<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period ------------- to ------------
Commission file number - 33-93962
APPLIED CELLULAR TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
MISSOURI 43-1641533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Highway 160 & CC, Suite 5, Nixa, Missouri 65714
(Address of principal executive offices) (Zip Code)
(417) 865-8288
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding twelve months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
file such filing requirements for the past thirty days.
Yes X No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report:
2,309,516 Shares of Common Stock ($.001 par value)
(Title of Class)
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
Page 1 of 40 Pages
<PAGE> 2
APPLIED CELLULAR TECHNOLOGY, INC.
PART I: Financial Information
ITEM 1 - Financial Statements
ITEM 2 - Management's discussion and analysis of financial
condition and results of operations
PART II: Other Information
ITEM 6 - Exhibits and Reports on Form 8-K
Page 2 of 40 Pages
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS:
---------------------
Page 3 of 40 Pages
<PAGE> 4
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Applied Cellular Technology, Inc.
Springfield, Missouri
We have reviewed the accompanying consolidated balance sheet of Applied
Cellular Technology, Inc. and subsidiaries as of March 31, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the three month periods ended March 31, 1995 and 1996. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements in order
for them to be in conformity with generally accepted accounting principles.
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheet as of December 31, 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended (not presented herein); and in our report dated March 8,
1996, we expressed an unqualified opinion on those consolidated financial
statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1995 is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
May 3, 1996
<PAGE> 5
<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 577,399 577,399
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
- ----------------------------------------------------------------------------------------------------------
$ 4,131,485 $ 4,576,408
==========================================================================================================
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) (308,400) (268,933)
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,051,940 3,229,640
- ----------------------------------------------------------------------------------------------------------
$ 4,131,485 $ 4,576,408
==========================================================================================================
- ----------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 2
</TABLE>
<PAGE> 6
<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 -- -- -- -- -- 10,267 10,267
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 $(477,493) $1,458,345
============================================================================================================================
BALANCE - JANUARY 1, 1996 -- $ -- 2,267,749 $2,268 $3,358,072 $(308,400) $3,051,940
NET INCOME -- -- -- -- -- 39,467 39,467
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 -- $ -- 2,309,516 $2,310 $3,496,263 $(268,933) $3,229,640
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
See the accompanying review report and notes to consolidated financial statements. Page 3
</TABLE>
<PAGE> 7
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED STATEMENT OF 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
INTEREST INCOME -- 20,669
INTEREST EXPENSE (889) (8,308)
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST 10,267 58,941
PROVISION FOR INCOME TAXES -- --
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 10,267 58,941
MINORITY INTEREST -- (19,474)
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 10,267 $ 39,467
==========================================================================================================
NET INCOME PER COMMON SHARE $ .01 $ .02
==========================================================================================================
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> 8
<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 $ 10,267 $ 39,467
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,545 83,416
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> 9
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.
- -------------------------------------------------------------------------------
Page 6
<PAGE> 10
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 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 cost method. The
Company does not currently, and has not since early in 1995, exercised
significant influence over Cadkey, Inc. and therefore should not be
recorded under the equity method. Management's basis for considering that
they no longer exercise significant influence over Cadkey, Inc. stems
from the fact that the majority ownership of Cadkey is concentrated among
a small group of shareholders who operate the investee without regard to
the views of the Company, the Company had attempted to obtain interim
financial statements from Cadkey, Inc. and were refused and the Company
has tried unsuccessfully to obtain representation on Cadkey's board of
directors.
The Company's policy for making on-going determinations of the net
realizable value for the investment in Cadkey, Inc. includes receiving
quarterly unaudited financial statements and annual audited financial
statements that management uses as an integral part of its on-going
assessment. Management also conducts an on-going review of readily
available industry statistics and compares these results to the investee
company's results to assess the investee company's operating performance
relative to other industry participants and to assess the on-going
prospects for the investee company's industry as a whole.
- -------------------------------------------------------------------------------
Page 7
<PAGE> 11
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.
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.
- -------------------------------------------------------------------------------
Page 8
<PAGE> 12
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
REVENUE RECOGNITION
For programming, consulting and software licensing services, the Company
recognizes revenue based on the percent complete for fixed fee
contracts, with the percent complete being calculated as either the
number of direct labor hours in the project to date divided by the
estimated total direct labor hours or based upon the completion of
specific task orders. It is the Company's policy to record contract
losses in their entirety in the period in which such losses are
foreseeable. For non-fixed fee jobs, the revenue is recognized based
on the actual direct labor hours in the job times the standard billing
rate and adjusted to realizable value if necessary. For product sales,
the Company recognizes revenue upon shipment. There are no significant
post contract support obligations at the time of revenue recognition.
The Company's accounting policy regarding vendor and post-contract
support obligations is according to the customers contract, billable
upon the occurrence of the post-sale support.
The Company does not experience many product returns, and therefore,
Company management is of the opinion that no allowance for sales returns
is necessary. The Company has no obligation for warranties on hardware
sales, because the warranty is given by the manufacturer. The Company
does not offer a warranty policy for their services to customers.
PROPRIETARY SOFTWARE IN DEVELOPMENT
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," the Company has capitalized certain computer
software development costs upon the establishment of technological
feasibility. Technological feasibility is considered to have occurred
upon completion of a detailed program design which has been confirmed by
documenting and tracing the detail program design to product
specifications and has been reviewed for high-risk development issues,
or to the extent a detailed program design is not pursued, upon
completion of a working model that has been confirmed by testing to be
consistent with the product design. Amortization of computer software
costs is provided based on the greater of the ratios that current gross
revenues for a product bear to the total of current and anticipated
future gross revenues for that product or the straight-line method over
the estimated useful life of the product. 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.
- -------------------------------------------------------------------------------
Page 9
<PAGE> 13
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Page 10
<PAGE> 14
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In November 1994, the Company formed a subsidiary, Kedwell
International, Inc. by issuing 180,000 shares at $1.25 of its $.001 par
value common stock. The subsidiary purchased software in exchange for
its 180,000 shares of Applied Cellular Technology's common stock valued
at $1.25 per share and for the issuance of 120,000 warrants at no value
as described in Note 17. Effective April 1995, Kedwell International,
Inc. changed its name to Tech Tools, Inc. Tech Tools, Inc. is a
software development and services company. The Company's office is
located in New Hampshire, with customers throughout the United States.
During 1994, the Company acquired 570,712 shares of Cadkey, Inc., a
software technology company, in exchange for 456,570 shares of its $.001
par value common stock valued at $1.25 per share, resulting in a 29%
investment in this company.
During April 1995, the Company formed a subsidiary, ACT Financial Corp.,
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.
- -------------------------------------------------------------------------------
Page 11
<PAGE> 15
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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>
- -------------------------------------------------------------------------------
Page 12
<PAGE> 16
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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 $ 570,713 $ 570,713
Additional costs of acquisition 6,686 6,686
- --------------------------------------------------------------------------------------------------------
$ 577,399 $ 577,399
========================================================================================================
</TABLE>
The original investment was calculated as follows:
<TABLE>
<S> <C>
Shares issued (456,670 x $2.50) $ 1,141,425
50% discount given to shares issued (Note 17) (570,712)
----------------
$ 570,713
================
</TABLE>
- -------------------------------------------------------------------------------
Page 13
<PAGE> 17
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
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.
- -------------------------------------------------------------------------------
Page 14
<PAGE> 18
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
8. PURCHASED COMPUTER SOFTWARE
Purchased computer software consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 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.
- -------------------------------------------------------------------------------
Page 15
<PAGE> 19
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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%.
- -------------------------------------------------------------------------------
Page 16
<PAGE> 20
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
11. CAPITAL LEASE OBLIGATIONS
Future payments for capital lease obligations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 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.
- -------------------------------------------------------------------------------
Page 17
<PAGE> 21
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
NOTE RECEIVABLE - CADKEY, INC.
The carrying value of the note approximates fair value because the
interest rate of the note approximates the current rate that the Company
could receive on a similar note, and also because this agreement was
renegotiated in the current year.
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.
- -------------------------------------------------------------------------------
Page 18
<PAGE> 22
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Page 19
<PAGE> 23
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Page 20
<PAGE> 24
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
14. COMMITMENTS
The Company was obligated to pay a royalty to Axon Investments, Inc.,
formerly Axcom Computer Consultants, Inc., in the amount of 2% of gross
collected revenues for 120 months beginning July 1, 1993. This royalty
agreement was terminated in July 1995. Royalty expense amounted to
$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.
- -------------------------------------------------------------------------------
Page 21
<PAGE> 25
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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.
15. PROFIT SHARING PLAN
Elite Computer Services, Inc. has a qualified, noncontributory 401(k)
plan for all eligible employees. The Company contributes, at its
discretion, up to 15% of the participant's annual compensation. Profit
sharing expense amounted to $4,565 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.
16. STOCKHOLDERS' EQUITY
The Board of Directors approved a 420-for-1 stock split effective March
1994. The Board of Directors also approved an increase in the number of
authorized shares of common stock to 10,000,000, with par value of .0024
per share, and authorized the issuance of 20,000 shares of redeemable
preferred stock, par value $10 per share. In April 1994, the Articles
of Incorporation were amended to change the par value to $.001 per
common share. The preferred stock shares were to be redeemable by the
Company at any time but were required to be redeemed by the Company at
such time as it had received a cumulative total of $500,000 in funding
or capitalization through private placement, warrant exercise, public
offering or any other such means excluding lines of credit or revenue
from sales and excluding funds received from the sale of said preferred
stock.
- -------------------------------------------------------------------------------
Page 22
<PAGE> 26
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Page 23
<PAGE> 27
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Page 24
<PAGE> 28
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, pending final
shareholder approval of the Company for the authorization of the
redeemable preferred shares, to purchase 80% of Burling Instruments, Inc.,
in exchange for 9,000 shares of 8% preferred stock, at $100 per share, of
Applied Cellular Technology, Inc. for a total value of $900,000.
The Company will also pay cash of $57,600. The approval of the redeemable
preferred shares is probable, due to the fact that the majority ownership
shareholders have been involved with the acquisition negotiations, and
are in favor of the transaction.
If and to the extent the redeemable preferred shares have not been
converted to Common Stock by the second anniversary of the initial
issuance of the shares, the Company shall redeem the redeemable preferred
shares by paying $100 per share. Each holder of the redeemable preferred
shares may convert their redeemable preferred shares into common stock
at a rate of $5.75 per $100 of redeemable preferred stock, for two years
from the issuance date.
- -------------------------------------------------------------------------------
Page 25
<PAGE> 29
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
17. SUPPLEMENTAL CASH FLOW INFORMATION
The Company had the following noncash investing and financing
activities:
In March 1995, the Company acquired a note receivable from Cadkey, Inc.
in exchange for the issuance of 200,000 restricted shares of its common
stock valued at $2.50 each.
In February 1996, Atlantic Systems, Inc. purchased a liquor store
software package (with exclusive rights to sell and support the
software, hardware and software support contracts with current
customers) and certain equipment from Quality Solutions, Inc., in
consideration for cash of $40,784 and 33,494 shares of common stock of
Applied Cellular Technology, Inc. at $5.50 per share.
18. STOCK REGISTRATION
During 1994, the Company completed a registration regarding distribution
of its shares of common stock to shareholders of Pratt, Wylce & Lords,
Ltd., a consultant to the Company. Additionally, the Company registered
on behalf of the selling shareholders 192,851 shares of common stock,
200,000 class A warrants, 200,000 class B warrants and 45,000 class C
warrants. The class A warrants are exercisable into one common share at
the purchase price of $4.75 and the class B warrants are exercisable
into one common share at the purchase price of $20. The class A and
class B warrants shall be effective for a period of four years from the
date of issuance and shall be redeemable by the Company at $.001 per
class A or class B warrant upon thirty day's notice. The class C
warrants were to be exercisable for a period of three years from the
date of issuance at the rate of one warrant plus $1.50 for one share of
common stock. The class C warrants were exercised in December 1994 for
$67,500.
In connection with this registration, the Company incurred $249,722 in
stock registration costs for the year ended December 31, 1994.
The Company is in the process of registering on Form SB-2, 1,000,000
shares of common stock, 300,000 common shares to be issued upon exercise
of the class F warrants, and 1,459,301 common shares being registered on
behalf of the selling security holders.
- -------------------------------------------------------------------------------
Page 26
<PAGE> 30
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
19. 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.
The Company has restated its balance sheet and income statement for the
year ended December 31, 1995 and for the three months ended March 31, 1995
and 1996 to reflect the recording of the investment in Cadkey, Inc. on the
cost method, instead of as previously shown under the equity method. The
Company does not currently, and has not since early in 1995, exercised
significant influence over Cadkey, Inc. and therefore the investment
should not have been recorded under the equity method. Management's basis
for considering that they no longer exercise significant influence over
Cadkey, Inc. stems from the fact that the majority ownership of Cadkey is
concentrated among a small group of shareholders who operate the investee
without regard to the views of the Company, the Company had attempted to
obtain interim financial statements from Cadkey, Inc. and were refused and
the Company has tried unsuccessfully to obtain representation on Cadkey's
board of directors.
The effect of this change reduced beginning retained earnings, as of
December 31, 1995, by $74,682. The effect of this change is to reduce net
income for the three months ended March 31, 1995 by $19,142, which reduced
the net income per common share by $.01 per share, from $.02 to $.01, and
to reduce net income for the three months ended March 31, 1996 by $20,190,
which reduced the net income per common share by $.01, from $.03 to $.02.
20. 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.
- -------------------------------------------------------------------------------
Page 27
<PAGE> 31
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 redeemable 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. for a
total value of $900,000. The Company will also pay cash of $57,600. The approval
of the redeemable preferred shares is probable, due to the fact that the
majority ownership shareholders have been involved with the acquisition
negotiations, and are in favor of the transaction.
If and to the extent the redeemable preferred shares have not been converted to
Common Stock by the second anniversary of the initial issuance of the shares,
the Company shall redeem the redeemable preferred shares by paying $100 per
share. Each holder of the redeemable preferred shares may convert their
redeemable preferred shares into common stock at a rate of $5.75 per $100 of
redeemable preferred stock, for two years from the issuance date.
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 $ 1,730,924 $ 792,865 $ (57,600) <F2> $ 2,466,189
Equipment and leasehold improvements 157,604 25,838 -- 183,442
Investment in Cadkey, Inc common stock 577,399 -- -- 577,399
Note receivable - Cadkey, Inc. 269,279 -- -- 269,279
Goodwill 883,008 -- 495,796 <F3> 1,378,804
Purchased computer software 758,971 -- -- 758,971
Other assets 199,223 20,881 -- 220,104
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 4,576,408 $ 839,584 $ 438,196 $ 5,854,188
============================================================================================================
Current liabilities $ 1,234,296 $ 225,739 $ -- $ 1,460,035
Capital lease obligations 35,996 -- -- 35,996
Minority interest 76,476 -- 115,451 <F4> 191,927
Redeemable preferred stock -- -- 900,000 <F5> 900,000
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 1,346,768 225,739 1,015,451 2,587,958
- ------------------------------------------------------------------------------------------------------------
Common stock 2,310 1,075 (1,075)<F6> 2,310
Additional paid-in capital 3,496,263 373,925 (373,925)<F7> 3,496,263
Retained earnings (268,933) 238,845 (202,255)<F8> (232,343)
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 3,229,640 613,845 (577,255) 3,266,230
- ------------------------------------------------------------------------------------------------------------
Total Liabilities And
Stockholders' Equity $ 4,576,408 $ 839,584 $ 438,196 $ 5,854,188
============================================================================================================
Common shares outstanding 2,309,516 2,309,516
============================================================================================================
</TABLE>
- -------------------------------------------------------------------------------
Page 28
<PAGE> 32
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 <F9> (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 12,395 <F10> 608,452
- ---------------------------------------------------------------------------------------------------------
Operating income (loss) 46,580 (17,920) (12,395) 16,265
Interest income 20,669 -- -- 20,669
Interest expense (8,308) (2,689) -- (10,997)
Minority interest (19,474) -- 4,122 <F11> (15,352)
Provision for income tax -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 39,467 $ (20,609) $ (8,273) $ 10,585
Dividends -- -- (18,000) <F12> (18,000)
- ---------------------------------------------------------------------------------------------------------
Net income (loss) applicable to
common shareholders $ 39,467 $ (20,609) $(26,273) $ (7,415)
=========================================================================================================
Net Income Per Common Share $ 0.02 $ --
=========================================================================================================
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 goodwill created in the 80% purchase of Burling
Instruments, Inc. (Stockholders' Equity of Burling Instruments, Inc.
at the date of acquisition of $577,255 times 80%, less amount paid
of $957,600).
<F4> Represents the original interest of the 20% minority ownership.
(Stockholders' Equity of Burling Instruments, Inc. at the date of
acquisition of $577,255 times 20%).
<F5> Represents the 9,000 shares of redeemable preferred stock, at
$100 per share, exchanged for the 80% interest in Burling
Instruments, Inc.
<F6> Represents the elimination of the common stock of Burling
Instruments, Inc.
<F7> Represents the elimination of the additional paid in capital of
Burling Instruments, Inc.
<F8> Represents the elimination of the retained earnings of Burling
Instruments, Inc. (Retained earnings of Burling Instruments, Inc.
at the date of acquisition was $202,255).
- -------------------------------------------------------------------------------
Page 29
<PAGE> 33
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:
<F9> 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.
<F10> Represents the amortization expense for the goodwill on the Burling
Instruments, Inc. acquisition, in the amount of $12,395 ($495,796
divided by 10 years times 1/4 of a year).
<F11> Represents the minority interest on the earnings (losses) of
Burling Instruments, Inc. for the three months ended March 31, 1996 of
$(20,609).
<F12> 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).
</TABLE>
- -------------------------------------------------------------------------------
Page 30
<PAGE> 34
APPLIED CELLULAR TECHNOLOGY, INC.
PART I (cont.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS.
- --------------------------
TRENDS AND UNCERTAINTIES. The Company has tried to eliminate the major
variables of interest rates and operating expense. However, as the Company
has little or no control as to the demand for its products and services,
inflation and changing prices could have a material effect on the future
profitability of the Company.
The Company had previously conducted negotiations for the purchase of Cra-Tek
Industrial Controls & Electric. The Company considered the acquisition to be
more probable than not. The Company had hoped to acquire eighty percent of
the fully diluted and outstanding classes of all authorized and outstanding
shares of Cra-Tek in exchange for restricted common shares of the Company
with demand registration rights. Cra-Tek conducts its operations in a 5,000
square foot building at 3650 51st Avenue in Sacramento, California. The Cra-Tek
acquisition negotiations were terminated, due to the fact that Cra-Tek did not
receive necessary Board approval for the purchase by the Company. There can be
no assurance that the Company will not expend its efforts and funds in the
future to pursue other acquisitions which may prove unsuccessful.
The Company's lease in Nixa, Missouri expires at June 30, 1996, Elite's lease
expires on May 31, 1996 and Burling's lease expires on August 31, 1996. The
Company intends to negotiate a smaller space for probably less rent at the
same office complex. At the current time, Elite and Burling have conducted
preliminary discussions with its current lessor and, based on those discussions,
do not anticipate a higher lease rate upon renewal. In all three of these
locations, there are many other lease opportunities at different facilities
at similar rates. The Company does not anticipate that there shall be any
material impact on its cashflow due to the expiration of these leases and
current cashflow is sufficient to continue to pay the lease amounts.
CAPITAL RESOURCES AND SOURCE OF 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.
Page 34 of 40 Pages
<PAGE> 35
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 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 35 of 40 Pages
<PAGE> 36
The current operating divisions of the Company generated approximately
$2,335,999 in revenues in the fiscal year 1995 and are projected to generate
approximately $5,500,000 in 1996. The Company's operating divisions are in
market segments, computer software and hardware, that are growing. No external
matters in the industry have occurred that have effected the Company in an
adverse way. The Company has not experienced any labor difficulties or any
other internal impediments.
The nature of the Company's business, computer software development and
distribution and the marketing of purchased computer hardware and hardware
components, do not require any significant ongoing capital expenditures, only
increases in working capital. Any proceeds utilized from the sale of the
common shares registered in this offering would be used primarily to fund the
increased working capital needs of the existing affiliated companies and to
retire some existing debt. If the registration was unsuccessful, management
would pursue lines of credit and increase the factoring arrangement (90% of
receivables under 60 days) at the Company or it may pursue a private sale of
its preferred stock. Management plans to establish a factoring arrangement
for TechTools, Inc. and a line of credit for Atlantic Systems, Inc. if required.
Additional acquisitions by the Company could increase the revenue base.
Management intends to pursue a registration of 2,000,000 common shares in 1996
for the express purpose of acquiring three or four companies that would be
strategic additions to the existing core companies or divisions. The
acquisitions are part of the Company's strategy to build a major international
software, manufacturing and technology business through strategic,
consolidating acquisitions. The acquisition strategy of the Company is to
acquire companies at favorable prices with steady cash flows. The Company
plans to increase profits through the projected gross margin objectives of
40-45% for hardware and 80-85% for software products. Broadened product lines
will allow each division to increase its customer base, which will result in an
increase in earnings. The Company's objective to increase profitability of each
division is to continue growth through 1) acquisition of established successful
business with above average expansion or growth potential 2) internal expansion
of existing businesses 3) introduction of new products into existing sales
channels and 4) the development of new ventures and expanded market
opportunities for existing products.
The investment in Cadkey has no effect on the Company's cash flow and,
consequently, does not have any effect on the Company's ability to survive.
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.
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
Page 36 of 40 Pages
<PAGE> 37
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
$1,186,213 for the year ended December 31, 1995 due to costs related mainly to
hardware products ($676,838) packaged software sales ($159,388), costs of
programming services ($271,174) and costs of software licensing revenue
($74,306) while operating expenses increased from $533,046 to $981,212 (mainly
from an increase in administrative expenses from $421,864 to $634,376 and
marketing and sales expenses from $83,326 to $346,836 for the same periods).
This resulted in operating income of $168,574 for the year ended December 31,
1995 compared to an operating loss of $(480,145) for the year ended December
31, 1994. Programming services provided 57.11% of the total revenue for the
year ended December 31, 1994 as compared to 18.96% for the year ended December
31, 1995 due to the Company's change in business focus. Direct costs comprised
83.61% of total revenue for the year ended December 31, 1994 as compared to
comprising 50.78% for the same period in 1995. The decrease in the direct
cost to revenue percentage is due to the Company's change in business focus and
its recent acquisitions. The Company received revenue of approximately
$2,335,999 in fiscal year 1995 and the Company expects the revenue level will
continue in the first quarter of 1996, and the Company will continue its
marketing efforts to obtain increased revenues.
Revenues from the Company's operations decreased significantly in fiscal year
1994 from 1993. Total Revenue was $322,769 for the year ended December 31, 1994
as compared to $410,346 for the year ended December 31, 1993 for the combined
results of Axcom and
Page 37 of 40 Pages
<PAGE> 38
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 $748,137 for the three months ended March 31, 1996 to $1,038,781 for the
three months ended March 31, 1996 giving effect to the probable acquisition.
As a result, gross profit for the three months ended March 31, 1996 was
$485,097 compared to the proforma amount of $624,717 for the same period.
Operating expenses increased from $438,517 to $608,452 for the three months
ended March 31, 1996 giving effect to the acquisitions. 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 $39,467 to $10,585 for the three months ended March 31, 1996
giving effect to the probable acquisition.
Page 38 of 40 Pages
<PAGE> 39
APPLIED CELLULAR TECHNOLOGY, INC.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
None
(b) Reports on Form 8-K
None
Page 39 of 40 Pages
<PAGE> 40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Garrett Sullivan
Date: September 26, 1996 ------------------------------
Garrett Sullivan, President
Page 40 of 40 Pages
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 32,281
<SECURITIES> 0
<RECEIVABLES> 912,301
<ALLOWANCES> 0
<INVENTORY> 554,170
<CURRENT-ASSETS> 1,730,924
<PP&E> 393,368
<DEPRECIATION> (235,764)
<TOTAL-ASSETS> 4,576,408
<CURRENT-LIABILITIES> 1,234,296
<BONDS> 0
<COMMON> 2,310
0
0
<OTHER-SE> 3,227,330
<TOTAL-LIABILITY-AND-EQUITY> 4,576,408
<SALES> 769,437
<TOTAL-REVENUES> 1,233,234
<CGS> 485,421
<TOTAL-COSTS> 748,137
<OTHER-EXPENSES> 438,517
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,308
<INCOME-PRETAX> 58,941
<INCOME-TAX> 0
<INCOME-CONTINUING> 39,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,467
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
