<PAGE> 1
11
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1996
COMMISSION FILE NUMBER 33-93962
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
AMENDMENT 6 TO FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
APPLIED CELLULAR TECHNOLOGY, INC.
MISSOURI 43-1641533
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdictions Classification Code Number) Identification Number)
of incorporation
or organization) James River Professional Center
Highway 160 & CC, Suite 3
P.O. Box 2067
Nixa, Missouri 65714
Telephone: 417-725-9888
(Address and telephone number of registrant's principal executive offices
and principal place of business.)
Richard J. Sullivan
James River Professional Center
Highway 160 & CC, Suite 3
P.O. Box 2067
Nixa, Missouri 65714
Telephone: 417-725-9888
(Name, address and telephone number of agent for service.)
With copies to:
Jody M .Walker
Attorney At Law
7841 South Garfield Way
Littleton, Colorado 80122
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
133, check the following box: / x /
<TABLE>
CALCULATION OF REGISTRATION FEE
================================================================================================================
<CAPTION>
Title of each Proposed Proposed Amount of
class of Amount to be offering aggregate registration
securities registered price offering price fee<F1>
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
$.001 par value 1,000,000 $5.00 $5,000,000 $1,724.14
Common Stock<F2> 300,000 2.50 750,000 258.62
Common Stock<F3> 1,309,305 5.00 6,546,525 2,257.42
----------------------------------------------------------------------------------------------------------------
Total 2,609,305 $12,296,525 $4,240.18
================================================================================================================
<FN>
<F1> Represents 1/29 of 1% of the average of the bid and asked price as of the Shares of common stock
issuable being registered in accordance with Reg. Section 230.457(c).
<F2> Represents Common Stock to be issued upon exercise of the Class F Warrants (300,000) on behalf of
Selling Securityholders.
<F3> Includes 1,309,305 Common Stock being registered hereunder on behalf of the Selling Securityholders.
</TABLE>
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
Page 1 of 158 Pages
<PAGE> 2
PRELIMINARY PROSPECTUS DATED MAY 16, 1996
SUBJECT TO COMPLETION
1,000,000 Common Shares
1,309,305 Common Shares on behalf of Selling Shareholders
300,000 Common Shares to be issued upon exercise of Class F Warrants
APPLIED CELLULAR TECHNOLOGY, INC.
Common Stock
($.001 Par Value)
The Company is offering 1,000,000 Common Shares at the purchase price of
$5.00 per Common Share. There is no minimum purchase requirement. The
Company is registering 1,309,305 common shares on behalf of its selling
security holders. The Company is also registering 300,000 common shares to
be issued upon the exercise of the Class F Warrants on behalf of its selling
security holders. Each Class F Warrant is exercisable into One common share
at the purchase price of $2.50. The Class F Warrants shall be effective for
a period of Five years from the date of issuance and shall be redeemable by
the Company at $.001 per Class F Warrant upon thirty days notice.
Prior to the date hereof, there has been a limited trading market for the
Common Stock of the Company. The Company's Common Stock os quoted on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). There can be no assurance, however, that an active trading
and/or a liquid market will develop or, if developed, that it will be
maintained.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sales of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any state.
<TABLE>
<CAPTION>
Price to Proceeds to
Public Commissions Corporation
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share $5.00 $.50 $4.50
Total Offering<F1><F2> $5,000,000 $500,000 $3,500,000
--------------------------------------------------------------------------------------------------
<FN>
(Footnotes on following page)
Page 2 of 158 Pages
<PAGE> 3
<F1>The Common Shares are being offered by the Company (employees, consultants,
officers and directors) and possibly selected broker-dealers. No sales
commission will be paid for Common Shares sold by the Company. Selected
broker-dealers shall receive a sales commission of up to 10% for any Common
Shares sold by them. The Company reserves the right to withdraw, cancel or
reject an offer in whole or in part. See "TERMS OF THE OFFERING - Plan of
Distribution and Offering Period." This Offering will terminate on or
before September 30, 1996. In the Company's sole discretion, the offering
of Common Shares may be extended for up to three Thirty day periods, but in
no event later than December 31, 1996. See "TERMS OF THE OFFERING - Plan
of Distribution."
<F2>The amount as shown in the preceding table does not reflect the deductions
of (1) general expenses payable by the Company; and (2) fees payable in
connection with legal and accounting expenses incurred in this Offering.
These expenses are estimated to be $32,738 if the maximum offering amount
is obtained.
</TABLE>
SUBJECT TO COMPLETION OR AMENDMENT
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
REPORTS TO SECURITY HOLDERS
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports
and other information with the Securities and Exchange Commission. The
reports and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission in
Washington, D.C. and at the Chicago Regional Office, Northwestern Atrium
Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60621-2511 and
the New York Regional Office, 7 World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference
Section of the Commission, Washington, D.C. 20549 at prescribed rates.
The Company will furnish to shareholders: (i) an annual report containing
financial information examined and reported upon by its certified public
accountants; (ii) unaudited financial statements for each of the first three
quarters of the fiscal year; and (iii) additional information concerning the
business and operations of the Company deemed appropriate by the Board of
Directors.
---------------
DOCUMENTS INCORPORATED BY REFERENCE
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (together with all amendments and
exhibits thereto, the "Registration Statement") under the Act with respect
to the securities offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the Rules and Regulations of the
Commission. For further information with respect to the Company and the
securities
Page 3 of 158 Pages
<PAGE> 4
offered hereby, reference is made to the Registration Statement. Copies of
such materials may be examined without charge at, or obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, at the
Chicago Regional Office, Northwestern Atrium Center, 300 West Madison Street,
Suite 1400, Chicago, Illinois 60621-2511, and the New York Regional Office, 7
World Trade Center, New York, NY 30048.
The Company will provide without charge to each person who receives a
prospectus, upon written or oral request of such person, a copy of any of
the information that was incorporated by reference in the prospectus (not
including exhibits to the information that is incorporated by reference
unless the exhibits are themselves specifically incorporated by reference).
Requests for copies of said documents should be directed to Richard
Sullivan, Chairman of the Board of Directors, Nixa Professional Center,
Highway 160 & Cc, Suite 3, Nixa, Missouri 65714; telephone: (417) 725-9888
or facsimile (417) 725-5350.
UNTIL ----- , 1996 (90 DAYS AFTER THE DATE OF THE PROSPECTUS),
ALL PERSONS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
SUCH PERSONS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
NO DEALER, SALESMAN, AGENT OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, OR THE UNDERWRITER, IF AN
UNDERWRITER ASSISTS IN THE SALE OF THE SECURITIES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION BY
ANYONE TO ANY PERSON IN ANY STATE, TERRITORY, OR POSSESSION OF
THE UNITED STATES IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED BY THE LAWS THEREOF, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
Page 4 of 158 Pages
<PAGE> 5
<TABLE>
------------------------------------------------------------
TABLE OF CONTENTS
------------------------------------------------------------
<S> <C>
PROSPECTUS SUMMARY 6
RISK FACTORS 8
SELLING SECURITY HOLDERS 10
SOURCE AND USE OF PROCEEDS 11
DILUTION 11
THE COMPANY 12
BUSINESS ACTIVITIES 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION 22
Trends and Uncertainties
Capital and Source of Liquidity
Results of Operations
MANAGEMENT 27
Officers and Directors
Remuneration
Indemnification
CERTAIN TRANSACTIONS 30
PRINCIPAL SHAREHOLDERS 31
SHARES ELIGIBLE FOR FUTURE SALE 32
MARKET FOR REGISTRANT'S COMMON EQUITY 33
TERMS OF THE OFFERING 34
DESCRIPTION OF SECURITIES 34
LEGAL MATTERS 36
LEGAL PROCEEDINGS 36
EXPERTS 36
INTERESTS OF NAMED EXPERTS AND COUNSEL 36
</TABLE>
Page 5 of 158 Pages
<PAGE> 6
-------------------------------------------------------------------------------
PROSPECTUS SUMMARY
-------------------------------------------------------------------------------
The following summary is qualified in its entirety by the more detailed
information, financial statements and notes to the financial statements
including the notes thereto appearing elsewhere in this Prospectus.
The Company. The Company was originally incorporated in 1988 under the name
of Axcom Computer Consultants ("Axcom") and operated as a custom programming
and systems house. In May, 1993, the Company was acquired by Great Bay
Technology, Inc. for the purpose of focusing the Company on marketing and
sales of emerging cellular data technology hardware and proprietary software
focused on the vertical markets of wholesale distribution, manufacturing and
health care. The name was subsequently changed to Axcom Information
Technology, Inc. on May 27, 1993 and then changed again in April, 1994 to
Applied Cellular Technology, Inc.
The subsequent references to the Company refer to the parent company only on
matters prior to November of 1994. Thereafter, any references to the Company
include the Company and its acquired subsidiaries (TechTools, Inc. as of
November, 1994, Atlantic Systems, Inc. as of August, 1995 and Elite Computer
Services as of September, 1995.)
In November, 1994, the Company formed a subsidiary, Kedwell International,
Inc. by issuing 180,000 shares of its $.001 par value common stock. The
subsidiary purchased software in exchange for its 180,000 shares of the
Company's common stock valued at $5.00 per share and for the issuance of
120,000 Class E Warrants of the Company. In August 1995, the Class E
Warrants were redeemed for 120,000 common shares of the Company. The name
of the subsidiary was subsequently changed to TechTools, Inc. in early 1995.
During 1994, the Company acquired 570,712 shares of Cadkey, Inc., a software
technology company, in exchange for 456,570 shares of its common stock,
resulting in a 29% investment in this corporation.
Pursuant to the original Articles of Incorporation, the Company has the
authority to issue an aggregate of Ten Million (10,000,000) common shares,
par value $1.00 per common share. In April, 1994, an amendment to the
Articles of Incorporation changed the par value to $.001 per common share.
The Company also has the authority to issue 20,000 shares of redeemable
Preferred Stock, par value $10.00.
The Company owns no real property and leases all of its facilities. The
Company's executive offices of approximately 2,000 square feet are located at
James River Professional Center, Suites 2 & 3, Highway 160 & CC, Nixa,
Missouri 65802. The Company's lease is for a term of one year beginning on
July 31, 1995 at a monthly rate of $500 per month.
The Company is a software development and services company which integrates
the technologies of Client-Server Computing; Object Oriented Programming;
Automated Data Collection Systems utilizing spread spectrum cellular
communications and auto-identification technologies; inter-processor and
inter-process communications using LU6.2, TCP/IP, RJE and proprietary
asynchronous and synchronous protocols and Micro-Cellular Radio Frequency
Data Networks. However, to date, revenues have been derived primarily from
the sales and distribution of third party hardware and software.
Page 6 of 158 Pages
<PAGE> 7
The Offering. The Company hereby offers up to 1,000,000 Common Shares at
$5.00 per Common Share.
<TABLE>
<S> <C>
Common Shares outstanding prior to
Public Offering 2,309,516
Common Shares to be outstanding after Offering 3,309,516
Percentage of Common Shares to be owned by present
shareholders after Offering 69.99%
Gross Proceeds After Offering $5,000,000
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds. The Company intends to utilize the sale of its Common Shares
for continual development of acquired companies,
for future acquisitions of related companies and
assets and for working capital over the next twelve months
This Prospectus also relates to
securities being registered on behalf
of selling securityholders and the
Company will not receive any cash or
other proceeds in connection with the
subsequent sale. Any proceeds
received from the subsequent exercise
of the Class B and F Warrants shall
be used as working capital and to
expand operations.
Certain Factors to be Considered See "Risk Factors."
Absence of Dividends; Dividend Policy The Company does not currently
intend to pay regular cash dividends
on its Common Stock; such policy
will be reviewed by the Company's
Board of Directors from time to time
in light of, among other things, the
Company's earnings and financial
position. See "Risk Factors."
Transfer Agent Florida Atlantic Stock Transfer, Inc.
is the Transfer Agent for the
Company's securities.
</TABLE>
Page 7 of 158 Pages
<PAGE> 8
-------------------------------------------------------------------------------
RISK FACTORS
-------------------------------------------------------------------------------
In analyzing this offering, prospective investors should read this entire
Prospectus and carefully consider, among other things, the following Risk
Factors:
Uncertainty of Future Financial Results. The Company has experienced
accumulated losses from operations to date and future financial results are
uncertain. As such, there can be no assurance that the Company can be
operated in a profitable manner. Profitability depends upon many factors,
including the success of the Company's marketing program, the maintenance or
reduction of expense levels and the success of the Company's business
activities. To date, the Company has accumulated losses from operations as of
December 31, 1994 of $(487,760), as of December 31, 1995 of $(233,718) and as
of March 31, 1996 of $(174,061). Lacking future profitable operations, the
Company will require additional capital. Even if the Company obtains future
financing or revenues to expand operations, increased rental expense for new
facilities would adversely affect liquidity of the Company. See "FINANCIAL
STATEMENTS."
Future Sales of and Market for the Shares. Upon successful completion of
the Offering of Common Shares herein the Company will have 3,309,516 common
shares outstanding, of which 2,609,305 Common Shares will be freely tradable
without restriction or further registration under the Securities Act of 1933
(the "Securities Act"). No assurance can be given that the availability of
such Common Shares for sale will not have an adverse impact on the market
price of the Company's Common Shares. Prior to this Offering, there has been
a limited public market for the securities of this Company. Management of
the Company cannot predict to what extent a secondary market in the Shares
will continue to develop and provide liquidity for holders of the Common
Shares. See "SALE OF SHARES PURSUANT TO RULE 144" and "MARKET INFORMATION ON
COMMON SHARES."
Risks Associated with Acquisitions. A major part of the Company's plan of
operations is to acquire businesses within similar industries that have a
history of profitable operations. These acquired companies may have working
capital needs which may have a negative effect on the cash flow of the
Company. There can be no assurance that an acquired company will continue to
have profitable operations. When acquiring only certain assets of a
Company, there is a risk that important vendors may be overlooked or
eliminated. Also, unknown obligations may exist as well as litigation risks
that may not have been disclosed. The Company will attempt to retain
current management to minimize the risks. See "Current Acquisitions" and
"Management's Discussion and Analysis of Financial Condition."
Competition. The Company currently competes in the areas of route
accounting systems, warehouse management systems, manufacturing shop floor
control systems and custom data collection applications. The competitive
advantage in the areas of route accounting systems, warehouse management
systems and manufacturing shop floor control systems depends on the features
of the systems offered, price, performance and reliability of the hardware
components of the systems, services and reputation of the companies. These
markets are highly competitive and the Company has no specific advantage as
to price, features, performance and reliability or reputation. See "THE
COMPANY - Competition."
Page 8 of 158 Pages
<PAGE> 9
Dependence on Key Individuals. The future success of the Company is highly
dependent upon the Company's ability to attract and retain qualified key
employees. The inability to obtain and employ these individuals would have a
serious effect upon the business of the Company. See "COMPANY - Employees"
and "MANAGEMENT."
Lack of Dividends. There can be no assurance that the continued operations
of the Company will result in any revenues or will be profitable. At the
present time, the Company intends to use any earnings which may be generated
to finance the growth of the Company's business. Accordingly, while payment
of dividends rests within the discretion of the Board of Directors, the
Company does not presently intend to pay dividends and there can be no
assurance that dividends will ever be paid. See "DIVIDEND POLICY."
Vulnerability to Fluctuations in Economy. Demand for the Company's proposed
products is dependent on, among other things, general economic conditions
which are cyclical in nature. Prolonged recessionary periods may be damaging
to the Company.
Experience of Officers and Potential Conflicts of Interests. The financial
success of the Company is dependent upon the management expertise, judgment
and experience of its officers. The death, disability or resignation of such
officers may adversely affect the financial performance of the Company. The
Company intends to apply for key man life insurance of Garrett Sullivan.
The Company currently carries $500,000 of term insurance on Gary Gray,
divisional president and Andrew Werdeman, Programming Manager. The officers
and directors have the exclusive authority to manage and control and make all
decisions regarding the business and affairs of the Company. Mr. Garrett
Sullivan devotes all of his time to the affairs of the Company. Mr. Richard
Sullivan spends as much time as deemed necessary on the corporate business
affairs (estimated to be approximately 25% of his time) but is not required
nor expected to devote his entire time or efforts to the Company's business
and affairs.
Some of the officers and directors of the Company are currently principals of
other businesses. Although none of the officers and directors are principals
of competing business, the officers and directors use their best efforts to
resolve equitably any time conflicts that might result from acting as
principals for a number of businesses, but there can be no assurance that
such other activities will not interfere with the officers' and directors'
ability to discharge their obligations herein. See "MANAGEMENT - Conflicts
of Interest."
Benefit to Management. The current officers and directors have received
compensation and common shares for their services which were not below market
rate. Additionally, the Company will, in the future, compensate the
Company's management with market rate salaries and other benefits. Those
officers actively involved in the operations of the Company have received
market rate compensation. Although the Company intends to reserve 2,000,000
Common Shares for issuance pursuant to a stock option plan not yet
implemented, the Company has not yet developed a formal compensation plan for
officers and directors and is not expected to do so until the fourth quarter
of 1996 or the first quarter of 1997. Even though no compensation plan has
been proposed or agreed upon, the payment of future salaries, and the costs
of these benefits may be a burden on the Company. See "MANAGEMENT -
Remuneration."
Page 9 of 158 Pages
<PAGE> 10
-------------------------------------------------------------------------------
SELLING SECURITY HOLDERS
-------------------------------------------------------------------------------
The Company shall register pursuant to this prospectus 1,309,305 Common
Shares currently outstanding for the account of the following individuals or
entities. The percentage owned prior to and after the offering reflects all
of the then outstanding common shares. The amount and percentage owned after
the offering assumes the sale of all of the Common Shares being registered on
behalf of the selling shareholders.
<TABLE>
<CAPTION>
Name and Amount Total Number of Percentage Owned Amount Owned After Percentage Owned
--------------- --------------- ---------------- ------------------ ----------------
Being Registered Shares prior to Offering Offering After Offering
---------------- ------ ----------------- -------- --------------
<S> <C> <C> <C> <C>
Baywater Investments, Ltd. 90,000 3.86% 0 0%
90,000
Bryan Cave LLP, 25,000 25,000 1.07% 0 0%
Great Bay Technology, Inc. 315,000 13.51% 190,000 5.70%
125,000
Gary Gray
8,500 23,128 .99% 14,628 .44%
Lance McIntosh
20,000 20,000 .86% 0 0%
Pratt, Wylce & Lords, Ltd.
10,000 10,000 .43% 0 0%
Fairfield Management, LLC
10,000 10,000 .43% 0 0%
Red Arrow Trading, Ltd.
210,000 210,000 9.00% 0 0%
Rudolf Kunzli
456,570 656,570 28.15% 200,000 6.00%
Baler Software Corporation
88,009 88,009 3.77% 0 0%
Ron E. Reimann
25,000 25,000 1.07% 0 0%
John N. McCarthy
62,033 62,033 2.66% 0 0%
John E. Kunish
62,033 62,033 2.66% 0 0%
Larry Axon
7,500 28,535 1.23% 21,085 .63%
Scott Axon
7,500 28,535 1.23% 21,085 .63%
Katherine J. DiGiacomo
51,080 51,080 2.19% 0 0%
Jack Hammell
51,080 51,080 2.19% 0 0%
<FN>
<F1>Owned by Angela, Stephanie and Richard Sullivan. Mr. Sullivan is a
director of the Company. Does not include any Common Shares which may be
issued upon exercise of Class F Warrants.
<F2>Mr. Gray is currently a divisional president of the Company. Mr. Gray
was previously a director of the Company. Does not include any Common Shares
which may be issued upon exercise of Class F Warrants.
<F3>Mr. Larry Axon was previously an advisory director of the Company.
</TABLE>
The Company shall register pursuant to this prospectus 300,000 Common Shares
to be issued upon the exercise of the Class F Warrants currently outstanding
for the account of the following individuals or entities. The percentage
owned prior to and after the offering reflects all of the then outstanding F
warrants. The amount and percentage owned after the offering assumes the
sale of all of the Common Shares to be issued upon the exercise of the Class
F Warrants being registered on behalf of the selling security holders.
Page 10 of 158 Pages
<PAGE> 11
<TABLE>
<CAPTION>
Total Number of Percentage of Total Number of Percentage of
Name and Amount Being Registered --------------- ------------- --------------- -------------
--------------------------------- Common Shares Owned Common Shares Common Shares Common Shares
------------------- ------------- ------------- -------------
Prior to Offering Owned prior to Owned After Owned
----------------- -------------- ----------- -----
Offering Offering After Offering
-------- -------- --------------
(assuming (assuming
--------- ---------
exercise) exercise)
--------- ---------
<S> <C> <C> <C> <C>
Great Bay Technology, Inc.<F1>
250,000 315,000 9.67% 240,000 7.37%
Gary Gray<F2>
50,000 23,128 1.02% 14,628 .45%
<FN>
<F1>Owned by Angela, Stephanie and Richard Sullivan. Mr. Sullivan is a
director of the Company
<F2>Mr. Gray is currently a divisional president and was previously a
director of the Company.
</TABLE>
------------------------------------------------------------------------------
SOURCE AND USE OF PROCEEDS
------------------------------------------------------------------------------
The Company intends to utilize the sale of its Common Shares for continual
development of acquired companies (30% of any funds received), for future
acquisitions of related companies and assets (60% of any funds received) and
for working capital (10% of any funds received) over the next twelve months.
The amount of proceeds which may be received from the offering is uncertain
and no actual amounts which will be attributed to the use of proceeds can be
determined.
Securities are also being registered on behalf of the selling securityholders
and the Company will not receive any cash or other proceeds in connection
with the subsequent sale. Any proceeds, if any, received upon the exercise
of the Class F Warrants shall be utilized for working capital.
------------------------------------------------------------------------------
DILUTION
------------------------------------------------------------------------------
Dilution. Assuming completion of offering, there will be a total of
3,309,516 Common Shares outstanding. The following table illustrates the per
Share dilution as of the date of this Prospectus, which may be experienced by
investors.
<TABLE>
<S> <C> <C>
Offering price $5.00
Net tangible book value per
Share before offering 1.64
Increase per Share
attributable to investors 1.02
----
Pro forma net tangible
book value per Common
Share after offering 2.66
-------
Dilution to investors $ 2.34
Dilution as a percent of
offering price 46.8%
</TABLE>
Net tangible book value is calculated as net book value less intangible
assets (i.e. good will and any other intangibles). Total net tangible
assets before the offering were $3,788,272 and after the offering (assuming
all of the securities offered are sold) would be $8,788,272.
Page 11 of 158 Pages
<PAGE> 12
<TABLE>
Comparative Per Common Share Data.
<CAPTION>
Per Total % of Total
Number of % of Shares Share Consider- Consider-
Shares Purchased Price ation Paid ation Paid
------ --------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
Existing Shareholders 2,332,375 69.99% $.1.44 $3,360,340 40.19%
---------------------------------------------------------------------------------
New Investors
of Common Shares 1,000,000 30.01% $5.00 $5,000,000 59.81%
---------------------------------------------------------------------------------
</TABLE>
Further Dilution. The Corporation may issue additional restricted Common
Shares pursuant to private business transactions. Any sales under Rule 144
after the applicable holding period may have a depressive effect upon the
market price of the Corporation's Common Shares and investors in this
offering upon conversion. See "SALES OF STOCK PURSUANT TO RULE 144."
------------------------------------------------------------------------------
THE COMPANY
------------------------------------------------------------------------------
The Company. The Company was originally incorporated in 1988 under the name
of Axcom Computer Consultants ("Axcom") and operated as a custom programming
and systems house. In May, 1993, the Company was acquired by Great Bay
Technology, Inc. for the purpose of focusing the Company on marketing and
sales of emerging cellular data technology hardware and proprietary software
focused on the vertical markets of wholesale distribution, manufacturing and
health care. The name was subsequently changed to Axcom Information
Technology, Inc. on May 27, 1993 and then changed again in April, 1994 to
Applied Cellular Technology.
Pursuant to the original Articles of Incorporation, the Company has the
authority to issue an aggregate of Ten Million (10,000,000) common shares,
par value $1.00 per common share. In April, 1994, an amendment to the
Articles of Incorporation changed the par value to $.001 per common share.
The Company also has the authority to issue 20,000 shares of redeemable
Preferred Stock, par value $10.00.
The Company owns no real property and leases all of its facilities. The
Company's executive offices of approximately 2,000 square feet are located at
James River Professional Center, Suites 2 & 3, Highway 160 & CC, Nixa,
Missouri 65802. The Company's lease is for a term of one year beginning on
July 31, 1995 at a monthly rate of $500 per month.
There are presently outstanding 2,309,516 Common Shares and no Preferred
Shares. There are also 200,000 Class B Warrants outstanding and 300,000 Class
F Warrants outstanding. See "DESCRIPTION OF SECURITIES" and "CERTAIN
TRANSACTIONS."
Subsidiaries. In November 1994, the Company formed a subsidiary, Kedwell
International, Inc., and capitalized it by issuing 180,000 common shares of
the Company's $.001 par value common stock. The name of the subsidiary was
changed to Tech Tools, Inc. on April, 1995. The subsidiary purchased
software in exchange for the 180,000 common shares of the Company and 120,000
redeemable Class E Warrants which were exercisable to acquire one common
share of the Company at the price of $7.50 per common share or one redeemable
Class A Convertible Preferred Share of the subsidiary, or if the subsidiary
becomes a public company, into an amount equal to 40% of its total
outstanding common shares. The subsidiary's redeemable Class A Convertible
Preferred was to have
Page 12 of 158 Pages
<PAGE> 13
paid a cumulative dividend compounded annually of 8% of the aggregate value
of $600,000. The Class A Convertible Preferred would have had cash
redemption rights five years after issuance at the option of the holder.
The redemption price shall be $5.00 per preferred share. These Class E
Warrants were exercised in August, 1995 into 120,000 common shares of the
Company. The value for the purchased software was determined by the market
price at acquisition of the shares given up less a 50% discount given to the
shares due to the limited market for these shares. The warrants were given
no value because the exercise price significantly exceeded the fair value of
the underlying common shares.
On December 22, 1994, the Company acquired 570,712 shares of Cadkey, Inc., a
software technology company from an unaffiliated individual, in exchange for
456,570 shares of its common stock, resulting in a 29% investment in Cadkey,
Inc. The purchase price was determined by the current market price at
acquisition of the shares given up less a 50% discount given to the shares
due to the limited market for these shares. The remaining 71% of Cadkey
common shares are owned by the founders (18.5%) who are unaffiliated with the
Company and 25 other unaffiliated individuals or entities.
During April, 1995, the Company formed a subsidiary, Applied Cellular
Technology Financial Corp., a Delaware corporation. The subsidiary was
formed to hold a note receivable from Cadkey, Inc. The Company purchased a
$1,000,000 note receivable in exchange for 200,000 common shares at a market
price of $5.00, with a 50% discount due to the limited market of the shares,
bringing the value down to $2.50 per share issued.
On August 9, 1995, the Company issued 124,066 shares of its common stock at
$5.50 per share to two shareholders in exchange for an amount of common
shares equal to 80% of the total outstanding common shares of Atlantic
Systems ("Atlantic"). The investment was recorded based on the $5.50 per
share market price less a 50% discount due to the limited market of these
shares. Atlantic develops and manufactures software and hardware systems for
the retail industry. Its major vertical market is retail liquor stores and
its secondary market is gift shops. Atlantic currently market in New
Jersey, where it has a 15% market share in the liquor stores with smaller
shares in New York, Connecticut and Massachusetts. The Company intends to
expand Atlantic's activities nationally either through the acquisition of
similar companies to be absorbed into Atlantic beginning in the key markets
of Atlanta, Chicago, Dallas and Los Angeles, or simply by adding marketing
personnel. For the fiscal year ended December 31, 1994, Atlantic had
revenues of $1,414,620 and earnings of $16,801. For the fiscal year ended
December 31, 1993, Atlantic had revenues of $1,162,059 and earnings of $840.
On September 6, 1995, the Company issued 102,160 shares of its common stock
at $8.94 per share to two shareholders in exchange for an 80% investment in
Elite Computer Services, Inc. ("Elite") The investment was recorded based
on the $8.94 per share market price less a 50% discount due to the limited
market of these shares. Elite's main business is the purchase of mainframe
computers which are then stripped and the parts sold. Elite's facilities
consist of 5,000 square feet of office and assembly space and are located in
Randolph, New Jersey. Elite is obligated under a five year lease that expires
May, 1996. The total lease commitment as of December 31, 1995 is $28,125.
For the fiscal year ended December 31, 1994, Elite had sales of $2,020,650
and a loss of $32,976. For the fiscal year ended December 31, 1993, Elite
had sales of $1,536,414 and a loss of $34,145.
Page 13 of 158 Pages
<PAGE> 14
Employees. In addition to management, the Company currently employs a
total of 35 individuals in the Company and its subsidiaries. These include
senior software developers, contract developers and a full time bookkeeper.
The Company's four subsidiaries employ a President, a Director of Marketing a
Manager of Development and a customer support technician. All software
development, customer support, accounting and administration support for the
subsidiary is provided by the Company's personnel.
Competition. The Company provides a combination of hardware technology,
proprietary vertical market application software packages, specialized
software engineering expertise and high-level consulting services. The
availability of all these capabilities from a single source makes the Company
able to serve the needs of firms of any size which are seeking to upgrade and
reintegrate their information systems.
The Company currently competes in the areas of route accounting systems,
warehouse management systems, manufacturing shop floor control systems and
custom data collection applications. The competitive advantage in the areas
of route accounting systems, warehouse management systems and manufacturing
shop floor control systems depends on the features of the systems offered,
price, performance and reliability of the hardware components of the systems,
services and reputation of the companies. These markets are highly
competitive and the Company has no specific advantage as to price, features,
performance and reliability or reputation.
Within the area of route accounting systems, there are at least 10 major
competitors, Within the area of warehouse management systems, there are at
least 50 competitors and within the areas of manufacturing shop floor control
systems there are at least 75 competitors.
In the area of custom data collection, competitive advantage depends on
price, availability, technical expertise and reputation of the companies.
There are several hundred companies operating in the area and, although
management is of the opinion that the Company has an excellent reputation,
client list and skill set, there might be from six to 100 companies who would
be qualified to respond to a particular bid request. The Company provides a
combination of hardware technology, proprietary vertical market application
software packages, specialized software engineering expertise and high-level
consulting services. The availability of all these capabilities from a
single source makes the Company able to serve the needs of firms of any size
which are seeking to upgrade and reintegrate their information systems.
Third Party Licenses. The Company's programs for distributors include
extensive customized programming. Certain accounting and host order
processing functions are provided under license from American Business
Systems, Inc. Certain warehouse automation and manufacturing data collection
functions are provided under license from Applied Automation Techniques, Inc.
Seasonal Nature of Business Activities. The Company's business activities
are not seasonal.
Page 14 of 158 Pages
<PAGE> 15
------------------------------------------------------------------------------
BUSINESS ACTIVITIES
------------------------------------------------------------------------------
General. The Company is a software development and services company which
integrates the technologies of Client-Server Computing; Object Oriented
Programming; Automated Data Collection Systems and communications systems
using radio frequency data networks and various other asynchronous and
synchronous protocols.
The Company offers custom-tailored software and hardware systems for
manufacturers, wholesalers and distributors with vehicle-based sales. The
applications offered automate various aspects of these businesses, including
order processing, inventory control, accounting, work-in-process control,
quality management and sales management. The Company operates as a
value-added reseller for several different manufacturers of computers, data
collection equipment and printers. The Company integrates this hardware with
custom-tailored software, specific for the customer's needs. The software
may be based on an existing application from a third party or may be entirely
proprietary to the Company. As a distributor, the Company's hardware sales
comprised 31.81% of total revenue for the year ended December 31, 1994 and
54.84% of total revenue for the fiscal year ended December 31, 1995.
Current Activities. During 1992, a decision was made to wind down the
Company's sales activity on custom-written data collection systems and to
stop selling general-purpose computer hardware and accounting/inventory
control systems. Sales of this type of system accounted for about 40% of
the Company's gross revenues in 1992. The decision resulted from to
shrinking margins on this type of system and an effort to reduce the high
overhead associated with selling and supporting the general purpose computer
hardware. Fiscal 1992's results show the effects of these reduced margins
and Fiscal 1993's results show reduced revenue but improved margins as a
result of the discontinuation of the general purpose systems.
In May, 1993 the focus of the Company's business operations was changed to
marketing and sales of emerging cellular data technology hardware and
vertically-focused, proprietary software. Subsequent to the acquisition of
Axcom by Great Bay Technology Group, Axcom's former president, Larry Axon,
remained as Director of Special Projects to ensure the Company retained its
backlog of business and smoothly transitioned relationships with its key
business partners, especially Telxon. Mr. Axon has since left the Company to
pursue other interests.
For the fiscal year ended December 31, 1994, the Company principally received
revenue from programming services ($184,335), the sale of hardware products
($102,661) software licensing revenue ($29,582) and other revenue ($6,191).
For the fiscal year ended December 31, 1995, the Company principally received
revenue from programming services ($442,874), the sale of hardware products
($1,281,101) software licensing revenue ($151,229), packaged software sales
($417,600) and other revenue ($43,195).
Current Acquisitions. A major part of the Company's plan of operations is
to acquire businesses within similar industries that have a history of
profitable operations. These acquired companies may have working capital
needs which may have a negative effect on the cash flow of the Company. When
acquiring only certain assets of a Company, there is a risk that important
vendors may be overlooked or eliminated. Also, unknown
Page 15 of 158 Pages
<PAGE> 16
obligations may exist as well as litigation risks that may not have been
disclosed. The Company will attempt to retain current management to
minimize the risks Additionally, there can be no assurance that an acquired
company will continue to have profitable operations.
The Company shall acquire the targeted companies as subsidiaries of the
Company. Subsidiaries which compliment each other shall be integrated
together or integrated into the Company. The Company shall initially run
the targeted companies without integration into other subsidiaries or itself,
however, if there is a real compatibility with product or services of two
owned entities of the Company, the Company shall evaluate possible
integration.
On August 4, 1995, the Company, acquired certain assets of Baler Software
Corporation ("Baler") in exchange for the payment of debt of $14,000, and the
issuance of 88,009 shares of the Company's common stock at $5-1/8 to
creditors and the issuance of 25,000 shares of the Company's common stock at
$5-1/8 to one shareholder. Mr. Ron Rheiman. The aggregate value of
consideration paid by the Company was $289,303. Mr. Rheiman is not an
affiliate of the Company and its affiliates and owns less than 5% of the
Company's common stock. The value for these shares was determined based on a
50% discount given to the market price of $5-1/8, due to the limited market
for these shares, giving them a value of $2.56 per share. The assets
purchased were the source code, inventory and manuals for a family of
software development tools (primarily Visual Baler, a spreadsheet compiler)
which are being marketed by TechTools. Selected fixtures and furnishings
were also included in the purchase. Baler was acquired and absorbed into the
current operations of the Company's subsidiary, TechTools, Inc. One Baler
technical support employee was transferred into TechTools, Inc. operations.
Founded in 1988, Baler invented the spreadsheet compiler. Its product line
compliments the current DataBoss family of software development tools.
TechTools, Inc. intends to market the Baler products through retail
distributors, direct mail catalogs and through direct sales to corporation.
For the fiscal year ended June 30, 1995, Baler had revenues of $722,442 and a
loss of $616,059. For the fiscal year ended June 30, 1994, Baler had
revenues of $818,009 and earnings of $45,461.
On February 8, 1996, the Company's subsidiary, Atlantic purchased certain
assets relating to fixture, furnishings, proprietary retail software for
liquor stores and customer lists of Quality Solutions, Inc. The sellers
did not retain any ownership in the assets. The only member in active
management of the assets previously, Mr. John Beasley, now functions as the
SouthWest District Sales Manager for Atlantic Systems. The aggregate value of
consideration paid by the Company was $225,000.
On March 7, 1996, the Company acquired Burling Instruments, Inc. of Chatman,
New Jersey ("Burling"). The Company purchased 80% of the outstanding
common shares of Burling with the Company's preferred stock, par value $10.00
with an 8% annual dividend (pending the Company's shareholder approval of an
increase in its preferred stock.) The aggregate value of consideration paid
by the Company is $962,400. Vern Anderson is affiliated with the Company due
to his continued position as President of Burling, retained the remaining 20%
of the Burling common stock of Burling. Burling is a fifty year old company
which manufactures digital and analog temperature control devices for home
and industry use.
There are not currently any other plans, arrangements, negotiations, or
understandings with respect to any future acquisitions.
Page 16 of 158 Pages
<PAGE> 17
Products.
Cellular Data Technology. The Company is a value-added reseller for
Aironet, the leading manufacturer of cellular data radio equipment. Aironet
designs and builds radio and base station components which are used to
establish wireless connections between portable computing devices and host
networks. Aironet also manufactures a line of products for connecting two or
more networks together between buildings at distances up to 6 miles. Aironet
is headquartered near Toronto, Ontario and is a subsidiary of Telxon
Corporation.
The Company utilizes the Aironet equipment to build tailored data collection
systems which capture events at the point of transaction (shop floor,
warehouse, work yard, etc.) and connect to network databases for immediate
update. The Company can integrate these systems with a wide variety of
mainframe, mid-range and networked host computers. Installation of wireless
data collection systems into existing facilities requires adapting to the
existing network topology, communication protocols, database structures and
application procedures. The Company is providing the consulting, design,
development and implementation services. The Company does not assemble or
manufacture any of the products it distributes.
Proprietary Software Applications. Since May, 1993, the Company has
embarked on a program of development to bring five proprietary products to
market, Automated Route Management System (ARMS), Automated Distribution
Management System (ADMS), Automated Inventory Management (AIM),
Compliance-Plus UCC-128 labeling System and the TransPort/open, Universal
Communications Hub. As a single source of supply, the Company achieves
better account control, better return on sales expense and can differentiate
itself from competitors offering only a partial solution. Currently, the
ADMS, ARMS and the Compliance-Plus UCC-128 Labeling System products have
been completed. In fiscal year 1995, these products generated 28% of the
Company revenue. The TransPort/Open, Universal Communications Hub and AIM
are still in the development stage.
Route Management System (ARMS). For manufacturers and
distributors of perishable products which are sold from route trucks, the
Company offers a complete system for managing route sales. The ARMS system
makes use of hand held computers which are used at the retailer's location by
the route salesman to record the quantity of each item on hand, record the
quantity stale, display a system-calculated recommended stock level, and
enter the quantity delivered. An invoice is printed. Periodically, the
salesman's truck is replenished from a feeder truck equipped with a portable
computer. The feeder truck carries an order for the salesman which was
calculated based on the past four weeks' usage. Information on sales,
stales, promo and unsalable merchandise is downloaded from the salesman's
computer to the portable and his hand held unit is updated from the portable
for the quantity of product being loaded on his truck from the feeder truck.
The feeder truck returns to the home office where route sales, payments,
stales and unsalables information is processed and uploaded to the central
system. (Customers can choose to buy their central system from the Company
or utilize the system's generalized interfaces which the Company or the
customer can use to communicate with an existing host system.) Pertinent
reports are produced by the system to ensure proper financial controls and to
provide meaningful management information.
Page 17 of 158 Pages
<PAGE> 18
The Company's route management system is applicable to a wide range of
business which sell perishable products from route vehicles.
Distribution Management System. ("ADMS") ADMS includes proven
programs which the Company has installed in a number of customer sites.
Taken together, they represent an integrated system for automating all phases
of the distribution operation. Included are solutions for the following
functional areas:
* Remote Customer Order Entry. Customers scan shelf labels
and/or an order book to enter their order into a Telxon portable
transaction computer ("PTC"). The order is then telephoned into
a central Telxon receiver PC at the warehouse. Orders are
sent from the PC receiver via TCP/IP (ethernet) to the host
system for processing.
* Order Book Processing. Order Books can be printed for a
specific customer using their contract pricing or at one of
five standard price levels (or printing with no pricing can
be selected). The books can be bar-coded or non-bar-coded.
* Customer Shelf Label Processing. Bar coded reorder shelf
labels can be printed from customer history (only the products
a customer typically buys) or for all products in a category.
The labels can show the customer's retail price, if desired.
Customers can be assessed a charge per label.
* On-Line Customer Order Services. Customers with in-store
computers can send an order to the company's Electronic Message
Center PC, located at the warehouse for processing by the
host. After an order has been invoiced, packing slip data is
automatically sent to the Message Center for downloading to
the customer's system to automatically update costs and
quantities on the in-store computer.
* Pricing, Promotions, Bulletins and Quotations. Customers
can elect a number of different pricing schemes for each or a
group of customers, including level pricing, category pricing
and contract pricing. Special promotional price contracts
can be entered which take effect and expire on a specified
date. Price contracts whose effective date falls with a
specified period can be extracted automatically and imported
to a word processor or desktop publisher for preparation of
customer promotion bulletins showing price changes,
promotions and new and obsolete products. The same features
which support pricing can be used to generate priced order
books and quotations.
* Sales Analysis. Cumulative sales information is stored for
each order, weekly salesman totals by category and product and
monthly sales totals by product for each customer. Standard
sales analysis reports include weekly sales totals by
salesman and customer monthly item movement. Special reports
can be written from any of the files using an optional report
writer.
* Inventory. Perpetual inventory balances are automatically
updated from purchase order receipts and shipping confirmation.
Multiple warehouses are supported. Cycle counts and physical
inventories are
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<PAGE> 19
performed using bar code scanners. Bar code slot tags allow
for easy identification of products by pickers and to
facilitate bar code entry of cycle counts and physical
inventory counts.
* Data Import/Export. Key system master files can be built
from text-format files output from other systems. This
drastically reduces the time required to convert to the new
system and reduces errors introduced by keypunching master
file data.
* Accounts Receivable. The A/R system features flexible
statement and aging parameters, cash application/reapplication,
purge paid items and customer inquiry screen.
* Accounts Payable. The A/P system features cash
requirements report, automatic distribution of expenses to
general ledger and an automatic interface to the purchase
order system.
* Purchase Orders. The Purchase Orders system features
create, edit and print purchase orders; receive all or
exceptions only receiving confirmation, automatic update of
inventory and an automatic interface to the payables system.
* General Ledger. The General Ledger system features
flexible account number and report formatting and automatic
interfaces from A/R and A/P.
Inventory Management System (AIM). In addition to the
inventory control features of the Company's system for distributors, a
special set of programs is available to manage inventory levels and assist
the purchasing department in various replenishment buying activities. AIM
analyzes usage, safety stock, lead time and order minimum data to assist the
buyer in consolidating a replenishment order for a selected vendor. By
displaying items in color (red, yellow and green), AIM alerts the buyer to
items needing attention. AIM can be interfaced to virtually any inventory
control system to achieve automatic building and balancing of orders. which
saves buyers hours of work and reduces inventory; facilitates alternate
source buying, promotional buying, forward buying, etc., easily switches
items from one vendor to another; automatic rebuilding to new specifications,
allows buyers to see the effects of proposed changes in safety stock, order
frequency, etc. and improved order fill rates and customer service levels.
Compliance-Plus UCC-128 Labeling System. For manufacturers
and distributors which supply products to larger retail chains, Compliance-
Plus provides for printing bar coded shipping labels which conform to the
formats specified by the retailers. In addition, the system allows for
verifying shipments by scanning the labels using hand held laser terminals
and comparing the scans against the customer's order. The system provides
for transferring order information into Compliance-Plus from the host order
processing system and for creating advance ship notice EDI transactions for
electronic transmission to the retailer.
TransPort/open, Universal Communications Hub. In May, the
Company released a Unix-based communications program which management
believes has the same or better functionality than current PC-based solutions
to handle most types of one- and two-way communications between a
centrally-located host computer and portable computers and hand held
terminals. Advantages of a Unix-based system include the capability to
support large numbers of remote units simultaneously and the capacity to
support additional remote units on a single system through the upgrading of
CPU and
Page 19 of 158 Pages
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memory capacity. The system will support communications to most host
systems including PC networks, Unix systems, IBM mainframes and proprietary
systems such as Digital Equipment Corporation VAX systems.
Automated data collection applications in manufacturing shop floor control.
The Company markets a tailored version of Applied Automation Technologies'
(Miami, Florida) Auto-Time time and attendance and job cost system which it
tailors to meet customer's requirements.
The percentage of total revenues derived from the above five software
products was .8% in Fiscal 1993, 9% in Fiscal 1994 and 28% for Fiscal 1995.
Future Products. Future products to be developed by the Company
will tend to be driven by the Company's goal to stay focused on one of the
four market sectors outlined above (Distribution, Manufacturing, Health
Care, and Information Systems). All will take advantage of or support the
emerging cellular data hand held and pen-based systems. The Company
expended $27,765 on company sponsored or customer sponsored research and
development for Fiscal 1995 compared to $27,850 for Fiscal 1994.
Other product areas being explored are:
Small, affordable automated data collection system for amusements,
theaters and hospitality businesses. These systems will be used to track
customer volume, profiles and preferences. The Company has already provided
one such system to a theme park and is working with another major national
theme park group on an RF-based system to capture data at the point of
transaction for various park attractions.
Automated data collection applications in medical cost control. With
physicians under pressure by hospitals, patients, employers, and the
government to reduce their fees, the ability to show the true cost of
procedures will be vital to every physician. The Company believes that
upcoming health care reform will create an instant demand for such systems
across the country.
Services. In addition to providing fixed-price, turnkey systems which
automate one or more functions within a business, the Company provides its
customers with consulting and support services to help ensure successful
implementation and smooth integration of each step along the customer's path
toward complete automation.
Business planning services are billed at an hourly rate and are intended to
assist the client with defining, budgeting, scheduling and measuring the
results of new systems.
Available contract support services include data center management, data
center operation, help desk (problem resolution and product support),
disaster restart/recovery, off-site data storage, and off-site operation.
Support services billed hourly include hardware configuration and
installation, employee acquisition and training, implementation facilitation
and quality assessment.
It is expected that each system installed by the Company will require some
degree of customization - either changes to the basic package or interfacing
to an existing host computer or both. This customization (or excess
development capacity) is sold as contract
Page 20 of 158 Pages
<PAGE> 21
services and used to provide needed revenue to fund cash requirements. An
important advantage of the contract services is the opportunity to learn
about new applications and develop new core technologies at the customers'
expense.
<TABLE>
Services are ordinarily quoted as fixed price projects and bid according to
the following schedule:
<CAPTION>
Local National
Rate Rate
<S> <C> <C>
Application Designer, Sen. Consultant: $89.50/hr $140.00/hr
Senior Systems Analyst: $59.50/hr $90.00/hr
Senior Programmer: $49.50/hr $80.00/hr
</TABLE>
Marketing and Sales. Emphasizing consultative services, proprietary
software and leading-edge hardware solutions, the Company's marketing efforts
are focused on medium to large sized corporations who have already made a
decision to upgrade and reintegrate their corporate systems. The Company's
sales activities are carried out by its President and a Sales Manager.
Telephone canvassing and seminars are used to develop new sales
opportunities. The Company also receives referrals from its business
partners. Often the Company will undertake a consulting engagement, performed
at a fee, to assist the customer in determining the need for a system, a
recommended implementation program and an expected pay back. The President
and two application engineers participate in such consulting activities.
The Company intends to expand its sales force as cash flows permit. Nine
metropolitan areas have been identified for commencing sales activities. A
team sales approach is used, wherein senior application engineers support
sales personnel with on-site evaluations. Engineers are expected to be
deployed at a ratio of one for every two or three salespeople. The nine
location sales force expansion is expected to be completed by the end of
calendar 1996.
In addition to the direct sales force, the Company will build a dealer
channel for its communications and database products as funds allow. These
will be a combination of value-added resellers, software publishers and
distributors. Management has not yet commenced building said channel and
cannot anticipate when it will be commenced or completed. This delay is due
to the decision to cultivate the alternative marketing relationship with Data
Documents, Inc. of Omaha, Nebraska, who will market the Company's Compliance
"PLUS" product. The Company has established an informal marketing
partnership with Data Documents, Inc. ("DDI"). Under this informal
agreement, DDI (through its 100plus person sales force) has agreed to work
with the Company to identify prospects for the Company's Compliance-Plus
system and the Company's custom data collection software services. DDI
receives no remuneration in this relationship except the opportunity to sell
the customers consumable products such as labels and ribbons which are
required in the operations of the systems installed by the Company. To
date, over 30 DDI sales representatives have been trained on the Company's
products and services and the companies are jointly working on a near and
long-term customer sales opportunities.
Value-Added Reseller Relationships. Value-added reseller relationships
with major hardware and software manufacturers have allowed the Company to
keep current on hardware, databases, programming and application
technologies, while participating in selected sales opportunities referred to
the Company from these manufacturers. Reseller
Page 21 of 158 Pages
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agreements entered into with these manufacturers afford the Company the
opportunity to sell the manufacturer's products at a discount and often
provides for technical documentation, training and support from the
manufacturer or distributor. Some manufacturers with which the Company
maintains such relationships are:
Telxon Corporation. The Company is a value-added reseller ("VAR") for
Telxon, a $350 million annual sales international manufacturer of portable
batch, RF and pen-based portable transaction computers ("PTC's"). Telxon's
share of the batch PTC market is estimated at 24%; its share of the emerging
RF PTC market is estimated at 47%. The Company has developed a strong
relationship with Telxon during its five years as a Telxon VAR. Although
Telxon has over 250 value-added resellers, Telxon selected the Company as
only one of six VAR's to hold a permanent position on its VAR Council, a
steering group which meets four times annually to review the needs of
Telxon's VAR channel, receive insider information regarding new products and
services and recommend improvements in Telxon's policies, procedures,
products and services. In addition, the Company is one of only four VAR's
selected to participate in Telxon's Software Products Committee, a steering
group tasked with determining Telxon's direction in operating systems,
communications and application software.
Telxon focuses on the manufacturing and marketing of hardware and relies upon
VAR's such as the Company to provide the application software and interface
engineering required to make Telxon's hand held units productive in the
customer's environment. Telxon has brought the Company in to assist with
implementations at such key accounts as Topco Foods, A.C. Nielsen Company,
Union Oil of California, Farmland Foods, Western Publishing Company, Land's
End, Chicago Public Schools and Kar Products. In each of these situations,
the Company provided tailored software and specialized communications
expertise to adapt the Telxon products to the customer's specific needs.
Aironet is the industry leader in micro-cellular spread spectrum RF
technology. Currently shipping over 10,000 radios per month, this division
of Telxon Corporation has an installed base greater than all of its
competition combined. The Company, as a Telxon value-added reseller, markets
Aironet's products for building-to-building network bridge and micro-cellular
network applications.
Computer Identics manufactures intelligent fixed point scanners,
specialized networks and a windows-based data collection application
generator. The Company participates in Computer Identics' VAR council and is
a value-added reseller of Computer Identics shop floor local area network
products.
Applied Automation Techniques ("AAT") develops client-server-based
packaged solutions for use by manufacturing and distribution companies. The
Company sells and customizes versions of AAT's Auto-Track (warehouse
management), Auto-Time (time and attendance and work-in-process control),
Auto-Ship (shipping management) and Auto-Quality (ISO 9000 compliant quality
management) application systems.
The Company resells Applied Automation Techniques products under a
non-exclusive reseller agreement and also performs work-for-hire contract
programming to assist Applied Automation Techniques in its software
development and customization efforts.
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United Bar Code Industries manufactures LAN-ready, industrial mount PC
workstations. These workstations are used as client data collection
terminals in industrial environments, connected to a Unix or PC-Lan server.
The Company is a value-added reseller for the United Bar Code Industries.
IBM, Hewlett Packard, NCR, Digital Equipment Corporation, Unisys and
Bull - the Company is an authorized value-added reseller for each of these
manufacturers' hardware systems.
American Business Systems ("ABS") develops and markets general business
software for distributors and manufacturers. The Company is an ABS
value-added reseller and is sometimes referred by ABS sales representatives
into customer accounts requiring customization or specialized application
software to solve specific needs which are not satisfied by the standard ABS
product offerings.
Oracle Corporation is a developer of database and application software.
The Company is an Oracle Business Alliance Partner ("BAP"). Oracle BAP's
participate in Oracle sales opportunities by being referred into Oracle
customer accounts by Oracle sales reps for programming services, specialized
hardware or software applications to solve specific needs which are not
satisfied by the standard Oracle product offerings.
Computer Associates ("CA") is a major supplier of packaged software for
mainframe and mid-range systems. The Company is a CA "Registered
Consultant" specializing in wholesale distribution and manufacturing
applications. CA refers its Registered Consultants into customer accounts
requiring software customization or specialized software to solve customer
needs not satisfied by CA's standard product offerings.
Data Documents, Inc. ("DDI") is a supplier of custom business forms and
label media. The Company consults with DDI and its customers on
warehousing, shipping and manufacturing systems which take advantage of bar
coding and data collection technologies. There are no fees paid to DDI by
the Company for these sales referrals. DDI uses this consulting capability
to enhance its position as a full-service provider to its customers.
------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
------------------------------------------------------------------------------
Trends and Uncertainties. The Company has tried to eliminate the major
variables of interest rates and operating expense. However, as the Company
has little or no control as to the demand for its products and services,
inflation and changing prices could have a material effect on the future
profitability of the Company.
The Company had previously conducted negotiations for the purchase of Cra-Tek
Industrial Controls & Electric. The Company considered the acquisition to be
more probable than not. The Company had hoped to acquire eighty percent of
the fully diluted and outstanding classes of all authorized and outstanding
shares of Cra-Tek in exchange for restricted common shares of the Company
with demand registration rights. Cra-Tek conducts its operations in a 5,000
square foot building at 3650 51st Avenue in Sacramento, California. The
Cra-Tek acquisition negotiations were terminated, due to the fact that Cra-
Page 23 of 158 Pages
<PAGE> 24
Tek did not receive necessary Board approval for the purchase by the
Company. There can be no assurance that the Company will not expend its
efforts and funds in the future to pursue other acquisitions which may prove
unsuccessful.
The Company's lease in Nixa, Missouri expires at June 30, 1996, Elite's lease
expires on May 31, 1996 and Burling's lease expires on August 31, 1996. The
Company intends to negotiate a smaller space for probably less rent at the
same office complex. At the current time, Elite and Burling have conducted
preliminary discussions with its current lessor and, based on those
discussions, do not anticipate a higher lease rate upon renewal. In all three
of these locations, there are many other lease opportunities at different
facilities at similar rates. The Company does not anticipate that there shall
be any material impact on its cashflow due to the expiration of these leases
and current cashflow is sufficient to continue to pay the lease amounts.
Capital Resources and Liquidity. The Company currently has no material
commitments for capital expenditures. The Company currently has a negative
cash flow from investing activities, and operating activities, however, the
Company has positive cash flow from financing activities which is sufficient
to cover the Company's working capital needs on a short-term basis.
The Company registered outstanding Common Shares and Class A, B and C
Warrants on behalf of selling securityholders. To date, the Company received
a total of $943,046 from the exercise of its Class A Warrants and $67,500
from the exercise of its Class C Warrants. These proceeds shall be used to
increase operations, to develop new products and for working capital.
For the three months ended March 31, 1995, the Company had an increase in
notes receivable - related party of $1,330. The Company had an increase in
other assets of $15,500. Payments for equipment, computer software and
leasehold improvements were made in the amount of $9,585. Net cash used in
investing activities for the three months ended March 31, 1995 was $26,415.
For the three months ended March 31, 1996, the Company applied $20,967 of
receipts to the note receivable from Cadkey, Inc. The Company had an increase
in other assets of $38,058. Payments for equipment, computer software and
leasehold improvements were made in the amount of $7,941. Payments for
acquisitions in the amount of $41,671 were made. Net cash used in investing
activities for the three months ended March 31, 1996 was $67,153.
For the year ended December 31, 1995, the Company had a decrease in notes
receivable - shareholder of $108,437. Payments were received on the note
receivable from Cadkey, Inc. of $240,632. The Company had an increase in
other assets of $107,958. Payments for equipment, computer software and
leasehold improvements were made in the amount of $40,199. The Company had
payments for costs of 80% acquisitions (net of cash balances acquired) of
$183,208 and had payments for costs of the acquisitions of $119,355. The
Company made payments on its notes payable - officers of $86,849. Net cash
used in investing activities for the year ended December 31, 1995 was
$100,793.
For the year ended December 31, 1994, the Company experienced an increase in
deposits of $450. However, an officer of the Company repaid $2,832 of the
principal and interest due on a loan received from the Company. The Company
loaned Great Bay Technology, Inc., an affiliated company an additional
$90,058 so that the affiliate could pursue
Page 24 of 158 Pages
<PAGE> 25
negotiations on acquisitions which may eventually be assigned to the
Company. Payments for equipment and computer software were made in the
amount of $14,923. Net cash used in investing activities for the year ended
December 31, 1994 was $102,559.
For the three months ended March 31, 1995, the Company paid $1,083 on its
capital lease obligation. The issuance of common stock resulted in an
increase of $159,214 in additional paid-in capital and common stock. The
Company paid net amounts of $34,550 on notes payable. All of the above
resulted in $123,581 net cash provided by financing activities for the three
months ended March 31, 1995. These monies were used to continue and increase
operations.
For the three months ended March 31, 1996, the Company received funds on new
notes payable in the amount of $181,101. The Company paid $7,103 on its
capital lease obligations. The Company had a decrease in notes payable
officers of $64,944. The issuance of common stock resulted in an increase of
$21,124 in additional paid in capital and common stock. All of the above
resulted in $130,178 net cash provided by financing activities for the three
months ended March 31, 1996.
The Company had an agreement with a bank for a line of credit of up to
$150,000. The agreement calls for interest to be charged at 8% and is
secured by an officer's personal property. The line of credit expired on July
6, 1995 and the Company decided not to renew said line of credit. The Company
had an outstanding balance of $137,047 and $0.00 at December 31, 1994 and
December 31, 1995, respectively. For the year ended December 31, 1995, the
Company paid $171,048 on all lines of credit and $15,318 on its capital lease
obligation. The issuance of common stock resulted in $516,778 in additional
paid-in capital. The redemption of its Class A preferred stock by Daniel E.
Penni Trust resulted in a decrease in cash flow of $147,392. All of the above
resulted in $96,171 net cash provided by financing activities for the year
ended December 31, 1995. These monies were used to continue and increase
operations.
The Company did have a line of credit for Elite Computer Systems, Inc. which
was acquired September 8, 1995 which was $29,999 at December 31, 1995.
Subsequent to year end, the line of credit was paid off and terminated.
On a long term basis, liquidity is dependent on increased revenues from
operations, additional infusions of capital and debt financing. The Company
believes that additional capital and debt financing in the short term will
allow the Company to increase its marketing and sales efforts and thereafter
result in increased revenue and greater liquidity in the long term. The
Company believes that its increased revenue from operations in addition to
proceeds received from this offering, if any, will result in sufficient
working capital and liquidity in the long term. However, there can be no
assurance that the Company will be able to obtain additional equity or debt
financing in the future, if at all.
Plan of Operation. The Company plans to increase its current revenues
and net earnings by two measures. One is to use the Company's current
industry knowledge to expand sales in high-tech areas, the other is to
acquire businesses within similar industries that have a history of
profitable operations and are managed by skilled owners or professional
managers.
Page 25 of 158 Pages
<PAGE> 26
The current operating divisions of the Company, (i) TechTools, Inc., a
software development tool business, (ii) the Company's operations in Nixa,
Missouri, as a value added reseller; (iii) Atlantic Systems, a developer and
marketer of retail software and hardware systems; and (iv) Elite Computer
Systems, a purchaser of used main frames to sell for parts, generated
approximately $2,335,999 in revenues in the fiscal year 1995 and are
projected to generate approximately $5,500,000 in 1996. The Company's
operating divisions are in market segments, computer software and hardware,
that are growing. No external matters in the industry have occurred that have
effected the Company in an adverse way. The Company has not experienced any
labor difficulties or any other internal impediments.
The nature of the Company's business, computer software development and
distribution and the marketing of purchased computer hardware and hardware
components, do not require any significant ongoing capital expenditures, only
increases in working capital. Any proceeds utilized from the sale of the
common shares registered in this offering would be used primarily to fund the
increased working capital needs of the existing affiliated companies and to
retire some existing debt. If the registration was unsuccessful, management
would pursue lines of credit and increase the factoring arrangement (90% of
receivables under 60 days) at the Company or it may pursue a private sale of
its preferred stock. Management plans to establish a factoring arrangement
for TechTools, Inc. and a line of credit for Atlantic Systems, Inc. if
required.
Additional acquisitions by the Company could increase the revenue base.
Management intends to pursue a registration of 2,000,000 common shares in
1996 for the express purpose of acquiring three or four companies that would
be strategic additions to the existing core companies or divisions. The
acquisitions are part of the Company's strategy to build a major
international software, manufacturing and technology business through
strategic, consolidating acquisitions. The acquisition strategy of the
Company is to acquire companies at favorable prices with steady cash flows.
The Company plans to increase profits through the projected gross margin
objectives of 40-45% for hardware and 80-85% for software products. Broadened
product lines will allow each division to increase its customer base, which
will result in an increase in earnings. The Company's objective to increase
profitability of each division is to continue growth through 1) acquisition
of established successful business with above average expansion or growth
potential 2) internal expansion of existing businesses 3) introduction of new
products into existing sales channels and 4) the development of new ventures
and expanded market opportunities for existing products.
The equity 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 three months ended March 31, 1995, the Company had a negative cash
flow from operations of $88,953. This was mainly due to an increase in
accounts receivable ($129,373) and prepaid expenses ($46,848). The
preliminary estimate for 1996 indicates that the Company's performance should
be able to obtain a positive cash flow in the second quarter of 1996 and that
its cash flow needs can be met through current operations along with the
issuance of its common stock. Management's assessment of future performance
is limited to projections based on current conditions and does not include
any uncertainties which may arise. Potential investors should not attribute
undue certainty to management's assessment. Management does not intend to
furnish updated projections.
Page 26 of 158 Pages
<PAGE> 27
For the three months ended March 31, 1996, the Company had a negative cash
flow from operations of $156,213. This was mainly due to an increase in
accounts receivable and an increase in unbilled receivables.
Results of Operations. Services, sales, fees, licensing and other revenue
increased to $1,233,234 for the three months ended March 31, 1996 from
$222,836 for the three months ended March 31, 1995 mainly due to the
Company's recent acquisitions which resulted in an increase in revenue from
the sale of hardware products from $90,217 for the three months ended March
31, 1995 to $769,437 for the three months ended March 31, 1996 and packaged
software sales of $234,465 compared to $0.00 for the three months ended March
31, 1995 (received as a result of one of the recent acquisitions). Software
licensing revenue decreased from $72,373 for the three months ended March 31,
1995 to $49,342 for the three months ended March 31, 1996 due to its change
in its business focus as described above and increased operations.
Direct costs increased from $155,129 for the three months ended March 31,
1995 to $748,137 for the three months ended March 31, 1996 due to costs
related mainly to hardware products ($485,421) packaged software sales
($131,691), costs of programming services ($118,605) and costs of software
licensing revenue ($11,920) while operating expenses increased from $56,551
to $438,517 (mainly from an increase in administrative expenses from $49,355
to $303,060 and marketing and sales expenses from $7,196 to $135,457 for the
same periods). This resulted in operating income of $46,580 for the three
months ended March 31, 1996 compared to operating income of $11,156 for the
three months ended March 31, 1995. Programming services provided 26.19% of
the total revenue for the three months ended March 31, 1995 as compared to
12.73% for the three months ended March 31, 1996 due to the Company's change
in business focus.
Direct costs comprised 69.62% of total revenue for the three months ended
March 31, 1995 as compared to comprising 60.66% 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 approximately $1,233,234 in the first quarter of 1996 and the
Company expects the revenue level will continue in the second quarter of
1996, and the Company will continue its marketing efforts to obtain increased
revenues.
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
$1,121,571 for the year ended December 31, 1995 due to costs related mainly
to hardware products ($676,838) packaged software sales ($94,746), costs of
programming services ($271,174) and costs of software licensing revenue
($74,306) while operating expenses increased from $533,046 to $943,144
(mainly from an increase in administrative expenses from $421,864 to $596,308
and marketing and sales expenses from $83,326 to $346,836 for the same
periods). This resulted in operating income of $271,284 for the year ended
December 31, 1995 compared to an operating loss of $(480,145) for the year
ended December 31, 1994.
Page 27 of 158 Pages
<PAGE> 28
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 48.01% for the same period in 1995. The decrease in the direct
cost to revenue percentage is due to the Company's change in business focus
and its recent acquisitions. The Company received revenue of approximately
$2,335,999 in fiscal year 1995 and the Company expects the revenue level
will continue in the first quarter of 1996, and the Company will continue
its marketing efforts to obtain increased revenues.
Revenues from the Company's operations decreased significantly in fiscal year
1994 from 1993. Total Revenue was $322,769 for the year ended December 31,
1994 as compared to $410,346 for the year ended December 31, 1993 for the
combined results of Axcom and the Company for the year. Programming services
revenue decreased from $349,456 for the year ended December 31, 1993 to
$184,335 for the year ended December 31, 1994, respectively. The decrease in
programming services revenue was due entirely to a strategy direction
decision by the Company to market, through alternative channels, its
Compliance Plus proprietary software and to acquire other third party
proprietary software products, moving away from custom programming and
consulting. Although programming services decreased, revenue from hardware
products increased from $52,106 in fiscal year 1993 to $102,661 in fiscal
year 1994 and software licensing revenue increased from $3,256 in fiscal year
1993 to $29,582 in fiscal year 1994. These increases were due to the change
of focus of the Company's business operations to marketing and sales of
cellular data technology hardware and vertically-focused, proprietary
software rather than general-purpose computer hardware and
accounting/inventory control systems. As of December 31, 1994, the Company
experienced a decrease in accounts receivable from December 31, 1993 of
$19,528, an increase in prepaid expenses of $13,780 and an increase in
accounts payable and accrued expenses of $54,062. These all related to the
Company's attempt to increase operations after the acquisition of Axcom
Computer Consultants, Inc. The Company also experienced an increase in
unbilled receivables of $3,001 which represents work in process comprised of
work for hire software services. Under the terms of the preliminary agreement
with the customer, these items are not billable until the delivery date is
formalized. All of the above items resulted in net cash used in operating
activities of $(284,983) for the period ended December 31, 1994.
The Company is seeking to reduce its operating expenses while increasing its
customer base and operating revenues. The Company is focusing on decreasing
administrative costs, however, these amounts have increased as a result of
the purchase of the software "DataBoss" in November, 1994 by the
Corporation's subsidiary Tech Tools, Inc. and the other acquisitions by the
Company. Additionally, increased marketing expenses will probably occur in
future periods as the Company attempts to further increase its marketing and
sales efforts.
Pro Forma Consolidated Results of Operations. Giving effect to the probable
acquisition of Burling Instruments, Inc. As of January 1, 1996, the proforma
March 31, 1996 net revenues increased to $1,663,498 for the three months
ended March 31, 1996 compared to $1,233,234 for that same period if the
acquisitions had not occurred as of January 1, 1996. Direct Costs increased
from $485,097 for the three months ended March 31, 1996 to $1,038,781 for the
three months ended March 31, 1996 giving effect to the probable acquisition.
As a result, gross profit for the three months ended March 31, 1996 was
$485,097 compared to the proforma amount of $624,717 for the same period.
Operating expenses increased from $438,517 to $596,057 for the three months
ended March 31,
Page 28 of 158 Pages
<PAGE> 29
1996 giving effect to the acquisitions. Dividend expense in the amount of
$18,000 had to be expensed in the proforma income statement for the three
months ended March 31, 1996 giving effect to the probable acquisition, and
recording the 8% preferred stock dividend. Net income decreased from $59,657
to $25,170 for the three months ended March 31, 1996 giving effect to the
probable acquisition.
------------------------------------------------------------------------------
MANAGEMENT
------------------------------------------------------------------------------
Officers and Directors. Pursuant to the Bylaws, each Director shall serve
until the annual meeting of the stockholders, or until his successor is
elected and qualified. It is the intent of the Company to support the
election of a majority of "outside" directors at such meeting. The Company's
basic philosophy mandates the inclusion of directors who will be
representative of management, employees and the minority shareholders of the
Company. Directors may only be removed for "cause". The term of office of
each officer of the Company is at the pleasure of the Company's Board.
<TABLE>
The principal executive officers and directors of the Company are as
follows:
<CAPTION>
Name Position Term(s) of Office
--------------------------------------------------------------------------------------------
<S> <C> <C>
Richard J. Sullivan, age 56. Chairman of the Since May 20, 1993
Board of Directors to present
Garrett Sullivan, age 60 Director
President, Secretary March 31, 1995
Acting Chief Financial Officer to present
Daniel E. Penni, age 48 Director March 20, 1996
to present
</TABLE>
Mr. Lance McIntosh was a Director for the Company from May 20, 1993 to March
31, 1995. Mr. McIntosh resigned for personal reasons. From May 20, 1993 to
May 10, 1994, Mr. Stephen Trocke acted as Chief Financial Officer until a
full time controller was hired. Mr. Trocke left the Company for personal
reasons. Gary A. Gray was Director from May 20, 1993 to December 31, 1995 and
President and Secretary from May 30, 1993 to March 31, 1995. Mr. Gray is
President of a subsidiary of the Company and resigned to more fully pursue
his duties with the subsidiary.
Mr. Penni was appointed to the Board of Directors due to the resignation of
Mr. Gary Gray. Mr. Penni shall serve until the annual meeting of the
shareholders.
Family Relationships. Angela M. Sullivan has been nominated for Director of
the Company for election at the annual meeting to be held in June, 1996.
Ms. Sullivan is married to Mr. Richard Sullivan, Chairman of the Board of
Directors. There are no other family relationships between the officers and
directors or a nominee to the Board of Directors.
Page 29 of 158 Pages
<PAGE> 30
Business Experience. The following is a brief account of the business
experience during at least the past five years of the directors and executive
officers, indicating their principal occupations and employment during that
period, and the names and principal businesses of the organizations in which
such occupations and employment were carried out.
Richard J. Sullivan. Mr. Sullivan is currently Chairman of Great Bay
Technology, Inc., an affiliate of the Company. From August 1989 to December
1992, Mr. Sullivan was chairman of the Board of Directors of Consolidated
Convenience Systems, Inc. in Springfield, Missouri. He has been the managing
General Partner of The Bay Group, a successful merger and acquisition firm in
New Hampshire since February, 1985. Mr. Sullivan was formerly Chairman and
Chief Executive Officer of Manufacturing Resources, Inc., an MRP II software
company in Boston, MA, and was Chairman and CEO of Encode Technology, a
Computer-Aided Manufacturing Company, in Nashua, New Hampshire from February,
1984 to August, 1986.
Garrett A. Sullivan. Mr. Sullivan is currently President, Secretary,
Acting Chief Financial Officer and a Director of the Company. He has been
Executive Vice President of Envirobusiness, Inc., an environmental consulting
firm since 1993. He was a partner of The Bay Group, a merger and acquisition
firm in New Hampshire from 1988-1993. From 1986 to 1988, Mr. Sullivan was
President of Granada Group PLC in Great Britain, a consulting firm which
implemented the consolidation of HT&T into Granada Hospital Group, resulting
in the world's largest hospital communications systems supplier. Mr.
Sullivan received a Bachelor of Arts degree from Boston University in 1960
and he obtained an MBA from Harvard University in 1962.
Daniel E. Penni. Mr. Penni is currently a Director of the Company. Mr.
Penni has been involved in the financing of several start up companies in the
past five years on a financial consultant basis. Mr. Penni has been
involved in the insurance business in many sales and administrative roles
since 1969. He was President of The Boston Insurance Center, Inc., an
insurance company until 1988. Mr. Penni was founder and President of BIC
Equities, Inc., a broker/dealer registered with the NASD. This firm was
involved in the sale of mutual funds and tax advantaged investments from 1978
to 1988. Mr. Penni graduated with a Bachelor of Science degree in 1969 from
the School of Management at Boston College.
Angela M. Sullivan. Ms. Sullivan is a nominee for Director of the Company.
From 1988 to present, Ms. Sullivan has been a partner in The Bay Group, a
private merger and acquisition firm, President of Great Bay Technology, Inc.,
an affiliate of the Company and President of Economy Car Care Centers, Inc.
Ms. Sullivan received a Bachelor of Science degree in Business Administration
in 1980 from Salem State College.
Identification of Certain Significant Employees. The Company does not
employ any persons who make or are expected to make significant contributions
to the business of the Company.
Directorships. No director or nominee for director holds a directorship in
any other company with a class of securities registered pursuant to Section
12 of the Securities Exchange Act of 1934 or subject to the requirements of
Section 15(d) of such Act or any company registered as an investment company
under the Investment Company Act of 1940.
Page 30 of 158 Pages
<PAGE> 31
During fiscal 1995, and as of the date of filing this report, no compensation
has been paid, nor have there been compensation arrangements or plans, other
than what has been indicated below.
Remuneration. The following table sets forth certain summary information
concerning the total remuneration paid or accrued by the Company, to or on
behalf of the Company's Chief Executive Officer and the Company's four most
highly compensated executive officers determined as of the end of each of the
last three years.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Awards SARs Outs sation
Position Year ($) ($) ($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary Gray
President, Secretary 1993 $20,999,98
Chief Financial Officer 1994 $51,346.14
1995 N/A
Garrett Sullivan<F1> 1993 N/A
President, Secretary 1994 N/A
Acting Chief Financial 1995 $27,745.00
Officer ---- ----------
<FN>
<F1>Mr. Sullivan also received $29,000 in non-employee compensation and $2,337
was paid by the Company for insurance.
</TABLE>
Compensation Pursuant to Plans. Other than disclosed above, the Company has
no plan pursuant to which cash or non-cash compensation was paid or
distributed during the last fiscal year, or is proposed to be paid or
distributed in the future, to the individuals and group described above in
this Item.
Compensation of Directors. Directors of the Company who are not employees
of the Company may receive a fee of $250 per meeting for their attendance at
meetings of the Company's Board of Directors, and are entitled to
reimbursement for reasonable travel expenses.
Termination of Employment and Change of Control Arrangement. Except as
noted in the next paragraph, the Company has no compensatory plan or
arrangements, including payments to be received from the Company, with
respect to any individual named above for the latest or the next preceding
fiscal year, if such plan or arrangement results or will result from the
resignation, retirement or any other termination of such individual's
employment with the Company, or from a change in control of the Company or a
change in the individual's responsibilities following a change in control.
------------------------------------------------------------------------------
CERTAIN TRANSACTIONS
------------------------------------------------------------------------------
Changes in Control. There are no arrangements, known to the Company,
including any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change of control of
the Company.
Page 31 of 158 Pages
<PAGE> 32
Related Party Transactions. The Company originally loaned $14,230 to one
officer for personal reasons at the interest rate of 6% with current balance
of $12,982 and amounts totaling approximately $108,437 to Great Bay
Technology, Inc. at the interest rate of 8% with a current balance of $0.00.
The loans do not have a payback term. Due to the lack of a specific payback
term, it is management's opinion that the terms of the loans are believed to
be less favorable, though not materially so, to the Company as those that
would have been entered into with unrelated parties. Management has adopted
the policy that future loans to any related parties shall be made at terms at
least as favorable to the Company as those that would have been entered into
with unrelated parties and will not be made if such loans will negatively
effect the Company's cash flow and hamper continued operations.
For services rendered in connection with the three acquisitions which took
place in the third quarter of 1995, the Company paid its affiliate company -
Great Bay Technology Group, Inc. $50,000 for each acquisition for investment
banking services and $76,500 for acquisition services rendered in the fourth
quarter for acquisitions to occur in 1996.
Consulting Agreement. The Company has entered into a consulting
agreement with Pratt, Wylce & Lords, Ltd. ("Pratt") to assist the Company in
its capitalization and the obtainment of additional financing. As partial
payment for consulting services, the Company issued 86,500 of its common
shares to Pratt, 40,000 which were distributed to Pratt shareholders pursuant
to its registration statement declared effective in August, 1994. In
addition, Pratt received cash compensation of $35,000.
Lockup Agreement. Pursuant to an oral agreement on May 15, 1994 and a
written agreement on September 14, 1994, the shareholders who received
warrants issued them pursuant to the "Joint Action by Unanimous Consent of
the Board of Directors and Shareholders" date March 25, 1994 have agreed as
follows:
In the event the shareholder exercises any warrants, the stock issued to the
shareholder pursuant to the exercise shall be locked in and restricted from
trading for a period of two years. A notice is to be placed on the face of
each stock certificate covered by the terms of the Agreement stating that the
transfer of the stock evidenced by the certificate is restricted until
twenty-four (24) months from the date of issuance. The shareholder also
agrees not to sell or otherwise transfer their interest in the warrants
except to an underwriter or other market makers in the stock once a market is
established. The shareholder further agrees that the total value in cash,
or other consideration, paid by the buyer to the seller shall not exceed
$.001 per warrant.
------------------------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
------------------------------------------------------------------------------
There were 2,267,749 Common Shares outstanding at December 31, 1995 and there
are 2,332,375 Common Shares outstanding at March 25, 1996 and no Preferred
Shares outstanding. The following tabulates holdings of shares of the
Company by each person who, subject to the above, at the date of this
Memorandum, holds of record or is known by Management to own beneficially
more than 5.0% of the Common Shares and, in addition, by all directors and
officers of the Company individually and as a group.
Page 32 of 158 Pages
<PAGE> 33
<TABLE>
<CAPTION>
Amount
Name and Address of of Common Shares
Beneficial Owner Currently Owned Percent
----------------------------------------------------------------------------------------
<S> <C> <C>
Great Bay Technology<F1>
Group, Inc.
19 Nathaniel Drive
Amherst, NH 03030 315,000 13.51%
Garrett Sullivan
29 Concord Avenue
Cambridge, Massachusetts 02138 0 0%
Rudolf Kunzli
Chateau Beauregard
F-39350
Pagney, France 656,570 29.07%
Daniel Penni
31 Arnold Road
Wellesley, MA 02181 65,000 2.79%
All Directors & Officers
as a group (3) 380,000 16.29%
<FN>
<F1>Angela Sullivan, Stephanie Sullivan and Richard Sullivan are the control
persons of Great Bay Technology Group, Inc.
</TABLE>
There are currently 200,000 Class B Warrants and 300,000 Class F Warrants
outstanding. The following tabulates holdings of Warrants to be distributed
and owned beneficially by all directors and officers of the Company
individually and as a group.
<TABLE>
<CAPTION>
Class and Number Percent of
Name and Address of Warrants<F1> Class
--------------------------------------------------------------------------------------------
<S> <C> <C>
Richard J. Sullivan Class B<F2> - 140,000 70%
Class F<F2> - 250,000 83%
Garrett Sullivan Class B - 0 0%
Class F - 0 0%
Daniel E. Penni Class B - 0 0%
Class F - 0 0%
All Directors & Officers
as a group (3) Class B - 140,000 70%
Class F - 250,000 83.33%
<FN>
<F1>pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or shared voting
power (including the power to vote or direct the voting) and/or sole or
shared investment power (including the power to dispose or direct the
disposition) with respect to a security whether through a
Page 33 of 158 Pages
<PAGE> 34
contract, arrangement, understanding, relationship or otherwise. Unless
otherwise indicated, each person indicated above has sole power to vote, or
dispose or direct the disposition of all shares beneficially owned, subject
to applicable community property laws.
<F2>Represents Class B and F Warrants owned by Great Bay Technology. Angela
Sullivan, Stephanie Sullivan and Richard Sullivan are the control persons of
Great Bay Technology Group, Inc.
</TABLE>
Changes in Control. There are no arrangements, known to the Company,
including any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change of control of
the Company.
------------------------------------------------------------------------------
SHARES ELIGIBLE FOR FUTURE SALE
------------------------------------------------------------------------------
The Company currently has 2,332,375 shares of Common Stock outstanding.
This does not include any Common Stock issued upon exercise of the Class F
Warrants. Other securities may be issued, in the future, in private
transactions pursuant to an exemption from the Securities Act are "restricted
securities" and may be sold in compliance with Rule 144 adopted under the
Securities Act of 1933, as amended. Rule 144 provides, in essence, that a
person who has held restricted securities for a period of two years may sell
every three months in a brokerage transaction or with a market maker an
amount equal to the greater of 1% of the Company's outstanding shares or the
average weekly trading volume, if any, of the shares during the four calendar
weeks preceding the sale. The amount of "restricted securities" which a
person who is not an affiliate of the Company may sell is not so limited:
Nonaffiliates may each sell without limitation shares held for three years.
The Company has made application for the listing of its Shares in the NASDAQ
system. Sales under Rule 144 may, in the future, depress the price of the
Company's Shares in the over-the-counter market, should a market develop.
Prior to this offering there has been a limited public market for the Common
Stock of the Company. The effect, if any, of a public trading market or the
availability of shares for sale at prevailing market prices cannot be
predicted. Nevertheless, sales of substantial amounts of shares in the
public market could adversely effect prevailing market prices.
------------------------------------------------------------------------------
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
------------------------------------------------------------------------------
The Company's common stock is traded on NASDAQ under the symbol "ACTC".
The following table sets forth the range of high and low bid quotations for
the Company's common stock for each quarter of the last two fiscal years, as
reported by the OTC Bulletin Board and NASDAQ. The Company's market makers
are Olsen Payne, Paragon, Frankel, Baron Chase, National Securities, M. H.
Myerson and NAIB. The quotations represent inter-dealer prices without
retail markup, markdown or commission, and may not necessarily represent
actual transactions.
Page 34 of 158 Pages
<PAGE> 35
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
<S> <C> <C>
9/30/93 * *
12/31/93 * *
3/31/94 * *
6/30/94 * *
9/30/94 * *
12/31/94 2 3/4 2 1/2
3/31/95 5 1/3 5
6/30/95 5 1/3 5
9/30/95 9 8 1/8
12/31/95 7 7/8 3 1/4
</TABLE>
The Company's common stock commenced trading on the over-the-counter market
on December 5, 1994. Prior to that time, there was no market for the
securities of the Company. The Company's common stock commenced trading on
NASDAQ in August, 1995.
Current Acquisitions. The Company has acquired companies through the
issuance of common stock of the Company at the then current market value
(discounted at 50%) which is higher than the offering price herein and the
current market value. These common shares have registration rights and
subsequent sale upon registration could have a negative impact on the market
price of the Company's common stock.
Holders. The approximate number of holders of record of the Company's $.001
par value common stock, as of December 31, 1995, was 1,800. Currently, as
of March 31, 1996, there are 1,800 holders of record.
Dividends. Holders of the Company's common stock are entitled to receive
such dividends as may be declared by its Board of Directors. Other than the
distribution of warrants pursuant to the "Joint Action by Unanimous Consent
of the Board of Directors and Shareholders" dated March 25, 1994, since
inception no dividends on the Company's common stock have ever been paid, and
the Company does not anticipate that dividends will be paid on its common
stock in the foreseeable future.
------------------------------------------------------------------------------
TERMS OF OFFERING
------------------------------------------------------------------------------
Plan of Distribution. The Company hereby offers up to 1,000,000 Common
Shares at the purchase price of $5.00 per Common Share. The Common Shares
are being offered by the Company (employees, consultants, officers and
directors) and possibly selected broker-dealers. No sales commission will be
paid for Common Shares sold by the Company. Selected broker-dealers shall
receive a sales commission of up to 10% for any Common Shares sold by them.
The Company reserves the right to withdraw, cancel or reject an offer in
whole or in part.
Offering Procedure. There is no minimum offering amount. As a result, the
proceeds of the Offering shall be deposited directly into the operation
account of the Company. This Offering will terminate on or before September
30, 1996. In the Company's sole discretion, the offering of Common Shares
may be extended for up to three Thirty day periods, but in no event later
than December 31, 1996.
Page 35 of 158 Pages
<PAGE> 36
Subscription Procedure. The full amount of each subscription will be
required to be paid with a check payable to the Company in the amount of the
subscription. Such payments are to be remitted directly to the Company by
the purchaser or by the soliciting broker/dealer before 12:00 noon, on the
following business day, together with a list showing the names and addresses
of the person subscribing for the offered Common Shares or copies of
subscribers confirmations.
------------------------------------------------------------------------------
DESCRIPTION OF SECURITIES
------------------------------------------------------------------------------
Qualification. The following statements constitute brief summaries of the
Company's Certificate of Incorporation and Bylaws, as amended. Such
summaries do not purport to be complete and are qualified in their entirety
by reference to the full text of the Certificate of Incorporation and Bylaws.
The Company's articles of incorporation authorize it to issue up to
10,000,000 Common Shares, par value $.001 per Common Share and 20,000
Preferred Shares, par value $10.00 per Preferred Share. The currently
outstanding 2,332,375 Common Shares are fully paid and non-assessable.
Currently 500,000 Common Shares are reserved for issuance pursuant to
outstanding Class B and Class F Warrants.
Common Stock. Holders of Common Shares of the Company are entitled to cast
one vote for each share held at all shareholders meetings for all purposes,
including the election of directors, and to share equally on a per share
basis in such dividends as may be declared by the Board of Directors out of
funds legally available therefor. Upon liquidation or dissolution, each
outstanding Common Share will be entitled to share equally in the assets of
the Company legally available for distribution to shareholders after the
payment of all debts and other liabilities. Common Shares are not
redeemable, have no conversion rights and carry no preemptive or other rights
to subscribe to or purchase additional Common Shares in the event of a
subsequent offering. All outstanding Common Shares are, and the shares
offered hereby will be when issued, fully paid and non-assessable.
Cumulative Voting. The Common Shares have cumulative voting rights.
Dividends. There are no limitations or restrictions upon the rights of
the Board of Directors to declare dividends out of any funds legally
available therefore. The Company paid dividends of Class A and Class B
Warrants on March 17, 1994 as further described below, however, it is not
anticipated that any dividends will be paid in the foreseeable future. The
Board of Directors initially may follow a policy of retaining earnings, if
any, to finance the future growth of the Company. Accordingly, future
dividends, if any, will depend upon, among other considerations, the
Company's need for working capital and its financial conditions at the time.
Class B Warrants. Pursuant to a special meeting of the shareholders held on
March 17, 1994, a dividend was declared to the shareholders of record as of
April 30, 1994. One Class A Warrant and One Class B Warrant was distributed
for each .305 shares of common stock owned.
There are currently no Class A Warrants issued and outstanding. All of the
Class A Warrants were exercised.
Page 36 of 158 Pages
<PAGE> 37
There are currently a total of 200,000 Class B Warrants issued and
outstanding. The Class B Warrants are exercisable at $20.00 to purchase one
share of Common Stock. The Class B Warrants are exercisable for a period of
four years from the date of issuance and may be redeemed by the Company with
30 days notice for the redemption price of $.001 per Class B Warrant.
Class F Warrants. In December, 1994, 300,000 Class F Warrants were
authorized and issued to two officers and directors of the Company. 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 $2.50 for each Common Share.
The Company is currently registering on behalf of selling Warrantholders, the
Common Stock underlying the Class F Warrants in this registration statement.
Preferred Stock. The Company's Articles of Incorporation authorize the
issuance of 20,000 Preferred Shares, par value $10.00. The Preferred Stock
authorized may be issued from time to time in series. The Board of Directors
of the Company is authorized to establish such series, to fix and determine
the variations and the relative rights and preferences as between series, and
to thereafter issue such stock from time to time. The Board of Directors is
also authorized to allow for conversion of the Preferred Stock to Common
Stock under terms and conditions as determined by the Board of Directors.
The ability of the Board of Directors to determine the rights, preferences,
privileges and limitations of the Preferred Shares (specifically the voting
rights) could result in a potential antitakeover effect of the Preferred
Stock. Such rights, preferences, privileges and limitations as may be
established by the Board of Directors could have the effect of impeding or
discouraging a change in the control of the Company.
Transfer Agent. Florida Atlantic Stock Transfer, Inc. acts as its transfer
agent for the securities of the Company.
------------------------------------------------------------------------------
LEGAL MATTERS
------------------------------------------------------------------------------
The due issuance of the Common Shares offered hereby will be opined upon for
the Company by J. M. Walker in which opinion Counsel will rely on the
validity of the Certificate and Articles of Incorporation issued by the State
of Missouri, as amended and the representations by the management of the
Company that appropriate action under Missouri law has been taken by the
Company.
------------------------------------------------------------------------------
LEGAL PROCEEDINGS
------------------------------------------------------------------------------
The Company is not involved in any legal proceedings as of the date of this
Prospectus.
------------------------------------------------------------------------------
EXPERTS
------------------------------------------------------------------------------
The audited financial statements included in this Prospectus have been so
included in reliance on the report of Rubin, Brown, Gornstein & Co.,
Certified Public Accountants, on the authority of such firm as experts in
auditing and accounting and Noke & Heard, Certified Public Accountants for
Burling Instruments, Inc.
Page 37 of 158 Pages
<PAGE> 38
------------------------------------------------------------------------------
INTERESTS OF NAMED
EXPERTS AND COUNSEL
------------------------------------------------------------------------------
None of the experts or counsel named in the Prospectus are affiliated with
the Company.
Page 38 of 158 Pages
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
Board of Directors
Applied Cellular Technology, Inc. & Subsidiaries
Springfield, Missouri
We have audited the accompanying consolidated balance sheet of
Applied Cellular Technology, Inc. and subsidiaries as of December
31, 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended
December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Applied Cellular Technology, Inc. and subsidiaries as
of December 31, 1995, and the results of its operations and its
cash flows for the years ended December 31, 1994 and 1995, in
conformity with generally accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co. LLP
March 8, 1996
Page 39 of 158 Pages
<PAGE> 40
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
<TABLE>
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 125,469
Accounts receivable 522,548
Unbilled receivables 104,111
Inventories 504,859
Prepaid expenses 51,840
Note receivable - officer 12,982
Note receivable - Cadkey, Inc. 87,057
-----------
TOTAL CURRENT ASSETS 1,408,866
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 138,489
INVESTMENT IN CADKEY, INC. COMMON STOCK 652,081
NOTE RECEIVABLE - CADKEY, INC. 292,627
GOODWILL 906,626
PURCHASED COMPUTER SOFTWARE 667,443
OTHER ASSETS 140,035
-----------
$ 4,206,167
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Note payable - line of credit $ 29,999
Notes payable - officers 280,095
Capital lease obligations - current 23,360
Accounts payable 564,692
Accrued expenses 105,146
-----------
TOTAL CURRENT LIABILITIES 1,003,292
-----------
LONG-TERM LIABILITIES
Capital lease obligations 19,251
-----------
MINORITY INTEREST 57,002
-----------
STOCKHOLDERS' EQUITY
Common stock:
Authorized 10,000,000 shares of $.001 par value; issued and
outstanding 2,267,749 shares 2,268
Additional paid-in capital 3,358,072
Retained earnings (deficit) (233,718)
-----------
TOTAL STOCKHOLDERS' EQUITY 3,126,622
-----------
$ 4,206,167
===========
------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 2
</TABLE>
Page 40 of 158 Pages
<PAGE> 41
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
PAGE 1 OF 2
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------------- ------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1994 -- $ -- 487,802 $ 1,161 $ -- $ (5,306) $ (4,145)
NET LOSS -- -- -- -- -- (482,454) (482,454)
ISSUANCE OF PREFERRED STOCK 20,000 200,000 -- -- -- -- 200,000
REDUCTION OF PAR VALUE OF COMMON
STOCK -- -- -- (673) 673 -- --
ISSUANCE OF COMMON STOCK -- -- 212,378 212 279,538 -- 279,750
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 29% OF CADKEY, INC.
(AS RESTATED) -- -- 456,570 457 570,256 -- 570,713
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF PURCHASED SOFTWARE
(AS RESTATED) -- -- 180,000 180 224,820 -- 225,000
----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 -
CARRIED FORWARD 20,000 $ 200,000 1,336,750 $ 1,337 $ 1,075,287 $ (487,760) $ 788,864
----------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 3
Page 41 of 158 Pages
<PAGE> 42
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
PAGE 2 OF 2
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------------- ------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 -
BROUGHT FORWARD 20,000 $ 200,000 1,336,750 $ 1,337 $ 1,075,287 $ (487,760) $ 788,864
NET INCOME -- -- -- -- -- 254,042 254,042
REDEMPTION OF PREFERRED STOCK (20,000) (200,000) 11,765 12 52,596 -- (147,392)
ISSUANCE OF COMMON STOCK -- -- 259,999 260 523,392 -- 523,652
ISSUANCE OF RESTRICTED COMMON
STOCK -- -- 200,000 200 499,800 -- 500,000
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF PURCHASED SOFTWARE -- -- 113,009 113 289,190 -- 289,303
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 80% OF ATLANTIC
SYSTEMS, INC. -- -- 124,066 124 341,058 -- 341,182
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 80% OF ELITE
COMPUTER SERVICES, INC. -- -- 102,160 102 456,553 -- 456,655
50% OF PRINCIPAL PAYMENTS RECEIVED
ON NOTE RECEIVABLE - CADKEY, INC. -- -- -- -- 120,316 -- 120,316
CLASS "E" WARRANTS REDEEMED -- -- 120,000 120 (120) -- --
----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 -- $ -- 2,267,749 $ 2,268 $ 3,358,072 $ (233,718) $ 3,126,622
======================================================================================================================
------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 4
</TABLE>
Page 42 of 158 Pages
<PAGE> 43
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------
1994 1995
---------------------------
<S> <C> <C>
REVENUES
Programming services $ 184,335 $ 442,874
Hardware products 102,661 1,281,101
Software licensing revenue 29,582 151,229
Packaged software sales -- 417,600
Other revenue 6,191 43,195
----------------------------------------------------------------------------------------
TOTAL REVENUES 322,769 2,335,999
----------------------------------------------------------------------------------------
DIRECT COSTS
Costs of programming services 192,623 271,174
Costs of hardware products 62,265 676,838
Costs of software licensing revenue 7,881 74,306
Cost of packaged software sales -- 159,388
Other costs -- 331
Royalty expense 7,099 4,176
----------------------------------------------------------------------------------------
TOTAL DIRECT COSTS 269,868 1,186,213
----------------------------------------------------------------------------------------
GROSS PROFIT 52,901 1,149,786
----------------------------------------------------------------------------------------
OPERATING EXPENSES
Marketing and sales 83,326 346,836
Administrative 421,864 634,376
Research and development expense 27,856 --
----------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 533,046 981,212
----------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (480,145) 168,574
EQUITY IN INCOME OF CADKEY, INC. -- 74,682
INTEREST INCOME -- 74,899
INTEREST EXPENSE (2,309) (15,150)
----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAX AND MINORITY INTEREST (482,454) 303,005
PROVISION FOR INCOME TAX -- --
----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST (482,454) 303,005
MINORITY INTEREST -- (48,963)
----------------------------------------------------------------------------------------
NET INCOME (LOSS) $(482,454) $ 254,042
========================================================================================
NET INCOME (LOSS) PER COMMON SHARE $ (0.82) $ .14
========================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 587,797 1,792,939
========================================================================================
------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 5
</TABLE>
Page 43 of 158 Pages
<PAGE> 44
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
-----------------------------------
1994 1995
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (482,454) $ 254,042
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,912 132,690
Equity in income of Cadkey, Inc. -- (74,682)
Minority interest portion of income -- 48,963
Loss on sale of equipment -- 519
Registration costs - shares issued 129,750 --
Imputed interest - notes payable - officers -- 6,614
Change in assets and liabilities:
(Increase) decrease in accounts receivable 19,528 (232,980)
Increase in unbilled receivables (3,001) (94,011)
Increase in inventories -- (43,668)
Increase in prepaid expenses (13,780) (14,411)
Increase in deposits -- (4,898)
Increase in accounts payable and accrued
expenses 54,062 149,262
----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (284,983) 127,440
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in notes receivable - officer 2,832 (792)
(Increase) decrease in note receivable - stockholder (90,058) 108,437
Payments received on note receivable - Cadkey, Inc. -- 240,632
Increase in other assets (450) (107,958)
Insurance proceeds on equipment theft -- 1,650
Payments for equipment and computer software (14,923) (40,199)
Payments for costs of 80% business acquisitions
(net of cash balances acquired) -- (183,208)
Payments for costs related to asset acquisitions -- (119,355)
----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (102,599) (100,793)
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts borrowed (paid) on line of credit 37,175 (171,048)
Payments on capital lease obligations (886) (15,318)
Decrease in notes payable - officers -- (86,849)
Issuance (redemption) of preferred stock 200,000 (147,392)
Issuance of common stock 150,673 516,778
----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 386,962 96,171
----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (620) 122,818
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,271 2,651
----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,651 $ 125,469
==========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 2,309 $ 15,150
----------------------------------------------------------------------------------------------------------
Noncash investing and financing activities (Note 18)
----------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 6
</TABLE>
Page 44 of 158 Pages
<PAGE> 45
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 And 1995
1. Summary Of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
Tech Tools, Inc. and ACT Financial Corp. which were formed in
November 1994 and April 1995, respectively, and its majority-
owned subsidiaries, Atlantic Systems, Inc. and Elite Computer
Services, Inc., in which an 80% interest was acquired by the
Company in August and September 1995, respectively. All
significant intercompany investments, transactions and account
balances have been eliminated in consolidation.
Use Of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from
those estimates.
Cash And Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
Allowance For Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to
the estimated collection losses that will be incurred in
collection of all receivables. The estimated losses are based on
historical collection experience coupled with a review of the
current status of the existing receivables. There is no
allowance for uncollectible accounts reflected in the balance
sheet as Company management is of the opinion that no allowance
is necessary.
Unbilled Receivables
The Company records an unbilled receivable to account for
salary expenses and certain other expenses that apply to
customer projects not yet billed.
------------------------------------------------------------------------------
Page 7
Page 45 of 158 Pages
<PAGE> 46
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Inventories
The Company's inventories consist mainly of new and used
computers, computer parts and software. The inventory is
valued at the lower of cost or market, determined by the FIFO
(first-in, first-out) method. The Company closely monitors
and analyzes inventory for potential obsolescence and slow-
moving items based upon the aging of the inventory listing and
the inventory turns by product. The Company will provide an
allowance for obsolete inventories if deemed necessary from
the analysis.
Equipment And Leasehold Improvements
Equipment and leasehold improvements are carried at cost, less
accumulated depreciation and amortization computed using
straight-line and accelerated methods. The assets are
depreciated and amortized over periods ranging from three to
seven years.
Organization Costs
Organization costs, such as legal fees and incorporation
costs, are capitalized and amortized over five years.
Loan Fees
Loan fees are capitalized using the straight-line amortization
method over the life of the loan.
Investment In Common Stock
The Company acquired a 29% interest in Cadkey, Inc. in
December 1994. The Company accounts for this investment using
the equity method. The resulting goodwill is being amortized
straight-line over 7 years.
The Company's policy for making on-going determinations of the
net realizable value for the investment in Cadkey, Inc.
includes receiving quarterly unaudited financial statements
and annual audited financial statements that management uses
as an integral part of its on-going assessment. The Company
analyzes the investee's ability to generate sufficient net
income to provide an equity in the earnings of Cadkey, Inc.
in an amount that exceeds the amount of goodwill amortization
recorded for the period of the Company's books. Management
also conducts an on-going review of readily available industry
statistics and compares these results to the investee
company's results to assess the investee company's operating
performance relative to other industry participants and to
assess the on-going prospects for the investee company's
industry as a whole.
------------------------------------------------------------------------------
Page 8
Page 46 of 158 Pages
<PAGE> 47
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Note Receivable - Cadkey, Inc.
The Company's policy for making on-going determinations of the
net realizable value of the note receivable from Cadkey, Inc.
is not only to review the overall performance of Cadkey, Inc.
as discussed within the Investment in Common Stock footnote,
but also to closely monitor the note repayment schedule agreed
to by Cadkey, Inc. in order to assess the continuing
likelihood of repayment and the on-going net realizable value
of the Cadkey, Inc. note. The carrying value of the note
receivable has been reduced by 50%, as a result of the
discounting of the value of the shares exchanged to acquire
the note receivable because of the restricted nature and the
limited market of those common shares (Note 17).
Goodwill
The goodwill resulting from the purchase of 80% ownership in
Atlantic Systems, Inc. and Elite Computer Services, Inc. (Note
17) is being amortized over 10 years.
The Company's policy for making on-going determinations of the
net realizable value of the goodwill is to monitor the net
income of Atlantic Systems, Inc. and Elite Computer Services,
Inc. and to determine if the expected income levels over the
remainder of the 10 year amortization period would exceed the
carrying value of the goodwill. If impairment of the goodwill
appears likely, a reduction in the carrying value would be
recorded at that time.
Purchased Computer Software
Purchased computer software is stated at cost less accumulated
amortization. The purchased computer software is at the
stage of technological feasibility which is considered to have
occurred when a product design and working model of the
software product have been completed and the completeness of
the working model and its consistency with the product design
have been confirmed by testing. Amortization is computed over
the greater of current revenues divided by the total of
expected revenues or straight-line over the number of years
of expected revenue. The straight-line life is determined to
be 5 years. The Databoss computer software purchased by
Tech Tools, Inc. in November 1994 (Note 17) has been amortized
beginning in July 1995 when it was available for release to
customers. Amortization began for the software acquired from
Baler Software Corporation in August 1995 at the date of its
acquisition (Note 17).
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Notes To Consolidated Financial Statements (Continued)
Revenue Recognition
For programming, consulting and software licensing services,
the Company recognizes revenue based on the percent complete
for fixed fee contracts, with the percent complete being
calculated as either the number of direct labor hours in the
project to date divided by the estimated total direct labor
hours or based upon the completion of specific task orders.
It is the Company's policy to record contract losses in their
entirety in the period in which such losses are foreseeable.
For non fixed fee jobs, the revenue is recognized based on the
actual direct labor hours in the job times the standard
billing rate and adjusted to realizable value if necessary.
For product sales, the Company recognizes revenue upon
shipment. There are no significant post contract support
obligations at the time of revenue recognition. The Company's
accounting policy regarding vendor and post-contract support
obligations is according to the customers contract, billable
upon the occurrence of the post-sale support.
The Company does not experience many product returns, and
therefore, Company management is of the opinion that no
allowance for sales returns is necessary. The Company has no
obligation for warranties on hardware sales, because the
warranty is given by the manufacturer. The Company does not
offer a warranty policy for their services to customers.
Proprietary Software In Development
In accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," the Company has
capitalized certain computer software development costs upon
the establishment of technological feasibility. Technological
feasibility is considered to have occurred upon completion of
a detailed program design which has been confirmed by
documenting and tracing the detail program design to product
specifications and has been reviewed for high-risk development
issues, or to the extent a detailed program design is not
pursued, upon completion of a working model that has been
confirmed by testing to be consistent with the product design.
Amortization of computer software costs is provided based on
the greater of the ratios that current gross revenues for a
product bear to the total of current and anticipated future
gross revenues for that product or the straight-line method
over the estimated useful life of the product. No
amortization was charged against revenue during the year ended
December 31, 1995. Amortization will begin in 1996 when the
products are ready for release to the general public.
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Notes To Consolidated Financial Statements (Continued)
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based on the
weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of convertible preferred
stock and common stock issuable upon exercise of stock options
and warrants (using the treasury stock method). Under the
rules of the Securities and Exchange Commission, common stock
issued by the Company during the 12-month period prior to the
initial public offering and stock options granted during the
same period, that had an exercise price that was less then the
IPO price, have been included in the calculation of common and
common equivalent shares using the treasury stock method as
if they were outstanding for all applicable periods (pre IPO
period only).
Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consists of taxes
currently due plus deferred taxes related primarily to
differences between the basis of goodwill, investment in 29%
owned company, equipment and leasehold improvements, and net
operating loss carryforwards for financial and income tax
reporting. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and
liabilities are recovered or settled.
The Company and its subsidiaries file consolidated tax
returns. Income taxes are paid by the parent company and
allocated to each subsidiary through intercompany charges.
2. Operations
Applied Cellular Technology, Inc. was incorporated in May 1993
under its former name, Great Bay Acquisition Company. On May
21, 1993, Great Bay Acquisition Company acquired the assets
of Axcom Computer Consultants, Inc. Effective September 1993,
Great Bay Acquisition Company changed its name to Axcom
Information Technology, Inc. and became the sole subsidiary
of Great Bay Technology Group, Inc. Effective March 1994,
Axcom Information Technology, Inc. changed its name to Applied
Cellular Technology, Inc. The Company is a software
development and services company and has applied technologies
in tailored solutions for a number of major American
corporations. The Company's market is primarily retail,
manufacturing and distribution firms and its operations are
conducted from the home office in Missouri, with customers
throughout the United States.
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Notes To Consolidated Financial Statements (Continued)
In November 1994, the Company formed a subsidiary, Kedwell
International, Inc. by issuing 180,000 shares at $1.25 of its
$.001 par value common stock. The subsidiary purchased
software in exchange for its 180,000 shares of Applied
Cellular Technology's common stock valued at $1.25 per share
and for the issuance of 120,000 warrants at no value as
described in Note 17. Effective April 1995, Kedwell
International, Inc. changed its name to Tech Tools, Inc. Tech
Tools, Inc. is a software development and services company.
The Company's office is located in New Hampshire, with
customers throughout the United States.
During 1994, the Company acquired 570,712 shares of Cadkey,
Inc., a software technology company, in exchange for 456,570
shares of its $.001 par value common stock valued at $1.25 per
share, resulting in a 29% investment in this company.
During April 1995, the Company formed a subsidiary, ACT
Financial Corp.
In August 1995, Tech Tools, Inc. purchased software and
certain other related assets and liabilities of Baler Software
Corporation in exchange for the issuance of 113,009 shares of
common stock of Applied Cellular Technology, Inc.
Additionally, in August 1995, the Company issued 124,066
shares of its common stock in exchange for an 80% investment
in Atlantic Systems, Inc., a software support company mainly
for the liquor industry, with customers throughout the United
States.
In September 1995, the Company issued 102,160 shares of its
common stock in exchange for an 80% investment in Elite
Computer Services, Inc., a distributor of computer parts, with
customers throughout the United States.
The acquisitions of Atlantic Systems, Inc. and Elite Computer
Services, Inc. have been accounted for using the purchase
method. The results of operations of the acquired companies
are included in the accompanying financial statements since
the dates of acquisition.
3. Note Receivable - Officer
The note is unsecured, bears interest at the prime lending
rate and is due on demand.
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Notes To Consolidated Financial Statements (Continued)
4. Note Receivable - Cadkey, Inc.
The note is unsecured and bears interest at 10.5%. Principal
and interest payments of $20,483 are due monthly, with the
final payment due October 1, 1999.
The note is valued as follows:
<TABLE>
<S> <C>
Shares issued (200,000 x $5.00) $ 1,000,000
50% discount given to shares issued (Note 17) (500,000)
----------------
Original carrying value of the note receivable 500,000
50% of principal payments received 120,316
----------------
Balance at December 31, 1995 379,684
Current portion (87,057)
----------------
Long-term portion $ 292,627
================
</TABLE>
The 200,000 shares of stock issued were restricted as to
voting rights.
Due to the 50% reduction in the face value of the note, as
payments are received, 50% of the amounts are credited to the
note receivable and the remaining 50% to paid-in capital.
5. Equipment And Leasehold Improvements
Equipment and leasehold improvements consist of:
<TABLE>
<S> <C>
Furniture, fixtures and equipment $ 180,630
Computer equipment 66,909
Leased vehicles 113,210
Leasehold improvements 1,087
--------------
361,836
Less: Accumulated depreciation and
amortization 223,347
--------------
$ 138,489
==============
</TABLE>
Included above are vehicles acquired under capital lease
obligations in the amount of $113,210. Related accumulated
depreciation amounted to $42,777 at December 31, 1995.
Depreciation and amortization charged against income amounted
to $7,718 and $27,613 for the years ended December 31, 1994
and 1995, respectively.
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Notes To Consolidated Financial Statements (Continued)
6. Investment In Cadkey, Inc. Common Stock
Investment in Cadkey, Inc. common stock consists of:
<TABLE>
<S> <C>
Original investment:
Investment in Cadkey, Inc. common stock $ 500,025
Goodwill 70,688
---------------
570,713
Additional costs of acquisition 6,686
Equity in income of Cadkey, Inc. 86,668
---------------
664,067
Less: Amortization of goodwill 11,986
---------------
$ 652,081
===============
</TABLE>
The original investment was calculated as follows:
<TABLE>
<S> <C>
Shares issued (456,670 x $2.50) $ 1,141,425
50% discount given to shares issued (Note 17) (570,712)
---------------
$ 570,713
===============
</TABLE>
Equity in income of Cadkey, Inc. for 1995 consists of:
<TABLE>
<S> <C>
Equity in income of Cadkey, Inc. $ 86,668
Amortization of goodwill (11,986)
---------------
$ 74,682
===============
</TABLE>
See Note 14 for summarized financial information of Cadkey, Inc.
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Notes To Consolidated Financial Statements (Continued)
7. Goodwill
Goodwill consists of:
<TABLE>
<S>
Shares issued in the Atlantic Systems, Inc. <C>
80% purchase (124,066 x $5.50) $ 682,363
Shares issued in the Elite Computer Services, Inc.
80% purchase (102,160 x $8.94) 913,310
50% discount given to shares issued (Note 17) (797,836)
---------------
Net value of shares issued 797,837
Additional costs of acquisitions 173,682
80% of net book value of companies acquired (26,825)
Accumulated amortization (38,068)
---------------
Carrying value $ 906,626
===============
</TABLE>
Amortization expense amounted to $38,068 for the year ended
December 31, 1995.
8. Purchased Computer Software
Purchased computer software consists of:
<TABLE>
<S> <C>
Shares issued in the purchase of the Baler
Software Corporation net assets
(113,009 x $5.125) $ 579,171
Shares issued in the purchase of the Databoss
software (180,000 x $2.50) 450,000
Warrants issued in the purchase of the Databoss
software (120,000 x $1.50) 180,000
50% discount given to the shares issued
(Note 17) (514,586)
100% discount given to the warrants issued
(Note 17) (180,000)
---------------
Net value of shares issued 514,585
Additional costs of acquisitions 217,500
Accumulated amortization (64,642)
---------------
Carrying value $ 667,443
===============
</TABLE>
Amortization expense amounted to $64,642 for the year ended
December 31, 1995.
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Notes To Consolidated Financial Statements (Continued)
The additional costs of acquisitions include any cash payments
according to the acquisition agreements plus costs for
investment banking services, legal services and accounting
services, that were essential costs in acquiring these assets.
9. Line Of Credit
Elite Computer Services, Inc. has a $100,000 line of credit
with a bank. The credit line is secured by accounts
receivable and inventories and bears interest at the prime
rate plus 2%. Borrowings are due on demand. The line of
credit was paid and terminated in February 1996.
Interest expense on the above debt amounted to $2,309 in 1994
and $9,350 in 1995.
The weighted average dollar amount of borrowings for the year
ended December 31, 1995 was $79,979. The weighted average
interest rate paid was 9% for the year ended December 31,
1995.
10. Notes Payable - Officers
The notes are non-interest bearing, unsecured and are due on
demand. Imputed interest has been recorded at a market rate
of 7%.
11. Capital Lease Obligations
At December 31, 1995, future payments for capital lease
obligations are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------------------
<S> <C>
1996 $ 28,337
1997 15,750
1998 8,489
--------------------------------------------------------------
Total minimum lease payments 52,576
Less: Amount representing interest 9,965
--------------------------------------------------------------
Capital Lease Obligation 42,611
Less: current maturities 23,360
--------------------------------------------------------------
Long-term Capital Lease Obligation $ 19,251
==============================================================
</TABLE>
Interest expense on the capital leases amounted to $5,800 in
1995.
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Notes To Consolidated Financial Statements (Continued)
12. Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the
short maturity of those instruments.
Accounts Receivable
The carrying amounts approximate fair value.
Note Receivable - Officer
The carrying amount approximates fair value because the stated
interest rate fluctuates with market rates.
Note Receivable - Cadkey, Inc.
The carrying value of the note approximates fair value because
the interest rate of the note approximates the current rate
that the Company could receive on a similar note, and also
because this agreement was renegotiated in the current year.
Note Payable - Line Of Credit
The carrying amount approximates fair value because the stated
interest rate fluctuates with current market rates.
Notes Payable - Officers
The carrying amount approximates fair value as the interest
being charged is at a current market rate.
Accounts Payable
The carrying amount approximates fair value.
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Notes To Consolidated Financial Statements (Continued)
Estimated fair values of the Company's financial instruments,
all of which are held for nontrading purposes, are as follows:
<TABLE>
<CAPTION>
1995
---------------------------
CARRYING FAIR
AMOUNT VALUE
---------------------------
<S> <C> <C>
Cash and cash equivalents $ 125,469 $ 125,469
Accounts receivable 522,548 522,548
Note receivable - officer 12,982 12,982
Note receivable - Cadkey, Inc. 379,684 379,684
Note payable - line of credit (29,999) (29,999)
Accounts payable (564,692) (564,692)
Notes payable - officers (280,095) (280,095)
</TABLE>
The estimated fair value amounts presented herein have been
determined using available market information and
appropriate valuation methodologies and are not necessarily
indicative of the amount the Company could realize in a
current market exchange.
13. Income Taxes
The Company has computed its income tax provision in
accordance with Statement of Financial Accounting Standards
No. 109 ("SFAS109"), which was effective for 1993 and years
thereafter.
The provision for income taxes includes current taxes and
deferred taxes computed on the temporary differences in the
basis of certain assets and liabilities between financial
statement and income tax reporting purposes. The principal
source of deferred income taxes as of December 31, 1995
consists of differences in the basis of goodwill and an
investment in a 29%-owned company.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1994 1995
---------------------------
<S> <C> <C>
Current taxes at statutory rates $ -- $ 80,000
Current taxes covered by net
operating loss carryforward -- (80,000)
--------------------------------------------------------------------------
Current income tax provision -- --
Deferred income taxes -- --
--------------------------------------------------------------------------
$ -- $ --
==========================================================================
</TABLE>
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Notes To Consolidated Financial Statements (Continued)
The components of the deferred tax asset (liability), at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
DEFERRED TAX ASSET (LIABILITY)
Goodwill basis difference $ 28,000
Cadkey, Inc. investment basis difference (23,000)
Equipment and leasehold improvements
basis differences (5,000)
Net operating loss carryforward 30,000
Valuation allowance (30,000)
---------------
NET DEFERRED TAX ASSET $ --
===============
</TABLE>
SFAS109 requires a valuation allowance be recorded when it
is "more likely than not that some portion or all of the
deferred tax assets will not be realized." At December 31,
1995, the Company has elected to record a valuation
allowance of $30,000 to offset the deferred tax asset.
The reconciliation of the effective tax rate with the
statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1994 1995
-------------------------------
% %
-------------------------------
<S> <C> <C>
Statutory rate -- 32
Surtax exemptions -- (10)
State income taxes -- 4
-------------------------------
-- 26
===============================
</TABLE>
Under the carryforward provisions of the Internal Revenue
Code and applicable state income tax law, the Company has
available for future periods the following carryforwards:
<TABLE>
<CAPTION>
YEAR YEAR OF
INCURRED EXPIRATION AMOUNT
-----------------------------------------------------
<S> <C> <C> <C>
Net operating loss 1994 2009 $ 95,000
=============
</TABLE>
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Notes To Consolidated Financial Statements (Continued)
14. Summarized Financial Information Of Cadkey, Inc.
The summarized financial information of Cadkey, Inc. (a 29%-
owned company) as of the fiscal years ending October 31,
1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
-----------------------------------------
<S> <C> <C>
Current assets $ 3,293,000 $ 2,334,000
Noncurrent assets 966,000 586,000
Current liabilities 3,795,000 2,198,000
Noncurrent liabilities 1,000,000 615,000
Stockholders' Equity (Deficit) (536,000) 107,000
Net sales 13,922,000 10,372,000
Cost of goods sold 3,054,000 2,128,000
Gross profit 10,868,000 8,244,000
Income (loss) from continuing operations (1,084,000) 266,000
Net income (loss) (2,374,000) 266,000
</TABLE>
15. Commitments
The Company was obligated to pay a royalty to Axon
Investments, Inc., formerly Axcom Computer Consultants,
Inc., in the amount of 2% of gross collected revenues for
120 months beginning July 1, 1993. This royalty agreement
was terminated in July 1995. Royalty expense amounted to
$7,099 in 1994 and $4,176 in 1995.
The Company has contracted with a registered broker-dealer
to receive financial consulting and investment banking
services through September 1996. The Company must pay the
broker-dealer $5,000 each month in the form of cash or in
the form of shares of capital stock.
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Notes To Consolidated Financial Statements (Continued)
Applied Cellular Technology, Inc. is obligated under a one-
year lease for its office space, expiring June 1996. Tech
Tools, Inc. is obligated under a one-year lease for its
office space, expiring April 1996. Elite Computer
Services, Inc. is obligated under a five-year lease for its
office space, expiring May 1996. Atlantic Systems, Inc.
is obligated under a three-year lease for its office space,
expiring December 1998. Total lease commitments are
summarized as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------
<S> <C>
1996 $ 68,305
1997 34,800
1998 36,000
---------------------------------
$ 139,105
=================================
</TABLE>
Rent expense amounted to $16,047 and $49,375 for the years
ended December 31, 1994 and 1995, respectively.
In September 1995, the Company entered into two employment
contracts with officers of Elite Computer Services, Inc.
which call for services to be provided for a period of two
years, and total annual salaries of $180,000.
16. Profit Sharing Plan
Elite Computer Services, Inc. has a qualified,
noncontributory 401(k) plan for all eligible employees.
The Company contributes, at its discretion, up to 15% of
the participant's annual compensation. Profit sharing
expense amounted to $4,659 in 1995.
Atlantic Systems, Inc. has a qualified, noncontributory
401(k) plan for all eligible employees. The amount of the
employer contribution is determined annually by the
employer at its discretion. There was no employer
contribution in 1995.
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Notes To Consolidated Financial Statements (Continued)
17. Stockholders' Equity
The Board of Directors approved a 420-for-1 stock split
effective March 1994. The Board of Directors also approved
an increase in the number of authorized shares of common
stock to 10,000,000, with par value of .0024 per share, and
authorized the issuance of 20,000 shares of redeemable
preferred stock, par value $10 per share. In April 1994,
the Articles of Incorporation were amended to change the
par value to $.001 per common share. The preferred stock
shares were to be redeemable by the Company at any time but
were required to be redeemed by the Company at such time as
it had received a cumulative total of $500,000 in funding
or capitalization through private placement, warrant
exercise, public offering or any other such means excluding
lines of credit or revenue from sales and excluding funds
received from the sale of said preferred stock.
Subsequently the terms of the preferred stock were changed
to five-year, noncumulative, 6% redeemable shares with the
dividend and redemption solely at the option of the Board
of Directors of Applied Cellular Technology, Inc.
In March 1994, the Company received $200,000 from an
investor for the preferred stock mentioned above.
In 1995 the Company redeemed the preferred shares and
issued 11,765 shares of common stock and paid the preferred
shareholder $147,392.
Effective March 1994, the Company authorized the issuance
of common stock purchase warrants as follows: 200,000 A
warrants exercisable at a rate of 1 warrant plus $4.75 to
purchase one share of common stock and 200,000 B warrants
exercisable at 1 warrant plus $20 to purchase one share of
common stock and 45,000 class C warrants exercisable for a
period of three years from the date of issuance at the rate
of 1 warrant plus $1.50 for one share of common stock.
Both the A & B purchase warrants are effective for a period
of 4 years from the date of issuance and shall be callable
with 30 days notice for a price of $.001 per warrant.
The Company declared a dividend to the shareholders of
record effective March 21, 1994. Said dividend was in the
form of A and B common stock purchase warrants. The
dividend was at a rate of one A and one B warrant for each
.305 shares of common stock owned.
The net loss per common share and all references to the
number of shares of common stock have been restated to
reflect the aforementioned stock split.
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Notes To Consolidated Financial Statements (Continued)
In March 1994, the Company entered into an agreement with
Pratt, Wylce & Lords, Ltd. ("Pratt"), for services to be
provided in connection with the registration (Note 19) and
other consulting services. In March 1994, the Company
issued 86,500 shares to Pratt. The shares were issued at
the fair value as of the date of issuance in direct payment
for services related to the registration. Consulting
expense at December 31, 1994 related to the registration
amounted to $129,750.
In November 1994, 120,000 redeemable E warrants were issued
as part of the acquisition of software by Tech Tools, Inc.
No value was attributed to these warrants because the
exercise price significantly exceeded the fair value of the
underlying common shares. Each warrant can be exercised,
at any time subsequent to Applied Cellular Technology's
market price reaching $7.50 per share, to acquire one
common share of Applied Cellular Technology, Inc. at the
price of $5.00 per common share, or one redeemable class A
convertible preferred share of Tech Tools, Inc. at the
price of $5.00, or, if Tech Tools, Inc. becomes a public
company, into an amount equal to 40% of its total
outstanding common shares. Tech Tools, Inc.'s preferred
stock pays a cumulative dividend, compounded annually, of
8% of the aggregate value of $600,000. The preferred stock
has cash redemption rights five years after issuance at the
option of the holder. The redemption price is $5.00 per
preferred share. In August 1995, the Class E warrants were
redeemed for 120,000 shares of Applied Cellular Technology,
Inc.
In December 1994, 300,000 class F warrants were authorized
for issuance. The class F warrants shall be exercisable
for a period of five years from the date of issuance and
shall be exercisable at the rate of 1 warrant plus $2.50
for each common share.
In March 1995, restricted common stock was issued to
purchase a note receivable. The Company issued 200,000
common shares at a market price of $5.00 with a 50%
discount, due to the limited market of the common shares,
bringing the value down to $2.50 each. The stock was
restricted as to voting rights until the bid price per
share equaled or exceeded $7.50 for a period of 48 hours or
more, which occurred in the third quarter of 1995. Due to
this discount, 50% of all principal payments being received
are recorded as additional paid-in capital. This amount
for 1995 was $120,316.
In August 1995, 350,000 class H warrants were authorized
for issuance. The class H warrants shall be exercisable
for a period of 5 years from the date of issuance and shall
be exercisable at the rate of 1 warrant plus $4.75 for each
common share.
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Notes To Consolidated Financial Statements (Continued)
On August 4, 1995, the Company acquired software and
related net assets of Baler Software Corporation (Baler) in
exchange for the payment of debt of $14,000, the issuance
of 88,009 shares of the Company's common stock, for full
payment of $451,046 debt of Baler's secured creditors and
the issuance of 25,000 shares of the Company's common stock
to one of Baler's shareholders in payment for the acquired
software and certain other assets and liabilities. The
then current market trading value of $5.125 a share has
been discounted by 50% due to limited market of the common
shares, resulting in a value of $2.56 a share.
On August 9, 1995, the Company issued 124,066 shares of its
common stock in exchange for an 80% investment in Atlantic
Systems, Inc. The then current market trading value of
$5.50 a share has been discounted by 50% due to the limited
market of the shares, resulting in a value of $2.75 a
share.
On September 6, 1995, the Company issued 102,160 shares of
its common stock in exchange for an 80% investment in Elite
Computer Services, Inc. The then current market trading
value of $8.94 a share has been discounted by 50% due to
the limited market of the shares, resulting in a value of
$4.47 a share.
18. Supplemental Cash Flow Information
The Company had the following noncash investing and
financing activities:
During 1994, the subsidiary purchased software through the
issuance of 180,000 shares of Applied Cellular Technology's
common stock at $1.25 per share and the issuance of 120,000
warrants, carrying no value.
During 1994, the Company acquired 570,712 shares of Cadkey,
Inc. in exchange for 456,570 shares of its common stock at
$1.25 a share, resulting in a 29% investment in this
company. The investment of $570,713 included approximately
$71,000 of goodwill which is being amortized over 7 years.
Also during 1994, the Company financed a lease for a
vehicle in the amount of $14,424.
During 1995, the Company recorded their 29% equity interest
in the income of Cadkey, Inc. which amounted to $86,668.
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.
------------------------------------------------------------------------------
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------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In August 1995, the Company acquired software and related
assets from Baler Software Corporation in exchange for the
issuance of 113,009 shares of its common stock at $2.56 per
share.
In August 1995, the Company issued 124,066 shares of its
common stock at $2.75 per share in exchange for an 80%
investment in Atlantic Systems, Inc. The related goodwill
of approximately $442,000 is being amortized over 10 years.
In September 1995, the Company issued 102,160 shares of its
common stock at $4.47 per share in exchange for an 80%
investment in Elite Computer Services, Inc. The related
goodwill of approximately $503,000 is being amortized over
10 years.
In October 1995, the Company entered into two capital
leases for vehicles in the amount of $24,420.
19. Stock Registration
During 1994, the Company completed a registration regarding
distribution of its shares of common stock to shareholders
of Pratt, Wylce & Lords, Ltd., a consultant to the Company.
Additionally, the Company registered on behalf of the
selling shareholders 192,851 shares of common stock,
200,000 class A warrants, 200,000 class B warrants and
45,000 class C warrants. The class A warrants are
exercisable into one common share at the purchase price of
$4.75 and the class B warrants are exercisable into one
common share at the purchase price of $20. The class A and
class B warrants shall be effective for a period of four
years from the date of issuance and shall be redeemable by
the Company at $.001 per class A or class B warrant upon
thirty day's notice. The class C warrants were to be
exercisable for a period of three years from the date of
issuance at the rate of one warrant plus $1.50 for one
share of common stock. The class C warrants were exercised
in December 1994 for $67,500.
In connection with this registration, the Company incurred
$249,722 in stock registration costs for the year ended
December 31, 1994.
The Company is in the process of registering on Form SB-2,
1,000,000 shares of common stock, 300,000 common shares to
be issued upon exercise of the class F warrants, and
1,459,301 common shares being registered on behalf of the
selling security holders.
------------------------------------------------------------------------------
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------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
20. Related Party Transactions
For services rendered in connection with the three
acquisitions which took place in the third quarter of 1995,
the Company paid a shareholder, Great Bay Technology Group,
Inc., $50,000 for each acquisition for investment banking
services. These payments were included in the total cost
of assets purchased and therefore amortized over the life
of the related assets. In the fourth quarter of 1995, the
Company paid a shareholder, Great Bay Technology Group,
Inc., $76,500 for investment banking services provided for
the acquisitions noted in the subsequent events. These
costs will be capitalized as a direct acquisition cost of
the related assets and amortized over the life of the asset
beginning in 1996.
21. Subsequent Events
In January 1996, the Board of Directors authorized the
issuance of 450,000 class I warrants to certain
shareholders and officers. The warrants will be
exercisable for a period of five years from the date of
issuance at the rate of one warrant plus $2.87.
In February 1996, Atlantic Systems, Inc. purchased a liquor
store software package (with exclusive rights to sell and
support the software, hardware and software support
contracts with current customers) and certain equipment
from Quality Solutions, Inc., in consideration for cash of
$40,784 and 33,494 shares of common stock of Applied
Cellular Technology, Inc., at $5.50 per share, the then
current market trading price. This value has been
discounted 50% due to the limited market of the shares,
resulting in a value of $2.75 a share, for a total value of
$92,109. Also in February 1996, the Company entered into
an employment contract with an officer of Quality
Solutions, Inc. for a period of three years with an annual
salary of $60,000, and an additional bonus based on 10% of
gross profit of all sales closed during the fiscal year to
be paid in the form of common shares of the Corporation.
Upon issuance of these shares, officer's compensation
expense will be recorded based on the number of shares
issued times the market price of the shares. An additional
bonus may be earned in the first year of service, on sales
from $200,000 to $450,000, with a maximum amount being paid
of $25,000.
In February 1996, the Company entered into two employment
contracts with officers of Atlantic Systems, Inc. which
call for services to be provided for a period of three
years, at annual salaries of $50,000 for each officer with
an additional bonus based on 25% of quarterly earnings
before income taxes in excess of $58,400 not to exceed
$50,000 to each officer.
------------------------------------------------------------------------------
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------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In March 1996, the Company entered into an agreement,
pending final shareholder approval of the buyer for the
authorization of the preferred shares, to purchase 80% of
Burling Instruments, Inc., in exchange for 9,000 shares of
8% preferred stock at $100 per share of Applied Cellular
Technology, Inc. The purchase will be recorded at 80% of
the book value of Burling Instruments, Inc. at the time of
acquisition. This value is approximately $400,000,
therefore the shares will be valued at $44.91 per share.
The Company will also pay cash of $57,600.
22. Restatement
The Company has restated its balance sheet at December 31,
1994 to reflect the adjustment of the acquisition price of
computer software acquired by Tech Tools, Inc. in exchange
for 180,000 shares of its common stock and for the issuance
of 120,000 warrants. In addition, the Company has adjusted
the value of the acquisition of its 29% investment in
Cadkey, Inc. obtained through issuance of 456,570 shares of
common stock.
The shares and warrants in connection with these
acquisitions were originally valued at $5 each resulting in
recorded acquisition amounts of $2,282,850 for Cadkey, Inc.
and $1,500,000 for the purchased software (Databoss). In
light of prevailing market values of $2.50 to $2.75 per
share during the fourth quarter of 1994 and with
consideration of a 50% discount due to the limited market
which existed for the shares at that date, the Company has
restated the valuation to $1.25 per share. No value was
given to the warrants because the exercise price exceeded
the $1.25 value.
The restatement results in a reduction of the purchase
price of the computer software by $1,275,000 to $225,000
and the investment in Cadkey, Inc. by $1,712,137 to
$570,713 with corresponding reduction in additional paid-in
capital totalling $2,987,137. There was no effect of this
restatement on operations for the year ended December 31,
1994.
------------------------------------------------------------------------------
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------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
23. Proforma Information (Unaudited)
The following pro forma balance sheet of Applied Cellular
Technology, Inc. and subsidiaries at December 31, 1995
gives effect to the probable acquisition of Burling
Instruments, Inc. as if it was effective at December 31,
1995. The statement gives effect to the acquisition under
the purchase method of accounting and the assumptions in
the accompanying notes to the pro forma financial
statements.
The following pro forma consolidated statement of
operations of Applied Cellular Technology, Inc. and
subsidiaries for the year ended December 31, 1995 and 1994
gives effect to the acquisitions of Atlantic Systems, Inc.,
Elite Computer Services, Inc., and the probable acquisition
of Burling Instruments, Inc. as though they were effective
at January 1, 1995. The statements give effect to the
acquisitions under the purchase method of accounting and
the assumptions in the accompanying notes to the pro forma
financial statements.
In August 1995, the Company issued 124,066 shares of common
stock at $2.75 per share (which was the prevailing market
price at the time of the acquisition, net of a discount of
50% due to the limited market for the shares) for a total
of $341,182, in exchange for an 80% investment in Atlantic
Systems, Inc. The resulting goodwill of $442,000 is being
amortized over 10 years. Other acquisition costs for this
transaction have also been capitalized in the amount of
$117,523.
In September 1995, the Company issued 102,160 shares of its
common stock at $4.47 per share (which was the prevailing
market price at the time of the acquisition, net of a
discount of 50% due to the limited market for the shares)
for a total of $456,655, in exchange for an 80% investment
in Elite Computer Services, Inc. The resulting goodwill of
$502,625 is being amortized over 10 years. Other
acquisition costs for this transaction have also been
capitalized in the amount of $56,159.
In March 1996, the Company entered into an agreement,
pending final shareholder approval for the authorization of
the preferred shares of the buyer, to purchase 80% of
Burling Instruments, Inc. in exchange for 9,000 shares of
8% preferred stock of Applied Cellular Technology, Inc., at
$100 per share. The investment will be recorded at 80% of
the book value and, therefore, there will be no goodwill.
Based on the book value of Burling Instruments, Inc. at
February 28, 1995 (within two months of this proformed
acquisition date of January 1, 1995), the value of the
shares would be $42.88 per share, for a total value of
$385,957. Other acquisition costs for this transaction
have been capitalized in the amount of $57,600.
------------------------------------------------------------------------------
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------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The pro forma statements may not be indicative of the
results that would have actually occurred if the
acquisitions had been effective on the dates indicated or
of the results that may be obtained in the future. The pro
forma statements should be read in conjunction with the
financial statements and notes thereto of the Company.
<TABLE>
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------
AS BURLING PRO FORMA
REPORTED INSTRUMENTS DECEMBER
DECEMBER INC. <F1> 31, 1995
31, 1995 (UNAUDITED) (UNAUDITED)
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets $ 1,408,866 $ 741,069 $ (57,600)<F2> $ 2,092,335
Equipment and leasehold improvements 138,489 26,084 -- 164,573
Investment in Cadkey, Inc. common stock 652,081 -- -- 652,081
Note receivable - Cadkey, Inc. 292,627 -- -- 292,627
Goodwill 906,626 18,000 -- 924,626
Purchased computer software 667,443 -- -- 667,443
Other assets 140,035 3,153 -- 143,188
----------------------------------------------------------------------------------------------------------------
Total Assets $ 4,206,167 $ 788,306 $ (57,600) $ 4,936,873
================================================================================================================
Current liabilities $ 1,003,292 $ 211,051 $ -- $ 1,214,343
Capital lease obligations 19,251 -- -- 19,251
Minority interest 57,002 -- 110,893 <F3> 167,895
Common stock 2,268 1,075 (1,075)<F4> 2,268
Preferred stock -- -- 385,957 <F5> 385,957
Additional paid-in capital 3,358,072 373,925 (373,925)<F6> 3,358,072
Retained earnings (233,718) 202,255 (179,450)<F7> (210,913)
----------------------------------------------------------------------------------------------------------------
Total Liabilities And
Stockholders' Equity $ 4,206,167 $ 788,306 $ (57,600) $ 4,936,873
================================================================================================================
Common shares outstanding 2,267,749 2,267,749
================================================================================================================
</TABLE>
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------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
<TABLE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------------
ELITE BURLING
ATLANTIC COMPUTER INSTRUMENTS PRO FORMA
AS REPORTED SYSTEMS SERVICES INC. DECEMBER 31,
DECEMBER 31, INC. INC. (UNAUDITED) 1995
1995 <F8> <F9> <F10> (UNAUDITED)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,335,999 $ 649,932 $ 1,255,125 $ 1,707,868 $ 5,948,924
Direct costs 1,186,213 237,298 562,417 1,021,120 3,007,048
--------------------------------------------------------------------------------------------------------------------------
Gross profit 1,149,786 412,634 692,708 686,748 -- 2,941,876
Operating expenses 981,212 419,768 637,821 653,694 60,108 <F11> 2,752,603
--------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 168,574 (7,134) 54,887 33,054 (60,108) 189,273
Equity in income of Cadkey, Inc. 74,682 -- -- -- -- 74,682
Interest income 74,682 -- -- 511 -- 75,410
Interest expense (15,150) -- (1,417) (10,681) -- (27,248)
Dividend expense -- -- -- -- (72,000)<F12> (72,000)
Minority interest (48,963) -- -- -- (13,829)<F13> (62,792)
Provision for income tax -- -- -- (74) 7,376<F14> 7,302
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 254,042 $ (7,134) $ 53,470 $ 22,810 $ (138,561) $ 184,627
==========================================================================================================================
Net Income (Loss) Per Common Share $ 0.14 $ 0.10
==========================================================================================================================
Weighted Average Number Of
Common Shares Outstanding 1,792,939 1,898,940
==========================================================================================================================
<FN>
Note A: The Pro Forma Consolidated Balance Sheet gives effect to
the following pro forma adjustments:
<F1> Represents the February 29, 1996 (within two months of
December 31, 1995) balance sheet of Burling Instruments,
Inc. that would have been consolidated with the Company if
the acquisition had taken place at December 31, 1995.
<F2> Represents the cash paid by Applied Cellular Technology,
Inc. in the acquisition of Burling Instruments, Inc.
<F3> Represents the original interest of the 20% minority
ownership.
<F4> Represents the elimination of the common stock of Burling
Instruments, Inc.
<F5> Represents the 9,000 shares of preferred stock, at $42.88,
exchanged for the 80% interest in Burling Instruments, Inc.
<F6> Represents the elimination of the additional paid in
capital of Burling Instruments, Inc.
<F7> Represents the elimination of the retained earnings of
Burling Instruments, Inc.
------------------------------------------------------------------------------
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------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Note B: The Pro Forma Consolidated Statement of Operations gives
effect to the following pro forma adjustments:
<F8> Represents the results of operations of Atlantic Systems,
Inc. for the period January 1, 1995 through July 31, 1995
that would have been consolidated with the Company had the
acquisition taken place on January 1, 1995.
<F9> Represents the results of operations of Elite Computer
Services, Inc. for the period January 1, 1995 through
August 31, 1995, that would have been consolidated with the
Company had the acquisition taken place on January 1, 1995.
<F10> Represents the results of operations of Burling
Instruments, Inc. for the fiscal year beginning March 1,
1995 and ended February 29, 1996 (within two months of
December 31, 1995) that would have been consolidated with
the Company if the acquisition would have taken place on
January 1, 1995.
<F11> Represents the additional amortization expense for the
goodwill of Atlantic Systems, Inc. and Elite Computer
Services, Inc. in the amounts of $24,731 and $35,377,
respectively.
<F12> Represents the payment of $72,000 of dividends on the 8%
preferred shares issued in the Burling Instruments, Inc.
acquisition.
<F13> Represents the minority interest in the earnings of
Burling Instruments, Inc. for the year ended December 31,
1995 of $4,562. Also represents the additional minority
interest for Atlantic Systems, Inc. of $(1,427) and for
Elite Computer Services, Inc. of $10,694 respectively, for
the periods from January 1, 1995 to the actual dates of
acquisition.
<F14> Represents the reversal of Burling's current provision of
income taxes of $11,953, due to the fact that Applied
Cellular Technology, Inc.'s net operating loss
carryforward will cover the federal taxes on their income,
along with the federal taxes due on Elite Computer
Services, Inc.'s income. It also represents additional
state taxes on Elite Computer Services, Inc. and Burling
Instruments, Inc. of $4,600 since consolidated state
returns cannot be filed.
</TABLE>
------------------------------------------------------------------------------
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<PAGE> 70
<TABLE>
CONTENTS
------------------------------------------------------------------------------
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT .......................................... 1
FINANCIAL STATEMENTS
Consolidated Balance Sheet ........................................ 2
Consolidated Statement Of Stockholders' Equity .................... 3 - 4
Consolidated Statement Of Operations .............................. 5
Consolidated Statement Of Cash Flows .............................. 6
Notes To Consolidated Financial Statements ........................ 7 - 31
</TABLE>
Page 70 of 158 Pages
<PAGE> 71
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED BALANCE SHEET
<CAPTION>
ASSETS
DECEMBER 31, MARCH 31,
1995 1996
-------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 125,469 $ 32,281
Accounts receivable 522,548 704,328
Unbilled receivables 104,111 207,973
Inventories 504,859 554,170
Prepaid expenses 51,840 129,752
Note receivable - officer 12,982 12,982
Note receivable - Cadkey, Inc. 87,057 89,438
----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,408,866 1,730,924
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 138,489 157,604
INVESTMENT IN CADKEY, INC. COMMON STOCK 652,081 672,271
NOTE RECEIVABLE - CADKEY, INC. 292,627 269,279
GOODWILL 906,626 883,008
PURCHASED COMPUTER SOFTWARE 667,443 758,971
OTHER ASSETS 140,035 199,223
----------------------------------------------------------------------------------------------------------
$ 4,206,167 $ 4,671,280
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 29,999 $ 211,100
Notes payable - officers 280,095 215,151
Capital lease obligation - current 23,360 23,912
Accounts payable 564,692 650,311
Accrued expenses 105,146 133,822
----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,003,292 1,234,296
----------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Capital lease obligation 19,251 35,996
----------------------------------------------------------------------------------------------------------
MINORITY INTEREST 57,002 76,476
----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock:
Authorized 10,000,000 shares of $.001 par value; issued and
outstanding 2,267,749 shares at December 31, 1995 and
2,309,516 at March 31, 1996 2,268 2,310
Additional paid-in capital 3,358,072 3,496,263
Retained earnings (deficit) (233,718) (174,061)
----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,126,622 3,324,512
----------------------------------------------------------------------------------------------------------
$ 4,206,167 $ 4,671,280
==========================================================================================================
----------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 2
</TABLE>
Page 71 of 158 Pages
<PAGE> 72
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
----------------------- ---------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1995 20,000 $200,000 1,336,750 $1,337 $1,075,287 $(487,760) $ 788,864
NET INCOME -- -- -- -- -- 29,409 29,409
ISSUANCE OF COMMON STOCK -- -- 37,037 37 159,177 -- 159,214
ISSUANCE OF RESTRICTED COMMON STOCK -- -- 200,000 200 499,800 -- 500,000
----------------------------------------------------------------------------------------------------------------------------
BALANCE - MARCH 31, 1995 20,000 $200,000 1,573,787 $1,574 $1,734,264 $(458,351) $1,477,487
============================================================================================================================
BALANCE - JANUARY 1, 1996 -- $ -- 2,267,749 $2,268 $3,358,072 $(233,718) $3,126,622
NET INCOME -- -- -- -- -- 59,657 59,657
ISSUANCE OF COMMON STOCK -- -- 8,273 8 25,148 -- 25,156
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF PURCHASED SOFTWARE -- -- 33,494 34 92,076 -- 92,110
50% OF PRINCIPAL PAYMENTS RECEIVED
ON NOTE RECEIVABLE - CADKEY, INC. -- -- -- -- 20,967 -- 20,967
----------------------------------------------------------------------------------------------------------------------------
BALANCE - MARCH 31, 1996 -- $ -- 2,464,516 $2,310 $3,496,263 $(174,061) $3,324,512
============================================================================================================================
----------------------------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 3
</TABLE>
Page 72 of 158 Pages
<PAGE> 73
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
FOR THE THREE
MONTHS ENDED MARCH 31,
----------------------
1995 1996
----------------------
<S> <C> <C>
REVENUES
Programming services $ 58,368 $ 156,947
Hardware products 90,217 769,437
Software licensing revenue 72,373 49,342
Packaged software -- 234,465
Other revenue 1,878 23,043
----------------------------------------------------------------------------------------------------------
TOTAL REVENUES 222,836 1,233,234
----------------------------------------------------------------------------------------------------------
DIRECT COSTS
Costs of programming services 60,371 118,605
Costs of hardware products 60,283 485,421
Costs of software licensing revenue 33,353 11,920
Costs of packaged software sales -- 131,691
Other costs -- 500
Royalty expense 1,122 --
----------------------------------------------------------------------------------------------------------
TOTAL DIRECT COSTS 155,129 748,137
----------------------------------------------------------------------------------------------------------
GROSS PROFIT 67,707 485,097
----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Marketing and sales 7,196 135,457
Administrative 49,355 303,060
----------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 56,551 438,517
----------------------------------------------------------------------------------------------------------
OPERATING INCOME 11,156 46,580
EQUITY IN CADKEY, INC. 19,142 20,190
INTEREST INCOME -- 20,669
INTEREST EXPENSE (889) (8,308)
----------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST 29,409 79,131
PROVISION FOR INCOME TAXES -- --
----------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 29,409 79,131
MINORITY INTEREST -- (19,474)
----------------------------------------------------------------------------------------------------------
NET INCOME $ 29,409 $ 59,657
==========================================================================================================
NET INCOME PER COMMON SHARE $ .02 $ .03
==========================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 1,541,637 2,313,721
==========================================================================================================
-----------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 4
</TABLE>
Page 73 of 158 Pages
<PAGE> 74
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE THREE
MONTHS ENDED MARCH 31,
---------------------------------
1995 1996
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,409 $ 59,657
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,545 83,416
Equity in Cadkey, Inc. (19,142) (20,190)
Minority interest -- 19,474
Change in assets and liabilities:
Increase in accounts receivable (129,373) (181,780)
Increase in unbilled receivables -- (103,862)
Increase in inventories -- (49,311)
Increase in prepaid expenses (46,848) (77,912)
Increase in due from employees (1,317) --
Increase in customer deposit 6,617 --
Increase in accounts payable and accrued
expenses 68,156 114,295
-------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (88,953) (156,213)
-------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable - related party (1,330) --
Payments received on note receivable - Cadkey, Inc. -- 20,967
Increase in other assets (15,500) (38,508)
Payments for equipment, computer software
and leasehold improvements (9,585) (7,941)
Payments for costs related to asset acquisitions -- (41,671)
-------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (26,415) (67,153)
-------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts received (paid) on notes payable (34,550) 181,101
Payments on capital lease obligations (1,083) (7,103)
Decrease in notes payable - officers -- (64,944)
Issuance of common stock 159,214 21,124
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 123,581 130,178
-------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 8,213 (93,188)
CASH - BEGINNING OF PERIOD 2,651 125,469
-------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 10,864 $ 32,281
=================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 889 $ 8,308
-------------------------------------------------------------------------------------------------
Noncash investing and financing activities (Note 18)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 5
</TABLE>
Page 74 of 158 Pages
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, Tech Tools, Inc. and
ACT Financial Corp. which were formed in November 1994 and April 1995,
respectively, and its majority-owned subsidiaries, Atlantic Systems,
Inc. and Elite Computer Services, Inc., in which an 80% interest was
acquired by the Company in August 1995 and September 1995, respectively.
All significant intercompany investments, transactions and account
balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for doubtful accounts equal to the
estimated collection losses that will be incurred in collection of all
receivables. The estimated losses are based on historical collection
experience coupled with a review of the current status of the existing
receivables.
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.
-------------------------------------------------------------------------------
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Notes To Consolidated Financial Statements (Continued)
INVENTORIES
The Company's inventories consist mainly of new and used computers,
computer parts and software. The inventory is valued at the lower of
cost or market, determined by the FIFO (first-in, first-out) method.
The Company closely monitors 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.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost, less
accumulated depreciation and amortization computed using straight-line
and accelerated methods. The assets are depreciated and amortized over
periods ranging from three to five 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 equity method. The
resulting goodwill is being amortized straight-line over 7 years.
The Company's policy for making on-going determinations of the net
realizable value for the investment in Cadkey, Inc. includes receiving
quarterly unaudited financial statements and annual audited financial
statements that management uses as an integral part of its on-going
assessment. The Company analyzes the investee's ability to generate
sufficient net income to provide an equity in the earnings of Cadkey,
Inc. in an amount that exceeds the amount of goodwill amortization
recorded for the period of the Company's books. 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.
-------------------------------------------------------------------------------
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Notes To Consolidated Financial Statements (Continued)
NOTE RECEIVABLE - CADKEY, INC.
The Company's policy for making on-going determinations of the net
realizable value of the note receivable from Cadkey, Inc. is not only to
review the overall performance of Cadkey, Inc. as discussed within the
Investment in Common Stock footnote, but also to closely monitor the
note repayment schedule agreed to by Cadkey, Inc. in order to assess the
continuing likelihood of repayment and the on-going net realizable value
of the Cadkey, Inc. note. The carrying value of the note receivable has
been reduced by 50%, as a result of the discounting of the value of the
shares exchanged to acquire the note receivable because of the
restricted nature and the limited market of those common shares.
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 Company's policy for making on-going determinations of the net
realizable value of the goodwill is to monitor the net income of
Atlantic Systems, Inc. and Elite Computer Services, Inc. and to
determine if the expected income levels over the remainder of the 10
year amortization period would exceed the carrying value of the
goodwill. If impairment of the goodwill appears likely, a reduction in
the carrying value would be recorded at that time.
PURCHASED COMPUTER SOFTWARE
Purchased computer software is stated at cost less accumulated
amortization. The purchased computer software is at the stage of
technological feasibility which is considered to have occurred when a
product design and working model of the software product have been
completed and the completeness of the working model and its consistency
with the product design have been confirmed by testing. Amortization is
computed over the greater of current revenues divided by the total of
expected revenues or straight-line over the number of years of expected
revenue. The straight-line life is determined to be 5 years. The
"Databoss" computer software purchased by Tech Tools, Inc. in November
1994 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.
-------------------------------------------------------------------------------
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Notes To Consolidated Financial Statements (Continued)
REVENUE RECOGNITION
For programming, consulting and software licensing services, the Company
recognizes revenue based on the percent complete for fixed fee
contracts, with the percent complete being calculated as either the
number of direct labor hours in the project to date divided by the
estimated total direct labor hours or based upon the completion of
specific task orders. It is the Company's policy to record contract
losses in their entirety in the period in which such losses are
foreseeable. For non-fixed fee jobs, the revenue is recognized based
on the actual direct labor hours in the job times the standard billing
rate and adjusted to realizable value if necessary. For product sales,
the Company recognizes revenue upon shipment. There are no significant
post contract support obligations at the time of revenue recognition.
The Company's accounting policy regarding vendor and post-contract
support obligations is according to the customers contract, billable
upon the occurrence of the post-sale support.
The Company does not experience many product returns, and therefore,
Company management is of the opinion that no allowance for sales returns
is necessary. The Company has no obligation for warranties on hardware
sales, because the warranty is given by the manufacturer. The Company
does not offer a warranty policy for their services to customers.
PROPRIETARY SOFTWARE IN DEVELOPMENT
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," the Company has capitalized certain computer
software development costs upon the establishment of technological
feasibility. Technological feasibility is considered to have occurred
upon completion of a detailed program design which has been confirmed by
documenting and tracing the detail program design to product
specifications and has been reviewed for high-risk development issues,
or to the extent a detailed program design is not pursued, upon
completion of a working model that has been confirmed by testing to be
consistent with the product design. Amortization of computer software
costs is provided based on the greater of the ratios that current gross
revenues for a product bear to the total of current and anticipated
future gross revenues for that product or the straight-line method over
the estimated useful life of the product. 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 $2,954 for the three
months ended March 31, 1996.
-------------------------------------------------------------------------------
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Notes To Consolidated Financial Statements (Continued)
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, investment in 29% owned company, equipment and leasehold
improvements, and net operating loss carryforwards for financial and
income tax reporting. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are
recovered or settled.
The Company and its subsidiaries file consolidated tax returns. Income
taxes are paid by the parent company and allocated to each subsidiary
through intercompany charges.
2. OPERATIONS
Applied Cellular Technology, Inc. was incorporated in May 1993 under its
former name, Great Bay Acquisition Company. On May 21, 1993, Great Bay
Acquisition Company acquired the assets of Axcom Computer Consultants,
Inc. Effective September 1993, Great Bay Acquisition Company changed
its name to Axcom Information Technology, Inc. and became the sole
subsidiary of Great Bay Technology Group, Inc. Effective March 1994,
Axcom Information Technology, Inc. changed its name to Applied Cellular
Technology, Inc. The Company is a software development and services
company and has applied technologies in tailored solutions for a number
of major American corporations. The Company's market is primarily
retail, manufacturing and distribution firms and its operations are
conducted from the home office in Missouri, with customers throughout
the United States.
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Notes To Consolidated Financial Statements (Continued)
In November 1994, the Company formed a subsidiary, Kedwell
International, Inc. by issuing 180,000 shares at $1.25 of its $.001 par
value common stock. The subsidiary purchased software in exchange for
its 180,000 shares of Applied Cellular Technology's common stock valued
at $1.25 per share and for the issuance of 120,000 warrants at no value
as described in Note 17. Effective April 1995, Kedwell International,
Inc. changed its name to Tech Tools, Inc. Tech Tools, Inc. is a
software development and services company. The Company's office is
located in New Hampshire, with customers throughout the United States.
During 1994, the Company acquired 570,712 shares of Cadkey, Inc., a
software technology company, in exchange for 456,570 shares of its $.001
par value common stock valued at $1.25 per share, resulting in a 29%
investment in this company.
During April 1995, the Company formed a subsidiary, ACT Financial Corp.,
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.
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.
The acquisitions of Atlantic Systems, Inc. and Elite Computer Services,
Inc. have been accounted for using the purchase method. The results of
operations of the acquired companies are included in the accompanying
financial statements since the dates of acquisition.
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.
-------------------------------------------------------------------------------
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Notes To Consolidated Financial Statements (Continued)
3. NOTE RECEIVABLE - OFFICER
The note is unsecured, bears interest at the prime lending rate
and is due on demand.
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, MARCH 31,
1995 1996
-----------------------------------
<S> <C> <C>
Shares issued (200,000 x $5.00) $ 1,000,000 $ 1,000,000
50% discount given to shares issued (Note 17) (500,000) (500,000)
--------------------------------------------------------------------------------------------------------
Original carrying value of the note receivable 500,000 500,000
50% of principal payments received 120,316 141,283
--------------------------------------------------------------------------------------------------------
379,684 358,717
Current portion (87,057) (89,438)
--------------------------------------------------------------------------------------------------------
Long-term portion $ 292,627 $ 269,279
========================================================================================================
</TABLE>
The 200,000 shares of stock issued were restricted as to voting rights.
Due to the 50% reduction in the face value of the note, as payments are
received, 50% of the amounts are credited to the note receivable and the
remaining 50% to paid-in capital.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 180,630 $ 181,272
Computer equipment 66,909 69,345
Leased vehicles 113,210 141,664
Leasehold improvements 1,087 1,087
--------------------------------------------------------------------------------------------------------
361,836 393,368
Less: Accumulated depreciation and
amortization 223,347 235,764
--------------------------------------------------------------------------------------------------------
$ 138,489 $ 157,604
========================================================================================================
</TABLE>
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Notes To Consolidated Financial Statements (Continued)
Included above are vehicles acquired under capital lease obligations in
the amount of $113,210 and $141,664 at December 31, 1995 and March 31,
1996, respectively. Related accumulated depreciation amounted to $42,777
and $50,550 at December 31, 1995 and March 31, 1996, respectively.
Depreciation and amortization charged against income amounted to $3,049
and $13,226 for the three months ended March 31, 1995 and March 31,
1996, respectively.
6. INVESTMENT IN CADKEY, INC. COMMON STOCK
Investment in Cadkey, Inc. common stock consists of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------------
<S> <C> <C>
Original investment:
Investment in Cadkey, Inc. common stock $ 500,025 $ 500,025
Goodwill 70,688 70,688
--------------------------------------------------------------------------------------------------------
570,713 570,713
Additional costs of acquisition 6,686 6,686
Equity in income of Cadkey, Inc. 86,668 109,383
--------------------------------------------------------------------------------------------------------
664,067 686,782
Less: Amortization of goodwill 11,986 14,511
--------------------------------------------------------------------------------------------------------
$ 652,081 $ 672,271
========================================================================================================
</TABLE>
The original investment was calculated as follows:
<TABLE>
<S> <C>
Shares issued (456,670 x $2.50) $ 1,141,425
50% discount given to shares issued (Note 17) (570,712)
----------------
$ 570,713
================
</TABLE>
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Notes To Consolidated Financial Statements (Continued)
Equity in income of Cadkey, Inc. consists of:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
--------------------------------------
<S> <C> <C>
Equity in income of Cadkey, Inc. $ 21,667 $ 22,715
Amortization of goodwill (2,525) (2,525)
--------------------------------------
$ 19,142 $ 20,190
======================================
</TABLE>
See Note 14 for summarized financial information of Cadkey, Inc.
7. GOODWILL
Goodwill consists of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
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 (Note 17) (797,836) (797,836)
--------------------------------------------------------------------------------------------------------
Net value of shares issued 797,837 797,837
Additional costs of acquisitions 173,682 173,682
80% of net book value of companies acquired (26,825) (26,825)
Accumulated amortization (38,068) (61,686)
--------------------------------------------------------------------------------------------------------
Carrying value $ 906,626 $ 883,008
========================================================================================================
</TABLE>
Amortization expense amounted to $23,618 for the three months ended
March 31, 1996.
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-------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
8. PURCHASED COMPUTER SOFTWARE
Purchased computer software consists of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
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
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
(Note 17) (514,586) (606,694)
100% discount given to the warrants issued
(Note 17) (180,000) (180,000)
-----------------------------------
Net value of shares issued 514,585 606,694
Additional costs of acquisitions 217,500 259,171
Accumulated amortization (64,642) (106,894)
-----------------------------------
Carrying value $ 667,443 $ 758,971
===================================
</TABLE>
Amortization expense amounted to $42,252 for the three months ended
March 31, 1996.
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.
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Notes To Consolidated Financial Statements (Continued)
9. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
---------------------------------------
<S> <C> <C>
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 -- 151,019
Applied Cellular Technology, Inc., note payable
- related party, $500,000 line of credit,
unsecured, bears interest at 7%, due on demand -- 60,081
--------------------------------------------------------------------------------------------------
$ 29,999 $ 211,100
==================================================================================================
</TABLE>
Interest expense on the notes payable amounted to $642 and $5,337 for
the three months ended March 31, 1995 and 1996, respectively.
The weighted average dollar amount of borrowings for the year ended
December 31, 1995 was $79,979 and $9,890 for the three months ended
March 31, 1996. The weighted average interest rate paid was 9% for the
year ended December 31, 1995 and 10.5% for the three months ended
March 31, 1996.
10. NOTES PAYABLE - OFFICERS
The notes are non-interest bearing, unsecured and are due on demand.
Imputed interest has been recorded at a market rate of 7%.
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Notes To Consolidated Financial Statements (Continued)
11. CAPITAL LEASE OBLIGATIONS
Future payments for capital lease obligations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
YEAR 1995 1996
---------------------------------------------------------------------------------
<S> <C> <C>
1996 $ 28,337 $ N/A
1997 15,750 30,640
1998 8,489 20,445
1999 -- 11,774
2000 -- 6,116
2001 -- 6,116
---------------------------------------------------------------------------------
Total minimum lease payments 52,576 75,091
Less: Amount representing interest 9,965 15,183
---------------------------------------------------------------------------------
Capital Lease Obligation 42,611 59,908
Less: current maturities 23,360 23,912
---------------------------------------------------------------------------------
Long-term Capital Lease Obligation $ 19,251 $ 35,996
=================================================================================
</TABLE>
Interest expense on the capital leases amounted to $247 and $2,971 for
the three months ended March 31, 1995 and 1996, respectively.
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.
NOTE RECEIVABLE - OFFICER
The carrying amount approximates fair value because the stated interest
rate fluctuates with market rates.
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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.
NOTE PAYABLE - LINE OF CREDIT
The carrying amount approximates fair value because the stated interest
rate fluctuates with current market rates.
NOTES PAYABLE - OFFICERS
The carrying amount approximates fair value as the interest being
charged is at a current market rate.
ACCOUNTS PAYABLE
The carrying amount approximates fair value.
Estimated fair values of the Company's financial instruments, all of
which are held for nontrading purposes, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
------------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 125,469 $ 125,469 $ 32,281 $ 32,281
Accounts receivable and
unbilled receivables 626,659 626,659 912,301 912,301
Note receivable - officer 12,982 12,982 12,982 12,982
Note receivable - Cadkey, Inc. 379,684 379,684 358,717 358,717
Notes payable (29,999) (29,999) (211,100) (211,100)
Notes payable - officers (280,095) (280,095) (215,151) (215,151)
Accounts payable (564,692) (564,692) (650,311) (650,311)
</TABLE>
The estimated fair value amounts presented herein have been determined
using available market information and appropriate valuation
methodologies and are not necessarily indicative of the amount the
Company could realize in a current market exchange.
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Notes To Consolidated Financial Statements (Continued)
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 March 31, 1996 consists of differences in the
basis of goodwill and an investment in a 29%-owned company.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1995 1996
-------------------------
<S> <C> <C>
Current taxes at statutory rates $ 6,000 $ 23,800
Current taxes covered by net
operating loss carryforward (6,000) (23,800)
--------------------------------------------------------------------------
Current income tax provision -- --
Deferred income taxes -- --
--------------------------------------------------------------------------
$ -- $ --
==========================================================================
</TABLE>
The components of the deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------------------------
<S> <C> <C>
DEFERRED TAX ASSET (LIABILITY)
Goodwill basis difference $ 28,000 $ 18,500
Cadkey, Inc. investment basis difference (23,000) (28,500)
Equipment and leasehold improvements
basis differences (5,000) (4,400)
Net operating loss carryforward 30,000 4,700
Valuation allowance (30,000) (9,700)
--------------------------------------------------------------------------
NET DEFERRED TAX ASSET $ -- $ --
==========================================================================
</TABLE>
SFAS109 requires a valuation allowance be recorded when it is "more
likely than not that some portion or all of the deferred tax assets will
not be realized." At December 31, 1995 and March 31, 1996, the Company
had elected to record a valuation allowance of $30,000 and $9,700,
respectively, to offset the deferred tax asset.
-------------------------------------------------------------------------------
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Notes To Consolidated Financial Statements (Continued)
The reconciliation of the effective tax rate with the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1995 1996
----------------------
% %
----------------------
<S> <C> <C>
Statutory rate 33 33
Surtax exemptions (18) --
State income taxes 5 7
----------------------
20 40
======================
</TABLE>
Under the carryforward provisions of the Internal Revenue Code and
applicable state income tax law, the Company has available for future
periods the following carryforwards:
<TABLE>
<CAPTION>
YEAR YEAR OF
INCURRED EXPIRATION AMOUNT
-------------------------------------
<S> <C> <C> <C>
Net operating loss 1994 2009 $ 95,000
============
</TABLE>
The net operating loss available of $95,000 is the amount remaining
from December 31, 1995 available for 1996.
14. SUMMARIZED FINANCIAL INFORMATION OF CADKEY, INC.
The summarized financial information of Cadkey, Inc. (a 29%-owned
company) as of the fiscal years ending October 31, 1994 and 1995 is as
follows:
<TABLE>
<CAPTION>
1994 1995
----------------------------------------
<S> <C> <C>
Current assets $ 3,293,000 $ 2,334,000
Noncurrent assets 966,000 586,000
Current liabilities 3,795,000 2,198,000
Noncurrent liabilities 1,000,000 615,000
Stockholders' Equity (Deficit) (536,000) 107,000
Net sales 13,922,000 10,372,000
Cost of goods sold 3,054,000 2,128,000
Gross profit 10,868,000 8,244,000
Income (loss) from continuing operations (1,084,000) 266,000
Net income (loss) (2,374,000) 266,000
</TABLE>
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Notes To Consolidated Financial Statements (Continued)
The unaudited net income of Cadkey, Inc. for the three months ended
January 31, 1996 was approximately $78,800. Applied Cellular
Technology, Inc.'s 29% equity in Cadkey, Inc. recorded for the three
months ended March 31, 1996 amounted to $22,715.
15. COMMITMENTS
The Company was obligated to pay a royalty to Axon Investments, Inc.,
formerly Axcom Computer Consultants, Inc., in the amount of 2% of gross
collected revenues for 120 months beginning July 1, 1993. This royalty
agreement was terminated in July 1995. Royalty expense amounted to
$1,122 for the three months ended March 31, 1995.
The Company has contracted with a registered broker-dealer to receive
financial consulting and investment banking services through September
1996. The Company must pay the broker-dealer $5,000 each month in the
form of cash or in the form of shares of capital stock.
Applied Cellular Technology, Inc. is obligated under a one-year lease
for its office space, expiring June 1996. Tech Tools, Inc. is obligated
under a one-year lease for its office space, expiring April 1996. Elite
Computer Services, Inc. is obligated under a five-year lease for its
office space, expiring May 1996. Atlantic Systems, Inc. is obligated
under a three-year lease for its office space, expiring December 1998.
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------
<S> <C>
1997 $ 47,545
1998 35,100
1999 27,000
------------------------------------
$ 109,645
====================================
</TABLE>
Rent expense amounted to $4,324 and $27,045 for the three months ended
March 31, 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.
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Notes To Consolidated Financial Statements (Continued)
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.
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.
16. PROFIT SHARING PLAN
Elite Computer Services, Inc. has a qualified, noncontributory 401(k)
plan for all eligible employees. The Company contributes, at its
discretion, up to 15% of the participant's annual compensation. Profit
sharing expense amounted to $4,565 for the three months ended March 31,
1996.
Atlantic Systems, Inc. has a qualified, noncontributory 401(k) plan for
all eligible employees. The amount of the employer contribution is
determined annually by the employer at its discretion. There was no
employer contribution for the three months ended March 31, 1996.
17. 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.
-------------------------------------------------------------------------------
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-------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Subsequently the terms of the preferred stock were changed to five-year,
noncumulative, 6% redeemable shares with the dividend and redemption
solely at the option of the Board of Directors of Applied Cellular
Technology, Inc.
In March 1994, the Company received $200,000 from an investor for the
preferred stock mentioned above.
In 1995 the Company redeemed the preferred shares and issued 11,765
shares of common stock and paid the preferred shareholder $147,392.
Effective March 1994, the Company authorized the issuance of common
stock purchase warrants as follows: 200,000 A warrants exercisable at a
rate of 1 warrant plus $4.75 to purchase one share of common stock and
200,000 B warrants exercisable at 1 warrant plus $20 to purchase one
share of common stock and 45,000 class C warrants exercisable for a
period of three years from the date of issuance at the rate of 1 warrant
plus $1.50 for one share of common stock. Both the A & B purchase
warrants are effective for a period of 4 years from the date of issuance
and shall be callable with 30 days notice for a price of $.001 per
warrant.
The Company declared a dividend to the shareholders of record effective
March 21, 1994. Said dividend was in the form of A and B common stock
purchase warrants. The dividend was at a rate of one A and one B
warrant for each .305 shares of common stock owned.
In March 1994, the Company entered into an agreement with Pratt, Wylce &
Lords, Ltd. ("Pratt"), for services to be provided in connection with
the registration (Note 19) and other consulting services. In March
1994, the Company issued 86,500 shares to Pratt. The shares were issued
at the fair value as of the date of issuance in direct payment for
services related to the registration.
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-------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In November 1994, 120,000 redeemable E warrants were issued as part of
the acquisition of software by Tech Tools, Inc. No value was attributed
to these warrants because the exercise price significantly exceeded the
fair value of the underlying common shares. Each warrant can be
exercised, at any time subsequent to Applied Cellular Technology's
market price reaching $7.50 per share, to acquire one common share of
Applied Cellular Technology, Inc. at the price of $5.00 per common
share, or one redeemable class A convertible preferred share of Tech
Tools, Inc. at the price of $5.00, or, if Tech Tools, Inc. becomes a
public company, into an amount equal to 40% of its total outstanding
common shares. Tech Tools, Inc.'s preferred stock pays a cumulative
dividend, compounded annually, of 8% of the aggregate value of $600,000.
The preferred stock has cash redemption rights five years after issuance
at the option of the holder. The redemption price is $5.00 per
preferred share. In August 1995, the Class E warrants were redeemed for
120,000 shares of Applied Cellular Technology, Inc.
In December 1994, 300,000 class F warrants were authorized for issuance.
The class F warrants shall be exercisable for a period of five years
from the date of issuance and shall be exercisable at the rate of 1
warrant plus $2.50 for each common share.
In March 1995, restricted common stock was issued to purchase a note
receivable. The Company issued 200,000 common shares at a market price
of $5.00 with a 50% discount, due to the limited market of the common
shares, bringing the value down to $2.50 each. The stock was restricted
as to voting rights until the bid price per share equaled or exceeded
$7.50 for a period of 48 hours or more, which occurred in the third
quarter of 1995. Due to this discount, 50% of all principal payments
being received are recorded as additional paid-in capital. This amount
was $120,316 and $20,967 for 1995 and the three month period ended March
1, 1996, respectively.
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.
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<PAGE> 94
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
On August 4, 1995, the Company acquired software and related net assets
of Baler Software Corporation (Baler) in exchange for the payment of
debt of $14,000, the issuance of 88,009 shares of the Company's common
stock for full payment of $451,046 debt of Baler's secured creditors,
and the issuance of 25,000 shares of the Company's common stock to one
of Baler's shareholders, in payment for the acquired software and
certain other assets and liabilities. The then current market trading
value of $5.125 a share has been discounted by 50% due to limited market
of the common shares, resulting in a value of $2.56 a share.
On August 9, 1995, the Company issued 124,066 shares of its common stock
in exchange for an 80% investment in Atlantic Systems, Inc. The then
current market trading value of $5.50 a share has been discounted by 50%
due to the limited market of the shares, resulting in a value of $2.75 a
share.
On September 6, 1995, the Company issued 102,160 shares of its common
stock in exchange for an 80% investment in Elite Computer Services, Inc.
The then current market trading value of $8.94 a share has been
discounted by 50% due to the limited market of the shares, resulting in
a value of $4.47 a share.
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 entered into an agreement to purchase 80% of
Burling Instruments, Inc., in exchange for 9,000 shares of 8% preferred
stock, at $100 per share, of Applied Cellular Technology, Inc. The
purchase will be recorded at 80% of the book value of Burling
Instruments, Inc. at the time of acquisition. This value is
approximately $400,000, therefore the shares will be valued at $44.91
per share. The Company will also pay cash of $57,600. The agreement is
contingent upon the buyers approval for the authorization of issuance of
the preferred shares.
-------------------------------------------------------------------------------
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-------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
18. 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.
The Company recorded their 29% equity in Cadkey, Inc. which amounted to
$103,250 and $22,715 for the three months ended March 31, 1995 and 1966,
respectively.
In February 1996, Atlantic Systems, Inc. purchased a liquor store
software package (with exclusive rights to sell and support the
software, hardware and software support contracts with current
customers) and certain equipment from Quality Solutions, Inc., in
consideration for cash of $40,784 and 33,494 shares of common stock of
Applied Cellular Technology, Inc. at $5.50 per share.
19. STOCK REGISTRATION
During 1994, the Company completed a registration regarding distribution
of its shares of common stock to shareholders of Pratt, Wylce & Lords,
Ltd., a consultant to the Company. Additionally, the Company registered
on behalf of the selling shareholders 192,851 shares of common stock,
200,000 class A warrants, 200,000 class B warrants and 45,000 class C
warrants. The class A warrants are exercisable into one common share at
the purchase price of $4.75 and the class B warrants are exercisable
into one common share at the purchase price of $20. The class A and
class B warrants shall be effective for a period of four years from the
date of issuance and shall be redeemable by the Company at $.001 per
class A or class B warrant upon thirty day's notice. The class C
warrants were to be exercisable for a period of three years from the
date of issuance at the rate of one warrant plus $1.50 for one share of
common stock. The class C warrants were exercised in December 1994 for
$67,500.
In connection with this registration, the Company incurred $249,722 in
stock registration costs for the year ended December 31, 1994.
The Company is in the process of registering on Form SB-2, 1,000,000
shares of common stock, 300,000 common shares to be issued upon exercise
of the class F warrants, and 1,459,301 common shares being registered on
behalf of the selling security holders.
-------------------------------------------------------------------------------
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
20. RESTATEMENT
The Company has restated its balance sheet at March 31, 1995 to reflect
the adjustment of the acquisition price of computer software acquired by
Tech Tools, Inc. in exchange for 180,000 shares of its common stock and
for the issuance of 120,000 warrants. In addition, the Company has
adjusted the value of the acquisition of its 29% investment in Cadkey,
Inc. obtained through issuance of 456,570 shares of common stock.
The shares and warrants in connection with these acquisitions were
originally valued at $5 each resulting in recorded acquisition amounts
of $2,282,850 for Cadkey, Inc. and $1,500,000 for the purchased software
(Databoss). In light of prevailing market values of $2.50 to $2.75 per
share during the fourth quarter of 1994 and with consideration of a 50%
discount due to the limited market which existed for the shares at that
date, the Company has restated the valuation to $1.25 per share. No
value was given to the warrants because the exercise price exceeded the
$1.25 value.
The restatement results in a reduction of the purchase price of the
computer software by $1,275,000 to $225,000 and the investment in
Cadkey, Inc. by $1,712,137 to $570,713 with corresponding reduction in
additional paid-in capital totalling $2,987,137.
21. PROFORMA INFORMATION (UNAUDITED)
The following pro forma balance sheet of Applied Cellular Technology,
Inc. and subsidiaries at March 31, 1996 gives effect to the probable
acquisition of Burling Instruments, Inc. as if it was effective at March
31, 1996. The statement gives effect to the acquisition under the
purchase method of accounting and the assumptions in the accompanying
notes to the pro forma financial statements.
The following pro forma consolidated statement of operations of Applied
Cellular Technology, Inc. and subsidiaries for the three months ended
March 31, 1996 gives effect to the probable acquisition of Burling
Instruments, Inc. as if it were effective at January 1, 1996. The
statement gives effect to the acquisition under the purchase method of
accounting and the assumptions in the accompanying notes to the pro
forma financial statements.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In March 1996, the Company entered into an agreement, pending final
shareholder approval for the authorization of the preferred shares of
the buyer, to purchase 80% of Burling Instruments, Inc. in exchange for
9,000 shares of 8% preferred shares, $100 per share, of Applied Cellular
Technology, Inc. The investment will be recorded at book value and
therefore there will be no goodwill. Based on the book value of Burling
Instruments, Inc. at February 29, 1996 (within two months of the
proforma acquisition date of January 1, 1996) the value of the shares
would be $44.91 per share for a total value of $404,204. Other
acquisition costs for this transaction have been capitalized in the
amount of $57,600.
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
proforma statements should be read in conjunction with the financial
statements and notes thereto of the Company.
<TABLE>
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------
AS
REPORTED BURLING PRO FORMA
MARCH 31, INSTRUMENTS MARCH 31,
1996 INC. <F1> 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets $ 1,686,279 $ 792,865 $ (57,600) <F2> $ 2,421,544
Equipment and leasehold improvements 157,604 25,838 -- 183,442
Investment in Cadkey, Inc common stock 672,271 -- -- 672,271
Note receivable - Cadkey, Inc. 269,279 -- -- 269,279
Goodwill 883,008 -- -- 883,008
Purchased computer software 758,971 -- -- 758,971
Other assets 199,223 20,881 -- 220,104
------------------------------------------------------------------------------------------------------------
Total Assets $ 4,626,635 $ 839,584 $ (57,600) $ 5,408,619
============================================================================================================
Current liabilities $ 1,234,296 $ 225,739 $ -- $ 1,460,035
Capital lease obligations 35,996 -- -- 35,996
Minority interest 76,476 -- 115,451 <F3> 191,927
Common stock 2,310 1,075 (1,075)<F4> 2,310
Preferred stock -- -- 404,204 <F5> 404,204
Additional paid-in capital 3,451,618 373,925 (373,925)<F6> 3,451,618
Retained earnings (174,061) 238,845 (202,255)<F7> (137,471)
------------------------------------------------------------------------------------------------------------
Total Liabilities And
Stockholders' Equity $ 4,626,635 $ 839,584 $ (57,600) $ 5,408,619
============================================================================================================
Common shares outstanding 2,309,516 2,309,516
============================================================================================================
</TABLE>
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<PAGE> 98
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
<TABLE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
PROFORMA ADJUSTMENTS
---------------------------
BURLING
AS INSTRUMENTS PRO FORMA
REPORTED INC. MARCH 31,
MARCH 31, (UNAUDITED) 1996
1996 <F8> (UNAUDITED)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net Revenues $ 1,233,234 $ 430,264 $ -- $ 1,663,498
Direct costs 748,137 290,644 -- 1,038,781
---------------------------------------------------------------------------------------------------------
Gross profit 485,097 139,620 -- 624,717
Operating expenses 438,517 157,540 -- 596,057
---------------------------------------------------------------------------------------------------------
Operating income (loss) 46,580 (17,920) -- 28,660
Equity in income of Cadkey, Inc. 20,190 -- -- 20,190
Interest income 20,669 -- -- 20,669
Interest expense (8,308) (2,689) -- (10,997)
Dividend expense -- -- (18,000) <F9> (18,000)
Minority interest (19,474) -- 4,122 <F10> (15,352)
Provision for income tax -- -- -- --
---------------------------------------------------------------------------------------------------------
Net income (loss) $ 59,657 $ (20,609) $(13,878) $ 25,170
=========================================================================================================
Net Income Per Common Share $ 0.03 $ 0.01
=========================================================================================================
Weighted Average Number Of
Common Shares Outstanding $ 2,313,721 $ 2,313,721
=========================================================================================================
<FN>
Note A: The Pro Forma Balance Sheet gives effect to the following pro
forma adjustments:
<F1> Represents the March 31, 1996 balance sheet of Burling
Instruments, Inc. that would have been consolidated with the Company
if the acquisition would have taken place on March 31, 1996.
<F2> Represents the cash paid by Applied Cellular Technology, Inc. in
the acquisition transaction of Burling Instruments, Inc.
<F3> Represents the original interest of the 20% minority ownership.
<F4> Represents the elimination of the common stock of Burling
Instruments, Inc.
<F5> Represents the 9,000 shares of preferred stock, at $44.91,
exchanged for the 80% interest in Burling Instruments, Inc.
<F6> Represents the elimination of the additional paid in capital of
Burling Instruments, Inc.
<F7> Represents the elimination of the retained earnings of Burling
Instruments, Inc.
-------------------------------------------------------------------------------
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Note B: The Pro Forma Consolidated Statement of Operations gives effects
to the following pro forma adjustments:
<F8> Represents the results of operations of Burling Instruments, Inc.
for the three months ended March 31, 1996 that would have been
consolidated with the Company if the acquisition would have taken
place on December 31, 1995.
<F9> Represents the first quarter 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 3/12).
<F10> Represents the minority interest on the earnings (losses) of
Burling Instruments, Inc. for the three months ended March 31, 1996 of
$(20,609).
</TABLE>
-------------------------------------------------------------------------------
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Page 99 of 158 Pages
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Cadkey Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cadkey Inc.
and Subsidiaries as of October 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity (deficiency), and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Cadkey Inc. and Subsidiaries as of October 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ DiSanto, Bertoline & Company, P.C.
Glastonbury, Connecticut
December 18, 1995
Page 100 of 158 Pages
<PAGE> 101
- 2 -
CADKEY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 364,587 $ 1,342,716
Accounts receivable, net of allowance for
doubtful accounts of $255,000 in 1995 and
$728,000 in 1994 1,060,164 1,375,753
Inventory 458,788 361,100
Net assets of discontinued operations 100,564 -
Prepaid expenses and other current assets 350,050 213,355
---------------- ----------------
Total current assets 2,334,153 3,292,924
PROPERTY AND EQUIPMENT
Computer equipment 2,903,228 2,782,678
Furniture and fixtures 778,605 773,602
Leasehold improvements 223,310 223,310
---------------- ----------------
3,905,143 3,779,590
Less: accumulated depreciation and amortization 3,397,596 2,931,828
---------------- ----------------
507,547 847,762
OTHER ASSETS, net of accumulated amortization
of $392,564 in 1995 and $361,768 in 1994
78,027 118,123
---------------- ----------------
Total assets $ 2,919,727 $ 4,258,809
================ ================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
1995 1994
---------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of note payable - stockholder $ 171,296 $ -
Accounts payable 747,361 1,593,710
Accrued payroll and payroll taxes 156,043 186,005
Other accrued liabilities 560,148 963,738
Unearned income - service contracts 563,291 625,719
Customer advances - 150,000
Net liabilities of discontinued operations - 275,550
---------------- ----------------
Total current liabilities 2,198,139 3,794,722
NOTE PAYABLE - STOCKHOLDER,
less current portion 615,233 1,000,000
STOCKHOLDERS' EQUITY (DEFICIENCY)
Participating convertible preferred stock,
$1 par value, 2,200 shares authorized,
2,184 shares issued and 2,136 shares
outstanding in 1995 and 1994,
(liquidating preference $500 per share,
aggregating $1,068,000) 2,184 2,184
Common stock, $.01 par value, 10,000,000
shares authorized, 1,996,501 and 1,996,401
shares issued in 1995 and 1994, respectively,
1,928,684 and 1,928,584 shares outstanding
in 1995 and 1994, respectively 19,965 7,986
Capital in excess of par value 4,428,386 4,067,355
Deficit (4,028,004) (4,293,856)
Foreign currency translation adjustment 17,626 14,220
---------------- ----------------
440,157 (202,111)
Less: shares of common stock in treasury
at cost, 67,817 shares in 1995 and 1994 309,802 309,802
shares of preferred stock in treasury at
cost, 48 shares in 1995 and 1994 24,000 24,000
---------------- ----------------
Total stockholders' equity
(deficiency) 106,355 (535,913)
---------------- ----------------
Total liabilities and stockholders'
equity (deficiency) $ 2,919,727 $ 4,258,809
================ ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 101 of 158 Pages
<PAGE> 102
- 3 -
CADKEY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------------- ----------------
<S> <C> <C>
NET SALES $ 10,371,814 $ 13,922,485
COST OF SALES 2,128,144 3,054,795
----------------- ----------------
Gross profit 8,243,670 10,867,690
RESEARCH AND DEVELOPMENT COSTS 1,824,241 2,084,049
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,002,973 10,191,373
----------------- ----------------
Income (loss) from operations 416,456 (1,407,732)
OTHER INCOME (EXPENSE)
Interest income 39,637 5,726
Minority interest - 54,423
Other income (expense), net (66,907) 342,184
Interest expense (103,334) (58,351)
----------------- ----------------
(130,604) 343,982
----------------- ----------------
Income (loss) from continuing operations before income taxes 285,852 (1,063,750)
PROVISION FOR INCOME TAXES 20,000 20,000
----------------- ----------------
Income (loss) from continuing operations 265,852 (1,083,750)
DISCONTINUED OPERATIONS
Loss from discontinued operations - (878,304)
Loss on disposal of discontinued operations - (411,803)
----------------- ----------------
- (1,290,107)
----------------- ----------------
Net income (loss) $ 265,852 $ (2,373,857)
================= ================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 102 of 158 Pages
<PAGE> 103
<TABLE>
<CAPTION>
- 4 -
CADKEY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1994
Treasury
Common Stock Preferred Stock Common Stock
--------------------------- ------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
---------- ----------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1993 1,953,301 $ 7,813 2,184 $ 2,184 (67,817) $ (309,802)
Issuance of common stock 600 3 - - - -
Translation adjustment - - - - - -
Purchase of two-thirds interest of
Cadkey (Europe) AG, Fullinsdorf 42,500 170 - - - -
Net loss - - - - - -
---------- ----------- ---------- ----------- ---------- --------------
Balance, October 31, 1994 1,996,401 7,986 2,184 2,184 (67,817) (309,802)
Issuance of common stock 100 1 - - - -
Increase in par value from $.004
per share to $.01 per share - 11,978 - - - -
Translation adjustment - - - - - -
Net income - - - - - -
Conversion of stockholder loan
to equity - - - - - -
---------- ----------- ---------- ----------- ---------- --------------
Balance, October 31, 1995 1,996,501 $ 19,965 2,184 $ 2,184 (67,817) $ (309,802)
========== =========== ========== =========== ========== ==============
<CAPTION>
Treasury Foreign
Preferred Stock Capital in Retained Currency Stockholders'
-------------------------- Excess of Earnings Translation Equity
Shares Amount Par Value (Deficit) Adjustment (Deficiency)
----------- ----------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1993 (48) $ (24,000) $ 3,938,828 $ (1,919,999) $ - $ 1,695,024
Issuance of common stock - - 1,197 - - 1,200
Translation adjustment - - - - 14,220 14,220
Purchase of two-thirds interest of
Cadkey (Europe) AG, Fullinsdorf - - 127,330 - - 127,500
Net loss - - - (2,373,857) - (2,373,857)
----------- ----------- ------------- -------------- -------------- --------------
Balance, October 31, 1994 (48) (24,000) 4,067,355 (4,293,856) 14,220 (535,913)
Issuance of common stock - - 299 - - 300
Increase in par value from $.004
per share to $.01 per share - - (11,938) - - -
Translation adjustment - - - - 3,406 3,406
Net income - - - 265,852 - 265,852
Conversion of stockholder loan
to equity - - 372,710 - - 372,710
----------- ----------- ------------- -------------- -------------- --------------
Balance, October 31, 1995 (48) $ (24,000) $ 4,428,386 $ (4,028,004) $ 17,626 $ 106,355
=========== =========== ============ ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 103 of 158 Pages
<PAGE> 104
- 5 -
<TABLE>
CADKEY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1994
<CAPTION>
1995 1994
------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 265,852 $ (2,373,857)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 493,497 622,826
Loss on disposal of discontinued operations - 411,803
Loss on investment - 127,500
Loss on disposal ofproperty and equipment 36 31,420
Minority interest in net loss of consolidated subsidiary - (54,423)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 315,589 (54,831)
Decrease (increase) in other assets (18,438) 161,822
Decrease in accrued payroll and payroll taxes (29,962) (297,321)
Decrease in unearned income - service contracts (62,428) (477,895)
(Increase) decrease in inventory (97,688) 41,708
(Increase) in prepaid expenses and other current assets (108,957) 147,945
(Decrease) increase in customer advances (150,000) 19,175
(Decrease) increase in other accrued liabilities (403,590) 473,510
(Decrease) increase in accounts payable (846,349) 743,797
------------- ---------------
Net cash used in operating activities (642,438) (476,821)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property and equipment - 10,500
Effect on cash of deconsolidation of subsidiaries - (66,339)
Purchases of property and equipment (125,914) (240,835)
------------- ---------------
Net cash used in investing activities (125,914) (296,674)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 300 1,200
(Repayment of) proceeds from note payable - stockholder, net (213,483) 1,372,700
------------- ---------------
Net cash provided by (used in) financing activities (213,183) 1,373,900
------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES 3,406 14,220
------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (978,129) 614,625
CASH AND CASH EQUIVALENTS, beginning of year 1,342,716 728,091
------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 364,587 $ 1,342,716
============= ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid (refunded) during the year for:
Interest $ 103,334 $ 122,774
Income taxes 3,717 (67,423)
Noncash investing and financing activities:
Note payable - stockholder converted to capital in excess of
par value $ 372,710 $ -
Stock issued to purchase Cadkey (Europe) AG, Fullinsdorf 127,500
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 104 of 158 Pages
<PAGE> 105
- 6 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Cadkey
Inc. and its wholly-owned subsidiaries, Cadkey International, Inc.,
Cadkey Europe B.V. and Cadkey (Europe) AG, Fullinsdorf. All material
intercompany balances and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS
The Company, with headquarters in Windsor, Connecticut, develops,
manufactures and markets productivity-enhanced computer-aided design
and drafting software worldwide. Available in multiple languages and
with installation worldwide, the Company's award-winning products
are some of the most widely used and highly acclaimed professional
software programs available today.
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, the disclosure of contingent assets and liabilities as
of the date of the financial statements, and the revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company places its cash and temporary
cash investments with high credit quality institutions. At times such
investments may be in excess of applicable insurance limits.
The Company's customers are concentrated in the computer industry and
include original equipment manufacturers, distributors and
wholesalers, both foreign and domestic. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral. The Company maintains allowances for potential credit
losses and such losses have been within management's expectations.
Notes receivable consist of various uncollateralized notes from
employees which management considers to represent negligible credit
risk.
REVENUE RECOGNITION
Revenue is generally recognized upon shipment of the product. Service
contract revenue is deferred and recognized over the period services
are rendered.
Page 105 of 158 Pages
<PAGE> 106
- 7 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company considers
all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. The Company had cash
equivalents of $204,633 and $1,000,461 as of October 31, 1995 and
1994, respectively.
INVENTORY
Inventory is valued at the lower of cost or market, with cost
determined on a first-in, first-out basis.
The Company's inventory is subject to rapid technological
obsolescence and certain inventory may be in excess of their current
requirements based on the recent level of sales. Management has
developed a program to reduce this inventory to desired levels over
the near term and believes no loss will be incurred on its
disposition. No estimate can be made of a range of amounts of loss
that are reasonably possible should the program not be successful.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful lives of the related assets or, in the case of
leasehold improvements, over the remaining terms of the leases or
assets, whichever is shorter. Depreciation and amortization expense
was $493,497 and $622,826 for the years ended October 31, 1995 and
1994, respectively.
Maintenance, repairs and minor renewals are charged to operations as
incurred. Expenditures which substantially increase the useful lives
of the related assets are capitalized.
CAPITALIZATION OF ACQUIRED SOFTWARE
Externally acquired source code that is deemed technologically
feasible for integration with existing products is capitalized and
amortized over three years. The Company's policy is to amortize
capitalized software costs by the greater of (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of
the product including the period being reported on. It is reasonably
possible that those estimates of anticipated future gross revenues,
the remaining estimated economic life of the product, or both will be
reduced significantly in the near term due to competitive pressures.
Page 106 of 158 Pages
<PAGE> 107
- 8 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions and financial statements of foreign
subsidiaries are translated into U.S. dollars at prevailing or
current rates, respectively, except for revenue, costs and expenses
which are translated at average current rates during each reporting
period. Gains and losses resulting from foreign currency transactions
are recognized currently in the consolidated statement of operations.
Translation gains and losses are excluded from the consolidated
statement of operations and are credited or charged directly to a
separate component of stockholders' equity (deficiency).
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the differences
between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. These costs
include only the direct costs of creating new products. Indirect
costs which may otherwise be allocated are included in administrative
expenses. These primarily include rent, utilities, payroll taxes,
benefits, and depreciation and amortization.
NOTE 2 - ACQUISITION
On September 23, 1994, the Company acquired the remaining one-third
interest in Cadkey (Europe) AG, Fullinsdorf in exchange for 42,500
shares of the Company's stock. The acquisition was accounted for
using the purchase method and, accordingly, the purchase price was
allocated to the net assets acquired based on their estimated fair
value. This treatment resulted in approximately $127,500 of cost in
excess of net assets acquired, which has been written off in the
consolidated statement of operations as a result of the
discontinuance of the subsidiary's operations (see Note 3). The
results of operations for the remaining interest acquired have been
included in loss from discontinued operations since the date of
acquisition.
Page 107 of 158 Pages
<PAGE> 108
- 9 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 3 - DISCONTINUED OPERATIONS
Effective October 31, 1994, the Company decided to terminate its
distribution operations in Europe and the Pacific Rim and sell the
assets and liquidate its foreign subsidiaries. It was estimated that
a loss of $411,803 would be incurred upon the final liquidation and
disposition of these segments.
In accordance therewith, results of operations of the foreign
subsidiaries have been excluded from the consolidated statement of
operations and reflected as loss from discontinued operations for the
year ended October 31, 1994. The following is a summary of results of
operations of these subsidiaries, excluding the loss on disposition
indicated above:
<TABLE>
<CAPTION>
Cadkey Cadkey Cadkey
Europe, (Europe) AG, Pacific,
Inc. Fullinsdorf Inc. Total
--------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ - $ 839,857 $ - $ 839,857
Loss before income taxes - (878,304) - (878,304)
Benefit from income taxes - - - -
Net loss from discontinued
operations - (878,304) - (878,304)
</TABLE>
Net liabilities of discontinued operations at October 31, 1994, have
been segregated in the accompanying consolidated balance sheet.
Included in net liabilities of discontinued operations is a note
payable to a stockholder of the Company for $372,710 which was
contributed to capital per agreement with the stockholder in
January, 1995.
NOTE 4 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets as of October 31, 1995
and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Prepaid expenses $307,431 $196,920
Income tax receivable 14,880 14,880
Notes receivable - current 27,739 1,555
--------- --------
$350,050 $213,355
======== ========
</TABLE>
Prepaid expenses include prepaid royalties of approximately
$236,000 and $165,000 at October 31, 1995 and 1994,
respectively, that will be amortized upon commencement
of sales of related products.
Page 108 of 158 Pages
<PAGE> 109
- 10 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 5 - OTHER ASSETS
Other assets as of October 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Notes receivable $ 12,981 $ 64,907
Licenses, net 12,324 43,119
Deposits 52,722 10,097
-------- --------
$ 78,027 $118,123
======== ========
</TABLE>
NOTE 6 - NOTE PAYABLE - STOCKHOLDER
In December, 1993, the Company received an uncollateralized loan
of $1,000,000 from one of its stockholders with interest payable
at an annual rate of 10.5% due December, 1996. One September 29,
1995, this note was replaced with another related party note with
terms summarized as follows:
<TABLE>
<S> <C>
Term note, interest rate at 10.5%, initial payment
of $200,000 and 48 monthly payments of $20,483,
the note is unsecured. $786,529
Less: current portion 171,296
--------
$615,233
========
</TABLE>
Aggregate maturities of note payable - stockholder in subsequent
years are as follows:
<TABLE>
<CAPTION>
Year ending October 31:
<S> <C>
1996 $171,296
1997 190,174
1998 211,131
1999 213,928
--------
$786,529
========
</TABLE>
Page 109 of 158 Pages
<PAGE> 110
- 11 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 7 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
Preferred stock is convertible at a rate of 250 shares of common
stock for each share of preferred. The preferred stock is also
subject to mandatory redemption beginning on June 1, 1998 for the
then outstanding shareholders. The redemption is limited to the
extent of available capital. The redemption price is $500 per share
plus appropriate adjustments for any recapitalization transactions.
The aggregate cost of redemption for preferred stock not yet
redeemed, exclusive of recapitalization adjustments including
conversions, will be $1,068,000.
No shares were redeemed during the years ended October 31, 1995 and
1994 pursuant to limitations associated with profitability
requirements of the preferred stock agreement.
Holders of convertible preferred shares are entitled to receive
dividends in an amount per share at least equal to the per share
amount, if any, of any cash dividends declared for common stock
multiplied by the conversion rate. Additionally, under certain
circumstances, the Company, at its option, may require holders of
convertible preferred shares to convert such shares into shares of
common stock.
COMMON STOCK
During 1993, the Company issued 444,444 shares of common stock at
$4.50 per share to one individual who had loaned funds to the Company
(see Note 6). During 1995, the individual transferred 571,944 shares
of Company stock to Applied Cellular Technology who has loaned funds
to the Company (see Note 6).
At a meeting of the Board of Directors on March 9, 1995, the
Company's Directors approved an increase in the par value of the
Company's common stock from $.004 per share to $.01 per share.
This change resulted in a transfer of $11,978 from the capital in
excess of par value account to common stock.
Page 110 of 158 Pages
<PAGE> 111
- 12 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
STOCK OPTION PLANS
The Company's incentive stock option plan ("1984 Plan") provides
for options to be granted to key employees at an option price not
less than 100% of the fair market value of the stock on the date of
grant. All per share option prices were determined by the Company's
Board of Directors and represent their judgment of the fair market
value of the stock at the grant date. Options generally become
exercisable in annual installments of 25% beginning either one and
one half or two years after the date of grant on a cumulative basis
and expire ten years after the date of grant. During fiscal year
1994, no options were granted under this plan as the 1984 Plan was
terminated February 6, 1994. In addition, upon certain circumstances
qualifying as a change in control, such options would become
immediately vested and exercisable.
Options for 100 and 600 shares were exercised during fiscal years
1995 and 1994, at a price of $3 per share and $2 per share,
respectively. No shares were issued from treasury stock in 1995 and
1994, respectively.
During 1994, the Company adopted an employee stock option plan
("1994 Plan"), which provides for granting of stock options, stock
appreciation rights (SARS) and other stock-based awards to employees
and officers of the Company. All per share option prices were
determined by the Company's Board of Directors and represent their
judgment of the fair market value of the stock on the grant date.
Options generally become exercisable on a grant by grant basis, but
in no event longer than five years. The maximum number of shares of
Company stock which may be issued under the 1994 Plan is 1,500,000
shares. During fiscal year 1995 and 1994, options for 244,600 and
71,000 shares, respectively were granted at option prices ranging
from $2.00 to $4.50 per share, of which 35% were immediately
vested. The remaining options will vest over a period of sixty
months. In addition, upon certain circumstances qualifying as a
change in control, such options would become immediately vested and
exercisable.
Page 111 of 158 Pages
<PAGE> 112
- 13 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
Transactions in stock option plans for 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1994 Plan 1984 Plan
--------------------- -------------------------
1995 1994 1995 1994
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Options outstanding, beginning
of year 71,000 - 581,400 781,300
Granted 244,600 71,000 - -
Exercised - - (100) (600)
Canceled (19,000) - (445,250) (199,300)
------- ------- --------- ---------
Options outstanding, end
of year 296,600 71,000 136,050 581,400
======= ======= ========= =========
Options price range at
October 31 $2.00 $2.00 $2.00 $2.00
to to to to
$4.50 $4.50 $4.50 $4.50
Options exercisable at
October 31 59,600 25,000 90,420 324,012
======= ======= ========= =========
</TABLE>
STOCK RIGHTS
On February 1, 1995, the Board of Directors declared a dividend
distribution of one common share purchase right for each
outstanding share of common stock and fifty rights for each share
of preferred stock outstanding on that date. Each right would entitle
stockholders to buy one share of common stock at an exercise price of
$30.00 per share, subject to adjustment. The rights are not currently
exercisable, but would become exercisable if certain events occurred
relating to a person or group acquiring or attempting to acquire
33 percent or more of the outstanding shares of common stock. The
rights expire on February 1, 2005, unless redeemed or exchanged by
the Company earlier.
Page 112 of 158 Pages
<PAGE> 113
- 14 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 8 - INCOME TAXES
The provision for income taxes for 1995 and 1994 is comprised of the
following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Currently payable
Federal $ 17,000 $ 17,000
State 3,000 3,000
-------- --------
$ 20,000 $ 20,000
======== ========
</TABLE>
The significant components of the deferred tax provision for 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Allowance for doubtful accounts $193,823 $(21,200)
Accrued restructuring costs 163,652 254,200
Net operating loss 37,264 230,800
Accrued vacation 12,602 26,600
Inventory reserve 6,688 49,300
Health insurance reserve (724) (16,100)
Property and equipment, net (123,700) 15,600
Valuation allowance (289,605) (539,200)
--------- ---------
$ - $ -
========= =========
</TABLE>
The components of the net deferred tax liability as of October 31,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss $1,578,500 $1,615,800
Allowance for doubtful accounts 104,510 298,300
Accrued restructuring costs 90,549 254,200
Inventory reserve 82,615 89,300
Property and equipment, net 76,299 -
Accrued vacation 28,410 41,000
Health insurance reserve 7,222 6,500
Valuation allowance (1,968,105) (2,257,700)
------------ ------------
Total deferred tax asset - 47,400
------------ ------------
Deferred tax liabilities:
Property and equipment, net - 47,400
------------ ------------
Total deferred tax liability - 47,400
------------ ------------
Net deferred tax liability $ - $ -
============ ============
</TABLE>
Page 113 of 158 Pages
<PAGE> 114
- 15 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 8 - INCOME TAXES (Continued)
The difference between the Company's provision for income taxes and
income taxes computed at the federal statutory rate is primarily
attributable to the payment of minimum state income taxes, payment
of Foreign Sales Corporation taxes and the deferral of certain
income tax benefits for financial reporting purposes until
realizable for federal and state income tax purposes.
Net operating losses and their respective expiration dates are as
follows:
<TABLE>
<CAPTION>
Net Operating Loss Expiration Dates
Year ---------------------------- ------------------
Generated Book Tax Federal State
--------- ---------- ---------- ------- -----
<S> <C> <C> <C> <C>
1992 $ 471,000 $ 771,000 2007 1997
1993 3,313,000 1,934,000 2008 1998
1994 2,045,000 1,145,000 2009 1999
---------- ----------
$5,829,000 $3,850,000
========== ==========
</TABLE>
The Company has available research and development tax credit
carryforwards of approximately $182,000, which will expire through
fiscal year 2007, and approximately $177,000 of foreign tax credit
carryforwards, which will expire through fiscal year 1999.
As a result of various stock transactions, prior to fiscal year 1994,
the Company may have experienced an ownership change as defined in,
and only for the purposes of, Internal Revenue Code Section 382.
As a result, utilization by the Company of its net operating losses
and tax credits may be subject to an annual limitation.
NOTE 9 - OPERATING LEASE COMMITMENTS
The Company has entered into an agreement to lease approximately
44,000 square feet of commercial space with a monthly rent of
approximately $44,000. The lease expires on November 15, 1996,
but is subject to two renewal option periods of five years each with
the same basic terms and conditions as in the initial lease term,
except for the rental amount. The Company has the option to purchase
the premises, under this lease for $5,762,000, subject to certain
adjustments. The Company has entered into a sublease for 16,000
square feet of the commercial space commencing January 1, 1995
and expiring on November 15, 1996 with a monthly rental of
$13,000.
The Company also entered into a lease for 6,500 square feet of
warehouse space with monthly payments of approximately $1,700
which expires on November 15, 1996.
Page 114 of 158 Pages
<PAGE> 115
- 16 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 9 - OPERATING LEASE COMMITMENTS (Continued)
The Company's minimum annual lease payments under noncancelable
operating leases, excluding sublease income, is approximately
$560,000 in 1996 and approximately $24,000 for 1997.
Rent expense relating to operating leases was $432,068 and
$563,380 for the years ended October 31, 1995 and 1994,
respectively.
NOTE 10 - PROFIT-SHARING AND BONUS PLANS
The Company has a defined contribution 401(k) profit-sharing
plan covering substantially all of its employees. Participants
are allowed to contribute an amount not to exceed the plan
limit allowable by law. The Company provides for a matching
contribution equal to 50% of each employee's contribution,
limited to a maximum of 1% of an employee's annual compensation.
Contributions to the plan were $17,860 and $30,359 for the years
ended October 31, 1995 and 1994, respectively.
The Company also maintains a bonus plan whereby it establishes a
bonus pool based upon a predetermined formula applied to net
operating income. Bonus expense was $68,694 and $-0- for the years
ended October 31, 1995 and 1994, respectively.
NOTE 11 - OTHER INCOME (EXPENSE)
During 1994, the Company recovered approximately $385,000 of the
$450,000 that it had written off in 1993 relating to advances that
had been made to an unrelated company. The recovery was recorded
as other income (expense) in the consolidated statement of
operations in 1994.
NOTE 12 - LITIGATION
The Company is involved in certain legal proceedings and claims
which have arisen in the ordinary course of it's business. While
the ultimate outcome of these legal proceedings cannot at this
time be predicted with certainty, management intends to vigorously
defend the claims. Management does not expect that these matters
will have a material adverse effect on the consolidated financial
position or results of operations of the Company.
Page 115 of 158 Pages
<PAGE> 116
- 17 -
CADKEY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OCTOBER 31, 1995 AND 1994
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has used a dealer which is related through ownership
by certain officers and stockholders of the Company.
The dealer markets the Company's products and provides certain
training services to the Company. Sales of products approximated
$21,000 and $14,100 and purchase of training services approximated
$26,250 and $19,400 for the years ended October 31, 1995 and 1994,
respectively. Further, the Company has provided working capital
advances to the dealer. Net amounts due from the dealer at October
31, 1995 and 1994 approximated $63,112 and $18,700, respectively.
Subsequent to October 31, 1995, the Company's Board of Directors
approved the acquisition of this related party.
Page 116 of 158 Pages
<PAGE> 117
INDEPENDENT AUDITORS' REPORT
Board of Directors
Atlantic Systems, Inc.
Spring Lake, New Jersey
We have audited the accompanying balance sheet of Atlantic Systems, Inc. as
of December 31, 1994 and the related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1993 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Systems, Inc. as of
December 31, 1994, and the results of its operations and its cash flows for
the years ended December 31, 1993 and 1994, in conformity with generally
accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co.
November 15, 1995
Page 117 of 158 Pages
<PAGE> 118
ATLANTIC SYSTEMS, INC.
-------------------------------------------------------------------------------
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 7,717
Accounts receivable 72,796
Inventory 45,131
----------------
TOTAL CURRENT ASSETS 125,644
EQUIPMENT AND VEHICLES 42,657
DEPOSITS 1,441
------------------
$ 169,742
==================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Capital lease obligation - current $ 20,207
Accounts payable 33,316
Accrued expenses 75,862
------------------
TOTAL CURRENT LIABILITIES 129,385
------------------
LONG-TERM LIABILITIES
Capital lease obligation 12,428
------------------
STOCKHOLDERS' EQUITY
Common stock:
Authorized 2,500 shares of no par value;
issued and outstanding 200 shares at
December 31, 1994 950
Additional paid-in capital 259,078
Retained earnings (deficit) (232,099)
------------------
TOTAL STOCKHOLDERS' EQUITY 27,929
------------------
$ 169,742
==================
-------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 2
</TABLE>
Page 118 of 158 Pages
<PAGE> 119
ATLANTIC SYSTEMS, INC.
-------------------------------------------------------------------------------
<TABLE>
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
----------------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1992 200 $ 950 $ 201,740 $ (238,544) $ 21,484
NET INCOME -- -- -- 840 840
INCREASE IN PAID-IN CAPITAL -- -- 57,338 -- --
----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1993 200 950 259,078 (237,704) 22,324
NET INCOME -- -- -- 16,801 16,801
SHAREHOLDER DISTRIBUTIONS -- -- -- (11,196) (11,196)
----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 200 $ 950 $ 259,078 $ (232,099) $ 27,929
======================================================================================================================
-------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 3
</TABLE>
Page 119 of 158 Pages
<PAGE> 120
ATLANTIC SYSTEMS, INC.
-------------------------------------------------------------------------------
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
-----------------------------------
1993 1994
-----------------------------------
<S> <C> <C>
SALES $ 1,162,059 $ 1,414,620
COST OF SALES 668,985 792,216
------------------------------------------------------------------
GROSS PROFIT 493,074 622,404
OPERATING EXPENSES 486,538 601,975
-------------------------------------------------------------------
INCOME FROM OPERATIONS 6,536 20,429
OTHER EXPENSE (5,696) (3,628)
-------------------------------------------------------------------
NET INCOME $ 840 $ 16,801
===================================================================
-------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 4
</TABLE>
Page 120 of 158 Pages
<PAGE> 121
ATLANTIC SYSTEMS, INC.
-------------------------------------------------------------------------------
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
------------------------------
1993 1994
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 840 $ 16,801
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 15,768 24,908
Change in assets and liabilities:
Increase in accounts receivable (48,732) (566)
Increase in inventory (33,353) (10,203)
Increase in accounts payable and accrued
expenses 36,411 8,335
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (29,066) 39,275
------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in other assets 2,300 --
Payments for equipment and vehicles (35,740) (38,593)
-------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (33,440) (38,593)
-------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts paid on line of credit (51,500) (2,500)
Net proceeds on capital lease obligation 24,881 7,755
Shareholder distributions (22,367) (11,196)
Increase in additional paid-in capital 57,338 --
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,352 (5,941)
-------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (54,154) (5,259)
CASH - BEGINNING OF YEAR 67,130 12,976
-------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 12,976 $ 7,717
=================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 5,671 $ 3,503
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 5
</TABLE>
Page 121 of 158 Pages
<PAGE> 122
ATLANTIC SYSTEMS, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
The Company's inventory consists of hardware and other supplies that
will be utilized for upcoming contracts and is valued using the lower
of cost or market (first-in, first-out method).
EQUIPMENT AND VEHICLES
Equipment and vehicles are carried at cost, less accumulated
depreciation computed using straight-line and accelerated methods. The
assets are depreciated and amortized over periods of five to seven
years.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment/delivery of the product.
There are no significant post contract support obligations at the time
of revenue recognition.
INCOME TAXES
The Company is an S Corporation and therefore all income (losses) are
reported on the owner's individual returns. Accordingly, the Company
does not accrue a provision for income taxes.
2. OPERATIONS
The Company is a software development and services company that sells
software to small retailers for use in tracking sales and inventory.
Atlantic Services, Inc. develops and sells its own software and sells
hardware supplied by other manufacturers. The Company does business in
about 10 states and Canada with liquor stores as their primary market.
-------------------------------------------------------------------------------
Page 6
Page 122 of 158 Pages
<PAGE> 123
ATLANTIC SYSTEMS, INC.
-------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
3. EQUIPMENT AND VEHICLES
Equipment and vehicles consist of:
<TABLE>
<S> <C>
Office equipment $ 62,900
Furniture and fixtures 16,559
Vehicles 67,957
Parts 38,092
-------------
185,508
Less: Accumulated depreciation and
amortization 142,851
-------------
$ 42,657
=============
</TABLE>
The vehicles under capital lease obligations in the amount of $32,635
at December 31, 1994 are included above. Related accumulated
depreciation amounted to $14,032 at December 31, 1994.
Depreciation and amortization charged against income amounted to
$15,768 in 1993 and $24,908 in 1994.
4. LINE OF CREDIT
The Company has an agreement with a bank for a line of credit of up to
$30,000. The agreement calls for interest to be charged at 7.5%, and
is secured by equipment. The line of credit expired in January 1994.
The Company had an outstanding balance of $2,500 and none at
December 31, 1993 and 1994, respectively.
Interest expense amounted to $3,800 in 1993 and none in 1994.
-------------------------------------------------------------------------------
Page 7
Page 123 of 158 Pages
<PAGE> 124
ATLANTIC SYSTEMS, INC.
-------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
5. CAPITAL LEASE OBLIGATIONS
At December 31, 1994, future payments for capital lease obligation
are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------
<S> <C>
1995 $ 20,207
1996 12,428
--------------------------------------------------
Total capital lease obligation $ 32,635
==================================================
</TABLE>
6. LEASE COMMITMENTS
The Company leases its office space on a month-to-month basis from a
related party. In August 1995, the Company entered into a long-term
lease for this space for monthly amounts totalling $2,700. The lease
expires in December 1998.
-------------------------------------------------------------------------------
Page: 8
Page 124 of 158 Pages
<PAGE> 125
<TABLE>
Date: 01/18/96
Atlantic Systems Inc Page: 1
P R O F I T & L O S S
FROM 4/1/95 TO 6/30/95
<CAPTION>
C U R R E N T Y E A R
CURRENT PERIOD YEAR TO DATE
Amount Pct Amount Pct
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
SALES
EQUIPMENT
- LIQUOR 61,339.07 22.6 147,207.47 25.5
- OTHER RETAIL 0.0 0.0
- ALL OTHERS 4,799.50 1.8 4,799.50 0.8
- ADD ON 54,311.87 20.0 104,536.13 18.1
- SBT/TIW 0.0 0.0
SOFTWARE
- LIQUOR 23,458.93 8.6 52,413.30 9.1
- OTHER RETAIL 0.0 0.0
- ALL OTHERS 430.00 0.2 430.00 0.1
- ADD ON 10,707.03 3.9 39,484.01 6.8
- SBT/TIW 0.0 0.0
- SBT/TIW Custom 0.0 0.0
INSTALL/REPAIR - SBT/TIW 0.0 0.0
INSTALLATION SERVICES 3,153.78 1.2 5,149.16 0.9
ALPHA MICRO MAINTENANCE 18,118.26 6.7 33,022.17 5.7
SUPPLIES 12,233.40 4.5 25,524.85 4.4
PRICING SERVICES 12,740.00 4.7 26,595.84 4.6
PRODUCT MOVEMENT INFO 12,125.00 4.5 23,300.00 4.0
TRAINING/SUPPORT 58,185.75 21.4 115,041.25 19.9
TRAINING/SUPPORT - SBT 0.0 0.0
----------- ----- ----------- -----
NET SALES $271,602.59 100.0 $577,503.68 100.0
COST OF SALES
PURCHASES - EQUIPMENT
- LIQUOR 37,696.73 13.8 84,838.83 14.6
- OTHER RETAIL 0.0 0.0
- ALL OTHERS 1,941.95 0.6 1,941.95 0.2
- ADD ON 33,733.54 12.3 63,112.67 10.8
- SBT/TIW 0.0 0.0
PURCHASES - SOFTWARE
- LIQUOR 4,460.00 1.5 13,026.50 2.2
- OTHER RETAIL 0.0 0.0
- ALL OTHERS 1,091.30 0.3 1,380.09 0.1
- ADD ON 6,145.00 2.2 24,204.11 4.1
- SBT/TIW 0.0 0.0
PURCHASES - SUPPLIES 7,677.56 2.7 16,986.63 2.8
PRICING SERVICE EXPENSES 3,839.84 1.3 7,589.74 1.2
INSTALLATION EXPENSES 1,840.34 0.6 3,531.77 0.5
WARRANTY REPAIR EXPENSE 603.58 0.1 1,351.41 0.1
DISCOUNTS TAKEN (1,408.65) 0.5 (2,607.85) 0.5
----------- ----- ----------- -----
TOTAL COST OF SALES $97,621.19 35.8 $215.355.85 37.2
----------- ----- ----------- -----
GROSS PROFIT $173,981.40 64.1 $362,147.83 62.7
</TABLE>
Page 125 of 158 Pages
<PAGE> 126
<TABLE>
Date: 01/18/96
Atlantic Systems Inc Page: 2
P R O F I T & L O S S
FROM 4/1/95 TO 6/30/95
<CAPTION>
C U R R E N T Y E A R
CURRENT PERIOD YEAR TO DATE
Amount Pct Amount Pct
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
OPERATING EXPENSES
PAYROLL
- EMPLOYEES 105,716.18 38.8 211,725.87 36.6
- SALES REPS 14,340.00 5.2 28,470.00 4.8
- PAYROLL TAXES 9,641.94 3.5 20,913.95 3.5
----------- ----- ----------- -----
TOTAL PAYROLL 129,698.12 47.7 261,109.82 45.1
ADVERTISING (904.11) 0.3 362.91 0.0
ADVERTISING - TRADE SHOWS 0.0 0.0
AUTO - EXPENSE 5,795.99 2.0 11,310.19 1.9
INSURANCE - AUTO 585.49 0.1 2,873.18 0.4
INSURANCE - THEFT & LIABILITY 0.0 625.00 0.0
INSURANCE - EMPLOYEE HEALTH 6,576.67 2.3 12,791.96 2.1
EMPLOYEE RETIREMENT FUND 0.0 0.0
INTEREST & BANK CHARGES 985.63 0.3 1,981.46 0.2
MISCELLANEOUS TAXES & PENALTY 11.00 0.0 (1,850.14) 0.3
MISCELLANEOUS 0.0 268.00 0.0
OFFICE SUPPLIES 5,866.46 2.1 8,247.76 1.3
POSTAGE / FREIGHT 2,250.90 0.7 4,375.21 0.7
PROFESSIONAL SERVICES 3,541.74 1.2 3,541.74 0.5
RENT 8,100.00 2.9 15,500.00 2.6
SEMINARS / SHOW ATTENDANCE 0.0 0.0
SUBSCRIPTIONS 166.74 0.0 350.04 0.0
TELEPHONE 8,151.21 2.9 17,672.77 3.0
NON EXEMPT TRAVEL & ENTERTAINMENT 641.80 0.1 1,242.01 0.1
EXEMPT TRAVEL 1,967.67 0.6 2,843.22 0.4
UTILITIES - ELECTRIC 1,054.91 0.3 1,826.27 0.2
----------- ----- ----------- -----
TOTAL OPERATING EXPENSES $174,490.22 64.1 $345,071.40 59.7
----------- ----- ----------- -----
NET OPERATING INCOME ($508.82) 0.1 $17,076.43 3.0
BAD DEBT WRITEOFF 0.0 0.0
DEPRECIATION And R & D 1,860.00 0.6 4,340.00 0.7
NJ Franchise Tax 255.00 0.0 225.00 0.0
----------- ----- ----------- -----
NET INCOME ($2,593.82) 0.9 $12,511.43 2.2
=========== ===== =========== =====
</TABLE>
Page 126 of 158 Pages
<PAGE> 127
<TABLE>
Date: 01/18/96
Atlantic Systems Inc Page: 1
B A L A N C E S H E E T
AT 6/30/95
<CAPTION>
C U R R E N T P E R I O D A C T U A L
==============================================
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
CASH IN BANK - FIDELITY (5,093.09)
ACCOUNTS RECEIVABLE - TRADE 63,940.56
----------
TOTAL LIQUID ASSETS $58,847.47
INVENTORY
- COMPUTER HARDWARE 48,675.20
- SOFTWARE 6,730.01
- SUPPLIES 3,666.91
----------
TOTAL INVENTORY $59,072.12
---------- -----------
TOTAL CURRENT ASSETS $117,919.59
FIXED ASSETS
OFFICE EQUIPMENT 62,899.87
RESERVE FOR DEPRECIATION (62,899.87)
FURNITURE & FIXTURES 16,558.56
RESERVE FOR DEPRECIATION (16,558.56)
VEHICLES 72,456.71
RESERVE FOR DEPRECIATION (27,668.00)
SPARE PARTS 38,091.83
RESERVE FOR DEPRECIATION (38,091.83)
NEW PRODUCT DEVELOPMENT
R & D Amortized ----------
NET DEPRECIABLE ASSETS $44,788.71
---------- -----------
TOTAL FIXED ASSETS $44,788.71
OTHER ASSETS
PREPAID INSURANCE
REFUNDABLE DEPOSITS 1,441.42
---------- -----------
TOTAL OTHER ASSETS $1,441.42
---------- -----------
T O T A L A S S E T S $164,149.72
===========
</TABLE>
Page 127 of 158 Pages
<PAGE> 128
<TABLE>
Date: 01/18/96 Atlantic Systems Inc Page: 2
B A L A N C E S H E E T
AT 6/30/95
<CAPTION>
C U R R E N T P E R I O D A C T U A L
=============================================
LIABILITIES
<S> <C> <C> <C>
ACCRUED TAXES PAYABLE
- FEDERAL WITHHOLDING
- FICA 1.00
- FUTA
- NJ WITHHOLDING 972.12
- NJ Franchise Tax Payable
- SUI 2,188.56
- SALES TAX - New Jersey 1,960.59
- SALES TAX - New York Cit 785.07
- SALES TAX - Nassau Count 250.17
- SALES TAX - Suffolk Coun 43.89
- SALES TAX - Mt. Vernon N 40.64
- SALES TAX - Orange Count
- SALES TAX - Westchester 644.50
-------------
TOTAL ACCRUED TAXES $6,886.54
NOTES PAYABLE VEHICLES 21,094.94
REVOLVING CREDIT - FIDELITY
5 Year Note - Current Ammoun
ACCOUNTS PAYABLE TRADE 34,179.04
CUSTOMER DEPOSITS
SEP-IRA Payable 57,585.00
---------------------------------
TOTAL CURRENT LIABILITIES $119,745.52
LONG TERM LIABILITIES
5 Year Note - Fidelity Bank
---------------------------------
TOTAL LONG TERM LIABILITIES
STOCKHOLDER'S EQUITY
RETAINED EARNINGS 30,942.77
YEAR TO DATE EARNINGS 12,511.43
COMMON STOCK - J. KUNISH 75.00
COMMON STOCK - J. McCARTHY 75.00
COMMON STOCK - Treasury 800.00
---------------------------------
TOTAL STOCKHOLDER'S EQUITY $44,404.20
---------------------------------
TOTAL EQUITY & LIABILITIES $164,149.72
==============
</TABLE>
Page 128 of 158 Pages
<PAGE> 129
INDEPENDENT AUDITORS' REPORT
Board of Directors
Elite Computer Services, Inc.
Randolph, New Jersey
We have audited the accompanying balance sheet of Elite Computer Services,
Inc. as of December 31, 1994 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December
31, 1993 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Elite Computer Services,
Inc. as of December 31, 1994, and the results of its operations and its cash
flows for the years ended December 31, 1993 and 1994, in conformity with
generally accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co.
November 15, 1995
Page 129 of 158 Pages
<PAGE> 130
ELITE COMPUTER SERVICES, INC.
------------------------------------------------------------------------------
<TABLE>
BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 8,280
Accounts receivable 208,671
Inventory 161,093
--------------
TOTAL CURRENT ASSETS 378,044
BUILDING, FURNITURE, FIXTURES AND EQUIPMENT 38,298
OTHER ASSETS 50,028
--------------
$ 466,370
==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable - officers $ 366,944
Accounts payable 128,690
Accrued expenses 11,469
--------------
TOTAL CURRENT LIABILITIES 507,103
--------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock:
Authorized 1,000 shares of $2 par value;
issued and outstanding 1,000 shares at
December 31, 1994 2,000
Additional paid-in capital 26,109
Retained earnings (deficit) (68,842)
--------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (40,733)
--------------
$ 466,370
==============
------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 2
</TABLE>
Page 130 of 158 Pages
<PAGE> 131
ELITE COMPUTER SERVICES, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE YEARS
ENDED DECEMBER 31,
-------------------------------------
1993 1994
-------------------------------------
<S> <C> <C>
REVENUES $ 1,536,419 $ 2,020,650
--------------------------------------------------------------------------------------
DIRECT COSTS
Costs of hardware products 749,374 1,176,023
Direct labor 94,385 97,752
--------------------------------------------------------------------------------------
TOTAL DIRECT COSTS 843,759 1,273,775
--------------------------------------------------------------------------------------
GROSS PROFIT 692,660 746,875
--------------------------------------------------------------------------------------
OPERATING EXPENSES
Marketing and sales 99,584 118,164
Administrative 627,221 661,687
--------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 726,805 779,851
--------------------------------------------------------------------------------------
NET LOSS $ (34,145) $ (32,976)
======================================================================================
--------------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 3
</TABLE>
Page 131 of 158 Pages
<PAGE> 132
<TABLE>
ELITE COMPUTER SERVICES, INC.
---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------------------------ PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1993 1,000 $ 2,000 $ 423 $ (1,721) $ 702
NET LOSS -- -- -- (34,145) (34,145)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1993 1,000 2,000 423 (35,866) (33,443)
Imputed interest on officer's notes payable -- -- 25,686 -- 25,686
NET LOSS -- -- -- (32,976) (32,976)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 1,000 $ 2,000 $ 26,109 $ (68,842) $ (40,733)
=================================================================================================================================
---------------------------------------------------------------------------------------------------------------------------------
See the accompanying notes to financial statements Page 4
</TABLE>
Page 132 of 158 Pages
<PAGE> 133
<TABLE>
ELITE COMPUTER SERVICES, INC.
---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE YEARS
ENDED DECEMBER 31,
----------------------------------
1993 1994
----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (34,145) $ (32,976)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 5,275 3,633
Change in assets and liabilities:
Increase in accounts receivable (13,261) (27,319)
(Increase) decrease in inventory 12,015 (127,431)
Increase (decrease) in accounts payable and accrued
expenses 42,287 (13,134)
Decrease in prepaids 1,543 --
--------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,714 (197,227)
--------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in cash surrender value (20,029) (11,272)
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in additional paid-in capital -- 25,686
Net amounts paid on line of credit (10,000) --
Increase in notes payable - officer 9,565 168,527
--------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (435) 194,213
--------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (6,750) (14,286)
CASH - BEGINNING OF YEAR 29,316 22,566
--------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 22,566 $ 8,280
==================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 4,120 $ 1,602
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 5
</TABLE>
Page 133 of 158 Pages
<PAGE> 134
ELITE COMPUTER SERVICES, INC.
------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for doubtful accounts equal to the
estimated collection losses that will be incurred in collection of all
receivables. The estimated losses are based on historical collection
experience coupled with a review of the current status of the existing
receivables. There is no allowance for uncollectible accounts
reflected in the balance sheet. Company management is of the opinion
that no allowance is necessary.
INVENTORY
The Company's inventory, consists of new and used computers and
computer parts. The inventory is valued at the lower of cost or
market, determined by the FIFO (first-in, first-out) method.
BUILDING, FURNITURE, FIXTURES AND EQUIPMENT
Building, furniture, fixtures and equipment are carried at cost, less
accumulated depreciation computed using straight-line and accelerated
methods. The assets are depreciated over periods ranging from five to
thirty-one years.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of the computer parts.
There are no significant post contract support obligations at the time
of revenue recognition.
The Company does not experience many product returns, and therefore,
Company management is of the opinion that no allowance for sales
returns is necessary. The Company has no obligation for warranties on
hardware sales.
INCOME TAXES
The Company elected under the S Corporation provisions of the Internal
Revenue Code and similar provisions of the New Jersey tax laws, not to
be subject to corporate income taxes, but rather to have the
stockholders report their distributive share of the Company's taxable
income or losses on their respective income tax returns. Therefore, no
liability for federal and state income taxes is reflected in the
accompanying financial statements.
------------------------------------------------------------------------------
Page 6
Page 134 of 158 Pages
<PAGE> 135
ELITE COMPUTER SERVICES, INC.
------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
2. OPERATIONS
Elite Computer Services, Inc. was incorporated in October 1988. The
Company buys computers and breaks them down into parts that are re-sold
mainly to computer maintenance companies. The Company also repairs
computers. The Company's market is primarily computer maintenance
companies for IBM products. Its operations are conducted out of the
office in New Jersey, with customers all over the United States.
3. BUILDING, FURNITURE, FIXTURES AND EQUIPMENT
Building, furniture, fixtures and equipment consist of:
<TABLE>
<S> <C>
Land $ 5,630
Buildings 34,520
Furniture, fixtures and equipment 26,066
Machinery and equipment 14,747
Automobile 2,400
----------------
83,363
Less: Accumulated depreciation 45,065
----------------
$ 38,298
================
</TABLE>
Depreciation charged against income amounted to $5,275 in 1993 and
$3,633 in 1994.
4. OTHER ASSETS
Other assets consist of:
<TABLE>
<S> <C>
Deposits $ 3,313
Cash surrender value 46,715
----------------
$ 50,028
================
</TABLE>
------------------------------------------------------------------------------
Page 7
Page 135 of 158 Pages
<PAGE> 136
ELITE COMPUTER SERVICES, INC.
------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
5. LINE OF CREDIT
The Company has an agreement with a bank for a line of credit of up to
$100,000. The agreement calls for interest to be charged at the prime
rate plus 2%, and is secured by accounts receivable and inventory. The
line of credit expires each May and any outstanding amounts are due on
demand. The Company had no outstanding balance at December 31, 1994.
Interest expense amounted to $4,120 in 1993 and $1,602 in 1994.
6. NOTES PAYABLE - OFFICERS
The notes are non-interest bearing, unsecured and are due on demand.
Imputed interest has been recorded at a market rate with an offset to
contributed capital.
7. LEASE COMMITMENTS
The Company is obligated under a five-year lease for its office space,
expiring May 1996. The total lease commitment through the end of the
lease is $47,813.
The Company was obligated under a month-to-month lease for some
additional warehouse space. This lease was terminated in 1994.
Rent expense amounted to $44,447 and $43,950 in December 31, 1993 and
1994, respectively.
8. PROFIT SHARING PLAN
The Company has a qualified, noncontributory 401k plan for all eligible
employees. The Company contributes, at its discretion, up to 15% of
the participants' annual compensation. Profit sharing expense amounted
to $40,500 and $40,000 in December 31, 1993 and 1994, respectively.
------------------------------------------------------------------------------
Page 8
Page 136 of 158 Pages
<PAGE> 137
<TABLE>
ELITE COMPUTER SERVICES PAGE 1
Balance Sheet
AS OF 06/30/95
<CAPTION>
** THIS MONTH THIS YEAR ** ** THIS MONTH LAST YEAR **
====================================================================================================================================
ASSETS
--------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
CASH-REGULAR-MERRIL/LYNCH 15,258.83 51,681.44
CASH-REGULAR-KAT-WEST 2,662.06 4,038.69
CASH-MONEY MARKET KAT WES 2,038.20 2,022.69
PETTY CASH 200.00 200.00
ACCOUNTS RECEIVABLE 198,608.09 329,871.51
OTHER RECEIVABLES 0.00 500.00
OFFICER'S DRAW-RICHARD 19,381.77 16,919.73
OFFICER'S DRAW-JACK 19,471.29 19,817.87
DRAW-PETER CASTRICUM 0.00 1,050.00
INVENTORY-SHIPPING/PAD 5,172.38 3,034.28
INVENTORY-COMPUTER PARTS 309,219.28 115,522.38
------------ ------------
TOTAL CURRENT ASSETS 571,986.83 544,239.39
FIXED ASSETS
LAND 5,630.00 5,630.00
BUILDINGS 34,520.00 34,520.00
FURNITURE & EQUIPMENT 26,068.00 26,068.00
MACHINERY/EQUIPMENT 14,737.00 14,747.00
AUTOMOBILE - TRUCKS 2,400.00 2,400.00
ACCUM DEPREC BUILDINGS (5,242.00) (3,463.00)
ACCUM DEPREC FURN/FIX (22,856.00) (21,597.00)
ACCUM DEPREC MACH/EQUIP (14,747.00) (15,742.00)
ACCUM DEPREC AUTO/TRUCK (2,400.00) (2,400.00)
SECURITY DEPOSITS 3,312.50 3,312.50
CSV OFFICER'S LIFE 35,443.00 35,443.00
PREPAID EXPENSES 14,812.57 0.00
------------ ------------
TOTAL FIXED ASSETS 91,386.07 78,916.50
------------ ------------
TOTAL ASSETS 663,372.90 623,155.89
============ ============
<CAPTION>
LIABILITIES & CAPITAL
-----------------------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
ACCOUNTS PAYABLE 108,168.66 100,963.45
ACCRUED ACCOUNTS PAYABLE 0.00 2,150.00
TAXES PAYABLE 2,275.97 1,087.45
GARNISHEE/D. COLEMAN 0.00 132.00
------------ ------------
TOTAL CURRENT LIABILITIES 110,444.63 104,352.90
Page 137 of 158 Pages
<PAGE> 138
<CAPTION>
ELITE COMPUTER SERVICES PAGE 2
Balance Sheet
AS OF 06/30/95
** THIS MONTH THIS YEAR ** ** THIS MONTH LAST YEAR **
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
LONG TERM LIABILITIES
NOTE PAYABLE-BANK 50,000.00 25,000.00
POWKATAN PLANTATIONS 0.00 19,822.47
LOANS PAYABLE-JACK R. 188,825.80 118,038.30
LOANS PAYABLE-RICH D. 176,619.38 139,119.39
------------ ------------
TOTAL LONG TERM LIABILITY 416,944.69 301,980.16
------------ ------------
TOTAL LIABILITIES 527,389.32 406,333.06
CAPITAL
COMMON STOCK 2,000.00 2,000.00
PAID IN CAPITAL 423.00 423.00
Shareholders' AAA (1,723.72) (1,723.72)
RETAINED EARNINGS (28,788.58) 3,491.77
CURRENT EARNINGS 184,072.86 212,831.78
------------ ------------
TOTAL CAPITAL 135,983.58 216,822.83
------------ ------------
TOTAL LIAB. & CAPITAL 663,372.90 623,155.89
============ ============
</TABLE>
Page 138 of 158 Pages
<PAGE> 139
<TABLE>
ELITE COMPUTER SERVICES PAGE 1
Income Statement
AS OF 06/30/95
<CAPTION>
---------------- T H I S Y E A R ----------------- --BUDGET-- ----- L A S T Y E A R ------
RATIO: INCOME THIS MONTH RATIO 6 MONTHS RATIO 6 MONTHS THIS MONTH 6 MONTHS
===================================================================================== ===========================================
** THIS MONTH THIS YEAR ** ** THIS MONTH LAST YEAR **
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
SALES 160,007.86 100.0 1,038,879.02 100.0 0.00 240,852.35 1,065,896.51
------------ ------- -------------- ------- --------- ------------ --------------
NET SALES 160,007.86 100.0 1,038,879.02 100.0 0.00 240,852.35 1,065,896.51
COST OF GOODS SOLD
COST OF SALES 86,000.00 53.7 459,196.71 44.3 0.00 127,701.25 500,800.00
FREIGHT 0.00 0.0 1,025.00 0.1 0.00 485.00 485.00
FREIGHT OUT 72.86 0.0 (5,288.89) (0.5) 0.00 (292.33) (285.92)
------------ ------- -------------- ------- --------- ------------ --------------
GROSS PROFIT 73,935.50 46.2 581,926.00 58.1 0.00 112,958.43 564,877.43
SALARIES 26,496.00 16.6 123,262.00 11.9 0.00 18,334.00 107,040.00
PAYROLL TAXES 1,647.89 1.0 11,713.86 1.1 0.00 1,830.00 8,862.98
PENSION PLAN 365.14 0.2 9,836.10 0.9 0.00 479.85 11,428.16
COMMISSIONS 3,989.75 2.5 25,609.09 2.5 0.00 1,081.00 21,686.55
RENT 4,812.50 3.0 24,275.00 2.3 0.00 3,662.50 25,637.50
FACTORY SUPPLIES 2,356.85 1.5 14,065.80 1.4 0.00 2,769.14 20,449.36
OFFICE EXPENSES 1,268.70 0.8 5,862.02 0.6 0.00 2,489.31 10,051.80
FACTORY EXPENSE 795.86 0.5 15,097.61 1.5 0.00 1,311.76 1,711.89
TELEPHONE 1,678.04 1.0 10,238.13 1.0 0.00 1,707.08 8,042.88
UTILITIES 544.12 0.3 5,025.85 0.5 0.00 417.67 5,359.79
TRAVEL EXPENSES 5,733.78 3.6 20,601.55 2.0 0.00 407.96 13,510.44
ENTERTAINMENT EXPENSES 1,590.81 1.0 8,891.25 0.9 0.00 1,760.75 7,101.90
AUTOMOBILE EXPENSES 6,886.01 4.3 57,957.23 5.6 0.00 3,919.42 35,774.97
AUTOMOBILE INSURANCE (7,354.40) (4.6) 14,078.85 1.4 0.00 235.00 8,145.17
BAD DEBT 2,073.26 1.3 2,023.26 0.2 0.00 0.00 0.00
ADVERTISING 210.09 0.1 2,877.41 0.3 0.00 854.54 3,107.77
INSURANCE-MEDICAL 1,938.95 1.2 11,817.76 1.1 0.00 51.62 6,051.44
INSURANCE-GENERAL 0.00 0.0 8,388.50 0.5 0.00 0.00 13,252.95
INSURANCE-LIFE 3,081.46 1.9 24,526.40 2.4 0.00 4,745.44 27,947.78
POSTAGE 182.94 0.1 938.56 0.1 0.00 272.47 1,461.34
CASUAL LABOR 1,300.00 0.8 1,390.00 0.1 0.00 2,966.00 2,966.00
PROFESSIONAL FEES 0.00 0.0 15,406.25 1.5 0.00 1,653.75 6,818.81
MAINTENANCE EXPENSES 600.00 0.4 2,563.00 0.2 0.00 300.00 2,100.00
DEPRECIATION 195.00 0.1 1,170.00 0.1 0.00 295.00 1,770.00
INTEREST EXPENSE 0.00 0.0 0.00 0.0 0.00 49.29 951.27
MISCELLANEOUS INCOME (110.79) (0.1) (456.58) (0.0) 0.00 (66.97) (423.41)
DUES & SUBSCRIPTIONS 8.37 0.0 830.44 0.1 0.00 188.59 904.53
CONTRIBUTIONS 0.00 0.0 85.00 0.0 0.00 0.00 370.00
------------ ------- -------------- ------- --------- ------------ --------------
TOTAL EXPENSES 60,281.33 37.7 417,853.14 40.3 0.00 51,496.09 352,079.85
------------ ------- -------------- ------- --------- ------------ --------------
INCOME BEFORE TAXES 13,854.17 8.6 164,072.86 15.8 0.00 61,463.34 212,797.78
STATE INCOME TAX 0.00 0.0 0.00 0.0 0.00 0.00 188.00
------------ ------- -------------- ------- --------- ------------ --------------
NET INCOME 13,654.17 8.5 164,072.86 15.8 0.00 81,463.34 212,631.78
</TABLE>
Page 139 of 158 Pages
<PAGE> 140
The following pro forma consolidated statements of operations of Applied
Cellular Technology, Inc. and Subsidiaries for the year ended December 31, 1994
and the nine month period ending September 30, 1995 give effect to the
acquisitions of Cadkey, Inc., Atlantic Systems Co. and Elite Computer
Services, Inc. as though they were effective at January 1, 1994. The
statements give effect to the Acquisitions under the purchase method of
accounting and the assumptions in the accompanying notes to the pro forma
financial statements.
In December 1994, the Company acquired 570,712 shares of Cadkey, Inc. in
exchange for 456,570 shares of its common stock at $1.50 a share (which is the
prevailing market price of the shares at the date of acquisition, net of a
discount valuation of approximately 45% due to the limited market for the
shares), resulting in a 29% investment in this company, accounted for under
the equity method. The resulting investment is $684,855, of which approximately
$185,000 is goodwill, being amortized over 7 years. Other acquisition costs
for this transaction have also been capitalized in the amount of $6,600.
In August 1995, the Company issued 124,066 shares of its common stock at
$5.50 per share (which was the prevailing market price at the time of the
acquisition) for a total of $682,363, in exchange for an 80% investment in
Atlantic Systems Company. The resulting goodwill of $781,000 is being
amortized over 10 years. Other acquisition costs for this transaction have
also been capitalized in the amount of $50,523.
In September 1995, the Company issued 102,160 shares of its common stock
at $8.94 per share (which was the prevailing market price at the time of the
acquisition) for a total of $913,055, in exchange for an 80% investment in
Elite Computer Services, Inc. The resulting goodwill of $1,031,000 is being
amortized over 10 years. Other acquisition costs for this transaction have
also been capitalized in the amount of $56,159.
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 statement and notes
thereto of the Company included elsewhere in this registration.
<TABLE>
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Pro forma Adjustments
As Reported -------------------------------------------------------------------- Pro Forma
December 31, Atlantic Elite Cadkey, Atlantic Elite December 31,
1994 Systems, Co. Services, Inc. Inc. Systems, Co. Services, Inc. 1994
<F1> <F2>
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues $322,769 $1,414,620 $2,020,650 $0 $0 $0 $3,758,039
Direct Costs 269,868 792,216 1,273,775 0 0 0 2,335,859
------------------------------------------------------------------------------------------------
Gross Profit 52,901 622,404 746,875 0 0 0 1,422,180
Operating Expenses 282,950 601,975 779,851 0 0 0 1,664,776
Amortization Expense 0 0 0 26,404 78,898 99,597 204,899
------------------------------------------------------------------------------------------------
Operating Income (Loss) (230,049) 20,429 (32,976) (26,404) (78,898) (99,597) (447,495)
Nonoperating Income (Expense) (252,405) (3,628) 0 (688,460) 0 0 (944,493)
Minority Interest 0 0 0 0 (3,360) 1,458 (1,902)
Provision for income tax 0 0 0 0 0 0 0
------------------------------------------------------------------------------------------------
Net Income (Loss) ($482,454) $16,801 ($32,976) ($714,864) ($82,258) ($98,139) ($1,393,890)
================================================================================================
Net Income (Loss) Per Common Share ($0.82) ($1.13)
Weighted Average Number Of
Common Shares Outstanding 587,797 1,231,816
</TABLE>
<TABLE>
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Pro forma Adjustments
As Reported -------------------------------------------------------------------- Pro Forma
Nine Months Atlantic Elite Cadkey, Atlantic Elite Nine Months
Ended Systems, Co. Services, Inc. Inc. Systems, Co. Services, Inc. Ended
September 30, September 30,
1994 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<F9> <F10>
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues $1,128,833 $649,930 $1,255,125 $0 $0 $0 $3,033,888
Direct Costs 632,989 443,636 644,325 0 0 0 1,720,950
-------------------------------------------------------------------------------------------------
Gross Profit 495,844 206,294 610,800 0 0 0 1,312,938
Operating Expenses 309,314 215,247 645,233 0 0 0 1,169,794
Goodwill And Software
Amortization 67,933 0 0 0 46,153 67,521 181,607
-------------------------------------------------------------------------------------------------
Operating Income 118,597 (8,953) (34,433) 0 (46,153) (67,521) (38,463)
Nonoperating Income (Expenses) 282,094 0 0 0 0 0 282,094
Minority Interest (45,554) 0 0 0 1,790 22,886 (20,878)
-------------------------------------------------------------------------------------------------
Net Income Before Provision
for Income Tax 355,137 (8,953) (34,433) 0 (44,363) (44,635) 222,753
Provision for income tax 30,100 0 0 0 0 0 30,100
-------------------------------------------------------------------------------------------------
Net Income (Loss) $325,037 ($8,953) (34,433) $0 ($44,363) ($44,635) $192,653
=================================================================================================
Net Income Per Common Share $0.20 $0.11
Weighted Average Number Of
Common Shares Outstanding 1,632,033 1,824,510
Page 140 of 158 Pages
<PAGE> 141
<FN>
Note A: The Pro Forma Consolidated Statements of Operations give effect to
the following pro forma adjustments:
<F1> Represents the December 31, 1994 Statement of Operations
of Atlantic Systems, Co. that would have been consolidated
with the Company if the acquisition would have taken place
on January 1, 1994.
<F2> Represents the December 31, 1994 Statement of Operations
of Elite Services, Inc. that would have been consolidated
with the Company if the acquisition would have taken place
on January 1, 1994.
<F3> Represents the amortization expense of the acquired goodwill
of $26,404 which records the expense as if the Cadkey
acquisition would have taken place on January 1, 1994.
<F4> Represents the 29% equity (loss) of ($688,460) which records
the equity as if the Cadkey acquisition would have taken
place on January 1, 1994.
<F5> Records the income affect of the amortization expense for
the goodwill acquired in the Atlantic acquisition of $78,898,
as if the acquisition would have taken place on January 1,
1994.
<F6> Records the income affect of the amortization expense for the
goodwill acquired in the Elite acquisition of $99,597, as if
the acquisition would have taken place on January 1, 1994.
<F7> Records the income affect of the minority interest in the
earnings for the year ended December 31, 1994 of ($3,360).
<F8> Records the income affect of the minority interest in the
earnings for the year ended December 31, 1994 of $1,458.
<F9> Represents the September 30, 1995 Statement of Operations
of Atlantic Systems, Co. that would have been consolidated
with the Company if the acquisition would have taken place
on January 1, 1994, less the amount already included in the
9/30/95 statements issued.
<F10> Represents the September 30, 1995 Statement of Operations
of Elite Services, Inc. that would have been consolidated
with the Company if the acquisition would have taken place
on January 1, 1994, less the amount already included in the
9/30/95 statements issued.
<F11> Records the amortization expense for the goodwill for the
nine month period ended September 30, 1995 (less the amount
already picked up on the 9/30/95 statements)
in the amount of $46,153.
<F12> Records the amortization expense for the goodwill for the
nine month period ended September 30, 1995 (less the amount
already picked up on the 9/30/95 statements)
in the amount of $67,521.
<F13> Records the minority interest in the earnings for the nine
month period ending September 30, 1995 (less the amount
already picked up at 9/30/95) of ($1,790).
<F14> Records the minority interest in the earnings for the nine
month period ending September 30, 1995 (less the amount
already picked up at 9/30/95) of ($22,886).
</TABLE>
Page 141 of 158 Pages
<PAGE> 142
NOKE AND HEARD
Certified Public Accountants
469 Morris Avenue
Summit, N. J. 07901-1564
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Burling Instruments, Inc.
16 River Road, P.O. Box 298
Chatham, New Jersey
We have audited the accompanying balance sheets of Burling Instruments, Inc.
as of February 28, 1995 and 1994, and the related statements of income,
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Burling Instruments,
Inc. as of February 28, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Noke and Heard
May 5, 1995.
Page 142 of 158 Pages
<PAGE> 143
<TABLE>
BURLING INSTRUMENTS, INC. EXHIBIT A
------------------------- ---------
COMPARATIVE BALANCE SHEETS
--------------------------
FEBRUARY 28, 1995 AND 1994
--------------------------
<CAPTION>
ASSETS
------
1995 1994
------------ ------------
<S> <C> <C>
Current assets
--------------
Cash $ 30,860 $ 57,842
Accounts receivable, net of allowance for
doubtful accounts 205,476 182,111
Inventories (Note 1, 2) 453,630 476,557
Prepaid expenses 4,688 4,513
Prepaid corporate taxes 2,205 10,225
------------ ------------
Total current assets 696,859 731,248
Plant, property and equipment
-----------------------------
Equipment, furniture and fixtures at cost -
net of accumulated depreciation (Note 1, 3) 60,644 86,871
Other assets
------------
Security deposits 2,224 1,903
Intangible assets - EXHIBIT A-1 22,180 25,431
----------------- ------------ ------------
Total assets $ 781,907 $ 845,453
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities
-------------------
Current maturities of long-term debt (Note 4) $ 100,000 $ 100,000
Accounts payable - trade 35,688 56,293
Corporate income tax payable 3,929 -
Profit-sharing payable (Note 5) - -
Accrued expenses - EXHIBIT A-1 66,895 67,371
Deferred Federal income tax (Note 1, 6) 20,950 20,396
------------ ------------
Total current liabilities 227,462 244,060
Long-term debt, net of current maturities (Note 4) - 100,000
------------ ------------
Total liabilities 227,462 344,060
------------ ------------
Shareholders' equity
--------------------
Common stock - at cost
No par value 1,000 shares authorized
issued and outstanding 1,075 1,075
Additional paid-in capital 373,925 373,925
Accumulated earnings - EXHIBIT B 179,445 126,393
------------ ------------
Total shareholders' equity 554,445 501,393
------------ ------------
Total liabilities
and shareholders' equity $ 781,907 $ 845,453
============ ============
The accompanying notes are an integral part of this statement.
</TABLE>
Page 143 of 158 Pages
<PAGE> 144
<TABLE>
BURLING INSTRUMENTS, INC. EXHIBIT A-1
------------------------- -----------
SUPPORTING EXHIBIT
------------------
FEBRUARY 28, 1995 AND 1994
--------------------------
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Intangible Assets
-----------------
Goodwill - net of accumulated amortization
of $5,400 and $4,800 in 1995 and 1994 $ 18,600 $ 19,200
Deferred loan costs-net of accumulated amortization
of $10,721 and $8,061 in 1995 and 1994 3,580 6,231
---------- ---------
Total - carried to EXHIBIT A $ 22,180 $ 25,431
----- ========== =========
Accrued Expenses
----------------
Commissions $ 18,126 $ 17,487
Payroll and related taxes 42,969 44,174
Other accrued expenses 5,800 5,710
---------- ---------
Total - carried to EXHIBIT A $ 66,895 $ 67,371
----- ========== =========
The accompanying notes are an integral part of this statement.
</TABLE>
Page 144 of 158 Pages
<PAGE> 145
<TABLE>
BURLING INSTRUMENTS, INC. EXHIBIT B
------------------------- ---------
STATEMENTS OF INCOME AND EXPENSES
---------------------------------
AND CHANGES IN RETAINED EARNINGS
--------------------------------
FOR THE YEARS ENDED FEBRUARY 28, 1995 AND 1994
----------------------------------------------
<CAPTION>
1994-95 1993-94
------------------------- -------------------------
% OF % OF
AMOUNT SALES AMOUNT SALES
------------ ----- ------------ -----
<S> <C> <C> <C> <C>
Net sales $ 1,725,449 100 $ 1,660,392 100
Cost of goods sold (Schedule 1) 962,399 56 1,000,092 60
------------ --- ------------ ---
Gross Profit 763,050 44 660,300 40
------------ --- ------------ ---
Operating expenses
------------------
Selling 287,742 17 281,728 17
Administrative 369,149 21 352,581 21
Profit-sharing Plan
Contributions -
------------ --- ------------ ---
Total Operating
Expenses 656,891 38 634,309 38
------------ --- ------------ ---
Income from Operations 106,159 6 25,991 2
Other income (expenses)
----------------------
Interest expense (14,857) (1) (21,992) (1)
Miscellaneous 253 3,665
------------ --- ------------ ---
Net income before provision
---------------------------
for taxes 91,555 5 7,664 1
---------
Provision for taxes (Note 6) (38,503) 2 1,762
------------ --- ------------ ---
Net income for the year 53,052 3 9,426 1
----------------------- === ===
Accumulated earnings -
Beginning of year 126,393 116,967
------------ ------------
Accumulated earnings -
End of year - carried
to EXHIBIT A $ 179,445 $ 126,393
============ ============
</TABLE>
Page 145 of 158 Pages
<PAGE> 146
<TABLE>
<CAPTION>
BURLING INSTRUMENTS, INC. EXHIBIT C
------------------------- ---------
COMPARATIVE STATEMENTS OF CASH FLOWS
------------------------------------
FEBRUARY 28, 1995 AND 1994
--------------------------
INCREASE (DECREASE) IN CASH
---------------------------
FEBRUARY 28,
----------------------------
1994-95 1993-94
---------- ----------
<S> <C> <C>
Cash flows from operating activities
------------------------------------
Net income - EXHIBIT B $ 53,052 $ 9,426
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 39,478 39,233
Bad debts -
Change in accounts receivable (23,365) 37,806
Change in inventory 22,927 (4,937)
Change in prepaid items 7,845 11,599
Change in reserve for medical claims - (10,000)
Change in accounts payable and accrued expenses (17,153) 16,350
Change in deferred taxes payable 554 (7,329)
---------- ----------
Net cash provided by operating activities 83,338 92,148
---------- ----------
Cash flows from investing activities
------------------------------------
Additional security deposit (321) (726)
Capital expenditures (10,000) (8,398)
---------- ----------
Net cash used by investing activities (10,321) (9,124)
---------- ----------
Cash flows from financing activities
------------------------------------
Principal payments on long-term debts (100,000) (100,000)
---------- ----------
Net cash used by financing activities (100,000) (100,000)
---------- ----------
Net increase (decrease) in cash and
-----------------------------------
cash equivalents (26,983) (16,976)
----------------
Cash balance - Beginning of year 57,843 74,819
-------------------------------- ---------- ----------
Cash balance - End of Year $ 30,860 $ 57,843
-------------------------- ========== ==========
Cash paid for interest $ 15,404 $ 22,390
Cash paid for income taxes $ 34,020 $ (6,069)
</TABLE>
Page 146 of 158 Pages
<PAGE> 147
BURLING INSTRUMENTS, INC.
-------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
FEBRUARY 28, 1995 AND 1994
--------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
-----------
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Depreciation
------------
Depreciation is provided for on the straight-line method over their
estimated useful lives. The estimated lives used in determining
depreciation are:
Furniture and fixtures 5 years
Machinery and equipment 10 years
Amortization
------------
Intangible assets are amortized on the straight-line method over the
following periods:
Goodwill 480 months
Covenant not to compete 60 months
Deferred loan costs 180 months
Organization costs 60 months
Income Taxes
------------
The deferred income taxes in the accompanying financial statements
reflect the timing differences in reporting results of operations for
income tax and financial accounting purposes. Deferred taxes are
classified as current or noncurrent depending on the classification of
the assets and liabilities which they relate.
2. INVENTORIES
Inventories consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Work-in process (assemblies) $ 190,190 $ 190,205
Raw materials 263,440 286,352
---------- ----------
Totals $ 453,630 $ 476,557
========== ==========
</TABLE>
Page 147 of 158 Pages
<PAGE> 148
BURLING INSTRUMENTS, INC.
-------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
FEBRUARY 28, 1995 AND 1994
--------------------------
3. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Building improvements $ 4,988 $ -
Furniture and fixtures 133,828 133,828
Machinery and equipment 349,691 339,691
---------- ----------
Total 488,507 478,507
Less: accumulated depreciation 427,863 391,636
---------- ----------
Net book value $ 60,644 $ 86,871
========== ==========
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Note payable with yearly payments of
$100,000 secured by accounts receivable,
inventories and equipment, interest rate
is variable, currently @7.5% $ 100,000 $ 200,000
Less: current maturities 100,000 100,000
---------- ----------
Net long-term debt $ None $ 100,000
========== ==========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
1994
----------
<S> <C>
1996 $ -
1995 100,000
----------
Total $ 100,000
==========
</TABLE>
Page 148 of 158 Pages
<PAGE> 149
BURLING INSTRUMENTS, INC.
-------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
FEBRUARY 28, 1995 AND 1994
--------------------------
5. COMMITMENTS
The Company has a discretionary profit-sharing plan covering
substantially all employees. The Company's contribution to the plan is
determined annually by the Board of Directors. No contribution will be
made for the years ended February 28, 1995 or 1994.
The Company conducts its operations in a leased facility. The Company
exercised the option to extend the lease for an additional five year
period expiring February 28, 1996.
The approximate minimum annual rental payments under the above lease
are as follows:
1995-96 $ 73,080
=========
Rent expense for the years ended February 28, 1995 and 1994 was $75,201
and $73,080 respectively.
The Company maintains 3 automobiles on lease. The lease commitments are
as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
1994-95 $ - $ 8,242
1995-96 10,775 7,459
1996-97 10,775 7,459
1997-98 8,824 1,549
1998-99 2,625 -
---------- ----------
Total $ 32,999 $ 24,709
========== ==========
</TABLE>
6. INCOME TAXES
The components of income tax expense are:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Current portion $ 37,949 $ 10,241
Deferred taxes (Note 1) 554 343
---------- ----------
Total income tax expense $ 38,503 $ 10,584
========== ==========
</TABLE>
Page 149 of 158 Pages
<PAGE> 150
AUDITOR'S REPORT
ON SUPPLEMENTARY INFORMATION
Our examination of the basic financial statements was made primarily to form
an opinion on such financial statements taken as a whole. The supplementary
information contained in the following pages is presented for the purpose of
additional analysis and, although not required for a fair presentation of
financial position, results of operations, and cash flows, was subjected to
the adult procedures applied in the examinations of the basic financial
statements. In our opinion, the supplementary information is fairly
presented in all material respects in relation to the basic financial
statements taken as a whole.
/s/ Noke and Heard
NOKE AND HEARD
Page 150 of 158 Pages
<PAGE> 151
<TABLE>
BURLING INSTRUMENTS, INC. SCHEDULE 1
------------------------- ----------
SCHEDULES OF COST OF GOODS SOLD
-------------------------------
FOR THE YEARS ENDED FEBRUARY 28, 1995 AND 1994
----------------------------------------------
<CAPTION>
1994-95 1993-94
----------------------- -----------------------
% OF % OF
AMOUNT SALES AMOUNT SALES
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Inventories - beginning of year $ 476,557 28 $ 471,620 28
Purchases - net 339,566 20 392,663 24
Direct labor 348,209 20 361,757 22
---------- ---- ---------- ----
Subtotal 1,164,332 68 1,226,040 74
Depreciation 34,388 2 33,888 2
Factory materials and supplies 15,063 1 14,410 1
Cleaning service 4,130 0 5,150 0
Insurance - general 13,590 1 13,238 1
Insurance - group 46,809 3 55,152 3
Payroll taxes 32,330 2 31,077 2
Real estate taxes 15,411 1 14,775 1
Rent 54,800 3 54,814 3
Repairs and maintenance 9,342 0 5,765 0
Shipping supplies 8,535 0 4,430 0
Utilities 17,299 1 17,910 1
---------- ---- ---------- ----
Goods available for sale 1,416,029 82 1,476,649 89
------------------------
Less: Inventories - end of
year 453,630 26 476,557 29
---------- ---- ---------- ----
Cost of goods sold $ 962,399 56 $1,000,092 60
------------------ ========== ==== ========== ====
</TABLE>
Page 151 of 158 Pages
<PAGE> 152
<TABLE>
BURLING INSTRUMENTS, INC. SCHEDULE 1
------------------------- ----------
SCHEDULES OF ADMINISTRATIVE EXPENSES
------------------------------------
FOR THE YEARS ENDED FEBRUARY 28, 1995 AND 1994
----------------------------------------------
<CAPTION>
1994-95 1993-94
----------------------- -----------------------
% OF % OF
AMOUNT SALES AMOUNT SALES
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Salaries and wages
Executive $ 158,607 9 $ 150,189 9
Other 58,411 4 57,511 4
---------- ---- ---------- ----
217,018 13 207,700 13
Agency approval 12,721 1 2,668 0
Amortization 3,251 0 3,251 0
Automobile 11,563 1 11,582 1
Bad debts 1,200 0 3,130 0
Charitable contributions 94 0 369 0
Cleaning service 1,340 0 1,718 0
Computer service 2,717 0 2,054 0
Depreciation 1,506 0 2,094 0
Director's fees 2,951 0 4,202 0
Dues and subscriptions 1,068 0 910 0
Employee's group insurance 17,191 1 21,789 1
Employment services - - 200 0
General insurance 7,940 1 8,866 1
Miscellaneous 4,084 0 3,624 0
Miscellaneous taxes 632 0 165 0
Office supplies 5,102 0 6,800 1
Payroll taxes 20,038 1 18,745 1
Postage 5,027 0 4,581 0
Professional fees 6,364 0 6,693 0
Real estate taxes 4,791 0 4,925 0
Rent 20,401 1 18,266 1
Repairs and maintenance 2,734 0 1,113 0
Research and development 532 0 43 0
Service contracts 1,882 0 1,405 0
Telephone 10,530 1 9,307 1
Temporary help 725 0 - 0
Utilities 5,747 1 6,381 0
---------- ---- ---------- ----
Total $ 369,149 21 $ 352,581 21
----- ========== ==== ========== ====
</TABLE>
Page 152 of 158 Pages
<PAGE> 153
PART II
INFORMATION NOT REQUIRED BY PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Other expenses in connection with this offering which will be paid by
Applied Cellular Technologies, Inc. (hereinafter in this Part II referred to
as the "Corporation") are estimated to be substantially as follows:
<TABLE>
<CAPTION>
Amount
Payable
Item By Corporation
---- --------------
<S> <C>
S.E.C. Registration Fees $ 7,738.32
State Securities Laws (Blue Sky) Fees and Expenses 3,500.00
Printing and Engraving Fees 7,500.00
Legal Fees 7,000.00
Accounting Fees and Expenses 5,500.00
Transfer Agent's Fees 1,500.00
Total $32,738.32
</TABLE>
Item 14. Indemnification of Officers and Directors.
The By-laws of the Corporation provides that a director of the registrant
shall have no personal liability to the Registrant or its stockholders for
monetary damages for breach of a fiduciary duty as a director, except for
liability (a) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (b) for acts and omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, and
(c) pursuant to Missouri law for any transaction form which the director
derived an improper personal benefit. Registrant's By-laws exculpates and
indemnifies the directors, officers, employees, and agents of the registrant
from and against certain liabilities. Further the By-laws also provides
that the Registrant shall indemnify to the full extent permitted under
Missouri law any director, officer employee or agent of Registrant who has
served as a director, officer, employee or agent or the Registrant or, at
the Registrant's request, has served as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise.
INDEMNIFICATION OF OFFICERS OR PERSONS CONTROLLING THE CORPORATION FOR
LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, IS HELD TO BE AGAINST
PUBLIC POLICY BY THE SECURITIES AND EXCHANGE COMMISSION AND IS THEREFORE
UNENFORCEABLE.
Item 15. Recent Sales of Unregistered Securities.
During April and early May,1994, the Corporation sold 55,000 common shares
for cash at $1.50 per common share for an aggregate of $82,500. These
sales were made in reliance on Section 4(2) and/or in compliance with Rule
506, Regulation D of the Securities Act of 1933. The common shares were
issued to sixteen individuals. No general sales material was used. All
sales were made by Registrant's management and no commissions or other
remuneration was paid. In March, 1994, the Company issued 86,500 to Pratt,
Wylce & Lords, Ltd. for consulting services valued at $129,750. In March,
1994 the Company issued 20,000 Preferred Shares to an unrelated party for
the purchase price of $10 per Preferred Share or $200,000. These issuances
were made in reliance on Section 4(2) by
Page 153 of 158 Pages
<PAGE> 154
Registrant's management and no commissions or other remuneration was paid.
On March 21, 1994, the Company declared a dividend to the shareholders of
record on that date. The dividend was in the form of an A and B Common Stock
Purchase Warrant. The dividend was at a rate of one A and one B warrant for
each .305 shares of common stock owned. The warrants issued pursuant to the
dividend and the subsequent common stock underlying the warrants will be
issued in reliance on Section 4(2). No commissions or other remuneration was
paid.
On August 4, 1995, the Company, acquired the assets of Baler Software
Corporation in exchange for the payment of debt of $14,000, and the issuance
of 88,009 restricted shares of the Company's common stock at $5-1/8 to
creditors and the issuance of 25,000 shares of the Company's common stock at
$5-1/8 to one shareholder. The restricted common shares of the Company have
demand registration rights and are being registered in this Offering on
behalf of Selling Shareholders.
On August 9, 1995, the Company issued 124,066 restricted shares of its
common stock at $5.50 per share to two shareholders in exchange for an
amount of common shares equal to 80% of the total outstanding common shares
of Atlantic Systems. The restricted common shares of the Company have
demand registration rights and are being registered in this Offering on
behalf of Selling Shareholders.
Exhibit Index.
(1) Not Applicable
(2) Not Applicable
(3) Articles of Incorporation, Amendments and Bylaws incorporated by
reference to Form S-1 filed on June 3, 1994
(4) Specimen certificate for Common Stock incorporated by reference
to Amendment 2 to Form S-1 filed on August 14, 1994
(5) Consent and Opinion of J.M. Walker, 7841 South Garfield
Way, Littleton, 80122 regarding legality of
securities registered under this Registration Statement
and to the references to such attorney in the Prospectus
filed as part of this Registration Statement
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10.1) Reseller Agreement between the Company and Oracle Corporation
incorporated by reference to Amendment 1 to Form S-1 filed on
July 26, 1994.
(10.2) Vendor Services Agreement between the Company and Computer
Associates International incorporated by reference to Amendment 1
to Form S-1 filed on July 26, 1994.
(10.3) Dealer License Agreement between the Company and American Business
Systems incorporated by reference to Amendment 1 to Form S-1 filed on
July 26, 1994
(10.4) Reseller Software License Agreement between the Company and
Applied Automation Techniques, Inc. incorporated by reference to
Amendment 1 to Form S-1 filed on July 26, 1994
Page 154 of 158 Pages
<PAGE> 155
(10.5) Contract Programmer Agreement between the Company and Telxon
Corporation incorporated by reference to Amendment 1 to Form S-1
filed on July 26, 1994
(10.6) Agreement between Company and warrantholders incorporated by reference
to Amendment 3 to Form S-1 filed on September 16, 1994
(10.7) Joint Marketing Agreement with Data Documents - to be filed by
amendment
(11) Not Applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Not Applicable
(18) Not Applicable
(19) Not Applicable
(20) Not Applicable
(21) Not Applicable
(22) Not Applicable
(23) Not Applicable
(24) Consent of Rubin, Brown, Gornstein & Co., Certified Public
Accountants for the Corporation
(24.1) Consent of Noke & Heard, Certified Public Accountants for Burling
Instruments, Inc.
(25) Not Applicable
(26) Not Applicable
(27) Not Applicable
(28) Not Applicable
(99) Consulting Agreement with Pratt, Wylce & Lords, Ltd. incorporated by
reference to Amendment 1 of Form S-1 filed on July 26, 1994.
Item 17. Undertaking.
The undersigned registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the formation set forth in the
Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
Page 155 of 158 Pages
<PAGE> 156
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Delivery of Certificates.
The undersigned registrant hereby undertakes to provide to the
Transfer Agent at the closing, certificates in such denominations and
registered in such names as are required by the Transfer Agent to permit
prompt delivery to each purchaser.
(c) Indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions set forth
in the Corporation's Articles of Incorporation or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of ay action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Page 156 of 158 Pages
<PAGE> 157
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Nashua,
in the State of New Hampshire on the 16th day of May, 1996.
-----------
Applied Cellular Technology, Inc.
/s/ Garrett Sullivan
------------------------------------------------
By: Garrett Sullivan
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and on the dates stated.
<TABLE>
<CAPTION>
Signature Capacity Date
<C> <S> <C>
/s/ Richard J. Sullivan Chairman of the Board of Directors 5/16/96
------------------------------------ --------
Richard J. Sullivan Chief Executive Officer
/s/ Garrett Sullivan Principal Financial Officer 5/16/96
------------------------------------ --------
Garrett Sullivan
Controller/Director
/s/ Daniel E. Penni Director 5/16/96
------------------------------------ --------
Daniel E. Penni
</TABLE>
Page 157 of 158 Pages
<PAGE> 158
<TABLE>
EXHIBIT INDEX.
<C> <S>
(1) Not Applicable
(2) Not Applicable
(3) Articles of Incorporation, Amendments and Bylaws incorporated by
reference to Form S-1 filed on June 3, 1994
(4) Specimen certificate for Common Stock incorporated by reference
to Amendment 2 to Form S-1 filed on August 14, 1994
(5) Consent and Opinion of J.M. Walker, 7841 South Garfield
Way, Littleton, 80122 regarding legality of
securities registered under this Registration Statement
and to the references to such attorney in the Prospectus
filed as part of this Registration Statement
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10.1) Reseller Agreement between the Company and Oracle Corporation
incorporated by reference to Amendment 1 to Form S-1 filed on
July 26, 1994.
(10.2) Vendor Services Agreement between the Company and Computer
Associates International incorporated by reference to Amendment 1
to Form S-1 filed on July 26, 1994.
(10.3) Dealer License Agreement between the Company and American Business
Systems incorporated by reference to Amendment 1 to Form S-1 filed on
July 26, 1994
(10.4) Reseller Software License Agreement between the Company and
Applied Automation Techniques, Inc. incorporated by reference to
Amendment 1 to Form S-1 filed on July 26,1994
(10.5) Contract Programmer Agreement between the Company and Telxon
Corporation incorporated by reference to Amendment 1 to Form S-1
filed on July 26, 1994
(10.6) Agreement between Company and warrantholders incorporated by reference
to Amendment 3 to Form S-1 filed on September 16, 1994
(10.7) Joint Marketing Agreement with Data Documents, Inc. - to be provided by
amendment
(11) Not Applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Not Applicable
(18) Not Applicable
(19) Not Applicable
(20) Not Applicable
(21) Not Applicable
(22) Not Applicable
(23) Not Applicable
(24) Consent of Rubin, Brown, Gornstein & Co., Certified Public
Accountants for the Corporation
(24.1) Consent of Noke and Heard, Certified Public Accountants for Burling
Instruments, Inc
(25) Not Applicable
(26) Not Applicable
(27) Not Applicable
(28) Not Applicable
(99) Consulting Agreement with Pratt, Wylce & Lords, Ltd. incorporated by
reference to Amendment 1 of Form S-1 filed on July 26, 1994.
</TABLE>
Page 158 of 158 Pages
<PAGE> 1
Jody M. Walker
Attorney At Law
7841 S. Garfield Way
Littleton, CO 80122
--------
(303) 850-7637
Fax (303) 220-9902
May 16, 1996
Re: OPINION RE: LEGALITY AND CONSENT OF COUNSEL TO USE OF NAME IN
REGISTRATION STATEMENT ON FORM SB-2 OF APPLIED CELLULAR TECHNOLOGY,
INC.
I am securities counsel for the above mentioned corporation and I have
prepared the registration statement on Form SB-2 and amendments, if any. I
hereby consent to the inclusion and reference to my name in Registration
Statement on Form SB-2 and amendments, if any, for Applied Cellular
Technology, Inc.
It is my opinion that the securities being registered with the Securities and
Exchange Commission pursuant to Form SB-2 Registration Statement of Applied
Cellular Technology, Inc. (Registration No. 33-93962) will, when distributed
and/or sold, be legally issued, fully paid and non-assessable.
Very truly yours,
/s/ Jody M. Walker
-------------------------------
Jody M. Walker
<PAGE> 1
Independent Auditors' Consent
We consent to the use, in this Amendment No. 6 to Registration Statement
No. 33-93962 of Applied Cellular Technology, Inc. and Subsidiaries, of our
report on Elite Computer Services, Inc. dated November 15, 1995 appearing
in the Prospectus, which is a part of such Registration Statement, and to
the reference to us under the heading "Experts" in such Prospectus.
/s/ RUBIN, BROWN, GORNSTEIN & CO. LLP
RUBIN, BROWN, GORNSTEIN & CO. LLP
St. Louis, Missouri
May 14, 1996
<PAGE> 2
Independent Auditors' Consent
We consent to the use in this Amendment No. 6 to Registration Statement
No. 33-93962 of Applied Cellular Technology, Inc. and Subsidiaries of our
report dated March 8, 1996 appearing in the Prospectus, which is a part of
such Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
/s/ RUBIN, BROWN, GORNSTEIN & CO. LLP
RUBIN, BROWN, GORNSTEIN & CO. LLP
St. Louis, Missouri
May 14, 1996
<PAGE> 3
Independent Auditors' Consent
We consent to the use, in this Amendment No. 6 to Registration Statement
No. 33-93962 of Applied Cellular Technology, Inc. and Subsidiaries, of our
report on Atlantic Systems, Inc. dated November 15, 1995 appearing in the
Prospectus, which is a part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ RUBIN, BROWN, GORNSTEIN & CO. LLP
RUBIN, BROWN, GORNSTEIN & CO. LLP
St. Louis, Missouri
May 14, 1996
<PAGE> 4
Certified Public Accountants
469 MORRIS AVENUE
SUMMIT, N.J. 07901-1564
WILLIAM B. NOKE, JR.
CHARLES F. HEARD, JR. TEL: (908) 277-4145
DANIEL P. DOUGHERTY FAX: (908) 277-2313
ARNOLD G. HARTELIUS
--------
DANIEL B. SMITH, III
DONALD C. HEARD
GRACE B. WILLIAMS
Independent Auditors' Consent
We consent to the use, in this Amendment No. 6 to Registration Statement
No. 33-93962 of Applied Cellular Technology, Inc. and Subsidiaries, our
report dated May 5, 1995 appearing in the Prospectus, which is a part of such
Registration Statement.
/s/ NOKE AND HEARD
NOKE AND HEARD
Summit, New Jersey
May 14, 1996
