<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: 12/31/96
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------- to ---------------
Commission file number: 33-79678
APPLIED CELLULAR TECHNOLOGY, INC.
(Exact name of registrant as specified in charter)
Missouri 43-1641533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
James River Professional Center, Highway 160 & CC, Suite 5, Nixa, Missouri 65714
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (417) 725-9888
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for at least the past 90 days.
Yes x No
----- ----
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference to Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X].
The Corporation's revenues for its most recent fiscal year were $19,883,400.
As of December 31, 1996, 11 market makers maintained bids in the Company's
securities. The current market value of the registrant's voting $.001 par
value common stock held by non-affiliates of the Registrant is approximately
$19,370,000.
The number of shares outstanding of registrant's only class of common stock,
as of December 31, 1996 was 5,798,701 and at March 27, 1996 was 7,358,692
shares of its $.001 par value common stock.
No documents are incorporated into the text by reference.
Transitional Small Business Disclosure Format (check one): Yes No x
--- ---
Exhibit Index is located on Page 33.
<PAGE> 2
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
TABLE OF CONTENTS
<CAPTION>
ITEM DESCRIPTION PAGE
PART I
<C> <S> <C>
1. Business 3
2. Properties 21
3. Legal Proceedings 21
4. Submission of Matters to a Vote of Security Holders 21
PART II
5. Market for Registrant's Common Equity and Related
Shareholder Matters 22
6. Management's Discussion and Analysis of Results of
Operations and Financial Condition 23
7. Financial Statements and Supplementary Data 26
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
9. Directors and Executive Officers of the Registrant 27
10. Executive Compensation 29
11. Security Ownership of Certain Beneficial Owners and
Management 31
12. Certain Relationships and Related Transactions 32
PART IV
13. Exhibits, Financial Statement Schedules, and Reports on
On Form 8-K 33
INDEX TO EXHIBITS 33
SIGNATURES 34
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT 35
SCHEDULES
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Applied Cellular Technology, Inc. (with its subsidiaries, "ACTC", our
"Company" or the "Registrant") is a diversified technology company, operating
predominantly in three industry segments. Our Company's business is
diversified by customer, customer type, product, equipment and software
segments, and the geographic location of our customers. Our customers
include large and small companies, public utilities and state and local
authorities, and individuals. A portion of our transactions are with repeat
customers, although our Company's businesses are not dependent on any single
customer or on any single source for purchasing or selling our products and
services.
SEGMENTS OF BUSINESS
Our products and services are organized into three business groups, or market
segments, and are generally provided through separate operating subsidiaries
or business entities. The three segments, or business groups, are as follows:
* the retail group which installs, sells, services and supports
cellular phone and other wireless services, business telephone
systems, voice mail and interactive voice response systems,
commercial long distance and local telephone services,
residential long distance telephone services, digital satellite
television services to business and consumer end-users, and
computer systems, offering custom and custom-tailored software
and hardware systems for manufacturers, wholesalers, distributors
and field sales and service organizations;
* the computer group which specializes in providing leasing,
remarketing, parts-on-demand, consulting and business continuity
services for mainframe, midrange and PC systems to a network of
industrial, commercial and retail organizations; and
* the manufacturing group which manufactures customized analog and
digital and off-the-shelf industrial temperature controls and
custom analog and digital electrical products.
See Note 20 to consolidated financial statements for additional information on
Segments of Business.
Our Company's corporate operations are conducted through our principal office
in Nixa, Missouri, and through satellite corporate offices in Amherst, New
Hampshire, Cambridge, Massachusetts and St. Louis, Missouri. Each operating
business is conducted through a separate subsidiary company directed by its
own management team and each has its own marketing and operations support
personnel. Each management team reports to the President, who is responsible
for overall corporate control and coordination, as well as financial
planning. The Chairman is responsible for the overall business and strategic
planning of our Company.
<PAGE> 4
ORGANIZATION
Our Company was originally incorporated in 1988 in Missouri under the name
Axcom Computer Consultants ("Axcom"), and operated as a custom programming
and systems house. In May, 1993, Axcom was acquired by Great Bay
Acquisition Company for the purpose of focusing our Company on marketing and
sales of emerging cellular data technology hardware and proprietary software
focused on the vertical markets of wholesale distribution, manufacturing and
health care. The name of our Company was subsequently changed to Axcom
Information Technology, Inc. on May 27, 1993 and then subsequently changed
again in April, 1994 to Applied Cellular Technology, Inc.
Pursuant to the amended Articles of Incorporation, our Company had the
authority to issue an aggregate of Ten Million (10,000,000) common shares,
par value $1.00 per common share. In April, 1994, an amendment to the
Articles of Incorporation changed the par value to $0.001 per common share.
Our Company also then had the authority to issue 20,000 shares of redeemable
Preferred Stock, par value $10.00. In August, 1996, the Articles of
Incorporation were again amended to increase the aggregate number of common
shares our Company may issue to Twenty Million (20,000,000), and to increase
the aggregate number of redeemable preferred shares to One Million (1,000,000).
As of December 31, 1996, there were 5,798,701 common shares outstanding and
7,358,692 common shares outstanding as of March 27, 1997. As of December 31,
1996 and March 27, 1997 there were 109,000 redeemable preferred shares
outstanding. The following warrants are also outstanding:
Class Number
----- ------
B 200,000
F 50,000
H 350,000
I 450,000
J 200,000
K 250,000
L 125,000
M 1,000,000
<PAGE> 5
FORWARD-LOOKING STATEMENTS
Statements about our Company's expectations, including future revenues,
earnings, our ability to compete and maintain market share, to adapt to and
to capitalize on growth opportunities and anticipated benefits of our
business strategies, and all other statements in this Report on Form 10-KSB,
including Management's Discussion and Analysis of Results of Operations and
Financial Condition, and other Company communications other than historical
facts, are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, Section 21E of the Securities Exchange Act of
1934, and as that term is defined in the Private Securities Litigation Reform
Act of 1995, and our Company intends that such forward-looking statements be
subject to the safe harbors created thereby. Since these statements involve
risks and uncertainties and are subject to change at any time, our Company's
actual results could differ materially from expected results. Our Company
undertakes no obligation to publicly update or revise any forward-looking
statements whether as a result of new information, future events or
otherwise.
SUBSIDIARIES
In November 1994, our Company formed a subsidiary, Kedwell
International, Inc., and capitalized it by issuing 180,000 common shares of
our Company's $.001 par value common stock. The name of the subsidiary was
changed to Tech Tools, Inc. on April, 1995. The subsidiary purchased
software in exchange for the 180,000 common shares of the Company and 120,000
redeemable Class E Warrants which were exercisable to acquire one common
share of our Company at the price of $7.50 per common share.
On December 22, 1994, our Company acquired 570,712 shares of Cadkey, Inc., a
software technology company from an unaffiliated individual, in exchange for
456,570 shares of our common stock, resulting in a 29% investment in Cadkey,
Inc.
<PAGE> 6
During April, 1995, our Company formed a subsidiary, ACT Financial Corp., a
Delaware corporation. The subsidiary was formed to hold a note receivable
from Cadkey, Inc. ACT Financial Corp. purchased a $1,000,000 note receivable
in exchange for 200,000 common shares at a market price of $5.00.
In November, 1996, we received a payment of $420,139 on the note receivable
from Cadkey, Inc.. The balance on the note at that time was $307,768.
Additionally, effective as of November 1, 1996, we exchanged our 29.0%
investment in Cadkey for a 76.67% interest in a $750,000 note receivable from
DataCAD, L.L.C. ("DataCAD"), a company that purchased one of Cadkey's product
lines. Our share of the note is $575,000. The remaining 23.33% of this note
($175,000) is owned by Micro Control System, Inc., ("Micro"), the successor
corporation to Cadkey. We act as collection agent, and disburse Micro's share
to them once payments have been received and collected.
In August 1995, the Company issued 124,066 common shares at the then current
market price of $5.50 per share to two shareholders in exchange for an amount
of common shares equal to 80% of the total outstanding common shares of
Atlantic Systems ("ASI").
In September 1995, the Company issued 102,160 common shares at $8.94 per share
to two shareholders in exchange for an 80% investment in Elite Computer
Services, Inc. ("Elite").
Acquisitions Consummated in 1996:
- ---------------------------------
Effective as of February 1, 1996, our Company purchased, for ASI, 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 common shares at the then current market price of $5.50 per share.
Effective as of March 1, 1996, our Company acquired 80% of the outstanding
common shares of Burling Instruments, Inc., ("Burling"), in exchange for
9,000 shares of 8% redeemable preferred shares of our Company at $100.00 per
share, for a total consideration of $900,000.00.
<PAGE> 7
Effective as of September 1, 1996, our Company acquired 80% of the outstanding
common shares of CRA-TEK Corp., ("CRA-TEK"), in exchange for 295,115 of our
common shares at the then current market trading price of $4.75 per share.
In October, 1996, we formed a subsidiary company, ACT Communications, Inc., a
Delaware company, for the sole purpose of acquiring 100% of the outstanding
common shares of Advanced Telecom Holdings, Inc. ("ATHI") effective as of
September 1, 1996. Our Company issued to the selling shareholders 1,618,180 of
our common shares at the then current market price of $5.00 per common share
and 100,000 shares of our 8% redeemable preferred shares at $100.00. In
addition, our Company issued to ATHI's selling shareholders 960,000 Class M
Warrants evidencing the right to purchase 960,000 of our Company's common
shares in consideration for the exchange of one warrant and $5.31 per common
share.
The 8% preferred dividend for the period October 1 through December 31, 1996
was waived by the holders. Dividends are payable in equal quarterly payments
on the first day of each January, April, July and October of each calendar
year commencing on April 1, 1997.
<PAGE> 8
Effective as of November 1, 1996, our Company acquired 80% of the outstanding
common shares of Universal Commodities Corp., ("UCC"), in exchange for 581,818
of our common shares at the then current market trading price of $5.50 per
share.
Effective as of December 1, 1996, our Company acquired 80% of the outstanding
common shares of US Electrical Products Corp., trading as Gavan-Graham Electric
Products, ("Gavan-Graham"), in exchange for 258,988 of our common shares at the
then current market trading price of $5.50.
Acquisitions Consummated in 1997 through the date of filing of this FORM 10-KSB:
- --------------------------------------------------------------------------------
On March 25, 1997, effective as of January 1, 1997, our Company acquired 100%
of the outstanding common shares of Hopper Manufacturing Co., Inc., ("Hopper"),
in exchange for 179,104 of our common shares at the then current market trading
price of $4.1875 per share and the assumption of bank debt of $657,445.
On March 26, 1997, effective as of January 1, 1997, our subsidiary, UCC,
acquired 80% of the outstanding common shares of Pizarro Re-Marketing , Inc.,
("Pizarro"), in exchange for 231,521 of our common shares at the then current
market price of $4.7188, of which 190,833 shares were issued at closing, and
40,688 shares will be issued on the first anniversary of the closing if certain
earnings targets are met.
<PAGE> 9
On March 27, 1997, effective as of January 1, 1997, our subsidiary, UCC,
acquired 80% of the outstanding common shares of Norcom Resources, Inc.,
("Norcom"), in exchange for 355,555 of our common shares at the then current
market price of $4.50, of which 284,444 shares were issued at closing, and
71,111 shares will be issued on the first anniversary of the closing if certain
earnings targets are met.
Effective February 1, 1997, our Company acquired 100% of the outstanding
common shares of MVAK Technologies, Inc., ("MVAK"), in exchange for 389,296 of
our common shares at the then current market price of $4.9375 and the
assumption of bank debt of $177,851.
BUSINESS GROUPS
Our Company primarily operates in three business groups, or industry
segments: Retail, Computer and Manufacturing.
RETAIL GROUP:
- -------------
The retail group is made up of the following subsidiary companies and
divisions:
* Advanced Telecomm Holdings, Inc., or ATHI, trading as ATI
Communications. ("ATI").
* Applied Cellular Technology's Software Development and Service
Division, ("ACT").
* Atlantic Systems, Inc., ("ASI"); and
* Tech-Tools, Inc. ("Tech-Tools").
<PAGE> 10
ATI COMMUNICATIONS -
- --------------------
Founded in Bethel Park, PA in 1984, ATI Communications ("ATI") is a
full-service telecommunications company specializing in complete telephone
systems and solutions for its customers. Through its team of highly trained
sales and service professionals, ATI offers an array of telecommunications
products and services including, but not limited to, interconnect (business
telephone systems and voice mail), Cellular telephones and other wireless
services, long distance service, digital satellite TV, internet access and
other network services.
In 1988, ATI expanded its operations to the Philadelphia area; in 1991,
ATI expanded to the Washington D.C./Baltimore/N. Virginia market. In 1995,
ATI opened an office in Harrisburg, PA, primarily to service one of its
largest customers: The Commonwealth of Pennsylvania. ATI now operates through
more than 50 distribution points and has approximately 375 employees.
<PAGE> 11
Products and Services
- ---------------------
i. Interconnect:
-------------
Accounting for approximately 25-30% of ATI's revenues, its original product
line, ATI continues to market, sell and install business telephone systems.
As one of the larger dealers of Toshiba America Information Systems, ATI has an
installed customer base of thousands of interconnect customers. In addition to
Toshiba, ATI is also a large dealer for Telrad and Applied Voice Technology.
In the late 1980s, with the advent of voice mail, ATI capitalized on the
opportunity and, today, sells and installs voice mail as an additional service
to interconnect customers.
ii. Cellular Phones and other Wireless Services
-------------------------------------------
In 1985, one of the first cellular phones was introduced to Pittsburgh. In its
first month of sales, ATI sold four cellular phones. Currently, cellular phone
sales account for approximately 65-70% of ATI's revenue. Cellular revenues are
comprised of sales of phones/accessories, commissions from the activation of
new customers, and residual commissions from ATI's customer base usage.
In Pittsburgh and Western Pennsylvania, ATI is an agent for AT&T Wireless
Services. Over the years, ATI's cellular customer base has provided a steady
monthly residual income stream and continues to do so. There is no assurance
that this stream will continue in the future.
In the Washington/Baltimore metro market, ATI is an agent for Cellular One
(owned by Southwestern Bell). With an active customer base of more than 100,000
customers, ATI derives a steady monthly residual income stream. There is no
assurance that this stream will continue in the future.
<PAGE> 12
iii. Long Distance Services
----------------------
The sale of commercial long distance is complimentary to businesses purchasing
and installing a new phone system. By offering each cellular customer a
preferred rate on their residential long distance, ATI customers may receive
added value from their relationship with ATI.
iv. Digital Satellite TV Service:
-----------------------------
In its infant stages at ATI, ATI views this industry's growth potential
over the next five years in a comparable status as cellular was in 1986.
In October 1996, ATI became a distributor for Echostar d/b/a The DISH Network.
Although the smallest of the three companies (DSS and Primestar), ATI chose
Echostar as its partner for two reasons, because ATI is of the opinion that: 1)
It was the only company that provided both the hardware and the service; 2) In
the fall of 1997, it will be the only provider to offer all local networks in
21 major metropolitan markets on the east coast. There can be no assurance that
either or both of these events will occur.
<PAGE> 13
Growth Strategy:
- ----------------
ATI can grow through acquisition in two ways: 1) acquire an existing
Interconnect company in another region and add the other (i.e., wireless,
Long Distance, etc.) components of ATI; 2) acquire an existing cellular
agent with a significant residual base and add the other (i.e., Interconnect,
Long Distance, etc.) components of ATI. There can be no assurance that ATI
will grow through acquisition.
ATI competes regionally with AT&T, the "baby bells" and numerous other large
and small companies.
SOFTWARE DEVELOPMENT AND SERVICES DIVISION ("ACT") -
- ----------------------------------------------------
ACTC's Software Development and Services Division, based in Nixa, Missouri,
offers custom-tailored software and hardware systems for manufacturers,
wholesalers, distributors and field sales and service organizations.
The applications offered automate various aspects of the business,
including order processing, inventory control, accounting, work-in-process
control, quality management and sales management. ACT operates as a
value-added reseller for several different manufacturers of wireless,
portable data collection terminals, bar code printers, computers and
related equipment. ACT integrates this hardware with custom-tailored
software, specific for the customer's needs. The software may be based
on an existing application from a third party or may be entirely
proprietary to ACT.
Communications technology is another important part of the ACT's
business. ACT integrates diverse systems and protocols to produce
integrated systems which collect data via wireless hand held devices,
process the data locally (either on the hand held unit or on a local
LAN-based processor) then transmit the data in real time to corporate
systems. This requires application of various system design and
programming techniques including client-server computing, operating
systems internals programming and application programming in a variety
of languages and involving a wide range of data base systems.
<PAGE> 14
ACT provides the following services and products:
* Customized Software Solutions
* Cellular Data Technology
* Hand Held Technology
* Proprietary Software Applications
* Licensed Software Products
Sales and marketing activities are carried out by the general manager
and the national sales manager. Joint marketing relationships with
hardware and software manufacturers have allowed ACT to keep current
on hardware, databases, programming and application technologies, while
participating in selected sales opportunities referred to ACT from its
partners.
ACT competes with the direct sales forces of the various data collection
hardware manufacturers and their Value-Added Reseller partners. Other
competitors are the developers of warehouse automation and manufacturing
shop floor data collection software products. ACT also competes with
custom software development houses which range in size from 1 to 500
employees and $.5 to $500 million in sales.
ATLANTIC SYSTEMS, INC. -
- ------------------------
ASI is a value added reseller of PC based computer systems. ASI's major
market is the independent retailer of liquor, wine and beer. With its
proprietary liquor store management software package running under
Microsoft's Windows 95 platform, ASI installs computer hardware and software
to manage the business of the liquor retailer.
<PAGE> 15
ASI, from its base in Spring Lake, New Jersey, provides software development,
sales, installation, training and customer support services. ASI also
maintains a sales and service office in Columbus, Georgia.
The major source of ASI's new customer leads come from word of mouth from its
current base of over 400 retailers. ASI also uses direct mailings and
participates in several liquor retailer trade shows.
TECH-TOOLS, INC. -
- ------------------
Tech-Tools, Inc., ("TT"), is a software sales company. TT offers specialized
database code generators, spreadsheet compilers and installer software to
develop business software applications running under Microsoft's Windows 95,
Windows and DOS platforms.
COMPUTER GROUP:
- ---------------
The computer group is made up of the following subsidiary companies:
* Universal Commodities Corp. ("UCC").
* Pizarro Re-Marketing, Inc. ("Pizarro")
* Norcom Resources, Inc. ("Norcom"); and
* Elite Computer Services, Inc. ("Elite").
UNIVERSAL COMMODITIES CORP. -
- -----------------------------
UCC, based in Burlington, New Jersey, is a buyer, seller and renter of new,
off-line and off-lease computer systems ranging from mainframes to PC's and
related peripheral equipment and devices. UCC is also a parts supplier, and
purchases electronic components and other scrap for de-manufacturing and
reclamation of precious materials, steel, aluminum and copper.
<PAGE> 16
Effective as of January 1, 1997, UCC acquired 80% interests in Pizarro and
Norcom.
PIZARRO RE-MARKETING, INC. -
- ----------------------------
Based in Dallas, Texas, Pizarro provides re-marketing services in the disk and
tape industry. The Company is also a retailer and wholesaler in both the
domestic and international markets of RAMAC product and IBM tape product.
NORCOM RESOURCES, INC -
- -----------------------
Norcom, based in Eagan, Minnesota, specializes in servicing the IBM mainframe
after-market with hardware, engineering services on an integrated basis, parts
and technical support.
<PAGE> 17
Norcom is an integrated organization providing Brokerage Services, Engineering
Services, Parts, and Technical Support.
ELITE COMPUTER SERVICES, INC. -
- -------------------------------
Elite is a seller of used IBM main frame parts and other components. It
acquires used parts by purchasing used IBM mainframes, monitors, keyboards
and printers, which it then strips down.
Sales are conducted primarily through telemarketing services, word of mouth
and computer bulletin boards. Elite, based in Randolph, New Jersey, provides
24-hour parts on demand service.
<PAGE> 18
MANUFACTURING GROUP:
- --------------------
The manufacturing group consists of:
* Burling Instruments, Inc. ("Burling")
* CRA-TEK Corp. ("CRA-TEK")
* US Electrical Products Corp., T/A Gavan-Graham Electric Products
("G-G")
* Hopper Manufacturing Co., Inc. ("Hopper"); and
* MVAK Technologies, Inc. ("MVAK").
BURLING INSTRUMENTS, INC. -
- ---------------------------
Burling, based in Chatham, New Jersey, is a manufacturer of Industrial
Temperature Controls. The typical uses of the product are as Temperature
Controls or Safety Limit Switches. Burling's customer base is broad based
over a variety of Original Equipment Manufacturers (OEM) and those in need of
replacement units. The scope of OEM companies include the manufacture of
tempering ovens for eyeglass stores to large Steam Turbines for the power
industry. Burling has been in business since 1935.
Burling has three basic product lines:
* Differential Expansion
* Solid State; and
* Thermostats.
Burling's marketing activities are co-ordinated by a Vice President of
Marketing and their products are sold by direct telemarketing sales, through
manufacturers reps and by print advertisements in trade registers,
publications and journals. Burling has a number of competitors for each of
its three basic product lines. These range from large, public companies to
small specialty shops.
<PAGE> 19
CRA-TEK Corp. -
- ---------------
CRA-TEK, based in Sacramento, California, is a specialized manufacturer of
custom digital and analog industrial electric controls and components.
CRA-TEK operates through two divisions:
* CRA-TEK Industrial Controls provides turn-key, rebuilt and
retrofit systems to manufacturing, water, and waste water
treatment facilities. It also provides 24-hour on-call service.
It is an authorized factory parts distributor, and custom
manufactures design motor control systems for the industrial
manufacturing and utility industries.
* CRA-TEK Industrial Electric manufactures and supplies custom
digital and analog electrical products to the water and waste
water industry, government, state and local authorities and
private and industrial commercial enterprises. This division
works with the control division to upgrade and retrofit existing
industrial facilities.
CRA-TEK markets its systems through warranty service representatives and
referrals. Electrical contracts are obtained through a bidding process,
referrals and satisfied repeat customers. There are a number of electrical
contractors in Northern California; however CRA-TEK offers custom electrical
applications, system integration, a 24-hour on-site service team, U. L. Panel
Building Abilities, distribution and warranty services at one location.
<PAGE> 20
GAVEN-GRAHAM ELECTRIC PRODUCTS -
- --------------------------------
G-G is a custom manufacturer of electrical products, specializing in digital
and analog panelboards, switchboards, motor controls, and general control
panels. G-G also provides custom manufacturing processes such as shearing,
punching, forming, welding, grinding, painting and assembly of various
component structures.
G-G is a 53 year old company located in Elizabeth, New Jersey. G-G contracts
with State and local authorities, primarily the New York Transit Authority,
the NJ Mass Transit Authority, the NY and NJ Departments of Transportation
and the NJ Turnpike Authority. It also performs work for "Fortune 500"
companies and other much smaller clients.
G-G, having been in business for over 50 years, has an established customer
base which has regularly provided repeat business. Products and services are
also marketed through manufacturers' reps.
Hopper Manufacturing Co., Inc. -
- --------------------------------
Hopper, based in Sacramento California, was acquired by our Company on March
25, 1997, effective as of January 1, 1997. Hopper re-manufactures and
distributes automotive parts, primarily alternators, starters, water
pumps, distributors and smog pumps, to an established client base primarily
in the Pacific states, but also to customers throughout the United States.
Sales and marketing activities are co-ordinated by a sales manager. Product
is sold directly, through manufacturers' reps and by word of mouth referrals.
Hopper competes directly in its primary pacific states markets with national
and small automotive parts suppliers.
<PAGE> 21
MVAK TECHNOLOGIES, INC. -
- -------------------------
MVAK, acquired as of February 1, 1997, re-manufactures and services high-end
vacuum pumps used in the semiconductor, medical and electronics manufacturing
industries. With facilities in Billerica, Massachusetts, East Hanover, New
Jersey and Orlando, Florida, MVAK is geared towards satisfying the stringent
demands of the vacuum industry.
MVAK's sales and marketing activities are co-ordinated by a sales manger.
Product and services are marketed by MVAK's own field sales representatives,
through direct telemarketing services, print advertisements in trade
registers and journals, by referral and through manufacturers' reps.
EMPLOYEES
At December 31, 1996, our Company employed approximately 495 employees. As
of March 27, 1997 our Company employed approximately 595 employees.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
To ACTC's best knowledge, compliance with federal, state and local provisions
enacted or adopted for protection of the environment has had no material
effect upon its operations.
ITEM 2. PROPERTIES
At December 31, 1996, our Company leased all of its operating facilities and
retail outlets totaling approximately 123,000 square feet. These leases
expire at various dates through 2002.
Subsequent to December 31, 1996, with the acquisitions of Hopper, Pizarro,
Norcom and MVAK, our Company now leases approximately 187,000 square feet.
In addition, in March, 1997, Burling purchased its office and manufacturing
facilities comprising approximately 11,000 square feet, of which 7,500 square
feet is for manufacturing and 3,500 square feet is for office space. The
purchase price of $621,000.00 plus closing costs of $24,891.76 for a total
consideration of $645,891.76 was satisfied by issuing 36,422 common shares
at the then current market price of $4.2625 to satisfy the down payment of
$155,250, and through a mortgage of $532,500.00. At closing, Burling received
net proceeds from this transaction of $41,858.24.
ITEM 3. LEGAL PROCEEDINGS
Some of our subsidiary companies are parties to various legal actions as either
plaintiff or defendant. In the opinion of management, these proceedings are
not likely to have a material adverse affect on the financial position or
overall trends in results of our Company. The estimate of the potential
impact on our Company's financial position or overall results of operations
for these proceedings could change in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1996, no
matters were submitted to a vote of our Company's security holders, through
the solicitation of proxies.
<PAGE> 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Our Company's common shares are traded on the NASDAQ under the symbol "ACTC".
The following table sets forth the range of high and low bid quotations for
our Company's common shares for each quarter for the last two fiscal years,
as reported by the OTC Bulletin Board and NASDAQ. Our Company's market
makers are:
Barron Chase Securities, Inc. Dominick & Dominick, Inc.
Gruntel & Co. Incorporated Herzog, Heine, Geduld, Inc.
Interfirst Capital Corp. J. Alexander Securities, Inc.
M. H. Meyerson & Co. H. J. Meyers & Co., Inc.
Nash Weiss/Div of Shatkin Inv. Wm. V. Frankel & Co., Inc.
Waldron & Co., Inc.
The quotations represent the inter-dealer prices without retail markup,
markdown or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
<S> <C> <C>
12/31/94 2 3/4 2 1/2
03/31/95 5 1/3 5
06/30/95 5 1/3 5
09/30/95 9 8 1/8
12/31/95 7 7/8 3 1/4
03/31/96 5 4 5/8
06/30/96 7 7/8 7 1/8
09/30/96 5 1/4 5
12/31/96 5 1/2 5
</TABLE>
Our Company's common shares commenced trading on the over-the-counter market
on December 5, 1994. Prior to that time, there was no market for the
securities of our Company. Our Company's common shares commenced trading on
the NASDAQ in August, 1995.
Current Acquisitions:
Our Company has acquired companies through the issuance of common shares of
our Company at the then current market value. For accounting purposes we
discount the book value of companies acquired by 50% to 75% due to the limited
market of the common shares and the restrictions attached thereto. These
common shares have registration rights and subsequent sale upon registration
could have a negative impact on the market price of our Company's common
shares.
Holders:
As of December 31, 1996, the approximate number of holders of record of our
Company's $0.001 par value common shares was 973. As of March 26, 1997, there
were 975 holders of record.
Dividends:
Holder's of our Company's common shares are entitled to receive such
dividends as may be declared by its Board of Directors. Other than the
distribution of warrants pursuant to the "Joint Actions by Unanimous Consent
of the Board of Directors and Shareholders" dated March 25, 1994, since
inception no dividend's on the Company's common shares have ever been paid,
and our Company does not anticipate that dividends will be paid on our common
shares in the foreseeable future. Holders of our redeemable preferred shares
are entitled to receive an 8% annual cumulative dividend.
Recent Sales of Unregistered Securities:
The following table lists all unregistered securities sold by our Company in
the last three years:
<TABLE>
<CAPTION>
Number of
-----------------------------------------------
Warrants
Convertible
into
Date of Common Preferred Common
Name Note Issue Shares Shares Shares
---- ---- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Equity Tech, LLC 1 Aug-95 20,000
Garrett A. Sullivan 2 Aug-95 100,000
Scott Axon 3 Sep-96 7,500
Larry Axon 3 Sep-96 7,500
Katherine DiGiaccomo 4 Jan-96 20,000
Jack Hammell 4 Jan-96 20,000
John Kunish 4 Jan-96 20,000
Kay Langsford 4 Jan-96 5,000
John Martin 4 Jan-96 5,000
John McCarthy 4 Jan-96 20,000
Garrett Sullivan 4 Jan-96 20,000
Richard Sullivan 4 Jan-96 50,000
Phil Tranbarger 4 Jan-96 5,000
Andrew Werdeman 4 Jan-96 2,000
Kemmerer Trust 5 Mar-96 9,000
North American Corp Con 6 Oct-96 5,000
Vincent A. & Kim N. LoCastro 7 Oct-96 48,000
Bruce Reale Revocable Trust dd 8/1/90 7 Oct-96 48,000
Bruce & Margaret Reale,
Co-Trustees
Capital Alliance Corporation 7 Oct-96 4,000
Baraban Securities 8 Nov-96 2,919
Reovest 9 Nov-96 510
Mario Bucca 10 Dec-96 41,213
Emerson Crooks 10 Dec-96 41,213
Blas H. Morilla 10 Dec-96 41,213
Oscar A. Morilla 10 Dec-96 41,213
Louis R. Notte 10 Dec-96 41,213
Anthony R. Palumbo 10 Dec-96 41,213
J. Alexander Securities 11 Jan-97 2,000
Edelson Technology Partners 12 Feb-97 139,073
Frank Giacona 12 Feb-97 45,445
Alan Kaplan 12 Feb-97 90,986
Ronald M. Kaplan 12 Feb-97 113,792
Maple Business Consultants 12 Feb-97 30,545
H. Sherman Burling, Jr. 13 Mar-97 36,422
Karen Clement 14 Mar-97 1,000
Marc Sherman 15 Mar-97 97,822
Stanley O. Hopper 16 Mar-97 178,162
Stephen M. Hopper 16 Mar-97 942
Ralph E. Davies 16 Mar-97 14,328
The Winn Company 16 Mar-97 3,140
Michael A. Erickson 17 Mar-97 332,836
Joel L. Owens 17 Mar-97 39,028
Donna W. Pizarro 18 Mar-97 231,521
Edward L. Cummings 19 Mar-97 8,872
Barry S. Hanburger 19 Mar-97 8,871
Marc Sherman 19 Mar-97 8,872
Kennedy Capital Management, Inc. 20 Mar-97 150,000
- -----------------------------------------------------------------------------------------------------------------------
Totals 1,991,364 109,000 100,000
=======================================================================================================================
<FN>
- -------------------
<F1> Shares issued in connection with the acquisition of DataBoss software
for Tech-Tools, Inc.
<F2> Mr. Sullivan was issued 100,000 Class H warrants on August 8, 1995,
exercisable for a period of 5 years commencing August 8, 1998.
<F3> Scott and Larry Axom were the original owners of Axcom. Pursuant to a
royalty agreement, the Axom's were to receive a royalty of 2% of the
revenue of ACTC's Software Development and Services Division for a
period of 10 years. In May, 1995, the royalty agreement was terminated
and the Axom's were each issued 15,000 common shares in consideration
for the cancellation of the royalty agreement. The agreement provided
that 7,500 shares each would be restricted and not be registered for a
period of three years.
<F4> These shares were issued, as a bonus, to officers and certain employees
of our Company on January 11, 1996. The shares are restricted and may
not be registered until January 11, 1999.
<F5> These shares were issued in connection with our Company's acquisition
of Burling Instruments, Inc. See page 6.
<F6> These shares were issued in consideration for services rendered.
<F7> These shares were issued in connection with our Company's acquisition
of ATHI. See page 7. Capital Alliance Corporation provided
acquisitions services.
<F8> These shares were issued in consideration for services rendered.
<F9> These shares were issued in consideration for services rendered.
<F10> These shares were issued in connection with our Company's acquisition
of US Electrical Products Corp. See page 8.
<F11> These shares were issued in consideration for services rendered.
<F12> These shares were issued in connection with our Company's acquisition
of MVAK Technologies, Inc. See page 9. Maple Business Consultants
was the broker for this transaction.
<F13> These shares were issued in connection with Burling's purchase of it's
manufacturing and office facility. See page 21.
<F14> These shares were issued as a bonus on March 3, 1997 and are restricted
for a period of three years from the date of issue.
<F15> These shares were issued to Mr. Sherman pursuant to an Amendment to the
Agreement of Sale of UCC. In consideration for our Company's common
shares, Mr. Sherman agreed to (i) cancel one of ACTC's obligations to him
under the Agreement of Sale; (ii) cancel a note payable from UCC to Mr.
Sherman, and (iii) pay down a bank line of credit that UCC had which
Mr. Sherman had personally guaranteed.
<F16> These shares were issued in connection with our Company's acquisition
of Hopper Manufacturing Co., Inc. See page 8. Ralph E. Davies and
The Winn Company were brokers for this transaction.
<F17> These shares were issued in connection with our Company's acquisition
of Norcom Resources, Inc. See page 9.
<F18> These shares were issued in connection with our Company's acquisition
of Pizarro Re-Marketing, Inc. See page 8.
<F19> These shares were issued to employees of UCC for acquisition services
in connection with the acquisitions of Norcom and Pizarro.
<F20> These shares were issued in consideration for $600,000 of working
capital. See Note 11 to the consolidated financial statements.
These shares were issued without registration in reliance upon the exemption
provided by Section 4(ii) of the Securities Act of 1933.
</TABLE>
<PAGE> 23
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Our main objective is to maximize shareholder value over time. To do so, we
have established the following objectives: (1) increasing revenue through
internal growth and by acquisition, (2) maximizing profit, (3) maximizing
our cash flow; and (4) adding economic value in the communities in which we
operate. To achieve these objectives, we will continue to invest in, and
acquire, high-return businesses that complement and add to our existing core
business base. Our Company operates primarily in three business segments, as
previously defined in Item 1 of this Report on Form 10-KSB.
RESULTS OF OPERATIONS:
Record Net Operating Revenue (NOR) of $19,883,400, a 751% increase over
1995, capped a year of unprecedented growth for our Company. NOR increases
are attributable to the growth of our existing businesses and to the growth
contributed by the five acquisitions our Company made during 1996. Three
large acquisitions occurred during August and October, 1996, accounting for
approximately 70% of our Company's 1996 NOR. In 1995 NOR increased by 624%
over 1994 primarily as a result of two acquisitions which occurred in 1995.
During 1996, 70.1% of NOR was contributed by the retail group compared to
72.4% in 1995 and 100.0% 1994. The computer and manufacturing groups
contributed 10.0% and 19.3% of NOR in 1996, compared to 27.6% and 0% of NOR
in 1995 and 0% in 1994.
Cost of goods sold (COGS) increased by 787% from 1995 to 1996 and by 340%
from 1994 to 1995. The growth in COGS from 1994 to 1996 is attributable to
our Company's growth through acquisition. COGS as a percentage of sales was
52.9% in 1996, 50.8% in 1995 and 83.6% in 1994. The increase in COGS from
1995 to 1996 is attributable to our continued growth and to the change in our
Company's business mix, with five acquisitions in 1996. In 1995, we
completed two smaller acquisitions and these broadened our operating business
base in the retail group and added products and services with improved
operating margins.
Our gross profit percentage was 47.1% in 1996, 49.2% in 1995 and 16.4% in
1994. Our gross profit increased by 714% from 1995 to 1996 and by 2073% from
1994 to 1995.
<PAGE> 24
From 1995 to 1996 and from 1994 to 1995, selling, general and administrative
expenses (SG&A) increased by 726% and 40.8%, respectively. SG&A, as a
percentage of NOR, was 40.8%, 42.0% and 165.1% in 1996, 1995 and 1994,
respectively. SG&A includes amortization of goodwill of $295,108 and $38,068
in 1996 and 1995, respectively. There was no amortization of goodwill
expense in 1994. Depreciation and amortization of equipment, leasehold
improvements and purchased computer software included in SG&A amounted to
$206,587, $27,613 and $7,718 in 1996, 1995 and 1994, respectively. The
increases between 1994 and 1996 are again attributable to our Company's
acquisitions during this period.
Operating income increased 645% from 1995 to 1996. From 1994 to 1995, we
improved our results from a ($480,145) operating loss to a $168,574
operating profit. Operating income (loss) as a percentage of NOR was 6.3%,
7.2% and (148.8%) in 1996, 1995 and 1994, respectively.
Interest income increased by 68.1% from 1995 to 1996. There was no interest
income in 1994. The increase in 1996 represents higher average interest
rates on investments in 1996, coupled with the exchange of our Investment in
Cadkey, Inc. for a 76.67% interest in a note receivable. This exchange
resulted in a deminimus loss of $2,399.
Interest expense increased 1,222% from 1995 to 1996, and by 556% from 1994 to
1995. The increases are relatively modest in dollar terms. As a percentage
of NOR, interest expense was 1.0%, 0.6% and 0.7% in 1996, 1995 and 1994,
respectively.
Our Company's effective income tax rate increased to 31% in 1996 from 0% in
1995. In 1995 our Company benefitted from tax net operating loss
carryforwards. In 1994 our Company had a net loss.
FINANCIAL CONDITION:
Our Company's financial condition continues to grow and strengthen. As of
December 31, 1996 cash and cash equivalents totaled $809,711, up from
$125,469 in 1995. Cash of $1,501,660 and $284,983 was used in operating
activities in 1996 and 1994, respectively, compared to $127,440 of cash
provided by operating activities in 1995. During 1996 we used cash to reduce
accounts payable and invest in inventory and prepaid expenses. The net
effect of these three activities was to use $2,956,524 of operating cash in
1996. One of our Company's objectives is to maximize our cash flow as we
believe it offers evidence of financial strength. As our Company experiences
substantial growth, our investment needs are more substantial than those of
more mature companies with modest investment needs. So is our need to use
cash in operating activities to finance growth in our operating assets and
liabilities and to finance this growth through our sources of financing
activities.
Inventory levels, particularly finished goods, increased significantly in
1996 over 1995. This increase was primarily attributable to our growth
through acquisitions and to the resulting increased level of business.
Accounts payable and accrued expenses also increased significantly from 1995
to 1996, again attributable to our growth and the resulting increased level
of business. The increase in accounts and unbilled receivables from 1995 to
1996 reflects revenue growth from both existing and acquired businesses. No
single customer accounts for more than 10% of our Company's accounts and
unbilled receivables.
<PAGE> 25
Investing activities provided $771,669 of cash in 1996 and used $100,793 and
$102,599 of cash in 1995 and 1994, respectively. In 1996, investing
activities consisted principally of payments received on notes receivable
offset by payment for equipment and leasehold improvements, increases in
other assets and the costs associated with our acquisitions. In 1995,
investing activities consisted principally of costs associated with our
acquisitions, increases in other assets, payment for equipment and leasehold
improvements, offset by cash received from notes receivable. In 1994,
investing activities primarily consisted of acquiring a note receivable and
payments for equipment and leasehold improvements.
In 1996 our Company exchanged its 29% interest in Cadkey, Inc., for a 76.67%
interest in a note receivable from a company that purchased a product line
from Cadkey. We also received payment of $420,139 on a note receivable that
we had from Cadkey, Inc. As a result, as of December 31, 1996, our Company
no longer has any involvement with or interest in Cadkey, Inc.
Our Company obtained positive cash flows of $1,414,233, $96,171 and $386,962
from financing activities in 1996, 1995 and 1994, respectively. The major
financing sources of cash in 1996 were from bank borrowing and the sale of
our Company's common shares. The major financing applications of cash in 1996
were for payments on notes payable and capital lease obligations. The major
financing source of cash in 1995 was from the sale of our Company's common
shares. The major financing applications of cash in 1995 were for payments on
long-term debt, notes payable, capital lease obligations and the redemption
of preferred shares. The major financing sources of cash in 1994 were from
the sale of our Company's preferred and common shares and from bank
borrowing. There were no major financing applications of cash in 1994.
Other sources of liquidity include our Company's ability to obtain term loans
and revolving lines of credit for its operating subsidiaries, the sale of
warrants and the sale of common and preferred shares. We believe that we
have the financial resources to meet our future business requirements,
including sustaining our growth through acquisition.
OUTLOOK:
As a rapidly growing Company that currently generates all of its operating
income from within the United States, we are uniquely positioned to benefit
from continued growth from existing business segments, and growth through
acquisitions both domestically and abroad. Our strategy has been, and
continues to be, to invest in, and acquire, high return businesses that
complement and add to our existing business base.
Management's statements contained in this "Management's Discussion and
Analysis of Results of Operations and Financial Condition" are based on
current expectations. These statements are forward looking in nature, and
actual results may differ materially.
<PAGE> 26
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of our Company at December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996 and the
Report of Management and the Report of Independent Auditors thereon are
incorporated by reference from the Registrant's 1996 and 1995 Consolidated
Financial Statements on pages 36 through 63.
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>
For the year ended December 31,
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current Assets $13,886,689 $1,408,866 $180,856 $96,997 $81,109
Land, Equipment And Leasehold
Improvements 2,915,056 138,489 36,270 15,314 34,738
Goodwill 14,267,985 906,626 0 0 0
Purchased Computer Software 638,397 667,443 450,000 0 0
Other Assets 1,499,966 1,010,061 692,560 10,449 0
-----------------------------------------------------------------------
Total Assets $33,208,093 $4,131,485 $1,359,686 $122,760 $115,847
-----------------------------------------------------------------------
Current Liabilities $12,214,536 $1,003,292 $222,596 $126,905 $77,850
Capital Lease Obligations 138,444 19,251 9,084 0 0
Long Term Debt 1,247,158 0 0 0 0
Minority Interest 456,139 57,002 0 0 0
Redeemable Preferred Stock 10,900,000 0 0 0 0
Preferred Shares 0 0 200,000 0 0
Common Shares 5,799 2,268 1,337 1,161 1,000
Additional Paid In Capital 7,928,198 3,358,072 1,414,429 0 0
Retained Earnings 317,819 (308,400) (487,760) (5,306) 36,997
-----------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $33,208,093 $4,131,485 $1,359,686 $122,760 $115,847
-----------------------------------------------------------------------
Net Operating Revenue $19,883,400 $2,335,999 $322,769 $410,346 $594,004
Cost Of Goods Sold 10,523,594 1,186,213 269,868 246,043 354,935
-----------------------------------------------------------------------
Gross Profit 9,359,806 1,149,786 52,901 164,303 239,069
Operating Expenses 8,104,754 981,212 533,046 165,040 243,243
-----------------------------------------------------------------------
Operating Income (Loss) 1,255,052 168,574 (480,145) (737) (4,174)
Interest Income 125,935 74,899 0 0 0
Interest Expense (200,291) (15,150) (2,309) (7,625) (18,897)
Minority Interest (132,331) (48,963) 0 0 0
Provision for income tax (362,146) 0 0 0 3,650
-----------------------------------------------------------------------
Net Income (Loss) 686,219 179,360 (482,454) (8,362) (19,421)
Preferred Dividends (60,000) 0 0 0 0
-----------------------------------------------------------------------
Net income (loss) applicable to
common shareholders $626,219 $179,360 ($482,454) ($8,362) ($19,421)
=======================================================================
Net Income (Loss) Per Common Share $0.19 $0.10 ($0.82) ($0.02) ($19.42)
=======================================================================
Refer to pages 5 through 9 for a description of the business combinations that
took place in the above years.
Refer to page 56 through 58 for a description of the segments of business that
our Company operates in.
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE> 27
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all directors and
executive officers of our Company and all persons nominated or chosen to
become a director, indicating all positions and offices with our Company held
by each such person and the period during which he or she has served as a
director.
The principal executive officers and directors of our Company are as follows:
<TABLE>
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
<CAPTION>
POSITION
NAME AGE POSITION HELD SINCE
---- --- -------- ----------
<S> <C> <C> <C>
Richard J. Sullivan 57 Chairman of the Board of Directors, May, 1993
<F1><F2> Chief Executive Officer, and Secretary
Garrett A. Sullivan 62 Director, President and Chief Operating March, 1995
<F1><F3> Officer
Daniel E. Penni 49 Director March, 1995
<F1><F2><F3>
Angela M. Sullivan 37 Director April, 1996
<F1><F2>
Arthur F. Noterman 55 Director February, 1997
<F1><F3>
David A. Loppert 42 Vice President, Treasurer and Chief February, 1997
Financial Officer
<FN>
- --------------
<F1> Member of the Executive Committee
<F2> Member of the Compensation Committee
<F3> Member of the Audit Committee
</TABLE>
[FN]
- -------------------
1. Mr. Lance McIntosh was a Director of our Company from May, 1993 to
March, 1995. Mr McIntosh resigned for personal reasons.
2. Mr. Stephen Trocke acted as Chief Financial Officer from May, 1993 to
May, 1994. Mr. Trocke left our Company for personal reasons.
3. Gary A. Gray was a Director from May, 1993 to December, 1995, and
President, Chief Financial Officer and Secretary from May, 1993 to
March, 1995. Mr. Grey is President of a subsidiary and of a division of
our Company and resigned to more fully pursue his duties with that
subsidiary and that division.
4. Angela M. Sullivan, Director, is married to Richard J. Sullivan,
Chairman of the Board of Directors. There are no other family
relationships between the officers and directors.
5. Mr. Noterman was appointed to the Board of Directors to fill a vacancy.
6. All directors serve for a term of one year until the annual general
meeting of the shareholders.
Following is a summary of the background and business experience and
descriptions of the Directors and Executive Officers:
Richard J. Sullivan: Mr. Sullivan was elected to the Board of Directors,
and named Chief Executive Officer, in May, 1993. He is Chairman of the
Executive and Compensation committees. He was appointed Secretary in March,
1996. Mr. Sullivan is currently Chairman of Great Bay Technology, Inc., an
affiliate of our Company. From August 1989 to December 1992, Mr. Sullivan
was Chairman of the Board of Directors of Consolidated Convenience Systems,
Inc., in Springfield, Missouri. He has been the Managing General Partner of
The Bay Group, a successful merger and acquisition firm in New Hampshire
since February, 1985. Mr. Sullivan was formerly Chairman and Chief Executive
Officer of Manufacturing Resources, Inc., an MRP II software company in
Boston, Massachusetts and was Chairman and CEO of Encode Technology, a
"Computer-Aided Manufacturing" Company, in Nashua, New Hampshire from
February, 1984 to August, 1986.
Garrett A. Sullivan: Mr. Sullivan was named President, Secretary and
Acting Chief Financial Officer in March, 1995. He was elected to the Board
of Directors in August, 1995. He was an Executive Vice President of
Envirobusiness, Inc., an environmental consulting firm from 1993 to
<PAGE> 28
1994. He was previously a partner in the Bay Group, a Merger and Acquisition
firm in New Hampshire from 1988 to 1993. Mr. Sullivan was President of Granada
Hospital Group, Burlington, Massachusetts, the world's largest television
system supplier from 1981 to 1988. Mr. Sullivan received a Bachelor of Arts
Degree from Boston University in 1960 and obtained an MBA from Harvard
University in 1962.
Daniel E. Penni: Mr. Penni has served as a Director since March, 1995. He is
currently an Insurance Branch Manager for Arthur J. Gallagher & Co. He has
worked in many sales and administrative roles in the insurance business since
1969. He was President of the Boston Insurance Center, Inc., an Insurance
Company until 1988. Mr. Penni was founder and President of BIC Equities, Inc.,
a broker/dealer registered with the NASD. Mr. Penni graduated with a Bachelor
of Sciences degree in 1969 from the School of Management at Boston College.
Angela M. Sullivan: Ms. Sullivan was elected to the Board of Directors in
April, 1996. From 1988 to present Ms. Sullivan has been a partner in the Bay
Group, a private Merger and Acquisition firm, President of Great Bay
Technology, Inc., an affiliate of our Company, and President of Spirit Saver,
Inc. Ms. Sullivan received a Bachelor of Science degree in Business
Administration in 1980 from Salem State College.
Arthur F. Noterman: Mr. Noterman, a Chartered Life Underwriter, was appointed,
in February 1997, a Director of our Company to fill a vacancy and is Chairman
of the Audit Committee. Since 1965, Mr. Noterman has represented various
national insurance companies in assisting primarily high net worth individuals
and smaller companies in determining appropriate insurance and investment
strategies. An operator of his own insurance agency, Mr. Noterman is a
registered NASD broker affiliated with a Chicago, IL. registered Broker/Dealer.
Mr. Noterman attended Northeastern University from 1965 to 1975, and obtained
the Chartered Life Underwriters Professional Degree in 1979 from The American
College, Bryn Mawr, Pennsylvania. Mr. Noterman is a licensed Life and Health
Insurance Broker, and holds NASD Series 6, 7 and 63 licenses.
David A. Loppert: Mr. Loppert joined our Company as Vice President, Treasurer
and Chief Financial Officer in February, 1997. From 1996 to 1997 he was Chief
Financial Officer of Bingo Brain, Inc., a manufacturer of a hand held
electronic bingo card manager. From 1994 to 1996 he was Chief Financial Officer
of C.T.A. America, Inc., and Ricochet International, L.L.C., affiliated
companies in the retail footwear business. From 1991 to 1994 he was a business
recovery consultant. From 1984 to 1991 he was Senior Vice President,
Acquisitions and Due Diligence, of Associated Financial Corporation, a
California real estate syndicator. Mr. Loppert started his financial career
with Price Waterhouse in 1988, in Johannesburg, South Africa, before moving to
their Los Angeles Office in 1980 where he rose to the position of Senior
Manager. He holds Bachelor Degrees in both Accounting and Commerce, as well as
a Higher Diploma in Accounting, all from the University of the Witwatersrand,
Johannesburg, South Africa. Mr. Loppert, a United States Citizen, is
designated a Chartered Accountant (South Africa) [CA(SA)], the US equivalent of
a CPA.
Identification of Certain Significant Employees: Our Company has entered into
employment
<PAGE> 29
agreements with key officers at each of its subsidiary companies. The
agreements are for periods of two to five years, and some provide for
bonus arrangements based on the earnings of the particular subsidiary.
Directorships: No director or nominee for director holds a directorship in
any other company with a class of securities registered pursuant to Section
12 of the Securities Exchange Act of 1934 or subject to the requirements of
Section 15(d) of such Act or any company registered as an investment company
under the Investment Company Act of 1940. The term of office for each Director
is one year.
During the last five years, no events required to be described in Item 401(d)
of Regulation SB in respect of any of the persons named above has occurred.
ITEM 10. EXECUTIVE COMPENSATION
During fiscal 1996, and as of the date of filing this report, no compensation
has been paid, nor have there been compensation arrangements or plans, other
than what has been indicated below.
The following table sets forth certain summary information concerning the
total remuneration paid or accrued by our Company, to or on behalf of the
Company's Chief Executive Officer and to our Company's other executive
officers determined as of the end of each of the last three years.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
--------------------------------- ---------------------- ----------------------
Other Restricted
Name and Principal Annual Stock Options/ LTIP All Other
Position <F1> Year Salary Bonus Compensation Awards SARs <F5> Payouts Compensation
------------- ---- ------ ----- ------------ ------ --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard J. Sullivan 1996 N/A $0 $11,793 50,000 1,130,000 $0 $0
Chairman, CEO and 1995 N/A $0 $0 0 0 $0 $0
Secretary 1994 N/A $0 $0 0 0 $0 $0
Garrett A. Sullivan <F2> 1996 $113,966 $25,000 $0 20,000 150,000 $0 $0
Director, President 1995 $27,745 $0 $0 0 0 $0 $0
and COO 1994 N/A $0 $0 0 0 $0 $0
Gary A. Gray <F3> 1996 N/A $0 $0 0 0 $0 $0
1995 $56,457 $0 $0 0 0 $0 $0
1994 $51,346 $0 $0 0 0 $0 $0
David A. Loppert <F4> 1996 N/A $0 $0 0 0 $0 $0
Vice President, Treasurer 1995 N/A $0 $0 0 0 $0 $0
and Chief Financial Officer 1994 N/A $0 $0 0 0 $0 $0
<FN>
- -------------------
<F1> No executive officer serves pursuant to an employment contract
<F2> Mr. Sullivan was Secretary until March, 1996 and Acting Chief
Financial Officer until February, 1997
<F3> Mr. Gray was President, Secretary and Chief Financial Officer from
May, 1993 to March, 1995.
<F4> Mr. Loppert joined our Company in February, 1997
<F5> Indicates number of securities underlying options
</TABLE>
<PAGE> 30
Stock Options
The following table contains information concerning our Company's grant of
Stock Options under our Company's 1996 Stock Option Plan and another plan to
the Named Officer's during our Company's last fiscal year.
<TABLE>
Option Grants in Last Fiscal Year
---------------------------------
<CAPTION>
Individual Grants
---------------------------------------------------------------
Number of % of Total
Securities Options Grant Date
Underlying Granted to Exercise Present
Options Employees Price Expiration Value <F3>
Name Granted in 1996 ($/Sh) Date ($)
---- ------- ------- ------ ---- ---
<S> <C> <C> <C> <C> <C>
Richard J. Sullivan <F1> 500,000 22.9% $4.25 08/04/02 $645,000
Richard J. Sullivan <F2> 630,000 28.9% $4.46 10/11/01 $812,700
Garrett A. Sullivan <F1> 150,000 6.9% $4.25 08/04/02 $193,500
<FN>
- -------------------
<F1> Options granted under the 1996 Stock Option Plan were granted at an
exercise price equal to 85% of the fair market value of our Company's
common shares on the grant date. These options are exercisable over a
five year period beginning with the first anniversary of the grant
date. The grant date of the options was August 5, 1996.
<F2> Options granted under a special plan set up in June, 1996, at an
exercise price equal to the fair market value of our Company's common
shares on the date of the grant. These options are exercisable
immediately over a five year period. The grant date of the options
was October 11, 1996.
<F3> Based on the grant date present value of $1.29 per option share which was
derived using the Black-Scholes option pricing model in accordance with
rules and regulations of the Securities Exchange Commission and is not
intended to forecast future appreciation of our Company's common share
price. The Black-Scholes model was used with the following assumptions:
dividend yield of 0%; expected volatility of 68.9; risk-free interest
rate of 8.5%; and expected lives of 5 years.
</TABLE>
Compensation Pursuant to Plans:
Other than disclosed above, our Company has no plans pursuant to which cash
or non-cash compensation was paid or distributed during the last fiscal year,
or is proposed to be paid or distributed in the future, to the individuals
and group described above in this Item.
Compensation of Directors:
Directors of our Company who are not employees of the Company may receive a
fee of $250 per meeting for their attendance at meetings of our Company's
Board of Directors, and are entitled to reimbursement for reasonable travel
expenses.
Termination of Employment and Change of Control Arrangement:
Except as provided for in our Company's 1996 Non-Qualified Stock Option Plan,
and the 1996 Option Plan for options granted to Richard J. Sullivan, our
Company has no compensatory plans or arrangements, including payment to be
received from the Company, with respect to any individual named above for
the latest or next preceding fiscal year, if such plan or arrangement results
or will result from the resignation, retirement or any other termination of
such individual's employment with our Company, or from a change in control of
our Company or a change in the individual's responsibilities following a
change in control.
<PAGE> 31
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There were 5,798,701 common shares, $0.001 par value, outstanding at December
31, 1996, and there are 7,358,692 common shares, $0.001 par value,
outstanding at March 27, 1997 and 109,000 redeemable preferred shares,
$100.00 par value, outstanding at December 31, 1996 and March 27, 1997. The
following table tabulates holdings of shares of our Company by each person
who, subject to the above, at the date of this Report on Form 10-KSB, holds
of record, or is known by management to own beneficially more than 5.00% of
the common shares and, in addition, by all directors and executive officers
of our Company individually and as a group.
<TABLE>
<CAPTION>
Warrants
Number of Percent of Shares Under Convertible
Common Outstanding Exercisable into Common
Name Shares Shares Option Shares
- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C>
The Bay Group <F1> 22,222 0.30% - 600,000
Cede & Company <F2> 776,726 10.56% - -
Great Bay Technology, Inc. <F1> 405,127 5.51% - 250,000
Rudolph Kunzli 656,570 8.92% - -
Vincent A. & Kim N. LoCastro <F2> 776,726 - - 480,000
David A. Loppert <F3> - - 50,000 -
Arthur F. Noterman <F3> - - 25,000 -
Daniel E. Penni 41,765 0.57% 25,000 -
The Bruce Reale Trust dated 8/1/90 776,726 10.56% - 480,000
Bruce & Margaret Reale, Co-Trustees
Marc Sherman 606,694 8.24% - -
Angela M. Sullivan <F1> - - 25,000 -
Garrett A. Sullivan 20,000 0.27% 150,000 200,000
Richard J. Sullivan <F1> 50,000 0.68% 1,130,000 -
All Directors and Officers as a
group 539,114 7.33% 1,405,000 800,000
<FN>
- -------------------
<F1> Richard J. Sullivan, Angela M. Sullivan and Stephanie Sullivan are the
control persons of Great Bay Technology, Inc. The Bay Group is
controlled by Richard J. Sullivan and Angela M. Sullivan.
<F2> The Registrant believes that Cede and Company either purchased from or
holds these common shares on behalf of Vincent A. & Kim N. LoCastro.
<F3> Options granted on February 3, 1997 pursuant to the Option Plan.
</TABLE>
The following tabulates holdings of warrants to be distributed and owned
beneficially by all directors and officers of our Company individually and as
a group.
<TABLE>
<CAPTION>
Class of Number of % of
Name Warrants <F1> Warrants <F1> Class
- ---- ------------- ------------- -----
<S> <C> <C> <C>
Richard J. Sullivan <F2> Class H 300,000 66.67%
Class I 300,000 66.67%
Class M 250,000 100.00%
Garrett A. Sullivan Class H 100,000 22.22%
Class I 100,000 22.22%
Daniel E. Penni - - -
Angela M. Sullivan - - -
Arthur F. Noterman - - -
David A. Loppert - - -
All Directors and Officers as a Class H 400,000 88.89%
group Class I 400,000 88.89%
Class M 250,000 100.00%
<FN>
- -------------------
<F1> Pursuant to Rule 13(d)(3) under the Securities Exchange Act of 1934, as
amended, beneficial ownership of a security interest consists of sole
or shared voting power (including the power to vote or direct the
voting) and/or sole or shared investment power (including the power
to dispose or direct the disposition) with respect to a security
whether through a contract, arrangement, understanding, relationship
or otherwise. Unless otherwise indicated, each person indicated
above has sole power to vote, or dispose or direct the disposition of
all shares beneficially owned, subject to applicable community
property laws.
<F2> Represents warrants owned by The Bay Group and Great Bay Technology,
Inc. Richard J. Sullivan and Angela M. Sullivan are the control
persons of The Bay Group. Richard J. Sullivan, Angela M. Sullivan
and Stephanie Sullivan are the control person of Great Bay
Technology, Inc.
</TABLE>
<PAGE> 32
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
Changes in Control:
There are no arrangements, known to our Company, including any pledge by any
person of securities of our Company, the operation of which may at a
subsequent date result in a change of control of our Company.
Related Party Transactions:
For services rendered in connection with acquisitions which took place in
1996 and 1995, our Company paid The Bay Group, $457,152 and $126,500,
respectively, for investment banking services. The Bay Group is controlled
by Richard J. Sullivan and Angela M. Sullivan.
Consulting Agreements:
On October 16, 1996 our Company entered into a Consulting Agreement
("Agreement") with Joseph, Brian & Christopher Associates, a Pennsylvania
partnership ("Consultant"). We engaged the Consultant to render acquisition
advice to our Company and to ACT Communications, Inc., a wholly owned
subsidiary of ACTC. The term of the Agreement is for a period of three years
ending September 30, 1999 and the consulting fee is $20,000 per month.
Thereafter, the Agreement may be extended by mutual agreement. The general
partners of the Consultant are the selling shareholders of ATHI, a company we
acquired effective as of September 1, 1996.
We also entered into a two-year consulting agreement for acquisition services
with an individual for $2,000 per month commencing in December, 1996.
Earnout Agreements:
Pursuant to the Agreement of Plan and Merger (the "Plan") by and amongst our
Company, ATHI and ATHI's selling shareholders (the "ATI Shareholders"), on or
before April 30, 2002, ACTC will deliver to the ATI Shareholders an
aggregate additional consideration ("Additional Consideration") equal to
three (3) times the average annual EBDIT of ATHI, (as that term is defined
below) for the five year periods commencing October 1, 1996 and ending
September 30, 2001 (the "Payout Period"); provided however, that (i) if the
average annual EBDIT is less than $2 million, the ATI Shareholders shall not
be entitled to receive any additional consideration and (ii) the amount
payable to the ATI Shareholders as Additional Consideration shall not exceed
$15 million. EBDIT is defined, for purposes of the payout of the Additional
Considerations, as the earnings of ATHI, before depreciation, interest and
taxes, computed on the accrual basis of accounting in accordance with
generally accepted accounting principles consistently applied, with certain
provisions as provided for in the Plan.
Put Options:
We entered into put options with the selling shareholders of various
companies we acquired in 1996.
ATHI:
- -----
From and after January 1, 2001 until January 1, 2002, the ATI Selling
Shareholders shall have the right to sell to ACTC up to Six Hundred Eighteen
Thousand One Hundred Eighty (618,180) of ACTC's common shares (the "Option
Shares"), and ACTC shall purchase such Option Shares upon the following
terms:
1. The purchase price for each Option Share sold by any holder pursuant to
the Put Option shall be an amount equal to (x) 80% of the average
annual EBDIT for the two (2) year period commencing on January 1,
2000 and ending on December 31, 2001 divided by (y) 618,180.
2. The Put Option shall only be exercisable by the ATI Shareholders,
Shares on the Effective Date ("Nominees") and the heirs of any ATI
Shareholder (an "Heir"); in no event shall any Put Option be
exercisable by any person or entity that is not an ATI Shareholder or
an Heir; provided however that the Put Option may be exercised by a
trust which has been, or may be, set up by an ATI Shareholder or
Nominee for the benefit of an ATI Shareholder, Nominee or Heir.
ACTC has similar Put Options with the selling shareholders of Atlantic,
Burling, CRA-TEK, Elite, Norcom, Pizarro, UCC and US Electrical Products
Corp., all of whom retained a 20% interest in the respective subsidiary when
ACTC acquired such subsidiary.
Employment Agreements
At the time ACTC acquired a particular company, we entered into Employment
Agreements with key selling shareholder/officers. The agreements are for
periods of one to three years, and some provide for bonus arrangements based
on the earnings of the subsidiary.
<PAGE> 33
ITEM 13: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K:
(a) 1. Financial Statements and Schedules
The consolidated financial statements listed in the accompanying
index to consolidated financial statements as set forth under
Item 7 of this report on Form 10-KSB are filed or incorporated by
reference as part of this annual report.
Financial statement schedules have been omitted since they are
either not required, not applicable, or the information is
otherwise included.
2. Exhibits
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as part of this annual report
(b) Reports on Form 8-K
Our Company filed the following reports on Form 8-K during the
fourth quarter of 1996:
1. A report on Form 8-K was filed on October 24, 1996 in order
to report the 100% purchase of Advanced Telecom Holdings, Inc.
There were no financial statements filed with this Form 8-K;
however an extension was requested and a Form 8-K/A was filed on
December 17, 1996 to file the audited financial statements of
this significant purchase.
2. A report on Form 8-K was filed on October 25, 1996 in order
to report the 80% purchase of CRA-TEK Corp. There were no
financial statements filed with this Form 8-K; however an
extension was requested and a Form 8-K/A was filed on December
30, 1996 to report that no financial statements were required to
be filed.
3. A report on Form 8-K was filed on October 27, 1996 in order
to report the 80% purchase of Universal Commodities Corp. There
were no financial statements filed with this Form 8-K; however an
extension was requested and a Form 8-K/A was filed on January 15,
1997 to report that no financial statements were required to be
filed.
(c) Exhibit Listing
<TABLE>
<C> <S>
(1) Not Applicable
(2) Not Applicable
(3) Articles of Incorporation, Amendments and Bylaws incorporated by
reference to Form S-1 filed on June 3, 1994
(4) Specimen certificate for Common Stock incorporated by reference
to Amendment 2 to Form S-1 filed on August 14, 1994
(5) Not Applicable
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10.1) Reseller Agreement between the Company and Oracle Corporation
incorporated by reference to Amendment 1 to Form S-1 filed on
July 26, 1994.
(10.2) Vendor Services Agreement between the Company and Computer
Associates International incorporated by reference to Amendment 1
to Form S-1 filed on July 26, 1994.
(10.3) Dealer License Agreement between the Company and American Business
Systems incorporated by reference to Amendment 1 to Form S-1 filed on
July 26, 1994
(10.4) Reseller Software License Agreement between the Company and
Applied Automation Techniques, Inc. incorporated by reference to
Amendment 1 to Form S-1 filed on July 26, 1994
(10.5) Contract Programmer Agreement between the Company and Telxon
Corporation incorporated by reference to Amendment 1 to Form S-1
filed on July 26, 1994
(10.6) Agreement between Company and warrantholders incorporated by reference
to Amendment 3 to Form S-1 filed on September 16, 1994
(10.7) Joint Marketing Agreement incorporated by reference to Form S-1 filed
July 26, 1994
(10.8) Agreement and Plan of Merger among the Company, ACT Communication, Inc.
and Advanced Telecom Holdings, Inc. incorporated by reference to Form
8-K, event date October 11, 1996
(10.9) Agreement and Plan of Reorganization between the Company, Craig Nelson
and Rigo Felix incorporated by reference to Form 8-K, event date
September 23, 1996
(10.10) Agreement between the Company, Universal Commodities Corp. and Marc
Sherman incorporated by reference to Form 8-K, event date November 14,
1996
(11) Not Applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Not Applicable
(18) Not Applicable
(19) Not Applicable
(20) Not Applicable
(21) Subsidiaries
(22) Not Applicable
(23) Not Applicable
(24) Not Applicable
(25) Not Applicable
(26) Not Applicable
(27) Financial Data Schedule
</TABLE>
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in St. Louis
County, State of Missouri, on March 27, 1997.
APPLIED CELLULAR TECHNOLOGY, INC.
BY /s/ David A. Loppert
-------------------------------------
David A. Loppert
Vice President, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
/s/ Richard J. Sullivan Chairman of the Board of Directors,
- ---------------------------------------- Chief Executive Officer and Secretary
/s/ Garrett A. Sullivan Director, President and Chief Operating Officer
- ----------------------------------------
/s/ Angela M. Sullivan Director
- ----------------------------------------
/s/ Daniel E. Penni Director
- ----------------------------------------
/s/ Arthur F. Noterman Director
- ---------------------------------------
/s/ David A. Loppert Vice President, Treasurer;
- --------------------------------------- Chief Financial Officer (Principal
Financial and Accounting Officer)
<PAGE> 35
</TABLE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<CAPTION>
[Item 14 (a)] Reference Page
--------------
<S> <C>
Report Of Management ....................................... 36
Independent Auditors' Report................................ 37
Consolidated Balance Sheets -
December 31, 1996 and 1995............................... 38
Consolidated Statements Of Operations for
the years ended December 31, 1996, 1995 and 1994........ 39
Consolidated Statements Of Cash Flows for
the years ended December 31, 1996, 1995 and 1994........ 40
Consolidated Statements Of Shareholders' Equity for
the years ended December 31, 1996, 1995 and 1994........ 41
Notes To Consolidated Financial Statements
December 31, 1996 and 1995............................... 42-63
</TABLE>
<PAGE> 36
REPORT OF MANAGEMENT
The management of Applied Cellular Technology, Inc. is responsible for the
integrity and objectivity of the accompanying consolidated financial
statements and related information. The statements have been prepared in
conformity with generally accepted accounting principles, and include
amounts that are based on our best judgments with due consideration given to
materiality.
Management maintains a system of internal accounting controls. This system
is designed to provide reasonable assurance, at reasonable cost, that assets
are safeguarded and that transactions and events are recorded properly.
While our Company is organized on the principles of decentralized
management, appropriate control measures are also evidenced by well-defined
organizational responsibilities, management selection, development and
evaluation processes, communicative techniques, financial planning and
reporting systems and formalized procedures.
It has always been the policy and practice of our Company to conduct our
affairs ethically and in a socially responsible manner.
Rubin, Brown, Gornstein & Co. LLP., independent auditors, is engaged to
audit our financial statements. RBG & Co. obtains and maintains an
understanding of our internal controls and conducts such tests and other
auditing procedures considered necessary in the circumstances to express
their opinion in the report that follows.
The Audit Committee of the Board of Directors, composed of a majority of
outside directors, may meet periodically with the independent auditors and
management to review their work and confirm that they are properly
discharging their responsibilities. In addition, the independent auditors
are free to meet with the Audit Committee without the presence of management
to discuss the results of their work and observations on the adequacy of
internal financial controls, the quality of financial reporting and other
relevant matters.
/s/ Richard J. Sullivan /s/ Garrett A. Sullivan /s/ David A. Loppert
- ---------------------------- ----------------------- ----------------------
Richard J. Sullivan Garrett A. Sullivan David A. Loppert
Chairman, Board of Directors President and Chief Vice President,
and Chief Executive Officer Operating Officer Treasurer and Chief
Financial Officer
March 7, 1997
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Applied Cellular Technology, Inc.
We have audited the accompanying consolidated balance sheets of Applied
Cellular Technology, Inc. and subsidiaries as of December 31, 1996 and 1995
and the related consolidated statements of operations, cash flows and
shareholders' equity for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Applied Cellular Technology, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31 1996, in conformity with generally accepted accounting
principles.
/s/ Rubin, Brown, Gornstein & Co., LLP
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
March 7, 1997
<PAGE> 38
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
DECEMBER 31,
------------------------------
1996 1995
------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 809,711 $ 125,469
Accounts receivable and unbilled receivables (net of allowance for
doubtful accounts of $101,000 in 1996) 6,874,808 626,659
Inventories 4,290,681 504,859
Notes receivable 1,646,773 100,039
Prepaid expenses 264,716 51,840
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 13,886,689 1,408,866
LAND, EQUIPMENT AND LEASEHOLD IMPROVEMENTS 2,915,056 138,489
INVESTMENT IN CADKEY, INC. -- 577,399
NOTES RECEIVABLE 575,000 292,627
GOODWILL 14,267,985 906,626
PURCHASED COMPUTER SOFTWARE 638,397 667,443
OTHER ASSETS 924,966 140,035
- -------------------------------------------------------------------------------------------------------------
$ 33,208,093 $ 4,131,485
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 3,920,057 310,094
Current maturities of long-term debt 333,833 --
Current portion of capital lease obligations 159,227 23,360
Accounts payable and accrued expenses 7,280,419 669,838
Due to investment company 521,000 --
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 12,214,536 1,003,292
- -------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt 1,247,158 --
Capital lease obligations 138,444 19,251
- -------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 1,385,602 19,251
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 13,600,138 1,022,543
- -------------------------------------------------------------------------------------------------------------
MINORITY INTEREST 456,139 57,002
- -------------------------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED SHARES 10,900,000 --
- -------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares:
Authorized 20,000,000 and 10,000,000 shares in 1996 and
1995, respectively, of $.001 par value; issued and outstanding
5,798,701 and 2,267,749 shares in 1996 and 1995, respectively 5,799 2,268
Additional paid-in capital 7,928,198 3,358,072
Retained earnings (deficit) 317,819 (308,400)
- -------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 8,251,816 3,051,940
- -------------------------------------------------------------------------------------------------------------
$ 33,208,093 $ 4,131,485
=============================================================================================================
- ------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 2
</TABLE>
<PAGE> 39
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
NET OPERATING REVENUE $ 19,883,400 $ 2,335,999 $ 322,769
COSTS OF GOODS SOLD 10,523,594 1,186,213 269,868
- --------------------------------------------------------------------------------------------------------
GROSS PROFIT 9,359,806 1,149,786 52,901
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,104,754 981,212 533,046
- --------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1,255,052 168,574 (480,145)
INTEREST INCOME 125,935 74,899 --
INTEREST EXPENSE (200,291) (15,150) (2,309)
- --------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 1,180,696 228,323 (482,454)
PROVISION FOR INCOME TAXES 362,146 -- --
- --------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 818,550 228,323 (482,454)
MINORITY INTEREST 132,331 48,963 --
- --------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 686,219 179,360 (482,454)
PREFERRED STOCK DIVIDENDS 60,000 -- --
- --------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ 626,219 $ 179,360 $(482,454)
========================================================================================================
NET INCOME (LOSS) PER COMMON SHARE $ .19 $ .10 $ (0.82)
========================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,329,099 1,792,939 587,797
========================================================================================================
- ------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 3
</TABLE>
<PAGE> 40
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 626,219 $ 179,360 $ (482,454)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 712,237 132,690 10,912
Minority interest 132,331 48,963 --
Loss on sale of equipment -- 519 --
Registration costs - shares issued -- -- 129,750
Loss on disposal of investment in Cadkey, Inc. 2,399 -- --
Imputed interest - notes payable - officers -- 6,614 --
Net change in operating assets and liabilities (2,974,846) (240,706) 56,809
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,501,660) 127,440 (284,983)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in notes receivable - officers 607,678 (792) 2,832
(Increase) decrease in note receivable - shareholder -- 108,437 (90,058)
Payments received on note receivable - Cadkey, Inc. 563,953 240,632 --
Payments for equipment and leasehold improvements (109,483) (40,199) (14,923)
Payments for costs of asset and business acquisitions
(net of cash balances acquired) (81,147) (302,563) --
Increase in other assets (209,332) (106,308) (450)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 771,669 (100,793) (102,599)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts borrowed (paid) on notes payable - bank 891,399 (171,048) 37,175
Proceeds from long-term debt 20,875 -- --
Payments on long-term debt (138,823) -- --
Payments on notes payable - officers (228,598) (86,849) --
Payments on capital lease obligations (75,225) (15,318) (886)
Proceeds from investment company 521,000 -- --
Issuance (redemption) of preferred shares -- (147,392) 200,000
Issuance of common shares 423,605 516,778 150,673
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,414,233 96,171 386,962
- -----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 684,242 122,818 (620)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 125,469 2,651 3,271
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 809,711 $ 125,469 $ 2,651
=============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 2,518 $ -- $ --
Interest paid 161,924 15,150 2,309
- -----------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 4
</TABLE>
<PAGE> 41
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------------- ------------------- PAID-IN EARNINGS SHAREHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL (DEFICIT) EQUITY
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1994 -- $ -- 487,802 $ 1,161 $ -- $ (5,306) $ (4,145)
Net loss -- -- -- -- -- (482,454) (482,454)
Issuance of preferred shares 20,000 200,000 -- -- -- -- 200,000
Reduction of par value of common shares -- -- -- (673) 673 -- --
Issuance of common shares -- -- 212,378 212 279,538 -- 279,750
Issuance of common shares for acquisitions -- -- 636,570 637 795,076 -- 795,713
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 20,000 200,000 1,336,750 1,337 1,075,287 (487,760) 788,864
Net income -- -- -- -- -- 179,360 179,360
Redemption of preferred shares (20,000) (200,000) 11,765 12 52,596 -- (147,392)
Issuance of common shares -- -- 259,999 260 523,392 -- 523,652
Issuance of common shares - note receivable -- -- 200,000 200 499,800 -- 500,000
Issuance of common shares for acquisitions -- -- 339,235 339 1,086,801 -- 1,087,140
50% of principal payments received on
note receivable - Cadkey, Inc. -- -- -- -- 120,316 -- 120,316
Class "E" warrants redeemed -- -- 120,000 120 (120) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 -- -- 2,267,749 2,268 3,358,072 (308,400) 3,051,940
Net income -- -- -- -- -- 626,219 626,219
Issuance of common shares -- -- 483,357 483 131,917 -- 132,400
Issuance of common shares for acquisitions -- -- 2,787,595 2,788 3,604,200 -- 3,606,988
Class "F" warrants redeemed -- -- 260,000 260 649,740 -- 650,000
50% of principal payments received on
note receivable - Cadkey, Inc. -- -- -- -- 71,898 -- 71,898
Settlement of note receivable - Cadkey, Inc. -- -- -- -- 112,371 -- 112,371
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996 -- $ -- 5,798,701 $ 5,799 $ 7,928,198 $ 317,819 $ 8,251,816
=================================================================================================================================
- ------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 5
</TABLE>
<PAGE> 42
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Applied Cellular Technology, Inc. and subsidiaries (our Company or
ACTC) is a diversified technology company operating in three market
segments:
* Retail distribution encompassing cellular, analog and digital
telephone systems, computer software development and services;
* Computer hardware services that help organizations reduce
technology cost and risk by providing asset management,
acquisition, disposition, leasing and brokerage; and
* Manufacturing and distribution of high-quality analog and
digital electrical and control components and equipment.
Principles of Consolidation
Our consolidated financial statements include the accounts of
Applied Cellular Technology, Inc. and wholly owned and 80% owned
subsidiaries. All significant intercompany accounts and transactions
are eliminated upon consolidation.
As further discussed in Note 23, our Company acquired subsidiaries
during 1996 all of which have been accounted for as a purchase.
Basis of Preparation
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year's presentation.
Use of Estimates
In conformity with generally accepted accounting principles, the
preparation of our financial statements requires our management to
make estimates and assumptions that affect the amounts reported in
our financial statements and accompanying notes. Although these
estimates are based on our knowledge of current events and actions
we may undertake in the future, they may ultimately differ from
actual results.
Cash And Cash Equivalents
Our Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
Allowance For Doubtful Accounts
Our 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
Unbilled receivables consist of certain direct costs incurred in
connection with projects not yet billed.
- ---------------------------------------------------------------------------
Page 6
<PAGE> 43
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Inventories
Inventories consist of raw materials, supplies and finished goods.
Inventory is valued at the lower of cost or market, determined by
the first-in, first-out method. Our Company closely monitors and
analyzes inventory for potential obsolescence and slow-moving items
based upon the aging of the inventory listing and the inventory
turns by product.
Land, Equipment And Leasehold Improvements
Land, equipment and leasehold improvements are carried at cost,
less accumulated depreciation and amortization computed using
straight-line and accelerated methods. Equipment and leasehold
improvements are depreciated and amortized over periods ranging
from three to forty years.
Investment in Cadkey, Inc.
Our Company had a 29% interest in Cadkey, Inc. which was
accounted for using the cost method because we did not
exercise significant influence over Cadkey, Inc.
Organization Costs
Organization costs are capitalized and amortized over five years.
Goodwill And Other Intangible Assets
Goodwill and other intangible assets are stated on the cost basis
and are amortized, principally on a straight-line basis, over the
estimated future periods to be benefitted (not exceeding 20 years).
Goodwill and other intangible assets are periodically reviewed for
impairment based on an assessment of future operations to ensure
that they are appropriately valued.
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 has been
completed and the completeness of the working model and its
consistency with the product design has 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.
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," our 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.
- ---------------------------------------------------------------------------
Page 7
<PAGE> 44
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Revenue Recognition
For programming, consulting and software licensing services, we
recognize 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 our Company's policy to record
contract losses in their entirety in the period in which such
losses are foreseeable. For non fixed fee jobs, 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, we recognize revenue upon shipment.
There are no significant post contract support obligations at the
time of revenue recognition. Our 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.
We do not experience many product returns, and therefore, Company
management is of the opinion that no allowance for sales returns is
necessary. Our Company has no obligation for warranties on
hardware sales, because the warranty is given by the manufacturer.
We do not offer a warranty policy for our services to customers.
Advertising Costs
We generally expense production costs of print advertisements as of
the first date the advertisements take place. Advertising expense
included in selling, general and administrative expenses were
$497,494 in 1996, $97,733 in 1995 and $2,782 in 1994.
Income Taxes
Our Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires the asset and liability approach for the
financial accounting and reporting for income taxes. Our Company and its
subsidiaries file a consolidated federal income tax return. Income taxes
are paid by the parent company and are allocated to each subsidiary through
intercompany charges.
Earnings Per Common And Common Share Equivalent
Earnings per common and common share equivalent are computed by
dividing net income by the weighted-average number of common and
dilutive common equivalent shares outstanding. Common equivalent
shares consist of common stock issuable upon exercise of stock
options and warrants using the treasury stock method.
New Accounting Standards
We adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), in 1996.
Under the provisions of SFAS 123, companies can elect to account
for stock-based compensation plans using a fair-value based method
or continue measuring compensation expense for those plans using
the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and related Interpretations. We have elected to continue
using the intrinsic value method to account for our stock-based
compensation plan. SFAS 123 requires companies electing to continue
to use the intrinsic value method to make certain pro-forma
disclosures (see Note 17).
- ---------------------------------------------------------------------------
Page 8
<PAGE> 45
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
2. NOTES RECEIVABLE
<TABLE>
<CAPTION>
1996 1995
------------------------------
<S> <C> <C>
Due from officers of a subsidiary, secured by 100,000
shares of ACTC preferred stock, bears interest at 8%,
any outstanding principal balance is due April 1997. $ 1,633,776 $ --
Due from officer of subsidiary, unsecured, bears
interest at the prime lending rate, due on demand. 12,997 12,982
Due from Cadkey, Inc., unsecured, bears interest at
10.5%, principal and interest payments of $20,483
due monthly, final payment originally due October 1,
1999. -- 379,684
In November 1996 our Company exchanged its 29%
investment in Cadkey, Inc. for a 76.67% interest in
a $750,000 promissory note. Our share of this note
is $575,000. We act as collection agent and receive
all payments due under the note and distribute the
23.33% of payments we receive to the participant in
this note. The note bears interest at 8% and provides
for monthly payments of principal and interest in an
amount equal to 10% of the maker's net cash revenue
for each proceeding month. The note is secured
by all of the maker's assets and the outstanding
balance of principal and accrued interest is due in
October, 2001. 575,000 --
-------------------------------------------------------------------------------------------------------------
2,221,773 392,666
Current portion 1,646,773 100,039
-------------------------------------------------------------------------------------------------------------
Long-term portion $ 575,000 $ 292,627
=============================================================================================================
</TABLE>
Subsequent to December 31, 1996, our Company received $810,000 as
payment on the officer notes receivable.
The Note Receivable due from Cadkey, Inc. had a balance of $307,768
in November 1996, at which time we received $420,139 as
payment on the note. The excess of $112,371 was added to
additional paid in capital, because the carrying value
of the original note receivable had been reduced by 50% through
additional paid in capital, as a result of the discounting of our
shares exchanged to acquire the note receivable.
- ---------------------------------------------------------------------------
Page 9
<PAGE> 46
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
3. LAND, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 2,791,638 $ 180,630
Vehicles 726,709 113,210
Leasehold improvements 627,922 1,087
Computer equipment 186,775 66,909
Land 490,000 --
---------------------------------------------------------------------------------------------
4,823,044 361,836
Less: Accumulated depreciation and amortization (1,907,988) (223,347)
---------------------------------------------------------------------------------------------
$ 2,915,056 $ 138,489
=============================================================================================
</TABLE>
Included above are vehicles and equipment acquired under capital
lease obligations in the amount of $553,353 and $113,210 at
December 31, 1996 and 1995, respectively. Related accumulated
depreciation amounted to $242,197 and $42,777 at December 31, 1996
and 1995, respectively.
Depreciation and amortization charged against income amounted to
$206,587, $27,613 and $7,718 for years ended December 31, 1996,
1995 and 1994, respectively.
4. INVESTMENT IN CADKEY, INC.
Investment in Cadkey, Inc. at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
<S> <C>
Original investment $ 570,713
Additional costs of acquisition 6,686
---------------------------------------------------------------------------------------------
$ 577,399
=============================================================================================
The original investment was calculated as follows:
Shares issued (456,670 x $2.50) $ 1,141,425
50% discount given to shares issued (570,712)
---------------------------------------------------------------------------------------------
$ 570,713
=============================================================================================
</TABLE>
Our Company acquired a 29% interest in Cadkey, Inc. in December
1994. We accounted for this investment using the cost method,
because we did not exercise significant influence over Cadkey, Inc.
In November 1996, we exchanged our $577,399 interest in Cadkey,
Inc. for an interest in a $575,000 note receivable (see Note 2).
- ---------------------------------------------------------------------------
Page 10
<PAGE> 47
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
5. GOODWILL
Goodwill consists of the excess of cost over book value of
companies purchased. Our Company applies the principles of
Accounting Principles Board Opinion No. 16, "Business
Combinations," and uses the purchase method of accounting for
acquisitions of wholly owned and 80% owned subsidiaries.
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Gross value of common shares, warrants or
preferred shares issued as consideration $ 31,922,802 $ 1,595,673
Discount applied to the common shares and warrants (16,695,684) (797,836)
---------------------------------------------------------------------------------------------
Net book value of shares issued 15,227,118 797,837
Costs of acquisitions 1,198,190 173,682
Net book value of companies acquired (1,824,147) (26,825)
Accumulated amortization (333,176) (38,068)
---------------------------------------------------------------------------------------------
Carrying value $ 14,267,985 $ 906,626
=============================================================================================
</TABLE>
Amortization expense amounted to $295,108 and $38,068 for the
years ended December 31, 1996 and 1995, respectively. There was no
amortization expense in 1994.
The costs of acquisitions include all cash payments according to
the acquisition agreements plus costs for investment banking
services, legal services and accounting services, that were
essential costs of acquiring these assets.
6. PURCHASED COMPUTER SOFTWARE
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Gross value of common shares and warrants
issued as consideration $ 1,393,388 $ 1,209,171
Discount applied to the common shares and warrants (786,694) (694,586)
---------------------------------------------------------------------------------------------
Net value of shares issued 606,694 514,585
Costs of acquisitions 267,410 217,500
Accumulated amortization (235,707) (64,642)
---------------------------------------------------------------------------------------------
Carrying value $ 638,397 $ 667,443
=============================================================================================
</TABLE>
Amortization expense amounted to $171,065 and $64,642 for the
years ended December 31, 1996 and 1995, respectively. There was no
amortization expense in 1994.
The costs of acquisitions include all cash payments according to
the acquisition agreements plus costs for investment banking
services, legal services and accounting services, that were
essential costs of acquiring these assets.
- ---------------------------------------------------------------------------
Page 11
<PAGE> 48
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
7. OTHER ASSETS
<TABLE>
<CAPTION>
1996 1995
----------------------------
<S> <C> <C>
Proprietary software $ 290,902 $ 107,958
Existing goodwill of acquired subsidiaries 259,800 --
Organizational costs and other assets 181,872 31,632
---------------------------------------------------------------------------------------------
732,574 146,079
Less: Accumulated amortization (127,698) (6,044)
---------------------------------------------------------------------------------------------
604,876 133,546
Deposits 119,628 6,489
Cash surrender value of officer's life
insurance policies 117,862 --
Deferred tax asset 82,600 --
---------------------------------------------------------------------------------------------
$ 924,966 $ 140,035
=============================================================================================
</TABLE>
Amortization of other assets charged against income amounted to
$39,477, $2,367 and $3,194 for years ended December 31, 1996, 1995
and 1994, respectively.
8. NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1995
----------------------------
<S> <C> <C>
Revolving credit lines - banks, secured by
subsidiaries' equipment, accounts receivable,
inventory and by personal guarantees of
officers/shareholders of certain subsidiaries.
Interest is payable monthly at rates of prime
plus 1.25% and prime plus 1.5%. The credit
lines are due through August 1997. Certain
borrowings are limited to the lesser of $5,000,000
or 80% of qualified accounts receivable. $ 3,785,000 $ --
Notes payable - bank and individual,
unsecured, bearing interest at rates of 8% and
prime plus 1.5%, due on demand. 83,560 --
Notes payable - officers, unsecured,
non-interest bearing, due on demand. 51,497 280,095
Credit line - bank, secured by a subsidiary's
accounts receivable and inventory, bearing
interest at prime rate plus 2%. The line of
credit was paid and terminated in February 1996. -- 29,999
---------------------------------------------------------------------------------------------
$ 3,920,057 $ 310,094
=============================================================================================
</TABLE>
- ---------------------------------------------------------------------------
Page 12
<PAGE> 49
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
9. LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Notes payable - banks, secured by
subsidiaries' equipment, accounts receivable,
inventory and by personal guarantees of
officers/shareholders of a subsidiary.
Payable in monthly installments totaling
$28,640 plus interest at rates of 9.85%, prime
plus 2% and prime plus 2.75%, due through
March 2001. $ 1,512,162
Notes payable to finance companies, secured by
a subsidiary's vehicles and equipment, payable
in monthly principal installments ranging from
$330 to $523, interest rates ranging from 9%
to 9.75%, due through January 2001. 68,829
------------------------------------------------------------------------------
1,580,991
Less: Current maturities 333,833
$ 1,247,158
==============================================================================
</TABLE>
The scheduled maturities of long-term debt at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
----------------------------------------------
<S> <C>
1997 $ 333,833
1998 325,250
1999 326,053
2000 527,768
2001 68,087
----------------------------------------------
$ 1,580,991
==============================================
</TABLE>
Interest expense on the long and short-term notes payable
(including Note 8) amounted to $193,579, $9,350 and $2,309 for the
years ended December 31, 1996, 1995 and 1994, respectively.
The weighted average dollar amount of all borrowings (including
notes payable in Note 8) for the year ended December 31, 1996 was
approximately $1,618,000. The weighted average interest rate paid
was 9.8% for the year ended December 31, 1996.
- ---------------------------------------------------------------------------
Page 13
<PAGE> 50
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
10. CAPITAL LEASE OBLIGATIONS
At December 31, 1996, future payments for capital lease
obligations are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------
<S> <C>
1997 $ 181,685
1998 97,078
1999 39,025
2000 12,357
2001 5,689
------------------------------------------------------
Total minimum future lease payments 335,834
Less: Amount representing interest 38,163
------------------------------------------------------
Capital Lease Obligation 297,671
Less: Current maturities 159,227
------------------------------------------------------
Long-term Capital Lease Obligation $ 138,444
======================================================
</TABLE>
Interest expense on the capital leases amounted to $6,712 and
$5,800 in 1996 and in 1995, respectively. There was no interest
expense on capital leases in 1994.
11. DUE TO INVESTMENT COMPANY
In December, 1996, our Company entered into an arrangement with
an investment company to provide operating capital. In exchange
for up to $600,000, we will issue 150,000 shares of restricted
common stock at a value of $4.00 per share on or before April 30,
1997. We will also pay a dividend of 7% per year on the $600,000,
commencing April 1, 1997. As of December 31, 1996, we had
received $521,000. We received the remaining balance in January
and February 1997.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the short
maturity of those instruments.
Accounts Receivable and Unbilled Receivables
The carrying amounts approximate fair value.
Notes Receivable
The carrying value of the notes approximate fair value because
either the interest rate of the note approximates the current rate
that we could receive on a similar note, or because of the short-
term nature of the notes.
- ---------------------------------------------------------------------------
Page 14
<PAGE> 51
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Notes Payable
The carrying amount approximates fair value because of the
short-term nature of the notes.
Long-term Debt
The carrying amount approximates fair value because either the
stated interest rates fluctuate with current market rates or the
interest rates approximate the current rates we could receive on a
similar note.
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value.
The estimated fair value amounts presented herein have been
determined using available market information and appropriate
valuation methodologies and are not necessarily indicative of the
amount we could realize in a current market exchange.
13. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Current taxes at statutory rates $ 477,046 $ 80,000 $ --
Current taxes covered by net operating loss (32,300) (80,000) --
------------------------------------------------------------------------------------------------------------
Current income tax provision 444,746 -- --
Deferred income taxes (credit) (82,600) -- --
------------------------------------------------------------------------------------------------------------
$ 362,146 $ -- $ --
============================================================================================================
</TABLE>
The components of the deferred tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Deferred Tax Asset (Liability)
Goodwill basis difference $ 136,918 $ 28,000
Cadkey, Inc. investment basis difference -- (23,000)
Equipment and leasehold improvements basis differences (162,064) (5,000)
Net operating loss carryforward -- 30,000
Accrued vacation 22,800 --
Allowance for inventory obsolescence 37,446 --
Allowance for doubtful accounts 47,500 --
Valuation allowance -- (30,000)
---------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 82,600 $ --
=============================================================================================
</TABLE>
- ---------------------------------------------------------------------------
Page 15
<PAGE> 52
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>
1996 1995 1994
% % %
---------------------------------------
<S> <C> <C> <C>
Statutory rate 34 34 --
State income taxes net of federal benefits 4 4 --
Current income taxes covered by net operating
loss carryforward -- (38) --
Realization of deferred tax asset valuation
allowance (3) -- --
Other (4) -- --
-------------------------------------------------------------------------------------------------------------
31 -- --
=============================================================================================================
</TABLE>
14. COMMITMENTS
Our Company is obligated under real estate leases, expiring
through 2002.
The total future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
-----------------------------------
<S> <C>
1997 $ 1,380,395
1998 1,101,801
1999 786,473
2000 638,218
2001 325,560
Thereafter 8,257
-----------------------------------
$ 4,240,704
===================================
</TABLE>
Rent expense amounted to $828,110, $49,375 and $16,047 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Our Company has entered into employment contracts with key
officers at each of its subsidiary companies. The agreements are
for periods of two to three years through December 1999. The total
annual salaries committed to these officers is approximately
$811,000. Some of the employment contracts also call for bonus
arrangements based on earnings of the particular subsidiary.
The Agreement of Plan and Merger for the acquisition of Advanced Telecomm
Holdings, Inc. (ATHI), includes an earnout provision. On or before
April 30, 2002, we will deliver to the former shareholders of ATHI,
aggregate additional consideration equal to three times ATHI's
average annual earnings before depreciation, interest and taxes
(EBDIT) for the five-year period commencing on October 1, 1996
and ending on September 30, 2001; provided however, that if the
average annual EBDIT is less than $2,000,000, the former
shareholders shall not be entitled to receive any additional
consideration, and the amount payable to the prior shareholders as
additional consideration shall not exceed $15,000,000.
- ---------------------------------------------------------------------------
Page 16
<PAGE> 53
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Our Company has similar earnout provisions from certain other
acquisition agreements.
Our Company entered into a three-year consulting agreement for
$20,000 a month, commencing in October 1996, with an
acquisition/consulting partnership whose partners are related
parties. We also entered into a two year consulting agreement with
an individual for $2,000 a month beginning in December 1996.
15. PROFIT SHARING PLAN
Several of our subsidiaries have qualified, noncontributory 401(k)
plans for all eligible employees. There were no employer
contributions in 1996. $4,659 was contributed in 1995.
16. REDEEMABLE PREFERRED SHARES
Our Company has authorized 1,000,000 shares of 8% redeemable
and convertible preferred stock to be issued from time to time
on such terms as is specified by the Board of Directors.
In March 1996, our Company issued 9,000 shares of our Company's 8%
redeemable preferred shares at $100 per share, in exchange for
80% of Burling Instruments, Inc. If, and to the extent, the
redeemable preferred shares have not been converted to common shares
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 shares by
dividing the redemption price ($100) by $5.75 per common share.
In October 1996, our Company issued 100,000 shares of our
Company's 8% redeemable preferred shares at $100 per share as
partial consideration for the 100% purchase of ATHI. The 8%
preferred dividend for the period October 1 through December 31,
1996 was waived by the holders. Dividends are payable in equal
quarterly payments on the first day of each January, April, July
and October of each calendar year commencing on April 1, 1997. The
preferred shares shall be redeemed by our Company at such time and
from time to time as our Company shall issue any common shares,
other capital stock of our Company, or any other security which our
Company gives in exchange for cash or other cash equivalents.
Two-thirds of the cash paid by the purchasers of any security shall
be utilized by our Company solely for the purpose of redemption of
the preferred shares. If, and to the extent, the preferred shares
have not been redeemed by our Company by the third anniversary of the
initial issuance of the preferred shares, each holder of these
preferred shares shall have the right to require our Company to
redeem such holders by payment with shares of ACT Communications,
Inc. (a wholly owned subsidiary of our Company), common shares
(1,000 shares outstanding). For purposes of redemption of the
preferred shares, each share of ACT Communications, Inc.'s common
shares shall be valued at $10,000.
- ---------------------------------------------------------------------------
Page 17
<PAGE> 54
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
17. SHAREHOLDERS' EQUITY
Warrants
Our Company has issued warrants convertible into shares of common
stock for consideration, as follows:
<TABLE>
<CAPTION>
WARRANTS
---------------------------------------- EXERCISE EXERCISABLE
CLASS AUTHORIZED ISSUED EXERCISED PRICE DATE OF ISSUE PERIOD
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A 200,000 200,000 198,536 $ 4.75 March 1994 N/A
Class B 200,000 200,000 -- 20.00 March 1994 4 years
Class C 45,000 45,000 45,000 1.50 March 1994 N/A
Class D 714,930 714,930 714,930 1.60 December 1994 N/A
Class E 120,000 120,000 120,000 5.00 December 1994 N/A
Class F 300,000 300,000 250,000 2.50 December 1994 5 years
Class G 200,000 200,000 200,000 2.50 December 1994 N/A
Class H 350,000 350,000 -- 2.00 August 1995 5 years
Class I 450,000 450,000 -- 2.00 January 1996 5 years
Class J 200,000 200,000 -- 5.35 September 1996 3 years
Class K 250,000 250,000 -- 5.31 September 1996 5 years
Class L 125,000 125,000 -- 5.35 October 1996 5 years
Class M 1,000,000 1,000,000 -- 5.31 October 1996 5 years
</TABLE>
Stock Option Plans
During 1996, our Company adopted a non-qualified stock option plan
(the Option Plan) and applies APB Opinion No. 25 and related
Interpretations in accounting for the Option Plan. Accordingly, no
compensation cost has been recognized. Had compensation cost for
the Option Plan been determined based on the fair value at the
grant dates for awards under the Option Plan, consistent with the
alternative method set forth under SFAS 123, our Company's net
income applicable to common shareholders and net income per common
and common equivalent share would have been reduced. The pro forma
amounts are indicated below:
<TABLE>
<S> <C>
Net Income Applicable to
Common Shareholders
As reported $626,219
Pro forma $430,713
Net Income Per Common Share
As reported $.19
Pro forma $.13
</TABLE>
Under the Option Plan, options for 2,000,000 common shares were
available for issuance to certain officers and employees of our
Company, of which 1,550,200 were granted. The options may not be
exercised until one to three years after the options have been
granted, and are exercisable for a period of 5 years.
In June 1996, we granted our Company's Chairman an option to
acquire 630,000 shares of our Company's common shares at $4.46 per
share. These options may be exercised for a period of five years
through June 2001.
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1996:
dividend yield of 0 percent; expected volatility of 69.8 percent;
risk-free interest rate of 8.5 percent; and expected lives of 5
years. The weighted-average fair value of options granted was $1.29 for
the year ended December 31, 1996.
- ---------------------------------------------------------------------------
Page 18
<PAGE> 55
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
A summary of stock option activity for 1996 is as follows:
<TABLE>
<CAPTION>
1996
------------------------------------
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------------------------------------
<S> <C> <C>
Outstanding on January 1 -- $ 0.00
Granted 2,180,200 4.40
Exercised -- 0.00
Forfeited/expired -- 0.00
------------------------------------------------------------------------------------
Outstanding on December 31 2,180,200 4.40
------------------------------------------------------------------------------------
Exercisable on December 31 -- 0.00
------------------------------------------------------------------------------------
Shares available on December 31 for
options that may be granted 449,800
------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options at
December 31, 1996:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-----------------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$4.00 to $5.00 2,105,200 5 $ 4.36
$5.01 to $6.00 75,000 5 5.50
------------------- -----------
$4.00 to $6.00 2,180,200 $ 4.40
=================== ===========
</TABLE>
Stock Registration
During 1996, our Company registered shares of common stock on Form
SB-2 and on Form S-3 as follows:
<TABLE>
<CAPTION>
TOTAL
NUMBER OF FOR GENERAL UPON ON BEHALF
SHARES CORPORATE EXERCISE OF FOR CLASS OF SELLING
FORM REGISTERED PURPOSES WARRANTS OF WARRANTS SECURITY HOLDERS
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SB-2 1,000,000 1,000,000 -- -- --
SB-2 300,000 -- 300,000 Class F --
SB-2 1,459,301 -- -- -- 1,459,301
-------------------------------------------------------------------------------------------------
Total 2,759,301 1,000,000 300,000 1,459,301
-------------------------------------------------------------------------------------------------
S-3 3,185,371 -- -- -- 3,185,371
S-3 350,000 -- 350,000 Class H --
S-3 450,000 -- 450,000 Class I --
S-3 200,000 -- 200,000 Class J --
S-3 250,000 -- 250,000 Class K --
S-3 125,000 -- 125,000 Class L --
S-3 1,000,000 -- 1,000,000 Class M --
-------------------------------------------------------------------------------------------------
Total 5,560,371 -- 2,375,000 3,185,371
-------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------------------------
Page 19
<PAGE> 56
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
18. LEGAL PROCEEDINGS
We are party to various legal proceedings. In the opinion of
management, these proceedings are not likely to have a material
adverse affect on the financial position or overall trends in
results of our Company. The estimate of potential impact on our
Company's financial position or overall results of operations for
the above legal proceedings could change in the future.
19. SUPPLEMENTAL CASH FLOW INFORMATION
The changes in operating assets and liabilities are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
(Increase) decrease in accounts receivable
and unbilled receivables $ 64,278 $ (326,991) $ 16,527
Increase in inventories (826,310) (43,668) --
Increase in prepaid expenses (140,229) (14,411) (13,780)
Increase in deposits -- (4,898) --
Increase in deferred tax asset (82,600) -- --
Increase (decrease) in accounts payable
and accrued expenses (1,989,985) 149,262 54,062
--------------------------------------------------------------------------------------------------------
$ (2,974,846) $ (240,706) $ 56,809
========================================================================================================
</TABLE>
In the years ended December 31, 1996, 1995 and 1994, our Company
had the following noncash investing and financing activities:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Investment in subsidiaries<F*> $ 14,303,853 $ 797,837 $ --
Investment in Cadkey, Inc.<F*> -- -- 570,713
Purchase of note receivable<F*> -- 500,000 --
Assets acquired<F*> 92,109 289,303 225,000
Capital leases 128,000 24,420 14,424
Payment of debt<F*> 300,000 -- --
Employment services<F*> 132,323 -- --
Other<F*> 37,500 -- --
<FN>
______________________________
<F*> Our Company issued shares of stock in exchange for this item.
</TABLE>
20. INDUSTRY SEGMENT REPORTING
Our Company operates predominately in three industry segments in
our principal market, the United States. In 1994, all of our
Company's operations related to the retail segment.
- ---------------------------------------------------------------------------
Page 20
<PAGE> 57
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The Retail Group installs, sells, services and supports cellular
phone and other wireless services, business telephone systems,
voice mail and interactive voice response systems, commercial long
distance and local telephone services, residential long distance
telephone services, digital satellite television services to
business and consumer end-users and computer systems, offering
custom and custom-tailored software and hardware systems for
manufacturers, wholesalers, distributors, and field sales and
service organizations.
The Computer Group specializes in providing leasing, remarketing,
parts-on-demand, consulting and business continuity services for
mainframe, midrange and PC systems to a network of industrial,
commercial and retail organizations.
The Manufacturing Group manufactures off the shelf and customized
analog and digital industrial temperature controls and custom
analog and digital electrical products.
Information about our Company's operations in 1996 and 1995, by
segment of business, is as follows:
<TABLE>
<CAPTION>
NET OPERATING REVENUE<F1>
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Retail $ 13,931,345 $ 1,691,450
Computer 1,992,501 644,550
Manufacturing 3,839,356 --
-----------------------------------------------------------------------------------------------
Segments total 19,763,202 2,336,000
Other 120,198 --
-----------------------------------------------------------------------------------------------
$ 19,883,400 $ 2,336,000
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
OPERATING PROFIT IDENTIFIABLE ASSETS
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Retail $ 828,137 $ 17,856 $ 13,995,490 $ 2,179,542
Computer 504,435 226,990 1,913,968 691,938
Manufacturing 443,889 -- 2,608,040 --
--------------------------------------------------------------------------------------------------------------
Segments total 1,776,461 244,846 18,517,498 2,871,480
Amounts not allocated<F2> (595,765) (16,523) -- --
General corporate -- -- 14,690,595 1,260,005
--------------------------------------------------------------------------------------------------------------
Total $ 1,180,696 $ 228,323 $ 33,208,093 $ 4,131,485
==============================================================================================================
<FN>
______________________________
<F1> No single customer represents 10% or more of sales.
<F2> Amounts not allocated to segments include interest expense,
interest income and general corporate income and expense.
</TABLE>
- ---------------------------------------------------------------------------
Page 21
<PAGE> 58
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
ADDITIONS TO LAND,
EQUIPMENT AND DEPRECIATION AND
LEASEHOLD IMPROVEMENTS AMORTIZATION
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Retail $ 113,687 $ 36,492 $ 323,781 $ 23,302
Computer 20,000 -- 1,703 3,695
Manufacturing 28,573 -- 36,820 --
------------------------------------------------------------------------------------------------------------
Segments total 162,260 36,492 362,304 26,997
General corporate 75,223 28,127 349,933 105,693
Noncash additions (128,000) (24,420) -- --
------------------------------------------------------------------------------------------------------------
Total $ 109,483 $ 40,199 $ 712,237 $ 132,690
============================================================================================================
</TABLE>
21. RELATED PARTY TRANSACTIONS
In connection with the acquisitions which
took place in 1996 and 1995, the Company paid a related party, The
Bay Group, $457,152 and $126,500, respectively, for investment
banking services. These payments were included in the total cost of
assets purchased and are being amortized over the life of the
related assets.
22. SUBSEQUENT EVENTS
Effective as of January 1, 1997, our Company purchased 100% of
Hopper Manufacturing Co., Inc., in exchange for 179,104 shares of
common stock. Hopper Manufacturing Co., Inc., based in Sacramento,
California, remanufactures and distributes automotive parts.
Effective as of January 1, 1997, our subsidiary, Universal Commodities
Corporation, acquired 80% of Pizarro Remarketing, Inc., in exchange for
200,111 shares of ACTC's common stock. Pizarro Remarketing, Inc.,
based in Dallas, Texas, remarkets mainframe computer disc drives and
tape memory peripheral devices.
Effective as of January 1, 1997, our subsidiary, Universal Commodities
Corporation, acquired 80% of Norcom Resources, Inc. in exchange for
269,474 shares of ACTC's common stock. Norcom Resources, Inc., based in
Eagan, Minnesota, is a re-marketer of mainframe computers.
Effective as of February 1, 1997, our Company purchased 100% of
MVAK Technologies Inc., in exchange for 389,296 shares of common
stock. MVAK Technologies Inc., with remanufacturing and service
facilities in New Jersey, Massachusetts and Florida, rebuilds and
distributes vacuum pumps to customers throughout the United States.
23. PROFORMA INFORMATION (UNAUDITED)
The following pro forma balance sheet of our Company at December
31, 1996 gives effect to the subsequent acquisitions of Hopper
Manufacturing Co., Inc., Pizarro Remarketing, Inc., Norcom
Resources, Inc. and MVAK Technologies, Inc. as if they were
effective at December 31, 1996. The statement gives effect to the
acquisitions under the purchase method of accounting and the
assumptions in the accompanying notes to the pro forma financial
statements.
- ---------------------------------------------------------------------------
Page 22
<PAGE> 59
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The following pro forma consolidated statements of operations of our
Company for the year ended December 31, 1996 gives effect to the
acquisitions of Burling Instruments, Inc., Advanced Telecomm
Holdings, Inc., CRA-TEK Corp., Universal Commodities Corporation,
U.S. Electrical Products Corp., and to the subsequent acquisitions
of Hopper Manufacturing Co., Inc., Pizarro Remarketing, Inc.,
Norcom Resources, Inc. and MVAK Technologies, Inc. as though they
were effective at January 1, 1996. The statement gives effect to
the acquisitions under the purchase method of accounting and the
assumptions in the accompanying notes to the pro forma financial
statements.
In March 1996, our Company acquired 80% of Burling Instruments,
Inc., in exchange for 9,000 shares of its 8% redeemable preferred
stock at $100 per share, for a total value of $900,000.
In September 1996, ACT Communications, Inc., a wholly-owned
subsidiary, acquired 100% of Advanced Telecomm Holdings, Inc. in
exchange for 1,618,180 shares of our common stock, 100,000 shares
of our 8% redeemable preferred stock at $100 per share and warrants
evidencing the right to purchase 1,000,000 shares of our common
stock.
In September 1996, our Company acquired 80% of CRA-TEK Corp. in
exchange for 295,115 shares of its common stock.
In November 1996, our Company acquired 80% of Universal Commodities
Corporation, in exchange for 581,813 shares of its common stock.
In December 1996, our Company acquired 80% of U.S. Electrical Products
Corp., in exchange for 258,988 shares of its common stock.
Effective as of January 1, 1997, our Company acquired 100% of
Hopper Manufacturing Co., Inc., in exchange for 179,104 shares of
its common stock.
Effective as of January 1, 1997, our subsidiary, Universal Commodities
Corporation, acquired 80% of Pizarro Remarketing, Inc., in exchange for
200,111 shares of ACTC's common stock.
Effective as of January 1, 1997, our subsidiary, Universal Commodities
Corporation, acquired 80% of Norcom Resources, Inc., in exchange for
269,474 shares of ACTC's common stock.
Effective as of February 1, 1997, our Company acquired 100% of
MVAK Technologies, Inc., in exchange for 389,296 shares of its
common stock.
The pro forma financial statements may not be indicative of the results
that would have actually occurred if the acquisitions had been
effective on the dates indicated or of the results that may be
obtained in the future. The pro forma financial statements should
be read in conjunction with the consolidated financial statements
and notes thereto of our Company.
- ---------------------------------------------------------------------------
Page 23
<PAGE> 60
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
<TABLE>
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
PRO FORMA
--------------------------------------------------------------------------
HOPPER PIZARRO NORCOM MVAK
MANUFACTURING REMARKETING, RESOURCES, TECHNOLOGIES, PRO FORMA
AS REPORTED CO., INC. INC. INC. INC. DECEMBER 31,
DECEMBER 31, (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) 1996
1996 <F1> <F2> <F3> <F4> (UNAUDITED)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $13,886,689 $1,488,122 $1,604,352 $981,349 $1,013,202 $ (227,985)<F5> $18,745,729
Land, equipment and
leasehold improvements 2,915,056 133,529 -- 17,708 76,148 -- 3,142,441
Goodwill 14,267,985 -- -- -- -- 316,470 <F6> 14,584,455
Purchased computer software 638,397 -- -- -- -- -- 638,397
Other assets 1,499,966 859 3,175 -- -- -- 1,504,000
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $33,208,093 $1,622,510 $1,607,527 $999,057 $1,089,350 $ 88,485 $38,615,022
================================================================================================================================
Current liabilities $12,214,536 $ 565,366 $1,020,210 $312,077 $ 403,143 $ -- $14,515,332
Long-term debt 1,247,158 506,789 -- 534,927 162,157 -- 2,451,031
Capital lease obligations 138,444 -- -- -- -- -- 138,444
Minority interest 456,139 -- -- -- -- 147,875 <F7> 604,014
Redeemable preferred stock 10,900,000 -- -- -- -- -- 10,900,000
Common stock 5,799 63,858 500 50 7,000 (70,304)<F8> 6,903
Preferred stock -- -- -- -- 800,000 (800,000)<F9> --
Additional paid-in capital 7,928,198 420,351 -- -- 250,922 1,082,010 <F10> 9,681,481
Retained earnings 317,819 66,146 586,817 152,003 (533,872) (271,096)<F11> 317,817
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities And
Shareholders' Equity $33,208,093 $1,622,510 $1,607,527 $999,057 $1,089,350 $ 88,485 $38,615,022
================================================================================================================================
- -------------------------------------------------------------------------------
Page 24
<PAGE> 61
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
<FN>
NOTE: The Pro Forma Consolidated Balance Sheet gives effect to
the following pro forma adjustments:
<F1> Represents the December 31, 1996 Balance Sheet of Hopper Manufacturing Co., Inc. that would have
been consolidated with the Company if the acquisition would have taken place on December 31, 1996.
<F2> Represents the December 31, 1996 Balance Sheet of Pizarro Remarketing, Inc. that would have been
consolidated with the Company if the acquisition would have taken place on December 31, 1996.
<F3> Represents the December 31, 1996 Balance Sheet of Norcom Resources, Inc. that would have been
consolidated with the Company if the acquisition would have taken place on December 31, 1996.
<F4> Represents the December 31, 1996 Balance Sheet of MVAK Technologies, Inc. that would have been
consolidated with the Company if the acquisition would have taken place on December 31, 1996.
<F5> Represents the cash paid for the estimated acquisitions costs for the above acquisitions.
<F6> Represents the amount of goodwill to be recorded on each of the acquisitions ($36,737 for MVAK and
$279,733 for Norcom).
<F7> Represents the minority interest to be recorded at the time of each of the acquisitions (equal to
20% of shareholder's equity at December 31, 1996, for companies 80% acquired).
<F8> Represents the total issuance of 1,104,523 shares of the Company's $.001 par value common stock for
the acquisitions above, less the elimination of the total common stock on the books of each of the
acquired companies at December 31, 1996 in the total amount of $71,408.
<F9> Represents the elimination of preferred stock on the books of the acquired companies at December 31,
1996 in the amount of $800,000.
<F10> Represents the total shares issued for all of the above acquisitions in the amount of $1,753,283,
less the elimination of the total additional paid-in capital on the books of each of the acquired
companies at December 31, 1996 in the amount of $671,273.
<F11> Represents the elimination of the total retained earnings on the books of each of the acquired
companies at December 31, 1996 in the amount of $271,096.
</TABLE>
- -------------------------------------------------------------------------------
Page 25
<PAGE> 62
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
<TABLE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------------------------------
U.S.
BURLING ADVANCED UNIVERSAL ELECTRICAL
INSTRUMENTS, TELECOMM CRA-TEK COMMODITIES PRODUCTS
AS REPORTED INC. HOLDINGS, INC. CORP. CORPORATION CORP.
DECEMBER 31, (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
1996 <F1> <F2> <F3> <F4> <F5>
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenue $19,883,400 $250,064 $19,363,543 $1,319,787 $4,575,131 $ 669,043
Direct costs 10,523,594 203,362 7,470,031 994,371 3,400,167 235,239
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 9,359,806 46,702 11,893,512 325,416 1,174,964 433,804
Operating expenses 8,104,754 102,200 11,185,016 186,095 1,012,507 519,490
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,255,052 (55,498) 708,496 139,321 162,457 (85,686)
Interest income 125,935 -- -- 2,041 59 29
Interest expenses (200,291) (1,700) (336,823) (3,254) (12,825) (44,708)
Minority interest (132,331) -- -- -- -- --
Provision for income tax (362,146) -- -- -- -- (1,043)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) 686,219 (57,198) 371,673 138,108 149,691 (131,408)
Dividends (60,000) -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable
to common shareholders $ 626,219 $(57,198) $ 371,673 $ 138,108 $ 149,691 $(131,408)
===========================================================================================================================
Net income (loss) per common
shares $ 0.19
===========================================================================================================================
Weighted average number of
common shares outstanding 3,329,099
===========================================================================================================================
<CAPTION>
HOPPER PIZARRO NORCOM MVAK PRO FORMA
MANUFACTURING REMARKETING, RESOURCES, TECHNOLOGIES, DECEMBER 31,
CO., INC. INC. INC. INC. 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<F6> <F7> <F8> <F9>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $3,867,099 $12,594,799 $8,985,985 $2,934,051 $ -- $74,442,902
Direct costs 2,871,654 12,040,105 8,096,528 1,838,359 -- 47,673,410
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 995,445 554,694 889,457 1,095,692 -- 26,769,492
Operating expenses 642,961 423,318 372,622 1,107,856 453,010<F10> 24,109,829
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 352,484 131,376 516,835 (12,164) (453,010) 2,659,663
Interest income 19 287 -- 58,567 -- 186,937
Interest expenses (77,951) (40,326) (38,401) (34,718) -- (790,997)
Minority interest -- -- -- -- (133,792)<F11> (266,124)
Provision for income tax -- -- -- (1,093) (246,118)<F12> (610,400)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) 274,552 91,337 478,434 10,592 (832,921) 1,179,079
Dividends -- -- -- -- (812,000)<F13> (872,000)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable
to common shareholders $ 274,552 $ 91,337 $ 478,434 $ 10,592 $(1,644,921) $ 307,079
==========================================================================================================================
Net income (loss) per common
shares $ 0.05
==========================================================================================================================
Weighted average number of
common shares outstanding 5,895,668
==========================================================================================================================
<FN>
NOTE: The Pro Forma Consolidated Statement of Operations gives effect to
the following pro forma adjustments:
<F1> Represents the Statement of Operations of Burling Instruments, Inc.
for the two months ended February 29, 1996 that would have been
consolidated with the Company if the acquisition would have taken
place on January 1, 1996.
<F2> Represents the Statement of Operations of Advanced Telecomm Holdings,
Inc. for the eight months ended August 31, 1996 that would have
been consolidated with the Company if the acquisition would have
taken placed on January 1, 1996.
<F3> Represents the Statement of Operations of CRA-TEK Corp. for the eight
months ended August 31, 1996 that would have been consolidated
with the Company if the acquisition would have taken place on
January 1, 1996.
<F4> Represents the Statement of Operations of Universal Commodities
Corporation for the ten months ended October 31, 1996 that would
have been consolidated with the Company if the acquisition would
have taken placed on January 1, 1996.
<F5> Represents the Statement of Operations of U.S. Electrical Products
Corp. for the eleven months ended November 30, 1996 that would
have been consolidated with the Company if the acquisition would
have taken place on January 1, 1996.
- -------------------------------------------------------------------------------
Page 26
<PAGE> 63
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
<F6> Represents the Statement of Operations of Hopper Manufacturing Co.,
Inc. for the twelve months ended December 31, 1996 that would
have been consolidated with the Company if the acquisition would
have taken place on January 1, 1996.
<F7> Represents the Statement of Operations of Pizarro Remarketing, Inc.
for the twelve months ended December 31, 1996 that would have
been consolidated with the Company if the acquisition would have
taken place on January 1, 1996.
<F8> Represents the Statement of Operations of Norcom Resources, Inc. for
the twelve months ended December 31, 1996 that would have been
consolidated with the Company if the acquisition would have taken
place on January 1, 1996.
<F9> Represents the Statement of Operations of MVAK Technologies, Inc. for
the twelve months ended December 31, 1996 that would have been
consolidated with the Company if the acquisition would have taken
place on January 1, 1996.
<F10> Represents the amortization expense for goodwill on each of the
following acquisitions:
Burling Instruments, Inc. in the amount of $4,907
Advanced Telecomm Holdings, Inc. in the amount of $389,449
Universal Commodities Corporation in the amount of $28,608
U.S. Electrical Products Corp. in the amount of $14,222
Norcom Resources, Inc. in the amount of $13,987
MVAK Technologies, Inc. in the amount of $1,837
<F11> Represents the minority interest on the earnings (losses) of:
Burling Instruments, Inc. for the two months ended February 29, 1996
of $(57,198) CRA-TEK Corp. for the eight months ended August 31, 1996
of $138,108 Universal Commodities Corporation for the ten months
ended October 31, 1996 of $149,691 U.S. Electrical Products, Corp.
for the eleven months ended November 30, 1996 of $(131,408) Pizarro
Remarketing, Inc. for the year ended December 31, 1996 of $91,337
Norcom Resources, Inc. for the year ended December 31, 1996 of $478,434.
<F12> Represents the increase in the tax provision due to the pro forma
additional earnings, before the nondeductible dividend expense.
<F13> Represents the additional dividends that would have been paid on
the 8% preferred stock issued in the Burling Instruments, Inc. acquisition
(9,000 x $100 x 8%), and the Advanced Telecomm Holdings, Inc. acquisition
(100,000 x $100 x 8%), less the $60,000 already accrued at December 31, 1996.
</TABLE>
- -------------------------------------------------------------------------------
Page 27
<PAGE> 1
EXHIBIT 21 - SUBSIDIARIES
Applied Cellular Technology, Inc.
Suite 5, James River Professional Center
Highway 160 & CC
Nixa, Missouri 65714
<TABLE>
<CAPTION>
Name State of Incorporation
- ---- ----------------------
<S> <C>
ACT Communications, Inc. Delaware
ACT Financial Corp. Delaware
Advanced Telecomm Holdings, Inc. Delaware
Advanced Telecomm of Pittsburgh,
a Pennsylvania Business Trust Pennsylvania
Advanced Telecomm of Butler, Inc. Pennsylvania
Advanced Telecomm of Washington D.C., Inc. Pennsylvania
Advanced Telecomm of Maryland, Inc. Maryland
Advanced Telecomm of Nevada, Inc. Nevada
Atlantic Systems, Inc. New Jersey
Burling Instruments, Inc. New Jersey
CRA-TEK Corp. California
Elite Computer Services, Inc. New Jersey
Hopper Manufacturing Co., Inc. California
MVAK Technologies, Inc. New Jersey
Norcom Resources, Inc. Minnesota
Pizarro Re-Marketing, Inc. Texas
Tech-Tools, Inc. Delaware
Universal Commodities Corp. New Jersey
US Electrical Products Corp. New Jersey
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 809,711
<SECURITIES> 0
<RECEIVABLES> 6,975,808
<ALLOWANCES> 101,000
<INVENTORY> 4,290,681
<CURRENT-ASSETS> 13,886,689
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10,900,000
0
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</TABLE>
