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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 quarterly period ended March 31, 1998
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 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, P.O. Box 2067
Nixa, Missouri 65714
(417) 725-9888
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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 May 12, 1998:
Class Number of Shares
Common Stock; $.001 Par Value 25,834,951
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC.
TABLE OF CONTENTS
Item Description Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three Months ended March 31, 1998 and 1997 4
Consolidated Statements of Stockholder's Equity -
Three Months ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows -
Three Months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
1. Legal Proceedings 15
2. Changes In Securities and Use Of Proceeds 15
3. Defaults Upon Senior Securities 16
4. Submission of Matters to a Vote of Security Holders 16
5. Other Information 16
6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
-2-
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
Assets
March 31, December 31,
--------------------------------
1998 1997
--------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,923,000 $ 7,657,000
Accounts receivable and unbilled
receivables (net of allowance
for doubtful accounts of $651,000 in
1998 and $675,000 in 1997) 24,574,000 19,389,000
Inventories 12,635,000 10,872,000
Notes receivable 601,000 390,000
Prepaid expenses and other current assets 1,653,000 1,267,000
- -----------------------------------------------------------------------------
Total Current Assets 45,386,000 39,575,000
Property, Plant And Equipment 6,597,000 5,339,000
Notes Receivable 575,000 575,000
Goodwill 16,381,000 12,263,000
Other Assets 4,128,000 3,530,000
- -----------------------------------------------------------------------------
$ 73,067,000 $ 61,282,000
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Liabilities And Stockholders' Equity
<S> <C> <C>
Current Liabilities
Notes payable $ 4,591,000 $ 4,783,000
Current maturities of long-term debt 933,000 842,000
Accounts payable and accrued expenses 19,785,000 14,488,000
---------------------------------------------------------------------------
Total Current Liabilities 25,309,000 20,113,000
Long-Term Liabilities 2,355,000 2,200,000
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Total Liabilities 27,664,000 22,313,000
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Minority Interest 1,869,000 1,785,000
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Redeemable Preferred Shares 700,000 900,000
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Stockholders' Equity
Common shares:
Authorized 40,000,000 shares in 1998
and 1997 of $.001 par value; issued
and outstanding 24,516,027 and
20,672,423 in 1998 and 1997, respectively 25,000 21,000
Additional paid-in capital 39,597,000 33,680,000
Retained earnings 3,183,000 2,586,000
Unrealized gain on marketable securities 12,000
Foreign currency translation adjustment 17,000 (3,000)
- ---------------------------------------------------------------------------
Total Stockholders' Equity 42,834,000 36,284,000
- ---------------------------------------------------------------------------
$ 73,067,000 $ 61,282,000
================================================================================
</TABLE>
See the accompanying notes to consolidated financial statements.
-3-
<PAGE>
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
---------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For The Three Months
Ended March 31,
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
Net Operating Revenue $ 38,784,000 $ 18,127,000
Cost of Goods Sold 28,298,000 12,079,000
- -------------------------------------------------------------------------------
Gross Profit 10,486,000 6,048,000
Selling, General and
Administrative Expenses 9,131,000 5,341,000
- -------------------------------------------------------------------------------
Operating Income 1,355,000 707,000
Interest Income 106,000 49,000
Interest Expense (234,000) (182,000)
- -------------------------------------------------------------------------------
Income Before Provision For Income Taxes
And Minority Interest 1,227,000 574,000
Provision For Income Taxes 518,000 207,000
- -------------------------------------------------------------------------------
Income Before Minority Interest 709,000 367,000
Minority Interest 94,000 70,000
- -------------------------------------------------------------------------------
Net Income 615,000 297,000
Preferred Stock Dividends 18,000 18,000
- -------------------------------------------------------------------------------
Net Income Applicable to Common Stockholders $ 597,000 $ 279,000
===============================================================================
Net Income Per Common Share - Basic $ .03 $ .05
===============================================================================
Net Income Per Common Share - Diluted $ .02 $ .04
===============================================================================
Weighted Average Number Of
Common Shares Outstanding - Basic 23,711,000 6,145,000
===============================================================================
Weighted Average Number Of
Common Shares Outstanding - Diluted 24,956,000 8,120,000
===============================================================================
</TABLE>
- ----------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
-4-
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Three Month Periods Ended March 31, 1998 And 1997
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Stockholders'
Number Amount Capital Earnings Other Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1997 5,798,701 $ 5,800 $ 7,928,000 $ 318,000 $ -- $ 8,251,800
Net income -- -- -- 297,000 -- 297,000
Issuance of common stock 1,534,680 1,200 2,781,000 -- -- 2,782,200
Warrants redeemed 10,000 -- 20,000 -- -- 20,000
Preferred stock dividends paid -- -- -- (18,000) -- (18,000)
- ------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1997 7,343,381 $ 7,000 $ 10,729,000 $ 597,000 $ -- $ 11,333,000
==============================================================================================================================
Balance - January 1, 1998 20,672,423 $ 21,000 $ 33,680,000 $ 2,586,000 $ (3,000) $ 36,284,000
Net income -- -- -- 615,000 -- 615,000
Issuance of common stock 3,843,604 4,000 5,917,000 -- -- 5,921,000
Foreign currency translation adjustment -- -- -- -- 20,000 20,000
Unrealized gain on marketable securities -- -- -- -- 12,000 12,000
Preferred stock dividends paid -- -- -- (18,000) -- (18,000)
- ------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1998 24,516,027 $ 25,000 $ 39,597,000 $ 3,183,000 $ 29,000 $ 42,834,000
==============================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
-5-
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For The Three Months
Ended March 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 615,000 $ 297,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 695,000 330,000
Minority interest 94,000 70,000
(Gain) Loss on sale of equipment (14,000) 2,000
Change in assets and liabilities:
Decrease in accounts receivable
and unbilled receivables 91,000 429,000
Increase in inventories (1,011,000) (748,000)
Increase in prepaid expenses (352,000) (213,000)
(Increase) decrease in deferred tax asset 29,000 (70,000)
Decrease in accounts payable and accrued
expenses (894,000) (660,000)
- -----------------------------------------------------------------------------
Net Cash Used In Operating Activities (747,000) (563,000)
- -----------------------------------------------------------------------------
Cash Flows From Investing Activities
(Increase) decrease in notes receivable - officers (211,000) 787,000
Increase in other assets (584,000) (144,000)
Proceeds from sale of property, plant,
and equipment 86,000 --
Payments for property, plant, and equipment (611,000) (548,000)
Proceeds from costs of asset and business
acquisitions (net of cash balances acquired) 1,279,000 481,000
- -----------------------------------------------------------------------------
Net Cash Provided By (Used In) Investing Activities (41,000) 576,000
- -----------------------------------------------------------------------------
Cash Flows From Financing Activities
Net amounts borrowed (paid) on notes payable (192,000) 380,000
Proceeds from long-term debt 255,000 --
Payments for long-term debt (737,000) --
Redemption of preferred shares (200,000) --
Preferred stock dividends paid (72,000) (72,000)
Issuance of common shares -- 54,000
- -----------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing Activities (946,000) 362,000
- -----------------------------------------------------------------------------
Net Increase (Decrease) In Cash And Cash Equivalents (1,734,000) 375,000
Cash And Cash Equivalents- Beginning Of Period 7,657,000 810,000
- -----------------------------------------------------------------------------
Cash And Cash Equivalents- End Of Period $ 5,923,000 1,185,000
=============================================================================
Supplemental Disclosure Of Cash Flow Information
Income taxes paid $ 300,000 --
Interest paid 154,148 $ 220,000
Noncash investing and financing activities:
Property acquired for long-term debt $ 352,000 490,000
Property acquired through issuance of stock -- 163,000
--------------------------------------------------------------------------
</TABLE>
See the accompanying notes to consolidated financial statements.
-6-
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited 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 consolidated balance sheet at December 31, 1997 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 consolidated statements of
operations for the three months ended March 31, 1998 is not necessarily
indicative of the results that may be expected for the entire year. These
statements should be read in conjunction with the consolidated financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
2. Principles of Consolidation
The financial statements include the accounts of Applied Cellular
Technology, Inc. and its wholly owned and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The Company acquired interests in two companies during the first
quarter of 1998 and four companies during the first quarter of 1997. The
financial position and results of operations of these acquisitions are included
in the Company's consolidated financial statements as of their effective date of
acquisition. Net operating revenue of these companies included in total revenue
was $11,953,000 and $1,338,000 for the three months ended March 31, 1998 and
1997, respectively.
3. Recently Issued Accounting Standards
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, which are
effective for fiscal years beginning after December 31, 1997, expand or modify
disclosures and will have no impact on the Company's consolidated financial
position, results of operations or cash flows.
4. Inventory
March 31, December 31,
1998 1997
---------------- -----------------
Raw materials $ 2,370,000 $ 1,962,000
Work in process 2,587,000 1,085,000
Finished goods 7,678,000 7,825,000
================ =================
$12,635,000 $ 10,872,000
================ =================
-7-
<PAGE>
5. Earnings Per Share
The following is a reconciliation of the numerator and denominator of basic
and diluted earnings per share:
March 31,
---------------------------
1998 1997
-------------- -----------
Numerator:
Net income $615,000 $297,000
Preferred stock dividends (18,000) (18,000)
-------------- -----------
Numerator for basic earnings per share -
Net income available to common stockholders 597,000 279,000
Effect of dilutive securities:
Preferred stock dividends 18,000 18,000
-------------- -----------
Numerator for diluted earnings per share -
Net income available to common stockholders $615,000 $297,000
============== ===========
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 23,711,000 6,145,000
-------------- -----------
Effect of dilutive securities -
Redeemable preferred stock 122,000 1,511,000
Warrants 624,000 279,000
Employee stock options 499,000 185,000
-------------- -----------
Dilutive potential common shares 1,245,000 1,975,000
-------------- -----------
Denominator for diluted earnings per share - adjusted
Weighted-average shares and assumed conversions 24,956,000 8,120,000
============== ===========
Basic earnings per share $0.03 $0.05
============== ===========
Diluted earnings per share $0.02 $0.04
============== ===========
6. Subsequent Event
On April 1, 1998, the Company's subsidiary, Universal Commodities
Corporation, acquired an 80 percent interest in Blue Star Electronics, Inc.
("Blue Star") in exchange for 193,939 shares of the Company's restricted common
stock. Blue Star, based in Hackensack, New Jersey, is a designer and
manufacturer of cable assemblies for the communication industry.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the accompanying
consolidated financial statements and related notes on pages 3 through 8, as
well as the Company's Annual Report on Form 10-K for the year ended December 31,
1997. 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 first
quarter of 1997 to the first quarter of 1998. The significant increases are all
attributable to the Company's growth of existing businesses and to its growth
through acquisition. Net operating revenues for the first quarter of 1998 were
$38.8 million, up $20.7 million or 114 percent from $18.1 million in the same
period in 1997. Net income applicable to common stockholders increased by 114
percent to $597,000 from $279,000 a year earlier. Basic earnings per share were
3 cents per share in 1998, compared to 5 cents per share in 1997. Diluted
earnings per share were 2 cents per share in 1998, compared to 4 cents per share
in 1997. The weighted average number of diluted shares outstanding increased by
207 percent from 1997 to 1998.
The following table summarizes the Company's results of operations as a
percentage of net operating revenue for the three months ended March 31, 1998
and 1997, and is derived from the unaudited consolidated statements of
operations in Part I, Item 1 of this report.
Relationship to Net
Operating Revenue
----------------------------
Three Months Ended March 31,
----------------------------
1998 1997
% %
Net Operating Revenue 100.0 100.0
Cost of Goods Sold 73.0 66.6
----------- -----------
Gross Profit 27.0 33.4
Selling, General and Administrative Expenses 23.5 29.5
----------- -----------
Operating Income 3.5 3.9
Interest Income 0.3 0.3
Interest Expense -0.6 -1.0
----------- -----------
Income Before Provision for Income Taxes 3.2 3.2
And Minority Interest
Provision For Income Taxes 1.4 1.2
----------- -----------
Income Before Minority Interest 1.8 2.0
Minority Interest 0.2 0.4
----------- -----------
Net Income 1.6 1.6
Preferred Stock Dividends 0.1 0.1
=========== ===========
Net Income Applicable to Common Stockholders 1.5 1.5
=========== ===========
-9-
<PAGE>
Net Operating Revenue
During the first quarter of 1998, the Company reorganized its business into
four groups:
ACT Communications Group
This group contains companies that provide products and services including
telephone systems, computer telephony, interactive voice response systems, flat
rate extended area calling services, long distance and local telephone services,
digital satellite services, networking services and the construction of
microwave, cellular and digital towers.
ACT Software and Services Group
This group contains companies that develop and market software products and
services for wireless-enabled applications, data acquisition, decision support,
point of sale and multi-function peripheral devices.
ACT Computer Group
This group contains companies that provide leasing, re-marketing,
components, peripherals, parts-on-demand, consulting and business continuity
services for mainframe, midrange and PC systems for industrial, commercial and
retail organizations.
ACT Specialty Manufacturing Group
This group contains companies that manufacture analog and digital
industrial temperature controls, analog and digital electrical products, factory
automation controls, environmental systems and satellite controllers, modems and
positioning systems for data broadcasting.
The following table summarizes the net operating revenue by business group:
March 31,
----------------------------------------------
Business Group 1998 % 1997 %
- ---------------------------------------------- -------- ----------------------
ACT Communications Group $22,471,000 57.9% $ 6,992,000 38.6%
ACT Software and Services Group 1,538,000 4.0% 612,000 3.4%
ACT Computer Group 10,622,000 27.4% 7,983,000 44.0%
ACT Specialty Manufacturing Group 4,153,000 10.7% 2,540,000 14.0%
============= ======== ======================
$38,784,000 100.0% $18,127,000 100.0%
============= ======== ======================
In the first quarter of 1998, the Company acquired interests in the
following two companies: Information Products Center, Inc. ("Information
Products") and The Framehill Company d/b/a Winward Electric ("Winward Electric).
Information Products is a provider of services and products designed to build
and manage personal computer network infrastructures and provides customized,
integrated solutions for a customer's network infrastructure by combining
comprehensive value added services with its expertise in personal computers,
network products, computer peripherals and desktop software applications.
Winward Electric is a full service electrical and communications systems
contractor for residential, commercial, institutional and industrial markets.
These two acquisitions contributed $11,953,000, or 30.8 percent, of net
operating revenue in the first quarter of 1998. In the first quarter of 1997,
the Company acquired interests in four companies who contributed $1,338,000 or
7.4 percent of 1997's net operating revenue.
-10-
<PAGE>
Gross Profit
Gross profit was $10,486,000 in the first quarter of 1998, up 73.4 percent
from $6,048,000 a year earlier. For the current quarter, the gross profit, as a
percentage of net operating revenue, was 27.0 percent compared to 33.4 percent
in the same period in 1997. The decline in the gross profit percentage from 1997
to 1998 is attributable to the 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, were 23.5 percent and 29.5 percent in the first quarters of
1998 and 1997, respectively, and includes depreciation and amortization of
$695,000 and $330,000, respectively. The decline in these expenses is
attributable to economies of scale being achieved with higher operating
revenues.
Operating Income
Operating income was $1,355,000 in the first quarter of 1998, up 91.7
percent from $707,000 in the same period in 1997. As a percentage of net
operating revenue, operating income was 3.5 percent and 3.9 percent in the first
quarters of 1998 and 1997, respectively. The increase in operating income is
attributable to the growth of the Company's existing businesses and to the
growth contributed by the two acquisitions the Company made during the first
quarter of 1998.
Interest Income and Expense
Interest income was $106,000 and $49,000 for the first quarters of 1998 and
1997. Interest expense was $234,000 and $182,000 for the first quarters of 1998
and 1997, respectively. Interest income increased 116.3 percent from the first
quarter of 1997 to the first quarter of 1998, while interest expense increased
by 29.1 percent in the same period. As a percentage of net operating revenue,
interest income was 0.3 percent in the first quarters of 1998 and 1997, while
interest expense was 0.6 percent and 1.0 percent in the first quarters of 1998
and 1997.
Income Taxes
The Company's effective income tax rate was 42.2 percent in the first
quarter of 1998 compared to 36.1 percent in the first quarter of 1997. The
increase in the effective rate for the first quarter of 1998 was as a result of
increased non-deductible expenses, primarily goodwill, over the first quarter of
1997.
Financial Condition
As of March 31, 1998, cash and cash equivalents totaled $5,923,000, down
22.6 percent from $7,657,000 at December 31, 1997. Cash of $747,000 and $563,000
was used in operating activities in the three months ended March 31, 1998 and
1997, respectively. This use of cash reflects increases in inventory and prepaid
expenses and decreases in accounts receivable and unbilled receivables and
accounts payable in both periods. These activities accounted for the use of
$2,166,000 and $1,192,000 of operating cash in 1998 and 1997, 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 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.
-11-
<PAGE>
Inventory levels increased by 16.2 percent from December 31, 1997 to March
31, 1998. This increase was primarily attributable to growth through
acquisitions and to the resulting increased level of business. The 26.7 percent
increase in accounts and unbilled receivables from December 31, 1997 to March
31, 1998 reflects revenue growth from both existing and acquired businesses.
Accounts payable and accrued expenses increased by 36.6 percent during this
period, again attributable to the Company's growth and the resulting increased
level of business.
Investing activities used $41,000 and provided $576,000 of cash in the
three months ended March 31, 1998 and 1997. During these periods, investing
activities consisted principally of changes in notes receivable from officers,
the purchase of property, plant and equipment, increase in other assets, offset
by cash acquired from acquisitions.
The Company used cash of $946,000 and obtained a positive cash flow of
$362,000 from financing activities in the three months ended March 31, 1998 and
1997, respectively. The major financing sources of cash in both the 1998 and
1997 period were proceeds from bank borrowing. The major financing applications
in 1998 were the repayment of debt and the redemption of preferred shares.
One of the Company's stated objectives is to grow and strengthen its
balance sheet without significant leverage. The following table reflects the
more commonly applied liquidity ratios, as follows:
Ratio March 31, December 31,
------------------------------- ----------------- -------------------
1998 1997
---- ----
Current ratio 1.79 1.97
Quick ratio 1.20 1.34
Debt to equity ratio 0.18 0.22
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
foreseeable future. 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 internally through its
existing business groups 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 in 1998 and future years, but there can be no assurance
that management will be able to continue to find, acquire and integrate high
quality companies at attractive prices.
-12-
<PAGE>
While the Company has been profitable for the last three fiscal years,
future financial results are uncertain. There can be no assurance that the
Company will continue to be operated in a profitable manner. Profitability
depends upon many factors, including the success of the Company's various
marketing programs, the maintenance or reduction of expense levels and the
ability of the Company to successfully coordinate the efforts of the different
segments of its business.
The Company has engaged in a continuing program of acquisitions of other
businesses which are considered to be complementary to the lines of business
carried on by the Company, and it is anticipated that such acquisitions will
continue to occur. As of March 31, 1998, the total assets of the Company were
approximately $73.1 million. As of December 31, 1997, the total assets of the
Company were approximately $61.3 million, compared to approximately $33.2
million at December 31, 1996 and approximately $4.1 million at the end of 1995.
Net operating revenues for the year ended December 31, 1997 were approximately
$103.2 million compared to approximately $19.9 million in 1996 and $2.3 million
in 1995. Managing these dramatic changes in the scope of the business of the
Company will present ongoing challenges to management, and there can be no
assurance that the Company's operations as currently structured, or as affected
by future acquisitions, will be successful. The businesses acquired by the
Company may require substantial additional capital, and there can be no
assurance as to the availability of such capital when needed, nor as to the
terms on which such capital might be made available to the Company. It is the
Company's policy to retain existing management of acquired companies and to
allow the new subsidiary to continue to operate in the manner which has resulted
in its success in the past, under the overall supervision of senior management
of the Company. Accordingly, the success of the operations of these subsidiaries
will depend, to a great extent, on the continued efforts of the management of
the acquired companies.
The Company is constantly looking at opportunities to improve operating
efficiencies and synergies within existing business segments. The Company also
plans to divest itself of business entities that are not critical to its
long-term strategy. In order to ensure that the Company's shareholders' value is
maximized, the Company is seeking to retain an investment banking firm to
determine what options are open to it. The Company will review all alternatives
to ensure appreciation of its shareholders' investments.
Competition
Each segment of the Company's business is highly competitive, and it is
expected that competitive pressures will continue. Many of the Company's
competitors have far greater financial and other resources than the Company. The
areas which the Company has identified for continued growth and expansion are
also target market segments for some of the largest and most strongly
capitalized companies in the United States, Canada and Europe. There can be no
assurance that the Company will have the financial, technical, marketing and
other resources required to compete successfully in this environment in the
future.
Dependence on Key Individuals
The future success of the Company is highly dependent upon the Company's
ability to attract and retain qualified key employees. The Company is organized
with a small senior management team, with each of its separate operations under
the day-to-day control of local managers. If the Company were to lose the
services of any members of its central management team, the overall operations
of the Company could be adversely affected, and the operations of any of the
individual facilities of the Company could be adversely affected if the services
of the local managers should be unavailable.
-13-
<PAGE>
Year 2000 Compliance
The Company believes that its business systems, including its computer
systems, are not subject to significant Year 2000 problems, because the computer
programs used by the Company are primarily off-the-shelf, recently developed
programs from third party vendors. However, the Company has begun a process of
confirming with such vendors whether their programs are year 2000 compliant and
identifying and addressing problems that may arise in this regard. The Company
expects to complete this process in early 1999, and does not believe it will
cause any material expense or significant disruption to the business of the
Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On January 29, 1998, the Company filed a Registration Statement on Form S-3
under the Securities Act of 1933, (Registration No. 333-45139), to register
1,421,556 outstanding Common Shares on behalf of selling shareholders. This
registration statement was declared effective on February 25, 1998.
On April 27, 1998, the Company filed a Registration Statement on Form S-3
under the Securities Act of 1933, (Registration No. 333-51067), to register
2,871,722 outstanding Common Shares on behalf of selling shareholders. This
registration statement is subject to completion and is not yet effective.
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by the Company
from January 1, 1998 through March 31, 1998. These shares were issued without
registration in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
Number of
Issued Common
Name/Entity/Nature Note For Shares
Alacrity Systems, Inc. 1 Acquisition 321,768
ATI Communications, Inc. 2 Acquisition 100,000
Cybertech Station, Inc. 3 Acquisition 37,738
Canadian Network Services, Inc. 4 Acquisition 212,738
Information Products Center, Inc. 5 Acquisition 551,876
The Fromehill Company 6 Acquisition 1,558,801
Norcom Resources, Inc. 7 Acquisition 74,667
Pizarro Re-Marketing, Inc. 7 Acquisition 42,723
Signal Processors Limited 7 Acquisition 915,167
Services 8 Services 28,126
=============
Total 3,843,604
=============
- --------------------------
1. Includes 312,630 additional shares issued to the selling shareholders and
9,138 additional shares issued as finder's fees in connection with the
"price protection" provision of the Agreement of Sale.
2. Represents the first installment of shares issued to a selling shareholder
in connection with the earnout provision under the Agreement and Plan of
Merger.
3. Includes (a) 14,335 additional shares issued to the selling shareholder and
805 additional shares issued as finder's fees in connection with the "price
protection" provision of the Agreement of Sale, and (b) 22,598 shares
issued to the selling shareholder as part of the earnout provision in the
Agreement of Sale.
4. Includes (a) 7,530 shares issued to the Stage I selling shareholders to
correct the initial issuance of shares, and (b) 170,683 shares issued to
the Stage II selling shareholders upon acquisition of their minority
interest in 1998.
5. Represents shares issued to a selling shareholder to acquire such
shareholders' 100 percent interest in the company.
-15-
<PAGE>
6. Represents shares issued to selling shareholders to acquire such
shareholders' 100 percent interest in the company.
7. Represents earnout payments under the Agreements of Sale of these
companies.
8. Represents shares issued in connection with professional services or under
employment or other agreements.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On March 30, 1998, the Company entered into an agreement to acquire all of
the 1,000 issued and outstanding shares of common stock, all of the 200 issued
and outstanding shares of Series A preferred stock and all of the 150 issued and
outstanding shares of Series B preferred stock of Information Products Center,
Inc. from the selling shareholder in consideration for $2,500,000 or 551,876
shares of the Company's restricted common stock issued at closing and up to an
additional $2,500,000 in shares of the Company's restricted common stock on the
first anniversary of closing if certain profit targets are met in 1998. For
accounting purposes, the effective date of the transaction was January 1, 1998.
On March 31, 1998, the Company entered into an agreement to acquire all of
the 30,425 issued and outstanding shares of common stock of The Fromehill
Company dba Winward Electric from the four selling shareholders in consideration
for $7,000,000 or 1,558,801 shares of the Company's restricted common stock
issued at closing and up to an additional $3,000,000 in shares of the Company's
restricted common stock on the first anniversary of closing if certain profit
targets are met in 1998. For accounting purposes, the effective date of the
transaction was January 1, 1998.
On April 1, 1998, the Company's subsidiary, Universal Commodities
Corporation, entered into an agreement to acquire 80 percent of the 100 issued
and outstanding shares of common stock of Blue Star Electronics, Inc. from the
selling shareholder in consideration for 193,939 shares of the Company's
restricted common stock issued at closing and additional consideration payable
after 1999 if certain profit levels in 1998 and 1999 are achieved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-3 (File No. 333-37713) filed with the Commission on November 19,
1997)
3.1 Amended and Restated Bylaws of the Company dated March 31, 1998
(incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998)
12 Statement re computation of ratios
27 Financial Data Schedule
99 Cautionary Statements
(b) Reports on Form 8-K
None
-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: May 12, 1998 By: /S/ DAVID A. LOPPERT
-------------------------------------------
David A. Loppert, Vice President, Treasurer
and Chief Financial Officer
-17-
<PAGE>
Exhibit Index
Number Description of Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-3 (File No. 333-37713) filed with the Commission on November 19,
1997)
3.1 Amended and Restated Bylaws of the Company dated March 31, 1998
(incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998)
12 Statement re computation of ratios
27 Financial Data Schedule
99 Cautionary Statements
-18-
Exhibit 12
STATEMENT RE COMPUTATION OF RATIOS
This schedule contains financial information extracted from the registrant's
unaudited consolidated balance sheets as of March 31, 1998 and December 31,
1997, and is qualified in its entirety by reference to such financial
statements:
March 31, December 31,
1998 1997
--------------------------------------
Current Ratio:
The ratio of current assets divided by
current liabilities -
Current assets (numerator) $ 45,386,000 $39,575,000
Current liabilities (denominator) 25,309,000 20,113,000
Current ratio
1.79 1.97
Quick Ratio:
The ratio of liquid current assets (cash and cash equivalents and accounts
receivable and unbilled receivables) divided by current liabilities:
Cash and cash equivalents $ 5,923,000 $ 7,657,000
Accounts receivable and unbilled receivables 24,574,000 19,389,000
------------------------------------
Total (numerator) 30,497,000 27,046,000
------------------------------------
Current liabilities (denominator) 25,309,000 20,113,000
Quick ratio
1.20 1.34
Debt to Equity Ratio:
The ratio of all debt
divided by stockholders' equity
Notes payable $ 4,591,000 $ 4,783,000
Current maturities of long-term debt 933,000 842,000
Long-term liabilities 2,355,000 2,200,000
------------------------------------
Total (numerator) 7,879,000 7,825,000
------------------------------------
Stockholders' equity (denominator) 42,834,000 36,284,000
Debt to equity ratio
0.18 0.22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's interim unaudited consolidated financial statements as of and for
the three months ended March 31, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000924642
<NAME> Applied Cellular Technology, Inc.
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 5,923,000
<SECURITIES> 0
<RECEIVABLES> 25,225,000
<ALLOWANCES> 651,000
<INVENTORY> 12,635,000
<CURRENT-ASSETS> 45,386,000
<PP&E> 13,056,000
<DEPRECIATION> 6,459,000
<TOTAL-ASSETS> 73,067,000
<CURRENT-LIABILITIES> 25,309,000
<BONDS> 2,355,000
<COMMON> 25,000
700,000
0
<OTHER-SE> 42,809,000
<TOTAL-LIABILITY-AND-EQUITY> 73,067,000
<SALES> 38,547,000
<TOTAL-REVENUES> 38,784,000
<CGS> 25,441,000
<TOTAL-COSTS> 28,298,000
<OTHER-EXPENSES> 9,131,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 234,000
<INCOME-PRETAX> 1,227,000
<INCOME-TAX> 518,000
<INCOME-CONTINUING> 709,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 615,000
<EPS-PRIMARY> .03
<EPS-DILUTED> .02
</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.
RISK FACTORS
In addition to the other information contained herein, the following
factors should be considered carefully in evaluating the Company and its
business.
Uncertainty of Future Financial Results
While the Company has been profitable for the last three fiscal years,
future financial results are uncertain. There can be no assurance that the
Company will continue to be operated in a profitable manner. Profitability
depends upon many factors, including the success of the Company's various
marketing programs, the maintenance or reduction of expense levels and the
ability of the Company to successfully coordinate the efforts of the different
segments of its business.
Future Sales of and Market for the Shares
As of May 12, 1998, the Company had 25,834,951 shares of Common Stock
outstanding. Since January 1, 1998, the Company has issued an aggregate of
5,162,528 shares of Common Stock, of which 4,206,446 shares were issued in
connection with acquisitions, 850,000 were issued upon the exercise of warrants
and 106,082 shares were issued for services rendered, in connection with
employment or as bonuses.
-21-
<PAGE>
Management of the Company anticipates that the Company will continue to
effect acquisitions and contract for certain services primarily through the
issuance of Common Stock or other equity securities of the Company. Such
issuance's of additional securities may be viewed as being dilutive of the value
of the Common Stock in certain circumstances and may have an adverse impact on
the market price of the Common Stock.
Lack of Dividends on Common Stock; Issuance of Preferred Stock
The Company does not have a history of paying dividends on its Common
Stock, and there can be no assurance that such dividends will be paid in the
foreseeable future. The Company intends to use any earnings which may be
generated to finance the growth of the Company's businesses. The Board of
Directors has the right to authorize the issuance of preferred stock, without
further shareholder approval, the holders of which may have preferences as to
payment of dividends.
Potential Conflicts of Interests
Mr. Richard Sullivan, the Chairman and Chief Executive Officer of the
Company, is also Chairman of Great Bay Technology, Inc. and Managing General
Partner of the Bay Group. Both these companies conduct business with the
Company, and receive compensation from the Company for various services,
including assistance in identifying potential acquisition candidates and in
negotiating acquisition transactions. The relationships among such companies,
Mr. Sullivan and the Company may involve conflicts of interest.
Possible Volatility of Stock Price
The Common Stock is quoted on the Nasdaq Small-Cap Market, which stock
market has experienced and is likely to experience in the future significant
price and volume fluctuations which could adversely affect the market price of
the Common Stock without regard to the operating performance of the Company. In
addition, the Company believes that factors such as the significant changes to
the business of the Company resulting from continued acquisitions and
expansions, quarterly fluctuations in the financial results of the Company,
shortfalls in earnings or sales below analyst expectations, changes in the
performance of other companies in the same market sectors as the Company and the
performance of the overall economy and the financial markets could cause the
price of the Common Stock to fluctuate substantially.
-22-
