- --------------------------------------------------------------------------------------
NET LOSS $ (34,145) $ (32,976)
======================================================================================
- --------------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 3
</TABLE>
<PAGE> 75
<TABLE>
ELITE COMPUTER SERVICES, INC.
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------------------------ PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1993 1,000 $ 2,000 $ 423 $ (1,721) $ 702
NET LOSS -- -- -- (34,145) (34,145)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1993 1,000 2,000 423 (35,866) (33,443)
Imputed interest on officer's notes payable -- -- 25,686 -- 25,686
NET LOSS -- -- -- (32,976) (32,976)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 1,000 $ 2,000 $ 26,109 $ (68,842) $ (40,733)
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
See the accompanying notes to financial statements Page 4
</TABLE>
<PAGE> 76
<TABLE>
ELITE COMPUTER SERVICES, INC.
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE YEARS
ENDED DECEMBER 31,
----------------------------------
1993 1994
----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (34,145) $ (32,976)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 5,275 3,633
Change in assets and liabilities:
Increase in accounts receivable (13,261) (27,319)
(Increase) decrease in inventory 12,015 (127,431)
Increase (decrease) in accounts payable and accrued
expenses 42,287 (13,134)
Decrease in prepaids 1,543 --
- --------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,714 (197,227)
- --------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in cash surrender value (20,029) (11,272)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in additional paid-in capital -- 25,686
Net amounts paid on line of credit (10,000) --
Increase in notes payable - officer 9,565 168,527
- --------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (435) 194,213
- --------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (6,750) (14,286)
CASH - BEGINNING OF YEAR 29,316 22,566
- --------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 22,566 $ 8,280
==================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 4,120 $ 1,602
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 5
</TABLE>
<PAGE> 77
ELITE COMPUTER SERVICES, INC.
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for doubtful accounts equal to the
estimated collection losses that will be incurred in collection of all
receivables. The estimated losses are based on historical collection
experience coupled with a review of the current status of the existing
receivables. There is no allowance for uncollectible accounts
reflected in the balance sheet. Company management is of the opinion
that no allowance is necessary.
INVENTORY
The Company's inventory, consists of new and used computers and
computer parts. The inventory is valued at the lower of cost or
market, determined by the FIFO (first-in, first-out) method.
BUILDING, FURNITURE, FIXTURES AND EQUIPMENT
Building, furniture, fixtures and equipment are carried at cost, less
accumulated depreciation computed using straight-line and accelerated
methods. The assets are depreciated over periods ranging from five to
thirty-one years.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of the computer parts.
There are no significant post contract support obligations at the time
of revenue recognition.
The Company does not experience many product returns, and therefore,
Company management is of the opinion that no allowance for sales
returns is necessary. The Company has no obligation for warranties on
hardware sales.
INCOME TAXES
The Company elected under the S Corporation provisions of the Internal
Revenue Code and similar provisions of the New Jersey tax laws, not to
be subject to corporate income taxes, but rather to have the
stockholders report their distributive share of the Company's taxable
income or losses on their respective income tax returns. Therefore, no
liability for federal and state income taxes is reflected in the
accompanying financial statements.
- ------------------------------------------------------------------------------
Page 6
<PAGE> 78
ELITE COMPUTER SERVICES, INC.
- ------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
2. OPERATIONS
Elite Computer Services, Inc. was incorporated in October 1988. The
Company buys computers and breaks them down into parts that are re-sold
mainly to computer maintenance companies. The Company also repairs
computers. The Company's market is primarily computer maintenance
companies for IBM products. Its operations are conducted out of the
office in New Jersey, with customers all over the United States.
3. BUILDING, FURNITURE, FIXTURES AND EQUIPMENT
Building, furniture, fixtures and equipment consist of:
<TABLE>
<S> <C>
Land $ 5,630
Buildings 34,520
Furniture, fixtures and equipment 26,066
Machinery and equipment 14,747
Automobile 2,400
----------------
83,363
Less: Accumulated depreciation 45,065
----------------
$ 38,298
================
</TABLE>
Depreciation charged against income amounted to $5,275 in 1993 and
$3,633 in 1994.
4. OTHER ASSETS
Other assets consist of:
<TABLE>
<S> <C>
Deposits $ 3,313
Cash surrender value 46,715
----------------
$ 50,028
================
</TABLE>
- ------------------------------------------------------------------------------
Page 7
<PAGE> 79
ELITE COMPUTER SERVICES, INC.
- ------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
5. LINE OF CREDIT
The Company has an agreement with a bank for a line of credit of up to
$100,000. The agreement calls for interest to be charged at the prime
rate plus 2%, and is secured by accounts receivable and inventory. The
line of credit expires each May and any outstanding amounts are due on
demand. The Company had no outstanding balance at December 31, 1994.
Interest expense amounted to $4,120 in 1993 and $1,602 in 1994.
6. NOTES PAYABLE - OFFICERS
The notes are non-interest bearing, unsecured and are due on demand.
Imputed interest has been recorded at a market rate with an offset to
contributed capital.
7. LEASE COMMITMENTS
The Company is obligated under a five-year lease for its office space,
expiring May 1996. The total lease commitment through the end of the
lease is $47,813.
The Company was obligated under a month-to-month lease for some
additional warehouse space. This lease was terminated in 1994.
Rent expense amounted to $44,447 and $43,950 in December 31, 1993 and
1994, respectively.
8. PROFIT SHARING PLAN
The Company has a qualified, noncontributory 401k plan for all eligible
employees. The Company contributes, at its discretion, up to 15% of
the participants' annual compensation. Profit sharing expense amounted
to $40,500 and $40,000 in December 31, 1993 and 1994, respectively.
- ------------------------------------------------------------------------------
Page 8
<PAGE> 80
<TABLE>
ELITE COMPUTER SERVICES PAGE 1
Balance Sheet
AS OF 06/30/95
<CAPTION>
** THIS MONTH THIS YEAR ** ** THIS MONTH LAST YEAR **
===================================================================================================================================
ASSETS
--------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
CASH-REGULAR-MERRIL/LYNCH 15,258.83 51,681.44
CASH-REGULAR-KAT-WEST 2,662.06 4,038.69
CASH-MONEY MARKET KAT WES 2,038.20 2,022.69
PETTY CASH 200.00 200.00
ACCOUNTS RECEIVABLE 198,608.09 329,871.51
OTHER RECEIVABLES 0.00 500.00
OFFICER'S DRAW-RICHARD 19,381.77 16,919.73
OFFICER'S DRAW-JACK 19,471.29 19,817.87
DRAW-PETER CASTRICUM 0.00 1,050.00
INVENTORY-SHIPPING/PAD 5,172.38 3,034.28
INVENTORY-COMPUTER PARTS 309,219.28 115,522.38
------------ ------------
TOTAL CURRENT ASSETS 571,986.83 544,239.39
FIXED ASSETS
LAND 5,630.00 5,630.00
BUILDINGS 34,520.00 34,520.00
FURNITURE & EQUIPMENT 26,068.00 26,068.00
MACHINERY/EQUIPMENT 14,737.00 14,747.00
AUTOMOBILE - TRUCKS 2,400.00 2,400.00
ACCUM DEPREC BUILDINGS (5,242.00) (3,463.00)
ACCUM DEPREC FURN/FIX (22,856.00) (21,597.00)
ACCUM DEPREC MACH/EQUIP (14,747.00) (15,742.00)
ACCUM DEPREC AUTO/TRUCK (2,400.00) (2,400.00)
SECURITY DEPOSITS 3,312.50 3,312.50
CSV OFFICER'S LIFE 35,443.00 35,443.00
PREPAID EXPENSES 14,812.57 0.00
------------ ------------
TOTAL FIXED ASSETS 91,386.07 78,916.50
------------ ------------
TOTAL ASSETS 663,372.90 623,155.89
============ ============
<CAPTION>
LIABILITIES & CAPITAL
-----------------------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
ACCOUNTS PAYABLE 108,168.66 100,963.45
ACCRUED ACCOUNTS PAYABLE 0.00 2,150.00
TAXES PAYABLE 2,275.97 1,087.45
GARNISHEE/D. COLEMAN 0.00 132.00
------------ ------------
TOTAL CURRENT LIABILITIES 110,444.63 104,352.90
<PAGE> 81
<CAPTION>
ELITE COMPUTER SERVICES PAGE 2
Balance Sheet
AS OF 06/30/95
** THIS MONTH THIS YEAR ** ** THIS MONTH LAST YEAR **
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LONG TERM LIABILITIES
NOTE PAYABLE-BANK 50,000.00 25,000.00
POWKATAN PLANTATIONS 0.00 19,822.47
LOANS PAYABLE-JACK R. 188,825.80 118,038.30
LOANS PAYABLE-RICH D. 176,619.38 139,119.39
------------ ------------
TOTAL LONG TERM LIABILITY 416,944.69 301,980.16
------------ ------------
TOTAL LIABILITIES 527,389.32 406,333.06
CAPITAL
COMMON STOCK 2,000.00 2,000.00
PAID IN CAPITAL 423.00 423.00
Shareholders' AAA (1,723.72) (1,723.72)
RETAINED EARNINGS (28,788.58) 3,491.77
CURRENT EARNINGS 184,072.86 212,831.78
------------ ------------
TOTAL CAPITAL 135,983.58 216,822.83
------------ ------------
TOTAL LIAB. & CAPITAL 663,372.90 623,155.89
============ ============
</TABLE>
<PAGE> 82
<TABLE>
ELITE COMPUTER SERVICES PAGE 1
Income Statement
AS OF 06/30/95
<CAPTION>
---------------- T H I S Y E A R ----------------- --BUDGET-- ----- L A S T Y E A R ------
RATIO: INCOME THIS MONTH RATIO 6 MONTHS RATIO 6 MONTHS THIS MONTH 6 MONTHS
===================================================================================== ==========================================
** THIS MONTH THIS YEAR ** ** THIS MONTH LAST YEAR **
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
SALES 160,007.86 100.0 1,038,879.02 100.0 0.00 240,852.35 1,065,896.51
------------ ------- -------------- ------- --------- ------------ --------------
NET SALES 160,007.86 100.0 1,038,879.02 100.0 0.00 240,852.35 1,065,896.51
COST OF GOODS SOLD
COST OF SALES 86,000.00 53.7 459,196.71 44.3 0.00 127,701.25 500,800.00
FREIGHT 0.00 0.0 1,025.00 0.1 0.00 485.00 485.00
FREIGHT OUT 72.86 0.0 (5,288.89) (0.5) 0.00 (292.33) (285.92)
------------ ------- -------------- ------- --------- ------------ --------------
GROSS PROFIT 73,935.50 46.2 581,926.00 58.1 0.00 112,958.43 564,877.43
SALARIES 26,496.00 16.6 123,262.00 11.9 0.00 18,334.00 107,040.00
PAYROLL TAXES 1,647.89 1.0 11,713.86 1.1 0.00 1,830.00 8,862.98
PENSION PLAN 365.14 0.2 9,836.10 0.9 0.00 479.85 11,428.16
COMMISSIONS 3,989.75 2.5 25,609.09 2.5 0.00 1,081.00 21,686.55
RENT 4,812.50 3.0 24,275.00 2.3 0.00 3,662.50 25,637.50
FACTORY SUPPLIES 2,356.85 1.5 14,065.80 1.4 0.00 2,769.14 20,449.36
OFFICE EXPENSES 1,268.70 0.8 5,862.02 0.6 0.00 2,489.31 10,051.80
FACTORY EXPENSE 795.86 0.5 15,097.61 1.5 0.00 1,311.76 1,711.89
TELEPHONE 1,678.04 1.0 10,238.13 1.0 0.00 1,707.08 8,042.88
UTILITIES 544.12 0.3 5,025.85 0.5 0.00 417.67 5,359.79
TRAVEL EXPENSES 5,733.78 3.6 20,601.55 2.0 0.00 407.96 13,510.44
ENTERTAINMENT EXPENSES 1,590.81 1.0 8,891.25 0.9 0.00 1,760.75 7,101.90
AUTOMOBILE EXPENSES 6,886.01 4.3 57,957.23 5.6 0.00 3,919.42 35,774.97
AUTOMOBILE INSURANCE (7,354.40) (4.6) 14,078.85 1.4 0.00 235.00 8,145.17
BAD DEBT 2,073.26 1.3 2,023.26 0.2 0.00 0.00 0.00
ADVERTISING 210.09 0.1 2,877.41 0.3 0.00 854.54 3,107.77
INSURANCE-MEDICAL 1,938.95 1.2 11,817.76 1.1 0.00 51.62 6,051.44
INSURANCE-GENERAL 0.00 0.0 8,388.50 0.5 0.00 0.00 13,252.95
INSURANCE-LIFE 3,081.46 1.9 24,526.40 2.4 0.00 4,745.44 27,947.78
POSTAGE 182.94 0.1 938.56 0.1 0.00 272.47 1,461.34
CASUAL LABOR 1,300.00 0.8 1,390.00 0.1 0.00 2,966.00 2,966.00
PROFESSIONAL FEES 0.00 0.0 15,406.25 1.5 0.00 1,653.75 6,818.81
MAINTENANCE EXPENSES 600.00 0.4 2,563.00 0.2 0.00 300.00 2,100.00
DEPRECIATION 195.00 0.1 1,170.00 0.1 0.00 295.00 1,770.00
INTEREST EXPENSE 0.00 0.0 0.00 0.0 0.00 49.29 951.27
MISCELLANEOUS INCOME (110.79) (0.1) (456.58) (0.0) 0.00 (66.97) (423.41)
DUES & SUBSCRIPTIONS 8.37 0.0 830.44 0.1 0.00 188.59 904.53
CONTRIBUTIONS 0.00 0.0 85.00 0.0 0.00 0.00 370.00
------------ ------- -------------- ------- --------- ------------ --------------
TOTAL EXPENSES 60,281.33 37.7 417,853.14 40.3 0.00 51,496.09 352,079.85
------------ ------- -------------- ------- --------- ------------ --------------
INCOME BEFORE TAXES 13,854.17 8.6 164,072.86 15.8 0.00 61,463.34 212,797.78
STATE INCOME TAX 0.00 0.0 0.00 0.0 0.00 0.00 188.00
------------ ------- -------------- ------- --------- ------------ --------------
NET INCOME 13,654.17 8.5 164,072.86 15.8 0.00 81,463.34 212,631.78
</TABLE>
<PAGE> 83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned duly authorized person.
Date: , 1996 APPLIED CELLULAR TECHNOLOGY, INC.
--------------------------------------
By: Garrett Sullivan, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date:
- ----------------------------------------------------- ------------------
Garrett Sullivan
President, Secretary, Acting Chief Financial Officer,
Controller, Director
Date:
- ----------------------------------------------------- ------------------
Richard Sullivan
Chairman of the Board of Directors, Chief Executive
Officer
Date:
- ----------------------------------------------------- ------------------
Daniel Penni
Director
