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 QUARTERLY PERIOD ENDED MARCH 31, 1999
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 May 6, 1999:
Class Number of Shares
Common Stock; $.001 Par Value 40,449,818
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC.
TABLE OF CONTENTS
Item Description Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations -
Three Months ended March 31, 1999 and 1998
(unaudited) 4
Consolidated Statements of Stockholders' Equity -
Three Months ended March 31, 1999 and 1998
(unaudited) 5
Consolidated Statements of Cash Flows -
Three Months ended March 31, 1999 and 1998
(unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
1. Legal Proceedings 24
2. Changes In Securities 24
3. Defaults Upon Senior Securities 25
4. Submission of Matters to a Vote of Security Holders 25
5. Other Information 25
6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
EXHIBITS
-2-
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
Assets
March 31, December 31,
1999 1998
---------- ------------
Current Assets
Cash and cash equivalents $ 698 $ 4,555
Accounts receivable (net of allowance for
doubtful accounts of $772 in 1999
1999 and $990 in 1998) 36,423 34,390
Inventories 21,847 20,657
Notes receivable 3,224 3,600
Prepaid expenses and other current assets 2,386 2,042
--------- ----------
Total Current Assets 64,578 65,244
Property And Equipment, net 15,914 15,627
Notes Receivable 1,538 1,445
Goodwill, net 41,708 33,430
Other Assets 8,326 8,370
--------- ---------
$ 132,064 $ 124,116
========= =========
Liabilities And Stockholders' Equity
Current Liabilities
Notes payable $ 20,283 $ 23,217
Current maturities of long-term debt 3,235 1,158
Accounts payable and accrued expenses 32,254 26,382
-------- ----------
Total Current Liabilities 55,772 50,757
Long-Term Debt 3,081 2,838
-------- ----------
Total Liabilities 58,853 53,595
--------- ----------
Commitments And Contingencies -- --
--------- ----------
Minority Interest 3,204 2,961
--------- ----------
Stockholders' Equity
Preferred shares:
Authorized 5,000 shares of $10 par value;
special voting, issued and
outstanding 1 share, Class B voting,
issued and outstanding 1 share -- --
Common shares:
Authorized 80,000 shares of $.001 par
value; issued 40,556 shares and
outstanding 40,450 shares in 1999 and
issued 35,683 shares and outstanding
35,577 shares in 1998 40 36
Common and preferred additional paid-in
capital 64,719 60,517
Retained earnings 5,587 7,232
Treasury stock (carried at cost, 106 shares) (337) (337)
Accumulated other comprehensive income (2) 112
--------- ----------
Total Stockholders' Equity 70,007 67,560
--------- ----------
$ 132,064 $ 124,116
========= ==========
See the accompanying notes to consolidated financial statements.
-3-
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For The Three Months
Ended March 31,
1999 1998
-----------------------
Net Operating Revenue $ 51,573 38,784
Cost of Goods Sold 33,176 28,298
- ------------------------------------------------------------------------------
Gross Profit 18,397 10,486
- ------------------------------------------------------------------------------
Operating Costs and Expenses
Selling, general and administrative expenses 17,512 9,131
Restructuring and unusual costs 2,550 --
- ------------------------------------------------------------------------------
Total Operating Costs And Expenses 20,062 9,131
- ------------------------------------------------------------------------------
Operating Income (Loss) (1,665) 1,355
Interest Income 134 106
Interest Expense (445) (234)
------- -------
Income (Loss) Before Provision (Benefit) For Income
Taxes And Minority Interest (1,976) 1,227
Provision (Benefit) For Income Taxes (575) 518
------- ------
Income (Loss) Before Minority Interest (1,401) 709
Minority Interest 244 94
--------- -------
Net Income (Loss) (1,645) 615
Preferred Stock Dividends -- 18
--------- -------
Net Income (Loss) Available to Common Stockholders $ (1,645) $ 597
========= =======
Net Income (Loss) Per Common Share - Basic $ (.04) $ .03
Net Income (Loss) Per Common Share - Diluted $ (.04) $ .02
Weighted Average Number Of Common
Shares Outstanding - Basic 41,236 23,711
Weighted Average Number Of Common
Shares Outstanding - Diluted 41,909 24,956
See the accompanying notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Three Month Periods Ended March 31, 1999 And 1998
(In thousands)
(Unaudited)
Accumulated Total
Preferred Stock Common Stock Additional Other Stock-
--------------- ---------------- Paid-In Retained Treasury Comprehensive holders'
Number Amount Number Amount Capital Earnings Stock Income Equity
------- ------ ------- ------ -------- --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1998 -- $ -- 20,672 $ 21 $ 33,680 $ 2,586 $ -- $ (3) $ 36,284
------ ----- ------ ---- -------- --------- ------- --------- --------
Net income -- -- -- -- -- 615 -- -- 615
Comprehensive income -
foreign currency translation -- -- -- -- -- -- -- 32 32
------ ----- ------ ---- -------- --------- ------- --------- --------
Total comprehensive income -- -- -- -- -- 615 -- 32 647
------ ----- ------ ---- -------- --------- ------- --------- --------
Issuance of common stock -- -- 3,843 4 5,917 -- -- -- 5,921
Preferred stock dividends paid -- -- -- -- -- (18) -- -- (18)
------ ----- ------ ---- -------- --------- ------- --------- ---------
Balance - March 31, 1998 -- $ -- 24,515 $ 25 $ 39,597 $ 3,183 $ -- $ 29 $ 42,834
====== ===== ====== ==== ======== ========= ======= ======== ========
Balance - January 1, 1999 -- $ -- 35,577 $ 36 $ 60,517 $ 7,232 $ (337) $ 112 $ 67,560
------ ----- ------ ---- -------- --------- ------- -------- --------
Net loss -- -- -- -- -- (1,645) -- -- (1,645)
Comprehensive loss -
foreign currency translation -- -- -- -- -- -- -- (114) (114)
------ ----- ------ ---- -------- --------- ------- --------- --------
Total comprehensive loss -- -- -- -- -- (1,645) -- (114) (1,759)
------ ----- ------ ---- -------- --------- ------- --------- --------
Issuance of common shares -- -- 5 -- 16 -- -- -- 16
Issuance of common shares for
accquisition -- -- 4,868 4 4,186 -- -- -- 4,190
------ ----- ------ ---- -------- --------- ------- --------- --------
Balance - March 31, 1999 -- $ -- 40,450 $ 40 $ 64,719 $ 5,587 $ (337) $ (2) $ 70,007
====== ===== ====== ==== ======== ========= ======= ========= ========
</TABLE>
See the accompanying notes to consolidated financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For The Three Months
Ended March 31,
-----------------------
1999 1998
----------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (1,645) $ 615
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,486 695
Minority interest 244 94
Gain on sale of equipment -- (14)
Loss on restructuring 205 --
Change in assets and liabilities:
(Increase) decrease in accounts receivable (2,032) 91
(Increase) in inventories (1,190) (1,011)
(Increase) in prepaid expenses (267) (352)
Decrease in deferred tax asset -- 29
Increase (decrease) in accounts payable and
accrued expenses 3,617 (894)
----------- --------
Net Cash Provided By (Used In) Operating Activities 418 (747)
----------- --------
Cash Flows From Investing Activities
(Increase) decrease in notes receivable - officers 130 (211)
(Increase) in other assets (257) (584)
Proceeds from sale of property and equipment 20 86
Payments for property and equipment (757) (611)
Proceeds from (payments for) costs of asset and
business acquisitions (net of cash balances
acquired) (2,411) 1,279
----------- --------
Net Cash Provided By (Used In) Investing Activities (3,275) (41)
----------- --------
Cash Flows From Financing Activities
Net amounts (paid) on notes payable (2,935) (192)
Proceeds from long-term debt 2,331 255
Payments on long-term debt (289) (737)
Redemption of preferred shares -- (200)
Preferred stock dividends paid -- (72)
Other financing costs (107) --
----------- --------
Net Cash Provided By (Used In) Financing Activities (1,000) (946)
----------- --------
Net Decrease In Cash And Cash Equivalents (3,857) (1,734)
Cash And Cash Equivalents - Beginning Of Period 4,555 7,657
----------- --------
Cash And Cash Equivalents - End Of Period $ 698 $ 5,923
=========== ========
Supplemental Disclosure Of Cash Flow Information
Income taxes paid $ 178 $ 300
Interest paid 462 154
Noncash investing and financing activities:
Property acquired for long-term debt 279 352
----------- --------
</TABLE>
See the accompanying notes to consolidated financial statements.
-6-
<PAGE>
APPLIED CELLULAR TECHNOLGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Applied
Cellular Technology, Inc. (the "Company") as of and for the three months ended
March 31, 1999 and 1998 have been prepared 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 Applied Cellular Technology's
management, all adjustments (consisting of only normal recurring adjustments)
considered necessary to present fairly the consolidated financial statements
have been made.
The consolidated statement of operations for the three months ended
March 31, 1999 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
our Annual Report on Form 10-K for the year ended December 31, 1998.
2. Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly owned and majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
3. Inventory
Inventory at March 31, 1999 and December 31, 1998 consists of:
March 31, December 31,
1999 1998
--------- ------------
Raw materials $ 4,515 $ 4,437
Work in process 2,015 2,349
Finished goods 15,919 15,246
--------- ----------
22,449 22,032
Allowance for excess and obsolescence (602) (1,375)
========= ==========
$ 21,847 $20,657
========= ==========
4. Business Restructuring and Unusual Charges
In the first quarter of 1999, a pre-tax charge of $2,550 was recorded
to cover restructuring costs of $2,236 and unusual charges of $314.
Restructuring Charge
As part of the Company's reorganization of its core business into five
reportable business groups, the Company has implemented a restructuring plan.
The restructuring plan includes the exiting of selected lines of business within
the Company's Telecommunications and Application Technology business groups, and
-7-
<PAGE>
APPLIED CELLULAR TECHNOLGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
the associated write-off of assets. The restructuring charge of $2,236 includes
asset impairments, primarily software and other intangible assets, of $1,522,
lease terminations of $541, and employee separations of $173. The total charge
reduced net income by $1,588.
The following table sets forth the rollforward of the liabilities for
business restructuring from January 1, 1999 through March 31, 1999:
<TABLE>
<CAPTION>
Balance, Balance,
January 1, March 31,
Type of Cost 1999 Additions Deductions 1999
---------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Asset Impairment $ 0 $ 1,522 $ (1,522) $ 0
Lease terminations 0 541 (30) 511
Employee separations 0 173 (30) 143
====== ======= ========= =======
Total $ 0 $ 2,236 $ (1,582) $ 654
====== ======= ========= =======
</TABLE>
Management believes that the remaining reserves for business
restructuring are adequate to complete its plan and anticipates completing it by
the end of 1999.
Unusual Items
During the first quarter of 1999, as part of the Company's core
business reorganization, the Company realigned certain operations within its
Telecommunications division and has recognized impairment charges and other
related costs of $314. The total charge reduced net income by $223.
-8-
<PAGE>
APPLIED CELLULAR TECHNOLGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
5. Earnings Per Share
The following is a reconciliation of the numerator and denominator of
basic and diluted earnings per share:
Three Months Ended
March 31,
======================
1999 1998
--------- ---------
Numerator:
Net (loss) income $ (1,645) $ 615
Preferred stock dividends -- (18)
--------- ---------
Numerator for basic earnings per share -
Net (loss) income available to common
stockholders (1,645) 597
Effect of dilutive securities:
Preferred stock dividends -- 18
--------- ---------
Numerator for diluted earnings per share -
Net (loss) income available to common
stockholders $ (1,645) $ 615
========= =========
Denominator:
Denominator for basic earnings per share -
Weighted-average shares (1) 41,236 23,711
--------- ---------
Effect of dilutive securities -
Redeemable preferred stock -- 122
Warrants 293 624
Employee stock options 380 499
--------- ---------
Dilutive potential common shares 673 1,245
--------- ---------
Denominator for diluted earnings per share -
Adjusted Weighted-average shares and
assumed conversions
41,909 24,956
========= =========
Basic earnings per share $ (0.04) $0.03
========= =========
Diluted earnings per share $ (0.04) $0.02
========= =========
-----------------------
1. Includes, for the three month period ended March 31, 1999,
1,257 shares of common stock reserved for issuance to the
holders of TigerTel Services Limited's (formerly Commstar
Ltd.) Exchangeable Shares and 136 shares of common stock
reserved for issuance to the holder's of ACT-GFX Canada,
Inc.'s Exchangeable Shares.
-9-
<PAGE>
APPLIED CELLULAR TECHNOLGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
6. Segment Information
In 1998, the Company adopted Statement of Financial Accounting
Standard No. 131, Disclosures about Segments of an Enterprise and Related
Information. Prior year information has been restated to present our reportable
segments.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K filed for the year ended December 31, 1998, except
that intersegment sales and transfers are generally accounted for as if the
sales or transfers were to third parties at current market prices. It is on this
basis that management utilizes the financial information to assist in making
internal operating decisions. Segment performance is evaluated based on
stand-alone segment operating income.
Following is the selected segment data as of and for the three months
ended March 31, 1999:
<TABLE>
<CAPTION>
--------- ---------- -------- --------- ------- -------- -------- --------- ------------ ------------
Communi- Appli-
Tele- Network cations cation
communi- Infra- Infra- Tech- Intelle- Corporate
cations structure Internet structure nology sale.com Non-Core Overhead Eliminations Consolidated
--------- ---------- -------- --------- ------- --------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $9,012 $4,006 $997 $9,010 $6,755 $15,574 $ 6,201 $ 18 $ -- $ 51,573
Intersegment revenue -- -- -- -- -- 1,533 -- -- (1,533) --
====== ====== ====== ======= ====== ======= ======= ======== ======== =========
Total revenue 9,012 4,006 997 9,010 6,755 17,107 6,201 18 (1,533) 51,573
====== ====== ====== ======= ====== ======= ======= ======== ======== =========
Operating income
(loss) 566 230 (23) 180 (323) 2,372 101 (4,381) (387) (1,665)
====== ====== ====== ======= ======= ======= ======= ======= ========== =========
Total assets 23,400 3,516 1,205 12,771 21,501 16,938 16,636 156,361 (120,264) 132,064
======= ====== ====== ======= ======= ======= ======= ======= ========== =========
</TABLE>
<TABLE>
Following is the selected segment data as of and for the three months
ended March 31, 1998:
<CAPTION>
--------- ---------- -------- --------- ------- -------- -------- --------- ------------ ------------
Communi- Appli-
Tele- Network cations cation
communi- Infra- Infra- Tech- Intelle- Corporate
cations structure Internet structure nology sale.com Non-Core Overhead Eliminations Consolidated
--------- ---------- -------- --------- ------- --------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue $7,024 $5,446 $-- $10,001 $1,703 $10,622 $ 3,776 $ 212 $ -- $38,784
Intersegment revenue -- -- -- -- -- 233 -- -- (233) --
====== ====== ===== ======= ======= ======= ======== ======== ========= =======
Total revenue 7,024 5,446 -- 10,001 1,703 10,855 3,776 212 (233) 38,784
====== ====== ===== ======= ======= ======= ======== ======== ========= =======
Operating income
(loss) 359 612 -- 410 42 835 (9) (652) (242) 1,355
======= ====== ===== ======= ======= ======= ======== ======== ========= =======
Total assets 11,376 3,472 -- 11,290 9,329 8,689 8,320 87,253 (66,662) 73,067
======= ====== ===== ======= ======= ======= ======== ======== ========= =======
</TABLE>
-10-
<PAGE>
7. Subsequent Events
On May 7, 1999 the Company entered into an agreement to merge its
wholly owned Canadian subsidiary, TigerTel Services Limited, with Contour
Telecom Management, Inc., a Canadian company. Subject to Contour's shareholder
approval, the Company expects to receive, in a reverse merger transaction,
27,257,188 shares of Contour's common stock, representing approximately 80% of
the total outstanding shares. The transaction is expected to be accounted for
under the purchase method of accounting.
-11-
<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 in Item 1 of this report as
well as our Annual Report on Form 10-K for the year ended December 31, 1998.
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 the Risk Factors sections later in this Item.
Beginning in the fourth quarter of 1998 and continuing into 1999, we
reorganized into seven operating segments to more effectively and efficiently
provide integrated communications products and services to a broad base of
customers. The five operating segments that represent our core competency are:
o Telecommunications - The Telecommunications division provides
telephone services and systems, computer telephony integration,
interactive voice response, call centers and voice messaging.
o Network Infrastructure - The Network Infrastructure division
provides computer systems, local area networks and application
servers.
o Internet - The Internet division provides electronic commerce,
intranet and extranet services and wide area networks.
o Communications Infrastructure - The Communications Infrastructure
division provides communications towers, fiber optics, cabling,
power distribution and communications equipment.
o Application Technology - The Application Technology division
provides global positioning systems, satellite systems, field
automation, asset management, corporate enterprise access,
decision support and voice/data technology.
Operating segments outside our core competency are:
o Intellesale.com - The Intellesale.com division, formerly known as
Inteletek, purchases and sells new and used computer equipment,
and provides peripherals, components, consulting, systems
integration and transportation of all types of computer systems.
o Non-Core - The Non-Core division provides electrical components,
control panels, design engineering, manufacturing engineering,
automation systems and vacuum pumps.
-12-
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes our results of operations as a
percentage of net operating revenue for the three month periods ended March 31,
1999 and 1998 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 Three Months Ended
March 31, 1999 March 31, 1998
% %
-------------------- -------------------
<S> <C> <C>
Net operating revenue 100.0 100.0
Cost of goods sold 64.3 73.0
------- -------
Gross margin 35.7 27.0
Selling, general and administrative expenses 34.0 23.5
Restructuring and unusual charges 4.9 0.0
------- -------
Operating income (loss) (3.2) 3.5
Interest income 0.3 0.3
Interest expense (0.9) (0.6)
------- -------
Income (loss) before provision for income
taxes (benefit) and minority interest (3.8) 3.2
Provision (benefit) for income taxes 1.1 (1.4)
------- -------
Income (loss) before minority interest (2.7) 1.8
Minority interest (0.5) (0.2)
------- -------
Net income (loss) (3.2) 1.6
Preferred stock dividends 0.0 (0.1)
------- -------
Net income (loss) available to common
stockholders (3.2) 1.5
======= =======
</TABLE>
Company Overview
- ----------------
Revenue
Revenue for the first three months of 1999 was $51.6 million, an
increase of $12.8 million, or 33.0%, from $38.8 million for the first three
months of 1998. This significant increase is attributable to growth through
acquisition of companies acquired after March 31, 1998.
-13-
<PAGE>
Revenue generated during the first three months of 1999 and 1998 was:
(In thousands) 1999 1998
---------- -----------
Telecommunications $ 9,012 $ 7,024
Network Infrastructure 4,006 5,446
Internet 997 --
Communications Infrastructure 9,010 10,001
Application Technology 6,755 1,703
Intellesale.com 17,107 10,855
Non-Core 6,201 3,776
Corporate (1,515) (21)
---------- ----------
Consolidated $51,573 $ 38,784
========== ==========
Gross Margin
The gross margin for the first three months of 1999 was $18.4 million,
an increase of $7.9 million, or 75.4%, from $10.5 million for the first three
months of 1998. As a percentage of revenue, the gross margin was 35.7% for the
first three months of 1999 and 27.0% for the first three months of 1998. The
change from the prior year is primarily due to the acquisition of several
companies with different cost allocations. Also affecting the gross margin
percentages were changes within the business mix and shifts in the competitive
marketplace. The largest growth of gross margin dollar contributions came from
the Intellesale.com, Application Technology and Telecommunications divisions.
The Intellesale.com division contributed $5.1 million in gross margin for the
first three months of 1999, an increase of $3.2 million or 167.9% over the first
three months of 1998. The Application Technology division contributed $3.6
million in gross margin for the first three months of 1999, an increase of $2.3
million or 176.3% over the first three months of 1998. The Telecommunications
division contributed $5.1 million in gross margin for the first three months of
1999, an increase of $1.5 million or 42.6% over the first three months of 1998.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $17.5 million for the
first three months of 1999, an increase of $8.4 million, or 91.8%, from $9.1
million for the first three months of 1998. As a percentage of revenue, selling,
general and administrative expenses were 34.0% and 23.5% for the first three
months of 1999 and 1998, respectively. The increase as a percentage of revenue
is due to the strengthening of the corporate infrastructure, additional costs
incurred as part of our reorganization into seven business segments and
additional amortization expense associated with goodwill from acquisitions.
Restructuring and Unusual Charges
As part of the Company's reorganization of its core business into five
reportable business groups, the Company has implemented a restructuring plan.
The restructuring plan includes the exiting of selected lines of business within
the Company's Telecommunications and Application Technology business groups, and
the associated write-off of assets. The restructuring charge of $2,236 includes
asset impairments, primarily software and other intangible assets, of $1,522,
lease terminations of $541, and employee separations of $173. In addition,
during the first quarter of 1999, as part of the Company's core business
reorganization, the Company realigned certain operations within its
Telecommunications division and has recognized impairment charges and other
related costs of $314.
-14-
<PAGE>
Operating Income (Loss)
The operating loss was $1.7 million for the first three months of 1999,
a decrease of $3.1 million, or 222.9%, from the $1.4 million of operating income
for the first three months of 1998. Excluding the $2.6 million restructuring and
unusual charges mentioned above, operating income for the first three months of
1999 was $0.9 million.
Operating income (loss) earned during the first three months of 1999
and 1998 was:
(In thousands) 1999 1998
---------- -----------
Telecommunications $ 566 $ 359
Network Infrastructure 230 612
Internet (23) --
Communications Infrastructure 180 410
Application Technology (1) (323) 42
Intellesale.com 2,372 835
Non-Core 101 (9)
Corporate (including amounts incurred
during consolidation) (1) (4,768) (894)
-------- --------
Consolidated $(1,665) $ 1,355
======== ========
- -------------
(1) Includes restructuring and unusual charges incurred in the first three
months of 1999 of $348 in the Application Technology division and
$2,202 in the corporate overhead expense.
Interest Income and Expense
Interest income was $0.1 million for the first three months of 1999 and
1998. Interest income is earned primarily from short term investments and notes
receivable.
Interest expense was $0.4 million for the first three months of 1999
and $0.2 million for the first three months of 1998. Interest expense is
principally associated with revolving credit lines and notes payable.
Income Taxes
We had an effective income tax benefit rate of 29.1% for the first
three months of 1999 and had an effective tax rate of 42.2% for the first three
months of 1998. The income tax benefit in 1999 was a result of the loss arising
in the quarter, primarily due to the $2.6 million restructuring and unusual
charges mentioned above. Changes in the effective rate primarily arise from the
effect of purchase accounting, given our acquisition activities in recent
years.
Segment Overview
- ----------------
Telecommunications
(In thousands) 1999 % 1998 %
-------- ----- ------- -----
Revenue $9,012 100.0 $ 7,024 100.0
Gross profit 5,135 57.0 3,602 51.3
Selling, general and administrative 4,569 50.7 3,243 46.2
Operating income $ 566 6.3 $ 359 5.1
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<PAGE>
The revenue growth in the Telecommunications division came from both
internal growth and through acquisition. Expansion into higher margin products
and services in Canadian markets, cost control and economies of scale enabled
the margins to increase.
Network Infrastructure
(In thousands) 1999 % 1998 %
-------- ----- ------- -----
Revenue $4,006 100.0 $ 5,446 100.0
Gross profit 820 20.5 1,140 20.9
Selling, general and administrative 590 14.7 528 9.7
Operating income $ 230 5.8 $ 612 11.2
Due to increased competition within the industry, the Network
Infrastructure division has begun to transition from sales of hardware to
installations and the providing of value added services. During the first three
months of 1999, hardware sales were down compared to the first three months of
1998, as evidenced by the lower revenue, but the gross margin held steady due to
the higher margins attained from the service business. Selling, general and
administrative expenses were fairly consistent for the first three months of
1999 and 1998, but increased as a percentage of revenue as a result of lower
revenues.
Internet
(In thousands) 1999 % 1998 %
-------- ------ ------- -----
Revenue $ 997 100.0 $ -- --
Gross profit 275 27.6 -- --
Selling, general and administrative 298 29.9 -- --
Operating income $ (23) (2.3) $ -- --
The Internet division began operations during the second quarter of
1998.
Communications Infrastructure
(In thousands) 1999 % 1998 %
-------- ------ ------- ----
Revenue $ 9,010 100.0 $10,001 100.0
Gross profit 1,743 19.3 1,218 12.2
Selling, general and administrative 1,563 17.3 808 8.1
Operating income $ 180 2.0 $ 410 4.1
Revenue in the Communications Infrastructure division for the first
three months of 1999 decreased from the first three months of 1998 due to
pricing pressures caused by increased competition within the industry. The
revenue decline was partially offset by acquisitions made in the second quarter
of 1998 which generated approximately $2.2 million during the first three months
of 1999. The increase in gross margin percentage came as a result of careful
cost management and acquisitions with higher gross margin percentages. The
higher selling, general and administrative expenses, both in total and as a
percentage of revenue, were due to the strengthening of the division's
infrastructure and newly acquired companies with different cost allocations
methods.
-16-
<PAGE>
Application Technology
(In thousands) 1999 % 1998 %
-------- ------ ------- -----
Revenue $ 6,755 100.0 $ 1,703 100.0
Gross profit 3,620 53.6 1,310 76.9
Selling, general and administrative 3,943 58.4 1,268 74.5
Operating income $ (323) (4.8) $ 42 2.4
The Application Technology division has grown mostly though
acquisition. Revenue increased 296.7% in the first three months of 1999 over the
first three months of 1998. Due to the competitive nature of this industry
segment, gross margins declined from 76.9% for the first three months of 1998 to
53.6% for the first three months of 1999 and could decline further in the
future. The selling, general and administrative expenses for the first three
months of 1999 include a $0.3 million charge for restructuring and unusual
items. Excluding this charge, selling, general and administrative expenses would
be 53.2% of revenue. The decline in the gross margin combined with increased
selling, general and administrative expenses relating primarily to development
of new products, has lowered the operating income as a percentage of revenue.
Intellesale.com
(In thousands) 1999 % 1998 %
-------- ------ ------ -----
Revenue $17,107 100.0 $10,855 100.0
Gross profit 5,124 30.0 1,913 17.6
Selling, general and administrative 2,752 16.1 1,078 9.9
Operating income $ 2,372 13.9 $ 835 7.7
Revenue for the first three months of 1999 increased 57.6% over
revenues for the first three months of 1998. Approximately $6.3 million of this
increase was contributed by companies acquired subsequent to March 31, 1998.
Margins have increased steadily as a result of changes in the product mix and
the additional services offered as a result of additional business lines
acquired.
Non-Core
(In thousands) 1999 % 1998 %
-------- ------ ------ -----
Revenue $ 6,201 100.0 $ 3,776 100.0
Gross profit 1,661 26.8 1,216 32.2
Selling, general and administrative 1,560 25.2 1,225 32.4
Operating income $ 101 1.6 $ (9) (0.2)
Revenue for the first three months of 1999 increased 64.2% over revenue
for the first three months of 1998. Although there has been growth in the level
of business, changes in product mix and pressures from a competitive marketplace
have resulted in a decline of the gross margin from 32.2% for the first three
months of 1998 to 26.8% for the first three months of 1999. Margins may continue
to decline in the future. Selling, general and administrative expenses have
declined as a percentage of revenue due to the disposition of a subsidiary with
relatively higher selling, general and administrative costs as a percentage of
revenue and acquisitions of companies with relatively lower selling, general and
administrative costs as a percentage of revenue.
-17-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, cash and cash equivalents totaled $0.7 million, a
decrease of $3.9 million, or 84.7% from $4.6 million at December 31, 1998.
Excess cash on hand has been concentrated and applied against our line of
credit. Cash of $0.4 million was provided by operations for the first three
months of 1999 and cash of $0.7 was used in operations during the first three
months of 1998. The cash generated in the first three months of 1999 was due to
net income, after adjusting for non-cash expenses. Accounts receivable increased
$2.0 million as a result of slower collections. Inventories increased by $1.2
million or 5.8% to $21.9 million at March 31, 1999 from $20.7 million at
December 31, 1998. This increase was primarily attributable to the lower sales
in the first quarter of 1999 compared to the fourth quarter of 1998. Accounts
payable and accrued expenses increased by $3.6 million as a result of careful
management of accounts payable to accounts receivable collections. The cash used
in the first three months of 1998 was primarily due to net income, after
adjusting for non-cash expenses, and increases in inventory of $1.0 million.
Investing activities used cash of $3.3 million during the first three
months of 1999 and $41,000 during the first three months of 1998. In the first
quarter of 1999, cash of $2.4 million was used to pay for the cost of asset and
business acquisitions, payments of $0.8 million were made for property, plant
and equipment and $0.3 million was spent on other assets. These investments were
partially offset by payments received on notes receivable from officers. During
the first three months of 1998, $1.3 million in cash was acquired in asset and
business acquisitions. This source of cash was offset mostly by payments for
property, plant and equipment of $0.6 million, increases in other assets of $0.6
million and increases in notes receivable to officers of $0.2 million.
Cash of $1.0 million and $0.9 million was used in financing activities
during the first three months of 1999 and 1998, respectively. In the first three
months of 1999, proceeds from long term debt of $2.3 million were offset by $2.9
million paid on notes payable, $0.3 million paid for long term debt and $0.1
million paid for other financing costs. In the first three months of 1998,
proceeds from long term debt of $0.3 million were offset by $0.7 million paid
toward long term debt, $0.2 million paid for the redemption of preferred shares,
$0.2 million paid on notes payable and $0.1 million paid for preferred stock
dividends.
One of our stated objectives is to maximize cash flow, as management
believes positive cash flow is an indication of financial strength. However, due
to our significant growth rate, our investment needs have increased.
Consequently, we may continue, in the future, to use cash from operations and
may continue to finance this use of cash through financing activities such as
the sale of common stock and/or bank borrowing, if available.
In August, 1998, we entered into a twenty million dollar line of credit
with a bank secured by all of our domestic assets (the "Credit Agreement") at
the prime lending rate or at the London Interbank Offered Rate, at our
discretion. In February 1999, the amount of the Credit Agreement was increased
to $23 million. The Credit Agreement expires on July 31, 1999 and contains
standard debt covenants relating to financial position and performance as well
as restrictions on the declarations and payment of dividends. We are in the
process of negotiating a new credit facility, but have not yet entered into a
definitive agreement. As of May 6, 1999, the outstanding balance was
approximately $20.1 million and the availability was approximately $2.9 million.
Our sources of liquidity include, but are not limited to, funds from
operations and funds available under the Credit Agreement, which we anticipate
extending or refinancing. We may be able to use additional bank borrowings,
-18-
<PAGE>
proceeds from the sale of common and preferred shares, proceeds from the
exercise of stock options and warrants, and the raising of other forms of debt
or equity through private placement or public offerings. There can be no
assurance however, that these options will be available, or if available, on
favorable terms. We believe that our current cash position, augmented by
financing activities, if available, will provide us with sufficient resources to
finance our working capital requirements for the foreseeable future. Our capital
requirements depend on a variety of factors, including but not limited to, the
rate of increase or decrease in our existing business base; the success, timing,
and amount of investment required to bring new products on-line; revenue growth
or decline; and potential acquisitions. We believe that we have the financial
resources to meet our future business requirements.
OUTLOOK
Our objective is to continue to grow each of our operating segments
internally and through acquisitions, both domestically and abroad. Our strategy
has been, and continues to be, to invest in and acquire businesses that
complement and add to our existing business base. We have expanded significantly
through acquisitions in the past and continue to do so. Our financial results
and cash flows are substantially dependent on not only our ability to sustain
and grow existing businesses, but to continue to grow through acquisition. We
expect to continue to pursue our acquisition strategy in 1999 and future years,
but there can be no assurance that management will be able to continue to find,
acquire, finance and integrate high quality companies at attractive prices.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain statements in this quarterly report, 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.
Applied Cellular Technology 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
our actual results, performance or achievements 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:
our continued ability to sustain our 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 technical, manufacturing, sales, marketing and management
capabilities; relationships with and dependence on third-party suppliers;
anticipated competition; uncertainties relating to economic conditions where we
operate; uncertainties relating to government and regulatory policies;
uncertainties relating to customer plans and commitments; rapid technological
developments and obsolescence in the industries in which we operate and compete;
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 we operate;
potential entry of new, well-capitalized competitors into our markets; changes
in our 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.
-19-
<PAGE>
Risk Factors
In addition to the other information contained herein, the following
factors should be considered carefully in evaluating our company and its
business.
Competition
Each segment of our business is highly competitive, and it is expected
that competitive pressures will continue. Many of our competitors have far
greater financial, technological, marketing, personnel and other resources. The
areas that we have 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 we will
have the financial, technical, marketing and other resources required to compete
successfully in this environment in the future.
Uncertainty of Future Financial Results
While we have been profitable for the last three fiscal years, future
financial results are uncertain. There can be no assurance that we will continue
to be operated in a profitable manner. Profitability depends upon many factors,
including the success of our various marketing programs, the maintenance or
reduction of expense levels and our ability to successfully coordinate the
efforts of the different segments of our company and its business.
Future Sales of and Market for the Shares
As of March 31, 1999, there were 40,449,818 shares of Common Stock
outstanding. In addition, 1,392,877 shares of Common Stock are reserved for
issuance in exchange for the exchangeable shares of ACT-GFX Canada, Inc. and the
exchangeable shares of TigerTel Services Limited (formerly Commstar, Ltd.), both
wholly owned subsidiaries. Since January 1, 1999, we have issued an aggregate of
4,872,510 shares of Common Stock, of which 2,882,097 shares of Common Stock were
issued as earnout payments in acquisitions, 1,952,263 were issued in exchange
for exchangeable shares, and 38,150 shares of Common Stock were issued for
services rendered, including services under employment agreements and employee
bonuses.
Although we previously announced that we intended to limit the use of
stock in future acquisitions and to focus on cash transactions, we may effect
acquisitions or contract for certain services through the issuance of Common
Stock or other equity securities as we have typically done in the past. In
addition, we have agreed to certain "price protection" provisions in acquisition
agreements which may result in additional shares of common stock being issued to
selling shareholders as of the effective date of the registration of the shares
such selling shareholder previously received as consideration. Such issuances 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.
Risks Associated with Acquisitions and Expansion
We have engaged in a continuing program of acquisitions of other
businesses which are considered to be complementary to our lines of business,
and it is anticipated that such acquisitions will continue to occur. Our total
assets were approximately $132 million as of March 31, 1999 and $124 million,
$61 million, $33 million and $4 million as of December 31, 1998, 1997, 1996 and
1995, respectively. Our net operating revenue was approximately $52 million for
the three months ended March 31, 1999 and approximately $207 million, $103
million, $20 million and $2 million for the years ended December 31, 1998, 1997,
1996 and 1995, respectively. Managing these dramatic changes in the scope of the
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<PAGE>
business will present ongoing challenges to management, and there can be no
assurance that our operations as currently structured, or as affected by future
acquisitions, will be successful.
We 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 us. Our Credit Agreement
expires on July 31, 1999 and there is no assurance that we will be able to
extend or refinance the Credit Agreement or obtain terms similar to those now in
place.
It is our policy to retain existing management of acquired companies,
under the overall supervision of senior management. 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.
We have entered into earnout arrangements with selling shareholders
under which they are entitled to additional consideration for their interests in
the companies they sold to us. Under these agreements, assuming that all
earnouts are achieved, and assuming certain levels of profitability in the
future, we are contingently liable for additional consideration amounting to
approximately $5 million based on achieved 1999 results, approximately $2
million based on achieved 2000 results, and approximately $4 million based on
achieved 2001 results. All amounts earned and payable have been accrued in the
accompanying balance sheets.
We have entered into put options with the selling shareholders of those
companies in which we acquired less than a 100% interest. These options provide
for us to acquire the remaining portion we do not own after periods ranging from
4 to 5 years from the dates of acquisition at amounts per share generally equal
to 10% - 20% of the average annual earnings per share of the company before
income taxes for, generally, a two-year period ending on the effective date of
the put multiplied by a multiple ranging from 4 to 5. These requirements are
recorded as changes in minority interest based upon current operating results.
Dependence on Key Individuals
Our future success is highly dependent upon our ability to attract and
retain qualified key employees. We are organized with a small senior management
team, with each of our separate operations under the day-to-day control of local
managers. If we were to lose the services of any member of our central
management team, the overall operations could be adversely affected, and the
operations of any of the individual facilities could be adversely affected if
the services of the local managers should be unavailable. We have entered into
employment contracts with key officers and employees of senior management and
certain subsidiaries. The agreements are for periods of one to ten years through
June 2009. Some of the employment contracts also call for bonus arrangements
based on earnings.
In July of 1998, we announced that we had formed an executive search
committee to locate and interview candidates for the position of President and
Chief Operating Officer. We expect to fill this new position by the end of the
second quarter of 1999.
Lack of Dividends on Common Stock; Issuance of Preferred Stock
We do not have a history of paying dividends on our Common Stock, and
there can be no assurance that such dividends will be paid in the foreseeable
future. Under the terms of a credit agreement with a bank, we may declare and
pay cash dividends to our stockholders in the aggregate amount of up to $150,000
in any calendar year. We intend to use any earnings which may be generated to
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<PAGE>
finance the growth of the businesses. Our Board of Directors has the right to
authorize the issuance of preferred stock, without further stockholder approval,
the holders of which may have preferences as to payment of dividends.
Possible Volatility of Stock Price
Our Common Stock is quoted on the Nasdaq Stock Market(R), 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
our Common Stock without regard to our operating performance. In addition, we
believe that factors such as the significant changes to the business resulting
from continued acquisitions and expansions, quarterly fluctuations in the
financial results or cash flows, shortfalls in earnings or sales below analyst
expectations, changes in the performance of other companies in the same market
sectors and the performance of the overall economy and the financial markets
could cause the price of our Common Stock to fluctuate substantially.
YEAR 2000 COMPLIANCE
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches, and are commonly referred to as the
"Millenium Bug" or "Year 2000 problem".
Assessment. The Year 2000 problem could affect computers, software, and
other equipment used, operated, or maintained by us. Accordingly, we are
reviewing our internal computers, software, applications and related equipment
and our systems other than information technology systems to ensure that they
will be Year 2000 compliant. We believe that our Year 2000 plan will be
completed in all material respects prior to the anticipated Year 2000 failure
dates. We spent approximately $200,000 in 1998 on our Year 2000 compliance plan
and estimate an additional $450,000 will be spent in 1999, most of which relates
to new equipment. There can be no assurance however, that the total costs will
be limited to this amount.
Software Sold to Consumers. We are in the process of identifying all
potential Year 2000 problems with any of the software products we develop and
market. However, we believe that it is not possible to determine with complete
certainty that all Year 2000 problems affecting our software products will be
identified or corrected due to the complexity of these products. In addition,
these products interact with other third party vendor products and operate on
computer systems which are not under our control. For non-compliant products, we
are providing recommendations as to how an organization may address possible
Year 2000 issues regarding that product. Software updates are available for
most, but not all, known issues. Such information is the most currently
available concerning the behavior of our products and is provided "as is"
without warranty of any kind. However, variability of definitions of
"compliance" with the Year 2000 and of different combinations of software,
firmware, and hardware may lead to lawsuits against us. The outcome of any such
lawsuits and the impact on our financial results of operations, cash flow and
financial position are not estimable at this time.
Internal Infrastructure. We believe that our major computers,
software applications, and related equipment used in connection with our
internal operations are not subject to significant Year 2000 problems, because
the computer programs we use are primarily off-the-shelf, recently developed
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<PAGE>
programs from third-party vendors. We are in the process of obtaining assurances
from such vendors as to the Year 2000 compliance of their products. Most vendors
are reluctant to provide written assurances and, although some vendors may make
verbal assurances of Year 2000 compliance, there can be no certainty that the
systems utilized will not be affected. We have assessed all 34 of our operating
locations and have determined that 21 of the 34 locations are Year 2000
compliant. Of the remaining 13 locations, 7 are in the process of upgrading
their current systems and 4 are replacing their systems. The remaining 2
locations are still evaluating the alternatives. All internal infrastructure
systems and equipment are expected to be Year 2000 compliant prior to the
anticipated Year 2000 failure dates.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems,
elevators, and other common devices may be affected by the Year 2000 problem. We
have assessed all 34 of our operating locations and have determined that 30 of
the 34 locations are Year 2000 compliant. The remaining 4 locations are in the
process of upgrading or replacing the current systems. All non-information
technology systems and equipment are expected to be Year 2000 compliant prior to
the anticipated Year 2000 failure dates.
Suppliers. We have initiated communications with third party suppliers
of the major computers, software, and other equipment used, operated, or
maintained by us to identify and, to the extent possible, to resolve issues
involving the Year 2000 problem. However, we have limited or no control over the
actions of these third party suppliers. Thus, while we expect that we will be
able to resolve any significant Year 2000 problems with these systems, there can
be no assurance that these suppliers will resolve any or all Year 2000 problems
with these systems before the occurrence of a material disruption to our
business or any of our customers. Any failure of these third parties to resolve
Year 2000 problems with their systems in a timely manner could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
Contingency Plans. At certain subsidiaries, where we feel it is
necessary, we are preparing contingency plans relating specifically to
identified Year 2000 risks and developing cost estimates relating to these
plans. Contingency plans may include stockpiling raw and packaging materials,
increasing inventory levels, securing alternate sources of supply and other
appropriate measures. We anticipate completion of the Year 2000 contingency
plans prior to the anticipated Year 2000 failure dates. Once developed, Year
2000 contingency plans and related cost estimates will be tested in certain
respects and continually refined as additional information becomes available.
Most Likely Consequences of Year 2000 Problems. We expect to identify
and resolve all Year 2000 problems that could materially adversely affect our
business operations and cash flows. However, we believe that it is not possible
to determine with complete certainty that all Year 2000 problems have been
identified or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, one
cannot accurately predict how many Year 2000 problem-related failures will occur
or the severity, duration, or financial consequences of these perhaps inevitable
failures. As a result, we expect that we may suffer the following consequences:
1. A significant number of operational inconveniences and
inefficiencies for us and our clients that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. A lesser number of serious system failures that may require
significant efforts by us or our customers to prevent or alleviate material
business disruptions.
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<PAGE>
Based on the activities described above, we do not believe that the
Year 2000 problem will have a material adverse effect on our business, results
of operations or cash flows. The estimate of the potential impact on our
financial position, overall results of operations or cash flows for the Year
2000 problem could change in the future. The discussion of our efforts, and
management's expectations, relating to Year 2000 compliance are forward-looking
statements. Our ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) 133, Accounting for Derivative Instruments
and Hedging Activities. We do not have any derivative instruments or hedging
transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With our Canadian and United Kingdom subsidiaries, we have operations
and sales in various regions of the world. Additionally, we may export and
import to and from other countries. Our operations may therefore be subject to
volatility because of currency fluctuations, inflation and changes in political
and economic conditions in these countries. Sales and expenses may be
denominated in local currencies and may be affected as currency fluctuations
affect our product prices and operating costs or those of our competitors.
We presently do not use any derivative financial instruments to hedge
our exposure to adverse fluctuations in interest rates, foreign exchange rates,
fluctuations in commodity prices or other market risks, nor do we invest in
speculative financial instruments.
Borrowings under our Credit Agreement are either at the prime rate or
at the London Interbank Offered Rate, at our election. Such rates are subject to
adjustment at any time.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None pursuant to Item 103 of regulation S-K.
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by us from
January 1, 1999 through March 31, 1999. 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.
-24-
<PAGE>
Number of
Issued Common
Name/Entity/Nature Note For Shares
The Americom Group, Inc. 1 Acquisition 106,581
Advanced Telecommunications, Inc. 1 Acquisition 550,000
Cybertech Station, Inc. 1 Acquisition 49,806
Information Products Center, Inc. 1 Acquisition 662,252
PPL, Ltd. 1 Acquisition 929,230
TigerTel Services Limited 2 Acquisition 43,877
Winward Electric Service Inc. 1 Acquisition 533,333
Charles Phillips 3 Asset Acquisition 7,018
Services 4 Services 38,150
=========
Total 2,920,247
=========
-----------------
1. Represents shares issued in connection with the earnout provision of the
Agreement of Sale.
2. Represents shares issued as a finders fee in connection with the Company's
acquisition of TigerTel Services Limited (formerly Commstar Ltd.).
3. Represents shares issued in connection with the acquisition of certain
assets by one of the Company's subsidiaries, Intellesale.com.
4. Represents shares issued for professional services or under employment or
other such agreements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECUTIRY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Effective as of August 25, 1998, we entered into a Credit Agreement
with State Street Bank and Trust Company. The Credit Agreement provides that we
may borrow from State Street from time to time up to $20 million at either their
then prime lending rate or at the London Interbank Offered Rate, at our
discretion. In February 1999, the amount of the Credit Agreement was increased
to $23 million. All unpaid principal and accrued interest is due and payable on
July 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
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<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 14, 1999 By: /S/ DAVID A. LOPPERT
----------------------------------
David A. Loppert, Vice President,
Treasurer and Chief Financial Officer
-26-
<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, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000924642
<NAME> Applied Cellular Technology, Inc.
<S> <C>
<PERIOD-START> Jan-01-1999
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 698,000
<SECURITIES> 0
<RECEIVABLES> 37,195,000
<ALLOWANCES> 772,000
<INVENTORY> 21,847,000
<CURRENT-ASSETS> 64,578,000
<PP&E> 30,261,000
<DEPRECIATION> 14,347,000
<TOTAL-ASSETS> 132,064,000
<CURRENT-LIABILITIES> 55,772,000
<BONDS> 0
0
0
<COMMON> 40,000
<OTHER-SE> 69,967,000
<TOTAL-LIABILITY-AND-EQUITY> 132,064,000
<SALES> 51,323,000
<TOTAL-REVENUES> 51,573,000
<CGS> 29,181,000
<TOTAL-COSTS> 33,176,000
<OTHER-EXPENSES> 20,062,000
<LOSS-PROVISION> 14,000
<INTEREST-EXPENSE> 445,000
<INCOME-PRETAX> (1,976,000)
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</TABLE>
