<PAGE>
As Filed with the Securities and Exchange Commission on June 25, 1999
Registration No. 333-[_________]
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
APPLIED CELLULAR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 3661 43-1641533
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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)
------------------------------------------------------
Garrett A. Sullivan Copies of all correspondence to:
400 Royal Palm Way, Suite 410 Denis P. McCusker, Esq.
Palm Beach, Florida 33480 Bryan Cave LLP
(561) 366-4800 One Metropolitan Square
(Name, address, including zip code, 211 North Broadway,
and telephone number, Suite 3600 St. Louis,
including area code, of agent for service) Missouri 63102-2750
(314) 259-2000
Approximate date of commencement of proposed sale to public: From time to
time.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
================================================================================
CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per aggregate offering registration fee
unit(1) price(1)
===================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value per share 8,279,858 shares $3.1875 $26,133,716 $7,265
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to Rule 457(c), the proposed offering price and registration fee
has been calculated on the basis of the average of the high and low trading
prices for the Common Stock on June 23, 1999 as reported on the Nasdaq
Stock Market.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
- --------------------------------------------------------------------------------
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED June 25, 1999
8,279,858 Shares
[GRAPHIC OMITTED]
APPLIED CELLULAR TECHNOLOGY, INC.
Common Stock
------------------
This prospectus relates to 8,279,858 shares of our Common Stock, par value
$.001 per share, which will be sold at various times by the Selling Shareholders
listed in this prospectus starting on page 50. More information about the shares
is under "Description of Capital Stock."
The Selling Shareholders may sell the shares of Common Stock in one or more
transactions (which may include "block transactions") on the NASDAQ Stock
Market, in the over-the-counter market, in negotiated transactions or in a
combination of such methods of sales, at fixed prices which may be changed, at
market prices prevailing at the time of sales, at prices related to such
prevailing market prices or at negotiated prices.
Our shares are listed on the NASDAQ Stock Market under the symbol "ACTC."
On June 23, 1999, the last reported sale price of the Common Stock was $3 3/16
per share. On or about July 1, 1999, our corporate name will change to Applied
Digital Solutions, Inc., and our trading symbol will be "ADSX."
We will not receive any proceeds from shares sold by the Selling
Shareholders and we will bear all the expenses incurred in connection with
registering this offering of Common Stock.
The Selling Shareholders may sell the shares of Common Stock directly or
through underwriters, dealers or agents. They may also pledge some of the shares
of Common Stock. This prospectus also relates to any sale of shares of Common
Stock that might take place following any foreclosure of such a pledge. More
information about the way the Selling Shareholders may distribute the Common
Stock is under the heading "Plan of Distribution."
See the information under the heading "Risk Factors" starting on page 6,
which describes certain factors you should consider before purchasing the Common
Stock.
Our principal office is at 400 Royal Palm Way, Suite 410, Palm Beach,
Florida 33480, and our telephone number is (561) 366-4800.
-------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
--------------------------
The date of this prospectus is [_____________], 1999.
<PAGE>
TABLE OF CONTENTS
Summary........................................................................3
Selected Financial Data........................................................5
Risk Factors...................................................................6
Selected Financial Data........................................................9
Our Business..................................................................11
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................17
Dividend Policy...............................................................33
Price Range of Common Stock...................................................33
Properties....................................................................34
Legal Proceedings.............................................................35
Management....................................................................36
Option Exercises and Fiscal Year-End Values...................................43
Certain Relationships and Related Transactions................................46
Beneficial Ownership of Common Stock..........................................48
Selling Shareholders..........................................................50
Description of Capital Stock..................................................53
Plan of Distribution..........................................................53
Shares Eligible for Future Sale...............................................54
Legal Opinion.................................................................54
Experts.......................................................................55
Additional Information........................................................55
Index To Financial Statements.................................................56
<PAGE>
SUMMARY
You should read the following summary together with the more detailed
information and financial statements and related notes thereto appearing
elsewhere in this prospectus. This prospectus contains forward-looking
statements. The outcome of the events described in these forward-looking
statements is subject to risks and actual results could differ materially. The
sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business" contain a
discussion of the factors that could contribute to those differences.
APPLIED CELLULAR TECHNOLOGY, INC.
Our Business
We are a full service communications company that offers a wide range of
products and services to the wireless, telecommunications and digital data
industries. We are building our core business around the following five business
segments in the communications industry:
o Communications Infrastructure
The Communications Infrastructure division is involved in the fabrication,
installation and maintenance of microwave towers and digital personal
communications service towers, and the construction and installation of
fiber optic and voice/data communications systems. The division also
provides complete installation, service and maintenance of power
distribution systems such as lighting, standby power, alarms and security
and video systems.
o Network Infrastructure
Our Network Infrastructure division provides an array of information
technology business solutions, including a broad range of software
operating systems and hardware platforms.
o Telecommunications Systems
Our Telecommunications division integrates a wide range of voice and data
solutions, from business communication systems to computer telephony
integration.
o Internet
Our Internet division assists customers in taking full advantage of the
productivity gained in utilizing the internet for business. This will
involve developing electronic commerce sites for businesses and providing
internet access services to customers of our other divisions.
o Application Technology
The Application Technology division develops and implements the hardware
and software technology needed to solve communication requirements, from
portable data collection systems to inventory control systems. These
solutions are helping end-users convert from analog to digital and from
wireline to wireless systems. We are also involved in the design,
manufacture and support of satellite communication technology, including
satellite modems, data broadcast receivers and wireless global positioning
for commercial and military applications.
Customers
Our customers span virtually all industries and include companies, both
public and private, of all sizes. We also provide services to the public sector,
including the United States government.
3
<PAGE>
Strategy
Our goal is to be a single source communications provider that businesses
can turn to for integrated communications systems, and we are taking advantage
of the communications industry's move from analog to digital and from wireline
to wireless systems.
About Us
We incorporated in Missouri in May 1993. Our principal offices are located
at 400 Royal Palm Way, Suite 410, Palm Beach, Florida 33480. Our telephone
number is (561) 366-4800.
The Offering
Common Stock offered by the
Selling Shareholders .......... 8,279,858 shares
Number of shares outstanding .... 43,672,595 shares as of June 18, 1999
NASDAQ National Market Symbol ... ACTC. Effective with our name change to
Applied Digital Solutions, Inc. on or about
July 1, 1999, our trading symbol will be
ADSX.
Dividend Policy ................. We have not paid dividends on our Common Stock
and do not anticipate paying dividends. See
"Dividend Policy", page 33.
Market Price of Common Stock .... The marked price of the Common Stock has
ranged from a high of $5 1/2 to a low of $1
17/32 during the 12 months preceding the
date of this prospectus.
Risk Factors .................... See "Risk Factors," starting on page 6, for a
discussion of factors you should carefully
consider before deciding to invest in our
Common Stock.
4
<PAGE>
Selected Financial Data
The following table provides selected financial information concerning our
business. This information should be read in conjunction with the audited
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
(In thousands, except per share Quarter Ended March 31, Year Ended December 31,
data)
---------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary Of Operations
Net Operating Revenue $ 51,573 $ 38,784 $ 207,081 $103,159 $ 19,883 $2,336 $ 323
Cost Of Goods Sold 33,176 28,298 142,893 69,408 10,524 1,186 270
- --------------------------------------------------------------------------------------------------------------------
Gross Profit 18,397 10,486 64,188 33,751 9,359 1,150 53
Selling, General And Administrative
Expenses 17,512 9,131 55,253 28,159 8,105 981 533
Restructuring and unusual costs 2,550
- --------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (1,665) 1,355 8,935 5,592 1,254 169 (480)
Interest Income 134 106 420 192 126 75 --
Interest Expense (445) (234) (1,653) (978) (200) (15) (2)
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Provision (Benefit) for Income
Taxes and Minority Interest
(1,976) 1,227 7,702 4,806 1,180 229 (482)
Provision (Benefit) For Income Taxes (575) 518 2,588 1,769 362 -- --
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Minority Interest (1,401) 709 5,114 3,037 818 229 (482)
Minority Interest 244 94 424 697 132 49 --
- --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) (1,645) 615 4,690 2,340 686 180 (482)
Preferred Stock Dividends -- 18 44 72 60 -- --
====================================================================================================================
Net Income (Loss) Available To Common
Stockholders $ (1,645) $ 597 $ 4,646 $ 2,268 $ 626 $ 180 $ (482)
====================================================================================================================
Average Common Shares Outstanding 41,236 23,711 32,318 12,632 3,329 1,792 588
Average Common Shares Outstanding
Assuming Dilution 41,909 24,956 34,800 15,245 4,641 1,967 588
Per Common Share Data
Basic Net Income (Loss) (0.04) 0.03 0.14 0.18 0.19 0.10 (0.82)
Diluted Net Income (Loss) (0.04) 0.02 0.13 0.15 0.15 0.09 (0.82)
Cash Dividends -- -- -- -- -- -- --
Balance Sheet Data
Cash and Cash Equivalents $ $698 $ 5,923 $ 4,555 $ 7,657 $ $810 $ 125 $ 3
Property and Equipment 15,914 6,597 15,627 5,339 2,915 138 36
Goodwill 41,708 16,381 33,430 12,787 14,528 907 --
Total Assets 132,064 73,067 124,116 61,282 33,208 4,131 1,360
Long-Term Debt 3,081 2,355 2,838 2,199 1,386 19 9
Total Debt 26,599 7,879 27,213 7,825 5,799 352 150
Minority Interest 3,204 1,869 2,961 1,785 456 57 --
Redeemable Preferred Stock -- 700 -- 900 10,900 -- --
Stockholders' Equity 70,007 42,834 67,560 36,285 8,252 3,052 1,128
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risk factors listed below. These risk
factors may cause our future earnings to be less or our financial condition to
be less favorable than we expect. You should read this section together with the
other information in this prospectus.
Forward-Looking Statements and Associated Risk
Certain statements under this heading and under the headings "Our Business"
and "Management's Discussion and Analysis of Business and Financial Condition"
in this prospectus constitute "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. All such forward-looking
information involves risks and uncertainties and may be affected by many
factors, some of which are beyond our control. These factors include:
o our growth strategies,
o anticipated trends in our business and demographics,
o our ability to successfully integrate the business operations of
recently acquired companies, and
o regulatory, competitive or other economic influences.
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 business. We incurred a loss in the
first quarter of 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Future Sales of and Market for the Shares
As of June 18, 1999, there were 43,672,595 shares of Common Stock
outstanding. In addition, 1,392,877 shares of Common Stock are reserved for
issuance in exchange for certain exchangeable shares issued by two of our
subsidiaries. Since January 1, 1999, we have issued an aggregate of 8,117,509
shares of Common Stock, of which 5,928,220 shares of Common Stock were issued as
earnout payments in acquisitions, 1,952,263 shares were issued in exchange for
such exchangeable shares, 121,465 shares were issued to acquire a minority
interest, and 115,561 shares of Common Stock were issued for services rendered,
including services under employment agreements and employee bonuses.
Although we previously announced that we intend 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 our 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 from us. Such
issuances of additional securities may be 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 we
anticipate 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. Net operating revenue was approximately $52 million for the three
6
<PAGE>
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 our 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 and the businesses acquired by us 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. On May 25, 1999, we entered into a credit facility described below under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
It is our policy to retain existing management of acquired companies, under
the overall supervision of our 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 $4.5
million based on achieved 1999 results, approximately $2 million based on
achieved 2000 results, approximately $4 million based on achieved 2001 results
and approximately $2 million based on each of 2002 and 2004 achieved 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. The 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 members of our central
management team, our overall operations could be adversely affected, and the
operations of any of our individual facilities could be adversely affected if
the services of the local managers should be unavailable. We have entered into
employment contracts with our key officers and employees 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 our term and revolving credit agreement, we may declare and
pay cash dividends of up to $150,000 in any calendar year. We intend to use any
earnings which may be generated to finance the growth of our 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
over the holders of the Common Stock as to payment of dividends.
7
<PAGE>
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 our business resulting
from continued acquisitions and expansions, quarterly fluctuations in our
financial results or cash flows, shortfalls in earnings or sales below analyst
expectations, changes in the performance of other companies in our 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. During the
12 months preceding the date of this prospectus, the price per share of our
Common Stock has ranged from a high of $5 1/2 to a low of $1 17/32.
Termination Payments
Our employment agreements with three of our executive officers include
"change of control" provisions, under which the employees may terminate their
employment within one year after a change of control, and be entitled to receive
specified severance payments and/or continued compensation payments for 60
months. Also, the agreements for both Richard Sullivan and Garrett Sullivan
provide for certain "triggering events" which include a change in control, the
termination of Richard Sullivan's employment other than for cause, or if Richard
Sullivan ceases to hold his current positions with us for any reason other than
a material breach of the terms of his employment agreement. In that case, we
would be obligated to pay, in cash and/or in stock, $12.1 million and $3.5
million, respectively, to Richard Sullivan and to Garrett Sullivan, in addition
to certain other compensation.
Our obligations to make the payments described in this section could
adversely affect our financial condition or could discourage other parties from
entering into transactions with us which might be treated as a change in control
or triggering event for purposes of these agreements. See
"Management--Employment Agreements and Executive Compensation."
8
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes included elsewhere in this prospectus
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statements of operations
data for the quarters ended March 31, 1998 and 1997, and the balance sheet data
as of March 31, 1999, are derived from the unaudited financial statements
included elsewhere in this prospectus. The balance sheet data as of March 31,
1997 is derived from unaudited financial statements not included herein. The
statements of operations data for the years ended December 31, 1996, 1997 and
1998, and the balance sheet data as of December 31, 1997 and 1998, are derived
from the audited financial statements included elsewhere in this prospectus. The
balance sheet data as of December 31, 1996, 1995 and 1994, and the statements of
operations data for the years ended December 31, 1995 and 1994, are derived from
audited financial statements not included herein. The historical results are not
necessarily indicative of results to be expected for future periods.
<TABLE>
<CAPTION>
(In thousands, except per share Quarter Ended March 31, Year Ended December 31,
data)
---------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Summary Of Operations
Net Operating Revenue $ 51,573 $ 38,784 $ 207,081 $103,159 $ 19,883 $2,336 $ 323
Cost Of Goods Sold 33,176 28,298 142,893 69,408 10,524 1,186 270
- --------------------------------------------------------------------------------------------------------------------
Gross Profit 18,397 10,486 64,188 33,751 9,359 1,150 53
Selling, General And Administrative
Expenses 17,512 9,131 55,253 28,159 8,105 981 533
Restructuring and unusual costs 2,550
- --------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (1,665) 1,355 8,935 5,592 1,254 169 (480)
Interest Income 134 106 420 192 126 75 --
Interest Expense (445) (234) (1,653) (978) (200) (15) (2)
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Provision (Benefit) for Income
Taxes and Minority Interest
(1,976) 1,227 7,702 4,806 1,180 229 (482)
Provision (Benefit) For Income Taxes (575) 518 2,588 1,769 362 -- --
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Minority Interest (1,401) 709 5,114 3,037 818 229 (482)
Minority Interest 244 94 424 697 132 49 --
- --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) (1,645) 615 4,690 2,340 686 180 (482)
Preferred Stock Dividends -- 18 44 72 60 -- --
====================================================================================================================
Net Income (Loss) Available To Common
Stockholders $ (1,645) $ 597 $ 4,646 $ 2,268 $ 626 $ 180 $ (482)
====================================================================================================================
Average Common Shares Outstanding 41,236 23,711 32,318 12,632 3,329 1,792 588
Average Common Shares Outstanding
Assuming Dilution 41,909 24,956 34,800 15,245 4,641 1,967 588
Per Common Share Data
Basic Net Income (Loss) (0.04) 0.03 0.14 0.18 0.19 0.10 (0.82)
Diluted Net Income (Loss) (0.04) 0.02 0.13 0.15 0.15 0.09 (0.82)
Cash Dividends -- -- -- -- -- -- --
Balance Sheet Data
Cash and Cash Equivalents $ 698 $ 5,923 $ 4,555 $ 7,657 $ 810 $ 125 $ 3
Property and Equipment 15,914 6,597 15,627 5,339 2,915 138 36
Goodwill 41,708 16,381 33,430 12,787 14,528 907 --
Total Assets 132,064 73,067 124,116 61,282 33,208 4,131 1,360
Long-Term Debt 3,081 2,355 2,838 2,199 1,386 19 9
Total Debt 26,599 7,879 27,213 7,825 5,799 352 150
Minority Interest 3,204 1,869 2,961 1,785 456 57 --
Redeemable Preferred Stock -- 700 -- 900 10,900 -- --
Stockholders' Equity 70,007 42,834 67,560 36,285 8,252 3,052 1,128
</TABLE>
Refer to Note 2 to our consolidated financial statements for a description
of the business combinations that took place in 1998 and 1997.
Refer to Note 20 to our consolidated financial statements for a description
of the segments of business in which we operate.
9
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY DATA (UNAUDITED)
(In thousands, except per share data) First Second Third Fourth Full
Year Ended December 31, Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Net Operating Revenue $ 51,573
Gross Profit 18,397
Net Income (loss) Applicable to
Common Stockholders (1,645)
Basic Net Income (loss) Per Share (0.04)
Diluted Net Income (loss) Per Share (0.04)
- --------------------------------------------------------------------------------------------------------
1998
Net Operating Revenue $ 38,784 $ 53,680 $ 59,044 $ 55,573 $ 207,081
Gross Profit 10,486 17,456 18,949 17,297 64,188
Net Income Available to Common Stockholders 597 2,351 1,654 44 4,646
Basic Net Income Per Share 0.03 0.07 0.05 - 0.14
Diluted Net Income Per Share 0.02 0.07 0.05 - 0.13
- --------------------------------------------------------------------------------------------------------
1997
Net Operating Revenue $ 18,127 $ 24,743 $ 29,195 $ 31,094 $ 103,159
Gross Profit 6,048 8,309 10,369 9,025 33,751
Net Income Available to Common Stockholders 279 519 1,174 296 2,268
Basic Net Income Per Share 0.05 0.07 0.09 0.02 0.18
Diluted Net Income Per Share 0.04 0.06 0.08 0.01 0.15
- --------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Our Business
General
We are a full service communications company that provides a wide range of
products and services to the wireless, telecommunications and digital data
industry. Our goal is to be a single source communications provider that
businesses can turn to for integrated communications systems. To achieve this
goal, we intend to take advantage of the communication industry's move from
analog to digital and from wireline to wireless systems. Our services include
the construction and installation of communications infrastructure, the
installation of local and wide area networks and the development of specialized
software for business applications. We also provide traditional
telecommunications services such as long distance toll service, one-number
dialing and call centers. We currently operate in the United States, Canada and
the United Kingdom.
In May 1993, our company was incorporated as a Missouri corporation under
the name Great Bay Acquisition Company, and acquired Axcom Computer Consultants,
which operated as a custom programming and systems house. After acquiring Axcom
Computer Consultants, we changed the focus of Axcom's business operations to
marketing and sales of emerging cellular data technology hardware and
vertically-focused, proprietary software. Subsequently, on May 27, 1993, we
changed our name to Axcom Information Technology, Inc. and then changed it again
in April 1994 to Applied Cellular Technology, Inc. On June 1, 1998, we moved our
principal office from Nixa, Missouri to Palm Beach, Florida. Until June, 1998,
we had satellite corporate offices located in Amherst, New Hampshire, Cambridge,
Massachusetts and St. Louis, Missouri.
Under our original Articles of Incorporation, we had the authority to issue
up to 10,000,000 common shares. In April 1994, we amended our Articles to allow
the issuance of up to 20,000 shares of redeemable Preferred Stock, par value
$10.00, per share. In August 1996, we again amended our Articles to increase the
number of shares of our authorized Common Stock to 20,000,000, and to increase
the number of authorized preferred shares to 1,000,000. In October 1997, we
amended our Articles to authorize the issuance of up to 40,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock, having terms to be
specified by our Board of Directors at the time of issuance. In June 1998, we
amended our Articles increase the authorized Common Stock to 80,000,000 shares.
Acquisitions and Developments
The majority of our current operations are the result of acquisitions
completed during the last five years. Our net operating revenues were $207.1
million, $103.2 million, $19.9 million, $2.3 million and $0.3 million
respectively, in 1998, 1997, 1996, 1995 and 1994. Since January 1, 1998, we have
completed fourteen acquisitions of companies whose aggregate net revenues for
the year ended December 31, 1998 were approximately $94.8 million, or 45.8% of
our total revenues for 1998. Until 1999, each of these acquisitions was managed
independently and was directed by its own management team, and had its own
marketing and operations support personnel. Our business has grown over the past
five years primarily as a result of the following acquisitions and developments,
which include earnout considerations and commissions paid through March 31,
1999:
o In November 1994, we formed a subsidiary, Kedwell International, Inc., and
capitalized it by issuing 180,000 shares of our Common Stock. The name of
the subsidiary was changed to Tech Tools, Inc. in April, 1995. The
subsidiary purchased software in exchange for the 180,000 shares of our
Common Stock and 120,000 redeemable Class E Warrants, which were exercised
in August 1995 into 120,000 shares of our Common Stock.
o In December 1994, we acquired 570,712 shares of Cadkey, Inc., a software
technology company, in exchange for 456,570 shares of our Common Stock,
resulting in a 29% investment in Cadkey, Inc.
11
<PAGE>
o During April 1995, we formed a subsidiary, ACT Financial Corp., a Delaware
corporation. The subsidiary was formed to hold a note receivable from
Cadkey, Inc. We purchased a $1,000,000 note receivable in exchange for
200,000 shares of Common Stock at a market price of $5.00. In November
1996, we received payment of $420,139 on the note receivable from Cadkey,
Inc. The balance on the note was $307,768. Additionally, effective as of
November 1, 1996, we exchanged our 29% investment in Cadkey for a 76.67%
interest in a $750,000 note receivable from DataCAD, L.L.C., a company that
purchased one of Cadkey's product lines. Our share in the note is $575,000.
The remaining 23.33% of the note ($175,000) is owned by Micro Control
System, Inc., the successor corporation to Cadkey.
o In August 1995, we acquired 80% of the common shares of Atlantic Systems,
Inc., a developer and manufacturer of software and hardware systems for the
retail industry, for 124,066 shares of our Common Stock. In August 1995, we
also acquired, for our subsidiary Tech Tools, Inc., certain assets of Baler
Software Corporation in exchange for the payment of debt of $14,000 and
113,009 shares of our Common Stock. Baler's assets purchased were the
source code, inventory and manuals for a family of software development
tools (primarily Visual Baler, a spreadsheet compiler). Selected fixtures
and furnishings were also included in the purchase.
o In September 1995, we acquired 80% of the common shares of Elite Computer
Services, Inc. for 102,160 shares of our Common Stock. This company's main
business is the purchase of mainframe computers which are then stripped and
the parts sold.
o Effective as of February 1, 1996, we purchased, for our subsidiary,
Atlantic Systems, a liquor store software package (with exclusive rights to
sell and support the software, hardware and software support contracts with
current customers) and certain equipment from Quality Solutions, Inc. in
consideration for cash of $40,784 and 33,494 shares of our Common Stock.
o Effective as of March 1, 1996, we acquired 80% of the outstanding common
shares of Burling Instruments, Inc., a manufacturer of digital and analog
temperature control devices for home and industry use, in exchange for
9,000 of our 8% redeemable preferred shares, at $100 per share, for a total
consideration of $900,000.
o Effective as of September 1, 1996, we acquired 81.9% of the outstanding
common shares of CRA-TEK Corp., in exchange for 295,115 shares of our
Common Stock.
o In September 1996, we formed a subsidiary company, ACT Communications,
Inc., a Delaware company, for the sole purpose of acquiring 100% of the
outstanding common shares of Advanced Telecom Holdings, Inc., a
telecommunications solutions provider. We issued to the selling
shareholders 1,618,180 shares of our Common Stock and 100,000 shares of our
8% redeemable preferred shares at $100 per share. In addition, we issued to
Advanced Telecom's selling shareholders 960,000 Class M Warrants evidencing
the right to purchase 960,000 shares of our Common Stock at an exercise
price of $5.31 per share.
o Effective as of November 1, 1996, we acquired 80% of the outstanding common
shares of Universal Commodities Corp., in exchange for 581,818 shares of
our Common Stock.
o Effective as of December 1, 1996, we acquired 80% of the outstanding common
shares of US Electrical Products Corp., trading as Gavan-Graham Electric
Products, in exchange for 258,988 shares of our Common Stock.
o Effective as of January 1, 1997, we acquired 100% of the outstanding common
shares of Hopper Manufacturing Co., Inc., a re-manufacturer of and
distributor of automotive parts, in exchange for 179,104 shares of our
Common Stock.
12
<PAGE>
o Effective as of January 1, 1997, our subsidiary, Universal Commodities
Corp., acquired 80% of the outstanding common shares of Pizarro
Re-Marketing, Inc., a provided or re-marketing services for the computer
disc and tape industry, in exchange for 261,659 shares of our Common Stock.
o Effective as of January 1, 1997, our subsidiary, Universal Commodities
Corp., acquired 80% of the outstanding common shares of Norcom Resources,
Inc., whose business consists of sales, service and support of mainframe
computers, in exchange for 375,420 shares of our Common Stock.
o Effective February 1, 1997, we acquired 100% of the outstanding common
shares of MVAK Technologies, Inc., a re-manufacturer of vacuum pumps, in
exchange for 389,296 shares of our Common Stock.
o In May 1997, we acquired 80% of Signal Processors, Ltd., a manufacturer of
satellite communication technology, in exchange for 1,416,455 shares of our
Common Stock.
o In July 1997, we acquired: 80% of Cybertech Station, Inc., a provider of
computer memory products, in exchange for 217,085 shares of our Common
Stock; 100% of DLS Service Corp., a value added reseller of computer
software, in exchange for 57,600 shares of our Common Stock; 100% of
Intermatica, Inc., a software sales company, in exchange for 710,953 shares
of our Common Stock; 80% of PPL, Ltd., a provider of leasing and rental
services, in exchange for 529,264 shares of our Common Stock; and 80% of
STC Netcom, Inc., a communications construction contractor, in exchange for
1,670,000 shares of our Common Stock.
o In October 1997, we acquired: 100% of Alacrity Systems, Inc., a software
developer and marketer, in exchange for 935,385 shares of our Common Stock;
100% of C.T. Specialists, Inc., a distributor of control systems, in
exchange for 757,610 shares of our Common Stock; and 100% of Canadian
Network Services, Ltd., a provider of extended area calling services, in
exchange for 1,404,447 shares of our Common Stock.
o In January 1998, we acquired 100% of Information Products Center, Inc., a
network infrastructure services provider, in exchange for 711,433 shares of
our Common Stock and 100% of Winward Electric, a full service electrical
and communications systems contractor, in exchange for 1,773,333 shares of
our Common Stock.
o In April 1998, we acquired: 80% of Americom Group, a provider of
communications infrastructure construction, maintenance, installation and
training services, in exchange for 235,507 shares of our Common Stock; 100%
of Aurora Electric, Inc., a full service electrical and communications
system contractor, in exchange for 1,138,039 shares of our Common Stock;
80% of Blue Star Electronics, a cable assembly manufacturer, in exchange
for 222,643 shares of our Common Stock; 100% of Consolidated Micro
Components, a reseller of memory, processors and mass storage devices, in
exchange for 429,805 shares of our Common Stock; 100% of Data Path
Technologies, a seller of computer systems, peripherals, components and
software, in exchange for 403,077 shares of our Common Stock; 100% of GDB
Software Services, a provider of data processing consulting services, in
exchange for 412,308 shares of our Common Stock; 80% of Innovative Vacuum
Solutions, Inc., a re-manufacturer of high-end vacuum pumps, in exchange
for 276,079 shares of our Common Stock; 80% of Service Transport Company, a
transporter of computer systems and electronics, in exchange for 35,000
shares of our Common Stock; and 100% of Teledata Concepts, Inc., an
internet and telecommunications services provider, in exchange for 144,828
shares of our Common Stock.
o In May 1998, we acquired 100% of TigerTel Services Limited (formerly,
Commstar Ltd.), a call centers, voice messaging and one number dialing
services provider, in exchange for 3,417,580 shares of our Common Stock.
13
<PAGE>
o In June 1998, we acquired 85% of Signature Industries, Limited, a
manufacturer of high-grade communications and safety devices, in exchange
for 3,605,948 shares of our Common Stock; and 85% of Ground Effects, Ltd.,
a manufacturer of aluminum and steel tubes, in exchange for 1,105,707
shares of our Common Stock.
o In May 1999, we acquired 100% of the outstanding shares of common stock of
Port Consulting, Inc., an integrator of information technology application
systems and custom application development services in consideration for
$621,000 at closing, and the assumption of debt of approximately $579,000.
o In June 1999, our subsidiary Intellesale.com, Inc., agreed to purchase all
of the shares of Bostek, Inc. and Micro Components International,
Incorporated for $30,055,000, of which $10,055,000 will be payable in cash
at closing, $10,000,000 will be payable in stock of Intellesale.com and the
remaining amount will be payable in cash over time. The closing of this
acquisition is scheduled to occur on the later of June 21, 1999 or the
fifth business day following the expiration of the applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. Bostek and Micro Components are engaged in the business of
acquiring open-box and off-specification computer equipment and selling
such equipment, using the internet and other selling channels.
Business Divisions
Prior to March 1999, our business was organized into three, and then
eventually, four business groups, or industry segments: the Services and
Solutions Group (formerly the Retail Group), the Computer Group, the
Manufacturing Group and the International Group. Each operating business was
conducted through a separate subsidiary company directed by its own management
team, and each subsidiary company had its own marketing and operations support
personnel. Each management team originally reported to our President, who was
responsible for overall corporate control and coordination, as well as financial
planning. Later, a Group Vice President was added and the management teams
reported to the Group Vice President, who ultimately reported to our President.
The Chairman was responsible for our overall business and strategic planning.
In March 1999, we announced a corporate reorganization at which time we
named five new divisions as outlined below. Each division is managed by a
division president who reports to the Senior Vice President who in turn reports
to the President. Each division either has in place or is in the process of
hiring a vice president of marketing and a financial controller. We believe we
will attain increased operating efficiencies through this reorganization and
believe this structure will facilitate the cross marketing of our products and
services.
Our primary businesses, other than Intellesale.com (formerly Inteletek,
Inc.) and the Non-Core Business Group, are now organized into five business
divisions:
o Telecommunications -- offers a wide range of communications services
including interconnect and computer telephony integration, flat rate
extended calling area service for commercial and residential accounts,
commercial long distance toll service, toll free service, call centers, one
number dialing, voice messaging and commercial long distance calling cards.
o Network Infrastructure -- provides personal computer network infrastructure
for the development of local and wide area networks as well as site
analysis, configuration proposals, training and customer support services.
o Internet -- is focused on developing electronic commerce sites for
businesses and providing internet access services to customers of our other
divisions.
14
<PAGE>
o Communications Infrastructure-- provides specialty communications
contracting services. It is involved in the fabrication, installation, and
maintenance of microwave, cellular and digital personal communication
services (PCS) towers and the construction and installation of fiber optic,
voice/data communications and switchgear systems. The division also
provides complete installation, service and maintenance of power
distribution systems such as lighting, standby power, alarms, security,
video systems, voice/data, network infrastructure and the installation of
fiber optics within customer premises. The Communications Infrastructure
division has secured contracts and provided services for national accounts
such as Sprint, AT&T Wireless, GTE, MCI WorldCom, Wiltel and Pacific Bell.
o Application Technology-- provides software applications for data
acquisition, asset management and decision support systems and develops
programs for portable data collection equipment, including wireless
hand-held devices. Its Flex Connect System links corporate systems to
laptops, PDA's, handheld terminals and other mobile devices via wireless or
wireline connections. It is also involved in the design, manufacture and
support of satellite communication technology including satellite modems,
data broadcast receivers and wireless global positioning systems for
commercial and military applications. In addition, the division develops
and markets peripheral enhancement software that creates a user-friendly
environment for sending faxes, email and scanning, copying and managing
documents on a desktop computer with a multi-function peripheral device.
Integration of these capabilities into a single multifunction program is
particularly advantageous to users in small offices, home offices and small
workgroup environments.
As of December 31, 1998, 1997 and 1996, revenues from these divisions
together accounted for 57.0%, 48.8% and 70.1%, respectively, of our total
revenues.
Intellesale.com
Intellesale.com, Inc. (formerly Inteletek, Inc.) provides leasing,
re-marketing, parts-on-demand and consulting services for mainframe, midrange
and PC systems to industrial, commercial and retail organizations. It utilizes
e-commerce and traditional distribution channels to market its products.
Intellesale is also a parts supplier and purchases electronic components and
other scrap for de-manufacturing and reclamation of precious materials, steel,
aluminum and copper.
As of December 31, 1998, 1997 and 1996, revenues from Intellesale accounted
for 29.4%, 38.2% and 10.0%, respectively, of our total revenues.
We have announced our intention to seek a separate public listing of
Intellesale's shares but will continue to hold a significant majority interest
in Intellesale for the foreseeable future. With our recently announced
reorganization, we believe that Intellesale should conduct business as a
separate publicly traded entity which can yield, over time, far greater returns
to its shareholders than under the current business structure. We anticipate
that we will file a registration statement for the initial public offering of
Intellesale by the end of July 1999, although no assurances can be given that
such offering will in fact be completed.
The Non-Core Business Group
This group is comprised of six individually managed companies whose
businesses are as follows:
o CRA-TEK Company is a specialized manufacturer of custom digital and analog
industrial electric controls and components.
o C.T. Specialists, Inc. is a distributor and manufacturers representative
company, specializing in the application and sales of controls for factory
automation, combustion and commercial heating and air conditioning (HVAC).
15
<PAGE>
o Gavin-Graham Electrical Products is a custom manufacturer of electrical
products, specializing in digital and analog panelboards, switchboards,
motor controls and general control panels. The company also provides custom
manufacturing processes such as shearing, punching, forming, welding,
grinding, painting and assembly of various component structures.
o Ground Effects, Ltd., based in Windsor, Canada, is a certified manufacturer
and tier one supplier of standard and specialized vehicle accessory
products to the automotive industry. The company exports over 80% of the
products it produces to the United States, Mexico, South America, the Far
East and the Middle East.
o Hopper Manufacturing Co., Inc. remanufactures and distributes automotive
parts. This primarily includes alternators, starters, water pumps,
distributors and smog pumps.
o Innovative Vacuum Solutions, Inc. designs, installs and re-manufactures
vacuum systems used in industry.
As of December 31, 1998, 1997 and 1996, revenues from this business group
accounted for 13.6%, 13.0% and 19.3%, respectively, of our total revenues.
We announced our intention to divest, in the ordinary course of business,
these non-core businesses at such time and on such terms as the board of
directors determines advisable. There can be no assurance that we will divest of
any or all of these businesses or as to the terms of any divestiture
transaction.
Growth Strategy
Our growth strategy is focused on internal expansion and growth through
acquisitions. The following are key elements of our strategy:
o Become a Single Source Communications Provider. We believe that our
expertise in all five areas of the communications path will enable us to
capitalize on the interest of businesses in fulfilling their communications
services needs through one supplier.
o Leverage of Existing Customer Relationships. We believe there are
significant opportunities within and between each division to cross market
our services to our existing client base. We are in the process of hiring a
vice president of marketing for each division who will be responsible for
identifying these opportunities.
o Profit Center Management. While our corporate management team provides
overall guidance, strategic direction and administrative support, our
division presidents have responsibility for the day-to-day operations of
their respective groups. We operate each business division as a largely
autonomous profit center, which is held accountable for achieving its
financial goals. We believe this approach to management increases our
responsiveness to changes in the marketplace and our customers'
requirements and contributes to our ability to grow profitably.
o Acquisitions. Since 1994 we have completed 35 acquisitions. Management
analyzes each acquisition opportunity using criteria including
profitability over a two to three year period, the strength of its balance
sheet, the strength of its customer base and the experience of its
management team. Going forward, we intend to make acquisitions that fit
within one of our five primary operating divisions.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and related notes included elsewhere in this prospectus. The
following discussion contains forward-looking statements that reflect our plans
and estimated beliefs. Our actual results could differ materially from those
anticipated in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below and elsewhere in
this prospectus, particularly in "Risk Factors."
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.
o Operating segments outside our core competency are:
o Intellesale.com - The Intellesale.com division 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.
17
<PAGE>
Results of Operations
Three Months ended March 31, 1999 and 1998. 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.
<TABLE>
<CAPTION>
Relationship to Net
Operating Revenue
-------------------------------
Three Months Three Months
Ended 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>
Years Ended December 31, 1998, 1997 and 1996. The following table
summarizes our results of operations as a percentage of net operating revenue
for the last three years:
<TABLE>
<CAPTION>
Relationship to Net Operating Revenue
-------------------------------------------------
1998 1997 1996
% % %
------- ------- -------
<S> <C> <C> <C>
Net operating revenue 100.0 100.0 100.0
Cost of goods sold 69.0 67.3 52.9
------ ------ ------
Gross margin 31.0 32.7 47.1
Selling, general and administrative
expenses 26.7 27.3 40.8
------ ------ ------
Operating income 4.3 5.4 6.3
Interest income 0.2 0.2 0.6
Interest expense (0.8) (0.9) (1.0)
------ ------ ------
Income before provision for income taxes
and minority interest 3.7 4.7 5.9
Provision for income taxes 1.2 1.7 1.8
------ ------ ------
Income before minority interest 2.5 3.0 4.1
Minority interest 0.2 0.7 0.7
------ ------ ------
Net income 2.3 2.3 3.4
Preferred stock dividends 0.0 0.1 0.3
====== ====== ======
Net income available to common stockholders 2.3 2.2 3.1
====== ====== ======
</TABLE>
18
<PAGE>
Company Overview
Revenue
Three Month Period ended March 31, 1999 and 1998. 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.
Revenue generated during the first three months of 1999 and 1998 was:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
--------- ----------
<S> <C> <C>
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
======== =========
</TABLE>
Years ended December 31, 1998, 1997 and 1996. Revenue for 1998 was $207.1
million, an increase of $103.9 million, or 100.7%, from $103.2 million in 1997.
The 1997 revenue represents an increase of $83.3 million, or 418.8% over the
$19.8 million reported in 1996. These significant increases are attributable to
our growth of existing businesses and to our growth through acquisition.
In 1997, we exited the cellular phone business, a part of our
Telecommunications division, due to increased competition from industry leaders
and changes in the marketplace. Revenue from this line of business totaled
approximately $12.6 million in 1997. After adjusting for the cellular line of
business, revenue from internal operations grew 23.9% in 1998 from 1997,
compared to 43.4% in 1997 from 1996. Revenue from external customers for each of
the operating segments was:
<TABLE>
(In thousands) 1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Telecommunications $30,369 $32,208 $10,537
Network Infrastructure 21,282 -- --
Internet 2,901 -- --
Communications Infrastructure 43,729 8,545 --
Application Technology 19,859 9,574 3,394
Intellesale.com 60,877 39,445 1,993
Non-Core 28,064 13,387 3,839
Corporate -- -- 120
=========== =========== =========
Consolidated $ 207,081 $ 103,159 $19,883
=========== =========== =========
</TABLE>
19
<PAGE>
Gross Margin
Three Month Period ended March 31, 1999 and 1998. 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.
Years ended December 31, 1998, 1997 and 1996. The gross margin for 1998 was
$64.2 million, an increase of $30.4 million, or 90.2%, from $33.7 million in
1997. The 1997 gross margin represents an increase of $24.4 million, or 260.6%,
over the $9.4 million reported in 1996. As a percentage of revenue, the gross
margin decreased to 31.0% in 1998 from 32.7% in 1997 and 47.1% in 1996. This
decrease is a result of changes within the business mix, increased competition,
and to new acquisitions with lower overall gross margin contributions.
Selling, General and Administrative Expense
Three Month Period ended March 31, 1999 and 1998. 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.
Years ended December 31, 1998, 1997 and 1996. Selling, general and
administrative expenses were $55.3 million in 1998, an increase of $27.1
million, or 96.2%, from $28.2 million in 1997. The 1997 expense represents an
increase of $20.1 million or 247.4% over the $8.1 million reported in 1996. As a
percentage of revenue, selling, general and administrative expenses have
decreased to 26.7% in 1998 from 27.3% in 1997 and 40.8% in 1996. This decrease
as a percentage of revenue is due to economies of scale that we were able to
recognize as we grew larger. Contributing to the dollar increase as a whole is
the additional amortization expense associated with goodwill from acquisitions.
Total depreciation and amortization expense included in selling general and
administrative expense was $4.5 million, $1.9 million and $0.7 million in 1998,
1997 and 1996 respectively. Information on depreciation and amortization expense
by operating segment can be found in Note 20 to our consolidated financial
statements.
Restructuring and Unusual Charges
Three Month Period ended March 31, 1999 and 1998. As part of our
reorganization of our core business into five reportable business groups, we
have implemented a restructuring plan. The restructuring plan includes the
exiting of selected lines of business within our Telecommunications and
Application Technology business groups, and the associated write-off of assets.
The restructuring charge of $2.2 million includes asset impairments, primarily
software and other intangible assets, of $1.5 million, lease terminations of $.5
million, and employee separations of $.2 million. In addition, during the first
20
<PAGE>
quarter of 1999, as part of our core business reorganization, we realigned
certain operations within our Telecommunications division and have recognized
impairment charges and other related costs of $.3 million.
Operating Income
Three Month Period ended March 31, 1999 and 1998. 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:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
----------- ------------
<S> <C> <C>
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
======== =======
</TABLE>
- ----------------------------
(1) Includes restructuring and unusual charges incurred in the first
three months of 1999 of $.3 million in the Application Technology
division and $2.2 million in the corporate overhead expense.
Years ended December 31, 1998, 1997 and 1996. Operating income was $8.9
million in 1998, an increase of $3.4 million, or 59.8%, from $5.6 million in
1997. The 1997 operating income represents an increase of $4.3 million, or
345.9% over the $1.3 million reported in 1996.
Operating income for each of the operating segments was:
<TABLE>
(In thousands) 1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Telecommunications $ 852 $1,477 $ 896
Network Infrastructure 1,563 -- --
Internet 272 -- --
Communications Infrastructure 3,789 348 --
Application Technology 1,424 2,159 (68)
Intellesale.com 4,509 2,356 504
Non-Core 1,122 626 444
Corporate (including amounts incurred
during consolidation) (4,596) (1,374) (522)
------- ------- --------
Consolidated $8,935 $5,592 $ 1,254
======= ======= ========
</TABLE>
Interest Income and Expense
Three Month Period ended March 31, 1999 and 1998. 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.
Years ended December 31, 1998, 1997 and 1996. Interest income was $0.4
million in 1998, an increase of $0.2 million, or 118.8%, from $0.2 million in
21
<PAGE>
1997. The 1997 interest income represents an increase of $66,000 or 52.4% over
the $0.1 million reported in 1996. Interest income is earned primarily from
short term investments and notes receivable.
Interest expense was $1.7 million in 1998, an increase of $0.7 million, or
69.0%, from $1.0 million in 1997. The 1997 expense represents an increase of
$0.8 million, or 389.0% over the $0.2 million reported in 1996. Interest expense
is principally associated with revolving credit lines and notes payable.
Information on interest income and interest expense by operating segment can be
found in Note 20 to our consolidated financial statements.
Income Taxes
Three Month Period ended March 31, 1999 and 1998. 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.
Years ended December 31, 1998, 1997 and 1996. Our effective income tax rate
was 33.6%, 36.8% and 30.7% in 1998, 1997 and 1996, respectively. Changes in the
effective rate primarily arise from the effect of purchase accounting, given our
acquisition activities in recent years.
Segment Overview
Telecommunications
<TABLE>
<CAPTION>
Three Month Period ended March 31, 1999 and 1998
(In thousands) 1999 % 1998 %
------- ------ -------- ------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
(In thousands) 1998 % 1997 % 1996 %
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 30,369 100.0 $ 32,208 100 $ 10,537 100.0
Gross profit 17,870 58.8 16,215 50.3 5,523 52.4
Selling, general and
administrative 17,018 56.0 14,738 45.8 4,627 43.9
Operating income 852 2.8 1,477 4.6 896 8.5
</TABLE>
In 1997, we exited the cellular phone business due to increased competition
from industry leaders and changes in the marketplace. Revenue and operating
income from this line of business totaled approximately $12.6 million and $0.2
million in 1997. Excluding the cellular business, revenue increased 54.7% and
86.4% in 1998 and 1997, respectively. Of those amounts, 23.7% and 3.9% came from
internal growth in 1998 and 1997, respectively.
22
<PAGE>
The cost shift in 1998 from cost of sales to selling, general and
administrative expenses is due to different cost allocation methods associated
with the Canadian markets entered during 1998. The operating income decrease in
1998 primarily reflected increasing competitive pressures in the
telecommunications industry as a whole.
Network Infrastructure
<TABLE>
<CAPTION>
Three Month Period ended March 31, 1999 and 1998
(In thousands) 1999 % 1998 %
------- ----- ------ -----
<S> <C> <C> <C> <C>
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
</TABLE>
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.
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1998 % 1997 1996
--------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenue $ 21,282 100.0 $ -- --
Gross profit 3,862 18.1 -- --
Selling, general and administrative 2,299 10.8 -- --
Operating income 1,563 7.3 -- --
</TABLE>
The Network Infrastructure division began operations during 1998.
Internet
Three Month Period ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 1999 % 1998 %
------- ------ ------ ----
<S> <C> <C> <C> <C>
Revenue $ 997 100.0 $ -- --
Gross profit 275 27.6 -- --
Selling, general and administrative 298 29.9 -- --
Operating income $ (23) (2.3) -- --
</TABLE>
23
<PAGE>
The Internet division began operations during the second quarter of 1998.
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1998 % 1997 1996
-------- ------ ------- ------
<S> <C> <C> <C> <C>
Revenue $ 2,901 100.0 $ -- $ --
Gross profit 1,200 41.4 -- --
Selling, general and administrative 928 32.0 -- --
Operating income 272 9.4 -- --
</TABLE>
The Internet division began operations during 1998.
Communications Infrastructure
Three Month Period ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 1999 % 1998 %
------- ----- -------- -----
<S> <C> <C> <C> <C>
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
</TABLE>
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.
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1998 % 1997 % 1996 %
--------- ------ ------- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 43,729 100.0 $ 8,545 100.0 $ -- --
Gross profit 8,887 20.3 1,274 14.9 -- --
Selling, general and administrative 5,098 11.7 926 10.8 -- --
Operating income 3,789 8.7 348 4.1 -- --
</TABLE>
The Communications Infrastructure division began operations during 1997.
Revenue increased 411.8% in 1998, 109.1% of which came from growth in internal
operations. As a percentage of revenue, operating income was 8.7% and 4.1% in
1998 and 1997, respectively. This increased profitability is a result of the
division's successful move to a larger operations base. The selling, general and
administrative expenses, as a percentage of revenue, increased to 11.7% in 1998
from 10.8% in 1997 as a result of increased overhead associated with the
expansion of this divisions internal infrastructure.
Application Technology
Three Month Period ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 1999 % 1998 %
-------- ------ ------- -------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
24
<PAGE>
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1998 % 1997 % 1996 %
--------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 19,859 100.0 $ 9,574 100.0 $ 3,394 100.0
Gross profit 11,613 58.5 5,846 61.1 1,374 40.5
Selling, general and administrative 10,189 51.3 3,687 38.5 1,442 42.5
Operating income 1,424 7.2 2,159 22.6 (68) (2.0)
</TABLE>
The Application Technology division has grown mostly though acquisition.
Revenue increased 107.5% and 182.0% in 1998 and 1997, respectively. Due to the
competitive nature of this industry segment, gross margins declined from 61.1%
in 1997 to 58.5% in 1998 and could decline further in the future. This, combined
with increased selling, general and administrative expenses relating to
development of new products, has lowered the operating income as a percentage of
revenue.
Intellesale.com
Three Month Period ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 1999 % 1998 %
-------- ------ -------- ------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1998 % 1997 % 1996 %
--------- ------ --------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 60,877 100.0 $ 39,445 100.0 $ 1,993 100.0
Gross profit 12,871 21.1 6,243 15.8 1,142 57.3
Selling, general and administrative 8,362 13.7 3,887 9.9 638 32.0
Operating income 4,509 7.4 2,356 6.0 504 25.3
</TABLE>
Revenue increased 54.3% and 1,880.1% in 1998 and 1997, respectively. Of
those amounts, 9.1% and 281.6% came from internal growth in 1998 and 1997,
respectively. The tremendous revenue growth in 1997 came at the expense of
margins due to the high volume, low profit businesses that were acquired in that
year. Internal growth and additional acquisitions in 1998 helped to round out
the product mix. Gross margins increased by 5.3% to 21.1% in 1998 from 15.8% in
1997. Gross margins had declined by 42.5% to 15.8% in 1997 from 57.3% in 1996 as
the business expanded into high volume but lower margin hardware sales. Selling,
general and administrative expenses, which were as high as 32.0% of revenue in
1996, reduced to 13.7% of revenue in 1998. This decline reflects the economies
of scale that have resulted from overall growth in the last two years.
25
<PAGE>
Non-Core
Three Month Period ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 1999 % 1998 %
-------- ------ -------- ------
<S> <C> <C> <C> <C>
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)
</TABLE>
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.
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1998 % 1997 % 1996 %
--------- ------ --------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 28,064 100.0 $ 13,387 100.0 $ 3,839 100.0
Gross profit 7,885 28.1 4,173 31.2 1,384 36.1
Selling, general and administrative 6,763 24.1 3,547 26.5 940 24.5
Operating income 1,122 4.0 626 4.7 444 11.6
</TABLE>
Revenue increased 109.7% and 248.7% in 1998 and 1997, respectively. Of
those amounts, 25.4% and 60.2% came from internal growth in 1998 and 1997,
respectively. Although there has been substantial growth in the level of
business, changes in product mix and pressures from a competitive marketplace
have resulted in a gradual decline of the gross margin from 36.1% in 1996 to
28.1% in 1998, which has contributed to the decline in operating income. Margins
may continue to decline in the future. Selling, general and administrative
expenses have remained relatively steady as a percentage of revenue.
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.
As of December 31, 1998, cash and cash equivalents totaled $4.6 million, a
decrease of $3.1 million, or 40.5% from $7.7 million at December 31, 1997. Cash
used in operating activities totaled $2.8 million, $3.3 million and $1.4 million
in 1998, 1997 and 1996, respectively. In all three years, the cash was used
primarily to fund increases in accounts receivable, inventory and prepaid assets
and to pay down accounts payable. Accounts and unbilled receivables, net of
allowance for doubtful accounts increased by $16.4 million or 90.6% to $34.4
million in 1998 from $18.0 million in 1997. This increase was primarily
26
<PAGE>
attributable to the increased volume of business in 1998 over 1997, as well as
the increases as a result of businesses acquired in 1998. As a percentage of
1998 and 1997 net operating revenue, accounts and unbilled receivables were
16.6% and 17.5%, respectively. Inventories increased by $9.8 million or 90.0% to
$20.7 million in 1998 from $10.9 million in 1997. This increase was primarily
attributable to the increased volume of business in 1998 over 1997, as well as
the increases as a result of businesses acquired in 1998. As a percentage of
1998 and 1997 cost of goods sold, inventories were 14.5% and 15.7%,
respectively. Prepaid expenses and other current assets increased by 61.2% or
$0.7 million to $2.0 million in 1998 from $1.3 million in 1997. This increase is
attributable to the overall increase in our size in 1998. Accounts payable and
accrued expenses increased by $8.6 million or 59.2% to $23.1 million in 1998
from $14.5 million in 1997. This increase was primarily attributable to the
increased volume of business in 1998 over 1997, as well as the increases as a
result of businesses acquired in 1998. As a percentage of 1998 and 1997 cost of
goods sold, accounts payable and accrued expenses were 16.1% and 20.9%,
respectively.
Investing activities used cash of $3.3 million during the first three
months of 1999 and $0.4 million 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.
Investing activities used cash of $6.8 million in 1998 and provided cash of
$4.2 million and $0.8 million in 1997 and 1996, respectively. In 1998, $7.4
million was used principally to increase assets such as notes receivable,
property and equipment and other assets, while $0.5 million was received from
the sale of assets. In 1997, sources of cash primarily included $4.0 million of
cash acquired in acquisitions and $2.3 million in proceeds from the sale of
assets. These amounts were partially offset by payments of $2.2 million for
property and equipment and other assets. In 1996, $1.2 million of cash was
provided by payments received on notes receivable and proceeds from the sales of
assets. This was offset slightly by investments of $0.3 million in property and
equipment and other assets.
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.
Cash of $6.4 million, $6.0 million and $1.4 million was provided by
financing activities in 1998, 1997 and 1996, respectively. In 1998, $13.2
million was obtained through borrowings under notes payable and long term debt
and $1.4 million was obtained through the issuance of common shares. Uses of
cash in 1998 included repayments of $6.9 million on long term debt, $0.9 million
for the redemption of preferred stock and $0.3 million for the repurchase of
common stock. In 1997, $9.4 million of cash was provided primarily though the
issuance of common stock and from long term debt proceeds. In 1997, $3.3 million
of cash was used to pay down notes payable and long term debt. In 1996, $1.6
million of cash came from borrowings under notes payable and the issuance of
common stock. $0.2 million of cash was used mostly to pay down long term debt.
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
27
<PAGE>
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 $20 million line of credit with State
Street Bank & Trust Company secured by all of our domestic assets at the prime
lending rate or at the London Interbank Offered Rate, at our discretion. In
February 1999, the amount of the line of credit was increased to $23 million. As
of May 25, 1999, the outstanding balance was approximately $22 million
On May 25, 1999, we entered into a Term and Revolving Credit Agreement with
IBM Credit Corporation. On May 26, 1999 we repaid the amount due to State
Street. The Term and Revolving Credit Agreement provides for:
(a) a revolving credit line of up to $33.5 million, designated as follows:
(i) a USA revolving credit line of up to $22 million, (ii) a Canadian
revolving credit line of up to $8.5 million, and (iii) a United
Kingdom revolving credit line of up to $3 million.
(b) a term loan A of up $22 million.
(c) a term loan B of up to $35 million, and
(d) a term loan C designated in Canadian dollars of up to CND$6.645
million.
The revolving credit line may be used for general working capital
requirements, capital expenditures and certain other permitted purposes. The USA
revolving credit line bears interest at the 30-day LIBOR rate plus 1.75%; the
Canadian revolving credit line bears interest at the base rate as announced by
the Toronto-Dominion Bank of Canada each month plus 0.1707%; the UK revolving
credit line bears interest at the base rate as announced by the National
Westminster Bank PLC of England each month plus 1.4207%.
Term loan A, which was used to pay off State Street Bank & Trust Company,
bears interest at the 30-day LIBOR rate plus 1.75%, will be amortized in
quarterly installments over six years and is repayable in full on the third
anniversary of the closing date of the loan.
Term loan B, which may be used for acquisitions, bears interest at the
30-day LIBOR rate plus 1.75%, will be amortized in quarterly installments over
six years and is repayable in full on the third anniversary of the closing date
of the loan. As of June 18, 1999, no advances had been made under the Term loan
B facility.
Term loan C, which will be used by our Canadian subsidiaries to repay their
outstanding loans to their existing lenders, bears interest at the base rate as
announced by the Toronto-Dominion Bank of Canada each month plus 0.1707%, will
be amortized in quarterly installments over six years and is repayable in full
on the third anniversary of the closing date of the loan. As of June 18, 1999,
no advances had been made under the Term loan C facility.
The agreement contains standard debt covenants relating to the financial
position and performance as well as restrictions on the declarations and payment
of dividends.
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,
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
28
<PAGE>
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 last twelve months 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.
We are constantly looking for ways to maximize shareholder value. As such,
we are continually seeking operational efficiencies and synergies within
operating segments as well as evaluating acquisitions of businesses and customer
bases which complement our operations. We have retained the services of an
investment banking firm to help evaluate strategic initiatives and maximize
shareholder value. These strategic initiatives may include acquisitions, raising
additional funds through debt or equity offerings, or the divestiture of
non-core business units that are not critical to our long term strategy or other
restructuring or rationalization of existing operations. We will review all
alternatives to ensure maximum appreciation of our shareholders' investments.
There can be no assurance however that any initiatives will be found, or if
found, that they will be on terms favorable to us.
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
"Millennium 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 $.2 million in 1998 on our Year 2000 compliance
plan and estimate an additional $.5 million 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, management believes 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
29
<PAGE>
"compliance" with the Year 2000 and of different combinations of software,
firmware and hardware could likely lead to lawsuits against us. The outcome of
any such lawsuits and the impact on us 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 used by us are primarily off-the-shelf, recently developed
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 by us 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. 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, management believes that it is not
possible to determine with complete certainty that all Year 2000 problems
affecting us 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, management expects that we may
suffer the following consequences:
30
<PAGE>
o 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
o A lesser number of serious system failures that may require significant
efforts by us or our customers to prevent or alleviate material
business disruptions.
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.
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.
Our domestic borrowings under our credit agreement are at the London
Interbank Offered Rate plus 1.75%. Such rate is subject to adjustment.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
On October 23, 1998, our Board of Directors voted to replace Rubin, Brown,
Gornstein & Co. LLP ("RBG") with PricewaterhouseCoopers LLP ("PwC") as our
independent accountants for the year ending December 31, 1998.
The reports of RBG on our financial statements for the past two fiscal
years did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of our financial statements for each of the two
fiscal years ended December 31, 1997 and 1996, and in the subsequent interim
period through November 2, 1998, there were no disagreements with RBG on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
RBG, would have caused RBG to make reference to the matter in their report.
During the two most recent fiscal years and in the subsequent interim
period through November 2, 1998, there were no reportable events as defined in
Regulation S-K Item 304(a)(1)(v).
31
<PAGE>
On November 2, 1998, we engaged PwC as our principal accountants to audit
our consolidated financial statements for the year ending December 31, 1998.
During fiscal 1996 and 1997 and in the subsequent interim period, we had not
consulted PwC on items which concerned the application of accounting principles
generally, or to a specific transaction or group of transactions, either
completed or proposed, or the type of audit opinion that might be rendered on
our consolidated financial statements.
We filed a Current Report on Form 8-K on November 4, 1998 with the
Securities and Exchange Commission to report the engagement of PwC. Attached to
that report as an exhibit was a letter from RBG addressed to the Securities and
Exchange Commission stating that they agreed with the disclosure contained in
Current Report on Form 8-K.
Competition
Each segment of our business is highly competitive, and we expect that
competitive pressures will continue. Many of our competitors have far greater
financial, technological, marketing, personnel and other resources than us. The
areas which 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.
Employees
At March 31, 1999, we, together with our subsidiaries, employed
approximately 1,700 employees.
Backlog
At March 31, 1999, we had a backlog of approximately $15 million, all of
which is expected to be filled in 1999.
Compliance with Environmental Regulations
Federal, state and local laws or regulations which have been enacted or
adopted regulating the discharge of materials into the environment have not had,
and under present conditions we do not foresee that they will have, a material
adverse effect on the capital expenditures, earnings, cash flows or our
competitive position. We will continue to monitor our operations with respect to
potential environmental issues, including changes in legally mandated standards.
32
<PAGE>
DIVIDEND POLICY
Holders of our Common Stock are entitled to receive such dividends as may
be declared by our Board of Directors. Other than the distribution of warrants
pursuant to the Joint Actions by Unanimous Consent of the Board of Directors and
Shareholders dated March 25, 1994, since our inception, no dividends on our
Common Stock have ever been paid, and we do not anticipate that dividends will
be paid on our Common Stock in the foreseeable future. Pursuant to certain
restrictions under a term and revolving credit agreement dated as of May 25,
1999 with IBM Credit Corporation, we may declare and pay cash dividends to our
shareholders in the aggregate amount of up to $150,000 in any calendar year. In
addition, we may only declare or pay dividends on our Common Stock if our
subsidiaries, TigerTel Services Limited (formerly Commstar Ltd.) and ACT-GFX
Canada, Inc., are able to, and simultaneously do, declare or pay an equivalent
dividend on each of their exchangeable shares. 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.
PRICE RANGE OF COMMON STOCK
Our Common Stock trades on the NASDAQ Stock Market(R) under the symbol
"ACTC." Effective with our name change to Applied Digital Solutions, Inc. on or
about July 1, 1999, our trading symbol will be "ADSX." The following table sets
forth the high and low sale prices of the Common Stock as reported by the NASDAQ
for each of the quarters since the beginning of 1997.
High Low
1997
First Quarter............................ 5 7/8 4
Second Quarter........................... 4 3/8 2 5/8
Third Quarter ........................... 8 3/4 2 13/16
Fourth Quarter .......................... 9 3/4 3 25/32
1998
First Quarter............................ 5 1/2 4 1/32
Second Quarter........................... 4 7/8 3 1/8
Third Quarter ........................... 3 1/2 1 9/16
Fourth Quarter .......................... 5 1/2 1 1/2
1999
First Quarter............................ 4 3/16 2
Second Quarter (through June 24, 1999) 3 1/8 2
Holders
As of June 18, 1999, there were 1,227 holders of record of our Common
Stock.
33
<PAGE>
Properties
At March 31, 1999, we leased 819,019 square feet of our operating
facilities, of which 231,501 square feet is for office facilities, 257,518
square feet is for factory/warehouse use and 330,000 square feet is for
exhibition space. These leases expire at various dates through 2009. In
addition, we own office and manufacturing facilities, comprising 41,000 square
feet, of which 34,500 square feet is for manufacturing and 6,500 square feet is
for office space.
The following table sets forth the principal locations of our properties:
<TABLE>
<CAPTION>
Square Feet
--------------------------------------------------
Factory / Exhibit /
Office Warehouse Other Total
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Alaska 6,000 23,532 -- 29,532
California 5,574 31,000 -- 36,574
Canada 79,041 73,600 -- 152,641
Florida 9,848 -- -- 9,848
Illinois 19,486 5,400 -- 24,886
Louisiana 500 -- -- 500
Massachusetts 3,781 10,791 -- 14,572
Minnesota 2,000 9,900 -- 11,900
Missouri 5,000 -- -- 5,000
New Hampshire 2,688 -- -- 2,688
New Jersey 43,247 59,370 -- 102,617
New York 3,240 21,000 330,000 354,240
Pennsylvania 18,196 4,925 -- 23,121
Texas 2,750 2,500 -- 5,250
United Kingdom 32,150 40,000 -- 72,150
Utah 4,500 10,000 -- 14,500
-------- -------- -------- --------
238,001 292,018 330,000 860,019
======== ======== ======== ========
</TABLE>
The following table sets forth our properties by business divisions:
<TABLE>
<CAPTION>
Square Feet
--------------------------------------------------
Factory / Exhibit /
Office Warehouse Other Total
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Telecommunications 106,723 10,325 -- 117,048
Network Infrastructure 5,000 1,720 -- 6,720
Internet 5,500 -- 5,500 --
Communications Infrastructure 13,974 33,532 -- 47,506
Application Technology 53,947 40,000 -- 93,947
Inteletek 15,390 62,200 330,000 407,590
Non--Core 30,431 144,241 -- 174,672
Corporate 7,036 -- 7,036 --
-----------------------------------------------
238,001 292,018 330,000 860,019
===============================================
</TABLE>
34
<PAGE>
LEGAL PROCEEDINGS
We and certain of our subsidiaries are parties to various legal actions as
either plaintiff or defendant. In the opinion of management, these proceedings
will not have a material adverse effect on the financial position, cash flows or
overall trends in our results. The estimate of the potential impact on our
financial position, overall results of operations or cash flows for these
proceedings could change in the future. We are not subject to any environmental
or governmental proceedings.
On May 17, 1999, we were named as defendants in a suit brought in the
United States District Court for the District of New Hampshire, in a matter
styled John H. Martin, Jr. v. Applied Cellular Technology, Inc. The plaintiff, a
former Vice President of sales and Chief Operating Officer of our former
subsidiary, Tech Tools, Inc., alleges that: (i) we verbally agreed to sell our
controlling interest in Tech Tools to plaintiff; (ii) we repudiated the sale;
and (iii) we caused Tech Tools to commence a wrongful civil action against
plaintiff for conversion and to file a false report against plaintiff alleging
plaintiff's illegal diversion of Tech Tool's funds which subjected plaintiff to
criminal proceedings. Based on these allegations, plaintiff is seeking monetary
damages in the amount of $20 million. We believe that plaintiff's claims are
without merit and intend to defend ourselves vigorously. We do not expect this
litigation to have a material adverse effect on our financial position, overall
results of operations or cash flows.
35
<PAGE>
MANAGEMENT
Directors and Executive Officers of the Registrant
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position/Committees Position Held Since
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard J. Sullivan 60 Chairman, CEO (1,2) May 1993
Garrett A. Sullivan 64 Director, President, COO (1,3) March 1995
Daniel E. Penni 51 Director (1,2,3) March 1995
Angela M. Sullivan 39 Director (1,2) April 1996
Arthur F. Noterman 57 Director (1,3) February 1997
Constance K. Weaver 46 Director (1,3) June 1998
Andrew J. Hidalgo 42 Senior Vice President March 1999
Marc Sherman 35 Senior Vice President March 1999
Scott R. Silverman 35 Senior Vice President March 1999
Jerome C. Artigliere 45 Vice President April 1998
Gary A. Gray 46 Vice President, Chief Technology Officer April 1998
David A. Loppert 44 Vice President, Treasurer, CFO February 1997
John F. Reap 50 Vice President November 1998
Tabitha N. Zane 39 Vice President February 1999
- ----------------------------
</TABLE>
(1) Member of the Executtee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Richard J. Sullivan: Mr. Sullivan was elected to the Board of Directors,
and named Chief Executive Officer, in May 1993. He is Chairman of the Executive
and Compensation Committees of our Board of Directors. He was appointed
Secretary in March 1996. Mr. Sullivan is currently Chairman of Great Bay
Technology, Inc. From August 1989 to December 1992, Mr. Sullivan was Chairman of
the Board of Directors of Consolidated Convenience Systems, Inc., in
Springfield, Missouri. He has been the Managing General Partner of The Bay
Group, a merger and acquisition firm in New Hampshire since February 1985. Mr.
Sullivan was formerly Chairman and Chief Executive Officer of Manufacturing
Resources, Inc., an MRP II software company in Boston, Massachusetts and was
Chairman and CEO of Encode Technology, a "Computer-Aided Manufacturing" Company,
in Nashua, New Hampshire from February 1984 to August 1986. Mr. Sullivan is
married to Angela M. Sullivan.
Garrett A. Sullivan: Mr. Sullivan has been our President since March 1995.
He was elected to the Board of Directors in August 1995. He was our acting
secretary from March 1995 to March 1996 and acting Chief Financial Officer from
March 1995 to February 1997. From 1993 to 1994 he was an Executive Vice
President of Envirobusiness, Inc. From 1988 to 1993, he served as president and
chief operating officer of two medium sized companies in the electronics and
chemical industries which were owned by Philips North America. He was previously
a partner in the Bay Group, a merger and acquisition firm in New Hampshire from
1988 to 1993. From 1981 to 1988 Mr. Sullivan was President of Granada Hospital
Group, Burlington, Massachusetts. Mr. Sullivan received a Bachelor of Arts
degree from Boston University in 1960 and obtained an MBA from Harvard
University in 1962.
Daniel E. Penni: Mr. Penni has served as a Director since March 1995. Since
March 1998 he has served as an Area Executive Vice President for Arthur J.
Gallagher and Co., an insurance agency since March 1998. He has worked in many
sales and administrative roles in the insurance business since 1969. He was
President of the Boston Insurance Center, Inc., an insurance agency until 1988.
36
<PAGE>
Mr. Penni was founder and President of BIC Equities, Inc., a broker/dealer
registered with the NASD. Mr. Penni graduated with a Bachelor of Sciences degree
in 1969 from the School of Management at Boston College.
Angela M. Sullivan: Ms. Sullivan has served as a Director since April 1996.
From 1988 to the present, Ms. Sullivan has been a partner in the Bay Group, a
private merger and acquisition firm, President of Great Bay Technology, Inc.,
and President of Spirit Saver, Inc. Ms. Sullivan received a Bachelor of Science
degree in Business Administration in 1980 from Salem State College. Ms. Sullivan
is married to Richard J. Sullivan.
Arthur F. Noterman: Mr. Noterman, a Chartered Life Underwriter, has served
as a Director since February 1997, and is Chairman of the Audit Committee. An
operator of his own insurance agency, Mr. Noterman is a registered NASD broker
affiliated with a Chicago, IL registered broker/dealer. Mr. Noterman attended
Northeastern University from 1965 to 1975 and obtained the Chartered Life
Underwriters Professional degree in 1979 from The American College, Bryn Mawr,
Pennsylvania.
Constance K. Weaver: Ms. Weaver was elected to the Board of Directors in
July 1998. From 1996 to the present, Ms. Weaver has been Vice President,
Investor Relations and Financial Communications for AT& T Corporation. From 1995
through 1996 she was Senior Director, Investor Relations and Financial
Communications for Microsoft Corporation. From 1993 to 1995 she was Vice
President, Investor Relations, and from 1991 to 1993 she was Director of
Investor Relations, for MCI Communications, Inc. Ms. Weaver is a director of
Primark Corporation and the National Investor Relations Institute (NIRI). Ms.
Weaver received a Bachelor of Science degree from the University of Maryland in
1975.
Andrew J. Hidalgo: Mr. Hidalgo joined us as Vice President of Strategic
Relations in January 1998. In March 1999, he was appointed Senior Vice President
of our primary business group with overall responsibility for the operations of
our Communications Infrastructure, Network Infrastructure, Application
Technology, Telecommunications and Internet divisions. From 1995 to 1997 he was
Divisional Director of Bentley Systems, Inc. From 1993 to 1995 he was Vice
President, Sales and Marketing, of Cadkey, Inc. Mr. Hidalgo has over twenty
years of experience in a variety of sales, marketing, operations and executive
management positions with such organizations as 3M Company, Schlumberger/MDSI
and General Electric. At General Electric, he was a member of the corporate
strategic business development committee. Mr. Hidalgo attended Fairfield
University in Fairfield Connecticut where he majored in marketing.
Marc Sherman: Mr. Sherman is President of our Intellesale.com division. He
was appointed as one of our Vice Presidents in April 1998 and Senior Vice
President in March 1999. Since 1994, Mr. Sherman has been President of Universal
Commodities Corporation, a company acquired by us in November 1996. He has over
ten years of experience in marketing, operations and executive management. Mr.
Sherman attended Rider University and majored in Business Administration.
Scott R. Silverman: Mr. Silverman joined us in December 1997 as Vice
President of Business Development with a focus on merger and acquisition
activity. In March 1999, he was appointed Senior Vice President, Corporate
Development and Legal Affairs. From 1995 to 1996 Mr. Silverman was Vice
President and Corporate Counsel of ATI Communications. He was appointed
President of ATI in November 1996 after ATI was acquired by us. Mr. Silverman is
a licensed attorney. From 1989 to 1995 he practiced law in the Philadelphia and
South New Jersey area specializing in commercial litigation and communications
law. Mr. Silverman graduated from the University of Pennsylvania in 1985 and
Villanova University School of Law in 1988.
Jerome C. Artigliere: Mr. Artigliere joined a subsidiary of ours as
President in December 1997, and was appointed as one of our Vice Presidents in
April 1998. From 1996 to 1997 he was Regional Vice President at General Electric
Capital Corporation in Portsmouth, NH. Prior to that, from 1994 to 1996 he was
37
<PAGE>
State Vice President at First National Bank in Portsmouth, NH, a commercial bank
subsidiary of Peoples Heritage Bank of Portland, MA. He received an
undergraduate degree in finance from Seton Hall University in 1977, and an MBA
from Fairleigh Dickinson University in 1980.
Gary A. Gray: Mr. Gray is our Vice President and Chief Technology Officer
and President of one of our operating units. He joined us at our founding in
1993 and served as our President from 1993 to 1995. From 1990 to 1992 he was
Vice President for Business Development of Consolidated Convenience Systems. Mr.
Gray has spent 22 years in the development and marketing of computer software.
He is a 1974 graduate of Hope College, Holland, Michigan, with a Bachelor of
Science degree in Physics.
David A. Loppert: Mr. Loppert joined us as Vice President, Treasurer and
Chief Financial Officer in February 1997. From 1996 to 1997, he was Chief
Financial Officer of Bingo Brain, Inc. From 1994 to 1996, he was Chief Financial
Officer of both C.T.A. America, Inc., and Ricochet International, L.L.C. Prior
to that he was Senior Vice President, Acquisitions and Due Diligence, of
Associated Financial Corporation. Mr. Loppert started his financial career with
Price Waterhouse in 1978, in Johannesburg, South Africa, before moving to their
Los Angeles Office in 1980 where he rose to the position of Senior Manager. He
holds Bachelor degrees in both Accounting and Commerce, as well as a Higher
Diploma in Accounting, all from the University of the Witwatersrand,
Johannesburg. Mr. Loppert was designated a Chartered Accountant (South Africa)
in 1980.
John F. Reap: Mr. Reap was appointed a Vice President in November 1998.
Since October 1997 he has also served as President of one of our operating
units. From 1988 to 1994, he was Vice President, Finance, and from 1994 to 1997,
he was Executive Vice President of that operating unit. Mr. Reap is a Certified
Public Accountant and received a Bachelor of Science degree with a major in
accounting firm St. Peters College in 1975.
Tabitha N. Zane: Ms. Zane joined us in February 1999 as Vice President of
Investor Relations. Previously, from 1997 to 1999, she was Director of Investor
Relations for Vanguard Cellular System, until that company was acquired by AT&T.
From 1993 to 1997, Ms. Zane served as Director of Investor Relations for U.S.
Long Distance Corp. Ms. Zane obtained a Bachelor of Arts degree, majoring in
political science, from Trinity College, Hartford, CT in 1981.
Board of Directors and Committees
Board of Directors
Our business is managed under the direction of our Board of Directors and
the number of Directors is currently fixed at six. Since 1998, our charter
provides that the Board shall be divided into three classes. The members of each
class of directors serve for staggered three-year terms, and the class to which
each Director has been assigned is designated as Group A, Group B or Group C.
Our Board is composed of two Group A Directors (Daniel E. Penni and Angela M.
Sullivan), whose terms will expire at the 2002 Annual Meeting of our
shareholders, two Group B Directors (Arthur F. Noterman and Constance K.
Weaver), whose terms expire at the 2000 Annual Meeting of our shareholders, and
two Group C Directors (Richard J. Sullivan and Garrett A. Sullivan), whose terms
expire at the 2001 Annual Meeting of our shareholders. Our basic philosophy
mandates the inclusion of directors who will be representative of management,
employees and our minority shareholders. Directors may only be removed for
"cause."
Board Committees and Meetings
We have standing Executive, Audit and Compensation Committees of the Board
of Directors.
The Executive Committee consists of Daniel E. Penni, Angela M. Sullivan,
Constance K. Weaver, Garrett A. Sullivan and Arthur F. Noterman and Richard J.
Sullivan, as Chairman.
38
<PAGE>
The Audit Committee recommends for approval by the Board of Directors a
firm of certified public accountants whose duty it is to audit our consolidated
financial statements for the fiscal year in which they are appointed and to
monitor the effectiveness of the audit effort, our internal and financial
accounting organization and controls and financial reporting. The Audit
Committee consists of Daniel E. Penni, Garrett A. Sullivan and Constance K.
Weaver and Arthur F. Noterman, as Chairman. The Audit Committee held four
meetings during 1998.
The Compensation Committee administers our 1996 Non-Qualified Stock Option
Plan, including the review and grant of stock options to officers and other
employees under such plan, and recommends the adoption of new plans. The
Compensation Committee also reviews and approves our various other compensation
policies and matters and reviews and approves salaries and other matters
relating to our executive officers. The Compensation Committee reviews all
senior corporate employees after the end of each fiscal year to determine
compensation for the subsequent year. Particular attention is paid to each
employee's contributions to our current and future success along with their
salary level as compared to the market value of personnel with similar skills
and responsibilities. The Compensation Committee also looks at accomplishments
which are above and beyond management's normal expectations for their positions.
The Compensation Committee consists of Daniel E. Penni and Angela M. Sullivan
and Richard J. Sullivan, as Chairman. The Compensation Committee held seven
meetings during 1998.
The Board of Directors held 58 meetings during 1998 and acted by written
consent 25 times during 1998. During the year, all Directors attended 75% or
more of the Board of Directors' meetings and the Board Committees to which they
were assigned.
Compensation of Directors
Prior to the fourth quarter of 1998, our non-employee Directors received a
fee of $250 per meeting, for their attendance at meetings of our Board of
Directors. Beginning in the fourth quarter of 1998, the non-employee director
compensation was changed to fixed quarterly fees in the amount of $5,000 per
non-employee director. In addition, non-employee directors receive a quarterly
fee in the amount of $1,000 for each committee on which they are a member.
Reasonable travel expenses are reimbursed when incurred.
Prior to 1996, Richard J. Sullivan, our Chairman and Chief Executive
Officer, did not receive direct compensation from us. Starting in 1996, Mr.
Sullivan's compensation has been determined taking into account the factors
identified in the preceding paragraph. See also "Executive Compensation."
39
<PAGE>
Employment Agreements and Executive Compensation
We, or our subsidiaries, have entered into employment agreements with the
following executive officers:
<TABLE>
<CAPTION>
Term
-------------------------------- Base
Name Length Commencing Salary
---- ------ ---------------- ------
<S> <C> <C> <C>
Richard J. Sullivan 5 years 1 July 1, 1998 $ 450,000 2
Garrett A. Sullivan 5 years 1 June 1, 1998 $ 165,000
Andrew J. Hidalgo 3 years May 11, 1998 $ 150,000 3
Marc Sherman 3 years November 13, 1996 $ 210,000 4
Scott R. Silverman 3 years February 1, 1999 $ 240,000 5
Jerome C. Artigliere 3 years December 16, 1997 $ 100,000 6
Gary A. Gray 3 years December 18, 1998 $ 42,000 7
David A. Loppert 5 years 1 June 19, 1998 $ 150,000
John F. Reap 3 years October 24, 1997 $ 120,000
Tabitha Zane 2 years February 8, 1999 $ 120,000
- --------------------------------------
</TABLE>
1 -- Automatically renewed for successive additional one-year terms on each
anniversary.
2 -- Provides for a minimum annual bonus of $140,000.
3 -- Effective as of March 9, 1999. Also contains a bonus provision if certain
targets are met.
4 -- Effective as of January 1, 1999
5 -- Provides for a minimum annual increase of 10% of base salary.
6 -- Effective as of February 1, 1999
7 -- In addition to base compensation, Mr. Gray receives a commission of 10% of
gross sales revenue of Applied Cellular Technology of Missouri, Inc.
In 1997, we entered into employment agreements with Richard J. Sullivan,
Chairman; Garrett A. Sullivan, President; and David A. Loppert, Chief Financial
Officer. These agreements were amended in 1998 and only covered certain of the
employment terms and conditions; the rest of the employment terms remained under
negotiation until a final agreement was reached on March 23, 1999. As of that
date, each employment agreement for Richard J. Sullivan, Garrett A. Sullivan and
David A. Loppert was revised and restated. Such employment agreements, as
revised and restated, include certain "change of control" provisions. At the
employee's option, he may terminate his employment under the agreement at any
time within one year after such change of control. We shall pay to the employee
a severance payment equal to the maximum amount which would not result in such
payment being an excess parachute payment as defined in the Internal Revenue
Code which would be subject to an excise tax. However, if any other amounts
payable by us to the employee are subject to the parachute provisions of the
Internal Revenue Code and reducing the severance payment would eliminate the
excise tax on the severance payment and such other payments and result in a
greater net payment, the severance payment may be reduced. Additionally, upon
termination of employment for any reason other than for breach under the
agreement, each of Garrett Sullivan and David Loppert shall be entitled to
receive from us 60 equal monthly payments of 8.333% of his compensation from us
over the 12-month period for which his compensation was the greatest, and
Richard Sullivan shall receive 60 monthly payments of $37,500 each. These
payments are reduced by any severance payments. Richard Sullivan's agreement
provides that he may elect to receive a percentage of his salary for each
12-month period in our Common Stock. For the 12-month period commencing July 1,
1998, Richard Sullivan has elected to receive $200,000 of his compensation in
stock.
Additionally, the agreements for both Richard Sullivan and Garrett Sullivan
provide for certain "triggering events" which include a change in control of us,
40
<PAGE>
the termination of Richard Sullivan's employment other than for cause, or if
Richard Sullivan ceases to hold his current positions with us for any reason
other than a material breach of the terms of his employment agreement. Within
ten days of the occurrence of a triggering event, we shall pay, in cash or in
stock, or in a combination thereof, $12.1 million and $3.5 million,
respectively, to Richard Sullivan and to Garrett Sullivan. In addition, we shall
transfer to Richard Sullivan certain other property valued at approximately $0.5
million. We would also be required to make a gross up payment that covers all
federal and state income taxes payable by Richard Sullivan, if any, as a result
of the transfer.
The following table sets forth certain summary information concerning the
total remuneration paid in 1998 and the two prior fiscal years to our Chief
Executive Officer and our four other most highly compensated executive officers.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
----------------------------------- ---------------------- ---------
Other
Annual Restricted All Other
Name and Compensa- Stock Options/ LTIP Compen-
Principal Position (1) Year Salary Bonus (2) tion (3) Awards SAR's (4) Payouts sation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard J. Sullivan 1998 $ 345,833 $ 180,000 $ 79,882 -- 1,500,000 $ -- $ --
Chairman, CEO and 1997 $ 116,669 $ 140,000 $ 3,623 -- 1,000,000 $ -- $ --
Secretary 1996 $ -- $ -- $ 68,816 -- 1,130,000 $ -- $ --
Garrett A. Sullivan (5) 1998 $ 144,165 $ 90,000 $ 8,842 -- 475,000 $ -- $ --
Director, President 1997 $ 105,499 $ 75,000 $ 811 -- 350,000 $ -- $ --
and COO 1996 $ 113,966 $ 25,000 $ -- -- 150,000 $ -- $ --
Andrew J. Hidalgo (6) 1998 $ 122,326 $ 25,000 $ -- -- 80,000 $ -- $ --
Senior Vice President 1997 N/A $ -- $ -- -- -- $ -- $ --
1996 N/A $ -- $ -- -- -- $ -- $ --
Scott R. Silverman (7) 1998 $ 204,000 $ 10,000 $ -- -- 50,000 $ -- $ --
Senior Vice President, 1997 $ 197,000 $ 0 $ -- -- $ -- $ --
Corporate Development 1996 $ 128,000 $ 0 $ -- -- 50,000 $ -- $ --
and Legal Affairs
David A. Loppert (8) 1998 $ 123,537 $ 40,000 $ 15,925 -- 285,000 $ -- $ --
Vice President, 1997 $ 64,423 $ 25,000 $ -- -- 150,000 $ -- $ --
Treasurer and Chief 1996 N/A $ -- $ -- -- -- $ -- $ --
Financial Officer
- -----------------------
</TABLE>
(1) No executive officer served pursuant to an employment contract through the
1996 fiscal year. See "Employment Contracts and Termination of Employment
and Change-In-Control Arrangements" below for agreements entered into
subsequent to December 31, 1996.
(2) The amounts in the Bonus column were discretionary awards granted by the
compensation committee in consideration of the contributions of the
respective named executive officers.
(3) Includes, in 1998 for Richard J. Sullivan, $73,394 reimbursed for the
payment of taxes. Prior to June 1997, Mr. Sullivan did not receive a salary
from the Company.
(4) Indicates number of securities underlying options.
(5) Mr. Sullivan was Secretary until March 1996 and Acting Chief Financial
Officer until February 1997.
(6) Mr. Hidalgo began his employment with the Company in January 1998 as the
Vice President of Strategic Relations and was appointed Senior Vice
President of the Company in March 1999.
(7) Mr. Silverman was Vice President and Corporate Counsel of a subsidiary of
the Company until November 1996, when he was appointed President of that
41
<PAGE>
subsidiary. In December 1997, Mr. Silverman was appointed Vice President of
Business Development of the Company, and in March 1999 he was appointed
Senior Vice President of the Company.
(8) Mr. Loppert was employed as Vice President, Treasurer, and Chief Financial
Officer of the Company in February 1997.
Option Grants in Last Fiscal Year
The following table contains information concerning our grant of Stock
Options under our 1996 Non-Qualified Stock Option Plan to the named executive
officers during 1998:
<TABLE>
<CAPTION>
Option Grants In Last Fiscal Year
Individual Grants
---------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise Grant Date
Options Employees in Price Expiration Date Present Value
Name (1) Granted (#) 1998 ($/Sh) (2) ($)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard J. Sullivan 500,000 9.3% $ 3.51 April-04 $ 635,000
500,000 9.3% $ 3.03 June-04 $ 635,000
500,000 9.3% $ 2.19 December-04 $ 635,000
Garrett A. Sullivan 150,000 2.8% $ 3.51 April-04 $ 190,500
150,000 2.8% $ 3.03 June-04 $ 190,500
175,000 3.3% $ 2.19 December-04 $ 222,250
Andrew J. Hidalgo 30,000 0.6% $ 3.03 June-04 $ 38,100
50,000 0.9% $ 2.19 December-04 $ 63,500
Scott R. Silverman 50,000 0.9% $ 2.19 December-04 $ 63,500
David A. Loppert 35,000 0.7% $ 3.51 April-04 $ 44,450
125,000 2.3% $ 3.03 June-04 $ 158,750
125,000 2.3% $ 2.19 December-04 $ 158,750
</TABLE>
(1) Options granted under the 1996 Non-Qualified Stock Option Plan were granted
at an exercise price equal to 85% of the fair market value of the Company's
common shares on the grant date. These options are exercisable over a
five-year period beginning with the first anniversary of the grant date.
(2) Based on the grant date present value of $1.27 per option share which was
derived using the Black-Scholes option pricing model in accordance with
rules and regulations of the Securities Exchange Commission and is not
intended to forecast future appreciation of the Company's common share
price. The Black-Scholes model was used with the following assumptions:
dividend yield of 0%; expected volatility of 43.69%; risk-free interest
rate of 8.5%; and expected lives of 5 years.
42
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to the named
executive officers concerning the exercise of options during 1998 and
unexercised options held on December 31, 1998:
<TABLE>
<CAPTION>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised
Unexercised Options at Year End In-The-Money Options at Year
1998 (#) End 1998 ($) (1)
---------------------------------- -------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
--------------------- -------------- -------------- -------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Sullivan -- $ -- 1,685,000 1,500,000 $ -- $ 5,343,750
Garrett A. Sullivan -- $ -- 500,000 475,000 $ -- $ 1,692,188
Andrew J. Hidalgo -- $ -- -- 80,000 $ -- $ 285,000
Scott R. Silverman -- $ -- 50,000 50,000 $ -- $ 178,125
David A. Loppert -- $ -- 150,000 285,000 $ -- $ 1,015,313
</TABLE>
(1) Based on the closing price of the Company's Common Stock on the NASDAQ
Stock Market(R)on December 31, 1998 ($3.5625).
Cash and Stock Incentive Compensation Programs
To reward performance, we provide our executive officers and our divisional
executive officers with additional compensation in the form of a cash bonus
and/or stock awards. No fixed formula or weighting is applied by the
Compensation Committee to corporate performance versus individual performance in
determining these awards. The amounts of such awards are determined by the
Compensation Committee acting in its discretion. Such determination, except in
the case of the award for the Chairman, is made after considering the
recommendations of the Chairman and President and such other matters as the
Compensation Committee deems relevant. The Committee, acting in its discretion,
may determine to pay a lesser award than the maximum specified. The amount of
the total incentive is divided between cash and stock at the discretion of the
Committee.
Stock Options
In August 1996, our shareholders approved our 1996 Non-Qualified Stock
Option Plan. Pursuant to the terms of the plan, 10,000,000 shares of our Common
Stock are reserved for issuance thereunder. The plan is a long-term plan
designed to link rewards with shareholder value over time. Stock options are
granted to aid in the retention of employees and to align the interests of
employees with shareholders. The plan will terminate on March 15, 2006, and no
option may be granted pursuant to the plan thereafter. The Board of Directors
has the sole right and power to amend the plan at any time; provided, however,
that the Board may not amend the plan, without the approval of our shareholders,
in a manner which would violate applicable law. Options are granted only to
persons who are our employees or employees of one of our subsidiaries who agree
to remain in the employ of, and render services to, us or one of our
subsidiaries for a period of at least one year from the date of the granting of
the option. The term "employee" includes officers, directors, executives and
supervisory personnel, as well as our other employees and employees of our
subsidiaries.
The purchase price under each option issued is determined by the
Compensation Committee, at the time the option is granted. In no event, however,
shall the purchase price under an option be less than 85% of the fair market
value of our Common Stock on the date of the grant. All options issued under the
plan shall be for such period as the Compensation Committee shall determine, but
for not more than ten years from the date of the grant thereunder.
43
<PAGE>
Grants to our executive officers and to officers of our subsidiaries are
made at the discretion of the Compensation Committee. The Committee may also
make available a pool of options to each subsidiary to be granted at the
discretion of such subsidiary's president. Stock options have value for an
employee only if the price of our stock increases above the fair market value on
the grant date and the employee remains in our employ for the period required
for the stock option to be exercisable, thus providing an incentive to remain
employed with us.
In 1998, stock options for the executive officers were granted upon the
recommendation of management and approval of the Compensation Committee based on
their subjective evaluation of the appropriate amount for the level and amount
of responsibility for each executive officer.
Compensation Pursuant to Other Plans
Other than as disclosed above, we have no plans pursuant to which cash or
non-cash compensation was paid or distributed during the last fiscal year or is
proposed to be paid or distributed in the future, to the individuals described
above.
Prior to the fourth quarter of 1998, non-employee Directors of the Company
received a fee of $250 per meeting, for their attendance at meetings of the
Company's Board of Directors. Beginning in the fourth quarter of 1998, the
non-employee director compensation was changed to fixed quarterly fees in the
amount of $5,000 per non-employee director. In addition, non-employee directors
receive a quarterly fee in the amount of $1,000 for each committee on which they
are a member. Reasonable travel expenses are reimbursed when incurred.
Individuals who become directors of the Company are automatically granted an
initial option to purchase 25,000 shares of Common Stock on the date they become
directors. Each of such options is granted pursuant to the Company's 1996
Non-Qualified Stock Option Plan on terms and conditions determined by the Board
of Directors. In addition, the following options were granted to directors in
1998: Arthur F. Noterman - 30,000 at $3.51 in April 1998, 35,000 at $3.03 in
June 1998, and 100,000 at $2.00 in December 1998; Daniel E. Penni - 30,000 at
$3.51 in April 1998, 35,000 at $3.03 in June 1998, and 100,000 at $2.00 in
December 1998; Angela M. Sullivan - 30,000 at $3.51 in April 1998, 35,000 at
$3.03 in June 1998, and 100,000 at $2.00 in December 1998; and Constance K.
Weaver - 35,000 at $2.76 in July 1998 and 100,000 at $2.00 in December 1998.
Directors who are not also executive officers are not eligible to participate in
any other benefit plan of the Company.
1999 Flexible Stock Plan
In April 1999, our Board of Directors adopted our 1999 Flexible Stock Plan,
which was approved by our Shareholders at our Annual Meeting on June 5, 1999.
The flexible plan is intended to attract, retain, motivate and reward employees
and other individuals and to encourage ownership by employees and other
individuals of our Common Stock. The flexible plan provides for benefits to be
awarded in the form of incentive stock options, non-qualified stock options,
stock appreciation rights, restricted stock, performance shares, cash awards,
and other stock based awards. Benefits under the flexible plan may be granted
only to persons who are our employees, members of our Board, employees and
owners of entities which are not affiliated with us but which have a direct or
indirect ownership interest in us or one of our affiliates, individuals who, and
employees and owners of entities which, are our or one of our affiliate's
customers or suppliers, individuals who, and employees and owners of entities
which, render services to us or one of our affiliates, and individuals who, and
employees and owners of entities which, have ownership or business affiliations
with any individual or entity previously described. The plan is to be
administered by a committee which will have complete authority to determine the
terms, conditions and provisions of, and restrictions relating to, and to grant,
the benefits under the flexible plan.
The number of shares of our Common Stock which may be issued in connection
with benefits granted under the flexible plan shall be 5,000,000 shares plus an
44
<PAGE>
annual increase, effective on the first day of each calendar year, equal to 5%
of the number of outstanding shares of Common Stock as of the first day of such
calendar year, but in no event more than 15,000,000 shares in the aggregate. If
there is any change in our Common Stock, the number and class of shares
available under the plan, and/or the price thereof, will be appropriately
adjusted.
Our Board of Directors may amend or terminate the plan, but the Board may
not amend the plan without the approval of our shareholders, if such amendment
would (i) cause the options which are intended to qualify as incentive stock
options to fail to qualify as such, (ii) cause the plan to fail to meet the
requirements of Rule 16b-3, or (iii) violate applicable law.
In the event of a change in control, the committee may provide such
protection as it deems necessary to maintain a participant's rights, including:
(i) providing for the acceleration of any time periods relating to the exercise
or realization of any benefit; (ii) providing for purchase of a benefit upon the
participant's request for an amount in cash equal to the amount which could have
been attained upon the exercise or realization of the benefit had it been
currently exercisable or payable; (iii) making such adjustment to the
outstanding benefits as the committee deems appropriate; and/or (iv) causing the
outstanding benefits to be assumed, or new benefits substituted therefor, by the
surviving corporation.
1999 Employees Stock Option Purchase Plan
In April 1999, our Board of Directors also adopted our 1999 Employees Stock
Option Purchase Plan, which was also approved by our Shareholders at our 1999
Annual Meeting. The stock purchase plan is intended to provide eligible
employees an opportunity to acquire an ownership stake in us. Stock ownership by
employees ties their interests directly to the performance of our Common Stock.
The stock purchase plan provides for the granting of options to employees of the
Company and its subsidiaries who are eligible to participate in the stock
purchase plan and who elect to participate. Eligibility to participate in the
plan will be determined by a committee which will administer the plan.
The committee will determine all of the terms of each offering of options
under the plan, including the entities whose employees may participate in the
offering, whether any employees of any such entity who may be excluded are to be
excluded, the number of shares to be offered, the maximum number of shares any
participant may purchase, each date options are exercised, the length of the
offering period, the exercise price per share, and whether interest will be paid
on participants' accounts. The exercise price may not be less than the lower of:
(i) 85% of the fair market value of the shares on the date the option is
granted; or (ii) 85% of the fair market value of the shares on the date the
option is exercised.
The number of shares for which options may be granted under the stock
purchase plan are 1,500,000 shares of Common Stock, plus an annual increase,
effective as of the first day of the calendar year, equal to 5% of the number of
outstanding shares of Common Stock as of the first day of such calendar year,
but in no event more than 3,000,000 shares in the aggregate. If our Common Stock
is changed, the number and class of shares available for options and/or the
price of such shares shall be appropriately adjusted.
Our Board of Directors may amend or terminate the stock purchase plan, but
the Board may not amend the plan without the approval of our shareholders, if
such amendment would (i) cause the stock purchase plan to fail to meet the
requirements of Section 423 of the Internal Revenue Code of 1986, as amended, or
(ii) violate applicable law or administrative regulation or rule.
Compensation Committee Interlocks and Insider Participation
Richard J. Sullivan, our Chief Executive Officer, is Chairman of the
Compensation Committee.
45
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Changes in Control
There are no arrangements, known to us, including any pledge by any person
of our securities, the operation of which may at a subsequent date result in a
change of control of us.
Indebtedness of Management
Garrett A. Sullivan, our President, has executed two promissory notes in
favor of us; one in the amount of $75,000, bearing interest at 7% per annum, and
one in the amount of $102,216.19. This promissory note is non-interest bearing
and is repayable from the proceeds of the sale of any shares of Common Stock Mr.
Sullivan may receive upon the exercise of warrants or options. The entire
amounts due on such notes were outstanding on June 18, 1999.
Scott R. Silverman, our Senior Vice President, has executed a promissory
note in favor of us in the amount of $195,000. The promissory note is
non-interest bearing and was executed as consideration for the purchase by Mr.
Silverman of 75,000 shares of our Common Stock. As of June 18, 1999, $150,000
was outstanding.
Daniel E. Penni, a member of the Company's Board of Directors, has executed
a revolving line of credit promissory note in favor of Applied Cellular
Technology Financial Corp., a subsidiary of the Company, in the amount of
$450,000. The promissory note is payable on demand, with interest payable
monthly on the unpaid principal balance at the rate equal to one percentage
point above the base rate announced by Street Bank and Trust Company (which
interest rate shall fluctuate contemporaneously with changes in such base rate).
As of June 18, 1999, $175,000 had been advanced under this note.
Marc Sherman, the President of the Company's Intellesale.com division, and
a Vice President of the Company, has executed a promissory note in favor of the
Company in the amount of $400,000. The promissory note is non-interest bearing
and was executed as consideration for the purchase by Mr. Sherman of 100,000
shares of the Company's Common Stock. $200,000 on such note was outstanding on
June 18, 1999. Additionally, Mr. Sherman has executed promissory notes totaling
$595,000 in favor of the Company's subsidiary, Universal Commodities Corp. The
notes are payable on demand and bear interest at the rate of 6% per annum. As of
June 18, 1999, the entire amount due on such notes were outstanding.
David A. Loppert, our Chief Financial Officer, has executed a promissory
note in favor of us in the amount of $260,000. The promissory note is
non-interest bearing and was executed as consideration for the purchase by Mr.
Loppert of 100,000 shares of our Common Stock. $200,000 on such note was
outstanding on June 18, 1999.
Consulting Agreements
On October 16, 1996, we entered into a Consulting Agreement ("Agreement")
with Joseph, Brian & Christopher Associated, a Pennsylvania partnership
("Consultant"). We engaged the Consultant to render acquisition advice to us and
to ACT Communications, Inc., one of our wholly owned subsidiaries, for a fee of
$10,000 per month. The general partners of the Consultant are the selling
shareholders of ATI Communications, a company that was acquired by us effective
as of September 1, 1996. This Agreement was terminated in December 1998.
Potential Conflicts of Interest and Related Party Transactions
Richard J. Sullivan, our Chief Executive Officer, is Managing General
Partner of The Bay Group. Until June 1998, The Bay Group conducted business with
us and received compensation from it for various services, including assistance
in identifying potential acquisition candidates and in negotiating acquisition
46
<PAGE>
transactions. The relationships among The Bay Group, Mr. Sullivan and us may
involve conflicts of interest. For services rendered in connection with
acquisitions which took place in 1998, 1997 and 1996, we paid The Bay Group
$597,500, $473,750 and $457,152, respectively, for investment banking services.
In December 1998, we sold our eighty-percent interest in a non-core
subsidiary to a company controlled by Richard J. Sullivan and Angela M.
Sullivan, one of our Directors. In consideration, we received 2,000 shares of
redeemable preferred stock valued at $2 million. The sales price was determined
based upon competitive offers received by us, and the highest offer was
accepted. We had acquired our interest in the subsidiary in 1996 for
approximately $1 million.
Earnout Agreements
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 $4.5
million based on achieved 1999 results, approximately $2 million based on
achieved 2000 results, approximately $4 million based on achieved 2001 results,
and approximately $2 million on each of 2002 and 2004 based on achieved results.
All amounts earned and payable have been accrued in the accompanying balance
sheets.
Put Options
We have entered into put options with the selling shareholders of various
companies in which we acquired less than a 100% interest. These options allow
the minority shareholder to require us to acquire the remaining portion we do
not own after periods ranging from four to five years from the dates of
acquisition at amounts generally equal to 10% to 20% of the average annual
earnings of the company before income taxes for the two-year period ending the
effective date of the put multiplied by a multiple ranging from four to five.
Employment Agreements
At the time we acquire a particular company, we generally enter into
employment agreements with the key selling shareholder/officers of the acquired
company. The agreements are for periods of two to ten years, and some provide
for bonus arrangements based on the earnings of the subsidiary. See
"Management-Employment Agreements and Executive Compensation" above.
47
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
Beneficial Ownership of Common Stock by Management
The following table sets forth information regarding beneficial ownership
of our Common Stock by each director and by each executive officer named in the
Summary Compensation Table and by all the directors and executive officers as a
group as of June 18, 1999:
<TABLE>
<CAPTION>
Aggregate Number Of Percent of
Shares Beneficially Outstanding
Name Owned (1) Shares
- ----------------------- ------------------- -----------
<S> <C> <C>
Daniel E. Penni 459,065 1.1%
Arthur F. Noterman 130,000 *
Angela M. Sullivan 807,775 (2) 2.0%
Constance K. Weaver -- *
Richard J. Sullivan 3,522,024 (2) 8.7%
Garrett A. Sullivan 800,000 2.0%
Andrew J. Hidalgo 31,000 *
Scott R. Silverman 110,434 *
David A. Loppert 400,000 *
All Directors and Executive
Officers as a Group
(15 Persons) 6,129,427 15.2%
</TABLE>
* Represents less than 1% of the issued and outstanding shares of our Common
Stock.
(1) This table includes presently exercisable stock options. The following
directors and executive officers hold the number of exercisable options set
forth following their respective names: Daniel E. Penni - 125,000; Arthur
F. Noterman - 125,000; Angela M. Sullivan - 125,000; Richard J. Sullivan -
2,685,000; Garrett A. Sullivan - 800,000; Andrew J. Hidalgo - 30,000; Scott
R. Silverman - 50,000; David A. Loppert - 310,000; and all directors and
executive officers as a group - 4,380,000.
(2) Includes 310,598 shares owned by The Bay Group and 367,177 shares owned by
Great Bay Technology, Inc. The Bay Group is controlled by Richard J.
Sullivan and Angela M. Sullivan. Great Bay Technology, Inc. is controlled
Richard J. Sullivan, Angela M. Sullivan and Stephanie Sullivan.
48
<PAGE>
The following table sets forth information concerning warrants to purchase
shares of our Common Stock which are owned beneficially by directors and our
named executive officers individually and as a group as of June 18, 1999:
<TABLE>
<CAPTION>
Class of Number of Percent of Exercise Price
Name Warrants Warrants (1) Class Per Share
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard J. Sullivan (2) Class K 250,000 100.0% $ 5.31
Class S 600,000 100.0% $ 3.00
Garrett A. Sullivan Class H 100,000 22.2% $ 2.00
Class N 100,000 12.5% $ 3.00
Daniel E. Penni -- -- -- --
Angela M. Sullivan (2) Class K 250,000 100.0% $ 5.31
Class S 600,000 100.0% $ 3.00
Constance K. Weaver -- -- -- --
Andrew J. Hidalgo -- -- -- --
Scott R. Silverman -- -- -- --
David A. Loppert -- -- -- --
All Directors and Executive Class F 40,000 13.3% $ 2.50
Officers as a Group (13 Persons) Class H 100,000 22.2% $ 2.00
Class K 250,000 100.0% $ 5.31
Class N 200,000 25.0% $ 3.00
Class S 600,000 100.0% $ 2.00
</TABLE>
Pursuant to Rule 13d-3 under the Exchange Act, beneficial ownership of a
security consists of sole or shared voting power (including the power to
vote or direct the voting) and/or sole or shared investment power
(including the power to dispose or direct a disposition) with respect to a
security whether through a contract, arrangement, understanding,
relationship or otherwise. Unless otherwise indicated, each person
indicated above has sole power to vote, or dispose or direct the
disposition of all shares beneficially owned, subject to applicable
community property laws.
(2) Represents warrants owned by Great Bay Technology, Inc. Great Bay
Technology, Inc. is controlled by Richard J. Sullivan, Angela M. Sullivan
and Stephanie Sullivan.
Principal Shareholders
Set forth in the table below is information as of June 18, 1999 with
respect to persons known to the Company (other than the directors and executive
officers shown in the preceding table) to be the beneficial owners of more than
five percent of the Company's issued and outstanding Common Stock:
Number of Shares
Name and Address Beneficially Owned Percent of Class
- --------------------------------------------------------------------------------
None
49
<PAGE>
SELLING SHAREHOLDERS
The following tables set forth information regarding the ownership of our
Common Stock by the Selling Shareholders and the shares being offered under this
prospectus.
We have issued the shares from time to time (a) in various acquisition
transactions, (b) in consideration for services rendered, including services
under employment agreements and employee bonuses, and (c) on exercises of
warrants or options, all as described in the footnotes to the following tables.
The registration of the shares has been effected pursuant to agreements entered
into by us with the Selling Shareholders.
<TABLE>
<CAPTION>
Shares Ownership
Ownership Prior to Offered After the
Selling Shareholder Offering Hereby Offering
- --------------------------------------------------- ----------------------- ------------ ------------
Shares % Shares
------------ ------- ------------
<S> <C> <C> <C> <C>
Bradley A. Haslett 549,020 1.3% 10,558 (1) 538,462
James S. Bosshart 10,558 * 10,558 (1) 0
John K. Murray 501,469 1.2% 501,469 (2) 0
Murray Limited Partnership 220,751 * 220,751 (3) 0
Anat Ebenstein 47,408 * 22,075 (4) 25,333
Sidney L. Karp Holding Company, Inc. 47,408 * 22,075 (4) 25,333
Capital Alliance Corporation 140,533 * 30,905 (4) 109,628
Michael Metropolis 155,606 * 155,606 (5) 0
Michelle Metropolis 152,076 * 152,076 (6) 0
Joseph T. Gabriel 230,613 * 150,357 (7) 80,256
David Cairnie 16,136 * 5,565 (8) 10,571
John Booker 16,904 * 16,904 (8) 0
Robin Tyler 16,904 * 16,904 (8) 0
Frederick Bassett 11,742 * 4,049 (8) 7,693
Alan Cook 3,818 * 1,317 (8) 2,501
Trevor Gage 3,818 * 1,317 (8) 2,501
Peter Sayles 3,818 * 1,317 (8) 2,501
ECI Ventures Nominees Limited 1,843,025 4.4% 784,184 (8) 1,058,841
Fisher Karpark Holdings PLC 937,841 2.2% 399,975 (8) 537,866
Kevin O'Keefe and Associates 11,631 * 11,631 (9) 0
Hayden, Buczek & Associates 15,000 * 15,000 (10) 0
Bruce Reale & Margaret Reale Trustees, Bruce 100,000 * 100,000 (11) 0
Reale Revocable Trust
The BOT Group 650,000 1.6% 650,000 (11) 0
John E. Fox 43,877 * 43,877 (12) 0
John F. Reap 18,193 * 5,053 (13) 13,140
Edward Feldman 3,368 * 3,368 (13) 0
Scott Bartolette 6,496 * 4,421 (13) 2,075
Brian J. Daly 4,421 * 4,421 (13) 0
John Beasley 7,560 * 7,560 (13) 0
Charles J. Phillips 7,018 * 7,018 (14) 0
Lawrence R. Wasielewski 18,327 * 8,327 (15) 10,000
Kerry G. Burst 203,494 * 101,740 (16) 101,754
Lance J. Umbertis 140,588 * 1,936 (16) 138,652
Eric J. Steinmann 56,695 * 1,695 (16) 55,000
Scott A. Capistrano 1,934 * 726 (16) 1,208
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Shares Ownership
Ownership Prior to Offered After the
Selling Shareholder Offering Hereby Offering
- --------------------------------------------------- ----------------------- ------------ ------------
Shares % Shares
------------ ------- ------------
<S> <C> <C> <C> <C>
John Dixson 484 * 484 (16) 0
Sherri Sheerr 123,563 * 70,646 (17) 52,917
Edward L. Cummings 106,549 * 41,719 (18) 64,830
Marc Sherman 399,419 * 38,451 (19) 360,968
Harvey H. Newman 728,906 1.7% 492,034 (20) 236,872
Martin D. Zuckerman 680,436 1.6% 433,639 (20) 246,797
Charles Newman 11,719 * 1,266 (20) 10,453
David C. Gerber 1,210,943 2.9% 289,235 (21) 921,708
Toby J. Quesinberry 432,274 1.0% 116,133 (21) 316,141
Albert F. Butters, Jr. 78,882 * 78,882 (21) 0
James C. Millerberg 49,083 * 49,083 (21) 0
Michael E. Sham 606,061 1.4% 606,061 (22) 0
Donn J. Wagner 384,615 * 338,461 (23) 46,154
Angela S. Wagner 418,615 1.0% 338,461 (23) 80,154
Edward M. Kelly 338,461 * 338,461 (23) 0
Eileen E. Kelly 424,615 1.0% 338,461 (23) 86,154
Joseph S. Keats 9,813 * 6,121 (24) 3,692
Patrick C. Chai 489,338 1.2% 303,030 (25) 186,308
Robert W. Borra 460,338 1.1% 303,030 (25) 157,308
Dominick & Dominick, Incorporated 250,000 * 250,000 (26) 0
Craig W. Nelson 157,465 * 121,465 (27) 36,000
Great Bay Technology, Inc. 617,117 1.4% 250,000 (28) 367,117
----------- ----------- ----------
Totals 14,176,806 8,279,858 5,896,948
=========== =========== ==========
</TABLE>
1. Represents "Price Protection" shares issued under the Agreement of Sale in
connection with our acquisition of Aurora Electric, Inc.
2. Includes (a) 135,023 "Price Protection" shares issued under the Agreement
of Sale in connection with our acquisition of Information Products Center,
Inc. and (b) 366,446 shares issued upon achievement of the "Earnout"
provision in the Agreement of Sale.
3. Represents shares issued to a partnership designated by the selling
shareholder upon the achievement of the "Earnout" provision in the
Agreement of Sale in connection with our acquisition of Information
Products Center, Inc.
4. Represents shares issued to individuals designated by the selling
shareholder upon the achievement of the "Earnout" provision in the
Agreement of Sale in connection with our acquisition of Information
Products Center, Inc.
5. Includes (a) 1,770 "Price Protection" shares issued under the Agreement of
Sale in connection with our acquisition of Innovative Vacuum Solutions,
Inc., (b) 142,071 shares issued upon achievement of the "Earnout" provision
in the Agreement of Sale, and (c) 11,765 shares earned as a bonus.
6. Includes (a) 1,770 "Price Protection" shares issued under the Agreement of
Sale in connection with our acquisition of Innovative Vacuum Solutions,
Inc., (b) 142,071 shares issued upon achievement of the "Earnout" provision
in the Agreement of Sale, and (c) 8,235 shares earned as a bonus.
7. Includes (a) 1,770 "Price Protection" shares issued under the Agreement of
Sale in connection with our acquisition of Innovative Vacuum Solutions,
Inc., (b) 142,071 shares issued upon achievement of the "Earnout" provision
in the Agreement of Sale, and (c) 6,516 shares earned as a bonus.
8. Represents "Price Protection" shares issued under the Agreement of Sale in
connection with our acquisition of Signature Industries Limited.
51
<PAGE>
9. Represents "Price Protection" shares issued under the Agreement of Sale in
connection with the payment of a finders fee in connection with our
acquisition of Signature Industries Limited.
10. Represents shares issued for services rendered.
11. Represents shares issued in connection with the Earnout Agreement in
connection with our acquisition of ATI Communications, Inc. The BOT group
is controlled by Bruce Reale.
12. Represents shares issued as a finders fee in connection with our
acquisition of TigerTel Services Limited.
13. Represents shares earned as a bonus.
14. Represents shares issued in connection with our subsidiary's,
Intellesale.com, acquisition of certain assets of Fiscal Advantage
Corporation from Mr. Phillips.
15. Represents shares issued in lieu of compensation.
16. Represents shares issued upon achievement of the "Earnout" provision of the
Agreement of Sale in connection with our acquisition of The Americom Group.
17. Represents shares issued upon achievement of the "Earnout" provision of the
Agreement of Sale in connection with our subsidiary's, Universal
Commodities Corp., acquisition of Cybertech Station, Inc.
18. Represents shares issued upon achievement of the "Earnout" provisions of
the Agreements of Sale in connection with our subsidiary's, Universal
Commodities Corp., acquisitions of Cybertech Station, Inc., PPL, Ltd,
Consolidated Micro Components, Inc, Data Path Technologies, Inc. and GD
Software Services, Inc.
19. Represents shares issued upon achievement of the "Earnout" provisions of
the Agreements of Sale in connection with our subsidiary's, Universal
Commodities Corp., acquisitions of Consolidated Micro Components, Inc, Data
Path Technologies, Inc. and GD Software Services, Inc.
20. Represents shares issued upon achievement of the "Earnout" provisions of
the Agreement and Plan of Merger in connection with our subsidiary's,
Universal Commodities Corp., acquisition of PPL, Ltd.
21. Represents shares issued upon achievement of the "Earnout" provisions of
the Agreement of Sale in connection with our acquisitions of Winward
Electric, Inc. and the Fromehill Company.
22. Represents shares issued upon achievement of the "Earnout" provisions of
the Agreement of Sale in connection with our subsidiary's, Universal
Commodities Corp., acquisition of Consolidated Micro Components, Inc.
23. Represents shares issued upon achievement of the "Earnout" provisions of
the Agreement and Plan of Class B Reorganization in connection with our
subsidiary's, Universal Commodities Corp., acquisition of Data Path
Technologies, Inc.
24. Represents shares issued upon (a) the achievement of the "Earnout"
provisions of the Agreement and Plan of Class B Reorganization in
connection with our subsidiary's, Universal Commodities Corp., acquisition
of Data Path Technologies, Inc., and (b) shares issued upon achievement of
the "Earnout" provisions of the Agreement of Sale in connection with our
subsidiary's, Universal Commodities Corp., acquisition of GDB Software
Services, Inc.
25. Represents shares issued upon achievement of the "Earnout" provisions of
the Agreement of Sale in connection with our subsidiary's, Universal
Commodities Corp., acquisition of GDB Software Services, Inc.
26. Represents shares underlying the issuance of Class "U" warrants to Dominick
& Dominick, Incorporated for services rendered. The Class "U" warrants may
be converted into shares of our Common Stock at an exercise price of $8.375
per share for a period of five years, commencing June 5, 1998.
27. Represents shares issued in connection with our acquisition of Mr. Nelson's
minority interest in Cra-Tek Company, a company in which we acquired an 80%
interest in September, 1996.
28. Represents shares underlying the issuance of Class "K" warrants to Great
Bay Technology, Inc. in 1996 for services rendered. The shares underlying
the issuance of the warrants were previously registered in a registration
statement in 1996 which registration statement has been terminated, and by,
agreement with the warrantholder, they are being included in this
registration. The Class "K" warrants may be converted into shares of our
Common Stock at an exercise price of $5.31 per share for a period of five
years, commencing September 13, 1996. Great Bay Technology, Inc. is
controlled by Richard J. Sullivan, Chairman, Angela M.
Sullivan, Director, and Stephanie Sullivan.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our Amended and Restated Articles of Incorporation authorize the issuance
of up to 80,000,000 shares of our Common Stock and up to 5,000,000 shares of
preferred stock (the "Preferred Stock"). The Preferred Stock may be issued from
time to time and on such terms as are specified by our Board of Directors,
without further authorization from our shareholders.
As of June 18, 1999, there were 43,672,595 shares of our Common Stock
outstanding. In addition, 1,392,877 shares of Common Stock are reserved for
issuance in exchange for Exchangeable Shares of two of our Canadian
subsidiaries.
As of June 18, 1999, (a) there were issued and outstanding warrants to
purchase 2,160,000 shares of our Common Stock at a weighted average exercise
price of $3.56 per share, and (b) options held by our employees to purchase
9,431,229 shares of our Common Stock at a weighted average exercise price of
$3.44 per share. All of the warrants are currently exercisable. Of the
outstanding options, 4,755,000 are now exercisable at a weighted average
exercise price of $4.01 per share, and the rest become exercisable at various
times over the next three years.
Our Common Stock trades on the NASDAQ Stock Market under the symbol "ACTC."
Effective with our name change to Applied Digital Solutions, Inc. on or about
July 1, 1999, our trading symbol will be "ADSX."
PLAN OF DISTRIBUTION
The Selling Shareholders may sell the shares offered hereby in one or more
transactions (which may include "block" transactions) on the NASDAQ Stock
Market, in the over-the-counter market, in negotiated transactions or in a
combination of such methods of sales, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Selling Shareholders may
effect such transactions by selling the shares directly to purchasers, or may
sell to or through agents, dealers or underwriters designated from time to time,
and such agents, dealers or underwriters may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders and/or the
purchaser(s) of the Shares for whom they may act as agent or to whom they may
sell as principals, or both. The Selling Shareholders may also pledge certain of
the Shares from time to time, and this prospectus also relates to any sale of
Shares that might take place following any foreclosure of such a pledge. The
Selling Shareholders and any agents, dealers or underwriters that act in
connection with the sale of the Shares might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any discount or
commission received by them and any profit on the resale of the shares as
principal might be deemed to be underwriting discounts or commissions under the
Securities Act.
We will receive no portion of the proceeds from the sale of the shares and
will bear all of the costs relating to the registration of this offering (other
than any fees and expenses of counsel for the Selling Shareholders). Any
commissions, discounts or other fees payable to a broker, dealer, underwriter,
agent or market maker in connection with the sale of any of the shares will be
borne by the Selling Shareholders.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
could adversely affect market prices of the Common Stock. Furthermore, sales of
substantial amounts of our Common Stock in the public market after various
restrictions lapse could also adversely affect the prevailing market price and
our ability to raise additional equity capital if we should desire to do so.
We have outstanding an aggregate of 43,672,595 shares of Common Stock. Of
these shares, 30,937,439 shares are generally freely tradeable without
restriction or further registration under the Securities Act. The remaining
7,779,858 shares of our Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act and may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act.
In addition, there are outstanding options held by our employees to
purchase 9,431,229 shares of our Common Stock at a weighted average exercise
price of $3.44 per share, and outstanding warrants to purchase 2,160,000 shares
of our Common Stock at a weighted average exercise price of $3.56 per share. We
have filed registration statements on Form S-8 under the Securities Act covering
shares of Common Stock reserved for issuance under our employee stock option
plans. Shares registered under such registration statements will generally be
available for sale in the open market, unless such shares are subject to vesting
restrictions with us.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year, including the holding period of any prior owner except an
affiliate, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
o one percent of the number of shares of our Common Stock then
outstanding; or
o the average weekly trading volume of the common stock on the NASDAQ
Stock Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is deemed not to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner except an affiliate, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144; therefore, unless otherwise
restricted, such "144(k) shares" may be sold immediately upon the completion of
this offering.
LEGAL OPINION
Bryan Cave LLP, St. Louis, Missouri, as our counsel, has issued an opinion
as to the legality of the Common Stock.
54
<PAGE>
EXPERTS
Our consolidated financial statements for the year ended December 31, 1998
included in this prospectus have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting. Our consolidated
financial statements for the year ended December 31, 1997 included in this
prospectus have been included herein in reliance upon the report of audited by
Rubin, Brown, Gornstein & Co. LLP, independent public accountants, and are
included herein by reference in reliance upon the authority of said firm as
experts in auditing and accounting in giving said reports.
The financial statements of Signature Industries Limited at and for the
years ended March 31, 1998 and 1997 appearing in this prospectus and
registration statement have been audited by Ernst & Young, independent auditors,
as set forth in their report appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 to register
the shares of Common Stock offered hereby. This prospectus is a part of that
Registration Statement. As allowed by the SEC rules, this prospectus does not
contain all the information you can find in the registration statement or the
exhibits to that registration statement. For further information with respect to
us and the common stock offered hereby, reference is made to the registration
statement and the exhibits to that registration statement. Statements in this
prospectus concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to that exhibit. Each statement in this
prospectus relating to a contract or document filed as an exhibit to the
registration statement is qualified by the filed exhibits. You can obtain a copy
of the registration statement and the exhibits through the SEC or the SEC's web
sit as described below.
In addition, we file reports, proxy statements and other information with
the SEC. Our SEC filings are also available over the Internet at the SEC's Web
sit at http://www.sec.gov. You may also read and copy any document we file at
the SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more information on
the public reference rooms and their copy charges. You may also inspect our
reports and other information filed with the SEC at the NASDAQ Stock Market,
Inc., 1735 K Street, N.W., Washington, D.C. 20606-1500.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Financial Statements of Applied Cellular Technology, Inc. for the Years ended
December 31, 1998, 1997 and 1996
Report of Management.........................................................F-1
Reports of Independent Accountants...........................................F-3
Financial Statements
Consolidated Balance Sheets.........................................F-5
Consolidated Statements of Operations...............................F-6
Consolidated Statements of Stockholders' Equity.....................F-7
Consolidated Statements of Cash Flows...............................F-8
Notes to Consolidated Financial Statements..........................F-9
Financial Statement Schedule
Valuation and Qualifying Accounts...........................................F-29
Unaudited Financial Statements of Applied Cellular Technology, Inc.
for the Three Months ended March 31, 1999
Consolidated Balance Sheets........................................F-30
Consolidated Statements of Operations..............................F-31
Consolidated Statements of Stockholders' Equity....................F-32
Consolidated Statements of Cash Flows..............................F-33
Notes to Consolidated Financial Statements.........................F-34
Financial Statements of Signature Industries Limited for the year ended
March 31, 1998
Profit and Loss Accounts....................................................F-39
Balance Sheets..............................................................F-40
Statements of Cash Flows....................................................F-41
Notes to the Accounts.......................................................F-42
Report of Independent Auditors..............................................F-55
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1998....................................F-56
56
<PAGE>
Report Of Management
Management is responsible for the preparation and integrity of the Consolidated
Financial Statements appearing in our Annual Report. The financial statements
were prepared in conformity with generally accepted accounting principles
appropriate in the circumstances and, accordingly, include certain amounts based
on our best judgments and estimates. Financial information in this Annual Report
is consistent with that in the financial statements.
Management is responsible for maintaining a system of internal accounting
controls and procedures to provide reasonable assurance, at an appropriate
cost/benefit relationship, assets are safeguarded and transactions are
authorized, recorded and reported properly. The internal accounting control
system is augmented by a program of internal audits and appropriate reviews by
management, written policies and guidelines, careful selection and training of
qualified personnel and a written Code of Business Conduct adopted by the
Company's Board of Directors, applicable to all employees of the Company and its
subsidiaries. In our opinion, the Company's internal accounting controls provide
reasonable assurance that assets are safeguarded against material loss from
unauthorized use or disposition and that the financial records are reliable for
preparing financial statements and other data and for maintaining accountability
of assets.
The Audit Committee of the Company's Board of Directors, composed of a majority
of Directors who are not officers of the Company, meets with the independent
accountants, management and internal auditors periodically to discuss internal
accounting controls and auditing and financial reporting matters. The Committee
reviews with the independent accountants, the scope and results of the audit
effort. The Committee also meets periodically with the independent accountants
and the director of internal audit without management present to ensure that the
independent accountants and the director of internal audit have free access to
the Committee.
F-1
<PAGE>
Report of Management (Continued)
The independent accountants, PricewaterhouseCoopers LLP, are recommended by the
Audit Committee of the Board of Directors, selected by the Board of Directors
and ratified by the Company's stockholders. PricewaterhouseCoopers LLP is
engaged to audit the Consolidated Financial Statements of Applied Cellular
Technology, Inc. and subsidiaries and conduct such tests and related procedures
as it deems necessary in conformity with generally accepted auditing standards.
The opinion of the independent accountants, based upon their audits of the
Consolidated Financial Statements, is contained in this Annual Report.
/S/ Richard J. Sullivan
- -------------------------------------
Richard J. Sullivan
Chairman, Board of Directors and
Chief Executive Officer
/S/ Garrett A. Sullivan
- -------------------------------------
Garrett A. Sullivan
President and Chief Operating Officer
/S/ David A. Loppert
- -------------------------------------
David A. Loppert
Vice President, Treasurer and
Chief Financial Officer
February 19, 1999
F-2
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Applied Cellular Technology, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Applied Cellular Technology, Inc. and its subsidiaries at December 31, 1998, and
the results of their operations and their cash flows for the year in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/S/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 19, 1999
F-3
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholders
Applied Cellular Technology, Inc.
We have audited the accompanying consolidated balance sheet of Applied Cellular
Technology, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. We have also
audited the financial statement schedule listed in the accompanying index as of
December 31, 1997 and for each of the two years in the period ended December 31,
1997. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Applied
Cellular Technology, Inc. and subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/S/ Rubin, Brown, Gornstein & Co., LLP
- ---------------------------------------
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 24, 1998
F-4
<PAGE>
<TABLE>
<CAPTION>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Assets
December 31,
----------------------
1998 1997
------- ------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 4,555 $ 7,657
Accounts receivable and unbilled receivables
(net of allowance for doubtful accounts of
$990 in 1998 and $675 in 1997) 34,390 18,039
Inventories 20,657 10,872
Notes receivable 3,600 1,040
Prepaid expenses and other current assets 2,042 1,267
--------- --------
Total Current Assets 65,244 38,875
Property And Equipment, net 15,627 5,339
Notes Receivable 1,445 1,275
Goodwill, net 33,430 12,787
Other Assets 8,370 3,006
--------- ---------
$ 124,116 $ 61,282
========= =========
Liabilities And Stockholders' Equity
Current Liabilities
Notes payable $ 23,217 $ 4,783
Current maturities of long-term debt 1,158 843
Accounts payable and accrued expenses 23,070 14,487
Other current liabilities 3,312 --
--------- ---------
Total Current Liabilities 50,757 20,113
Long-Term Debt 2,838 2,199
--------- ---------
Total Liabilities 53,595 22,312
--------- ---------
Commitments And Contingencies
Minority Interest 2,961 1,785
--------- ---------
Redeemable Preferred Shares -- 900
--------- ---------
Stockholders' Equity
Preferred shares:
Authorized 5,000 shares in 1998 of $10 par value; special voting, issued
and outstanding 1 share in 1998, Class B voting, issued and outstanding
1 share in 1998 -- --
Common shares:
Authorized 80,000 and 40,000 shares in 1998 and 1997, respectively, of
$.001 par value; issued 35,683 shares and outstanding 35,577 shares in
1998 and 20,672 shares issued
and outstanding in 1997 36 21
Common and preferred additional paid-in capital 60,517 33,680
Retained earnings 7,232 2,586
Treasury stock (carried at cost, 106 shares) (337) --
Accumulated other comprehensive income 112 (2)
--------- ---------
Total Stockholders' Equity 67,560 36,285
--------- ---------
$ 124,116 $ 61,282
========= =========
</TABLE>
See the accompanying notes to consolidated financial statements.
F-5
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For The Years Ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Net Operating Revenue $ 207,081 $103,159 $ 19,883
Costs Of Goods Sold 142,893 69,408 10,524
--------- -------- --------
Gross Profit 64,188 33,751 9,359
Selling, General And Administrative Expenses 55,253 28,159 8,105
--------- -------- --------
Operating Income 8,935 5,592 1,254
Interest Income 420 192 126
Interest Expense (1,653) (978) (200)
--------- -------- --------
Income Before Provision For Income
Taxes And Minority Interest 7,702 4,806 1,180
Provision For Income Taxes 2,588 1,769 362
--------- -------- --------
Income Before Minority Interest 5,114 3,037 818
Minority Interest 424 697 132
--------- -------- --------
Net Income 4,690 2,340 686
Preferred Stock Dividends 44 72 60
--------- -------- --------
Net Income Available To Common Stockholders $ 4,646 $ 2,268 $ 626
========= ======== ========
Earnings Per Common Share - Basic $ .14 $ .18 $ .19
========= ======== ========
Earnings Per Common Share - Diluted $ .13 $ .15 $ .15
========= ======== ========
Weighted Average Number Of Common
Shares Outstanding - Basic 32,318 12,632 3,329
========= ======== ========
Weighted Average Number Of Common
Shares Outstanding - Diluted 34,800 15,245 4,641
========= ======== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY For The Years Ended
December 31, 1998, 1997 And 1996
(In thousands)
Accumulated
Other Total
Preferred Stock Common Stock Additional Retained Compre- Stock-
---------------- ------------- Paid-In Earnings Treasury hensive holders
Number Amount Number Amount Capital (Deficit) Stock Income Equity
------ ------ ------ ------ -------- --------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 -- $ -- 2,268 $ 2 $ 3,358 $ (308) $ -- $ -- $ 3,052
Net income -- -- -- -- -- 686 -- -- 686
Issuance of common shares -- -- 483 1 132 -- -- -- 133
Issuance of common shares for
acquisitions -- -- 2,788 3 3,604 -- -- -- 3,607
Warrants redeemed for common shares -- -- 260 -- 650 -- -- -- 650
Payments received on note receivable -- -- -- -- 72 -- -- -- 72
Settlement of note receivable -- -- -- -- 112 -- -- -- 112
Preferred stock dividends paid -- -- -- -- -- (60) -- -- (60)
---- ---- ------ ---- -------- -------- ------- ----- --------
Balance - December 31, 1996 -- -- 5,799 6 7,928 318 -- -- 8,252
---- ---- ------ ---- -------- -------- ------- ----- --------
Net income -- -- -- -- -- 2,340 -- -- 2,340
Comprehensive income - foreign
currency translation -- -- -- -- -- -- -- (2) (2)
---- ---- ------ ---- -------- -------- ------- ----- --------
Total comprehensive income -- -- -- -- -- 2,340 -- (2) 2,338
Issuance of common shares -- -- 1,572 2 5,534 -- -- -- 5,536
Issuance of common shares to redeem -- --
preferred stock -- -- 1,354 1 2,499 -- -- -- 2,500
Issuance of common shares for
acquisitions -- -- 9,624 10 10,263 -- -- -- 10,273
Warrants redeemed for common shares -- -- 2,323 2 7,456 -- -- -- 7,458
Preferred stock dividends paid -- -- -- -- -- (72) -- -- (72)
---- ---- ------ ---- -------- -------- ------- ----- --------
Balance - December 31, 1997 -- -- 20,672 21 33,680 2,586 -- (2) 36,285
---- ---- ------ ---- -------- -------- ------- ----- --------
Net income -- -- -- -- -- 4,690 -- -- 4,690
Comprehensive income - foreign
currency translation -- -- -- -- -- -- -- 114 114
---- ---- ------ ---- -------- -------- ------- ----- --------
Total comprehensive income -- -- -- -- -- 4,690 -- 114 4,804
Issuance of common shares -- -- 50 -- 100 -- -- -- 100
Issuance of common shares for
acquisitions -- -- 12,511 12 18,770 -- -- -- 18,782
Issuance of preferred shares -- -- -- -- 6,020 -- -- -- 6,020
Conversion of preferred shares to
common shares -- -- 1,600 2 (2) -- -- -- --
Warrants redeemed for common shares -- -- 850 1 1,949 -- -- -- 1,950
Preferred dividends paid -- -- -- -- -- (44) -- -- (44)
Common shares repurchased -- -- (106) -- -- -- (337) -- (337)
---- ---- ------ ---- -------- -------- ------- ----- --------
Balance - December 31, 1998 -- $ -- 35,577 $ 36 $ 60,517 $ 7,232 $ (337) $ 112 $ 67,560
==== ==== ====== ==== ======== ======== ======= ===== ========
</TABLE>
See the accompanying notes to consolidated financial statements.
F-7
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For The Years Ended December 31,
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 4,690 $ 2,340 $ 686
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 4,501 1,874 712
Minority interest 424 697 132
(Gain) loss on sale of assets (873) (1,679) 2
Net change in operating assets and liabilities (11,525) (6,549) (2,974)
----------- ---------- ----------
Net Cash Used In Operating Activities (2,783) (3,317) (1,442)
----------- ---------- ----------
Cash Flows From Investing Activities
(Increase) decrease in notes receivable (2,338) 122 607
Proceeds from sale of assets 507 2,296 564
Payments for property and equipment and other assets (5,068) (2,243) (318)
(Payments for) proceeds from asset and business acquisitions
(net of cash balances acquired) 57 3,983 (81)
----------- ---------- ----------
Net Cash Provided By (Used In) Investing Activities (6,842) 4,158 772
----------- ---------- ----------
Cash Flows From Financing Activities
Net amounts borrowed (paid) on notes payable 12,202 (2,847) 663
Proceeds from long-term debt 1,011 335 21
Payments for long-term debt (6,936) (494) (214)
Issuance of common shares 1,354 9,084 945
Repurchase of common stock (337) -- --
Redemption of preferred shares (900) -- --
Preferred stock dividends paid (44) (72) (60)
----------- ---------- ----------
Net Cash Provided By Financing Activities 6,350 6,006 1,355
----------- ---------- ----------
Net Increase (Decrease) In Cash (3,275) 6,847 685
Effect Of Exchange Rate Changes On Cash 173 -- --
Cash And Cash Equivalents - Beginning Of Year 7,657 810 125
----------- ---------- ----------
Cash And Cash Equivalents - End Of Year $ 4,555 $ 7,657 $ 810
========== ========= ==========
Supplemental Disclosure Of Cash Flow Information
Income taxes paid $ 2,430 $ 964 $ 3
Interest paid 1,534 1,012 162
</TABLE>
See the accompanying notes to consolidated financial statements.
F-8
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 And 1997
1. Organization And Summary Of Significant Accounting Policies
Organization
Applied Cellular Technology, Inc. and subsidiaries (the Company) is a
full service communications company that provides a wide range of
products and services to the wireless, telecommunications and digital
data industry. The Company's goal is to be a single source
communications provider to which businesses can turn for integrated
communications systems and it intends to take advantage of the
communications industry move from analog to digital and from wireline
to wireless systems. The Company's services include the construction
and installation of communications infrastructure, the installation of
local and wide area networks and the development of specialized
software for business applications. The Company also provides
traditional telecommunications services such as long distance toll
service, one-number dialing and call centers. The Company currently
operates in the United States, Canada and the United Kingdom.
Principles of Consolidation
The consolidated 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 upon consolidation.
As further discussed in Note 2, the Company acquired subsidiaries
during 1998 and 1997 all of which have been accounted for under the
purchase method of accounting.
Use of Estimates
The preparation of the financial statements requires management to make
certain estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and actions the
Company may undertake in the future, they may ultimately differ from
actual results.
Foreign Currencies
The Company's foreign subsidiaries use their local currency as their
functional currency. Results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities
are translated at end of period exchange rates. Translation adjustments
resulting from this process are included in accumulated other
comprehensive income in stockholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional
currency, are included in the results of operations as incurred.
Cash And Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Unbilled Receivables
Unbilled receivables consist of certain direct costs incurred in
connection with projects not yet billed.
Inventories
Inventories consist of raw materials, work in process and finished
goods. Inventory is valued at the lower of cost or market, determined
by the first-in, first-out method. The Company closely monitors and
analyzes inventory for potential obsolescence and slow-moving items
based upon the aging of the inventory and the inventory turns by
product. Inventory items designated as obsolete or slow-moving are
reduced to net realizable value.
F-9
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Property And Equipment
Property and equipment are carried at cost, less accumulated
depreciation and amortization computed using straight-line and
accelerated methods. Building and leasehold improvements are
depreciated and amortized over periods ranging from 10 to 40 years and
equipment is depreciated over periods ranging from 3 to 10 years.
Goodwill And Other Intangible Assets
Goodwill and other intangible assets are stated on the cost basis and
are amortized, principally on a straight-line basis, over the
estimated future periods to be benefitted (not exceeding 20 years).
Goodwill and other intangible assets are periodically reviewed for
impairment based on expected future undiscounted cash flows to ensure
that they are appropriately valued.
Purchased Computer Software
Purchased computer software is stated at cost less accumulated
amortization. Amortization is computed over the greater of current
revenues divided by the total of expected revenues or straight-line
over the number of years of expected revenue. The straight-line life
is determined to be no more than five years.
Proprietary Software In Development
In accordance with Statement of Financial Accounting Standards (FAS)
No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, the Company has capitalized certain
computer software development costs upon the establishment of
technological feasibility. Technological feasibility is considered to
have occurred upon completion of a detailed program design which has
been confirmed by documenting and tracing the detail program design to
product specifications and has been reviewed for high-risk development
issues, or to the extent a detailed program design is not pursued,
upon completion of a working model that has been confirmed by testing
to be consistent with the product design. Amortization is provided
based on the greater of the ratios that current gross revenues for a
product bear to the total of current and anticipated future gross
revenues for that product, or the straight-line method over the
estimated useful life of the product. The straight-line life is
determined to be 2 to 5 years.
Revenue Recognition
For programming, consulting and software licensing services and
construction contracts, the Company recognizes revenue based on the
percent complete for fixed fee contracts, with the percent complete
being calculated as either the number of direct labor hours in the
project to date divided by the estimated total direct labor hours or
based upon the completion of specific task orders. It is the Company's
policy to record contract losses in their entirety in the period in
which such losses are foreseeable. For non fixed fee jobs, revenue is
recognized based on the actual direct labor hours in the job times the
standard billing rate and adjusted to realizable value, if necessary.
For product sales, the Company recognizes revenue upon shipment. There
are no significant post contract support obligations at the time of
revenue recognition. The Company's accounting policy regarding vendor
and post-contract support obligations is based on the terms of the
customers' contract, billable upon the occurrence of the post-sale
support. Revenue from royalties is recognized when licensed products
are shipped. Costs of goods sold are recorded as the related revenue is
recognized.
The Company does not experience significant product returns, and
therefore, management is of the opinion that no allowance for sales
returns is necessary. The Company has no obligation for warranties on
hardware sales, because the warranty is provided by the manufacturer.
The Company does not offer a warranty policy for services to customers.
F-10
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Advertising Costs
The Company generally expenses production costs of print
advertisements as of the first date the advertisements take place.
Advertising expense, included in selling, general and administrative
expenses, was $0.7 million in 1998, $0.9 million in 1997, $0.5 million
in 1996.
Income Taxes
The Company accounts for income taxes in accordance with FAS 109,
Accounting for Income Taxes, which requires the asset and liability
approach for the financial accounting and reporting for income taxes.
Income taxes include U.S. and international taxes. The Company and its
U.S. subsidiaries file a consolidated federal income tax return.
Income taxes are paid by the parent company and are allocated to each
subsidiary through intercompany charges.
Minority Interest
The Company has recorded the minimum liability for minority interest
put rights.
Earnings Per Common And Common Share Equivalent
The Company has adopted the provisions of FAS 128, Earnings Per Share,
effective December 31, 1997. FAS 128 requires the presentation of
basic and diluted earnings per share (EPS). Basic EPS is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted
EPS is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common
shares consist of incremental shares issuable upon exercise of stock
options and warrants, conversion of preferred stock outstanding and
contingently issuable shares. All prior period earnings per share
amounts have been restated to comply with FAS 128.
New Accounting Standards
In 1998, the Company adopted FAS 131, Disclosures about Segments of an
Enterprise and Related Information. FAS 131 supersedes FAS 14,
Financial Reporting for Segments of a Business Enterprise, replacing
the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used
by management for making operating decisions and assessing performance
as the source of the Company's reportable segments. FAS 131 also
requires disclosures about products and services, geographic areas,
and major customers. The adoption of FAS 131 did not affect results of
operations or financial position but did affect the disclosure of
segment information (see Note 20).
In 1998, the Company adopted FAS 130, Reporting Comprehensive Income,
which establishes standards for reporting and disclosure of
comprehensive income and its components. The Company's comprehensive
income consists of foreign currency translation adjustments and is
reported in the consolidated statements of stockholders' equity.
F-11
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
2. Acquisitions
The following represents acquisitions which occurred in 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
Common/
Date Of Percent Acquisition Preferred
Acquisition Acquired Price Shares Issued Business Description
<S> <C> <C> <C> <C> <C>
1998 Acquisitions
Information Products Center, Inc. 01/01/98 100% $ 1,297 1,104 Network Infrastructure services provider
Winward Electric 01/01/98 100% 3,606 1,773 Full service electrical and communications
systems contractor
Americom Group 04/01/98 80% 404 227 Provider of communications infrastructure
construction, maintenance, installation and
training services
Aurora Electric, Inc. 04/01/98 100% 1,897 1,098 Full service electrical and communications
system contractor
Blue Star Electronics 04/01/98 80% 431 203 Cable assembly manufacturer
Consolidated Micro Components 04/01/98 100% 698 392 Reseller of memory, processors and mass storage
devices
Data Path Technologies 04/01/98 100% 671 385 Seller of computer systems, peripherals,
components and software
GDB Software Services 04/01/98 100% 681 385 Provider of data processing consulting services
Ground Effects, Ltd. 04/01/98 85% 2,046 1,106 Manufacturer of aluminum and steel tubes
Innovative Vacuum Solutions, Inc. 04/01/98 80% 455 276 Re-manufacturer of high-end vacuum pumps
Service Transport Company 04/01/98 80% 89 35 Transporter of computer systems and electronics
Teledata Concepts, Inc. 04/01/98 100% 308 138 Internet and telecommunications services
provider
TigerTel Services, Ltd. 05/01/98 100% 6,384 3,418 Call centers, voice messaging and one number
dialing services provider
Signature Industries, Ltd. 06/01/98 85% 4,963 3,571 Manufacturer of high-grade communications and
safety devices
1997 Acquisitions
Hopper Manufacturing Co., Inc. 01/01/97 100% 287 179 Re-manufacturer and distributor of automotive
parts
Norcom Resources, Inc. 01/01/97 80% 538 359 Sales, service and support of mainframe
computers
Pizarro ReMarketing, Inc. 01/01/97 80% 356 234 Re-marketing services for the computer disc and
tape industry
MVAK Technologies, Inc. 02/01/97 100% 786 389 Re-manufacturer of vacuum pumps
Advanced Telecommunications, Inc. 05/01/97 80% 3,195 2,824 Telecommunications solutions provider
Signal Processors, Ltd. 05/01/97 80% 1,368 1,391 Manufacturer of satellite communication
technology
Cybertech Station, Inc. 07/01/97 80% 289 222 Provider of computer memory products
DLS Service Corp. 07/01/97 100% 73 58 Value added reseller of computer software
Intermatica, Inc. 07/01/97 100% 753 711 Software sales company
PPL, Ltd. 07/01/97 80% 719 504 Leasing and rental services
STC Netcom, Inc. 07/01/97 80% 1,415 1,600 Communications construction contractor
Alacrity Systems, Inc. 10/01/97 100% 1,348 935 Software developer and marketer
C.T. Specialists, Inc. 10/01/97 100% 1,027 758 Distributor of control systems
Canadian Network Services, Ltd. 10/01/97 100% 1,639 1,404 Provider of extended area calling services
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All of the above acquisitions have been accounted for using the
purchase method of accounting and, accordingly, the consolidated
financial statements reflect the results of operations of each company
from the date of acquisition. The costs of acquisitions include all
payments according to the acquisition agreements plus costs for
investment banking services, legal services and accounting services,
that were direct costs of acquiring these assets. Goodwill resulting
from these acquisitions is being amortized on a straight-line basis,
over twenty years. Certain acquisition agreements include the issuance
of additional shares contingent on profits of the acquired subsidiary,
which continue through 2001. The number of shares to be issued is
variable, based upon future earnings levels achieved by the acquired
companies. Upon issuance of these shares, the value will be recorded
as additional goodwill. The acquisitions above include contingent
shares issued upon attainment of certain profits by subsidiaries
through December 31, 1998. See Note 22 for unaudited pro forma
information for the above acquisitions that occurred in 1998 and 1997.
F-12
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
3. Restructuring
Towards the end of the third quarter of 1997, the Company made a
decision to exit its retail cellular operations. During the fourth
quarter of 1997, the Company completed its exit strategy and incurred
costs related to the restructuring of these operations, including
provisions for terminations of leases and employees and writedown of
the carrying values of inventory and other assets. Costs totalling $1.7
million were included in selling, general and administrative expenses
in 1997 and no material costs are to be incurred in future periods.
All amounts were paid in 1997.
4. Inventories (In thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials $ 4,437 $ 1,962
Work in process 2,349 1,085
Finished goods 15,246 8,721
-------- --------
22,032 11,768
Less: Allowance for excess and obsolescence 1,375 896
-------- --------
$ 20,657 $ 10,872
========= =========
</TABLE>
5. Notes Receivable (In thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Due from purchaser of cellular assets, personally
guaranteed by company owners, bears interest at 6.5%,
$350 due 1/1/99, remaining payable in monthly
installments of $25 including interest starting
July 1999 $ 1,300 $ --
Due from purchaser of interconnect service business,
unsecured, payable in two payments due through December
1999 1,350 1,350
Due from officers of subsidiaries, unsecured, bear
interest at varying interest rates, due on demand 1,594 328
Due from customer, unsecured, bears interest at the
prime rate, due on demand 226 62
Due from other, secured by maker's assets, bears
interest at 8.7% and provides for monthly payments of
principal and interest equal to 10% of the maker's net
cash revenue for each preceding month, balance due
October 2001 575 575
--------- ---------
5,045 2,315
Less: Current portion 3,600 1,040
--------- ---------
$ 1,445 $ 1,275
========= =========
</TABLE>
The Company performs a credit evaluation and considers the holders' financial
condition before entering into notes receivable.
F-13
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
6. Property And Equipment (In thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 755 $ 759
Building and leasehold improvements 4,097 875
Equipment 18,021 8,691
--------- ---------
22,873 10,325
Less: Accumulated depreciation and amortization 7,246 4,986
--------- ---------
$ 15,627 $ 5,339
========= =========
</TABLE>
Included above are vehicles and equipment acquired under capital lease
obligations in the amount of $1,577 and $908 at December 31, 1998 and
1997, respectively. Related accumulated depreciation amounted to $602
and $428 at December 31, 1998 and 1997, respectively.
Depreciation and amortization charged against income amounted to
$2,260, $846 and $207 for the years ended December 31, 1998, 1997 and
1996, respectively.
7. Goodwill (In thousands)
Goodwill consists of the excess of cost over fair value of tangible
and identifiable intangible assets of companies purchased. The Company
applies the principles of Accounting Principles Board (APB) Opinion
No. 16, Business Combinations, and uses the purchase method of
accounting for acquisitions of wholly owned and majority owned
subsidiaries.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Original balance $ 35,920 $ 13,790
Accumulated amortization (2,490) (1,003)
---------- ----------
Carrying value $ 33,430 $ 12,787
========= =========
</TABLE>
Amortization expense amounted to $1,487, $670 and $295 for the year
ended December 31, 1998, 1997, and 1996, respectively.
The Company has entered into various earnout arrangements with the
selling shareholders of certain acquired subsidiaries. These
arrangements provide for additional consideration to be paid in future
years if certain earnings levels are met. These amounts are added to
goodwill as earned.
F-14
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
8. Other Assets (In thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Proprietary software $ 5,586 $ 2,722
Purchased computer software 393 387
Other assets 417 272
------- -------
6,396 3,381
Less: Accumulated amortization 1,730 976
------- -------
4,666 2,405
Investment in preferred stock 3,000 --
Other 704 601
------- -------
$ 8,370 $ 3,006
======= =======
</TABLE>
Amortization of other assets charged against income amounted to $754,
$358 and $210 for the years ended December 31, 1998, 1997 and 1996,
respectively.
9. Notes Payable (In thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Notes payable - banks, collateralized by business
assets and by personal guarantees of
officers/stockholders of certain subsidiaries.
Interest is payable monthly at rates varying from
prime plus 1/2% to prime plus 2-1/4% in 1998. The
credit lines are due through December 1999. $ 5,974 $ 4,505
Revolving credit line - bank, collateralized by all
domestic assets of the Company, bearing interest at
the prime lending rate or the London Interbank Offered
Rate, as elected by the Company, expiring in July 1999 17,193 --
Notes payable - other, unsecured, due on demand 50 278
-------- -------
$ 23,217 $ 4,783
======== =======
</TABLE>
During the third quarter of 1998, the Company entered into a twenty
million dollar line of credit with a bank, collateralized by all
domestic assets of the Company (the "Credit Agreement"), at the prime
lending rate or at the London Interbank Offered Rate, as elected by the
Company. 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.
As of December 31, 1998, the outstanding balance was $17,193 and the
availability was $2,807.
On February 4, 1999, the bank increased the amount available under the
revolving line of credit to twenty-three million dollars.
The weighted average interest rate was 8.8% and 9.8% for the years
ended December 31, 1998 and 1997, respectively.
F-15
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
10. Long-Term Debt (In thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Notes payable - banks, collateralized by subsidiaries' business assets,
payable in monthly installments totalling $28 plus interest at rates of
prime plus 1.5% and prime plus 2.5% in 1997, originally due through May
2001, paid
off in 1998 $ -- $ 1,105
Notes payable - bank, collateralized by land,
building and aassets, payable in monthly
installments of principal and interest totalling
$25, bearing interest at rates between 8.15% and
prime plus 1.5%, due through October 2002 805 --
Note payable - bank, collateralized by subsidiary's
business assets, payable in monthly principal
payments of $62 plus interest at the prime rate
plus 1/2%, due in November 2002 1,402 --
Mortgage notes payable - bank, collateralized by
buildings, payable in monthly installments of
principal and interest totalling $8, bearing
interest at rates ranging from 4.2% to 10.75% in
1998 and $5, bearing interest at 9.5% in 1997,
due through April 2028 802 529
Notes payable - finance companies and banks,
collateralized by vehicles, payable in monthly
principal installments of $6, bearing interest at
rates ranging from 8.0% to 10.9% in 1998 and $6,
bearing interest at rates ranging from 9.75% to 10.9%
in 1997, due through June 2003 132 114
Notes payable - bank, collateralized by business
assets, payable in monthly installments of principal
and interest totalling $23, bearing interest at
rates ranging from 5.61% to prime plus 2%, due
through June 2003 118 869
Capital lease obligations 737 425
------- -------
3,996 3,042
Less: Current maturities 1,158 843
------- -------
$ 2,838 $ 2,199
======= =======
</TABLE>
The scheduled maturities of long-term debt at December 31, 1998 are as
follows:
Year Amount
1999 $ 1,158
2000 907
2001 689
2002 546
2003 177
Thereafter 519
-------
$ 3,996
=======
Interest expense on the long and short-term notes payable (including
notes payable in Note 9) amounted to $1,653, $978 and $200 for the
years ended December 31, 1998, 1997, 1996, respectively.
F-16
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
11. Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the short
maturity of those instruments.
Notes Receivable
The carrying value of the notes approximate fair value because either
the interest rates of the notes approximate the current rate that the
Company could receive on a similar note, or because of the short-term
nature of the notes.
Notes Payable
The carrying amount approximates fair value because of the short-term
nature of the notes.
Long-term Debt
The carrying amount approximates fair value because either the stated
interest rates fluctuate with current market rates or the interest
rates approximate the current rates at which the Company could borrow
funds on a similar note.
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value.
12. Income Taxes (In thousands)
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
United States at statutory rates $1,747 $1,570 $ 477
International 930 533 --
Current taxes covered by net operating
loss -- (88) (32)
------- ------- ------
Current income tax provision 2,677 2,015 445
------- ------- ------
Deferred:
United States 94 (246) (83)
International (183) -- --
------- ------- ------
Deferred income taxes provision (credit) (89) (246) (83)
------- ------- ------
$2,588 $1,769 $ 362
======= ======= ======
</TABLE>
F-17
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred Tax Assets:
Liabilities and reserves $ 557 $ 269
Net operating loss carryforwards 3,892 3,749
-------- --------
Gross deferred tax assets 4,449 4,018
Valuation allowance (2,994) (3,514)
-------- --------
1,455 504
-------- --------
Deferred Tax Liabilities:
Accounts Receivable 719 --
Notes Receivable 361 --
Property and equipment 10 45
Intangible assets 365 59
-------- --------
1,455 104
-------- --------
Net Deferred Tax Asset $ -- $ 400
======== ========
</TABLE>
The valuation allowance for deferred tax asset decreased by $520 in
1998 and increased by $3,514 in 1997. Management has recorded a
valuation allowance as it believes sufficient uncertainty exists
regarding the realizability of the net deferred tax asset.
Approximate domestic and international income before provision for
income taxes consists of :
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Domestic $ 5,082 $ 3,132 $ 1,180
International 2,620 1,674 --
------- ------- -------
$ 7,702 $ 4,806 $ 1,180
======= ======= =======
</TABLE>
At December 31, 1998, the company had aggregate net operating loss
carryforwards of approximately $10,200 for income tax purposes which
expire in various amounts through 2012. The net operating loss
carryforwards were acquired in connection with various 1997 and 1998
acquisitions and are limited as to use in any particular year based on
Internal Revenue Code sections related to separate return year and
change of ownership restrictions. Utilization of the Company's net
operating loss carryforwards are estimated to be limited to
approximately $941 per year. When realized, the tax benefit of the
acquired net operating loss carryforwards will be recorded a reduction
of goodwill or other long-term assets.
The reconciliation of the effective tax rate with the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
% % %
---- ---- ----
Statutory rate 34 34 34
State income taxes, net of federal benefits 5 7 4
International tax rates different from the
the statutory US federal rate -- (3) --
Realization of deferred tax asset valuation
allowance (6) (5) (3)
Other 1 4 (4)
---- ---- ----
34 37 31
==== ==== ====
</TABLE>
F-18
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
13. Earnings Per Share (In thousands, except per share data)
In accordance with the disclosure requirements of FAS 128, a reconciliation
of the numerator and denominator of basic and diluted EPS is provided as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Numerator:
Net income $ 4,690 $ 2,340 $ 686
Preferred stock dividends (44) (72) (60)
-------- -------- --------
Numerator for basic earnings per share -
net income available to common
stockholders 4,646 2,268 626
Effect of dilutive securities:
Preferred stock dividends 44 72 60
-------- -------- --------
Numerator For Diluted Earnings
Per Share - Income Available To
Common Stockholders $ 4,690 $ 2,340 $ 686
======== ======== ========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 32,318 12,632 3,329
-------- -------- --------
Effect of dilutive securities:
Redeemable preferred stock 85 998 580
Warrants 477 779 628
Employee stock options 266 451 104
Contingent stock - acquisitions 1,654 385 --
-------- -------- --------
Dilutive potential common shares 2,482 2,613 1,312
-------- -------- --------
Denominator For Diluted Earnings
Per Share - Adjusted Weighted-
Average Shares And Assumed
Conversions 34,800 15,245 4,641
======== ======== ========
Basic Earnings Per Share $ .14 $ .18 $ .19
Diluted Earnings Per Share $ .13 $ .15 $ .15
</TABLE>
14. Commitments And Contingencies
Rentals of space, vehicles, and office equipment under operating leases
amounted to approximately $3.9 million, $2.7 million and $0.8 million
for the years ended December 31, 1998, 1997, and 1996, respectively.
The Company has entered into employment contracts with key officers and
employees of the Company 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
of the particular subsidiary.
F-19
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
The approximate minimum payments required under operating leases and
employment contracts that have initial or remaining terms in excess of
one year at December 31, 1998 are (in thousands):
<TABLE>
<CAPTION>
Minimum Employment
Year Rental Payments Contracts
<S> <C> <C>
1999 $ 3,753 $ 7,400
2000 3,251 6,700
2001 2,740 5,000
2002 2,195 4,000
2003 1,316 1,600
Thereafter 2,775 800
-------- --------
$ 16,030 $ 25,500
======== ========
</TABLE>
The Company has entered into put options with the selling shareholders
of various companies in which the Company acquired less than a 100%
interest. These options provide for the Company to acquire the
remaining portion it does not own after periods ranging from 4 to 5
years from the dates of acquisition at amounts generally equal to
10%-20% of the average annual earnings of the company before income
taxes for the two-year period ending the effective date of the put
multiplied by a multiple ranging from 4 to 5.
The employment agreements for three officers of the Company include
certain "change of control" provisions. At the employee's option, he
may terminate his employment under the agreement at any time within one
year after such change of control. The Company shall pay to the
employee a severance payment based on formulas relating to parachute
payment provisions of the Internal Revenue Code and prior compensation.
Additionally, the agreements for two officers provide for certain
"triggering events" which include a change in control of the Company
and the termination of employment other than for cause. Upon the
occurrence of a triggering event, the Company shall pay, in cash or in
stock, or in a combination thereof, $12.1 million and $3.5 million,
respectively, to these two officers.
15. Profit Sharing Plan
The Company has a Section 401(k) Plan for the benefit of eligible
United States employees. The Company has made no contributions to the
Section 401(k) Plan.
The Company's International subsidiaries operate certain defined
contribution pension schemes. The Company's expense relating to the
schemes approximated $0.3 million in 1998.
16. Redeemable Preferred Shares
In March 1996, the Company issued nine thousand 8% convertible
preferred shares at $100 per share, in exchange for 80% of Burling
Instruments, Inc. If, and to the extent, the preferred shares had not
been converted to common stock by the second anniversary of the initial
issuance of the shares, the Company was required to redeem the
preferred shares by paying $100 per share. Each holder of the preferred
shares had the ability to convert their preferred shares into common
shares by dividing the redemption price ($100) by $5.75 per common
share. The shares were redeemed in 1998.
F-20
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
In October 1996, the Company issued one hundred thousand 8% redeemable
preferred shares at $100 per share as partial consideration for the
100% purchase of ATI Communications. There was no existing market for
these shares. During 1997, the one hundred thousand shares of
preferred stock were redeemed for 1.4 million of the Company's common
shares, valued at $2,500. The purchase price of ATI Communications has
been revised to reflect the fair value of the final consideration
given.
17. Stockholders' Equity
Preferred Shares
The Company has authorized 5 million 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 shares
of Commstar not owned by the Company that can be exchanged for the
Company's common shares. 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 of
Commstar's 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 the right to call the outstanding
exchangeable shares with the occurrence of various events including
liquidation of Commstar and at the five-year anniversary date of the
acquisition. The Company initially reserved 3.4 million shares of its
Common Stock to be exchanged for exchangeable shares held by the
Commstar selling shareholders, 1.4 million of which have been exchanged
into shares of Common Stock and 2.0 million are reserved at December
31, 1998. On July 30, 1998, Commstar acquired certain assets from
Western Inbound Network, Inc., an Ontario corporation, in consideration
for 0.4 million exchangeable shares.
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 shares of Ground Effects not owned by the
Company that can be exchanged for the Company's common shares. 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 of Ground
Effects have been exchanged or redeemed for shares of the Company's
Common Stock, the Special Preferred Share will be cancelled. The
Company has the right to call the outstanding exchangeable shares with
the occurrence of various events including liquidation of Ground
Effects and at the five-year anniversary date of the acquisition. The
Company has reserved 1.1 million shares of its Common Stock to be
exchanged for exchangeable shares held by Ground Effects selling
shareholders, 0.2 million of which have been exchanged into shares of
common stock and 0.9 million are reserved as of December 31, 1998.
Since the Preferred Shares provide votes for the equivalent number of
common shares that may be exchanged and the common shares may be
exchanged at any time at the holders' option, for purposes of computing
basic and diluted earnings per share (Note 13), the reserved common
shares are considered to be outstanding for all periods that the
Preferred Shares are issued.
F-21
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Warrants
Warrants are valued at fair value at the date of grant.
The Company has issued warrants convertible into shares of common
stock for consideration, as follows (in thousands, except exercise
price):
<TABLE>
<CAPTION>
Class Of Exercise Exercisable
Warrants Authorized Issued Exercised Price Date Of Issue Period
<S> <C> <C> <C> <C> <C> <C>
Class F 300 300 260 $ 2.50 December 1994 5 years
Class H 450 450 350 2.00 August 1995 5 years
Class K 250 250 -- 5.31 September 1996 5 years
Class L 51 51 50 5.35 October 1996 5 years
Class L 74 74 -- 3.00 October 1996 5 years
Class N 800 800 600 3.00 August 1997 5 years
Class P 520 520 -- 3.00 September 1997 5 years
Class Q 250 250 250 8.38 September 1997 5 years
Class R 125 125 -- 8.38 October 1997 5 years
Class S 600 600 -- 2.00 April 1998 5 years
Class U 250 250 -- 8.38 November 1998 5 years
----- ----- -----
3,670 3,670 1,510
===== ===== =====
</TABLE>
Stock Option Plan
During 1996, the Company adopted a non-qualified stock option plan
(the Option Plan) and applies APB 25 and related Interpretations in
accounting for the Option Plan. Under the Option Plan, options are
granted at an exercise price equal to fair value on the date of grant.
Accordingly, no compensation cost has been recognized. Had
compensation cost for the Option Plan been determined based on the
fair value at the grant dates for awards under the Option Plan,
consistent with the alternative method set forth under FAS 123,
Accounting for Stock-Based Compensation, the Company's net income
applicable to common stockholders and earnings per common and common
equivalent share would have been reduced. The pro forma amounts are
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Income Available To Common
Stockholders
As reported $ 4,646 $ 2,268
Pro forma $ 2,408 $ 1,614
Earnings Per Common Share - Basic
As reported $ .14 $ .18
Pro forma $ .07 $ .13
Earnings Per Common Share - Diluted
As reported $ .13 $ .15
Pro forma $ .07 $ .11
</TABLE>
Under the Option Plan, options for ten million and five million common
shares were authorized for issuance to certain officers and employees
of the Company at December 31, 1998 and 1997 respectively, of which 9.8
million had been issued through December 31, 1998. The options may not
be exercised until one to three years after the options have been
granted, and are exercisable for a period of five years.
F-22
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997: dividend
yield of 0% in both years; expected volatility of 43.69% and 44.03%;
risk-free interest rate of 8.5% for both years; and expected lives of 5
years for both years. The weighted-average fair value of options
granted was $1.27 for the year ended December 31, 1998 and $1.58 for
the year ended December 31, 1997.
A summary of stock option activity for 1998 and 1997 is as follows (in
thousands, except for per share data):
<TABLE>
<CAPTION>
1998 1997
--------------------- -------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding on January 1 3,835 $ 4.39 2,180 $ 4.40
Granted 5,367 2.80 2,487 4.62
Exercised -- (650) 4.25
Forfeited (97) 4.79 (182) 4.23
----- ------- ------ -------
Outstanding on December 31 9,105 3.55 3,835 4.39
----- ------- ------ -------
Exercisable on December 31 2,885 4.48 705 4.44
----- ------- ------ -------
Shares available on December 31 for
options that may be granted 450 1,145
----- ------
</TABLE>
The following table summarizes information about stock options at December 31,
1998 (in thousands, except for exercise price data and contractual life):
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Stock Options
------------------------------------------------ -------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range Of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
<S> <C> <C> <C> <C> <C>
$2.00 to $3.00 2,825 6.22 $ 2.35 70 $ 2.71
$3.01 to $4.00 3,446 5.49 3.53 930 3.93
$4.01 to $5.00 1,929 4.70 4.38 1,185 4.38
$5.01 to $6.00 855 5.03 5.53 700 5.57
$6.01 to $7.00 50 5.76 6.99 -- --
------ ------ ----- ------
$2.00 to $7.00 9,105 $ 3.55 2,885 $ 4.48
====== ====== ===== ======
</TABLE>
18. Legal Proceedings
The Company is party to various legal proceedings. In the opinion of
management, these proceedings are not likely to have a material adverse
affect on the financial position or overall trends in results of the
Company. The estimate of potential impact on the Company's financial
position, overall results of operations or cash flows for the above
legal proceedings could change in the future.
F-23
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
19. Supplemental Cash Flow Information
The changes in operating assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
For The Years Ended December 31,
-----------------------------------
1998 1997 1996
<S> <C> <C> <C>
(Increase) decrease in accounts receivable
and unbilled receivables $ (1,922) $ (3,992) $ 65
Increase in inventories (4,148) (657) (826)
Increase in prepaid expenses (422) (676) (140)
Increase in deferred tax asset (89) (121) (83)
Increase (decrease) in accounts payable
and accrued expenses (4,944) (1,103) (1,990)
---------- --------- ---------
$ (11,525) $ (6,549) $ (2,974)
========== ========= =========
</TABLE>
In the years ended December 31, 1998, 1997 and 1996, the Company had
the following noncash investing and financing activities (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Payment of debt in exchange for common stock $ -- $ 521 $ 300
Assets acquired for long-term debt 2,042 490 --
Assets acquired for common stock 25,408 13,485 14,396
Capital leases 593 124 128
Sale of assets for preferred stock 3,000 -- --
Other 132 -- 37
</TABLE>
On December 31, 1998, the Company entered into a Purchase and Sale
Agreement for the sale of certain of its cellular assets. In
consideration, the Company received one thousand shares of 6% first
series preferred stock of the purchaser of the cellular assets in the
face amount and having a liquidation value of $1 million. The first
series preferred stock may be redeemed at any time through December 31,
2004. This sale resulted in a gain of $647,000 included in operating
income.
On December 31, 1998, the Company entered into an Agreement for Sale of
Stock for the sale of its investment in a subsidiary company. In
consideration, the Company received two thousand shares of 6% preferred
stock of the purchaser of the subsidiary in the face amount and having
a liquidation value of $2 million, due December 31, 2003. This sale
resulted in a gain of $86,000 included in operating income.
20. Segment Information
In 1998, the Company adopted FAS No. 131. Prior year information has
been restated to present the Company's reportable segments.
The Company is organized into seven operating segments. The seven
segments and their principal products and services are as follows:
F-24
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Operating Segment Principal Products and Services
Telecommunications o Telephone services and systems
o Computer telephony integration
o Interactive voice response
o Call centers
o Voice messaging
Network Infrastructure o Computer systems
o Local area networks
o Application servers
Internet o Electronic commerce
o Intranet
o Extranet
o Wide area networks
Communications Infrastructure o Communications towers
o Fiber optics
o Cabling
o Power distribution
o Communications equipment
Application Technology o Global positioning systems
o Field automation
o Asset management
o Satellite systems
o Corporate enterprise access
o Decision support
o Voice/data technology
Inteletek o Purchase/sale of new and used computer
equipment
o Peripherals
o Components
o Business continuity services
o Consulting
o Systems integration
Non-Core o Transportation
o Electrical components
o Control panels
o Design engineering
o Manufacturing engineering
o Automation systems
o Vacuum pumps
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies, except that
intersegment sales and transfers are generally accounted for as if the sales or
transfers were to third parties at current market prices; segment data includes
an allocated charge for the corporate headquarters costs; and segment income tax
expense is allocated to the segments by an application of the effective tax rate
to the profit or loss of each segment. It is on this basis that management
utilizes the financial information to assist in making internal operating
decisions. The Company evaluates performance based on stand alone segment
operating income.
F-25
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
The "Eliminations" category includes all amounts recognized upon
consolidation of the Company's subsidiaries such as the elimination of
intersegment revenues, expenses, assets and liabilities and goodwill
amortization expense.
<TABLE>
<CAPTION>
1998 (In thousands)
Communi-
Network cations
Telecommun- Infra- Infra- Application Corporate Elimina- Consol-
ications structure Internet structure Technology Inteletek Non-Core Overhead tions idated
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue from external
customers $ 30,369 $ 21,282 $ 2,901 $ 43,729 $ 19,859 $ 60,877 $ 28,064 $ -- $ -- $207,081
Intersegment net revenue -- -- -- -- -- 1,949 -- -- (1,949) --
-------- -------- ------- -------- -------- -------- -------- --------- -------- --------
Total revenue 30,369 21,282 2,901 43,729 19,859 62,826 28,064 -- (1,949) 207,081
======== ======== ======= ======== ======== ======== ======== ========= ======== ========
Depreciation and
amortization 653 39 24 458 1,241 251 477 137 1,221 4,501
Operating income 852 1,563 272 3,789 1,424 4,509 1,122 (3,376) (1,220) 8,935
Interest income 128 14 1 71 47 45 12 686 (584) 420
Interest expense 468 144 63 111 192 340 448 471 (584) 1,653
Income tax expense
(benefit) (935) 498 43 1,050 (359) 757 163 440 931 2,588
Segment assets 21,066 5,528 923 13,497 22,849 13,595 15,777 147,518 (116,637) 124,116
Expenditures for property 226 46 5 574 73 138 214 674 -- 1,950
</TABLE>
<TABLE>
<CAPTION>
1997 (In thousands)
Communi-
Network cations
Telecommun- Infra- Infra- Application Corporate Elimina- Consol-
ications structure Internet structure Technology Inteletek Non-Core Overhead tions idated
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue from external
customers $ 32,208 $ -- $ -- $ 8,545 $ 9,574 $ 39,445 $ 13,387 $ -- $ -- $103,159
Intersegment net revenue -- -- -- -- -- 2,127 -- -- (2,127) --
-------- -------- ------- -------- -------- -------- -------- --------- -------- --------
Total revenue 32,208 -- -- 8,545 9,574 41,572 13,387 -- (2,127) 103,159
======== ======== ======= ======== ======== ======== ======== ========= ======== ========
Depreciation and
amortization 300 -- -- 104 459 108 173 17 713 1,874
Operating income 1,477 -- -- 348 2,159 2,356 626 (665) (709) 5,592
Interest income 62 -- -- 1 26 1 6 130 (34) 192
Interest expense 491 -- -- 44 103 152 212 9 (33) 978
Income tax expense
(benefit) 251 -- -- 125 312 883 161 (203) 240 1,769
Segment assets 12,559 -- -- 4,490 77,886 8,736 8,177 3,523 (54,089) 61,282
Expenditures for property 118 -- -- 62 141 364 216 15 -- 916
</TABLE>
F-26
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
1996 (In thousands)
Communi-
Network cations
Telecommun- Infra- Infra- Application Corporate Elimina- Consol-
ications structure Internet structure Technology Inteletek Non-Core Overhead tions idated
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue from external
customers $ 10,537 $ -- $ -- $ -- $ 3,394 $ 1,993 $ 3,839 $ 120 $ -- $ 19,883
Intersegment net revenue -- -- -- -- -- -- -- -- -- --
-------- -------- ------- -------- -------- -------- -------- --------- -------- --------
Total revenue 10,537 -- -- -- 3,394 1,993 3,839 120 -- 19,883
======== ======== ======= ======== ======== ======== ======== ========= ======== ========
Depreciation and
amortization 83 -- -- -- 241 2 37 9 340 712
Operating income 896 -- -- -- (68) 504 444 241 (763) 1,254
Interest income 31 -- -- -- -- 1 4 90 -- 126
Interest expense 137 -- -- -- 23 10 23 7 -- 200
Income tax expense
(benefit) 296 -- -- -- (181) 190 158 (37) (64) 362
Segment assets 24,280 -- -- -- 24,198 1,920 2,608 3,033 (22,831) 33,208
Expenditures for property 25 -- -- -- 26 8 13 37 -- 109
</TABLE>
Revenues are attributed to geographic areas based on the location of the assets
producing the revenues. Information concerning principal geographic areas as of
and for the years ended December 31, was as follows (in thousands):
<TABLE>
<CAPTION>
United
United States Canada Kingdom Consolidated
<S> <C> <C> <C> <C>
1998
Net revenue $ 172,369 $ 22,017 $ 12,695 $ 207,081
Total assets 91,458 18,137 14,521 124,116
1997
Net revenue $ 96,796 $ 1,381 $ 4,982 $ 103,159
Total assets 56,177 1,254 3,851 61,282
1996
Net revenue $ 19,883 $ -- $ -- $ 19,883
Total assets 33,208 -- -- 33,208
</TABLE>
F-27
<PAGE>
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
21. Related Party Transactions
In connection with the acquisitions which took place in 1998, 1997 and
1996, the Company paid a related party, $0.6 million, $0.5 million and
$0.5 million, respectively, for investment banking services. These
payments were included in the total cost of assets purchased and are
being amortized over the life of the related assets.
In 1998, the Company sold its investment in a subsidiary company to a
related party for two thousand shares of preferred stock.
22. Pro Forma Information (Unaudited)
The following pro forma consolidated information of the Company for
the years ended December 31, 1998 and 1997 gives effect to the
acquisitions, disclosed in Note 2, as if they were effective at
January 1, 1997. The statement gives effect to the acquisitions under
the purchase method of accounting.
The pro forma information may not be indicative of the results that
would have actually occurred if the acquisitions had been effective on
the dates indicated or of the results that may be obtained in the
future. The pro forma information should be read in conjunction with
the consolidated financial statements and notes thereto of the
Company.
<TABLE>
<CAPTION>
Pro Forma
(In thousands)
December 31,
----------------------------
<S> <C> <C>
1998 1997
Net operating revenue $ 230,425 $ 231,151
Net income 2,803 2,873
Net income available to common stockholders 2,759 2,312
Earnings per common share - basic .08 .08
Earnings per common share - diluted .08 .07
</TABLE>
F-28
<PAGE>
<TABLE>
APPLIED CELLULAR TECHNOLOGY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<CAPTION>
Additions
--------------------------
Balance At Charged To Valuation Balance At
Beginning Cost And Accounts End Of
Description Of Period Expenses Acquired Deductions Period
- ------------------------------------------------------------------------- -------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Valuation reserve deducted in the balance sheet from the
asset to which it applies:
Accounts Receivable:
1998 Allowance for doubtful accounts $ 675 $ 1,031 $ 262 $ 978 $ 990
1997 Allowance for doubtful accounts 101 328 270 24 675
1996 Allowance for doubtful accounts --- 43 100 42 101
Inventory:
1998 Allowance for excess and obsolescence 896 468 11 --- 1,375
1997 Allowance for excess and obsolescence --- --- 1,108 212 896
1996 Allowance for excess and obsolescence --- --- --- --- ---
</TABLE>
F-29
<PAGE>
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.
F-30
<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.
F-31
<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.
F-32
<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.
F-33
<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
F-34
<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.
F-35
<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.
F-36
<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>
F-37
<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.
F-38
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
PROFIT AND LOSS ACCOUNTS
for the years ended 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
Notes (pound)000 (pound)000
<S> <C> <C> <C>
TURNOVER 2 12,266 14,820
Cost of sales 7,499 8,590
---------- ----------
Gross profit 4,767 6,230
Administrative expenses 5,693 5,337
---------- ----------
OPERATING (LOSS)/PROFIT 3 (926) 893
Bank interest receivable 26 23
Interest payable 6 (138) (151)
---------- ----------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (1,038) 765
Taxation 7 (57) 145
---------- ----------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION (981) 620
Dividends on non-equity shares 8 282 332
---------- ----------
RETAINED (LOSS)/PROFIT FOR THE YEAR (1,263) 288
========== ==========
</TABLE>
There are no recognised gains or losses other than as shown above.
A statement of the movement on reserves is shown in note 19 to the accounts.
A summary of the significant adjustments to (loss)/profit on ordinary activities
after taxation that would be required if United States generally accepted
accounting principles were to be applied instead of those generally accepted in
the United Kingdom is shown in note 23 to the accounts.
1
F-39
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
BALANCE SHEETS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
Notes pound)000 pound)000
<S> <C> <C> <C>
FIXED ASSETS
Intangible assets 9 1,246 1,371
Tangible assets 10 951 1,111
Investments 11 290 290
------- -------
2,487 2,772
------- -------
CURRENT ASSETS
Stocks 12 1,514 1,555
Debtors 13 1,979 3,321
Cash at bank and in hand 2 1,032
------- -------
3,495 5,908
CREDITORS: amounts falling due within one year 14 2,944 4,758
------- -------
NET CURRENT ASSETS 551 1,150
------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES 3,038 3,922
CREDITORS: amounts falling due after more than one year 16 171 159
------- -------
2,867 3,763
======= =======
CAPITAL RESERVES
Called up share capital 18 370 370
Share premium account 19 3,330 3,330
Profit and loss account 19 (833) 63
------- -------
Shareholders' funds (including non-equity interests) 19 2,867 3,763
======= =======
</TABLE>
A summary of the significant adjustments to shareholders' funds that would be
required if United States generally accepted accounting principles were to be
applied instead of those generally accepted in the United Kingdom is shown in
note 23 to the accounts.
2
F-40
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
for the years ended 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
Notes (pound)000 (pound)000
<S> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES 3(b) 24 1,273
----------- -----------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 26 23
Interest paid (36) (75)
Interest element of finance lease rental payments (17) (2)
Preference dividends paid (400) -
----------- -----------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS
AND SERVICING OF FINANCE (427) (54)
----------- -----------
TAXATION
Corporation tax paid (201) (10)
----------- -----------
CAPITAL EXPENDITURE
Payments to acquire tangible fixed assets (79) (280)
Receipts from sales of tangible fixed assets - 16
----------- -----------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE (79) (264)
----------- -----------
NET CASH (OUTFLOW)/INFLOW BEFORE FINANCING (683) 945
=========== ===========
FINANCING
Repayments of borrowings 17 500 500
Capital element of finance lease rental payments 17 66 15
----------- -----------
NET CASH OUTFLOW FROM FINANCING 566 515
(DECREASE)/INCREASE IN CASH (1,249) 430
----------- -----------
(683) 945
=========== ===========
</TABLE>
<TABLE>
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET (DEBT)/FUNDS
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
(Decrease)/increase in cash in the year (1,249) 430
Net cash outflow from decrease in debt and lease financing 566 515
----------- -----------
Change in net cash resulting from cash flows (683) 945
New finance leases (115) (215)
----------- -----------
Movement in net (debt)/funds in the year (798) 730
Net funds/(debt) at beginning of year 186 (544)
----------- -----------
Net (debt)/funds at end of year (612) 186
=========== ===========
</TABLE>
A summary of the significant differences between the cashflow statements
presented above and those required under United States generally accepted
accounting principles were to be applied instead of those generally accepted in
the United Kingdom is shown in note 23 to the accounts.
3
F-41
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
Accounting convention
The accounts are prepared under the historical cost convention and in accordance
with applicable United Kingdom accounting standards.
Group accounts
The company is not required to prepare group accounts by virtue of S229(5) of
the Companies Act 1985, on the grounds that the inclusion of its subsidiary
undertaking is not material for the purpose of giving a true and fair view.
The accounts therefore present information about the company as an individual
undertaking and not about its group.
Goodwill
Goodwill is the difference between the amount paid on the acquisition of the
business and the aggregate fair value of its separable net assets. It is being
written off in equal annual instalments over its estimated economic life of 15
years.
Depreciation
Depreciation is provided on all tangible fixed assets at rates calculated to
write off the cost less estimated residual value, of each asset evenly over its
expected useful life, as follows:
Short leasehold buildings - 10 - 20 years
Plant and machinery - 2 - 10 years
Fixtures and fittings - 10 years
Computer equipment - 5 years
Stocks
Stocks are stated at the lower of cost and net realisable value as follows:
Cost incurred in bringing each product to its present location and condition:
Raw materials and goods for resale - purchase cost on a first-in,
first-out basis.
Work in progress and finished goods - cost of direct materials and labour
plus attributable overheads based on a normal level of activity.
Net realisable value is based on estimated selling price less any further costs
expected to be incurred to completion and disposal.
Research and development
Research and development expenditure is now written off as incurred.
4
F-42
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (continued)
Provision for warranties
Provisions for the estimated costs of maintenance under warranties are charged
to the profit and loss account in the year of sale.
Deferred taxation
Deferred taxation is provided on the liability method on all timing differences
which are expected to reverse in the future without being replaced, calculated
at the rate at which it is estimated that taxation will be payable.
Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling at the date
of the transaction.
Leasing and hire purchase commitments
Assets held under finance leases, which are leases where substantially all the
risks and rewards of ownership of the asset have passed to the company, and hire
purchase contracts are capitalised in the balance sheet and are depreciated over
their useful lives. The capital elements of future obligations under the leases
and hire purchase contracts are included as liabilities in the balance sheet.
The interest elements of the rental obligations are charged in the profit and
loss account over the periods of the leases and hire purchase contracts and
represent a constant proportion of the balance of capital repayments
outstanding.
Rentals paid under operating leases are charged to income on a straight line
basis over the lease term.
Pensions
The company operates a defined contribution pension scheme. Contributions are
charged to the profit and loss account as they become payable in accordance with
the rules of the scheme.
Statutory accounts
These accounts do not comprise the company's statutory accounts within the
meaning of the Companies Act 1985. Statutory accounts for years ended 31 March
1998 and 1997, on which the auditors reports were unqualified, have been
delivered to the registrar of Companies for England and Wales.
2. TURNOVER
Turnover, which is stated net of value added tax, represents amounts invoiced to
third parties and is attributable to the principal activity of the company, all
of which is continuing.
An analysis of turnover by geographical market is given below:
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
United Kingdom 10,065 11,524
Other European Union 1,325 1,415
Other 876 1,881
----------- -----------
12,266 14,820
=========== ===========
</TABLE>
5
F-43
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
3. OPERATING (LOSS)/PROFIT
(a) This is stated after charging/(crediting):
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Auditors' remuneration - audit services 21 18
- non-audit services 19 18
Depreciation on owned assets 306 250
Depreciation on assets held under finance leases 44 14
Amortisation of goodwill 125 125
Operating lease rentals - plant and machinery 36 33
- land and buildings 213 206
- other 170 207
Rentals receivable from short term hire of assets (351) (168)
Investment and bringing to market new products 511 459
Redundancy and reorganisation costs 156 -
========== ==========
</TABLE>
(b) Reconciliation of operating (loss)/profit to net cash inflow from operating
activities:
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Operating (loss)/profit (926) 893
Depreciation 350 264
Amortisation of goodwill 125 125
Loss/(gain) on disposal of tangible fixed assets 4 (5)
Loss on disposal of intangible fixed assets - 34
Decrease in stocks 41 192
Decrease/(increase) in debtors 1,455 (725)
(Decrease)/increase in creditors (1,025) 495
----------- ----------
Net cash inflow from continuing operating activities 24 1,273
=========== ==========
</TABLE>
4. DIRECTORS' REMUNERATION
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Payments to third parties in respect of services as directors 46 37
Other emoluments 228 259
Pension scheme contributions 19 18
Ex Gratia payments 22 -
---------- -----------
315 314
=========== ==========
</TABLE>
The number of directors to whom retirement benefits are accruing in respect of
qualifying services under a money purchase scheme is 3 (1997 - 3).
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Emoluments of the highest paid director:
Other emoluments 101 117
Pension scheme contributions 9 8
----------- -----------
110 125
=========== ==========
</TABLE>
6
F-44
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
5. STAFF COSTS
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Sub-contract/temps 526 587
Wages and salaries 3,821 3,898
Social security costs 325 340
Other pension costs 97 97
----------- -----------
4,769 4,922
=========== ==========
</TABLE>
The average weekly number of employees during the year was as follows:
<TABLE>
<CAPTION>
1998 1997
No. No.
<S> <C> <C>
Sales and office management 118 119
Manufacturing 145 154
----------- -----------
263 273
=========== ==========
</TABLE>
6. INTEREST PAYABLE
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Bank loan and overdraft and other loans wholly
repayable within five years 36 75
Unpaid preference dividends 85 74
Finance charges payable under finance leases
and hire purchase contracts 17 2
----------- -----------
138 151
=========== ==========
</TABLE>
7. TAXATION
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
UK corporation tax (110) 145
Corporation tax overprovided in prior year (44) -
ACT written off 97 -
----------- -----------
(57) 145
=========== ==========
</TABLE>
A deferred tax asset, arising from timing differences in respect of depreciation
charged in advance of capital allowances, has not been recognised.
7
F-45
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
8. DIVIDENDS ON NON-EQUITY SHARES
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
10% cumulative `A' preference shares 202 185
5% cumulative `B' preference shares 80 70
Preferred ordinary shares - 77
----------- -----------
282 332
=========== ==========
</TABLE>
Due to the non-redemption of 400,000 `A' preference shares on 30 April 1996 and
30 April 1997, and the non-redemption of 280,000 `B' preference shares on 30
April 1997, the dividend rate on these shares has increased from 10% to 14% and
5% to 9% respectively with effect from that date.
9. INTANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
Development
Goodwill expenditure Total
(pound)000 (pound)000 (pound)000
<S> <C> <C> <C>
Cost:
At 1 April 1996 1,871 46 1,917
Written off during the year - (46) (46)
----------- ----------- -----------
At 31 March 1997 and 31 March 1998 1,871 - 1,871
----------- ----------- -----------
Amortisation:
At 1 April 1996 375 12 387
Provided during the year 125 - 125
Written off - (12) (12)
----------- ----------- -----------
At 31 March 1997 500 - 500
Provided during the year 125 - 125
----------- ----------- -----------
At 31 March 1998 625 - 625
----------- ------------ -----------
Net book value at 31 March 1998 1,246 - 1,246
=========== =========== ===========
Net book value at 1 April 1997 1,371 - 1,371
=========== =========== ===========
</TABLE>
Goodwill arising on the acquisition of various divisions from FKI Communications
Limited is being amortised over the directors' estimate of its useful economic
life of 15 years.
8
F-46
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
10. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
Short Plant Fixtures
leasehold and and Computer
buildings machinery fittings equipment Total
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000
<S> <C> <C> <C> <C> <C>
Cost:
At 1 April 1996 285 941 62 313 1,601
Additions 2 445 27 21 495
Disposals - (86) (6) (16) (108)
----------- ----------- ----------- ----------- -----------
At 31 March 1997 287 1,300 83 318 1,988
Additions - 147 19 28 194
Disposals - (21) (1) (2) (24)
----------- ----------- ----------- ----------- -----------
At 31 March 1998 287 1,426 101 344 2,158
----------- ----------- ----------- ----------- -----------
Depreciation:
At 1 April 1996 94 381 16 219 710
Provided during the year 32 178 17 37 264
Disposals - (78) (4) (15) (97)
----------- ----------- ----------- ----------- -----------
At 31 March 1997 126 481 29 241 877
Provided during the year 31 259 17 43 350
Disposals - (17) (1) (2) (20)
----------- ----------- ----------- ----------- -----------
At 31 March 1998 157 723 45 282 1,207
----------- ----------- ----------- ----------- -----------
Net book value:
At 31 March 1998 130 703 56 62 951
=========== =========== =========== =========== ===========
At 1 April 1997 161 819 54 77 1,111
=========== =========== =========== =========== ===========
</TABLE>
Included within plant and machinery are assets available for short term hire at
a cost of (pound)244,740 (1997 - (pound)193,734) and a related accumulated
depreciation charge of (pound)131,866 (1997 - (pound)85,709). Also, included
within plant and machinery are assets held under finance leases with a net book
value of (pound)264,053 (1997 - (pound)205,224).
9
F-47
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
11. INVESTMENTS
Subsidiary Subsidiary
undertaking undertaking
1998 1997
(pound)000 (pound)000
Cost at 31 March 1997 and 31 March 1998 290 290
=========== ===========
The investment represents the cost of 100% of the issued share capital of
Keyswitch Varley Limited, a company registered in England and Wales. This
company does not trade. The aggregate amount of its capital and reserves at 31
March 1998 was (pound)290,523 (1997 - (pound)290,523).
It is the opinion of the directors that the aggregate value of the investment is
not less than the amount stated above.
12. STOCKS
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Raw materials and consumables 594 734
Work in progress 584 716
Finished goods and goods for resale 336 105
----------- -----------
1,514 1,555
=========== ===========
</TABLE>
The difference between purchase price or production cost of stocks and their
replacement cost is not material.
13. DEBTORS
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Trade debtors 1,642 2,964
Corporation tax 113 -
Other debtors 27 30
Prepayments and accrued income 197 327
----------- -----------
1,979 3,321
=========== ===========
</TABLE>
10
F-48
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
14. CREDITORS: amounts falling due within one year
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Current instalment due on bank loan - 500
Bank overdraft 365 146
Payments received in advance - 203
Trade creditors 1,530 2,288
Obligations under finance leases (note 15) 78 41
Corporation tax - 145
Other taxes and social security costs 229 340
Other creditors 141 561
Accruals 601 534
----------- -----------
2,944 4,758
=========== ===========
</TABLE>
The bank loan is secured by a fixed and floating charge over the assets of the
company.
The overdraft is secured by a mortgage debenture over the assets of the company.
Included within other creditors is(pound)10,107 (1997 -(pound)10,318) relating
to outstanding contributions payable to the pension scheme.
15. OBLIGATIONS UNDER FINANCE LEASES AND HIRE PURCHASE CONTRACTS
The maturity of these amounts is as follows:
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
Amounts payable:
<S> <C> <C>
Within one year 91 55
In two to five years 185 184
----------- -----------
276 239
Less:
Finance charges allocated to future periods (27) (39)
----------- -----------
249 200
=========== ===========
</TABLE>
Finance leases and hire purchase contracts are analysed as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Current obligations 78 41
Non-current obligations 171 159
----------- -----------
249 200
=========== ===========
</TABLE>
16. CREDITORS: amounts falling due after more than one year
1998 1997
(pound)000 (pound)000
Obligations under finance leases (note 15) 171 159
=========== ===========
11
F-49
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
17. ANALYSIS OF CHANGES IN NET FUNDS/(DEBT)
<TABLE>
<CAPTION>
At Other At Other At
1 April Cash non-cash 31 March Cash non-cash 31 March
1996 flow changes 1997 flow changes 1998
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000 (pound)000 (pound)000
<S> <C> <C> <C> <C> <C> <C> <C>
Cash at bank and in hand 542 490 1,032 (1,030) 2
Overdrafts (86) (60) (146) (219) (365)
------------ ---------- ---------- ----------- ----------
456 430 886 (1,249) (363)
Debt due after one year (500) 500 - - -
Debt due within one year (500) - (500) 500 -
Finance leases - 15 (215) (200) 66 (115) (249)
------------ ---------- ----------- ---------- ------------ ------- -------------
(1,000) 515 (215) (700) 566 (115) (249)
------------ ---------- ----------- ---------- ------------ ------- -------------
(544) 945 (215) 186 (683) (115) (612)
============ ========== =========== ========== ============ ======= =============
</TABLE>
18. SHARE CAPITAL
<TABLE>
<CAPTION>
Allotted called up
Authorised and fully paid
1998 1997 1998 1997
No. No. (pound)000 (pound)000
<S> <C> <C> <C> <C> <C>
Ordinary shares of 10p each 240,000 240,000 24 24
Preferred ordinary shares of 10p each 360,000 360,000 36 36
`A' preference shares of 10p each 1,700,000 1,700,000 170 170
`B' preference shares of 10p each 1,400,000 1,400,000 140 140
--------------- -------------- ----------- -----------
3,700,000 3,700,000 370 370
=============== ============== =========== ===========
</TABLE>
The `A' and `B' preference shares entitle the holders to a fixed cumulative
preferential dividend at the rate of 10% and 5% per annum on the subscription
price, respectively. On a winding up the holders are entitled in priority to all
other shareholders to participate in the surplus assets of the company to the
extent of an amount equal to the subscription price for the preference shares
together with any dividend arrears.
The `A' preference shares entitle the holders to attend general meetings of the
company but do not entitle the holders to vote upon any resolution unless the
dividend thereon is two months or more in arrears or the company fails to redeem
the shares on the redemption date or the business of the meeting includes a
resolution for the winding up of the company or reducing its share capital or
the approval of the giving of financial assistance or the purchase by it of any
of its shares, in which event each holder will be entitled to one vote.
The `B' preference shares entitle the holders to attend general meetings of the
company but do not entitle the holders to vote upon any resolution unless the
resolution directly or indirectly varies, modifies, alters or abrogates any of
the rights attaching to the `B' preference shares or is for the winding up of
the company or reducing its share capital or the purchase by it of any of its
shares, in which event each holder will be entitled to one vote.
12
F-50
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
18. SHARE CAPITAL (continued)
The preferred ordinary shares entitle the holders to a cumulative cash dividend
of 10% of profit before tax from the accounting period ending 31 March 1996. On
a winding up the holders are entitled, subject to the rights of the `A' and `B'
preference shareholders but in priority to all other shareholders, to
participate in the surplus assets of the company to the extent of an amount
equal to the subscription price for the preferred ordinary shares together with
any dividend arrears. Thereafter, they shall rank pari-passu with the ordinary
shareholders after the ordinary shareholders shall have received an amount equal
to the subscription price for the shares. The preferred ordinary shares entitle
the holders to attend general meetings of the company and vote on all
resolutions.
The `A' and `B' preference shares shall be redeemed at the subscription price at
the option of the shareholder on the occurrence of certain events, or with at
least 14 days' notice from the company, but in any event, on the following
dates:
`A' preference `B' preference
shares shares
30 April 1998 400,000 280,000
30 April 1999 500,000 280,000
30 April 2000 - 280,000
30 April 2001 - 280,000
On 30 April 1996 and 30 April 1997 400,000 `A' preference shares were due to be
redeemed and on 30 April 1997 280,000 `B' preference shares were due to be
redeemed. These redemptions did not take place and hence the dividend on those
shares not redeemed has increased from 10% to 14% and 5% to 9% respectively per
annum in accordance with the terms of the shareholder agreement.
On the occurrence of certain events, the preferred ordinary shares shall be
converted and re-designated as ordinary shares or deferred shares at the option
of the shareholder.
19. MOVEMENTS ON RESERVES AND RECONCILIATION OF SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Share Profit
Share premium and loss
capital account account Total
(pound)000 (pound)000 (pound)000 (pound)000
<S> <C> <C> <C> <C>
At 1 April 1996 370 3,330 (231) 3,469
Retained profit for the year 288 288
Unpaid preference dividends 332 332
Interest on unpaid preference dividends 74 74
Transfer to current liabilities (400) (400)
----------- ----------- ----------- -----------
At 31 March 1997 370 3,330 63 3,763
Retained loss for the year (1,263) (1,263)
Unpaid preference dividends 282 282
Interest on unpaid preference dividends 85 85
----------- ----------- ----------- -----------
At 31 March 1998 370 3,330 (833) 2,867
=========== =========== =========== ===========
</TABLE>
13
F-51
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
19. MOVEMENTS ON RESERVES AND RECONCILIATION OF SHAREHOLDERS' FUNDS (continued)
Shareholders' funds are analysed as follows:
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Equity interests (1,752) (499)
Non-equity interests:
Preferred ordinary 449 449
`A' preference shares 2,478 2,220
`B' preference shares 1,692 1,593
----------- -----------
2,867 3,763
=========== ===========
</TABLE>
20. PENSION COMMITMENTS
The company operates a defined contribution pension scheme for its directors and
employees. The assets of the scheme are held separately from those of the
company in an independently administered fund.
21. OTHER FINANCIAL COMMITMENTS
At 31 March 1998 the company had annual commitments under non-cancellable
operating leases as set out below:
<TABLE>
<CAPTION>
Land and buildings Other
1998 1997 1998 1997
(pound)000 (pound)000 (pound)000 (pound)000
<S> <C> <C> <C> <C>
Operating leases which expire:
within one year - - 29 28
within two to five years 9 9 114 126
in over five years 210 198 - 32
----------- ----------- ----------- ----------
219 207 143 186
=========== =========== =========== ==========
</TABLE>
22. POST BALANCE SHEET EVENTS
On 30 April 1998, 400,000 `A' preference shares and 280,000 `B' preference
shares were due to be redeemed at the subscription price. This event did not
take place and therefore the rate of the preference dividend on those shares not
redeemed will increase from 10% to 14% for the `A' shares and from 5% to 9% for
the `B' shares until they have been redeemed.
On 8 June 1998 Applied Cellular Technology Inc. purchased 85% of the share
capital of Signature Industries Limited. From that date Applied Cellular
Technology Inc. became Signature Industries Limited's ultimate parent company.
The accounts of that company are available from 400 Royal Palm Way, Suite 410,
Palm Beach, Florida 33480.
14
F-52
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
23. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The company prepares its accounts in accordance with accounting principles
generally accepted in the United Kingdom ("UK GAAP") which differ from United
States generally accepted accounting principles ("US GAAP"). The significant
differences as they apply to the company are summarised below.
Deferred taxation
Under UK GAAP, the company provides for deferred taxation using the liability
method on all timing differences which are expected to reverse in the future
without being replaced, calculated at the rate at which it is estimated that
taxation will be payable. Deferred tax assets are recognised if their
realisation is probable.
Under US GAAP, deferred taxation is provided for on all temporary differences
between the book and tax bases of assets and liabilities. Deferred tax assets
are recognised to the extent their recoverability is more likely than not.
Consolidation
Under UK GAAP, the company's subsidiary does not have to be consolidated.
Under US GAAP, the subsidiary would be consolidated.
Preference shares
Under US GAAP, the company's `A' and `B' preference shares which are mandatorily
redeemable by April 1999 and April 2001, respectively, would not be included in
shareholders' equity.
The following is a summary of the significant adjustments to income and
shareholders' funds which would be required in US GAAP were to be applied
instead of UK GAAP:
<TABLE>
<CAPTION>
1998 1997
Income (pound)000 (pound)000
<S> <C> <C>
(Loss)/profit on ordinary activities after taxation as reported under
UK GAAP (981) 620
Adjustments:
Deferred tax 135 (91)
ACT write off 97 -
--------- --------
Net (loss)/income under US GAAP (749) 529
========= ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
Shareholders' funds (pound)000 (pound)000
<S> <C> <C>
Shareholders' funds as reported under UK GAAP 2,867 3,763
Adjustments:
Deferred tax (assets) 135 (91)
ACT recoverable 97 -
Share capital:
`A' preference shares (170) (170)
`B' preference shares (140) (140)
Share premium (2,790) (2,790)
--------- --------
Shareholders' funds under US GAAP (1) 572
========= ========
</TABLE>
15
F-53
<PAGE>
Signature Industries Limited
- --------------------------------------------------------------------------------
NOTES TO THE ACCOUNTS
at 31 March 1998 and 31 March 1997
- --------------------------------------------------------------------------------
23. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued) Cash flows The cash flow statements prepared
under UK GAAP present substantially the same information as those required under
US GAAP but they differ with respect to the classification of items within them
and as regards the definition of cash under UK GAAP and cash and cash
equivalents under US GAAP.
Under UK GAAP, cash comprises cash at bank and in hand less bank overdrafts.
Under US GAAP, cash and cash equivalents would not include bank overdrafts which
would be treated as borrowings. Under US GAAP, only three categories of cash
flow would be presented: operating, investing and financing as compared with the
five under UK GAAP. Under US GAAP, cash flows from taxation and returns on
investments and servicing of finance would be included in operating activities,
under US GAAP, the payment of dividends would be included as a financing
activity and capital expenditure would be included as an investing activity.
The categories of cash flow activity under US GAAP can be summarised as follows:
<TABLE>
<CAPTION>
1998 1997
(pound)000 (pound)000
<S> <C> <C>
Cash inflow/(outflow) from operating activities (604) 1,209
Cash inflow/(outflow) from investing activities (79) (264)
Cash inflow/(outflow) from financing activities (347) (455)
--------- ---------
Increase in cash and cash equivalents 1,030 490
Cash and cash equivalents at 1 April 1,032 542
--------- ---------
Cash and cash equivalents at 31 March 2 1,032
========= =========
</TABLE>
16
F-54
<PAGE>
REPORT OF INDEPENDENT AUDITORS to the directors of Signature Industries Limited
We have audited the balance sheets of Signature Industries Limited as at 31
March 1998 and 1997, and the related profit and loss accounts and statements of
cash flows for each of the years in the period ended 31 March 1998. These
accounts are the responsibility of the company's management. Our responsibility
is to express an opinion on these accounts based on our audits.
We conducted our audits in accordance with United Kingdom auditing standards
which do not differ in any significant respect from United States generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the accounts are free of
material misstatement. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the accounts. An audit also
includes assessing the accounting principles used and significant estimates made
by management as well as evaluating the overall accounts presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accounts referred to above present fairly, in all material
respects, the financial position of Signature Industries Limited at 31 March
1998 and 1997, and the results of its operations and its cash flows for each of
the years in the period ended 31 March 1998 in conformity with accounting
principles generally accepted in the United Kingdom which differ in certain
respects from those followed in the United States (see note 23 of notes to the
accounts).
Ernst & Young
London
England
6 August 1998 except for
note 23 - differences between United Kingdom and
United States Generally Accepted Accounting Principles
as to which the date is 15 December 1998
F-55
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
INTRODUCTION
The accompanying unaudited pro forma condensed consolidated statement of
operations reflects the consolidated results of operations of Cellular
Technology, Inc. (the "Company") for the year ended December 31, 1998 after
giving pro forma effect to the purchase of an eighty five percent interest in
Signature Industries Limited ("Signature") completed on June 8, 1998.
The unaudited pro forma financial information does not purport to be indicative
of actual results that would have been achieved had the acquisition actually
been completed as of the date indicated below nor which may be achieved in the
future.
<TABLE>
Applied Cellular Technology, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the year ended December 31, 1998
(In thousands)
<CAPTION>
Company As Pro Forma
Reported Signature Consolidated
December 31, Industries Pro Forma December 31,
1998 (A) (B) Adjustments 1998
- --------------------------------------------- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net Revenues $ 207,081 $ 7,464 $ -- $ 214,545
Direct Costs 142,893 4,891 -- 147,784
---------- -------- ---------- -----------
Gross Profit 64,188 2,573 -- 66,761
Operating Expenses 55,253 3,907 23 C 59,183
---------- -------- ---------- -----------
Operating Income (Loss) 8,935 (1,334) (23) 7,578
Interest Income 420 -- -- 420
Interest Expense (1,653) (14) -- (1,667)
Minority Interest (424) -- 202 D (222)
Provision for Income Tax (2,588) -- 425 E (2,163)
---------- -------- ---------- -----------
Net Income (Loss) 4,690 (1,348) 604 3,946
Dividends (44) -- -- (44)
========== ======== ========== ============
Net Income (Loss) Available to Common
Stockholders $ 4,646 $(1,348) $ 604 $ 3,902
========== ======== ========== ===========
Net Income per Common Share - Basic $ 0.14 $ 0.12
==========
===========
Net Income per Common Share - Diluted
$ 0.13 $ 0.11
========== ===========
Weighted Average Number of Common Shares
Outstanding - Basic 32,318 32,067
========== ===========
Weighted Average Number of Common Shares
Outstanding - Diluted 34,800 34,549
========== =============
</TABLE>
F-56
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The unaudited pro forma condensed consolidated statement of operations for the
year ended December 31, 1998 gives effect to the consolidated results of
operations for the year ended December 31, 1998 as if the acquisition of
Signature Industries occurred on January 1, 1998. These results are not
necessarily indicative of the consolidated results of operations of the Company
as they may be in the future or as they might have been had this event been
effective January 1, 1998. The unaudited pro forma condensed consolidated
financial information should be read in conjunction with the historical
financial statements of the Company and Signature Industries and related notes
thereto.
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 ARE AS FOLLOWS:
(A) Represents the historical condensed consolidated results of the Company for
the year ended December 31, 1998.
(B) Represents the historical condensed results of Signature Industries for the
five months ended May 31, 1998.
(C) Represents the net increase to amortization of the cost over the net book
value of Signature Industries amortized over a period of twenty years.
(D) Represents the minority interest in the net loss of Signature Industries
attributable to the percentage interest not acquired by the Company (15%).
(E) Represents a decrease in the tax provision due to the pro forma reduction
in earnings, before non-deductible dividend expense.
F-57
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than underwriting
discounts and commissions), which other than the SEC registration fee are
estimates, payable by the Company in connection with the sale and distribution
of the shares registered hereby**:
SEC Registration Fee .................................... $ 7,337
Accounting Fees and Expenses............................. 20,000 *
Legal Fees and Expenses.................................. 20,000 *
Miscellaneous Expenses................................... 2,663 *
-----------
Total ....................................... $ 50,000 *
============
- -------------
* Estimated
** The Selling Shareholders will pay any sales commissions or underwriting
discount and fees incurred in connection with the sale of shares
registered hereunder.
Item 14. Indemnification of Directors and Officers.
Sections 351.355(1) and (2) of The General and Business Corporation Law of
the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful, except that, in the case of an action or suit by or in the right
of the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation,
unless and only to the extent that the court in which the action or suit was
brought determines upon application that such person is fairly and reasonably
entitled to indemnity for proper expenses. Section 351.355(3) provides that, to
the extent that a director, officer, employee or agent of the corporation has
been successful in the defense of any such action, suit or proceeding or any
claim, issue or matter therein, he shall be indemnified against expenses,
including attorneys' fees, actually and reasonably incurred in connection with
such action, suit or proceeding. Section 351.355(7) provides that a corporation
may provide additional indemnification to any person indemnifiable under
subsection (1) or (2), provided such additional indemnification is authorized by
the corporation's articles of incorporation or an amendment thereto or by a
shareholder-approved bylaw or agreement, and provided further that no person
shall thereby be indemnified against conduct which was finally adjudged to have
been knowingly fraudulent, deliberately dishonest or willful misconduct or which
involved an accounting for profits pursuant to Section 16(b) of the Securities
Exchange Act of 1934.
The bylaws of the Registrant provide that the Registrant shall indemnify,
to the full extent permitted under Missouri law, any director, officer, employee
or agent of the Registrant who has served as a director, officer, employee or
agent of the Registrant or, at the Registrant's request, has served as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to such provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities.
The following table lists all unregistered securities sold by the
Registrant from January 1, 1996 through June 18, 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 Regulatio D promulgated thereunder.
<TABLE>
<CAPTION>
Number of
Name/Entity/Nature Note Issued For Date Issued Common Shares
- -------------------------------------------- ------------ ------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Advanced Telecommunications, Inc. 1 Acquisition July-97 2,100,480
Advanced Telecommunications, Inc. 2 Acquisition September-98 775,822
Alacrity Systems, Inc. 3 Acquisition October-97 640,959
Alacrity Systems, Inc. 4 Acquisition January-98 321,768
Amherst Systems 5 Assets August-98 66,667
ATI Communications, Inc. 6 Acquisition October-96 1,618,180
ATI Communications, Inc. 7 Acquisition March-98 200,000
ATI Communications, Inc. 8 Acquisition April-99 550,000
ATI Communications, Inc. 9 Preferred Stock June-97- 1,354,167
Conversion October-97
Aurora Electric, Inc. 10 Acquisition July-98 1,138,039
Blue Star Electronics, Inc. 11 Acquisition August-98 222,643
Burling Industries, Inc. 12 Acquisition August-96 22,126
Burling Industries, Inc. 13 Assets March-97 36,422
Canadian Network Services, Inc. 14 Acquisition December-97 1,116,460
Canadian Network Services, Inc. 15 Acquisition January-98 322,512
Commstar Limited 16 Acquisition June-98 3,849,590
Commstar Limited 17 Acquisition February-99 43,877
Consolidated Micro Components, Inc. 18 Acquisition July-98 429,805
Consolidated Micro Components, Inc. 19 Acquisition June-99 649,696
Cra-Tek Company 20 Acquisition October-96 310,734
Cra-Tek Company 21 Acquisition October-97 6,726
Cra-Tek Company 22 Acquisition June-99 121,465
CT Specialists, Inc. 23 Acquisition December-97 787,914
CT Specialists, Inc. 24 Acquisition August-98 7,328
Cybertech Station, Inc. 25 Acquisition October-97 167,238
Cybertech Station, Inc. 26 Acquisition March-98 49,847
Cybertech Station, Inc. 27 Acquisition April-99 49,806
Data Path Technologies, Inc. 28 Acquisition July-98 403,077
Data Path Technologies, Inc. 29 Acquisition June-99 1,393,230
DLS Service Corporation 30 Acquisition July-97 57,600
Employee Stock Award 31 Stock Award January-96 167,000
Employee Stock Sales 32 Stock Purchase See Note 32 275,000
Assets
Fiscal Advantage Corporation 33 Assets March-99 7,018
GDB Software Services, Inc. 34 Acquisition July-98 412,308
GDB Software Services, Inc. 35 Acquisition June-99 627,879
Great Bay Technology, Inc. 36 Services March-97 100,000
Ground Effects Limited 37 Acquisition June-98 1,105,708
II-2
<PAGE>
Hopper Manufacturing Co., Inc. 38 Acquisition March-97 196,572
Information Products Center, Inc. 39 Acquisition March-98 711,433
Information Products Center, Inc. 40 Acquisition April-99 662,252
Innovative Vacuum Solutions, Inc. 41 Acquisition July-98 276,079
Innovative Vacuum Solutions, Inc. 42 Acquisition June-99 426,213
Intermatica, Inc. 43 Acquisition June-97 710,953
Loan Conversions 44 Loan See Note 44 135,000
Conversions
MVAK Technologies, Inc. 45 Acquisition February-97 408,131
Norcom Resources, Inc. 46 Acquisition March-97 300,753
Norcom Resources, Inc. 47 Acquisition March-98 74,667
Pizarro Re-Marketing, Inc 48 Acquisition March-97 218,936
Pizarro Re-Marketing, Inc 49 Acquisition March-98 42,723
PPL, Ltd. 50 Acquisition October-97 528,852
PPL, Ltd. 51 Acquisition April-99 929,230
Private Placements 52 Private See Note 52 222,044
Placements
Quality Solutions, Inc. 53 Assets February-96 33,494
Richard J. Sullivan 54 Salary Elections See Note 54 104,249
Service Transportation Company 55 Acquisition April-98 37,181
Services 56 Services January-96 - 498,507
June-99
Signal Processors Limited 57 Acquisition July-97 488,162
Signal Processors Limited 58 Acquisition February-98 928,293
Signature Industries Limited 59 Acquisition June-98 3,605,948
STC Netcom, Inc. 60 Acquisition September-97 1,670,000
Stock Options Exercised 61 Stock Option November-97 650,000
Exercise
Teledata Concepts, Inc. 62 Acquisition June-98 144,828
The Americom Group, Inc. 63 Acquisition June-98 235,507
The Americom Group, Inc. 64 Acquisition April-99 106,581
The Bay Group, Inc. 65 Services June-97 193,265
The Bay Group, Inc. 66 Services May-98 218,682
Universal Commodities Corp. 67 Acquisition November-96 581,818
Universal Commodities Corp. 68 Acquisition December-97 260,708
US Electrical Products Corp. 69 Acquisition 258,988
Warrants Exercised 70 Warrants 3,433,500
Exercised
Winward Electric, Inc. 71 Acquisition March-98 1,816,400
Winward Electric, Inc. 72 Acquisition April-99 533,333
============
Total 43,152,373
- -------------------------------------------- ============
</TABLE>
1. Includes (a) 2,048,000 shares issued to the selling shareholders to acquire
their 80 percent interest in the company and (b) 52,480 shares issued as
finder's fees.
2. Represents shares issued in connection with the "price protection"
provision of the Agreement of Sale.
3. Includes (a) 622,755 shares issued to the selling shareholders to acquire
their 100 percent interest in the company and (b) 18,204 shares issued as
finder's fees.
4. Includes (a) 312,630 shares issued to the selling shareholders and (b)
9,138 shares issued as finder's fees all in connection with the "price
protection" provision of the Agreement of Sale.
5. Represents shares issued to Amherst Systems to acquire customer lists for
the Registrant's subsidiary, Atlantic Systems, Inc.
6. Represents shares issued to the selling shareholders to acquire their 100
percent interest in the company.
7. 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.
8. Represents the final installment of shares issued to a selling shareholder
in connection with the earnout provision under the Agreement and Plan of
Merger.
9. Represents shares issued to the selling shareholders upon conversion of
their Redeemable Preferred Stock.
10. Includes (a) 1,098,039 shares issued to selling shareholders to acquire
such shareholders' 100 percent interest in the company, and (b) 40,000
shares issued as a finder's fee.
11. Includes (a) 202,667 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, (b) 19,394 shares
issued as a finder's fee, and (c) 582 shares issued for services in
connection with the acquisition.
II-3
<PAGE>
12. Represents shares issued as a finder's fee in connection with the
acquisition.
13. Represents shares issued in connection with the acquisition of Burling's
building.
14. Represents shares issued to the Stage I selling shareholders to acquire
their interest in the company.
15. 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, (c) 109,774 shares issued to the Stage I and Stage II selling
shareholders in connection with the "price protection" provision of the
Agreement of Sale, and (d) 34,525 shares issued as a finder's fee.
16. Represents shares of stock reserved for issuance in exchange for
exchangeable shares of TigerTel Services Limited (formerly, Commstar Ltd.),
in connection with the Registrant's acquisition of 100 percent of TigerTel,
and TigerTel's acquisition of certain assets from Western Inbound Network,
Inc. As of June 18, 1999, 2,593,141 exchangeable shares had been converted
into shares of the Registrant's common stock, and 1,256,449 shares are
reserved for conversion.
17. Represents shares issued as a finder's fee in connection with the
acquisition.
18. Includes (a) 392,157 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 37,648
shares issued as a finder's fee.
19. Includes (a) 606,061 shares issued in connection with the "earnout"
provision of the Agreement of Sale, and (b) 43,635 shares issued as
additional finders fees in connection with the "earnout" payment.
20. Represents shares issued to the selling shareholders to acquire their 80
percent interest in the company.
21. Represent shares issued to a selling shareholder to acquire such
shareholders minority interest.
22. Represents shares issued to a selling shareholder to acquire such
shareholders minority interest.
23. Includes (a) 757,610 shares issued to selling shareholder to acquire such
shareholders' 100 percent interest in the company, and (b) 30,304 shares
issued as a finder's fee.
24. Represents additional shares issued as finder's fees in connection with the
"price protection" provision of the Agreement of Sale.
25. Includes (a) 158,351 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 8,887 shares
issued as a finder's fee.
26. Includes (a) 26,444 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.
27. Represents shares issued in connection with the "earnout" provision of the
Agreement of Sale.
28. Includes (a) 384,616 shares issued to selling shareholders to acquire such
shareholders' 100 percent interest in the company, and (b) 18,461 shares
issued as a finder's fee.
29. Includes (a) 1,353,844 shares issued in connection with the "earnout"
provision of the Agreement of Sale, and (b) 39,386 shares issued as
additional finders fees in connection with the "earnout" payment.
30. Represents shares issued to the selling shareholders to acquire their 100
percent interest in the Registrant.
31. Represents shares issued to certain employees of the Registrant as a
discretionary bonus.
32. Includes (a) 100,000 shares sold to David A. Loppert, the Chief Financial
Officer of the Registrant, in May 1997, (b) 75,000 shares sold to Scott R.
Silverman, Senior Vice President, in June 1997, and (c) 100,000 shares sold
to Marc Sherman, Senior Vice President, in May 1998.
33. Represents shares issued to acquire certain customer lists for the
Registrant's subsidiary, Intellesale.com (formerly Inteletek, Inc.).
34. Includes (a) 384,616 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 27,692
shares issued as a finder's fee.
35. Includes (a) 606,060 shares issued in connection with the "earnout"
provision of the Agreement of Sale, and (b) 21,819 shares issued as
additional finders fees in connection with the "earnout" payment.
36. Represents shares issued in connection with acquisition services for the
Registrant in 1996 and 1997. Great Bay Technology, Inc. is controlled by
Richard J. Sullivan, Chairman and CEO of the Registrant, Angela M.
Sullivan, a Director of the Registrant, and Stephanie Sullivan.
37. Represents shares of stock reserved for issuance in exchange for
exchangeable shares of ACT-GFX Canada, Inc. in connection with the
Registrant's acquisition of 85 percent of Ground Effects Limited. As of
June 18, 1999, 969,280 exchangeable shares had been converted into shares
of the Registrant's common stock and 136,428 shares are reserved for
conversion.
38. Includes (a) 179,104 shares issued to the selling shareholders to acquire
such shareholders' 100 percent interest in the company, and (b) 17,468
shares issued as a finder's fee.
39. Represents shares issued to the selling shareholder to acquire such
shareholder's 100 percent interest in the company.
II-4
<PAGE>
40. Represents shares issued in connection with the "earnout" provision of the
Agreement of Sale.
41. Represents shares issued to selling shareholders to acquire such
shareholders' 80 percent interest in the company.
42. Represents shares issued in connection with the "earnout" provision of the
Agreement of Sale.
43. Represents shares issued to the selling shareholders to acquire their 100
percent interest in the company.
44. Includes (a) 125,000 shares issued to Great Bay Technology, Inc. in May
1996 upon the conversion of a loan, and (b) 10,000 shares issued to Daniel
E. Penni, a Director of the Registrant, in September 1997 upon the
conversion of a loan.
45. Includes (a) 389,296 shares issued to the selling shareholders to acquire
such shareholders' 100 percent interest in the company, and (b) 18,835
shares issued as a finder's fee.
46. Includes (a) 284,444 shares issued to the selling shareholders to acquire
such shareholders' 80 percent interest in the company, and (b) 16,309
shares issued as a finder's fee.
47. Represents shares issued in connection with the "earnout" provision of the
Agreement of Sale.
48. Includes (a) 190,833 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 28,103
shares issued as a finder's fee.
49. Represents shares issued in connection with the "earnout" provision of the
Agreement of Sale.
50. Includes (a) 503,669 shares issued to the selling shareholders to acquire
such shareholders' 80 percent interest in the company, and (b) 25,183
shares issued as a finder's fee.
51. Represents shares issued in connection with the "earnout" provision of the
Agreement of Sale.
52. Includes (a) 49,822 and 22,222 shares issued to The Bay Group in November
1996 and February 1997, respectively, in Private Placement transactions and
(b) 150,000 shares issued to a private investment group in March 1997. The
Bay Group is controlled by Richard J. Sullivan and Angela M. Sullivan.
53. Represents shares issued to acquire certain software source code from
Quality Solutions, Inc. for the Registrant's subsidiary, Atlantic Systems,
Inc.
54. Represents 48,109 and 56,140 shares issued to Richard J. Sullivan in June
1997 and August 1998, respectively, in lieu of cash compensation under the
terms of his employment agreement with the Registrant for the fiscal years
beginning June 1, 1997 and 1998, respectively.
55. Includes (a) 35,000 shares issued to the selling shareholders to acquire
such shareholders' 80 percent interest in the company, and (b) 2,181 shares
issued for acquisition services.
56. Represents shares issued for professional services or under employment or
other such agreements.
57. Includes (a) 475,920 shares issued to the selling shareholders to acquire
such shareholders' 80 percent interest in the company, and (b) 12,242
shares issued for acquisition services.
58. Includes (a) 915,167 shares issued to the selling shareholders, and (b)
13,126 shares issued as finder's fees in connection with the "price
protection" provision of the Agreement of Sale.
59. Includes (a) 3,571,235 shares issued to selling shareholders to acquire
such shareholders' 85 percent interest in the company, and (b) 34,713
shares issued as a finder's fee.
60. Includes (a) 1,600,000 shares issued to the selling shareholders to acquire
such shareholders' 80 percent interest in the company, and (b) 70,000
shares issued as a finder's fee.
61. Represents shares issued upon the exercise of Stock Options under the
Registrant's 1996 Non-Qualified Stock Option Plan.
62. Includes (a) 140,138 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.
63. Represents shares issued to the selling shareholder to acquire such
shareholder's 80 percent interest in the company.
64. Represents shares issued in connection with the "earnout" provision of the
Agreement of Sale.
65. Represents shares issued for investment banking services in connection with
certain acquisition made by the Registrant in 1997.
66. Represents shares issued for investment banking services in connection with
certain acquisition made by the Registrant in 1998.
67. Represents shares issued to the selling shareholder to acquire such
shareholder's 80 percent interest in the company.
68. Includes (a) 152,896 shares issued in connection with the "earnout"
provision of the Agreement of Sale and (b) 107,812 shares issued in
connection with amendments to the Agreement of sale.
69. Includes (a) 247,278 shares issued to the selling shareholders to acquire
such shareholders' 80 percent interest in the company, and (b) 11,710
shares issued as a finder's fee.
70. Includes shares issued upon the exercise of Warrants by the warrant
holders, as follows:
II-5
<PAGE>
Number of
Date Exercised Class of Warrants Shares
-------------- ----------------- ------
July 1996 F 260,000
March 1997 H 10,000
April 1997 H 50,000
July 1997 H 250,000
August 1997 H 40,000
April 1997 I 10,000
June 1997 I 340,000
July 1997 I 50,000
August 1997 I 50,000
September 1997 J 200,000
October 1997 L 123,500
July 1997 M 390,000
September 1997 M 610,000
April 1998 N 600,000
December 1997 O 200,000
April 1998 Q 250,000
================
Total 3,433,500
================
71. Includes (a) 1,778,543 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.
72. Represents shares issued in connection with the "earnout" provision of the
Agreement of Sale.
Item 16. Exhibits and Financial Statements.
See Exhibit Index and Financial Statements schedule.
Item 17. Undertakings.
(a) The undersigned issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of this registration
statement (or the most recent post-effective amendment hereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in this
Registration Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in this Registration Statement or any material change to such
information in this Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
II-6
<PAGE>
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palm Beach,
State of Florida, on June 23, 1999.
APPLIED CELLULAR TECHNOLOGY, INC.
By: /s/ DAVID A. LOPPERT
David A. Loppert, Vice President, Treasurer and
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Garrett A. Sullivan and David A. Loppert, and each of them (with full power to
each of them to act alone), the true and lawful attorney in fact and agent for
the undersigned, to act on behalf of and in the name of the undersigned in
connection with this Registration Statement, including the authority to sign any
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with exhibits and any and all other documents filed with
respect thereto, with the Securities and Exchange Commission (or any other
governmental or regulatory authority), and each such person ratifies and
confirms all that said attorneys in fact and agents may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ RICHARD J. SULLIVAN Chairman of the Board of
- --------------------------- Directors, Chief Executive June 23, 1999
(Richard J. Sullivan) Officer and Secretary
(Principal Executive Officer)
/s/ GARRETT A. SULLIVAN President and Director (Principal June 23, 1999
- --------------------------- Operating Officer)
(Garrett A. Sullivan)
/S/ DAVID A. LOPPERT Vice President, Treasurer and
- --------------------------- Chief Financial Officer June 23, 1999
(David A. Loppert) (Principal Accounting Officer)
June 23, 1999
/s/ ANGELA M. SULLIVAN Director
- ---------------------------
(Angela M. Sullivan)
/s/ DANIEL E. PENNI Director June 23, 1999
- ---------------------------
(Daniel E. Penni.)
Director June , 1999
- ---------------------------
(Arthur F. Noterman)
/s/ CONSTANCE K. WEAVER Director June 23, 1999
- ---------------------------
(Constance K. Weaver)
II-8
<PAGE>
<TABLE>
SCHEDULE II
APPLIED CELLULAR TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<CAPTION>
Additions
--------------------------
Balance At Charged To Valuation Balance At
Beginning Cost And Accounts End Of
Description Of Period Expenses Acquired Deductions Period
- ------------------------------------------------------------------------- -------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Valuation reserve deducted in the balance sheet from the
asset to which it applies:
Accounts Receivable:
1998 Allowance for doubtful accounts $ 675 $ 1,031 $ 262 $ 978 $ 990
1997 Allowance for doubtful accounts 101 328 270 24 675
1996 Allowance for doubtful accounts --- 43 100 42 101
Inventory:
1998 Allowance for excess and obsolescence 896 468 11 --- 1,375
1997 Allowance for excess and obsolescence --- --- 1,108 212 896
1996 Allowance for excess and obsolescence --- --- --- --- ---
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
4.1 Second Amended and Restated Articles of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 4.1 to Amendment No 1 to the
Registrant's Registration Statement on Form S-1 (File No. 333-57613) filed
with the Commission on June 16, 1999)
4.2 Amendment of Restated Articles of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 4.2 to the Registrant'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 Registrant dated March 31, 1998
(incorporated herein by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998)
5.1 Opinion of Bryan Cave LLP regarding the validity of the Common Stock
10.1 1996 Non-Qualified Stock Option Plan of Applied Cellular Technology, Inc.,
as amended through June 13, 1998 (incorporated herein by reference to
Exhibit 10.1 to the Registrant's Annual Report on Form 10-K filed with the
Commission on March 31, 1999 (Commission File Number 000-26020))
10.2 1999 Employees Stock Purchase Plan of the Registrant (incorporated herein
by reference to Exhibit 10.2 to Amendment No 1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-57613) filed with the
Commission on June 16, 1999)
10.3 1999 Flexible Stock Plan of the Registrant (incorporated herein by
reference to Exhibit 10.3 to Amendment No 1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-57613) filed with the
Commission on June 16, 1999)
10.4 Richard J. Sullivan Employment Agreement (incorporated herein by reference
to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K filed with
the Commission on March 31, 1999 (Commission File Number 000-26020))
10.5 Garrett A. Sullivan Employment Agreement (incorporated herein by reference
to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K filed with
the Commission on March 31, 1999 (Commission File Number 000-26020))
10.6 David A. Loppert Employment Agreement (incorporated herein by reference to
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K filed with the
Commission on March 31, 1999 (Commission File Number 000-26020))
10.7 Scott R. Silverman Employment Agreement (incorporated herein by reference
to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K filed with
the Commission on March 31, 1999 (Commission File Number 000-26020))
10.8 Andrew J. Hidalgo Employment Agreement (incorporated herein by reference to
Exhibit 10.8 to the Registrant's Annual Report on Form 10-K filed with the
Commission on March 31, 1999 (Commission File Number 000-26020))
II-10
<PAGE>
10.9 Gary A. Gray Employment Agreement (incorporated herein by reference to
Exhibit 10.9 to the Registrant's Annual Report on Form 10-K filed with the
Commission on March 31, 1999 (Commission File Number 000-26020))
10.10Jerome C. Artigliere Employment Agreement (incorporated herein by reference
to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K filed with
the Commission on March 31, 1999 (Commission File Number 000-26020))
10.11Tabitha Zane Employment Agreement (incorporated herein by reference to
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K filed with the
Commission on March 31, 1999 (Commission File Number 000-26020))
10.12Marc Sherman Employment Agreement (incorporated herein by reference to
Exhibit 10.12 to the Registrant's Annual Report on Form 10-K filed with the
Commission on March 31, 1999 (Commission File Number 000-26020))
10.13John Reap Employment Agreement (incorporated herein by reference to
Exhibit 10.13 to the Registrant's Post-Effective Amendment No. 1 on Form
S-1 to Registration Statements Nos. 333-25431, 333-37713, 333-45139,
333-51067 and 333-64755 filed with the Commission on May 14, 1999)
10.14Term and Revolving Credit Agreement, dated May 25, 1999, between the
Registrant and IBM Credit Corporation (incorporated by reference to the
Registrant's Current Report on Form 8-K filed with the Commission on June
2, 1999 (Commission File Number 000-26020))
10.15Agreement of Purchase and Sale dated as of June 4, 1999, as amended, by
and among Intellesale.com, Inc., Applied Cellular Technology, Inc. David
Romano and Eric Limont, relating to the acquisition of the shares of
Bostek, Inc. and Micro Components International, Incorporated (incorporated
by reference to the Registrant's Current Report on Form 8-K filed with the
Commission on June 11, 1999 (Commission File Number 000-26020)).
16.1 Letter from Rubin, Brown, Gornstein & Co., LLP ("RBG") concurring with the
statements made by the Registrant in the Form 8-K report concerning RBG's
resignations as the Registrant's principal accountant (incorporated herein
by reference to Exhibit 16 to the Registrant's Current Report on Form 8-K
filed with the Commission on November 4, 1998 (Commission File Number
000-26020))
21.1 List of subsidiaries of Applied Cellular Technology, Inc. (incorporated
herein by reference to Exhibit 21.1 to the Registrant's Annual Report on
Form 10-K filed with the Commission on March 31, 1999 (Commission File
Number 000-26020))
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Rubin, Brown, Gornstein & Co., LLP
23.3 Consent of Ernst & Young
23.4 Consent of Bryan Cave LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included in signature page)
II-11
Exhibit 5
BRYAN CAVE LLP
ONE METROPOLITAN SQUARE
211 N. BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102-2750
(314) 259-2000
FACSIMILE (314) 259-2020
DENIS P. MCCUSKER [email protected]
(314) 259-2455
June 24, 1999
Board of Directors
Applied Cellular Technology, Inc.
400 Royal Palm Way, Suite 410
Palm Beach, Florida 33480
Gentlemen:
We are acting as counsel for Applied Cellular Technology, Inc., a Missouri
corporation (the "Company"), in connection with the preparation and filing of a
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The Registration Statement relates to 8,279,858 shares of the Company's common
stock, $.001 par value per share (the "Shares").
In connection herewith, we have examined and relied without independent
investigation as to matters of fact upon such certificates of public officials,
such statements and certificates of officers of the Company and originals or
copies certified to our satisfaction of the Registration Statement, the Articles
of Incorporation and By-laws of the Company as amended and now in effect,
proceedings of the Board of Directors of the Company and such other corporate
records, documents, certificates and instruments as we have deemed necessary or
appropriate in order to enable us to render this opinion. In rendering this
opinion, we have assumed the genuineness of all signatures on all documents
examined by us, the due authority of the parties signing such documents, the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies.
Based upon and subject to the foregoing, it is our opinion that the
issuance of the Shares has been duly authorized by all requisite corporate
action of the Company, and that the Shares, when issued in accordance with such
authorization, will be legally issued and are fully paid and non-assessable
shares of Common Stock of the Company.
We hereby consent to the reference to our name in the Registration
Statement under the caption "Legal Opinion" and further consent to the filing of
this opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
BRYAN CAVE LLP
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 19, 1999 relating to the financial statements and
financial statement schedule of Applied Cellular Technology, Inc. which appear
in such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
June 18, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 24, 1998 relating to the financial statements and
financial statement schedule of Applied Cellular Technology, Inc. which appear
in such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ RUBIN, BROWN, GORNSTEIN & CO. LLP
Rubin, Brown, Gornstein & Co. LLP
St. Louis, Missouri
June 21, 1999
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated 6 August 1998, except for note 23 - differences
between United Kingdom and United States Generally Accepted Accounting
Principles as to which the date is 15 December 1998, with respect to the
financial statements of Signature Industries Limited included in the
Registration Statement (Form S-1) of Applied Cellular Technology, Inc. relating
to the sale of 8,279,858 shares of its common stock.
/s/ ERNST & YOUNG
London, England
24 June, 1999
