<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 11, 1996
-------------------
APPLIED CELLULAR TECHNOLOGY, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 33-79678 43-1641533
- ------------------------------------------------------------------------------
(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Highway 160 & CC, Suite 5, Nixa, Missouri 65714
- ------------------------------------------------------------------------------
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: 417-725-9888
Page 1
<PAGE> 2
Item 1. Changes in Control of Registrant
Item 2. Acquisition or Disposition of Assets.
On October 11, 1996, ACT Communication, Inc. (a wholly owned subsidiary of
Applied Cellular Technology, Inc.), purchased 100% of the 1,000, $1.00 par,
shares issued and outstanding from the two shareholders of Advanced Telecomm
Holdings, Inc. in exchange for 100,000 shares of Applied Cellular Technology's
8% Preferred Stock at $100.00 per share, 1,618,180 shares of Applied Cellular
Technology's Common Stock at $5.00 per share and warrants evidencing the right
to purchase 1,000,000 shares of Applied Cellular Technology's common stock at a
price per common share of $5.31 per warrant.
Item 3. Bankruptcy or Receivership. None.
Item 4. Changes in Registrant's Certifying Accountant. No.
Item 5. Other Events. None.
Item 6. Resignation of Registrant's Directors. None.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
See attached.
(b) Pro forma financial information.
See attached.
(c) Exhibits. Agreement of Sale
Already provided.
Item 8. Change in Fiscal Year. None.
Page 2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
APPLIED CELLULAR TECHNOLOGY, INC.
(Registrant)
Date: December 17, 1996 /s/ Garrett Sullivan
------------------------------ --------------------------------
President
Page 3
<PAGE> 1
Wengryn, Hughan & Co., Inc.
Certified Public Accountants Manorview Office Building
2025 Greentree Road, Second Floor
Pittsburgh, PA 15220
(412) 344-7700
Fax (412) 344-7801
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Advanced Telecomm of Pittsburgh and Affiliates
We have audited the accompanying combined balance sheet of Advanced Telecomm
of Pittsburgh and Affiliates as of December 31, 1995, and the related
combined statement of income, retained earnings, and cash flows for the year
then ended. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
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
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Telecomm
of Pittsburgh and Affiliates as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Wengryn, Hughan & Co., Inc.
Wengryn, Hughan & Co., Inc.
Certified Public Accountants
Pittsburgh, PA
April 15, 1996
1
<PAGE> 2
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
<TABLE>
COMBINED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 160,299
Receivables - Trade (Note 2) 3,353,721
Receivables - Related Party (Note 3) 1,611,826
Inventory (Note 2 and 4) 2,206,902
Due From Affiliates 3,745,057
Other Current Assets 41,480
-----------
Total Current Assets 11,119,285
PROPERTY AND EQUIPMENT
Land 249,466
Furniture, Fixtures, Equipment 548,959
Leasehold Improvements 579,828
Vehicles 454,056
Computer Equipment 80,542
-----------
1,912,851
Less: Accumulated Depreciation (802,285)
-----------
Total Property and Equipment 1,110,566
OTHER ASSETS
Goodwill, Net 178,500
Security Deposits 61,087
Organizational Costs, Net 133
-----------
Total Other Assets 239,720
-----------
Total Assets $12,469,571
===========
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
<CAPTION>
LIABILITIES
<S> <C>
CURRENT LIABILITIES
Notes Payable - Revolving Credit Line (Note 5) $ 2,128,152
Current Portion of Long-Term Debt 394,084
Notes Payable - Other (Note 6) 86,926
Accounts Payable - Trade 4,790,217
Accrued Expenses 61,021
Customer Deposits 108,799
-----------
Total Current Liabilities 7,569,199
LONG-TERM DEBT (Note 7) 1,524,247
Less: Current Portion (394,084)
-----------
Total Long-Term Debt 1,130,163
SHAREHOLDERS' SENIOR SUBORDINATED DEBT (Note 8) 1,789,524
Commitments and Contingencies
(Notes 1, 2, 5, 6, 7, 8, 9, 10, 11, 12, and 13)
SHAREHOLDERS' EQUITY
COMMON STOCK
Advanced Telecomm of Pittsburgh - $1.00 Par Value, 1,000 Shares
Authorized, 200 Shares Issued and Outstanding 200
Advanced Telecomm of Washington, D.C., Inc. - $1.00 Par Value,
1,000 Shares Authorized, 200 Shares Issued and Outstanding 200
Advanced Telecomm of Maryland, Inc. - $1.00 Stated Value,
10,000 Shares Authorized, 200 Shares Issued and Outstanding 200
Advanced Telecomm of Butler, Inc. - $1.00 Stated Value, 10,000
Shares Authorized, 200 Shares Issued and Outstanding 200
Advanced Telecomm of Nevada, Inc. - $1.00 Stated Value, 10,000
Shares Authorized 200 Shares Issued and Outstanding 200
ACCUMULATED EARNINGS 1,979,685
-----------
Total Equity 1,980,685
-----------
Total Liabilities and Shareholders' Equity $12,469,571
===========
</TABLE>
2
<PAGE> 4
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
<TABLE>
COMBINED STATEMENT OF INCOME AND EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
<CAPTION>
SALES Percent of
Amount Sales
------------ ----------
<S> <C> <C>
Cellular Sales $ 22,545,654 68.8 %
Interconnect Sales 9,888,177 30.2 %
Other Revenue 358,643 1.0 %
------------ -------
Total Sales 32,792,474 100.0 %
Less: Cost of Sales (14,908,104) (45.5)%
------------ -------
Gross Profit 17,884,370 54.5 %
GENERAL ADMINISTRATIVE EXPENSES
Salaries 9,262,810 28.3 %
Rent 1,592,210 4.9 %
Advertising 1,162,346 3.5 %
Payroll Taxes 840,416 2.6 %
Office Expenses 853,931 2.6 %
Utilities 616,515 1.8 %
Other Administrative Expenses 386,976 1.3 %
Contract Labor 141,872 .4 %
Automobile Expense 200,760 .6 %
Employee Benefits 45,065 .1 %
Insurance 256,144 .8 %
Interest Expense 396,087 1.2 %
Depreciation and Amortization 265,046 .8 %
------------ -------
Total General and
Administrative Expenses 16,020,178 48.9 %
------------ -------
Net Income (Note 2) $ 1,864,192 5.6 %
============ =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE> 5
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
<TABLE>
COMBINED STATEMENT OF ACCUMULATED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<S> <C>
Accumulated Earnings - January 1, 1995 $ 1,277,758
Net Income 1,864,192
Distributions to Shareholders (1,162,265)
-----------
Accumulated Earnings - December 31, 1995 $ 1,979,685
===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE> 6
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
<TABLE>
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,864,192
Noncash Items Included in Net Income
Depreciation and Amortization 265,046
Net Loss on Sale of Equipment 5,235
Changes in:
Accounts Receivable 149,137
Inventories (139,781)
Due From Affiliate (1,810,858)
Accounts Payable 841,515
Accrued Expenses (934,970)
Customer Deposits 4,490
Other Assets 259,223
Security Deposits (5,242)
-----------
Net Cash Provided By Operating Activities 497,987
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Equipment 38,731
Purchase of Equipment (897,928)
Acquisition of Goodwill (210,000)
-----------
Net Cash Used for Investing Activities (1,069,197)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Notes Payable (341,902)
Proceeds from Notes Payable Borrowing 1,660,750
Net Proceeds from Advance Lease Funding lines 847,237
Net Proceeds from Line of Credit Borrowings 86,926
Net Payments on Subordinated Debt (680,535)
Distributions to Shareholders (1,162,265)
Net Proceeds from Stock Issuance 400
-----------
Net Cash Provided by Financing Activities 410,611
-----------
DECREASE IN CASH (160,599)
CASH - JANUARY 1, 1995 320,898
-----------
CASH - DECEMBER 31, 1995 $ 160,299
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Interest Paid $ 396,087
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<PAGE> 7
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - BASIS OF PRESENTATION
Advanced Telecomm of Pittsburgh and Affiliates (the Company) are engaged in
the selling, installation, and servicing of communications equipment in the
Mid Atlantic region. All companies share common ownership with the same
shareholders. Advanced Telecomm of Pittsburgh, formerly Advanced Telecomm
Company, a general partnership, began business on January 5, 1985. Effective
January 1, 1990, the partnership incorporated and transferred all of its
assets and liabilities to Advanced Telecomm of Pittsburgh, Inc. pursuant to
Section 351 of the Internal Revenue Code. Effective December 31, 1993,
Advanced Telecomm of Pittsburgh, Inc. merged with and into Advanced Telecomm
of Pittsburgh, a business trust organized under and in accordance with
Chapter 95 of Title 15 of the Pennsylvania Consolidated Statutes. The other
related companies (Advanced Telecomm of Washington, D.C., Inc., Advanced
Telecomm of Maryland, Inc., and Advanced Telecomm of Butler, Inc.) were
originally incorporated between the dates of March 9, 1990 and September 5,
1991. Advanced Telecomm of Nevada, Inc., a Nevada corporation, was
incorporated on December 29, 1995. Advanced Telecomm, Inc., ATI
Communications, Inc., and Advanced Telecomm of Delaware, Inc., which are also
commonly controlled companies, are not included in the financial statements.
These companies ultimately will not have common management and a combined
presentation would not likely be more meaningful to the users of these
statements.
Effective March 31, 1995, the Company acquired certain assets of Cellular
Services of Washington, Inc. The total purchase price was $450,000 which
included a $175,000 payment at closing and the remaining balance due was
financed by a promissory note due in three monthly installments through June
1995. The Company also assumed certain office space and office equipment
operating leases.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents - For purposes of the statement of cash flows, the Company
- ----------------
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Accounts Receivable - Accounts receivable are written-off when deemed to be
- -------------------
uncollectible. No allowance for doubtful accounts is deemed necessary.
Inventory - Inventory is stated at the lower of cost or market value. Cost
- ---------
is determined using the first-in, first-out (FIFO) method.
Property, Equipment, and Depreciation - Property and equipment are stated
- -------------------------------------
at cost. Depreciation for financial statement and income tax purposes is
computed by use of the MACRS method. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation charges for all
property and equipment were $265,046 for the year ended December 31, 1995.
6
<PAGE> 8
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Taxes on Income - Effective January 1, 1990, Advanced Telecomm of Pittsburgh
- ---------------
and Affiliates, with the consent of its shareholders, have elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code.
Under these provisions, the Company does not pay federal and state corporate
income taxes on its taxable income. Instead, the shareholders are liable for
individual income taxes on their respective shares of the Company's taxable
income.
Concentrations of Credit Risk - The Company sells and services communications
- -----------------------------
equipment in the Mid Atlantic region. The Company extends credit to customers
located within the Mid Atlantic region.
NOTE 3 - RECEIVABLES - RELATED PARTY
At December 31, 1995, accounts receivable from related parties represent
amounts receivable from officers/shareholders. The balance is non-interest
bearing and due on demand.
NOTE 4 - INVENTORY
Inventory at December 31, 1995 consists of the following:
<TABLE>
<S> <C>
Telephone Systems and Peripherals $1,336,867
Cellular Telephones and Accessories 870,035
----------
Total $2,206,902
==========
</TABLE>
NOTE 5 - NOTES PAYABLE-REVOLVING CREDIT LINE
Revolving Credit Line as of December 31, 1995 $2,128,152
During 1993, the Company obtained a revolving credit line from S & T Bank.
The revolving line has an interest rate of prime plus one and one-half
percent. Borrowings are limited to the lesser of $3,500,000 or the sum of
the lesser of $3,300,000 or eighty-five percent of qualified accounts
receivable (as fully described in the Loan and Security Agreement) plus the
lesser of $200,000 or 125% of the Eligible Securities provided by the
shareholders as additional collateral. Interest is payable monthly and all
unpaid principal advances will be due on March 29, 1996, the date on which the
Loan and Security Agreement expires. See also Note 13 - Subsequent Events.
7
<PAGE> 9
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 6 - NOTES PAYABLE-OTHER
The Company's Notes Payable-Other are to equipment leasing vendors under
Advance Lease Funding Program Agreements. This program offers lease
financing to the Company's interconnect customers. The following is a
summary of the Notes Payable as of December 31, 1995:
<TABLE>
<S> <C>
Advance Lease Funding Program Agreement with Aloha
Leasing, a division of the Bennett Funding Group,
Inc., $100,000 maximum, interest on the unused portion
of the advances at prime plus two (2) percent, due on
demand. $13,317
Prepayment of Purchase Agreement with Norwest Financial
Leasing, Inc., $100,000 maximum, interest on the unused
advances at prime plus one (1) percent, due on demand. 73,609
-------
$86,926
=======
</TABLE>
NOTE 7 - LONG-TERM DEBT
The Company's long-term debt consists of the following as of December 31,
1995:
<TABLE>
<S> <C>
Automobile installment loans, payable in equal
monthly installments totalling $10,071 with
various maturity dates through June 15, 1999,
interest rates ranging from 1.90% through 14.00%,
secured by vehicles $ 210,253
Capital lease obligation, payable in equal monthly
installments of $568, maturity date 8/1/98, interest
rate at 12.95%, secured by computer equipment 13,994
Term loan from S & T Bank, payable in sixty
monthly installments of $25,000 plus interest at
prime plus one percent, secured by the Company's
assets and by the shareholders' personal guarantees 1,300,000
----------
$1,524,247
==========
</TABLE>
8
<PAGE> 10
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 7 - LONG-TERM DEBT (CONTINUED)
The following is a summary of principal maturities of long-term debt during
the next five years:
<TABLE>
<S> <C>
1996 $ 394,084
1997 381,066
1998 345,307
1999 303,790
2000 100,000
----------
$1,524,247
==========
</TABLE>
NOTE 8 - SHAREHOLDERS' SENIOR SUBORDINATED DEBT
<TABLE>
<S> <C>
Unsecured senior subordinated debt agreements with a
related partnership and the shareholders. Interest is
payable monthly on unpaid principal balance at 12% per
annum. However, the debt holders have agreed to waive
the interest bearing provision of the note. The
principal balance is due on December 31, 2002. $1,789,524
==========
</TABLE>
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company is currently involved in various legal actions arising from the
normal course of business transactions. Management believes that the actions
will not result in any material liability to the Company. Accordingly, no
provision has been recorded for potential losses.
NOTE 10 - OPERATING & RENTAL LEASES
The Company leases office furniture, equipment, and facilities under
non-cancelable primary operating leases with right to sublease expiring at
various dates through 2003. Generally, the leases provide for renewal for
various periods at the then fair rental value.
At December 31, 1995, future minimum lease payments for the next five years
were as follows:
<TABLE>
<S> <C>
1996 $1,290,607
1997 1,198,020
1998 813,850
1999 680,070
2000 477,855
</TABLE>
9
<PAGE> 11
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 11 - PROFIT SHARING RETIREMENT PLAN
Effective April 1, 1995, the Company adopted a qualified 401(K) employee
profit sharing plan for the benefit of all employees who have attained 21
years of age and completed one year of service. Under the plan, each
participant may contribute up to 15% of his compensation to this plan. The
Company has a discretionary matching contribution. Company contributions to
the plan amounted to $13,000 for 1995.
NOTE 12 - RELATED PARTY TRANSACTIONS
Advanced Telecomm of Pittsburgh rents the Bethel Park Office and Warehouse
facility from a real estate partnership owned by the shareholders. On
January 1, 1993, the Company entered into a noncancelable ten (10) year
lease. Effective May 1, 1995, the monthly rent increased from $9,746 to
$10,262. The Company recognized $121,080 in rent expense for 1995 as per the
lease agreement.
NOTE 13 - SUBSEQUENT EVENTS
On March 1, 1996, the Company obtained a revolving loan note and term note
from CoreStates Bank. The revolving loan has an interest rate of CoreStates
Bank's National Commercial Rate plus one and one-quarter percent (1.25%).
Borrowings are limited to the lesser of $5,000,000 or eighty percent of
qualified accounts receivable as fully described in the Loan and Security
Agreement. Interest is payable monthly and all unpaid principal advances
will be due on June 30, 1997 the date on which the Loan and Security
Agreement expires.
The term note had an original principal balance of $1,350,000. The term note
has an interest rate of nine and eighty-five hundredths percent (9.85%) and
is payable in sixty monthly payments of $22,500 plus interest beginning April
1, 1996. The term note matures on March 1, 2001.
10
<PAGE> 1
Wengryn, Hughan & Co., Inc.
Certified Public Accountants Manorview Office Building
2025 Greentree Road, Second Floor
Pittsburgh, PA 15220
(412) 344-7700
Fax (412) 344-7801
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Advanced Telecomm of Pittsburgh and Affiliates:
We have audited the accompanying combined balance sheet of Advanced Telecomm
of Pittsburgh and Affiliates as of December 31, 1994, and the related
combined statement of income, retained earnings, and cash flows for the year
then ended. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
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
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Telecomm
of Pittsburgh and Affiliates as of December 31, 1994, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Wengryn, Hughan & Co., Inc.
Wengryn, Hughan & Co., Inc.
Certified Public Accountants
Pittsburgh, PA
April 15, 1996
1
<PAGE> 2
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
<TABLE>
COMBINED BALANCE SHEET
DECEMBER 31, 1994
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 320,898
Receivables Trade (Note 2) 3,334,626
Receivables - Related Party (Note 3) 1,780,058
Inventory (Note 2 and 4) 2,067,121
Other Assets 300,703
Due From Affiliates 1,934,199
-----------
Total Current Assets 9,737,605
PROPERTY AND EQUIPMENT
Furniture, Fixtures, Equipment 346,990
Leasehold Improvements 351,587
Vehicles 385,794
Computer Equipment 13,602
-----------
1,097,973
Less: Accumulated Depreciation (608,085)
-----------
Total Property and Equipment 489,888
OTHER ASSETS
Security Deposits 55,845
Organizational Costs, Net 395
-----------
Total Other Assets 56,240
-----------
Total Assets $10,283,733
===========
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
<CAPTION>
LIABILITIES
<S> <C>
CURRENT LIABILITIES
Notes Payable - Revolving Credit Line (Note 5) $ 1,280,915
Current Portion of Long-Term Debt 87,995
Accounts Payable - Trade 3,948,702
Accrued Expenses 995,991
Customer Deposits 104,309
-----------
Total Current Liabilities 6,417,912
LONG-TERM DEBT (Note 6) 205,399
Less: Current Portion (87,995)
-----------
Total Long-Term Debt 117,404
SHAREHOLDERS' SENIOR SUBORDINATED DEBT (Note 7) 2,470,059
Commitments and Contingencies
(Notes 1, 2, 5, 6, 7, 8, 9, 10, 11, and 12)
SHAREHOLDERS' EQUITY
COMMON STOCK
Advanced Telecomm of Pittsburgh - $1.00 Par Value, 1,000 Shares
Authorized, 200 Shares Issued and Outstanding 200
Advanced Telecomm of Washington, D.C., Inc. - $1.00 Par Value,
1,000 Shares Authorized, 200 Shares Issued and Outstanding 200
Advanced Telecomm of Maryland, Inc. - $1.00 Stated Value,
10,000 Shares Authorized, 200 Shares Issued and Outstanding 200
ACCUMULATED EARNINGS 1,277,758
-----------
Total Equity 1,278,358
-----------
Total Liabilities and Shareholders' Equity $10,283,733
===========
</TABLE>
2
<PAGE> 4
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
<TABLE>
COMBINED STATEMENT OF INCOME AND EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1994
<CAPTION>
SALES Percent of
Amount Sales
------------ ----------
<S> <C> <C>
Cellular Sales $ 23,651,655 76.8%
Interconnect Sales 6,787,050 22.0%
Other Revenue 348,830 1.2%
------------ ------
Total Sales 30,787,535 100.0%
Less: Cost of Sales (15,182,133) 49.3%
------------ ------
Gross Profit 15,605,402 50.7%
GENERAL ADMINISTRATIVE EXPENSES
Salaries 8,477,512 27.5%
Rent 1,295,823 4.2%
Advertising 1,022,181 3.3%
Payroll Taxes 762,736 2.5%
Office Expenses 526,398 1.7%
Utilities 419,219 1.4%
Other Administrative Expenses 394,997 1.3%
Contract Labor 263,304 .8%
Automobile Expense 208,315 .7%
Insurance 164,060 .5%
Interest Expense 194,802 .6%
Depreciation and Amortization 171,887 .6%
------------ ------
Total General and
Administrative Expenses 13,901,234 45.1%
------------ ------
Net Income (Note 2) $ 1,704,168 5.6%
============ ======
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE> 5
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
<TABLE>
COMBINED STATEMENT OF ACCUMULATED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
<S> <C>
Accumulated Earnings - January 1, 1994 $ 396,897
Net Income 1,704,168
Distributions to Shareholders (823,307)
-----------
Accumulated Earnings - December 31, 1994 $ 1,277,758
===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE> 6
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
<TABLE>
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,704,168
Noncash Items Included in Net Income
Depreciation and Amortization 171,887
Net Loss on Sale of Equipment 17,546
Changes in:
Accounts Receivable (2,327,796)
Inventories (919,736)
Accounts Payable 2,039,753
Accrued Expenses (963,511)
Customer Deposits 39,459
Other Assets (59,573)
Security Deposits 17,030
Due From Affiliates (1,228,481)
-----------
Net Cash Used for Operating Activities (1,509,254)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Equipment 59,937
Purchase of Equipment (218,931)
-----------
Net Cash Used for Investing Activities (158,994)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Notes Payable (169,767)
Proceeds from Notes Payable Borrowing 133,930
Net Proceeds from Short-Term Notes Payable 1,137,747
Net Proceeds from Subordinated Debt 1,500,000
Distributions to Shareholders (823,307)
-----------
Net Cash Provided by Financing Activities 1,778,603
-----------
INCREASE IN CASH 110,355
CASH - JANUARY 1, 1994 210,543
-----------
CASH - DECEMBER 31, 1994 $ 320,898
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 194,802
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<PAGE> 7
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 - BASIS OF PRESENTATION
Advanced Telecomm of Pittsburgh and Affiliates (the Company) are engaged in
the selling, installation, and servicing of communications equipment in the
Mid Atlantic region. All companies share common ownership with the same
shareholders. Advanced Telecomm of Pittsburgh, formerly Advanced Telecomm
Company, a general partnership, began business on January 5, 1985. Effective
January 1, 1990, the partnership incorporated and transferred all of its
assets and liabilities to Advanced Telecomm of Pittsburgh, Inc. pursuant to
Section 351 of the Internal Revenue Code. Effective December 31, 1993,
Advanced Telecomm of Pittsburgh, Inc. merged with and into Advanced Telecomm
of Pittsburgh, a business trust organized under and in accordance with
Chapter 95 of Title 15 of the Pennsylvania Consolidated Statutes. The other
related companies (Advanced Telecomm of Washington, D.C., Inc. and Advanced
Telecomm of Maryland, Inc.) were originally incorporated between the dates
of March 9, 1990 and September 5, 1991. Advanced Telecomm, Inc., ATI
Communications, Inc., and Advanced Telecomm of Delaware, Inc., which are also
commonly controlled companies, are not included in the financial statements.
These companies ultimately will not have common management and a combined
presentation would not likely be more meaningful to the users of these
statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents - For purposes of the statement of cash flows, the Company
- ----------------
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Accounts Receivable - Accounts receivable are written-off when deemed to be
- -------------------
uncollectible. No allowance for doubtful accounts is deemed necessary.
Inventory - Inventory is stated at the lower of cost or market value. Cost
- ---------
is determined using the first-in, first-out (FIFO) method.
Property, Equipment, and Depreciation - Property and equipment are stated
- -------------------------------------
at cost. Depreciation for financial statement and income tax purposes is
computed by use of the MACRS method. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation charges for all
property and equipment were $171,887 for the year ended December 31, 1994.
Taxes on Income - Effective January 1, 1990, Advanced Telecomm of Pittsburgh
- ---------------
and Affiliates, with the consent of its shareholders, have elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code.
Under these provisions, the Company does not pay federal and state corporate
income taxes on its taxable income. Instead, the shareholders are liable for
individual income taxes on their respective shares of the Company's taxable
income.
6
<PAGE> 8
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of Credit Risk - The Company sells and services communications
- -----------------------------
equipment in the Mid Atlantic region. The Company extends credit to customers
located within the Mid Atlantic region.
NOTE 3 - RECEIVABLES - RELATED PARTY
At December 31, 1994, accounts receivable from related parties represent
amounts receivable from officers/shareholders. The balance is non-interest
bearing and due on demand.
NOTE 4 - INVENTORY
Inventory at December 31, 1994 consists of the following:
<TABLE>
<S> <C>
Telephone Systems and Peripherals $1,036,240
Cellular Telephones and Accessories 1,030,881
----------
$2,067,121
==========
</TABLE>
NOTE 5 - NOTES PAYABLE-REVOLVING CREDIT LINE
Revolving Credit Line as of December 31, 1994 $1,280,915
During 1993, the Company obtained a revolving credit line from S & T Bank.
The revolving line has an interest rate of prime plus one and one-half
percent. Borrowings are limited to the lesser of $3,500,000 or the sum of
the lesser of $3,300,000 or eighty-five percent of qualified accounts
receivable (as fully described in the Loan and Security Agreement) plus the
lesser of $200,000 or 125% of the Eligible Securities provided by the
shareholders as additional collateral. Interest is payable monthly and all
unpaid principal advances will be due on December 31, 1995, the date on which
the Loan and Security Agreement expires. See also Note 12 - Subsequent Events.
7
<PAGE> 9
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 6 - LONG-TERM DEBT
The Company's long-term debt consists of the following as of December 31,
1994:
<TABLE>
<S> <C>
Automobile installment loans, payable in equal
monthly installments totalling $10,971 with
various maturity dates through June 15, 1999,
interest rates ranging from 1.90% through 14.00%,
secured by vehicles $ 205,399
</TABLE>
The following is a summary of principal maturities of long-term debt during
the next five years:
<TABLE>
<S> <C>
1995 $ 87,995
1996 62,716
1997 41,606
1998 9,292
1999 3,790
--------
$205,399
========
</TABLE>
NOTE 7 - SHAREHOLDERS' SENIOR SUBORDINATED DEBT
<TABLE>
<S> <C>
Unsecured senior subordinated debt agreements with a
related partnership. Interest is payable monthly on
unpaid principal balance at 12% per annum. However,
the debt holders have agreed to waive the interest
bearing provision of this note. The principal balance
is due on December 31, 2002. $2,470,059
==========
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is currently involved in various legal actions arising from the
normal course of business transactions. Management believes that the actions
will not result in any material liability to the Company. Accordingly, no
provision has been recorded for potential losses.
NOTE 9 - OPERATING & RENTAL LEASES
The Company leases office furniture, equipment, and facilities under
non-cancelable primary operating leases with right to sublease expiring at
various dates through 2003. Generally, the leases provide for renewal for
various periods at the then fair rental value.
8
<PAGE> 10
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 9 - OPERATING & RENTAL LEASES (CONTINUED)
At December 31, 1994, future minimum lease payments for the next five years
were as follows:
<TABLE>
<S> <C>
1995 $ 995,162
1996 862,397
1997 759,169
1998 437,643
1999 378,061
</TABLE>
NOTE 10 - ADVANCE LEASE FUNDING PROGRAM
The company has an Advance Lease Funding Program Agreement with Aloha
Leasing, a Division of the Bennett Funding Group, Inc. This program offers
financing to the Company's interconnect customers. The maximum outstanding
balance permitted is $100,000 and the interest rate charged on the unused
portion of the advances is prime plus two (2) percent. At December 31, 1994
there was no outstanding balance due Aloha Leasing under this program.
NOTE 11 - RELATED PARTY TRANSACTIONS
Advanced Telecomm of Pittsburgh rents the Bethel Park Office and Warehouse
facility from a real estate partnership owned by the shareholders. On
January 1, 1993, the Company entered into a noncancelable ten (10) year
lease. The Company recognized $116,952 in rent expense for 1994 as per the
lease agreement. See also Note 12 - Subsequent Events.
NOTE 12 - SUBSEQUENT EVENTS
The Shareholders' also own Advanced Telecomm of Butler, Inc. The company was
incorporated on March 18, 1992 to operate a similar business. The company
ceased operations during 1993 and filed an out-of-existence affidavit with
the Commonwealth of Pennsylvania as of December 31, 1993. The company filed
with the Commonwealth of Pennsylvania to regain active status and began
operations January 1, 1995
Effective March 31, 1995, the Company acquired certain assets of Cellular
Services of Washington, Inc. The total purchase price was $450,000 which
included a $175,000 payment at closing and the remaining balance due was
financed by a promissory note due in three monthly installments through June
1995. The Company also assumed certain office space and office equipment
operating leases.
Effective April 1, 1995, the Company adopted a qualified 401(K) employee
profit sharing plan for the benefit of all employees who have attained 21
years of age and completed one year of service. Under the plan, each
participant may contribute up to 15% of his compensation to this plan. The
Company has a discretionary matching contribution.
9
<PAGE> 11
ADVANCED TELECOMM OF PITTSBURGH
-------------------------------
AND AFFILIATES
--------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
On April 3, 1995 the Company obtained a term loan from S&T Bank for
$1,500,000 to retire the shareholders' subordinated $1,500,000 note payable.
The loan is payable in sixty (60) equal monthly principal payments plus
interest beginning May 1, 1995. The interest rate is prime plus one (1)
percent. The loan is secured by the Company's assets and by shareholders'
personal guarantees.
The Shareholders' also own Advanced Telecomm of Nevada, Inc., a Nevada
corporation which was incorporated on December 29, 1995.
On March 1, 1996, the Company obtained a revolving loan note and term note
from CoreStates Bank to replace the S&T Bank revolving credit facility and
term loan. The revolving loan has an interest rate of CoreStates Bank's
National Commercial Rate plus one and one-quarter percent (1.25%).
Borrowings are limited to the lesser of $5,000,000 or eighty percent of
qualified accounts receivable as fully described in the Loan and Security
Agreement. Interest is payable monthly and all unpaid principal advances
will be due on June 30, 1997 the date on which the Loan and Security
Agreement expires.
The term note had an original principal balance of $1,350,000. The term note
has an interest rate of nine and eighty-five hundredths percent (9.85%) and
is payable in sixty monthly payments of $22,500 plus interest beginning April
1, 1996. The term note matures on March 1, 2001.
Effective May 1, 1996, the monthly rent increased from $9,746 to $10,262 for
the Bethel Park office and warehouse.
10
<PAGE> 1
The following pro forma consolidated statement of operations of
Applied Cellular Technology, Inc. and Subsidiaries for
the year ended December 31, 1995 and for the nine months ended September
30, 1996 gives effect to the acquisition of Advanced Telecom Holdings, Inc.
as if it were effective January 1, 1995. The statements give effect to the
Acquisition under the purchase method of accounting and the assumptions in
the accompanying notes to the pro forma financial statements.
In September 1996, the Company entered into an agreement
to purchase 100% of Advanced Telecom Holdings, Inc. in exchange for
1,618,180 shares of Applied Cellular Technology, Inc's common stock,
100,000 shares of 8% redeemable preferred stock at $100 per share of
Applied Cellular Technology, Inc. and warrants evidencing the right to
purchase 1,000,000 shares of Applied Cellular Technology, Inc.'s common
stock. The shares of common stock issued were valued at 75% of the then
current market trading value of $5.00, due to the limited market of the
shares and the restricted nature of the shares. No value was attributed to
the warrants because the exercise price exceeded the fair value of the
underlying common shares. Each warrant can be exercised, at any time, and
from time to time, beginning in October 1996 until October 2001, at a price
of one warrant plus $5.31 per common share. The total value of the
investment based on the above facts was recorded at $12,022,725 plus
acquisition costs of $326,863, for a total investment of $12,349,588. The
agreement dated October 1996, called for the effective date of
the acquisition to be September 1, 1996 due to the significant control of
the Company by ACT Communications, Inc. since September 1, 1996 and the
agreement called for the profit and loss to be allocated to ACT
Communications beginning September 1,1996. The 8% preferred dividend
begins accruing on October 1,1996.
The pro forma statements may not be indicative of the results that
would have occurred if the Acquisitions had been effective on the dates
indicated or of the results that may be obtained in the future. The pro
forma statements should be read in conjunction with the financial
statements and notes thereto of the Company.
<TABLE>
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
As Reported Pro forma adjustments Pro Forma
For the year ended ----------------------------------- For the year ended
December 31, Advanced December 31,
1995 Telecom 1995
Holdings, Inc.
<F1> (UNAUDITED)
<S> <C> <C> <C> <C>
Net Revenues $2,335,999 $32,792,474 $35,128,473
Direct Costs $1,186,213 $14,908,104 $16,094,317
------------------------------------------------------------------------------------------
Gross Profit $1,149,786 $17,884,370 $19,034,156
Operating Expenses $981,212 $15,624,091 $643,250<F2> $17,248,553
------------------------------------------------------------------------------------------
Operating Income (Loss) $168,574 $2,260,279 ($643,250) $1,785,603
Interest Income $74,899 $0 $74,899
Interest Expense ($15,150) ($396,087) ($411,237)
Minority Interest ($48,963) $0 ($48,963)
Provision for income tax $0 $0 ($439,539)<F3> ($439,539)
------------------------------------------------------------------------------------------
Net Income (Loss) $179,360 $1,864,192 ($1,082,789) $960,763
Dividends ($800,000)<F4> ($800,000)
Net income (loss) applicable to
common shareholders $179,360 $1,864,192 ($1,882,789) $160,763
==========================================================================================
Net Income (Loss) Per Common Share $0.10 $0.05
Weighted Average Number Of
Common Shares Outstanding 1,792,939 3,129,474
<FN>
Note : The Pro Forma Consolidated Statement of Operations gives effect to the
following pro forma adjustments:
<F1> Represents the Statement of Operations of Advanced Telecom Holdings, Inc. for the year ended December 31, 1995
that would have been consolidated with the Company if the acquisition would have taken place on January 1, 1995.
<F2> Represents the amortization expense for goodwill on the Advanced Telecom Holdings, Inc. acquistition, in the
amount of $643,250 ($12,865,009 divided by 20 years)
<F3> Represents an increase in the tax provision as reported at December 31, 1995, due to the proformed increase in book
income from (F1)-(F2).
<F4> Represents the twelve months expense for the dividends that will be paid on the 8% preferred stock issued in the
Advanced Telecom Holdings, Inc. acquistion (100,000 x $100 x 8%)
</TABLE>
<PAGE> 2
<TABLE>
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Pro Forma
As Reported Pro forma adjustments For the nine
For the nine months ended ----------------------------------- months ended
September 30, Advanced September 30,
1996 Telecom 1996
Holdings, Inc.
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<F1>
<S> <C> <C> <C> <C>
Net Revenues $7,602,707 $19,363,543 $26,966,250
Direct Costs $4,163,160 $7,470,031 $11,633,191
------------------------------------------------------------------------------------------
Gross Profit $3,439,547 $11,893,512 $15,333,059
Operating Expenses $2,911,541 $11,185,016 $435,148<F2> $14,531,705
------------------------------------------------------------------------------------------
Operating Income (Loss) $528,006 $708,496 ($435,148) $801,354
Interest Income $67,628 $0 $67,628
Interest Expense ($75,151) ($336,823) ($411,974)
Minority Interest ($80,013) $0 ($80,013)
Provision for income tax ($133,702) $0 ($22,851)<F3> ($110,851)
------------------------------------------------------------------------------------------
Net Income (Loss) $306,768 $371,673 ($412,297) $266,194
Dividends ($600,000)<F4> ($600,000)
Net income (loss) applicable to
common shareholders $306,768 $371,673 ($1,012,297) ($333,856)
==========================================================================================
Net Income (Loss) Per Common Share $0.11 ($0.08)
Weighted Average Number Of
Common Shares Outstanding 2,706,254 4,140,685
<FN>
Note : The Pro Forma Consolidated Statement of Operations gives effect to the
following pro forma adjustments:
<F1> Represents the Statement of Operations of Advanced Telecom Holdings, Inc. for the eight months ended
August 31, 1996 (the month to date for September 30, 1996 is already included in the as reported column)
that would have been consolidated with the Company if the acquisition would have taken place
on January 1, 1995.
<F2> Represents the amortization expense for goodwill on the Advanced Telecom Holdings, Inc. acquisition, in
the amount of $482,438 ($12,865,009 divided by 20 years x 9/12) less the $47,290 that is already
reflected in the as reported column.
<F3> Represents a decrease in the tax provision as reported at September 30, 1996, due to the proformed
decrease in book income from (F1)-(F2).
<F4> Represents the nine months expense for the dividends that will be paid on the 8% preferred stock issued
in the Advanced Telecom Holdings, Inc. acquistion (100,000 x $100 x 8% x 9/12)
</TABLE>
