<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period ------------- to ------------
Commission file number - 33-93962
APPLIED CELLULAR TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
MISSOURI 43-1641533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Highway 160 & CC, Suite 5, Nixa, Missouri 65714
(Address of principal executive offices) (Zip Code)
(417) 725-9888
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding twelve months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
file such filing requirements for the past thirty days.
Yes X No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report:
4,901,866 Shares of Common Stock ($.001 par value)
(Title of Class)
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
<PAGE> 2
APPLIED CELLULAR TECHNOLOGY, INC.
PART I: Financial Information
ITEM 1 - Financial Statements
ITEM 2 - Management's discussion and analysis of financial
condition and results of operations
PART II: Other Information
ITEM 4 - Submission of Matters to a Vote of Security Holders
The Company had the following submission of matters to a
vote of Security Holders: The date of the annual meeting
was August 2, 1996, at which time they elected the
following directors: Richard J. Sullivan (continuing
director), Garrett A. Sullivan (continuing director),
Daniel E. Penni and Angela Sullivan. The matters voted
on and the respective number of votes for and against
each matter is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Total Voted Withhold
- ----------------------------------------------------------------------------------------------------------------------------
For: Against: Abstain:
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Election of Officers
- ----------------------------------------------------------------------------------------------------------------------------
Richard Sullivan 2,144,821 0 2,238
- ----------------------------------------------------------------------------------------------------------------------------
Garrett Sullivan 2,144,821 0 2,238
- ----------------------------------------------------------------------------------------------------------------------------
Daniel Penni 2,144,821 0 2,238
- ----------------------------------------------------------------------------------------------------------------------------
Angela Sullivan 2,144,820 0 2,239
- ----------------------------------------------------------------------------------------------------------------------------
2 Authorize increase in Common Shares to 20,000,000 2,135,592 9,887 1,580
- ----------------------------------------------------------------------------------------------------------------------------
3 Amend Article Four of the Articles of Incorporation to 1,806,086 27,423 5,633
Eliminate Pre-emptive rights
- ----------------------------------------------------------------------------------------------------------------------------
4 Increase Preferred Shares to 1,000,000 and 1,805,584 28,951 4,807
amend terms such that the preferred stock authorized
may be issued from time to time in series-the variations
to be established by the Board of Directors, which shall
also be authorized to allow for conversion of preferred
stock to common stock.
- ----------------------------------------------------------------------------------------------------------------------------
5 Approve 96 Non-Statutory Stock Option Plan 1,910,121 32,927 4,082
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 6 - Exhibits and Reports on Form 8-K
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS:
---------------------
<PAGE> 4
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Applied Cellular Technology, Inc.
Springfield, Missouri
We have reviewed the accompanying consolidated balance sheet of Applied
Cellular Technology, Inc. and subsidiaries as of September 30, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the three month periods ended September 30, 1995 and 1996 and for
the nine month periods ended September 30, 1995 and 1996. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements in
order for them to be in conformity with generally accepted accounting
principles.
We have audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year then ended (not presented herein); and in our report dated
March 8, 1996, we expressed an unqualified opinion on those consolidated
financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1995 is fairly stated in all material
respects in relation to the consolidated financial statements from which it
has been derived.
November 1, 1996
<PAGE> 5
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC.
AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
PAGE 1 OF 2
<CAPTION>
ASSETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 125,469 $ 966,699
Accounts receivable (net of allowance for doubtful accounts
of $103,044 at September 30, 1996) 522,548 6,702,242
Unbilled receivables 104,111 153,015
Inventories (net of allowance for obsolescence of
$125,000 at September 30, 1996) 504,859 3,427,343
Prepaid expenses 51,840 299,900
Notes receivable - officers 12,982 12,982
Note receivable - Cadkey, Inc. 87,057 94,251
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,408,866 11,656,432
LAND, EQUIPMENT AND LEASEHOLD IMPROVEMENTS 138,489 1,784,974
INVESTMENT IN CADKEY, INC. COMMON STOCK 577,399 577,399
NOTE RECEIVABLE - OFFICERS -- 2,241,469
NOTE RECEIVABLE - CADKEY, INC. 292,627 220,957
GOODWILL 906,626 14,224,816
PURCHASED COMPUTER SOFTWARE 667,443 682,102
OTHER ASSETS 140,035 651,654
DEFERRED INCOME TAX ASSET -- 46,052
- ---------------------------------------------------------------------------------------------------------------
$ 4,131,485 $ 32,085,855
===============================================================================================================
- ---------------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 2
</TABLE>
<PAGE> 6
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC.
AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
PAGE 2 OF 2
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ -- $ 301,401
Notes payable 310,094 3,588,437
Capital lease obligation - current 23,360 157,561
Accounts payable and accrued expenses 564,692 8,278,550
Deferred revenue -- 322,920
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,003,292 12,648,869
- ---------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Capital lease obligation 19,251 157,309
Long-term debt -- 998,199
- ---------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 19,251 1,155,508
- ---------------------------------------------------------------------------------------------------------------
MINORITY INTEREST 57,002 378,077
- ---------------------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK -- 10,900,000
- ---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock:
Authorized 10,000,000 shares of $.001 par value;
issued and outstanding 2,267,749 at December 31, 1995
and 4,901,866 shares at September 30, 1996 2,268 4,902
Additional paid-in capital 3,358,072 7,000,131
Retained earnings (deficit) (308,400) (1,632)
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,051,940 7,003,401
- ---------------------------------------------------------------------------------------------------------------
$ 4,131,485 $ 32,085,855
===============================================================================================================
- ---------------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 3
</TABLE>
<PAGE> 7
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
----------------------- --------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1995 20,000 $ 200,000 1,336,750 $ 1,337 $ 1,075,287 $ (487,760) $ 788,864
NET INCOME -- -- -- -- -- 94,047 94,047
REDEMPTION OF PREFERRED STOCK (20,000) (200,000) 11,765 12 52,596 -- (147,392)
ISSUANCE OF COMMON STOCK -- -- 250,826 251 665,742 -- 665,993
ISSUANCE OF RESTRICTED COMMON
STOCK -- -- 200,000 200 499,800 -- 500,000
ISSUANCE OF COMMON STOCK
- IN ACQUISITION OF BALER SOFTWARE
CORPORATION'S NET ASSETS -- -- 113,009 113 289,473 -- 289,586
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. -- -- 102,160 102 456,426 -- 456,528
CLASS "E" WARRANTS REDEEMED -- -- 120,000 120 (120) -- --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 1995 -- $ -- 2,258,576 $ 2,259 $ 3,380,262 $ (393,713) $ 2,988,808
==============================================================================================================================
BALANCE - JANUARY 1, 1996 -- $ -- 2,267,749 $ 2,268 $ 3,358,072 $ (308,400) $ 3,051,940
NET INCOME -- -- -- -- -- 306,768 306,768
ISSUANCE OF COMMON STOCK -- -- 427,328 427 464,505 -- 464,932
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF PURCHASED SOFTWARE -- -- 33,494 34 92,076 -- 92,110
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 80% OF CRA-TEK
COMPANY -- -- 295,115 295 350,154 -- 350,449
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF ADVANCED TELECOM
HOLDINGS, INC. -- -- 1,618,180 1,618 2,021,107 -- 2,022,725
CLASS "F" WARRANTS REDEEMED -- -- 260,000 260 649,740 -- 650,000
50% OF PRINCIPAL PAYMENTS RECEIVED
ON NOTE RECEIVABLE - CADKEY, INC. -- -- -- -- 64,477 -- 64,477
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 1996 -- $ -- 4,901,866 $ 4,902 $ 7,000,131 $ (1,632) $ 7,003,401
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 4
</TABLE>
<PAGE> 8
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC.
AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
FOR THE FOR THE
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------------------------------
1995 1996 1995 1996
----------------------------------------------------------
<S>
REVENUES <C> <C> <C> <C>
Programming services $ 128,228 $ 281,623 $ 269,801 $ 665,800
Hardware products 402,026 649,784 561,865 2,239,825
Packaged software sales 154,904 145,666 195,743 530,131
Interconnect sales -- 712,367 -- 712,367
Electronics/thermostats -- 751,326 -- 1,440,146
Cellular phone sales -- 1,740,779 -- 1,740,779
Other revenue 11,177 121,159 101,424 273,659
- ----------------------------------------------------------------------------------------------------------
TOTAL REVENUES 696,335 4,402,704 1,128,833 7,602,707
- ----------------------------------------------------------------------------------------------------------
DIRECT COSTS
Costs of programming services 125,069 149,564 232,515 434,894
Costs of hardware products 148,355 471,390 255,130 1,523,192
Costs of packaged software sales 105,934 85,259 120,429 324,944
Costs of interconnect and cellular
phone sales -- 850,565 -- 850,565
Costs of electronics/thermostats -- 312,563 -- 609,893
Other costs 3,636 63,649 48,595 185,031
Royalty expense 193 234,641 4,176 234,641
- ----------------------------------------------------------------------------------------------------------
TOTAL DIRECT COSTS 383,187 2,167,631 660,845 4,163,160
- ----------------------------------------------------------------------------------------------------------
GROSS PROFIT 313,148 2,235,073 467,988 3,439,547
- ----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Marketing and sales 67,942 738,296 100,875 1,089,823
Administrative 161,209 1,090,679 248,516 1,821,718
- ----------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 229,151 1,828,975 349,391 2,911,541
- ----------------------------------------------------------------------------------------------------------
OPERATING INCOME 83,997 406,098 118,597 528,006
INTEREST INCOME 27,940 25,522 54,381 67,628
INTEREST EXPENSE 2,075 49,930 3,277 75,151
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 109,862 381,690 169,701 520,483
PROVISION FOR INCOME TAXES 30,100 133,702 30,100 133,702
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 79,762 247,988 139,601 386,781
MINORITY INTEREST (45,554) (42,816) (45,554) (80,013)
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 34,208 $ 205,172 $ 94,047 $ 306,768
==========================================================================================================
NET INCOME PER COMMON SHARE $ .02 $ .06 $ .06 $ .11
==========================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,947,407 3,505,122 1,632,033 2,706,254
==========================================================================================================
- ----------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 5
</TABLE>
<PAGE> 9
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC.
AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------------
1995 1996
-------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 94,047 $ 306,768
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 81,653 351,456
Minority interest 45,554 80,013
Loss on sale of assets 519 --
Insurance proceeds 1,650 --
Change in assets and liabilities:
Increase in accounts receivable (254,110) (968,641)
Increase in unbilled receivables -- (31,500)
Increase in inventories (89,092) (493,646)
Increase (decrease) in prepaid expenses 2,696 (175,414)
Increase in deposits (1,585) --
Increase in due from employees (4,956) --
Increase in accounts payable and accrued expenses 10,559 109,072
Increase in deferred income tax (asset) liability 29,100 (63,510)
Increase in deferred revenue -- 322,920
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (83,965) (562,482)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in notes receivable - related party 79,890 --
Increase in other assets (74,533) (173,043)
Payments received on note receivable - Cadkey, Inc. -- 128,953
Payments for equipment, leasehold improvements
and computer software (20,476) (84,294)
Payments for costs of 80% and 100% acquisitions
(net of cash balances acquired) (160,504) 280,362
Payments for costs of software acquisitions (73,053) (49,912)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (248,676) 102,066
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts borrowed (paid) on long-term debt
and notes payable - bank (126,047) 803,712
Payments on capital lease obligations (6,185) (26,110)
Payments made on officers' notes payable -- (238,658)
Minority interest upon acquisition (7,507) --
Issuance of common stock 718,600 762,702
Redemption of preferred stock (200,000) --
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 378,861 1,301,646
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 46,220 841,230
CASH - BEGINNING OF PERIOD 2,651 125,469
- ---------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 48,871 $ 966,699
===============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,541 $ 75,151
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 6
</TABLE>
<PAGE> 10
APPLIED CELLULAR TECHNOLOGY, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
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., ACT
Financial Corp. and ACT Communications, Inc. which were formed in
November 1994, April 1995 and September 1996, respectively, and its
majority-owned subsidiaries, Atlantic Systems, Inc., Elite Computer
Services, Inc., Burling Instruments, Inc. and Cra-Tek Company in which
an 80% interest was acquired by the Company in August 1995, September
1995, March 1996 and September 1996, 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.
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> 11
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, software, cellular phones and parts, electronic parts
and control panels. The inventory is valued at the lower of cost or
market, determined by the FIFO (first-in, first-out) method. The
Company closely monitors its inventory and analyzes it 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 inventory if deemed necessary from
the analysis.
LAND, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Land, 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 has not recorded
this investment under the equity method. Management's bases for
considering that it no longer exercises 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 unsuccessfully to obtain interim financial statements from
Cadkey, Inc. and the Company has tried unsuccessfully to obtain
representation on Cadkey's Board of Directors.
- --------------------------------------------------------------------------------
Page 8
<PAGE> 12
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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 received as a requirement
under its note agreement 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.
NOTES 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.
GOODWILL
The goodwill resulting from the purchase of 80% ownership in Atlantic
Systems, Inc. and Elite Computer Services, Inc. is being amortized over
10 years. The goodwill resulting from the purchase of 80% ownership in
Burling Instruments, Inc. is being amortized over 20 years. The
goodwill resulting from the purchase of 100% ownership in Advanced
Telecom Holdings, Inc. is being amortized over 20 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., Elite Computer Services, Inc., Burling
Instruments, Inc. and Advanced Telecom Holdings, Inc. and to determine
if the expected income levels over the remainder of the 10 or 20 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.
- --------------------------------------------------------------------------------
Page 9
<PAGE> 13
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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 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. Amortization began for the software acquired
from Quality Solutions, Inc. in February 1996 at the date of its
acquisition.
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.
- --------------------------------------------------------------------------------
Page 10
<PAGE> 14
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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. The straight-line life is
determined to be 5 years. Amortization began in 1996 when the products
were ready for release to the general public. Amortization expense on
proprietary software in development amounted to $11,353 for the nine
months ended September 30, 1996.
NET INCOME PER COMMON SHARE
Net income 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 option 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 periods 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, and equipment and leasehold improvements 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.
- --------------------------------------------------------------------------------
Page 11
<PAGE> 15
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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.
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., which acts as a holding company.
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.
- --------------------------------------------------------------------------------
Page 12
<PAGE> 16
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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
its office located in New Jersey and 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 its office located in New
Jersey and customers throughout the United States.
In February 1996, the Company issued 33,494 shares of its common stock
in exchange for software and certain other related assets and
liabilities of Quality Solutions, Inc.
In March 1996, the Company acquired 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 redeemable preferred shares were issued in August 1996.
In September 1996, the Company acquired 80% of Cra-Tek Company in
exchange for 295,115 shares of its common stock. Cra-Tek Company
provides electrical contracting services primarily on industrial
projects. It also manufactures custom electronic and electrical
control panels. The company's office is located in California with
customers throughout the United States and Europe.
In September 1996, the Company formed a subsidiary, ACT Communications,
Inc. The subsidiary purchased 100% of Advanced Telecom Holdings, Inc.
in exchange for 1,618,180 shares of Applied Cellular Technology's
common stock, 100,000 shares of 8% redeemable preferred stock of
Applied Cellular Technology, Inc. and warrants evidencing the right to
purchase 1,000,000 shares of Applied Cellular Technology, Inc.'s common
stock. Advanced Telecom Holdings, Inc. is engaged in the selling,
installation and servicing of communications equipment in the Mid
Atlantic region.
The acquisitions of Atlantic Systems, Inc., Elite Computer Services,
Inc., Burling Instruments, Inc., Cra-Tek Company and Advanced Telecom
Holdings, 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.
- --------------------------------------------------------------------------------
Page 13
<PAGE> 17
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
3. NOTES RECEIVABLE - OFFICER
<TABLE>
<S> <C>
Applied Cellular Technology, Inc. - the note is
unsecured, bears interest at the prime lending rate
and is due on demand from one officer. $ 12,982
Advanced Telecom Holdings, Inc. the note is
due from two officers of ACT Communications, Inc.,
secured by the 100,000 shares of 8% preferred stock,
bears interest at 8% payable at the time the dividends
are paid on the 8% redeemable preferred shares,
principal payments are due as the preferred shares are
redeemed in an amount equal to the amount redeemed times
the payment ratio (the then outstanding note receivable
principal balance divided by the then outstanding
preferred stock balance), any outstanding principal
balance is due November 1, 2001. 2,241,469
---------------
2,254,451
Current portion 12,982
--------------
Long-term portion $ 2,241,469
===============
</TABLE>
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>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------------------------------------
<S> <C> <C>
Shares issued (200,000 x $5.00) $ 1,000,000 $ 1,000,000
50% discount given to shares issued (500,000) (500,000)
------------------------------------------------------------------------------------------
Original carrying value of the note receivable 500,000 500,000
50% of principal payments received 120,316 184,792
------------------------------------------------------------------------------------------
379,684 315,208
Current portion (87,057) (94,251)
------------------------------------------------------------------------------------------
Long-term portion $ 292,627 $ 220,957
==========================================================================================
</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.
- --------------------------------------------------------------------------------
Page 14
<PAGE> 18
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
5. LAND, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Land, equipment and leasehold improvements consist of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------------------------------------
<S> <C> <C>
Land $ -- $ 395,000
Furniture, fixtures and equipment 180,630 1,646,151
Computer equipment 66,909 206,700
Leased vehicles 113,210 736,102
Leasehold improvements 1,087 624,723
-----------------------------------------------------------------------------------------
361,836 3,608,676
Less: Accumulated depreciation and
amortization 223,347 1,823,702
-----------------------------------------------------------------------------------------
$ 138,489 $ 1,784,974
=========================================================================================
</TABLE>
Included in equipment are vehicles acquired under capital lease
obligations in the amount of $113,210 and $547,875 at December 31, 1995
and September 30, 1996, respectively. Related accumulated depreciation
amounted to $42,777 and $212,414 at December 31, 1995 and September 30,
1996, respectively.
Depreciation and amortization charged against income amounted to $12,584
and $65,979 for the nine months ended September 30, 1995 and 1996,
respectively.
6. INVESTMENT IN CADKEY, INC. COMMON STOCK
Investment in Cadkey, Inc. common stock consists of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------------------------------------
<S> <C> <C>
Original investment:
Investment in Cadkey, Inc. common stock $ 570,713 $ 570,713
Additional costs of acquisition 6,686 6,686
-----------------------------------------------------------------------------------------
$ 577,399 $ 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 (570,712)
-----------------
$ 570,713
=================
</TABLE>
- --------------------------------------------------------------------------------
Page 15
<PAGE> 19
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
7. GOODWILL
Goodwill consists of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------------------------------------
<S> <C> <C>
Shares issued in the Atlantic Systems, Inc.
80% purchase (124,066 x $5.50) $ 682,363 $ 682,363
Shares issued in the Elite Computer Services, Inc.
80% purchase (102,160 x $8.94) 913,310 913,310
50% discount given to shares issued in the
Atlantic and Elite acquisitions (797,836) (797,836)
Preferred shares issued in the Burling
Instruments, Inc. 80% purchase
(9,000 x $100.00) -- 900,000
Shares issued in the Cra-Tek Company
80% purchase (295,115 x $4.75) -- 1,401,796
Shares issued in the Advanced Telecom
Holdings, Inc. 100% purchase
(1,618,180 x $5) -- 8,090,900
Warrants issued in the Advanced Telecom
Holdings, Inc. 100% purchase
(1,000,000 x $5.31) -- 5,310,000
75% discount given to shares issued in the
Cra-Tek and Advanced acquisitions -- (7,119,522)
100% discount given to warrants issued in the
Advanced acquisition -- (5,310,000)
Preferred shares issued in the Advanced
Telecom Holdings, Inc.
(100,000 x $100) -- 10,000,000
----------------------------------------------------------------------------------------------------------
Net value of shares issued 797,837 14,071,011
Additional costs of acquisitions 173,682 790,410
80% or 100% of net book value of companies
acquired (26,825) (463,231)
Accumulated amortization (38,068) (173,374)
----------------------------------------------------------------------------------------------------------
Carrying value $ 906,626 $ 14,224,816
==========================================================================================================
</TABLE>
Amortization expense amounted to $11,557 and $135,308 for the nine months
ended September 30, 1995 and 1996, respectively.
- --------------------------------------------------------------------------------
Page 16
<PAGE> 20
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
8. PURCHASED COMPUTER SOFTWARE
Purchased computer software consists of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------------------------------------
<S> <C> <C>
Shares issued in the purchase of the Baler Software
Corporation net assets (113,009 x $5.125) $ 579,171 $ 579,171
Shares issued in the purchase of the Databoss
software (180,000 x $2.50) 450,000 450,000
Warrants issued in the purchase of the Databoss
software (120,000 x $1.50) 180,000 180,000
Shares issued in the purchase of the Quality
Solutions Software (33,494 x $5.50) -- 184,217
50% discount given to the shares issued (514,586) (606,694)
100% discount given to the warrants issued (180,000) (180,000)
----------------------------------------------------------------------------------------------------------
Net value of shares issued 514,585 606,694
Additional costs of acquisitions 217,500 267,410
Accumulated amortization (64,642) (192,002)
----------------------------------------------------------------------------------------------------------
Carrying value $ 667,443 $ 682,102
==========================================================================================================
</TABLE>
Amortization expense amounted to $27,856 and $127,360 for the nine months
ended September 30, 1995 and 1996, respectively.
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.
- --------------------------------------------------------------------------------
Page 17
<PAGE> 21
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
9. LONG-TERM DEBT
Long-term debt consist of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------------------------------
<S> <C> <C>
Cra-Tek Company, notes payable to finance
companies, secured by vehicle and equipment,
payable in monthly installments ranging from
$330 to $523, interest rates ranging from 9% to
9.75%, due through January 2001 $ -- $ 70,158
Cra-Tek Company, note payable - bank, secured
by a shareholder's personal guarantee, payable
in monthly installments of $867 plus interest at
prime plus 2.75%, due January 1998 -- 14,442
Advanced Telecom Holdings, Inc., note payable
bank, secured by the Company's assets and by
shareholders' personal guarantees, payable in
monthly installments of $22,500 plus interest at
9.85%, due March 1, 2001 -- 1,215,000
-------------------------------------------------------------------------------------------------------
-- 1,299,600
Less: Current Maturities -- 301,401
-------------------------------------------------------------------------------------------------------
$ -- $ 998,199
=======================================================================================================
</TABLE>
Interest expense on the notes payable (including Note 10) amounted to
$3,277 and $33,526 for the nine months ended September 30, 1995 and 1996,
respectively.
The weighted average dollar amount of all borrowings including note
payable (Note 10) for the year ended December 31, 1995 was $79,979 and
$633,435 for the nine months ended September 30, 1996. The weighted
average interest rate paid was 9% for the year ended December 31, 1995 and
9.8% for the nine months ended September 30, 1996.
The scheduled maturities of long-term debt at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
-----------------------------------------------------------------
<S> <C>
1997 $ 301,401
1998 293,200
1999 286,883
2000 281,315
2001 136,801
-----------------------------------------------------------------
$ 1,299,600
=================================================================
</TABLE>
- --------------------------------------------------------------------------------
Page 18
<PAGE> 22
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
10. NOTES PAYABLE
Notes payable consists of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------------------------------------
<S> <C> <C>
Notes payable - officers, noninterest bearing,
unsecured and are due on demand. Imputed
interest has been recorded at a market rate of
7% $ 280,095 $ 41,437
Elite Computer Services, Inc., $100,000 line of
credit - bank, secured by accounts receivable
and inventories and bears interest at the prime
rate plus 2%, due on demand 29,999 --
ACT Financial, note payable, unsecured, bears
interest at 8%, due on demand -- 20,000
Burling Instruments, Inc., note payable - bank,
unsecured, bears interest at the prime rate plus
1.5%, due on demand -- 75,000
Cra-Tek Company, $100,000 line of credit -
bank, secured by shareholders personal
guarantee, bears interest at prime plus 1.975%,
due November 1996 -- 50,000
Advanced Telecom Holding, Inc., revolving
credit line - bank, secured by the Company's
assets and by shareholders personal guarantees
interest is payable monthly at the bank's
National Commercial rate plus 1.25%, due
December 31, 1996. Borrowings are limited to
the lessor of $5,000,000 or 80% of qualified
accounts receivable -- 3,402,000
-------------------------------------------------------------------------------------------------------
$ 310,094 $ 3,588,437
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Page 19
<PAGE> 23
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
11. CAPITAL LEASE OBLIGATIONS
Future payments for capital lease obligations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
YEAR 1995 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 28,337 $ 176,680
1998 15,750 119,354
1999 8,489 42,216
2000 -- 13,726
2001 -- 10,144
-------------------------------------------------------------------------------------------------------
Total minimum lease payments 52,576 362,120
Less: Amount representing interest 9,965 47,250
-------------------------------------------------------------------------------------------------------
Capital Lease Obligation 42,611 314,870
Less: current maturities 23,360 157,561
-------------------------------------------------------------------------------------------------------
Long-term Capital Lease Obligation $ 19,251 $ 157,309
=======================================================================================================
</TABLE>
Interest expense on the capital leases amounted to $41,625 for the nine
months ended September 30, 1996. There was no interest for the nine
months ended September 30, 1995.
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 AND UNBILLED RECEIVABLES
The carrying amounts approximate fair value.
NOTES RECEIVABLE
The carrying amount approximates fair value because the stated interest
rate fluctuates with market rates.
- --------------------------------------------------------------------------------
Page 20
<PAGE> 24
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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.
LONG-TERM DEBT
The carrying amount approximates fair value because the stated interest
rates fluctuates with current market rates.
NOTES PAYABLE
The carrying amount approximates fair value as the interest being
charged is at a current market rate.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value.
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 and September 30, 1996 consists of differences in
the basis of goodwill, equipment and leasehold improvements and net
operating loss carryforward.
- --------------------------------------------------------------------------------
Page 21
<PAGE> 25
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The provision for income taxes consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------
1995 1996
-------------------------------------
<S> <C> <C>
Current taxes at statutory rates $ 52,000 $ 230,212
Current taxes covered by net
operating loss carryforward (51,000) (33,000)
-------------------------------------------------------------------------------------------------------
Current income tax provision 1,000 197,212
Deferred income taxes (credits) 29,100 (63,510)
--------------------------------------------------------------------------------------------------------
$ 30,100 $ 133,702
=======================================================================================================
</TABLE>
The components of the deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------------------------------------
<S> <C> <C>
DEFERRED TAX ASSET (LIABILITY)
Goodwill basis difference $ 11,000 $ 69,350
Equipment and leasehold improvements
basis differences (5,000) (23,298)
Net operating loss carryforward 30,000 --
Valuation allowance (36,000) --
----------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSET $ -- $ 46,052
==========================================================================================================
</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 had elected to record a
valuation allowance of $36,000 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>
SEPTEMBER 30,
----------------------------------
1995 1996
----------------------------------
% %
<S> <C> <C>
Statutory rate 25 34
State income taxes 5 6
Realization of deferred tax asset valuation allowance -- (14)
Surtax exemptions (13) --
--------------------------------------------------------------------------------------------------------
17 26
========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Page 22
<PAGE> 26
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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>
The net operating loss available of $95,000 is the amount remaining
from December 31, 1995 available for 1996.
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 of Applied Cellular Technology, Inc. for 120 months
beginning July 1, 1993. This royalty agreement was renegotiated in
July 1995 which called for the issuance of 30,000 shares of common
stock as full payment for the remainder of the royalties due for the
remaining 7 years of the agreement.
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 23
<PAGE> 27
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 1997. Tech Tools, Inc. is
obligated under a month-to-month lease for its office space. Elite
Computer Services, Inc. is obligated under a five-year lease for its
office space, expiring May 2001. Atlantic Systems, Inc. is obligated
under a three-year lease for its office space, expiring December 1998.
Burling Instruments, Inc. and Cra-Tek Company are obligated under a
month-to-month leases for their office and warehouse space. Advanced
Telecom Holdings, Inc. is obligated under several leases for their
stores, office and warehouses, expiring through 2002.
The future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
-------------------------------------
<S> <C>
1997 $ 1,364,295
1998 1,102,901
1999 804,473
2000 638,218
2001 325,560
Thereafter 8,257
-------------------------------------
$ 4,243,704
=====================================
</TABLE>
Rent expense amounted to $80,901 and $241,981 for the nine months ended
September 30, 1995 and 1996, 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.
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 24
<PAGE> 28
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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.
The Company will continue the employment contract with an officer of
Burling Instruments, Inc. which calls for an annual salary of $84,000.
In September 1996, the Company entered into an employment contract with
an officer of Cra-Tek Company for a period of 2 years, with the terms
to be negotiated.
In September 1996, the Company entered two employment contracts with
officers of Advanced Telecom Holdings, Inc. for an annual salary of
$72,000 each.
The purchase agreement for the acquisition of Advanced Telecom
Holdings, Inc., includes an earnout provision. On or before April 30,
2002, Applied Cellular Technology, Inc. will deliver to the prior two
shareholders of Advanced Telecom Holdings, Inc., an aggregate
additional consideration equal to three times the average annual EBDIT
for the five-year periods commencing on October 1, 1996 and ending on
September 30, 2001, provided however, that if the average annual EBDIT
is less than $2,000,000, the prior shareholders shall not be entitled
to receive any additional consideration and the amount payable to the
prior shareholders as additional consideration shall not exceed
$15,000,000. EBDIT shall mean the earnings of the Company, prior to
depreciation, interest and taxes.
The Company also entered into a three-year consulting agreement with an
acquisition/consulting agency for $20,000 a month beginning October
1996.
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 $2,749 for the nine months ended September
30, 1996.
- --------------------------------------------------------------------------------
Page 25
<PAGE> 29
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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. Profit sharing
expense amounted to $2,034 for the nine months ended September 30,
1996.
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.
- --------------------------------------------------------------------------------
Page 26
<PAGE> 30
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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.
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 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.
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 July 1996,
260,000 of Class F warrants were redeemed for 260,000 shares of Applied
Cellular Technology, Inc.
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 was $120,316 and $64,477 for 1995 and the nine-month period
ended September 30, 1996, respectively.
- --------------------------------------------------------------------------------
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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.
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.
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. 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.
In March 1996, the Company acquired 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 redeemable preferred shares were issued in August 1996.
The 8% preferred dividend begins accruing on January 1, 1997.
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<PAGE> 32
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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.
In September, 1996, the Company acquired 80% of Cra-Tek Company, in
exchange for 295,115 shares of its common stock. The then current
market trading value of $4.75 a share has been discounted by 75% due to
the limited market of the shares and the restricted nature of the
shares, resulting in a value of $1.19 a share. The investment was
recorded at the net value of the 80% investment which was $492,023.
In October 1996, ACT Communications, Inc. purchased 100% of Advanced
Telecom Holdings, Inc. in exchange for 1,618,180 shares of Applied
Cellular Technology, Inc.'s common stock, 100,000 shares of 8%
redeemable preferred stock at $100 per share of Applied Cellular
Technology, Inc. and warrants evidencing the right to purchase
1,000,000 shares of Applied Cellular Technology, Inc.'s common stock.
The shares of common stock issued were valued at 75% of the then
current market trading value of $5.00, due to the limited market of the
shares and the restricted nature of the shares. No value was
attributed to the warrants because the exercise price exceeded the fair
value of the underlying common shares. Each warrant can be exercised,
at any time, and from time to time, beginning in October 1996 until
October 2001, at a price of one warrant plus $5.31 per common share.
The total value of the investment based on the above facts was recorded
at $12,022,725 plus acquisition costs of $326,863, for a total
investment of $12,349,588. The agreement dated October 1996, called
for the effective date of the acquisition to be September 1, 1996 due
to the significant control of the Company by ACT Communications, Inc.
since September 1, 1996 and the agreement called for the profit and
loss to be allocated to ACT Communications beginning September 1, 1996.
The 8% preferred dividend begins accruing on October 1, 1996.
- --------------------------------------------------------------------------------
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<PAGE> 33
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The redeemable preferred shares shall be redeemed by the corporation at
such time and from time to time as the corporation shall issue any
shares of Common Stock, other capital stock of the corporation, or any
other security which gives the corporation in exchange for cash or
other cash equivalent. Two-thirds of the cash paid by the purchasers
of any Security shall be utilized by the corporation solely for the
purpose of redemption of the Preferred shares. If and to the extent
the Preferred shares gave not been redeemed by the corporation by the
third anniversary of the initial issuance of the Preferred shares, each
holder of the Preferred Stock shall have the right to require the
corporation to redeem such holder's Preferred by paying therefor, with
shares of ACT Communications common stock (1,000 shares outstanding).
For purposes of redemption of the Preferred shares, each share of the
ACT Communication common stock shall be valued at $10,000.
17. SUPPLEMENTAL CASH FLOW INFORMATION
The Company had the following noncash investing and financing
activities:
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.
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. 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.
During 1996, the Company issued 9,000 shares of its redeemable
preferred stock at $100 per share in exchange for an 80% investment in
Burling Instruments, Inc. The related goodwill of approximately
$440,000 is being amortized over 20 years.
During 1996, the Company entered into a capital lease in the amount of
$24,400.
During 1996, the Company issued 5,000 shares of common stock at $5 per
share for development services.
During 1996, the Company issued 25,000 shares of its common stock in
exchange for payment of $250,000 of note payable - related party.
- --------------------------------------------------------------------------------
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<PAGE> 34
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In September 1996, the Company issued 295,115 shares of its common
stock in exchange for an 80% investment in Cra-Tek Company. The
company also issued 16,842 shares to the broker as payment for the
acquisition services related to this purchase.
In October 1996 (effective September 1996), the Company issued
1,618,180 shares of its common stock and 100,000 shares of its 8%
redeemable preferred stock in exchange for an 100% investment in
Advanced Telecom Holdings, Inc. The related goodwill of approximately
$12,865,000 is being amortized over 20 years.
In July 1996, the Company issued 30,000 shares of its common stock as
an advance payment for the remainder of a royalty fee due. The expense
is being amortized over the remaining 7 years of the original 10 year
contract.
In July 1996, the Company issued 167,000 shares of its common stock to
certain employees as a stock advance for employment services to be
earned over the next three years, and thus amortized over a three year
period.
In July 1996, the Company issued 25,000 shares of its common stock as
payment on $50,000 of debt due to a related party.
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.
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<PAGE> 35
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In July 1996, the Company completed a registration on Form SB-2, for
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
registered on behalf of the selling security holders.
19. RESTATEMENT
The Company has restated its balance sheet and income statement for the
nine months ended September 30, 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 the investment should not have been recorded under
the equity method.
The effect of this change is to reduce net income for the nine months
ended September 30, 1995 by $230,990, which reduced the net income per
common share by $.14 per share, from $.20 to $.06.
20. PRO FORMA INFORMATION (UNAUDITED)
The following pro forma consolidated statement of operations of Applied
Cellular Technology, Inc. and subsidiaries for the nine months ended
September 30, 1996 gives effect to the acquisitions of Burling
Instruments, Inc., Cra-Tek Company and Advanced Telecom Holdings, Inc.
as if they were effective at January 1, 1996. 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 March 1996, the Company acquired 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.
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.
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<PAGE> 36
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In September, 1996, the Company acquired 80% of Cra-Tek Company, in
exchange for 295,115 shares of its common stock. The then current
market trading value of $4.75 a share has been discounted by 75% due to
the limited market of the shares and the restricted nature of the
shares, resulting in a value of $1.19 a share. The investment was
recorded at the net value of the 80% investment which was $492,023.
In October 1996, ACT Communications, Inc. purchased 100% of Advanced
Telecom Holdings, Inc. in exchange for 1,618,180 shares of Applied
Cellular Technology, Inc.'s common stock, 100,000 shares of 8%
redeemable preferred stock at $100 per share of Applied Cellular
Technology, Inc. and warrants evidencing the right to purchase
1,000,000 shares of Applied Cellular Technology, Inc.'s common stock.
The shares of common stock issued were valued at 75% of the then
current market trading value of $5.00, due to the limited market of the
shares and the restricted nature of the shares. No value was
attributed to the warrants because the exercise price exceeded the fair
value of the underlying common shares. Each warrant can be exercised,
at any time, and from time to time, beginning in October 1996 until
October 2001, at a price of one warrant plus $5.31 per common share.
The total value of the investment based on the above facts was recorded
at $12,022,725 plus acquisition costs of $326,863, for a total
investment of $12,349,588.
The redeemable preferred shares shall be redeemed by the corporation at
such time and from time to time as the corporation shall issue any
shares of Common Stock, other capital stock of the corporation, or any
other security which gives the corporation in exchange for cash or
other cash equivalent. Two-thirds of the cash paid by the purchasers
of any Security shall be utilized by the corporation solely for the
purpose of redemption of the Preferred shares. If and to the extent
the Preferred shares have not been redeemed by the corporation by the
third anniversary of the initial issuance of the Preferred shares, each
holder of the Preferred Stock shall have the right to require the
corporation to redeem such holder's Preferred by paying therefor, with
shares of ACT Communications common stock (1,000 shares outstanding).
For purposes of redemption of the Preferred shares, each share of the
ACT Communication common stock shall be valued at $10,000.
The pro forma statements may not be indicative of the results that
would have 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 statements should be read in conjunction with the financial
statements and notes thereto of the Company.
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<PAGE> 37
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
<TABLE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------------------------------
ADVANCED
AS BURLING TELECOM PRO FORMA
REPORTED INSTRUMENTS HOLDINGS, CRA-TEK SEPTEMBER 30,
SEPTEMBER 30, INC. INC. COMPANY 1996
1996 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------------------------------------------------------------------------------------------------
<F1> <F2> <F3>
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ 7,602,707 $ 250,064 $ 19,363,543 $ 1,319,787 $ 28,536,101
Direct costs 4,163,160 203,362 7,470,031 994,371 12,830,924
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 3,439,547 46,702 11,893,512 325,416 $ -- 15,705,177
Operating expenses 2,911,541 102,200 11,185,016 186,095 433,488 <F4> 14,818,340
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 528,006 (55,498) 708,496 139,321 (433,488) 886,837
Interest income 67,628 -- -- 2,041 -- 69,669
Interest expense (75,151) (1,700) (336,823) (3,254) (416,928)
Minority interest (80,013) -- -- -- (16,182)<F5> (96,195)
Provision for income tax (133,702) -- -- -- -- (133,702)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 306,768 (57,198) 371,673 138,108 (449,670) 309,681
Dividends -- -- (654,000)<F6> (654,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to
common shareholders $ 306,768 $ (57,198) $ 371,673 $ 138,108 $ (1,103,670) $ (344,319)
====================================================================================================================================
Net Income Per Common Share $ 0.11 $ (.08)
====================================================================================================================================
Weighted Average Number Of
Common Shares Outstanding 2,706,254 4,424,288
====================================================================================================================================
</TABLE>
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<PAGE> 38
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
[FN]
Note: The Pro Forma Consolidated Statement of Operations gives effects
to the following pro forma adjustments:
<F1> Represents the Statement of Operations of Burling Instruments, Inc.
for the two months ended February 29, 1996 that would have been
consolidated with the Company if the acquisition would have taken
place on January 1, 1996.
<F2> Represents the Statement of Operations of Advanced Telecom
Holdings, Inc. for the eight months ended August 31, 1996 that
would have been consolidated with the Company if the
acquisition would have taken place on January 1, 1996.
<F3> Represents the Statement of Operations of Cra-Tek Company
for the eight months ended August 31, 1996 that would have been
consolidated with the Company if the acquisition would have
taken place on January 1, 1996.
<F4> Represents the amortization expense for goodwill on the
Burling Instruments, Inc. acquisition, in the amount of $4,654
($558,487 divided by 20 years times 2/12 of a year) and the
amortization expense for goodwill on the Advanced Telecom
Holdings, Inc. acquisition, in the amount of $428,834
($12,865,009 divided by 20 years times 8/12 of a year).
<F5> Represents the minority interest on the earnings
(losses) of Burling Instruments for the two months ended
February 29, 1996 of ($57,198) and the minority interest on
the earnings (losses) of Cra-Tek for the eight months
ended August 31, 1996 of $138,108.
<F6> Represents the nine months expense for the dividends that
will be paid on the 8% preferred stock issued in the Burling
Instruments, Inc. acquisition (9,000 x $100 x 8% x 9/12), and
in the Advanced Telecom Holdings, Inc. acquisition (100,000 x
$100 x 8% x 9/12)
- --------------------------------------------------------------------------------
Page 35
<PAGE> 39
APPLIED CELLULAR TECHNOLOGY, INC.
PART I (cont.)
ITEM 2. 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's lease in Nixa, Missouri expires at June 30, 1997, Elite's lease
expires on May 31, 2001, Atlantic's lease expires December 1998, and Tech Tools,
Burling and Cra-Tek currently have month to month leases. Advanced Telecom
Holdings, Inc. is obligated under several leases for their stores, office and
warehouses which expire through 2002. In all 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 SOURCE OF LIQUIDITY. The Company currently has no
material commitments for capital expenditures. The Company currently has a
positive cash flow from investing activities, and financing activities, however,
the Company has negative cash flow from operating activities.
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.
In July 1996, the Company completed a registration on Form SB-2, for 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 registered on behalf of the
selling security holders.
For the nine months ended September 30, 1995, the Company had a decrease in
notes receivable - related party of $79,890. The Company had an increase in
other assets of $74,533. Payments for equipment, computer software and leasehold
improvements were made in the amount of $20,476. Payments made for the purchase
of software and for costs of 80% and 100% acquisitions was $233,557. Net cash
provided by investing activities for the nine months ended September 30, 1995
was $248,676.
For the nine months ended September 30, 1996, the Company applied $128,953 of
receipts to the note receivable from Cadkey, Inc. The Company had an increase
in other assets of $173,043. Payments for equipment, computer software and
leasehold improvements were made in the amount of $84,294. Payments for
acquisitions net with cash balances acquired in the amount of $230,450 were
received. Net cash provided by investing activities for the nine months ended
September 30, 1996 was $102,066.
<PAGE> 40
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. Net cash used in investing
activities for the year ended December 31, 1995 was $100,793.
For the nine months ended September 30, 1995, the Company paid $6,185 on its
capital lease obligations. The issuance of common stock resulted in an increase
of $718,600 in additional paid-in capital and common stock. The Company paid
net amounts of $126,047 on notes payable. The Company had a redemption of
preferred stock for $200,000. Minority interest of acquired companies was
$7,507. All of the above resulted in $378,861 net cash provided by financing
activities for the nine months ended September 30, 1995. These monies were used
to continue and increase operations.
For the nine months ended September 30, 1996, the Company received funds on new
notes payable in the net amount of $803,712. The Company paid $26,110 on its
capital lease obligations. The issuance of common stock resulted in an increase
of 762,702 in additional paid in capital and common stock. The Company had a
decrease in notes payable officers of $238,658. All of the above resulted in
$1,301,646 net cash provided by financing activities for the nine months ended
September 30, 1996.
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.
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 the recent 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.
This was achieved in the third quarter with the 100% acquisition of
Advanced Telecom Holdings, Inc. and the 80% acquisition of Cra-Tek Company.
Advanced Telecom Holdings, Inc. is engaged in the selling, installation
and servicing of communications equipment. Cra-Tek Company manufactures custom
electronic and electrical control panels and provides electrical contracting
services primarily on industrial projects.
<PAGE> 41
The current operating divisions of the Company generated approximately
$2,335,999 in revenues in the fiscal year 1995 and are projected to generate
approximately $10,000,000 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 the recent offering would be used primarily to fund
the increased working capital needs of the existing affiliated companies and to
retire some existing debt. Management can also 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.
The recently completed registration of common shares was for the express
purpose of acquiring three or four companies that would be strategic additions
to the existing core companies or divisions. Thus, there was a purchase of
Advanced Telecom Holdings, Inc. and Cra-Tek Company in the third quarter.
These two companies were strategic additions that strengthen the consolidated
group. 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 cost 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.
For the nine months ended September 30, 1995, the Company had a negative cash
flow from operations of $83,965. This was mainly due to an increase in accounts
receivable ($254,110) and inventories ($89,092). The preliminary estimate
for 1996 indicates that the Company's performance should be able to obtain a
positive cash flow in the fourth 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.
For the nine months ended September 30, 1996, the Company had a negative
cash flow from operations of $562,482. This was mainly due to an increase
in accounts receivable, unbilled receivables, prepaids and inventories.
RESULTS OF OPERATIONS:
Services, sales, fees, licensing and other revenue increased to $7,602,707 for
the nine months ended September 30, 1996 from $1,128,833 for the nine months
ended September 30, 1995 mainly due to the Company's recent acquisitions which
resulted in an increase in revenue from the sale of hardware products from
$561,865 for the nine months ended September 30, 1995 to $2,239,825 for the nine
months ended September 30, 1996, packaged software sales of $530,131 compared to
$195,743 for the nine
<PAGE> 42
months ended September 30, 1995 (received as a result of one of the
acquisitions), and interconnect, electronics, thermostats and cellular phone
sales of $3,893,292 compared to $0.
Services, sales, fees, licensing and other revenue increased to $4,402,704 for
the three months ended September 30, 1996 from $696,335 for the three months
ended September 30, 1995 mainly due to the Company's recent acquisitions.
Direct costs increased from $660,845 for the nine months ended September 30,
1995 to $4,163,160 for the nine months ended September 30, 1996 due to costs
related mainly to hardware products ($1,523,192) packaged software sales
($324,944), costs of programming services ($434,894) and costs of electronics,
thermostats, interconnect and cellular ($1,460,458) while operating expenses
increased from $349,391 to $2,911,541 (mainly from an increase in administrative
expenses from $248,516 to $1,821,718 and marketing and sales expenses from
$100,875 to $1,089,823 for the same periods). This resulted in operating income
of $528,006 for the nine months ended September 30, 1996 compared to operating
income of $118,597 for the nine months ended September 30, 1995. Programming
services provided 23.9% of the total revenue for the nine months ended September
30, 1995 as compared to 8.8% for the nine months ended September 30, 1996 due to
the Company's change in business focus. Direct costs comprised 58.5% of total
revenue for the nine months ended September 30, 1995 as compared to comprising
54.8% for the same period in 1996. 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 $4,402,704 in the third quarter of
1996 and the Company expects the revenue level will continue in the fourth
quarter of 1996, and the Company will continue its marketing efforts to obtain
increased revenues.
Direct costs increased from $383,187 for the three months ended September 30,
1995 to $2,167,631 for the three months ended September 30, 1996 due to costs
related mainly to hardware products ($471,390), packaged software sales
($85,259), costs of programming services ($149,564) and costs of
electronics/thermostats, interconnect and cellular ($1,163,128) while operating
expenses increased from $229,151 to $1,828,975 (mainly from an increase in
administrative expenses from $161,209 to $1,090,679 and marketing and sales
expenses from $67,942 to $738,296 for the same periods). This resulted in
operating income of $406,098 for the three months ended September 30, 1996
compared to operating income of $83,997 for the three months ended September
30, 1995. Programming services provided 18.4% of the total revenue for the three
months ended September 30, 1995 as compared to 6.4% for the three months ended
September 30, 1996 due to the Company's change in business focus, and due to the
recent acquisitions. Direct costs comprised 55% of total revenue for the three
months ended September 30, 1995 as compared to comprising 49.2% for the same
period in 1996.
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 $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.
<PAGE> 43
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 and "Baler" in 1995 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 acquisitions
- ---------------------------------------------
of Burling Instruments, Inc., Cra-Tek Company and Advanced Telecom Holdings,
Inc. as of January 1, 1996, the proforma September 30, 1996 net revenues
increased to $28,536,101 for the nine months ended September 30, 1996 compared
to $7,602,707 for that same period if the acquisitions had not occurred as of
January 1, 1996. Direct Costs increased from $4,163,160 for the nine months
ended September 30, 1996 to $12,830,924 for the nine months ended September 30,
1996 giving effect to the acquisition as of January 1, 1996. As a result, gross
profit for the nine months ended September 30, 1996 increased to $15,705,177
from $3,439,547 for the same period. Operating expenses increased from
$2,911,541 to $14,818,340 for the nine months ended September 30, 1996 giving
effect to the acquisitions. Dividend expense in the amount of $654,000 had to be
expensed in the proforma income statement for the nine months ended September
30, 1996 giving effect to the acquisition, and recording the 8% preferred stock
dividend on the Burling and Advanced Telecom acquisitions. Net income applicable
to common shareholders decreased from $306,768 to $(344,319) for the nine months
ended September 30, 1996 giving effect to the acquisition as of January 1, 1996.
<PAGE> 44
APPLIED CELLULAR TECHNOLOGY, INC.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
None
(b) Reports on Form 8-K
Two Form 8-K's were filed this quarter:
1) Form 8-K for the 100% acquisition of Advanced Telecom
Holdings, Inc., dated October 24, 1996. A request for
the 60 day extension to file the required financial
statements has been made.
2) Form 8-K for the 80% acquisition of Cra-Tek Company,
dated October 25, 1996. A request for the 60 day
extension to file any required financial statements
has been made.
<PAGE> 45
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Garrett Sullivan
Date: November 11, 1996 ------------------------------
Garrett Sullivan, President
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 966,699
<SECURITIES> 0
<RECEIVABLES> 6,702,242
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<INVENTORY> 3,427,343
<CURRENT-ASSETS> 11,656,432
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<DEPRECIATION> (1,823,702)
<TOTAL-ASSETS> 32,085,855
<CURRENT-LIABILITIES> 12,648,869
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<COMMON> 4,902
10,900,000
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<OTHER-SE> 6,998,499
<TOTAL-LIABILITY-AND-EQUITY> 32,085,855
<SALES> 6,663,048
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