UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
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: 000-26020
APPLIED CELLULAR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State or other jurisdiction
of incorporation or organization)
43-1641533
(IRS Employer
Identification number)
James River Professional Center,
Highway 160 & CC, Suite 5, Nixa, Missouri 65714
(Address of principal executive offices)
Registrant's telephone number, including area code: (417) 725-9888
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of business on November 10, 1997:
Class Number of Shares
Common Stock; $.001 Par Value 17,715,221
1
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC.
Index
Page No.
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Stockholders' Equity for the
Nine Months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 10
Part II Other Information
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
2
<PAGE>
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
Assets
September 30, December 31,
1997 1996
---------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,327,091 $ 809,711
Accounts receivable and unbilled receivables (net of allowance for
doubtful accounts of $132,000 in 1997 and $101,000 in 1996) 18,203,454 6,874,808
Inventories 9,867,162 4,290,681
Notes receivable 803,811 1,646,773
Prepaid expenses and other current assets 1,265,930 264,716
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 35,467,448 13,886,689
Land, Equipment And Leasehold Improvements 5,031,275 2,915,056
Notes Receivable 575,000 575,000
Goodwill 10,678,979 14,267,985
Purchased Computer Software 411,190 638,397
Other Assets 2,775,786 924,966
- ------------------------------------------------------------------------------------------------------------------------
$ 54,939,678 $ 33,208,093
========================================================================================================================
</TABLE>
<TABLE>
Liabilities And Stockholders' Equity
<S> <C> <C>
Current Liabilities
Notes payable $ 6,782,357 $ 3,920,057
Current maturities of long-term debt 361,942 333,833
Current portion of capital lease obligations 109,696 159,227
Accounts payable and accrued expenses 13,921,376 7,280,419
Due to investment company -- 521,000
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 21,175,371 12,214,536
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Long-term debt 2,067,877 1,247,158
Capital lease obligations 219,875 138,444
- ------------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 2,287,752 1,385,602
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities 23,463,123 13,600,138
- ------------------------------------------------------------------------------------------------------------------------
Minority Interest 1,703,713 456,139
- ------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Shares 900,000 10,900,000
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common shares:
Authorized 40,000,000 shares in 1997 and 20,000,000 in 1996,
of $.001 par value; issued and outstanding 16,281,849
and 5,798,701 shares in 1997 and 1996, respectively 16,282 5,799
Additional paid-in capital 26,575,493 7,928,198
Retained earnings 2,289,796 317,819
Foreign currency translation adjustment (8,729) --
- ------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 28,872,842 8,251,816
- ------------------------------------------------------------------------------------------------------------------------
$ 54,939,678 $ 33,208,093
========================================================================================================================
</TABLE>
See the accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,,
----------------------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Operating Revenue $ 29,195,281 $ 4,402,704 $ 72,065,644 $ 7,602,707
Cost of Goods Sold 18,826,116 2,167,631 47,339,170 4,163,160
- ----------------------------------------------------------------------------------------------------------------------
Gross Profit 10,369,165 2,235,073 24,726,474 3,439,547
Selling, General and Administrative Expenses 7,703,503 1,828,975 20,245,539 2,911,541
- ----------------------------------------------------------------------------------------------------------------------
Operating Income 2,665,662 406,098 4,480,935 528,006
Interest Income 45,956 25,522 133,903 67,628
Interest Expense (295,275) (49,930) (739,662) (75,151)
- ----------------------------------------------------------------------------------------------------------------------
Income Before Provision For Income Taxes
And Minority Interest 2,416,343 381,690 3,875,176 520,483
Provision For Income Taxes 980,693 133,702 1,395,053 133,702
- ----------------------------------------------------------------------------------------------------------------------
Income Before Minority Interest 1,435,650 247,988 2,480,123 386,781
Minority Interest 244,060 42,816 454,146 80,013
- ----------------------------------------------------------------------------------------------------------------------
Net Income 1,191,590 205,172 2,025,977 306,768
Preferred Stock Dividends 18,000 -- 54,000 --
- ----------------------------------------------------------------------------------------------------------------------
Net Income Applicable To
Common Shareholders $ 1,173,590 $ 205,172 $ 1,971,977 $ 306,768
======================================================================================================================
Net Income Per Common Share $ .09 $ .06 $ .21 $ .11
======================================================================================================================
Weighted Average Number Of
Common Shares Outstanding 12,896,253 3,505,122 9,619,372 2,706,254
======================================================================================================================
</TABLE>
See the accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 1997 And 1996
(Unaudited)
<CAPTION>
Foreign
Additional Retained Currency Total
Common Stock Paid-In Earnings Translation Stockholders'
Number Amount Capital (Deficit) Adjustment Equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1996 2,267,749 $ 2,268 $ 3,358,072 $ (308,400) $ -- $ 3,051,940
Net Income -- -- -- 306,768 -- 306,768
Issuance Of Common Stock 427,328 427 464,505 -- -- 464,932
Issuance Of Common Stock For Acquisitions 1,946,789 1,947 2,463,337 -- -- 2,465,284
Warrants Redeemed 260,000 260 649,740 -- -- 650,000
50% Of Principal Payments Received
On Note Receivable - Cadkey, Inc. -- -- 64,477 -- -- 64,477
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - September 30, 1996 4,901,866 $ 4,902 $ 7,000,131 $ (1,632) $ -- $ 7,003,401
=================================================================================================================================
Balance - January 1, 1997 5,798,701 $ 5,799 $ 7,928,198 $ 317,819 $ -- $ 8,251,816
Net Income -- -- -- 1,971,977 -- 1,971,977
Issuance Of Common Stock 1,075,694 1,076 2,039,389 -- -- 2,040,465
Issuance Of Common Stock to Redeem
Preferred Stock 1,354,167 1,354 2,498,646 -- -- 2,500,000
Issuance Of Common Stock For Acquisitions 6,053,287 6,053 7,000,260 -- -- 7,006,313
Warrants Redeemed 2,000,000 2,000 7,109,000 -- -- 7,111,000
Foreign Currency Translation Adjustment -- -- -- -- (8,729) (8,729)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - September 30, 1997 16,281,849 $ 16,282 $ 26,575,493 $ 2,289,796 $ (8,729) $ 28,872,842
=================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
See the accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For The Nine Months
Ended September 30,
-----------------------------------
1997 1996
-----------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,971,977 $ 306,768
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,286,348 351,456
Minority interest 454,146 80,013
Gain on sale of equipment (1,234,771) --
Change in assets and liabilities:
Increase in accounts receivable and unbilled receivables (3,081,649) (1,000,141)
Increase in inventories (1,391,360) (493,646)
Increase in prepaid expenses (322,604) (175,414)
Increase in deferred tax asset (71,625) (63,510)
Increase (decrease) in accounts payable and
accrued expenses (1,400,063) 431,992
- -----------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (3,789,601) (562,482)
- -----------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Decrease in notes receivable - officers 345,861 --
Payments received on note receivable - Cadkey, Inc. -- 128,953
Increase in other assets (589,318) (173,043)
Payments for equipment, computer software
and leasehold improvements (1,048,913) (84,294)
Proceeds from sale of equipment, computer software
and leasehold improvements 1,436,820 --
Payments for costs of asset and business acquisitions
(net of cash balances acquired) 192,868 230,450
- -----------------------------------------------------------------------------------------------------------
Net Cash Provided By Investing Activities 337,318 102,066
- -----------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net amounts borrowed on notes payable and long-term debt 105,433 803,712
Payments on capital lease obligations (164,060) (26,110)
Decrease in notes payable - officers -- (238,658)
Issuance of common stock 8,028,290 762,702
- -----------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 7,969,663 1,301,646
- -----------------------------------------------------------------------------------------------------------
Net Increase In Cash And Cash Equivalents 4,517,380 841,230
Cash And Cash Equivalents - Beginning Of Period 809,711 125,469
- -----------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents - End Of Period $ 5,327,091 $ 966,699
===========================================================================================================
Supplemental Disclosure Of Cash Flow Information
Interest paid $ 778,029 $ 75,151
Income taxes paid 443,735 --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Applied Cellular Technology, Inc. (the "Company") have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, all adjustments (consisting of only normal recurring
adjustments) considered necessary to present fairly the consolidated financial
statements have been made.
The condensed consolidated balance sheet at December 31, 1996 has been derived
from the audited consolidated financial statements at that date, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The condensed
consolidated statements of operations for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year. These statements should be read in conjunction
with the condensed financial statements and related notes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996.
2. Principles of Consolidation
The financial statements include the accounts of Applied Cellular Technology,
Inc. and wholly owned and eighty percent owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company acquired interests in four companies during the first quarter of
1997, interests in three companies during the second quarter of 1997, and
interests in four companies during the third quarter of 1997. The financial
position and results of operations of these acquisitions are included in the
Company's financial statements as of their effective date of acquisition. Net
operating revenue of these companies included in total revenue were $18,401,882
and $39,653,956 for the three and nine months ended September 30, 1997,
respectively.
2. Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share", which is required to be adopted in the
fourth quarter of 1997. The Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. The impact of the adoption is
not expected to materially impact basic earnings per share. The Company has not
yet determined what the impact of Statement No. 128 will be on the calculation
of fully diluted earnings per share.
In June, 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income", and Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information". These statements will
affect the disclosure requirements for the 1998 annual financial statements.
Currently, the Company is evaluating the effect of these new statements.
7
<PAGE>
3. Stockholders' Equity
On August 20, 1997, the stockholders of the Company approved an
amendment to the Company's Articles of Incorporation to increase the authorized
number of shares of common stock from 20,000,000 to 40,000,000, an amendment to
increase the authorized number of shares of preferred stock from 1,000,000 to
5,000,000, and an amendment to the Company's 1996 Non-Qualified Stock Option
Plan to increase the number of shares reserved for issuance from 2,000,000 to
5,000,000.
4. Subsequent Event
On October 24, 1997, the Company acquired a 100 percent interest in
Alacrity Systems, Inc. ("Alacrity") in exchange for 622,755 shares of the
Company's restricted common stock. Alacrity, headquartered in Hackettstown, New
Jersey, is a software technology company that develops software for office
devices that have telephony, faxing, copying, printing and scanning capabilities
in one multifunctional (MFP) product. Alacrity licenses its technology and
desktop software to manufacturers of multifunctional devices and image
processing peripherals. This software enables users to view, manage, transmit
and process information from the desktop with full fax, scan, e-mail (including
Internet), optical character recognition, print and copy capability.
5. Pro Forma Information
The following pro forma condensed consolidated statement of operations of
the Company for the nine months ended September 30, 1997 gives effect to the
acquisitions of the following companies as if they were effective at January 1,
1997:
Acquired Company Effective Date of Acquisition
Hopper Manufacturing Co., Inc. January 1, 1997
Norcom Resources, Inc. January 1, 1997
Pizarro Remarketing, Inc. January 1, 1997
MVAK Technologies, Inc. February 1, 1997
Advanced Telecommunications, Inc. May 1, 1997
Signal Processors, Ltd. May 1, 1997
Intermatica, Inc. June 30, 1997
DLS Service Corporation July 1, 1997
STC Netcom, Inc. July 1, 1997
Cybertech Station, Inc. July 1, 1997
PPL, Ltd. July 1, 1997
Alacrity Systems, Inc. October 1, 1997
The pro forma condensed consolidated statement of operations gives effect to the
acquisitions under the purchase method of accounting, and may not be indicative
of the results that would have occurred had the acquisitions been effective on
the dates indicated or of the results that may be obtained in the future.
8
<PAGE>
<TABLE>
Pro Forma Condensed Consolidated Statement of Operations
For The Nine Months Ended September 30, 1997
<CAPTION>
(Unaudited)
<S> <C>
Net operating revenue $ 92,396,024
Cost of goods sold 61,030,719
---------------
Gross profit 31,365,305
Operating expenses 26,725,778
---------------
Operating income 4,639,527
Interest income 207,001
Interest expense (841,830)
Minority interest (382,322)
Provision for income taxes (1,475,498)
---------------
Net income 2,146,878
Dividends 54,000
---------------
Net income applicable to common stockholders $ 2,092,878
===============
Net income per common share 0.15
===============
Weighted average number of common shares outstanding 14,130,057
===============
</TABLE>
The following pro forma condensed consolidated balance sheet at September 30,
1997 gives effect to the acquisitions as though they were effective as of
September 30, 1997. The pro forma condensed consolidated balance sheet gives
effect to the acquisitions under the purchase method of accounting.
<TABLE>
Pro Forma Condensed Consolidated Balance Sheet
September 30, 1997
<CAPTION>
(Unaudited)
<S> <C>
Current assets $ 38,027,353
Land, equipment and leasehold improvements 5,359,460
Goodwill 10,728,056
Other assets 3,766,726
Total assets $ 57,881,595
===============
Current liabilities $ 21,515,491
Capital lease obligations 219,875
Long-term debt 2,067,877
Minority interest 1,631,889
Redeemable preferred stock 900,000
Common stock 16,905
Additional paid-in capital 29,127,590
Retained earnings 2,410,697
Foreign currency translation adjustments (8,729)
Total liabilities and stockholders' equity $ 57,881,595
===============
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This discussion should be read in conjunction with the accompanying condensed
consolidated financial statements and related notes on pages 3 through 9, as
well as the Company's Annual Report on Form 10- KSB for the year ended December
31, 1996. Certain statements made in this report may contain forward-looking
statements. For a description of risks and uncertainties relating to such
forward-looking statements, see exhibit 99 attached hereto.
Results of Operations
The Company's results of operations improved significantly from the
third quarter of 1996 to the third quarter of 1997, and from the nine months
ended September 30, 1996 to the same period in 1997. The significant increases
are all attributable to the Company's growth of existing businesses and to its
growth through acquisition.
The Company had net income of $1,173,590, or 9 cents per share, in the
third quarter of 1997, a 472% increase from $205,172, or 6 cents per share, a
year earlier. For the nine months ended September 30, 1997, the Company had net
income of $1,971,977, or 21 cents per share, up 543% from $306,768, or 11 cents
per share, for the nine months ended September 30, 1996.
The following table summarizes the Company's results of operations as a
percentage of net operating revenue for the three and nine months ended
September 30, 1997 and 1996, and is derived from the unaudited condensed
consolidated statements of operations in Part I of this report.
<TABLE>
Relationship to Net Operating Revenue
-----------------------------------------------------------
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
1997 1996 1997 1996
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Operating Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 64.5% 49.2% 65.7% 54.8%
-------------- ------------- ------------- --------------
Gross Profit 35.5% 50.8% 34.3% 45.2%
Selling, General and Administrative Expenses 26.4% 41.5% 28.1% 38.3%
-------------- ------------- ------------- --------------
Operating Income 9.1% 9.3% 6.2% 6.9%
Interest Income 0.2% 0.6% 0.2% 0.9%
Interest Expense -1.0% -1.1% -1.0% -1.0%
-------------- ------------- ------------- --------------
Income Before Provision For Income Taxes And
Minority Interest 8.3% 8.8% 5.4% 6.8%
Provision For Income Taxes -3.4% -3.0% -1.9% -1.8%
-------------- ------------- ------------- --------------
Income Before Minority Interest 4.9% 5.8% 3.5% 5.0%
Minority Interest -0.8% -1.0% -0.6% -1.1%
-------------- ------------- ------------- --------------
Net Income 4.1% 4.8% 2.9% 3.9%
Preferred Stock Dividends -0.1% 0.0% -0.1% 0.0%
-------------- ------------- ------------- --------------
Net Income Applicable To Common Stockholders' 4.0% 4.8% 2.8% 3.9%
-------------- ------------- ------------- --------------
</TABLE>
10
<PAGE>
Net Operating Revenue
Net operating revenue was $29,195,281 in the third quarter of 1997, up
563% percent from $4,402,704 a year earlier. For the nine months ended September
30, 1997, net operating revenue rose 848% to $72,065,644 from $7,602,707 in the
nine months ended September 30, 1996. Net operating revenue increases are
attributable to the growth of the Company's existing businesses and to the
growth contributed by the five acquisitions the Company made during the latter
half of 1996, four acquisitions during the first quarter of 1997 three
acquisitions made during the second quarter of 1997, and four acquisitions made
during the third quarter of 1997.
In the first quarter of 1997, the Company acquired interests in the
following four companies: Hopper Manufacturing, Co., Inc., a re-manufacturer and
distributor of automotive parts; Norcom Resources, Inc., which provides computer
brokerage and engineering services, parts and technical support for main frame
computer systems; Pizarro Re-Marketing, Inc., which provides re-marketing
services of internal disk drives and tape storage devices for main frame
computer systems; and MVAK Technologies, Inc. which remanufactures and services
high-end vacuum pumps used in the semiconductor, medical and electronics
manufacturing industries.
During the second quarter, the Company acquired interests in the
following three companies: Advanced Telecommunications, Inc., an installer of
telecommunication equipment and voice messaging/voice response systems, and a
distributor of voice and data network services; Signal Processors Limited, a
United Kingdom manufacturer of satellite communications equipment, including
satellite modems and satellite tracking systems; and Intermatica, Inc., a
developer of industry compatible original equipment manufacturer software tool
kits.
During the third quarter, the Company acquired interests in the
following four companies: DLS Service Corporation, a value added reseller of
point-of-sale systems specializing in sales to the retail liquor industry; STC
Netcom, Inc., a builder and installer of PCS (Personal Communication Services),
Microwave, and Cellular antennas in North America; Cybertech Station, Inc., a
reseller of new and used memory products for workstations, servers and midrange
computer systems, and PPL, Ltd., a rental and leasing company specializing in
the leasing and rental of computers, accessories and peripherals.
These eleven acquisitions contributed $18,401,882, or 63 percent, of
net operating revenue in the third quarter of 1997, and $39,653,956, or 55
percent, of revenue for the nine months ended September 30, 1997.
During the third quarter of 1997, 50.0 percent of net operating revenue
was contributed by the Services (formerly Retail) Group, 31.9 percent was
contributed by the Computer Group and 18.1 percent by the Manufacturing Group.
In the third quarter of 1996, these groups contributed 74.9 percent, 7.1 percent
and 18.0 percent of net operating revenue, respectively. For the nine months
ended September 30, 1997, 45.2 percent of net operating revenue was contributed
by the Services Group, 37.5 percent was contributed by the Computer Group and
17.3 percent by the Manufacturing Group. In the same period in 1996, these
groups contributed 67.8 percent, 12.8 percent and 19.4 percent, respectively.
Gross Profit
Gross profit was $10,369,165 in the third quarter of 1997, up 364
percent from $2,235,073 a year earlier. For the current quarter, the gross
profit, as a percentage of net operating revenue, was 35.5 percent compared to
50.8 percent in the same period in 1996. For the nine months ended September 30,
1997, gross profit was $24,726,474, up 619 percent from $3,439,547 in the same
period in 1996. For the nine months ended September 30, 1997, the gross profit
percentage was 34.3 percent compared to 45.2 percent in the same period in 1996.
The decline in the gross profit percentage from 1996 to 1997 is attributable to
the
11
<PAGE>
different business mix and to newly acquired businesses with lower overall
margin contributions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net
operating revenue, was 26.4 percent and 41.5 percent in the third quarters of
1997 and 1996, respectively, and includes depreciation and amortization of
$566,261 and $168,633, respectively. For the nine months ended September 30,
1997, selling, general and administrative expenses, as a percentage of net
operating revenue, was 28.1 percent and 38.3 percent, respectively, and includes
depreciation and amortization of $1,286,348 and $351,456, respectively.
Operating Income
Operating income was $2,665,662 in the third quarter of 1997, up 556%
from $406,098 in the same period in 1996. As a percentage of net operating
revenue, operating income was 9.1 percent and 9.2 percent in the third quarters
of 1997 and 1996, respectively. Operating income for the nine months ended
September 30, 1997 was $4,480,935, up 749 percent from $528,006 in the 1996
period. Operating income as a percentage of net operating revenue was 6.2
percent and 6.9 percent for the nine month periods ended September 30, 1997 and
1996, respectively. The increase in operating income is attributable to the
growth of the Company's existing businesses and to the growth contributed by the
five acquisitions the Company made during the latter half of 1996, and the
eleven acquisitions during 1997.
Interest Income and Expense
Interest income was $45,956 and $25,522 for the third quarters of 1997
and 1996, respectively, and $133,903 and $67,628 for the nine months ended
September 30, 1997 and 1996, respectively. Interest expense was $295,275 and
$49,930 for the third quarters of 1997 and 1996, respectively, and $739,662 and
$75,151 for the nine months ended September 30, 1997 and 1996, respectively.
Interest expense increased 491 percent from the third quarter of 1996 to the
third quarter of 1997, and by 884 percent for the nine months ended September
30, 1996 to 1997. As a percentage of net operating revenue, interest expense was
1.0 percent and 1.1 percent in the third quarters of 1997 and 1996,
respectively, and 1.0 percent for both the nine months ended September 30, 1997
and 1996.
Income Taxes
The Company's effective income tax rate was 40.6 percent in the third
quarter of 1997 compared to 35.0 percent in the third quarter of 1996, and was
36.0 percent for the nine months ended September 30, 1997 compared to 25.7
percent in 1996. The increase in the effective rate for the third quarter of
1997 was as a result of adjustments to the provision for income tax recorded by
the Company's United Kingdom subsidiary, Signal Processors, Ltd.. In 1996 the
Company benefitted from tax net operating loss carryforwards, resulting in a
lower income tax rate used in the income tax provision.
Financial Condition
As of September 30, 1997, cash and cash equivalents totaled $5,327,091,
up from $809,711 at December 31, 1996. Cash of $3,789,601 and $562,482 was used
in operating activities in the nine months ended September 30, 1997 and 1996,
respectively. This use of cash during these periods reflects increases in
accounts receivable and unbilled receivables, inventory and prepaid expenses and
a decrease in accounts payable in the 1997 period. These activities accounted
for the use of $6,195,676 and $1,237,209 of operating cash in 1997 and 1996,
respectively. One of the Company's objectives is to maximize its cash flow as
management believes it offers evidence of financial strength. However, as the
Company experiences substantial growth, its investment needs are more
substantial than those of more mature companies with
12
<PAGE>
modest investment needs. Consequently, the Company will continue, in the
foreseeable future, to continue to use cash from operations and to continue to
finance this use of cash through financing activities such as the sale of common
stock and/or bank borrowing.
Inventory levels increased by 130 percent from December 31, 1996 to
September 30, 1997. This increase was primarily attributable to growth through
acquisitions and to the resulting increased level of business. The 165 percent
increase in accounts and unbilled receivables from December 31, 1996 to
September 30, 1997 reflects revenue growth from both existing and acquired
businesses. Accounts payable and accrued expenses increased by 91 percent during
this period, again attributable to the Company's growth and the resulting
increased level of business.
Investing activities provided $337,318 and $102,066 of cash in the nine
months ended September 30, 1997 and 1996. During this period in 1997, investing
activities consisted principally of decreases in notes receivable from officers,
increases in other assets and a net cash inflow from the sale of equipment,
computer software and leasehold improvements net of payments for equipment,
computer software and leasehold improvements. In the same period in 1996,
investing activities consisted principally of costs associated with
acquisitions, and increases in other assets, offset by cash received from notes
receivable.
The Company obtained positive cash flows of $7,969,663 and $1,301,646
from financing activities in the nine months ended September 30, 1997 and 1996,
respectively. The major financing sources of cash in both the 1997 and 1996
period were proceeds from the sale of the Company's common shares and net bank
borrowing, offset by payments on capital lease obligations.
Other sources of liquidity include the Company's ability to obtain term
loans and revolving lines of credit for its operating subsidiaries, the sale of
common and preferred shares, the exercise of warrants, and the raising of other
forms of debt or equity through private placement. The Company believes that its
current cash position, augmented by financing activities, will provide it with
sufficient resources to finance its working capital requirements for the
remainder of the year. The Company's capital requirements depend on a variety of
factors, including but not limited to, the rate of increase or decrease in its
existing business base; the success, timing, and amount of investment required
to bring new products on-line; revenue growth or decline; and potential
acquisitions. The Company believes that it has the financial resources to meet
its future business requirements.
Outlook
The Company's objective is to continue to grow from existing business
segments and through acquisitions, both domestically and abroad. The Company's
strategy has been, and continues to be, to invest in, and acquire, businesses
that complement and add to its existing business base. The Company has expanded
significantly through acquisitions in the last twelve months and continues to do
so. The Company's financial results are substantially dependent on not only its
ability to sustain and grow existing businesses, but to continue to grow through
acquisition. The Company expects to continue to pursue its acquisition strategy
for the remainder of 1997, but there can be no assurance that management will be
able to continue to find, acquire and integrate high quality companies at
attractive prices.
The Company has made a decision to exit the retail cellular phone business
and is currently evaluating the impact of this decision, but expects that it
will have no material adverse impact on future earnings or performance.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not applicable
Item 2 - Changes in Securities
Effective as of January 1, 1997, the Company entered into agreements
with Bruce Reale, Vincent A. Lo Castro and Capital Alliance Corporation, under
which the Company agreed to pay quarterly consulting fees of $96,000 each to Mr.
Reale and Mr. Lo Castro, and $8,000 to Capital Alliance Corporation, in lieu of
dividends otherwise payable in respect of shares of preferred stock of the
Company owned by Mr. Lo Castro, a trust affiliated with Mr. Reale and Capital
Alliance Corporation. Effective June 30, 1997, the Company exchanged an
aggregate of 650,000 shares of its common stock for 48,000 shares of such
preferred stock held by Mr. Lo Castro, and in exchange for certain related
warrants. The Company's obligation to pay the consulting fees to Mr. Lo Castro
described above was terminated as part of such exchange. Effective September 30,
1997, the Company exchanged an aggregate of 704,167 shares of its common stock
for 52,000 shares of such preferred stock held by Mr. Reale and Capital Alliance
Corporation, and in exchange for certain related warrants. The Company's
obligation to pay the consulting fees to Mr. Reale and Capital Alliance
Corporation described above were terminated as part of such exchange.
An aggregate of 2,900,562 shares of the Company's restricted common
stock was issued as consideration for the businesses acquired as discussed in
Item 5 below.
On October 10, 1997, the Company filed a Registration Statement on Form
S-3 under the Securities Act of 1933 (Registration No. 333-37713), to register
8,858,516 outstanding Common Shares on behalf of selling shareholders. This
registration statement is subject to completion and is not yet effective.
On November 5, 1997, the Company filed a Registration Statement on Form S-8
under the Securities Act of 1933 (Registration No. 333-39553), to register
5,000,000 shares of the Company's authorized Common Shares reserved for issuance
under the Company's 1996 Non-Qualified Stock Option Plan (as amended through
August 20, 1997). This registration statement became effective on November 5,
1997. On November 11, 1997, Richard J. Sullivan, the Chairman of the Board and
Chief Executive Officer of the Company, and Garrett A. Sullivan, the President
and Chief Operating Officer of the Company, exercised options covered by this
registration statement to acquire an aggregate of 650,000 shares of common stock
of the Company, at an exercise price of $4.25 per share. On November 12, 1997,
the Company filed a post-effective amendment to the registration statement to
allow for the resale of such shares. The selling shareholders expect to sell
such shares in broker transactions through Attkisson, Carter & Akers, Atlanta,
Georgia.
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
An Annual Meeting of Stockholders was held on August 20, 1997 to:
(i) Elect five directors to hold office until the Annual Meeting of
Stockholders to be held in 1998 and until their respective successors
have been duly elected and qualified. The result of the vote to elect
the five directors were as follows:
Richard J. Sullivan, Garrett A. Sullivan, Angela M. Sullivan and Arthur F.
Noterman all received 5,811,922 votes for, none withheld, and 6,941
abstentions. Daniel E. Penni received 5,811,922 votes for, none
withheld, and 6,940 abstentions.
(ii) Ratify the appointment of Rubin, Brown, Gornstein & Co., LLP as
independent auditors of the Company for the 1997 calendar year. The
proposal received 5,806,678 votes for, 3,899 votes against, and 8,286
abstentions.
14
<PAGE>
(iii) Approve an amendment to the articles of incorporation of the Company to
increase the authorized number of shares of common stock from
20,000,000 to 40,000,000. The proposal received 5,535,467 votes for,
277,335 votes against, and 6,061 abstentions.
(iv) Approve an amendment to the articles of incorporation of the Company to
increase the authorized number of shares of preferred stock from
1,000,000 to 5,000,000. The proposal received 5,386,707 votes for,
425,593 votes against, and 6,563 abstentions.
(v) Approve an amendment to the articles of incorporation of the Company to
allow the Board of Directors to adopt and amend the By-Laws without
further action by the shareholders. The proposal received 4,786,835
votes for, 538,627 votes against, and 493,401 abstentions.
(vi) Approve a further amendment and restatement of the articles of
incorporation of the Company. The proposal received 5,529,386 votes
for, 234,562 votes against, and 54,915 abstentions.
(vii) Approve an amendment to the Company's 1996 Non-Qualified Stock Option
Plan (a) to increase the number of shares available for issuance from
2,000,000 to 5,000,000, (b) to allow for re-issuance of options for
shares delivered to the Company in payment for option shares, and (c)
to permit grant of options by the whole Board of Directors as well as
by a committee of the Board. The proposal received 5,528,644 votes for,
249,431 votes against, and 40,788 abstentions.
(viii) Ratify grants of options to purchase an aggregate of 1,765,200 shares
of the Company's common stock granted under the Company's 1996
Non-Qualified Stock Option Plan since the 1996 Annual Meeting of
Shareholders. The proposal received 5,632,617 votes for, 141,226 votes
against, and 45,020 abstentions.
Item 5 - Other Information
On July 28, 1997, the Company entered into an agreement to acquire all
of the 500 issued and outstanding common shares of DLS Service Corporation from
the two selling shareholders in consideration for 57,600 shares of the Company's
restricted common stock issued at closing and up to an additional 28,800 shares
of the Company's restricted common stock on each of the first and second
anniversaries of closing if certain profit targets are met. For accounting
purposes, the effective date of the transaction was July 1, 1997.
On September 5, 1997, the Company entered into an agreement to purchase
eighty percent of the 20,000 issued and outstanding common shares of STC Netcom,
Inc., from twenty-one selling shareholders in exchange for 1,600,000 shares of
the Company's restricted common stock. For accounting purposes, the effective
date of the transaction was July 1, 1997.
On October 8, 1997, the Company entered into an agreement to purchase
eighty percent of the 100 issued and outstanding ordinary shares of Cybertech
Station, Inc. from the selling shareholder in exchange for 158,351 shares of the
Company's restricted common stock at closing and additional consideration to be
determined at the end of calendar year 1997 in the form of shares of the
Company's restricted common stock dependent upon Cybertech's operating profits
for 1997. For accounting purposes, the effective date of the transaction was
July 1, 1997.
15
<PAGE>
Effective as of July 1, 1997, the Company's wholly owned subsidiary,
PPL of Delaware Inc. ("PPL- Delaware."), entered into an Agreement of Plan and
Merger ("Merger") with the two selling shareholders (PPL Sellers") of PPL, Ltd.
("PPL"), whereby PPL-Delaware was merged with and into PPL in consideration for
the Company issuing 461,856 shares of its restricted common stock to the PPL
Sellers. Under the terms of the Merger, the PPL Sellers shall be entitled to
receive additional shares of the Company's restricted common stock if certain
profit levels are met in 1998, 1999 and 2000. For accounting purposes, the
effective date of the transaction was July 1, 1997.
On October 24, 1997, the Company entered into an agreement to purchase
all of the 6,537,865 issued and outstanding common shares, and all of the
27,879,377 issued and outstanding preferred shares of Alacrity Systems, Inc.
from forty-four selling shareholders in exchange for 622,755 shares of the
Company's restricted common stock. The shares were issued on October 27, 1997,
and the transaction was consummated on October 31, 1997. For accounting
purposes, the effective date of the transaction is October 1, 1997.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule (filed only electronically with the SEC)
(99) Cautionary Statements
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company between
July 1, 1997 and the date of filing this report:
(1) the Company's current report on Form 8-K filed on November 13,
1997.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED CELLULAR TECHNOLOGY, INC.
(Registrant)
Date: November 13, 1997 By: /s/ David A. Loppert
-----------------------
David A. Loppert, Vice President, Treasurer and
Chief Financial Officer (Principal Financial
and Accounting Officer)
17
<PAGE>
Exhibit Index
Number Description of Exhibits
27 Financial Data Schedule (filed only electronically with the SEC)
99 Cautionary Statements
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's interim unaudited condensed consolidated financial statements as of
and for the nine months ended September 30, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000924642
<NAME> Applied Cellular Technology, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 5,327,091
<RECEIVABLES> 18,335,454
<SECURITIES> 0
<ALLOWANCES> 132,000
<INVENTORY> 9,867,162
<CURRENT-ASSETS> 35,467,448
<PP&E> 9,142,806
<DEPRECIATION> 4,111,531
<TOTAL-ASSETS> 54,939,678
<CURRENT-LIABILITIES> 21,175,371
<BONDS> 2,287,752
900,000
0
<COMMON> 16,282
<OTHER-SE> 28,856,560
<TOTAL-LIABILITY-AND-EQUITY> 54,939,678
<SALES> 71,001,379
<TOTAL-REVENUES> 72,065,644
<CGS> 44,198,063
<TOTAL-COSTS> 47,339,170
<OTHER-EXPENSES> 20,245,539
<LOSS-PROVISION> 27,975
<INTEREST-EXPENSE> 739,662
<INCOME-PRETAX> 3,875,176
<INCOME-TAX> 1,395,053
<INCOME-CONTINUING> 2,480,123
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,971,977
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
Exhibit 99
Cautionary Statements
Certain statements in this quarterly report on Form 10-Q of Applied
Cellular Technology, Inc. (the "Company"), and the documents incorporated by
reference herein, constitute "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 the Private Securities Litigation Reform Act of 1995,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: the continued ability of the Company to sustain its growth through
product development and business acquisitions; the successful completion and
integration of future acquisitions; the ability to hire and retain key
personnel; the continued development of the Company's technical, manufacturing,
sales, marketing and management capabilities; relationships with and dependence
on third-party suppliers; anticipated competition; uncertainties relating to
economic conditions where the Company operates; uncertainties relating to
government and regulatory policies; uncertainties relating to customer plans and
commitments; rapid technological developments and obsolescence in the industries
in which the Company operates and competes; potential performance issues with
suppliers and customers; governmental export and import policies; global trade
policies; worldwide political stability and economic growth; the highly
competitive environment in which the Company operates; potential entry of new,
well-capitalized competitors into the Company's markets; changes in the
Company's capital structure and cost of capital; and uncertainties inherent in
international operations and foreign currency fluctuations. The words "believe",
"expect", "anticipate", "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
18
