<PAGE>
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 JUNE 30, 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
(State or other jurisdiction
of incorporation or organization)
43-1641533
(IRS Employer
Identification number)
400 Royal Palm Way, Suite 410
Palm Beach, Florida 33480
(561) 366-4800
(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 August 11, 1998:
Class Number of Shares
Common Stock; $.001 Par Value 31,307,254
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC.
TABLE OF CONTENTS
Item Description Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three and Six Months ended June 30, 1998 and 1997 4
Consolidated Statements of Stockholder's Equity -
Six Months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows -
Six Months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Financial Condition 11
And Results of Operations
3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
1. Legal Proceedings 18
2. Changes In Securities and Use Of Proceeds 18
3. Defaults Upon Senior Securities 20
4. Submission of Matters to a Vote of Security Holders 20
5. Other Information 20
6. Exhibits and Reports on Form 8-K 22
SIGNATURES 24
Page 2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Assets
June 30, December 31,
1998 1997
---------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,304,000 $ 7,657,000
Accounts receivable and unbilled receivables (net of allowance for
doubtful accounts of $763,000 in 1998 and $675,000 in 1997) 37,282,000 19,389,000
Inventories 19,162,000 10,872,000
Notes receivable 825,000 390,000
Prepaid expenses and other current assets 3,206,000 1,267,000
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 65,779,000 39,575,000
Property, Plant And Equipment 15,498,000 5,339,000
Notes Receivable 666,000 575,000
Goodwill 24,105,000 12,263,000
Other Assets 7,638,000 3,530,000
- ------------------------------------------------------------------------------------------------------------------------
$ 113,686,000 $ 61,282,000
========================================================================================================================
Liabilities And Stockholders' Equity
Current Liabilities
Notes payable $ 11,225,000 $ 4,783,000
Current maturities of long-term debt 1,589,000 843,000
Accounts payable and accrued expenses 27,134,000 14,487,000
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 39,948,000 20,113,000
Long-Term Liabilities 4,943,000 2,200,000
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities 44,891,000 22,313,000
- ------------------------------------------------------------------------------------------------------------------------
Minority Interest 3,323,000 1,785,000
- ------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Shares 700,000 900,000
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred shares
Special voting, $10 par value, issued and outstanding 1 share
in 1998 -- --
Class B voting, $10 par value, issued and outstanding 1 share
in 1998 -- --
Common shares:
Authorized 80,000,00 and 40,000,000 shares in 1998 and 1997 of $.001 par
value; issued and outstanding 31,151,753 and 20,672,423
in 1998 and 1997, respectively 31,000 21,000
Additional paid-in capital 59,120,000 33,680,000
Retained earnings 5,534,000 2,586,000
Unrealized gain on marketable securities 14,000 --
Foreign currency translation adjustment 73,000 (3,000)
- ------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 64,772,000 36,284,000
- ------------------------------------------------------------------------------------------------------------------------
$ 113,686,000 $ 61,282,000
========================================================================================================================
</TABLE>
See the accompanying notes to consolidated financial statements. Page 3
<PAGE>
================================================================================
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Operating Revenue $ 53,680,000 $ 24,743,000 $ 92,464,000 $ 42,870,000
Cost of Goods Sold 36,224,000 16,434,000 64,522,000 28,513,000
- -----------------------------------------------------------------------------------------------------------------------
Gross Profit 17,456,000 8,309,000 27,942,000 14,357,000
Selling, General and Administrative
Expenses 13,273,000 7,201,000 22,404,000 12,542,000
- -----------------------------------------------------------------------------------------------------------------------
Operating Income 4,183,000 1,108,000 5,538,000 1,815,000
Interest Income 113,000 39,000 219,000 88,000
Interest Expense (432,000) (262,000) (666,000) (444,000)
- -----------------------------------------------------------------------------------------------------------------------
Income Before Provision For Income Taxes
And Minority Interest 3,864,000 885,000 5,091,000 1,459,000
Provision For Income Taxes 1,224,000 208,000 1,742,000 415,000
- -----------------------------------------------------------------------------------------------------------------------
Income Before Minority Interest 2,640,000 677,000 3,349,000 1,044,000
Minorityy Interest 275,000 140,000 369,000 210,000
- -----------------------------------------------------------------------------------------------------------------------
Net Income 2,365,000 537,000 2,980,000 834,000
Preferred Stock Dividends 14,000 18,000 32,000 36,000
- -----------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stockholders $ 2,351,000 $ 519,000 $ 2,948,000 $ 798,000
=======================================================================================================================
Net Income Per Common Share - Basic $ .07 .07 $ .11 $ .12
=======================================================================================================================
Net Income Per Common Share
Diluted $ .07 .06 $ .10 $ .09
=======================================================================================================================
Weighted Average Number Of
Common Shares Outstanding - Basic $ 31,761,196 $ 7,547,408 $ 27,758,551 $ 6,849,921
=======================================================================================================================
Weighted Average Number of Common
Shares Outstanding - Diluted $ 32,963,540 $ 9,527,126 $ 29,152,472 $ 9,087,114
=======================================================================================================================
</TABLE>
See the accompanying notes to consolidated financial statements. Page 4
<PAGE>
================================================================================
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Six Month Periods Ended June 30, 1998 And 1997
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock Preferred Stock Paid-In Retained Stockholders'
------------------------- -------------
Number Amount Number Amount Capital Earnings Other Equity
----------------------------------------------------------------------------------------------
<S> <C> <C> <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 -- -- -- -- -- 834,000 -- 834,000
Issuance of common stock 3,249,299 3,300 -- -- 11,328,000 -- -- 11,331,300
Warrants redeemed 410,000 400 -- -- 819,000 -- -- 819,400
Foreign currency translation
adjustment -- -- -- -- -- -- 27,000 27,000
Preferred stock dividends paid -- -- -- -- -- (36,000) -- (36,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1997 9,458,000 $ 9,500 -- $ -- $ 20,075,000 $ 1,116,000 $ 27,000 $ 21,227,500
=================================================================================================================================
Balance - January 1, 1998 20,672,423 $ 21,000 -- $ -- $ 33,680,000 $ 2,586,000 $ (3,000) $ 36,284,000
Net income -- -- -- -- -- 2,980,000 -- 2,980,000
Issuance of common stock 9,629,330 9,100 -- -- 15,666,000 -- -- 15,675,100
Issuance of preferred stock -- -- 2 -- 7,825,000 -- -- 7,825,000
Warrants redeemed 850,000 900 -- -- 1,949,000 -- -- 1,949,900
Foreign currency translation
adjustment -- -- -- -- -- -- 76,000 76,000
Unrealized gain on marketable
securities -- -- -- -- -- -- 14,000 14,000
Preferred stock dividends paid -- -- -- -- -- (32,000) -- (32,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1998 31,151,753 $ 31,000 2 $ -- $ 59,120,000 $ 5,534,000 $ 87,000 $ 64,772,000
===================================================================================================================================
</TABLE>
See the accompanying notes to consolidated financial statements. Page 5
<PAGE>
================================================================================
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
---------------------------------------
1998 1997
---------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,980,000 $ 834,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,787,000 720,000
Minority interest 369,000 210,000
Loss on sale of equipment 73,000 7,000
Change in assets and liabilities:
Increase in accounts receivable and unbilled
receivables (3,012,000) (1,658,000)
Increase in inventories (1,842,000) (1,072,000)
Increase in prepaid expenses (1,142,000) (74,000)
Increase in deferred tax asset (38,000) (34,000)
Increase (decrease) in accounts payable and accrued
expenses (45,000) 5,000
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (870,000) (1,062,000)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Increase in notes receivable - officers (276,000) (305,000)
Increase in other assets (1,359,000) (233,000)
Proceeds from sale of property, plant, and equipment 111,000 22,000
Payments for property, plant and equipment (1,932,000) (660,000)
Proceeds from (payments for) costs of asset and business
acquisitions (net of cash balances acquired) 638,000 (24,000)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (2,818,000) (1,200,000)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net amounts borrowed on notes payable 481,000 1,313,000
Proceeds from long-term debt 891,000 --
Payments for long-term debt (2,115,000) --
Redemption of preferred shares (200,000) --
Preferred stock dividends paid (72,000) (72,000)
Issuance of common shares 2,350,000 2,009,000
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 1,335,000 3,250,000
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash And Cash Equivalents (2,353,000) 988,000
Cash And Cash Equivalents - Beginning Of Period 7,657,000 810,000
- ------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents - End Of Period $ 5,304,000 $ 1,798,000
========================================================================================================================
Supplemental Disclosure Of Cash Flow Information
Income taxes paid $ 1,479,000 $ --
Interest paid 587,000 483,000
Noncash investing and financing activities:
Property acquired for long-term debt 508,000 496,000
Property acquired through issuance of stock -- 163,000
- ------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 6
</TABLE>
<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 and six months ended June 30, 1998 are 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. During the six-month periods ended June 30, 1998 and 1997, the
Company acquired interests in fourteen and seven companies, respectively. 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.
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
June 30, December 31,
1998 1997
--------------- -----------------
Raw materials $ 6,242,000 $ 1,962,000
Work in process 2,583,000 1,085,000
Finished goods 10,337,000 7,825,000
=============== =================
$19,162,000 $ 10,872,000
=============== =================
Page 7
<PAGE>
5. Stockholders' Equity
The Company has authorized 5,000,000 shares of preferred stock, $10.00 par
value, to be issued from time to time on such terms as is specified by the Board
of Directors.
In May 1998, in connection with the Company's acquisition of Commstar
Limited, an Ontario corporation ("Commstar"), the Board of Directors authorized
the issuance of one share of the Company's Preferred Stock ($10.00 par value)
designated as the Company's Special Voting Preferred Stock (the "Special
Preferred Share"). The Special Preferred Share is entitled to a number of votes
equal to the number of outstanding Exchangeable Shares not owned by the Company.
The holder of the Special Preferred Share is not entitled to receive any
dividends or participate in any distribution of assets to the stockholders of
the Company. When all Exchangeable Shares have been exchanged or redeemed for
shares of the Company's Common Stock, the Special Preferred Share will be
cancelled. The Company has reserved 3,417,580 shares of its Common Stock to be
exchanged for Exchangeable Shares held by the Commstar selling shareholders.
Subsequent to June 30, 1998, Commstar acquired certain assets from Western
Inbound Network, Inc., an Ontario corporation, in consideration for 432,010
Exchangeable Shares. The Company has similarly reserved 432,010 shares of its
Common Stock.
In June 1998, in connection with the Company's acquisition of Ground
Effects Limited, an Ontario corporation ("Ground Effects"), the Board of
Directors authorized the issuance of one share of the Company's Preferred Stock
($10.00 par value) designated as the Company's Class B Voting Preferred Stock
(the "Class B Special Preferred Share"). The Class B Special Preferred Share is
entitled to a number of votes equal to the number of outstanding Exchangeable
Shares not owned by the Company. The holder of the Class B Special Preferred
Share is not entitled to receive any dividends or participate in any
distribution of assets to the stockholders of the Company. When all Exchangeable
Shares have been exchanged or redeemed for shares of the Company's Common Stock,
the Special Preferred Share will be cancelled. The Company has reserved
1,105,708 shares of its Common Stock to be exchanged for Exchangeable Shares
held by the Ground Effects selling shareholders.
Page 8
<PAGE>
6. Earnings Per Share
The following is a reconciliation of the numerator and denominator of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 2,365,000 $537,000 $2,980,000 $834,000
Preferred stock dividends 14,000 18,000 32,000 36,000
---------------------------------------------------------
Numerator for basic earnings per share -
Net income available to common 2,351,000 519,000 2,948,000 798,000
stockholders
Effect of dilutive securities:
Preferred stock dividends 14,000 18,000 32,000 36,000
---------------------------------------------------------
Numerator for diluted earnings per share -
Net income available to common stockholders $ 2,365,000 $537,000 $2,980,000 $834,000
========================================================
Denominator:
Denominator for
basic earnings per share -
Weighted-average shares (1) 31,761,196 7,547,408 27,758,551 6,849,921
--------------------------------------------------------
Effect of dilutive securities -
Redeemable preferred stock 121,739 1,510,689 121,739 1,510,689
Warrants 751,982 468,234 859,886 725,508
Employee stock options 236,210 795 365,835 996
Contingent stock - acquisitions 92,413 0 46,461 0
--------------------------------------------------------
Dilutive potential common shares 1,202,344 1,979,718 1,393,921 2,237,193
--------------------------------------------------------
Denominator for diluted earnings per share -
Adjusted Weighted-average shares and
assumed conversions
32,936,540 9,527,126 29,152,472 9,087,114
========================================================
Basic earnings per share $0.07 $0.07 $0.11 $0.12
========================================================
Diluted earnings per share $0.07 $0.06 $0.10 $0.09
========================================================
</TABLE>
-----------------------
1. Includes, for the three and six month periods ended June 30, 1998,
3,417,580 shares of common stock reserved for issuance to the holders
of Commstar's Exchangeable Shares and 1,105,708 shares of common stock
reserved for issuance to the holder's of Ground Effects' Exchangeable
Shares.
Page 9
<PAGE>
7. Pro-Forma Information
The following pro-forma condensed consolidated statement of operations of
the Company for the six months ended June 30, 1998 gives effect to the
acquisitions of the following companies as if they were effective at January 1,
1998:
Effective Date
Acquired Company of Acquisition
------------------------------------------ --------------
The Americom Group, Inc. April 1, 1998
Aurora Electric, Inc. April 1, 1998
Blue Star Electronics, Inc. April 1, 1998
Commstar Limited May 1, 1998
Consolidated Micro Components, Inc. April 1, 1998
Data Path Technologies, Inc. April 1, 1998
The Fromehill Company dba Winwood Electric January 1, 1998
GDB Software Services, Inc April 1, 1998
Ground Effects Limited April 1, 1998
Information Products Center, Inc. January 1, 1998
Innovative Vacuum Solutions, Inc. April 1, 1998
Service Transportation Company April 1, 1998
Signature Industries Limited June 1, 1998
Teledata Concepts, Inc. April 1, 1998
The pro-forma condensed consolidated statement of operations gives effect
to the acquisitions under the purchase method of accounting, and is not
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.
- --------------------------------------------------------------------------------
Applied Cellular Technology, Inc.
Pro-Forma Condensed Consolidated Statement Of Operations
For The Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Net operating revenue $115,808,000
Cost of goods sold 79,312,000
Gross profit 36,496,000
Selling, general and administrative expenses 33,750,000
Operating income 2,746,000
Interest income 234,000
Interest expense -878,000
Minority interest -290,000
Provision for income taxes -720,000
Net income 1,092,000
Dividends -32,000
Net income available to common stockholders $ 1,060,000
Net income per common share
- basic $.03
- diluted $.03
Weighted average number of common shares outstanding
=========================================================================
--------------------------------------------------------------------------
- basic 34,036,198
- diluted 35,430,119
=========================================================================
</TABLE>
Page 10
<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 10 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 second
quarter of 1997 to the second 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 revenue for the second quarter of 1998 was
$53.7 million, up $28.9 million or 117.0 percent from $24.7 million in the same
period in 1997. Net income applicable to common stockholders increased by 353.0
percent to $2,351,000 from $519,000 a year earlier. Basic earnings per share
were 7 cents per share in 1998 and 1997. Diluted earnings per share were 7 cents
per share in 1998, compared to 6 cents per share in 1997. The weighted-average
number of diluted shares outstanding increased by 246.0 percent from 1997 to
1998.
For the six-month period ended June 30, 1998 and 1997, net operating
revenue increased by $49.6 million or 115.7% to $92.5 million from $42.9
million. Net income applicable to common stockholders increased by 269.4 percent
to $2,948,000 from $798,000 a year earlier. Basic earnings per share were 11
cents per share in 1998 compared to 12 cents per share in 1997. Diluted earnings
per share were 10 cents per share in 1998, compared to 9 cents per share in
1997. The weighted-average number of diluted shares outstanding increased by
220.8 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 and six-month periods ended
June 30, 1998 and 1997, and is derived from the unaudited consolidated
statements of operations in Part I, Item 1 of this report.
<TABLE>
<CAPTION>
Relationship to Net Operating Revenue
----------------------------------------------
Three Months Ended Six Months Ended June
June 30, 30,
----------------------------------------------
1998 1997 1998 1997
% % % %
<S> <C> <C> <C> <C>
Net Operating Revenue 100.0 100.0 100.0 100.0
Cost of Goods Sold 67.5 66.4 69.8 66.5
----------------------------------------------
Gross Profit 32.5 33.6 30.2 33.5
Selling, General and Administrative 24.7 29.1 24.2 29.3
Expenses ----------------------------------------------
Operating Income 7.8 4.5 6.0 4.2
Interest Income 0.2 0.2 0.2 0.2
Interest Expense -0.8 -1.1 -0.7 -1.0
----------------------------------------------
Income Before Provision for Income Taxes 7.2 3.6 5.5 3.4
And Minority Interest
Provision For Income Taxes 2.3 0.8 1.9 1.0
----------------------------------------------
Income Before Minority Interest 4.9 2.8 3.6 2.4
Minority Interest 0.5 0.6 0.4 0.5
----------------------------------------------
Net Income 4.4 2.2 3.2 1.9
Preferred Stock Dividends 0.0 0.1 0.0 0.1
==============================================
Net Income Applicable to Common Stockholders 4.4 2.1 3.2 1.8
==============================================
</TABLE>
Page 11
<PAGE>
Net Operating Revenue
The Company operates in four business groups or segments. A fifth business
group, ACT Financial Group, is being developed to provide financial services for
end users and each ACT business unit:
ACT Communications Group
This group contains companies that provide products and services including
telephone systems, voice mail, computer telephony, interactive voice response
systems, telephone services, calling cards, paging services, cellular services,
digital satellite services, call centers, networking systems, fiber optic
cabling, power distribution services and communication towers.
ACT Software and Services Group
This group contains companies that develop and market software products and
services for wireless-enabled applications, data acquisition, field service,
decision support, corporate enterprise access and multi-function peripheral
devices.
ACT Computer Group
This group contains companies that provide computer systems, peripherals,
components, specialty systems, cabling, consulting, rental services, system
integration, transportation, and de-installation services.
ACT Specialty Manufacturing Group
This group contains companies that manufacture and market electrical
components, control panels, global positioning systems, satellite modems,
transceivers, controllers, communication devices, orbit modeling applications,
as well as provide design and manufacturing engineering services.
The following table summarizes the net operating revenue by business group:
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------
Business Group 1998 % 1997 %
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ACT Communications Group $ 46,441,000 50.2% $ 15,890,000 37.1%
ACT Software and Services Group 3,493,000 3.8% 2,138,000 5.0%
ACT Computer Group 28,197,000 30.5% 17,745,000 41.4%
ACT Specialty Manufacturing Group 14,333,000 15.5% 7,097,000 16.5%
============= ====== =========== =====
$ 92,464,000 100.0% $ 42,870,000 100.0%
============= ====== ============ ======
Three Months Ended June 30,
-------------------------------------------------------------
Business Group 1998 % 1997 %
------------------------------------- ---------------- ---------- --- ---------------- ------------
ACT Communications Group $ 23,970,000 44.7% $ 8,898,000 36.0%
ACT Software and Services Group 1,955,000 3.6% 1,526,000 6.2%
ACT Computer Group 17,575,000 32.7% 9,762,000 39.5%
ACT Specialty Manufacturing Group 10,180,000 19.0% 4,557,000 18.3%
================ ========== === ================ ============
$ 53,680,000 100.0% $ 24,743,000 100.0%
================ ========== === ================ ============
</TABLE>
Page 12
<PAGE>
In the first quarter of 1998, the Company acquired interests in the
following two companies:
Information Products Center, Inc. is a provider of services and
products designed to build and manage personal computer network
infrastructures.
The Fromehill Company, dba Winward Electric is a full service
electrical and communications systems contractor for residential,
commercial, institutional and industrial markets.
In the second quarter of 1998, the Company acquired interests in the
following twelve companies:
The Americom Group provides communications infrastructure
construction, maintenance, installation and training services for the
telecommunications industry.
Aurora Electric, Inc. is a full service electrical and
communications system contractor for residential, commercial,
institutional and industrial markets.
Blue Star Electronics, Inc. is a cable assembly manufacturer
specializing in custom voice and data cabling applications
Commstar Limited provides call centers, voice messaging and one
number dialing services throughout Canada.
Consolidated Micro Components, Inc. specializes in buying new and
surplus memory, processors and mass storage devices from auctions and
liquidation events and reselling the products to end users in the
commercial, institutional and government market sectors.
Data Path Technologies, Inc. specializes in marketing and
servicing computer systems, peripherals, components and business
software applications.
GDB Software Services, Inc. provides data processing consulting
services for mainframe, midrange and personal computer networks for
financial institutions.
Ground Effects Limited specializes in aluminum and steel tubular
manufacturing primarily for the automotive industry.
Innovative Vacuum Solutions, Inc. re-manufactures and services
high-end vacuum pumps used in the semiconductor, optical, electronics
and general manufacturing industry.
Service Transportation Company is a shipping company specializing
in the packaging and transportation of computer systems and
electronics.
Signature Industries Limited is a manufacturer of high-grade
communication and safety devices.
Teledata Concepts, Inc. is a full service telecommunications
provider of PBX, computer telephony integration and call center
technology.
Page 13
<PAGE>
Gross Profit
Gross profit was $17.5 million in the second quarter of 1998, up 110.1
percent from $8.3 million a year earlier. For the current quarter, the gross
profit, as a percentage of net operating revenue, was 32.5 percent compared to
33.6 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.
Gross profit was $27.9 million for the six months ended June 30, 1998, up
94.6 percent from $14.4 million a year earlier. Year-to date, the gross profit,
as a percentage of net operating revenue, was 30.2 percent compared to 33.5
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 24.7 percent and 29.1 percent in the second quarters of
1998 and 1997, respectively, and includes depreciation and amortization of
$1,092,000 and $390,000, respectively. The decline in these expenses is
attributable to economies of scale being achieved with higher operating
revenues.
Year-to-date, selling, general and administrative expenses, as a percentage
of net operating revenue, were 24.2 percent and 29.3 percent in 1998 and 1997,
respectively, and includes depreciation and amortization of $1,787,000 and
$720,000, respectively. The decline in these expenses is attributable to
economies of scale being achieved with higher operating revenues.
Operating Income
Operating income was $4.2 million in the second quarter of 1998, up 277.5
percent from $1.1 million in the same period in 1997. As a percentage of net
operating revenue, operating income was 7.8 percent and 4.5 percent in the
second 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 acquisitions the Company made during 1998.
Year-to-date, operating income was $5.5 million in 1998, up 205.1 percent
from $1.8 million in the same period in 1997. As a percentage of net operating
revenue, operating income was 6.0 percent and 4.2 percent in 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
acquisitions the Company made during 1998.
Interest Income and Expense
Interest income was $113,000 and $39,000 for the second quarters of 1998
and 1997. Interest expense was $432,000 and $262,000 for the second quarters of
1998 and 1997, respectively. Interest income increased 189.7 percent from the
second quarter of 1997 to the second quarter of 1998, while interest expense
increased by 64.9 percent in the same period. As a percentage of net operating
revenue, interest income was 0.2 percent in the second quarters of 1998 and
1997, while interest expense was 0.8 percent and 1.1 percent in the second
quarters of 1998 and 1997.
Page 14
<PAGE>
For the six months ended June 30, 1998 and 1997, interest income was
$219,000 and $88,000, respectively. Year-to date, interest expense was $666,000
and $444,000 for 1998 and 1997, respectively. Interest income increased 148.9
percent from 1997 to 1998, while interest expense increased by 50.0 percent in
the same period. As a percentage of net operating revenue, interest income was
0.2 percent in 1998 and 1997, while interest expense was 0.7 percent and 1.0
percent in 1998 and 1997.
Income Taxes
The Company's effective income tax rate was 31.7 percent in the second
quarter of 1998 compared to 23.5 percent in the second quarter of 1997. The
increase in the effective rate for the second quarter of 1998 was as a result of
increased non-deductible expenses, primarily goodwill, over the second quarter
of 1997, partially offset by tax net operating loss carryforwards available in
both periods.
For the six months ended June 30, 1998, the Company's effective income tax
rate was 34.2 percent in 1998 compared to 28.4 percent in 1997. The increase in
the effective in 1998 was as a result of increased non-deductible expenses,
primarily goodwill, over 1997, partially offset by tax net operating loss
carryforwards available in both periods.
Financial Condition
As of June 30, 1998, cash and cash equivalents totaled $5.3 million, down
30.7 percent from $7.7 million at December 31, 1997. Cash of $870,000 and
$1,062,000 was used in operating activities in the six months ended June 30,
1998 and 1997, respectively. This use of cash reflects increases in accounts
receivable and unbilled receivables, inventory and prepaid expenses and a
decrease in accounts payable in 1998. These activities accounted for the use of
$6,041,000 and $2,799,000 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.
Inventory levels increased by 76.2 percent from December 31, 1997 to June
30, 1998. This increase was primarily attributable to growth through
acquisitions and to the resulting increased level of business. The 92.3 percent
increase in accounts and unbilled receivables from December 31, 1997 to June 30,
1998 reflects revenue growth from both existing and acquired businesses.
Accounts payable and accrued expenses increased by 87.3 percent during this
period, again attributable to the Company's growth and the resulting increased
level of business.
Investing activities used cash of $2.8 million and $1.2 million,
respectively, in the six months ended June 30, 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 in 1998.
The Company obtained positive cash flows of $1.3 million and $3.3 million,
respectively, from financing activities in the six months ended June 30, 1998
and 1997. The major financing sources of cash in 1998 were proceeds from the
sale of common stock and bank borrowings, reduced by the repayment of long-term
debt, the redemption of preferred shares and the payment of preferred stock
Page 15
<PAGE>
dividends. In 1997, the major financing sources of cash were from the sale of
common stock and bank borrowings, reduced by the payment of preferred stock
dividends.
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:
<TABLE>
<CAPTION>
Ratio June 30, December 31,
---------------------------- ----------------- -------------------
1998 1997
<S> <C> <C>
Current ratio 1.65 1.97
Quick ratio 1.07 1.34
Debt to equity ratio 0.27 0.22
</TABLE>
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.
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 June 30, 1998, the total assets of the Company were
approximately $113.7 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
Page 16
<PAGE>
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 has retained 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.
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
Page 17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
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. On June
10, 1998 an amendment was filed increasing the number of shares being registered
to 5,181,995 shares. The registration statement was declared effective on June
12, 1998.
On June 24, 1998, the Company filed a Registration Statement on Form S-3
under the Securities Act of 1933, (Registration No. 333-57613), to register
3,273,518 Common Shares to be issued from time to time upon exchange or
redemption of exchangeable shares (the "Exchangeable Shares") of Commstar
Limited, an Ontario corporation ("Commstar"). The Exchangeable Shares have been
issued by Commstar in exchange for common shares of Commstar in connection with
the acquisition by the Company of Commstar. On July 7, 1998, an amendment was
filed increasing the number of shares being registered to 3,417,580. The
registration statement was declared effective on July 10, 1998. The Company has
issued a single share of Special Voting Preferred Stock (the "Special Preferred
Share") to the Montreal Trust Company of Canada, (the "Voting Trustee"). Except
as otherwise required by law or the Company's Articles of Incorporation, the
Special Preferred Share will be entitled to a number of votes equal to the
number of outstanding Exchangeable Shares not owned by the Company, and may be
voted in the election of directors and on all other matters submitted to a vote
of the Company's stockholders. When all Exchangeable Shares have been exchanged
or redeemed for shares of the Company's Common Stock, the Special Preferred
Share will be cancelled.
On July 21, 1998, the Company filed a Registration Statement on Form S-3
under the Securities Act of 1933, (Registration No. 333-57613), to register
412,574 Common Shares to be issued from time to time upon exchange or redemption
of exchangeable shares (the "Exchangeable Shares") of Commstar Limited, an
Ontario corporation ("Commstar"). The Exchangeable Shares have been issued by
Commstar as consideration for certain assets it acquired from Western Inbound
Network, Inc., an Ontario corporation. On July 30 1998, an amendment was filed
increasing the number of shares being registered to 432,010. The registration
statement was declared effective on August 4, 1998.
Page 18
<PAGE>
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by the Company
from January 1, 1998 through June 30, 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
The Americom Group, Inc. 2 Acquisition 169,167
ATI Communications, Inc. 3 Acquisition 200,000
Aurora Electric, Inc. 4 Acquisition 1,076,923
Blue Star Electronics, Inc. 5 Acquisition 204,218
Canadian Network Services, Inc. 6 Acquisition 212,738
Commstar Limited 7 Acquisition 3,417,580
Consolidated Micro Components, Inc. 8 Acquisition 410,981
Cybertech Station, Inc. 9 Acquisition 37,738
Data Path Technologies, Inc. 10 Acquisition 384,616
The Fromehill Company 11 Acquisition 1,596,658
GDB Software Services, Inc. 12 Acquisition 403,077
Ground Effects Limited 13 Acquisition 1,105,708
Innovative Vacuum Solutions, Inc. 14 Acquisition 270,769
Information Products Center, Inc. 15 Acquisition 551,876
Norcom Resources, Inc. 16 Acquisition 74,667
Pizarro Re-Marketing, Inc. 16 Acquisition 42,723
Service Transportation Company 17 Acquisition 35,431
Signature Industries Limited 18 Acquisition 2,339,703
Signal Processors Limited 16 Acquisition 928,293
Teledata Concepts, Inc. 19 Acquisition 142,621
The Bay Group 20 Acquisition Services 101,349
Warrants Exercised 21 Warrants Exercised 850,000
Services 22 Services 174,531
Employee Stock Sale 23 Stock Purchase 100,000
==============
Total 15,153,135
==============
- --------------------------
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 shares issued to the selling shareholder to acquire such
shareholder's 80 percent interest in the company.
3. Represents the first and second installments of shares issued to a selling
shareholder in connection with the earnout provision under the Agreement
and Plan of Merger.
4. Represents shares issued to selling shareholders to acquire such
shareholders' 100 percent interest in the company.
5. Includes (a) 193,393 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, (b) 9,697 shares
issued as a finder's fee, and (c) 582 shares issued for services in
connection with the acquisition.
6. Includes (a) 7,530 shares issued to the Stage I selling shareholders to
correct the initial issuance of shares, (b) 170,683 shares issued to the
Stage II selling shareholders upon acquisition of their minority interest
in 1998, and (c) 34,525 shares issued as a finder's fee.
Page 19
<PAGE>
7. Represents shares of stock reserved for issuance in exchange for
Exchangeable Shares of Commstar Limited, in connection with the Company's
acquisition of 100 percent of Commstar Limited.
8. Includes (a) 392,157 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 18,824
shares issued as a finder's fee.
9. 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.
10. Represents shares issued to selling shareholders to acquire such
shareholders' 80 percent interest in the company.
11. Includes (a) 1,558,801 shares issued to the selling shareholder to acquire
such shareholder's 100 percent interest in the company, and (b) 37,857
shares issued as a finder's fee.
12. Includes (a) 384,616 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 18,461
shares issued as a finder's fee.
13. Represents shares of stock reserved for issuance in exchange for
Exchangeable Shares of ACT-GFX Canada, Inc., in connection with the
Company's acquisition of 80 percent of Ground Effects Limited.
14. Represents shares issued to selling shareholders to acquire such
shareholders' 80 percent interest in the company.
15. Represents shares issued to the selling shareholder to acquire such
shareholder's 100 percent interest in the company.
16. Represents earnout payments under the Agreements of Sale of these
companies.
17. Includes (a) 35,000 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, (b) 431 shares
issued for acquisition services.
Page 20
<PAGE>
18. Represents shares issued to selling shareholders to acquire such
shareholders' 85 percent interest in the company.
19. Includes (a) 142,621 shares issued to the selling shareholder to acquire
such shareholder's 100 percent interest in the company, and (b) 4,690
shares issued as a finder's fee.
20. Represents shares issued for investment banking services in connection with
acquisitions made by the Company in 1998.
21. Represents shares issued upon the exercise of Warrants by the warrant
holders.
22. Represents shares issued for professional services or under employment or
other such agreements.
23. Represents shares sold to an officer of the Company. Item 3. Defaults Upon
Senior Securities.
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 June 13, 1998 to:
i. Elect five directors, two to hold office until the 1999 Annual Meeting
of Stockholders (Group A), one to hold office until the 2000 Annual Meeting of
Stockholders (Group B), and two to hold office until the 2001 Annual Meeting of
Stockholders (Group C), or in each case until their respective successors have
been elected or appointed. The result of the vote to elect the five directors
were as follows:
<TABLE>
Votes Received
----------------------------------------
Name Group For Against Abstain
------------------- ----------- ------------- ---------------- ---------
<S> <C> <C> <C> <C>
Daniel E. Penni A 21,805,457 267,325 1,237,759
Angela M. Sullivan A 21,852,212 267,325 1,218,004
Arthur F. Noterman B 21,809,458 267,325 1,233,758
Richard J. Sullivan C 22,083,929 0 1,226,612
Garrett A. Sullivan C 22,083,929 0 1,226,612
<S> <C> <C> <C> <C>
</TABLE>
i. Ratify the appointment of Rubin, Brown, Gornstein & Co., LLP as
independent auditors of the Company for the 1998 calendar year. The proposal
received 21,770,884 votes for, 510,195 votes against, and 1,043,642 abstentions.
ii. Approve an amendment to the Company's Amended and Restated Articles of
Incorporation to increase the authorized number of shares of common stock from
40,000,000 to 80,000,000. The proposal received 19,957,792 votes for, 2,351,487
votes against, and 1,015,442 abstentions.
iii. Approve an amendment to the Company's 1996 Non-Qualified Stock Option
Plan to increase the number of shares available for issuance from 5,000,000 to
10,000,000. The proposal received 13,278,114 votes for, 2,544,164 votes against,
and 93,254 abstentions.
Item 5. Other Information
Effective as of April 1, 1998, the Company entered into agreements to
acquire the following companies:
Page 21
<PAGE>
The Americom Group, Inc. - the Company entered into an agreement to acquire
80 percent of the 49 issued and outstanding shares of common stock from the
selling shareholder in consideration for 161,111 shares of the Company's
restricted common stock valued at $725,000 issued at closing and up to an
additional $725,000 payable in two equal installments in April 1999 and April
2000 if certain profit levels in 1998 and 1999 are achieved.
Aurora Electric, Inc. - the Company entered into an agreement to acquire
100 percent of the 266,950 issued and outstanding shares of common stock from
the selling shareholders in consideration for 1,076,923 shares of the Company's
restricted common stock valued at $3,500,000 issued at closing and $2,500,000
payable in two equal installments in October 1999 and October 2000 if certain
profit levels for the twelve month periods ending June 30, 1999 and June 30,
2000 are achieved.
Blue Star Electronics, Inc. - 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 from the selling shareholder
in consideration for 193,939 shares of the Company's restricted common stock
valued at $800,000 issued at closing and up to $250,000 payable after 1999 if
certain profit levels in 1998 and 1999 are achieved.
Consolidated Micro Components, Inc. - the Company's subsidiary, Universal
Commodities Corporation, entered into an agreement to acquire 100 percent of the
100 issued and outstanding shares of common stock from the selling shareholder
in consideration for 392,157 shares of the Company's restricted common stock
valued at $1,250,000 issued at closing, $1,250,000 if certain earnings targets
are met for the twelve months ending March 31, 1999, and additional
consideration not to exceed $600,000 payable after December 2001 if certain
profit levels in 1999, 2000 and 2001 are achieved.
Data Path Technologies, Inc. - the Company's subsidiary, Universal
Commodities Corporation, entered into an agreement to acquire 100 percent of the
200 issued and outstanding shares of common stock from the selling shareholders
in consideration for 384,616 shares of the Company's restricted common stock
valued at $1,250,000 issued at closing, $1,250,000 if certain earnings targets
are met for the twelve months ending March 31, 1999, and additional
consideration not to exceed $2,000,000 payable after December 2001 if certain
profit levels in 1999, 2000 and 2001 are achieved.
GDB Software Services, Inc - the Company's subsidiary, Universal
Commodities Corporation, entered into an agreement to acquire 100 percent of the
200 issued and outstanding shares of common stock from the selling shareholders
in consideration for 384,616 shares of the Company's restricted common stock
valued at $1,250,000 issued at closing, $1,250,000 if certain earnings targets
are met for the twelve months ending March 31, 1999, and additional
consideration not to exceed $2,000,000 payable after December 2001 if certain
profit levels in 1999, 2000 and 2001 are achieved.
Ground Effects Limited ("Ground Effects") - the Company's wholly owned
subsidiary, ACT-GFX Canada, Inc. acquired 80% of the outstanding shares of
common and preferred stock from the selling shareholders in consideration for
1,105,708 shares of the Company's restricted common stock valued at $3,593,548
reserved at closing and evidenced by the issuance by the Company of one Class B
Voting Preferred Stock (the "Class B Special Preferred Share"). The Company has
reserved 1,105,708 shares of its Common Stock to be exchanged for Exchangeable
Shares held by the Ground Effects selling shareholders. The selling shareholders
will convert their Ground Effects shares into ACT-GFX Canada, Inc. exchangeable
shares, which shares may then be converted into the reserved shares of the
Company's common stock. At such time as all the exchangeable shares have been
exchanged or redeemed, the Class B Special Preferred Share will be cancelled.
Page 22
<PAGE>
Innovative Vacuum Solutions, Inc. - the Company entered into an agreement
to acquire 80 percent of the 1,500 issued and outstanding shares of common stock
from the selling shareholders in consideration for 270,769 shares of the
Company's restricted common stock valued at $880,000 issued at closing and
$500,000 payable after March, 1999 if certain profit levels for the twelve month
period ending March 31, 1999 are achieved.
Service Transportation Company - the Company's subsidiary, Universal
Commodities Corporation, entered into an agreement to acquire 80 percent of the
43,750 issued and outstanding shares of common stock from the selling
shareholders in consideration for 35,000 shares of the Company's restricted
common stock valued at $157,500 issued at closing.
Teledata Concepts, Inc. - the Company entered into an agreement to acquire
100 percent of the 500 issued and outstanding shares of common stock from the
selling shareholders in consideration for 137,931 shares of the Company's
restricted common stock valued at $500,000 issued at closing and $2,000,000
payable in two equal installments in April 1999 and April 2000 if certain profit
levels for the nine and twelve month periods ending December 31, 1998 and
December 31, 1999 are achieved.
Effective as of May 1, 1998, the Company entered into an agreement to
acquire 100 percent of the 12,195,403 issued and outstanding shares of common
stock of Commstar Limited ("Commstar") from the selling shareholders in
consideration for 3,417,580 shares of the Company's restricted common stock
valued at $12,057,221 reserved at closing and evidenced by the issuance by the
Company of one Special Voting Preferred Stock (the "Special Preferred Share") to
the Montreal Trust Company of Canada, (the "Voting Trustee"). The Commstar
selling shareholders will convert their Commstar common shares into Commstar
exchangeable shares, which shares may then be converted into the reserved shares
of the Company's common stock. At such time as all the exchangeable shares have
been exchanged or redeemed, the Special Preferred Share will be cancelled.
Effective as of June 1, 1998, the Company entered into an agreement to
acquire an 85% interest in Signature Industries Limited ("Signature"), in
exchange for (pounds)5,300,000.00 at closing payable (pounds)90,238 in cash and
(pounds)5,209,763 in the form of restricted shares of the Company's common
stock. The sellers received 2,339,703 shares of the Company's common stock
valued at $8,510,760 per share. The Sellers will also receive additional
consideration of up to (pounds)5,106,550, payable in shares of the Company's
common stock, if Signature achieves certain operating profit targets in 1998 and
1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 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)
4.2 Amendment of Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (File No. 333-59523) filed
with the Commission on July 21, 1998)
4.3 Amended and Restated Bylaws of the Company dated March 31, 1998
(incorporated herein by reference to Exhibit 4.1 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
Page 23
<PAGE>
27 Financial Data Schedule
99 Cautionary Statements
(b) Reports on Form 8-K
1. The Company's Current Reports on Form 8-K and Form 8-K/A filed
with the Commission on June 26, 1998 and June 29, 1998,
respectively, reporting the Company's acquisition of Signature
Industries Limited.
2 The Company's Current Report on Form 8-K filed with the
Commission on July 14, 1998 reporting the Company's acquisition
of Commstar Limited.
Page 24
<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: August 12, 1998 By: /s/ David A. Loppert
-----------------------
David A. Loppert, Vice President,
Treasurer and Chief Financial Officer
Page 25
<PAGE>
Exhibit Index
Number Description of Exhibits
12 Statement re computation of ratios
27 Financial Data Schedule
99 Cautionary Statements
Page 26
<PAGE>
Exhibit 12
----------
STATEMENT RE COMPUTATION OF RATIOS
This schedule contains financial information extracted from the
registrant's unaudited consolidated balance sheets as of June 30, 1998 and
December 31, 1997, and is qualified in its entirety by reference to such
financial statements:
June 30, December 31,
1998 1997
-------------------------------
Current Ratio:
The ratio of current assets divided by current
liabilities -
Current assets (numerator) 65,779,000 $ 39,575,000
Current liabilities (denominator) 39,948,000 20,113,000
Current ratio 1.65 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 $ 5,304,000 $ 7,657,000
Accounts receivable and unbilled receivables 37,282,000 19,389,000
---------------------------------
Total (numerator) 42,586,000 27,046,000
---------------------------------
Current liabilities (denominator) 39,948,000 20,113,000
Quick ratio 1.07 1.34
Debt to Equity Ratio:
The ratio of all debt divided by
stockholders' equity
Notes payable $ 11,225,000 $ 4,783,000
Current maturities of long-term debt 1,589,000 843,000
Long-term liabilities 4,943,000 2,200,000
---------------------------------
Total (numerator) 17,757,000 7,826,000
---------------------------------
Stockholders' equity (denominator) 64,772,000 36,284,000
Debt to equity ratio 0.27 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 six months ended June 30, 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> 6-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 5,304,000
<RECEIVABLES> 38,045,000
<SECURITIES> 0
<ALLOWANCES> 763,000
<INVENTORY> 19,162,000
<CURRENT-ASSETS> 65,779,000
<PP&E> 28,337,000
<DEPRECIATION> 12,839,000
<TOTAL-ASSETS> 113,686,000
<CURRENT-LIABILITIES> 39,948,000
<BONDS> 4,943,000
700,000
0
<COMMON> 36,000
<OTHER-SE> 64,736,000
<TOTAL-LIABILITY-AND-EQUITY> 113,686,000
<SALES> 91,879,000
<TOTAL-REVENUES> 92,464,000
<CGS> 57,461,000
<TOTAL-COSTS> 64,522,000
<OTHER-EXPENSES> 22,404,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 666,000
<INCOME-PRETAX> 5,091,000
<INCOME-TAX> 1,742,000
<INCOME-CONTINUING> 3,349,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,980,000
<EPS-PRIMARY> .11
<EPS-DILUTED> .10
</TABLE>
Exhibit 99
----------
CAUTIONARY STATEMENTS
Certain statements in this quarterly report on Form 10-Q of Applied
Cellular Technology, Inc. (the ACompany), 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 August 11, 1998, the Company had 31,307,254 shares of Common Stock
<PAGE>
outstanding. In addition, 4,955,298 shares are reserved for issuance in exchange
for the exchangeable shares of Commstar Limited and in exchange for certain
exchangeable shares to be issued by ACT-GFX Canada, Inc., a wholly-owned
subsidiary of the Company. Since January 1, 1998, the Company has issued or
reserved an aggregate of 15,740,145 shares of Common Stock, of which 9,505,316
shares of Common Stock were issued in acquisitions, 4,955,298 shares of Common
Stock are reserved for issuance upon exchange or redemption of exchangeable
shares issued in acquisitions, 850,000 shares of Common Stock were issued upon
the exercise of warrants, 250,000 shares of Common Stock were sold to certain
directors and an officer of the Company, and 179,531 shares were issued for
services rendered, including services under employment agreements and employee
bonuses.
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 National 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.
