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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only [as permitted by Rule
14z-6(e)(2)]
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
APPLIED CELLULAR TECHNOLOGY, INC.
(name of Registrant as Specified In Its Charter)
--
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a6(i)(1), 14a6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF
APPLIED CELLULAR TECHNOLOGY, INC. (the "Company")
Richard J. Sullivan is hereby authorized to represent and to vote the shares
of the undersigned in the Company at an Annual Meeting (hereinafter referred
to as "Annual Meeting") of Stockholders to be held on August 2, 1996 and at
any adjournment as if the undersigned were present and voting at the meeting.
NOTE: Cumulative voting for directors is not allowed.
1. Election of Directors
FOR all nominees (except as written on the line below) [ ]
WITHHOLD AUTHORITY TO VOTE
for all nominees listed below [ ]
NOMINEES: Richard J. Sullivan, Garrett A. Sullivan, Daniel E.
Penni, Angela M. Sullivan
(INSTRUCTIONS: To withhold authority to vote for any individual
nominees write the nominee's name on the line below.)
----------------------------------------------------------------
2. Proposal to authorize increase in Common Shares to 20,000,000
Common Shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Proposal to amend Article Four of the Articles of Incorporation
to eliminate preemptive rights.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Proposal to authorize increase in Preferred Shares to 1,000,000
Preferred Shares and amend the terms of Preferred Shares such
that the Preferred Stock authorized may be issued from time to
time in series. The Board of Directors of the Company shall be
authorized to establish such series, to fix and determine the
variations and the relative rights and preferences as between
series, and to thereafter issue such stock from time to time.
The Board of Directors shall also be authorized to allow for
conversion of the Preferred Stock to Common Stock under terms
and conditions as determined by the Board of Directors.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. Proposal to Approve 1996 Non-Statutory Stock Option Plan
FOR [ ] AGAINST [ ] ABSTAIN [ ]
6. In their discretion, on any other business that may properly come
before the meeting.
The shares represented hereby will be voted. With respect to items 1 - 5
above, the shares will be voted in accordance with the specifications made
and where no specifications are given, said proxies will vote for the
proposals. This proxy may be exercised by a majority of those proxies or
their substitutes who attend the meeting.
Dated , 1996
----------------------------------------
Signature
----------------------------------------
Signature
Please sign, date and return in the enclosed envelope. Joint Owners should
each sign. Attorneys-in-fact, executors, administrators, trustees, guardians
or corporation officers, should give full title.
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APPLIED CELLULAR
----------------
technology
July 11, 1996
To the Stockholders of
Applied Cellular Technology, Inc.
You are cordially invited to attend an Annual Meeting (hereinafter referred
to as "Annual Meeting") of Stockholders of Applied Cellular Technology, Inc.
(the "Company"), to be held at the Branson Grand Ramada; 245 N. Wildwood;
Branson, Missouri 65616 on August 2, 1996, 11:00 A.M., Central Standard
time, to consider and vote upon the matters set forth in the accompanying
Notice of Annual Meeting of Stockholders.
In addition to the election of directors and the approval of independent
certified public accountants for the fiscal year ended December 31, 1995,
Shareholders will be asked to approve the Company's 1996 Non-Statutory Stock
Option Plan. Approval of the Non-Statutory Stock Option Plan would be
economically beneficial to the Company. The Company would be able to
partially compensate eligible participants in a non-monetary manner with the
1996 Non-Statutory Stock Option Plan. The Company is proposing the approval
of the increase in the authorized Common Shares, an increase in the
authorized Preferred Shares and a revision to the terms of the Preferred
Shares. These increases and the revision will be beneficial to the Company in
its efforts to acquire entities within similar industries that have a history
of profitable operations. The Company is also requesting approval of the
removal of Article Four of the Articles of Incorporation regarding preemptive
rights.
Since it is important that your shares be represented at the meeting whether
or not you plan to attend in person, please indicate on the enclosed proxy
your decisions about how you wish to vote and sign, date and return the proxy
promptly in the envelope provided. If you find it possible to attend the
meeting and wish to vote in person, you may withdraw your proxy at that time.
Your vote is important, regardless of the number of shares you own.
Sincerely,
/s/ Richard J. Sullivan
Richard J. Sullivan
Chairman of the Board of Directors
Chief Executive Officer
P.O. Box 2067 * James River Professional Center * Suite 2 * Nixa, MO 65714
TEL 417.725.9888 FAX 417.725.5350
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APPLIED CELLULAR TECHNOLOGY, INC.
--------------------------
NOTICE OF
ANNUAL MEETING
OF STOCKHOLDERS
To Be Held
August 2, 1996
--------------------------
To the Stockholders of
Applied Cellular Technology, Inc.
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of Applied
Cellular Technology, Inc. (the "Company") will be held on August 2, 1996 at
11:00 o'clock in the morning, local time at the Branson Grand Ramada located
at 245 N. Wildwood; Branson, Missouri 65616 for the following purposes; all
as more specifically set forth in the attached Proxy Statement.
1. To consider and vote upon the re-election and election of the
Officers and Directors of the Company.
2. To consider and vote upon the proposal to authorize increase in
Common Shares to 20,000,000 Common Shares.
3. To consider and vote upon the proposal to authorize increase in
Preferred Shares to 1,000,000 Preferred Shares and to amend the terms of the
Preferred Shares.
4. To consider and vote upon proposal to amend Article Four of the
Articles of Incorporation to eliminate preemptive rights.
5. To consider and vote upon the proposal to approve the 1996
Non-Statutory Stock Option Plan
6. To transact such other business as may properly be brought before
this meeting.
Only holders of record of Common Stock of the Corporation as of the close of
business on July 8, 1996 are entitled to notice of or to vote at the meeting
or any adjournment thereof. The stock transfer books of the Corporation will
not be closed.
Stockholders are encouraged to attend the meeting in person. To ensure that
your shares will be represented, we urge you to vote, date, sign and mail the
Proxy Card in the envelope which is provided, whether or not you expect to be
present at the meeting. The prompt return of your Proxy Card will be
appreciated. It will also save the Company the expense of a reminder
mailing. The giving of such Proxy will not affect your right to revoke such
Proxy by appropriate written notice or to vote in person should you later
decide to attend the meeting.
By order of the Board of Directors
/s/ Richard J. Sullivan
Richard J. Sullivan
July 11, 1996 Chairman of the Board of Directors
Chief Executive Officer
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PROXY STATEMENT
APPLIED CELLULAR TECHNOLOGY, INC.
--------------------------
ANNUAL MEETING OF STOCKHOLDERS
To Be Held August 2, 1996
--------------------------
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Applied Cellular Technology, Inc., a
Missouri corporation (the "Company"), to be voted at an Annual Meeting of
Stockholders of the Company to be held on August 2, 1996 at 11:00 P.M.,
Central Standard time, at the Branson Grand Ramada, 245 N. Wildwood, Branson,
Missouri 65616 and at any adjournment thereof (the "Meeting"). The Proxy may
be revoked by appropriate written notice at any time before it is exercised.
See, "Voting and Solicitation of Proxies".
This Proxy Statement and the accompanying Notice and Form of Proxy are being
mailed on or about July 11, 1996 to record holders of the Company's Common
Stock as of July 8, 1996 (the "Record Date").
As of Record Date, 2,439,920 shares of Common Stock of the Corporation were
issued and outstanding. Each share of Common Stock entitles the holder to
one vote on all matters brought before the Annual Meeting.
The Company was originally incorporated in 1988 under the name of Axcom
Computer Consultants ("Axcom") and operated as a custom programming and
systems house. In May, 1993, the Company was acquired by Great Bay
Technology, Inc. for the purpose of focusing the Company on marketing and
sales of emerging cellular data technology hardware and proprietary software
focused on the vertical markets of wholesale distribution, manufacturing and
health care. The name was subsequently changed to Axcom Information
Technology, Inc. on May 27, 1993 and then changed again in April, 1994 to
Applied Cellular Technology, Inc.
In November, 1994, the Company formed a subsidiary, Kedwell International,
Inc. by issuing 180,000 shares of its $.001 par value common stock. The
subsidiary purchased software in exchange for its 180,000 shares of the
Company's common stock valued at $5.00 per share and for the issuance of
120,000 Class E Warrants of the Company. In August 1995, the Class E
Warrants were redeemed for 120,000 common shares of the Company.
During 1994, the Company acquired 570,712 shares of Cadkey, Inc., a software
technology company, in exchange for 456,570 shares of its common stock,
resulting in a 29% investment in this corporation.
Pursuant to the original Articles of Incorporation, the Company has the
authority to issue an aggregate of Ten Million (10,000,000) common shares,
par value $1.00 per common share. In April, 1994, an amendment to the
Articles of Incorporation changed the par value to $.001 per common share.
The Company also has the authority to issue 20,000 shares of redeemable
Preferred Stock, par value $10.00.
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The Company's executive offices are located at James River Professional
Center, P.O. Box 2067, Highway 160 & CC, Suite 3, Nixa, Missouri 65714 -
Telephone number (417) 725-9888.
The Company is a software development and services company which integrates
the technologies of Client-Server Computing; Object Oriented Programming;
Automated Data Collection Systems utilizing spread spectrum cellular
communications and auto-identification technologies; inter-processor and
inter-process communications using LU6.2, TCP/IP, RJE and proprietary
asynchronous and synchronous protocols and Micro-Cellular Radio Frequency
Data Networks. However, to date, revenues have been derived primarily from
the sales and distribution of third party hardware and software.
ELECTION OF BOARD OF DIRECTORS
Pursuant to the Bylaws, each Director shall serve until the annual meeting of
the stockholders, or until his successor is elected and qualified. The
Company's basic philosophy mandates the inclusion of directors who will be
representative of management, employees and the minority shareholders of the
Company. Directors may only be removed for "cause". The term of office of
each officer of the Company is at the pleasure of the Company's Board.
The principal executive officers and directors of the Company are as
follows:
Name Position Term(s) of Office
- -----------------------------------------------------------------------------------------------
Richard J. Sullivan, age 56. Chairman of the Since May 20, 1993
Board of Directors to present
Garrett A. Sullivan, age 60 Director
President, Secretary March 31, 1995
Acting Chief Financial Officer to present
Daniel E. Penni, age 48 Director March 20, 1996
to present
The following individuals are seeking re-election or initial election to the
Board of Directors:
Richard J. Sullivan, Chairman. Mr. Sullivan is currently Chairman of Great
Bay Technology, Inc., the parent company of ACT. 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 successful 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, MA, 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 Sullivan.
Garrett A. Sullivan. Mr. Sullivan is currently President, Secretary,
Acting Chief Financial Officer and a Director of the Company. He was an
Executive Vice President of Envirobusiness, Inc., an environmental consulting
firm from 1993-1994. He was previously a partner of The Bay Group, a merger
and acquisition firm in New Hampshire from 1988 to 1993. Mr. Sullivan was
President of Granada Hospital Group, Burlington, MA., the world's largest
hospital television systems supplier from 1981-1988. Mr. Sullivan received a
Bachelor of Arts degree from Boston University in 1960 and he obtained an MBA
from Harvard University in 1962.
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Daniel E. Penni. Mr. Penni has been involved in the financing of several
start up companies in the past five years on a financial consultant basis.
Mr. Penni has been involved in the insurance business in many sales and
administrative roles since 1969. He was President of The Boston Insurance
Center, Inc., an insurance company until 1988. Mr. Penni was founder and
President of BIC Equities, Inc., a broker/dealer registered with the NASD.
This firm was involved in the sale of mutual funds and tax advantaged
investments from 1978 to 1988. Mr. Penni graduated with a Bachelor of
Science degree in 1969 from the School of Management at Boston College.
Angela M. Sullivan. From 1988 to present, Ms. Sullivan has been a partner
in The Bay Group, a private merger and acquisition firm, President of Great
Bay Technology, Inc., an affiliate of the Company and President of Economy
Car Care Centers, Inc. Ms. Sullivan received a Bachelor of Science degree
in Business Administration in 1980 from Salem State College. Ms. Sullivan
is married to Mr. Richard J. Sullivan.
The affirmative vote of a majority of the shares of Common Stock of the
Company represented and voting at the Annual Meeting is required for approval
of the above Directors. The Board of Directors unanimously recommends a
vote FOR the re-election of Richard J. Sullivan, Garrett Sullivan and the
election of Daniel E. Penni and Angela Sullivan to the Board of Directors of
the Company. Proxies solicited by management will be so voted unless
stockholders specify otherwise.
INCREASE IN AUTHORIZED NUMBER OF COMMON SHARES
The Company's articles of incorporation authorize it to issue up to
10,000,000 Common Shares, par value $.001 per Common Share. There are
currently outstanding 2,439,920 Common Shares. Currently 950,000 Common
Shares are reserved for issuance pursuant to outstanding Class B, Class F and
Class I Warrants.
Holders of Common Shares of the Company are entitled to cast one vote for
each share held at all shareholders meetings for all purposes, including the
election of directors, and to share equally on a per share basis in such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon liquidation or dissolution, each outstanding Common
Share will be entitled to share equally in the assets of the Company legally
available for distribution to shareholders after the payment of all debts and
other liabilities. Common Shares are not redeemable, have no conversion
rights and do carry preemptive rights to subscribe to or purchase additional
Common Shares in the event of a subsequent offering.
The Company proposes to increase the authorized number of Common Shares to
20,000,000. This increase will be beneficial to the Company in its efforts
to acquire entities within similar industries that have a history of
profitable operations through the issuance of Common Shares of the Company as
consideration.
The Company is registering 1,000,000 Common Shares pursuant to a pending
registration statement, File No. 33-93962. The sale of these Common Shares
could have a negative effect on the market value of outstanding securities
held by existing shareholders. The completion of the proposed public offering
is not dependent upon shareholder approval of the proposed amendments to
increase the number of authorized Common and Preferred Shares.
Additionally, the Company has acquired companies through the issuance of
common stock of the Company at the then current market value (discounted at
50%) which is higher than the offering price herein and the current market
value. These common shares have registration rights and subsequent sale
upon registration could have a negative impact on the market price of the
Company's common stock.
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Pursuant to the agreement to acquire 80% of the outstanding shares of
Burling, the Company shall issue $57,600 in common shares of the Company in
addition to the issuance of Preferred Shares. For a further information of
the acquisition, see discussion on the increase in the authorized number of
Preferred Shares. Other than this issuance, there are not currently any
other plans, arrangements, negotiations, or understandings to issue Common
Shares with respect to any other acquisitions.
The affirmative vote of a majority of the shares of Common Stock of the
Company represented and voting at the Annual Meeting is required for approval
of the increase in the number of authorized Common Shares. The Board of
Directors unanimously approved the proposal and recommends a vote FOR the
proposal to effectuate the increase in the number of authorized Common Shares
to Twenty Million (20,000,000). Proxies solicited by management will be so
voted unless stockholders specify otherwise.
ELIMINATION OF PREEMPTIVE RIGHTS
Article Four of the Articles of Incorporation provides that there are no
limitation or denials of the preemptive rights of a shareholder to acquire
additional shares. The preemptive right is the preferential right of
existing shareholders to subscribe to or purchase new stock in proportion to
the number of shares held by them. Missouri law allows for the limitation
of preemptive rights.
The Board of Directors believe that the preemptive rights of common
stockholders are not needed for stockholder protection. Preemptive rights
are useful principally to allow stockholders in small, closely held companies
to maintain their proportionate ownership interest. The Company's common
stock is traded on NASDAQ and any stockholder desiring to maintain a
continuing proportionate interest in the Company's stock may do so through
market purchases. An advantage of maintaining a continuing proportionate
interest through market purchases is that any stockholder may buy the
securities at any time depending on the stockholder's availability of funds
and the current market price. The stockholder must purchase any securities
to be available pursuant to preemptive rights during the offering period.
Additionally, the price of the securities which may be available pursuant to
preemptive rights shall be set or restricted due to the terms of the offering
and the timing of the effective date.
The Company currently has approximately 1,800 stockholders and prior to the
application of preemptive rights, the Company shall have to determine the
number of shares necessary to allow the current shareholders to maintain a
continuing proportionate interest in the Company's stock. The Company is
currently in an acquisition mode and intends to pursue future acquisitions.
Due to the number of stockholders and the potential frequency of the
Company's acquisitions, the application of preemptive rights would require
the approval of the issuance of securities pursuant to a registration
statement each time. The registration process can be a lengthy and
expensive one.
Moreover, the Board believes that the Company's ability to obtain funds
promptly and effectively upon the most favorable terms might be impaired if
the Company were first required to offer securities to the stockholders.
The absence of preemptive rights does not preclude shares being offered to
stockholders in the future on a pro rata basis whenever desirable.
The affirmative vote of a majority of the shares of Common Stock of the
Company represented and voting at the Annual Meeting is required for approval
of the elimination of preemptive rights. Due to the above discussion and
the complexity and expense of the application of the preemptive rights for a
public company, the Board of Directors unanimously approved the proposal and
recommend a vote FOR the proposal to amend the Articles of Incorporation and
eliminate any preemptive rights.
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INCREASE IN AUTHORIZED NUMBER OF PREFERRED SHARES
The Company's Articles of Incorporation authorize the issuance of 20,000
Preferred Shares, par value $10.00. There are currently no Preferred Shares
outstanding and none have been reserved for issuance pursuant to outstanding
options, warrants, rights or convertible securities. The Preferred Stock
shall earn a cumulative annual dividend of 6%, payable in arrears annually
within 30 days of the end of the fiscal year of the Corporation. The
Preferred Stock shall be redeemable by the Corporation at any time but shall
be required to be redeemed by the Corporation at such time as the Corporation
has received a cumulative total of $500,000 in funding or capitalization
through private placement, warrant exercise, public offering or any other
such means excluding lines of credit or revenue from sales and excluding
funds received from the sale of the Preferred Stock. The Preferred Stock
shall be redeemed at par value plus any interest accumulated to date and by
the issuance to the Preferred Stockholders, of a total of 45,000 Common Stock
purchase warrants (C Warrant). The C Warrants shall be issued pro-rata to
the shareholders of the Preferred Stock.
Due to the restrictive nature of the above terms, the Board of Directors
recommend that the terms of the Preferred Stock be amended as follows: The
Company proposes that the number of authorized Preferred Shares be increased
to 1,000,000. The Company believes that the availability of the Preferred
Stock will provide the Company with increased flexibility in structuring
possible future financings and acquisitions, and in meeting other corporate
needs which might arise. Having such authorized shares available for
issuance will allow the Company to issue shares of the Preferred Stock
without the expense and delay of a special stockholders' meeting. The
authorized shares of the Company, as well as the shares of Common Stock, will
be available for issuance without further action by the Company's
shareholders, unless such action is required by applicable law or the rules
of any stock exchange on which the Company's stock may then be listed.
Although the Board has no intention at the present time of doing so, it could
issue a series of Preferred Stock that could, depending on the terms of such
series, either impede or facilitate the completion of a merger, tender offer
or other takeover attempt. For instance, such series of Preferred Stock
might impede a business combination by including class voting rights which
would enable the holder to block such a transaction or facilitate a business
combination by including voting rights which would provide a required
percentage vote of stockholders. The Board will make any determination to
issue such shares based on its judgment as to the best interest of the
Company and its then existing stockholders. The Board, in so acting, could
issue Preferred Stock having terms which could discourage an acquisition
attempt or other transaction that some, or a majority of the stockholders
might believe to be in their best interest or in which stockholders might
receive a premium for their stock over the then market price of such stock.
In this respect, certain companies have recently issued, to the holders of
their common stock, preferred stock, rights or warrants to acquire preferred
stock or common stock having terms designed to protect against the adverse
consequences to stockholders of partial takeovers, front-end loaded two-step
takeovers and freezeouts and other abusive takeover tactics. The authorized
and unissued Preferred Stock, as well as the authorized and unissued Common
Stock, would be available for such purpose.
The Company may need to raise additional capital in the future and pursue
acquisitions which may require the issuance of preferred shares as partial
consideration.
In March, 1996, the Company purchased 80% of the shares of Burling
Instruments, Inc. ("Burling") 16 River Road, Chatham, NJ 07928-0298
(telephone 201-635-9481) from the John L. Kemmerer, Jr. Trust. The
acquisition is an exchange of 9,000 shares of convertible preferred shares of
the Company at a value of $100 each plus $57,600 in common shares of the
Company for 80% of the outstanding shares of Burling. The Preferred Shares
may be converted at the price of $5.75 per common share over two years at the
choice of the buyer. The preferred shares will pay an annual dividend of
8%. The
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authorization of the Preferred Shares is being sought in this proxy
statement. The transaction is described in its entirety in the Agreement
and Plan of Reorganization between the Company and the John L. Kemmerer, Jr.
Trust dated March 7, 1996. The common shares of Burling Instruments, Inc.
are being held in escrow until the completion of this Annual Meeting of the
Shareholders of the Company. If shareholder approval regarding the increase
in the authorized preferred Shares is not received, the Company may have to
return the common shares of Burling unless alternative terms can be
negotiated. These terms may include cash payments in lieu of the issuance
of Preferred Shares. There can be no assurance that the Company would be
able to negotiate favorable terms or obtain amounts necessary for any cash
payment.
Other than the acquisition of Burling Instruments, Inc., there are not
currently any other plans, arrangements, negotiations, or understandings to
issue Preferred Shares with respect to any future acquisitions.
The affirmative vote of a majority of the shares of Common Stock of the
Company represented and voting at the Annual Meeting is required for approval
of the change of the terms and an increase in the number of authorized
Preferred Shares. The Board of Directors unanimously approved the
proposal and recommends a vote FOR the proposal to effectuate the amendment
to change the terms of the Preferred Shares and to increase in the number of
authorized preferred shares to One Million (1,000,000). Proxies solicited by
management will be so voted unless stockholders specify otherwise.
1996 NON-STATUTORY STOCK OPTION PLAN
The Company needs to continue to attract and retain persons of experience and
ability and whose services are considered valuable. In addition the Company
needs to continue to encourage the sense of proprietorship in such persons
and to stimulate the active interest of such persons in the development and
success of the Company. As a result, the Board of Directors has approved the
1996 Stock Option Plan and reserved for issuance 2,000,000 Common Shares
pursuant to the 1996 Stock Option Plan. The source of Common Shares to be
reserved for issuance under the 1996 Non-Statutory Stock Option Plan shall be
a portion of the currently authorized Common Shares. The Plan will terminate
on March 15, 2006 and no option may be granted pursuant to the Plan
thereafter.
Options are granted only to persons who are employees of the Company or a
subsidiary corporation of the Company (including any subsidiary which may be
organized or acquired subsequent to adoption of the Plan) who agree to remain
in the employ of, and render services to, the Company or a subsidiary
corporation of the Company for a period of at least one (1) year from the
date of the granting of the option. The term "employees" shall include
officers, directors, executives and supervisory personnel, as well as other
employees of the Company or a subsidiary corporation of the Company.
The purchase price under each option issued is determined by a Committee (of
not less than three members, at least one of whom shall be a Director of the
Company), at the time the option is granted, but in no event shall such
purchase price be less than 85 percent of the fair market value of the
Company's Common Stock on the date of the grant. All options issued under
the Plan shall be for such period as the Committee shall determine, but for
not more than ten (10) years from the date of grant thereof.
New Plan Benefits. The benefits or amounts that will be received by or
allocated to the executive officers, directors or employees cannot be
determined. At the end of each fiscal year, the compensation committee
determines who shall receive the options. The compensation committee, which
is composed of the Board of Directors, reviews all employees after the end of
each fiscal year. Particular attention is paid to each employee's
contribution to the current and future success of the Company along with
their salary level as compared to the market value of personnel with similar
skills. The
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compensation committee also looks at accomplishments which are
above and beyond management's normal expectations for their position.
The affirmative vote of a majority of the shares of Common Stock of the
Company represented and voting at the Annual Meeting is required for approval
of the 1996 Non-Statutory Stock Option Plan. The Board of Directors
unanimously approved the proposed 1996 Non-Statutory Stock Option Plan and
recommends a vote FOR the proposed 1996 Non-Statutory Stock Option Plan.
Proxies solicited by management will be so voted unless stockholders specify
otherwise.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following tables list the Company's stockholders who, to the best of the
Company's knowledge, own of record or, to the Company's knowledge,
beneficially, more than 5% of the Company's outstanding Common Stock; the
total number of shares of the Company's Common Stock beneficially owned by
each Director; and the total number of shares of the Company's Common Stock
beneficially owned by the Directors and elected officers of the Company, as a
group.
There are currently 2,439,920 Common Shares outstanding and no Preferred
Shares outstanding. The following tabulates holdings of shares of the
Company by each person who, subject to the above, at the date of this
Memorandum, holds of record or is known by Management to own beneficially
more than 5.0% of the Common Shares and, in addition, by all directors and
officers of the Company individually and as a group.
Shareholdings at
Record Date
----------------------
Amount
Name and Address of of Common Shares
Beneficial Owner Currently Owned Percent
- ---------------------------------------------------------------------------------------------
Great Bay Technology<F1>
Group, Inc.
19 Nathaniel Drive
Amherst, NH 03030 315,000 9.67%
Garrett Sullivan
29 Concord Avenue
Cambridge, Massachusetts 02138 0 0%
Daniel Penni
31 Arnold Road
Wellesley, MA 02181 65,000 2.79%
Rudolf Kunzli
Chateau Beauregard
F-39350
Pagney, France 656,570 29.07%
All Directors & Officers
as a group (3) 380,000 16.29%
<FN>
<F1> Angela Sullivan, Stephanie Sullivan and Richard Sullivan are the control
persons of Great Bay Technology Group, Inc.
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There are currently 200,000 Class B Warrants, 300,000 Class F Warrants and
450,000 Class I Warrants outstanding. The following tabulates holdings of
Warrants to be distributed and owned beneficially by all directors and
officers of the Company individually and as a group.
Class and Number Percent of
Name and Address of Warrants<F1> Class
- ---------------------------------------------------------------------------------------
Richard J. Sullivan Class B<F2> - 140,000 70.00%
Class F<F2> - 250,000 83.33%
Class I<F3> - 300,000 66.67%
Garrett Sullivan Class B - 0 0%
Class F - 0 0%
Class I - 100,000 22.22%
Daniel E. Penni Class B - 0 0%
Class F - 0 0%
All Directors & Officers
as a group (3) Class B - 140,000 70.00%
Class F - 250,000 83.33%
Class I - 400,000 88.89%
<FN>
<F1>pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, 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 the
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.
<F2>Represents Class B and F Warrants owned by Great Bay Technology. Angela
Sullivan, Stephanie Sullivan and Richard Sullivan are the control persons of
Great Bay Technology Group, Inc.
EXECUTIVE COMPENSATION
Remuneration. The following table sets forth certain summary information
concerning the total remuneration paid or accrued by the Company, to or on
behalf of the Company's Chief Executive Officer and the Company's other
executive officer as of the end of each of the last three years.
SUMMARY COMPENSATION TABLE
Annual Long Term Compensation
Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Awards SARs Outs sation
Position Year ($) ($) ($) ($) ($) ($) ($)
Gary Gray
President, Secretary 1993 $20,999,98 - - - - - -
Chief Financial Officer 1994 $51,346.14 - - - - - -
1995 N/A - - - - - -
Page 10
13
Garrett Sullivan<F1> 1993 N/A - - - - - -
President, Secretary 1994 N/A - - - - - -
Acting Chief Financial
Officer 1995 $27,745.00 - - - - - -
<F1>Mr. Sullivan also received $29,000 in non-employee compensation for
consulting fees for a trial consultancy period from May through September,
1995 and $2,337 was paid by the Company for insurance . Mr. Sullivan was
subsequently hired as President of the Company.
Compensation Pursuant to Plans. The Company has no plan 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 and group described in paragraph (a) of this Item. None of the
directors of the Company received or became entitled to any amounts during
fiscal 1995 pursuant to any plan.
Stock Option and Stock Appreciation Right Plans - See discussion under "1996
Non-Statutory Stock Option Plan" above.
Compensation of Directors. Directors of the Company who are not employees
of the Company may receive a fee of $250 per meeting for their attendance at
meetings of the Company's Board of Directors, and are entitled to
reimbursement for reasonable travel expenses.
Termination of Employment and Change of Control Arrangement. The Company
has no compensatory plan or arrangements, including payments to be received
from the Company, with respect to any individual named in paragraph (a) and
(b) of this Item, for the latest or the next preceding fiscal year, if such
plan or arrangement results or will result from the resignation, retirement
or any other termination of such individual's employment with the Company, or
from a change in control of the Company or a change in the individual's
responsibilities following a change in control.
CERTAIN TRANSACTIONS
Changes in Control. There are no arrangements, known to the Company,
including any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change of control of
the Company.
Issuance of Warrants to Certain Shareholders and Officers. In January 1996,
the Board of Directors authorized the issuance of 450,000 Class I warrants to
certain shareholders and officers. The warrants will be exercisable for a
period of five years from the date of issuance at the exercise price of one
Warrant plus $2.87 for each Common Share.
Related Party Transactions. The Company originally loaned $14,230 to one
officer for personal reasons at the interest rate of 6% with current balance
of $12,982. The loan does not have a payback term. Due to the lack of a
specific payback term, it is management's opinion that the terms of the loan
are believed to be less favorable, though not materially so, to the Company
as those that would have been entered into with unrelated parties.
Additionally, amounts totaling approximately $108,437 were loaned to Great
Bay Technology, Inc. at the interest rate of 8% with a current balance of
$0.00. The loan to Great Bay Technology, Inc. was offset by an invoice
received from Great Bay Technology, Inc. on June 8, 1995 for $120,000 for
investment banking services rendered by Great Bay Technology, Inc. for the
Company in 1995. Management has adopted the policy that future loans to
any related parties shall be made at terms at least as favorable to the
Company as those that would have been entered into with unrelated parties and
will not be made if such loans will negatively affect the Company's cash flow
and hamper continued operations.
Page 11
14
For services rendered in connection with the three acquisitions which took
place in the third quarter of 1995, the Company paid its affiliate company -
Great Bay Technology Group, Inc. $50,000 for each acquisition for investment
banking services and $76,500 for acquisition services rendered in the fourth
quarter for acquisitions to occur in 1996. These acquisition services were
investment banking services including negotiations of the terms of the
purchase and sales, and employment agreements specifically relating to the
acquisition of Quality Solutions which closed February 13, 1996 for Atlantic
Systems, Inc.
Consulting Agreement. The Company has entered into a consulting agreement
with Pratt, Wylce & Lords, Ltd. ("Pratt") in March 1993 to assist the Company
in its capitalization and the obtaining of additional financing. These
services were rendered in connection with a public registration on Form S-1.
As partial payment for consulting services, the Company issued 86,500 of its
common shares to Pratt valued at $1.50 for an aggregate value of $129,750,
40,000 which were distributed to Pratt shareholders pursuant to its
registration statement on Form S-1 declared effective in August, 1994. In
addition, Pratt received cash compensation of $35,000.
Lockup Agreement. Pursuant to an oral agreement on May 15, 1994 and a
written agreement on September 14, 1994, the shareholders who received
warrants issued them pursuant to the "Joint Action by Unanimous Consent of
the Board of Directors and Shareholders" date March 25, 1994 have agreed as
follows:
In the event the shareholder exercises any warrants, the stock issued to the
shareholder pursuant to the exercise shall be locked in and restricted from
trading for a period of two years. A notice is to be placed on the face of
each stock certificate covered by the terms of the Agreement stating that the
transfer of the stock evidenced by the certificate is restricted until
twenty-four (24) months from the date of issuance. The shareholder also
agrees not to sell or otherwise transfer their interest in the warrants
except to an underwriter or other market makers in the stock once a market is
established. The shareholder further agrees that the total value in cash,
or other consideration, paid by the buyer to the seller shall not exceed
$.001 per warrant.
Acquisition of Burling Instruments, Inc. In March, 1996, the Company
purchased 80% of the shares of Burling Instruments, Inc. ("Burling") 16 River
Road, Chatham, NJ 07928-0298 (telephone 201-635-9481) from the John L.
Kemmerer, Jr. Trust. . The aggregate value of consideration paid by the
Company is $962,400. The remaining 20% of the shares are held by Vernon
Anderson, the current president, who remains in that position under a new
employment agreement with the Company.
The acquisition is an exchange of 9,000 shares of convertible preferred
shares of the Company at a value of $100 each plus $57,600 in common shares
of the Company for 80% of the outstanding shares of Burling. The Preferred
Shares may be converted at the price of $5.75 per common share over two years
at the choice of the buyer. The preferred shares will pay an annual
dividend of 8%. The authorization of the Preferred Shares is being sought
in this proxy statement. The transaction is described in its entirety in
the Agreement and Plan of Reorganization between the Company and the John L.
Kemmerer, Jr. Trust dated March 7, 1996.
The Company entered into the transaction because (i) the operations of
Burling fit with the Company's RF wireless technology which when combined
with the Burling's current line, could greatly expand Burling's market
potential; (ii) Burling can be expanded profitably by assembling products
Burling is now importing as finished goods; and (iii) Burling has an
excellent reputation that can be promoted and expanded in current markets of
the Company.
The valuation of the transaction was based on projected earnings under the
combined management of Burling and the Company. The Company has a policy of
acquiring
Page 12
15
companies at 4 times projected earnings before interest and taxes (EBIT). After
that determination is made, the number of shares to be issued by the Company is
based on the current market price of the Common Shares at the time of closing
($4.75) plus a $1.00 per share premium. The Company did not obtain an opinion
from an independent financial analyst for valuation purposes due to the cost
because the Company, as an operating entity depends on the expertise of the
Chairman who has extensive experience in investment banking, with follow up
review of the Board of Directors.
Based on current projections of Burling's income of $167,500 for the ten
months ended December 31, 1996, the incremental shares issued to purchase
Burling will earn approximately $1.00 per share in 1996. Therefore, the
overall interest of current shareholders will be enhanced by the issuance of
shares to Burling and the acquisition will result in no dilution to current
shareholders.
Burling will be covered on the Company's books as an 80% owned subsidiary and
the transaction will be treated as a tax-free exchange of stock.
The Agreement and Plan of Reorganization requires that 8% dividends to be
paid by the Company to the Kemmerer Trust by the 66th day of the two calendar
years following the year of issuance. Currently, the aggregate amount of
dividends in arrears that are payable by the Company to the Kemmerer Trust is
$0.00. There are no other dividends payable or in arrears by the Company.
There are no federal or state regulatory requirements which must be complied
with or whose approval must be obtained in connection with the transaction.
Business and Properties of Burling. Burling was originally founded in 1935
as a proprietorship. Burling was incorporated in New Jersey in 1985.
Since its inception, as Burling Instruments, Inc., there has never been a
bankruptcy, receivership or similar proceeding, nor has there been a major
consolidation or purchase or sale of any significant assets until the
proposed purchase of 80% of Burling's common stock by the Company. Burling
is a manufacturer of Industrial Temperature Controls (Standard Industrial
Classification 3823).
Products. Burling's principal products are Electromechanical
temperature controls, Electronic temperature controls and imported
Thermostats. Burling's products are sold by independent sales
representatives throughout the United States and Europe. These independent
sales representatives are serviced by Burling's inside sales desk in Chatham,
New Jersey. Burling has a mature product line and has not publicly announced
any new products or services. Burling has a less than one per cent market
share in the process control market.
Raw Materials. Burling buys its raw materials from domestic suppliers
of switches, tubing, castings, fasteners and sheet metal stampings. Some of
its principal suppliers are Microswitch, Tube Sales, Fastbolt, Eastern
Castings and Bloomfield Manufacturing. Burling has alternate sources
available at similar costs for the raw materials.
Customers; Seasonability; Backlog. Burling has no dependence on one
or a few major customers. Its largest customer represents less than 5% of
its total sales. Burling's business is not seasonal in nature. At December
31, 1994 and 1995, Burling had a backlog of unfilled orders for its products
of approximately $200,000.
Patents, Trademarks and Licenses. Burling has no patents, trademarks,
licenses, etc. that are affecting the business and there is no required
governmental approval of its principal products or services, nor is there any
material effect on the business by government regulations.
Page 13
16
Research and Development. Burling's research and development expenses
have amounted to approximately $1,000 in each of the last two years.
Customers of Burling have not borne any of the research and development
expenses of Burling.
Competition. Burling will be competing with established companies and
other entities (many of which may possess substantially greater resources
than Burling). Almost all of the companies with which Burling competes are
substantially larger, have more substantial histories, backgrounds,
experience and records of successful operations, greater financial,
technical, marketing and other resources, more employees and more extensive
facilities than Burling now has, or will have in the foreseeable future. It
is also likely that other competitors will emerge in the near future. There
is no assurance that Burling's products will compete successfully with other
established and/or well regarded products. Primary competition are
companies such as United Electric, Fenwal, Part Low, Barksdale, Love
Controls, Athena, Robertshaw, Sensors and Switches and RANCO. Burling shall
compete on the basis of quality and cost of its products. Inability to
compete successfully might result in increased costs, reduced yields and
additional risks to the investors herein
Environment. Burling has spent under $500 per year to have hazardous
waste materials shipped to a licensed disposal site with appropriate paper
work supporting compliance with existing Federal and New Jersey laws
governing such removal.
Employees. Burling presently employs nineteen (19) people, fifteen
(15) of them full time.
Legal Proceedings. There are no existing legal proceedings involving
Burling.
Properties. Burling currently leases an 11,000 square foot, single
story building in good condition at 16 River Road, Chatham, New Jersey. The
building is currently on a six (6) month extension of a five (5) year lease.
Management of Burling believes that building has adequate insurance
protection.
Market for Burling's Common Equity and Related Stockholder Matters.
Burling's common stock is privately held and there is no market for Burling's
common stock. The approximate number of holders of record of Burling's $.001
par value common stock, as of December 31, 1995, was two. Currently, as of
March 31, 1996, there are two holders of record. Holders of Burling's
common stock are entitled to receive such dividends as may be declared by its
Board of Directors. Since inception no dividends on the Company's common
stock have ever been paid, and the Company does not anticipate that dividends
will be paid on its common stock in the foreseeable future.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Burling.
Trends and Uncertainties. Burling has tried to limit the major
variables of interest rates and operating expense. However, as Burling has
little or no control as to the demand for its products and services,
inflation and changing prices could have a material effect on the future
profitability of Burling.
The gross profit as a percent of sales has remained fairly steady (40% for
fiscal 1994, 44% for fiscal 1995 and 40% for fiscal 1996. However, net
income (1% of gross sales in fiscal 1994, 3.0% of gross sales in fiscal 1995
and 1.% of gross sales in fiscal 1996) is usually subject to year end
adjustments and is therefore harder to project at this time. There can be
no assurance that gross profit as a percent of sales will remain at current
levels or that net income as a percentage of gross sales will not continue to
decline.
Capital Resources and Source of Liquidity. Burling currently has no
material commitments for capital expenditures. Burling currently has a
negative cash flow from investing activities and financing activities,
however, Burling has positive cash flow from
Page 14
17
operating activities which is sufficient to cover Burling's working capital
needs on a short-term basis.
For the year ended February 29, 1996, Burling made capital expenditures for
equipment of $1,137. Net cash used in investing activities for the year
ended February 29, 1996 was $1,137.
For the year ended February 28, 1995, Burling made capital expenditures for
equipment of $10,000, and paid a security deposit of $321, resulting in cash
used by investing activities of $10,321.
Burling made principal payments on its long-term debts of $20,595 for the
year ended February 29, 1996. Burling received $20,000 on a temporary bank
loan for the year ended February 29, 1996. As a result, net cash used by
financing activities for the year ended February 29, 1996 was $595.
Burling made principal payments on its long-term debts of $100,000 for the
year ended February 28, 1995. As a result, net cash used in financing
activities for the year ended February 28, 1995 was $100,000.
On a long term basis, liquidity is dependent on increased revenues from
operations, additional infusions of capital and debt financing. The Company
and Burling believes that additional capital and debt financing in the short
term will allow Burling to increase its marketing and sales efforts and
thereafter result in increased revenue and greater liquidity in the long
term. The Company and Burling believes that Burling's increased revenue
from operations will result in sufficient working capital and liquidity in
the long term. However, there can be no assurance that Burling will be able
to obtain additional equity or debt financing in the future, if at all.
Plan of Operation. The Company and Burling plan to increase Burling's
current revenues and net earnings by using the Company's current industry
knowledge to expand Burling's sales in high-tech areas.
The current operations of Burling are estimated to generate approximately
$1,700,000 in revenues in the fiscal year 1996 and are projected to generate
at least that same amount in fiscal year 1997. No external matters in the
industry have occurred that have affected Burling in an adverse way. Burling
has not experienced any labor difficulties or any other internal impediments.
The nature of Burling's business does not require any significant ongoing
capital expenditures, only increases in working capital. If revenues were
not sufficient, to maintain working capital needs, management would pursue
lines of credit.
For the year ended February 28, 1995, the Company had a positive cash flow
from operations of $83,338, had a positive cash flow of $44,514 for the nine
months ended November 30, 1995 and the preliminary estimate for 1996
indicates that the Company's performance should retain a positive cash flow
and that its cash flow needs can be met through current operations.
Management's assessment of future performance is limited to projections based
on current conditions and does not include any uncertainties which may arise.
Potential investors should not attribute undue certainty to management's
assessment. Management does not intend to furnish updated projections.
Results of Operations:
Burling had sales of $1,313,400 and $1,309,900 for the ten months ended
November 30, 1995 and November 30, 1994 respectively. The gross profit
decreased in dollars and percentages from $619,999 (40%) in 1994 to $573,400
(44%) in 1995. This was due to an increase in the cost of goods sold from
$619,000 for the nine months ended November 30, 1994 to $740,000 for the nine
months ended November 30, 1995 mainly due to the
Page 15
18
purchase of $92,568 in thermostats included in raw materials. Net income
decreased to $43,900 for the nine months ended November 30, 1995 from $71,500
for the nine months ended November 30, 1994.
Burling had sales of $1,725,449 and $1,669,392 for the fiscal years ended
February 28, 1995 and February 28, 1994 respectively. The gross profit
increased in dollars and percentages from $660,300 (40%) in 1994 to $763,050
(44%) in 1995. This resulted from a reduction in cost of goods sold made
possible by the purchase of an added lathe allowing for machining of parts by
Burling that had formerly been purchased from an outside source. Prices had
also been increased in mid 1993 and thus there was the effect on a full year
of sales. Net income increased to $53,052 in fiscal year 1995 from $9,426
in fiscal year 1994.
Burling is seeking to reduce its operating expenses while increasing its
customer base and operating revenues. The major change in 1996 will be from
increased sales in the bulb and capillary thermostats which are currently
being imported from Germany under a Private Label agreement. In the second
quarter of 1996, Burling intends to enter into an agreement with the German
supplier, Jumo Process Control, Inc. which will enable Burling to assemble
these products in Chatham, New Jersey by shipping Burling component parts.
The agreement to potentially assemble those products in the United States is
in the early stages of negotiations. This will enable Burling to produce the
Thermostats more economically since German labor rates are significantly
higher than Burling rates for similar work. These lower costs will permit
Burling to be more competitive in the market place and result in higher
sales. Burling currently has a private label agreement with this supplier
whereby Burling markets in the United States and Canada, a series of bulb and
capillary thermostats which the German supplier manufactures in German.
Other than described above, no past, present or proposed material contracts,
arrangements, understandings, relationships, negotiations or transactions
have occurred during the periods for which financial statements are presented
between the John L. Kemmerer, Jr. Trust, Burling and the Company.
The high and low sale prices of the Common Shares of the Company as of the
date preceding public announcement of the acquisition (January 9, 1996) were
5 1/8 and 6 7/8 respectively. Representatives of Rubin, Brown & Gornstein,
principal accountants for the Company are expected to be present at the
Annual Meeting of the Shareholders, will have the opportunity to make a
statement if they desire to do so; and are expected to be available to
respond to appropriate questions.
Similar information on the Company is hereby incorporated by reference to the
Annual Report which accompanies this proxy statement.
Financial Statements of Burling:
Page 16
19
BURLING INSTRUMENTS, INC.
-------------------------
FINANCIAL STATEMENTS
--------------------
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
-----------------------------------------------------------
AND
---
AUDITOR'S REPORT
----------------
20
BURLING INSTRUMENTS, INC.
-------------------------
INDEX
-----
FEBRUARY 29, 1996
-----------------
Auditor's Opinion Letter
EXHIBIT A - Balance Sheets at February 29, 1996 and February 28, 1995
EXHIBIT A-1 - Supporting Exhibit
EXHIBIT B - Statements of Income and Expenses for the years ended February
29, 1996 and February 28, 1995
EXHIBIT C - Statements of Cash Flows for the Years ended February 29, 1996
and February 28, 1995
Notes to Financial Statement
Auditor's Report on Supplementary Information
SCHEDULE 1 - Schedules of Selling Expenses for the years ended February 29,
1996 and February 28, 1995
SCHEDULE 2 - Schedules of Selling Expenses for the years ended February 29,
1996 and February 28, 1995
SCHEDULE 3 - Schedules of Administrative Expenses for the years ended
February 29, 1996 and February 28, 1995
21
NOKE AND HEARD
Certified Public Accountants
469 Morris Avenue
Summit, N. J. 07901-1564
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Burling Instruments, Inc.
16 River Road, P.O. Box 298
Chatham, New Jersey
We have audited the accompanying balance sheets of Burling Instruments, Inc.
as of February 29, 1996 and February 28, 1995, and the related statements of
income, retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of Burling Instruments,
Inc. as of February 29, 1996 and February 28, 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Noke and Heard
May 5, 1996.
22
BURLING INSTRUMENTS, INC. EXHIBIT A
------------------------- ---------
COMPARATIVE BALANCE SHEETS
--------------------------
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
---------------------------------------
ASSETS
------
1996 1995
------------ ------------
Current assets
- --------------
Cash $ 29,882 $ 30,860
Accounts receivable, net of allowance for
doubtful accounts 209,272 205,476
Inventories (Note 1, 2) 476,975 453,630
Prepaid expenses 20,117 4,688
Prepaid corporate taxes 4,823 2,205
------------ ------------
Total current assets 741,069 696,859
Plant, property and equipment
- -----------------------------
Equipment, furniture and fixtures at cost -
net of accumulated depreciation (Note 1, 3) 26,084 60,644
Other assets
- ------------
Security deposits 2,224 2,224
Intangible assets - EXHIBIT A-1 18,929 22,180
- ----------------- ------------ ------------
Total assets $ 788,306 $ 781,907
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
- -------------------
Current maturities of debt (Note 4) $ 99,405 $ 100,000
Accounts payable - trade 38,126 35,688
Corporate income tax payable - 3,929
Accrued expenses - EXHIBIT A-1 64,449 66,895
Deferred Federal income tax (Note 1, 6) 9,071 20,950
------------ ------------
Total current liabilities 211,051 227,462
------------ ------------
Long-term debt, (Note 4) - -
Total liabilities 211,051 227,462
------------ ------------
Shareholders' equity
- --------------------
Common stock - at cost
No par value 1,000 shares authorized
issued and outstanding 1,075 1,075
Additional paid-in capital 373,925 373,925
Accumulated earnings - EXHIBIT B 202,255 179,445
------------ ------------
Total shareholders' equity 577,255 554,445
------------ ------------
Total liabilities
and shareholders' equity $ 788,306 $ 781,907
============ ============
The accompanying notes are an integral part of this statement.
23
BURLING INSTRUMENTS, INC. EXHIBIT A-1
------------------------- -----------
SUPPORTING EXHIBIT
------------------
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
---------------------------------------
1996 1995
---------- ---------
Intangible Assets
- -----------------
Goodwill - net of accumulated amortization
of $6,000 and $5,400 in 1996 and 1995 $ 18,000 $ 18,600
Deferred loan costs-net of accumulated amortization
of $13,363 and $10,721 in 1996 and 1995 929 3,580
---------- ---------
Total - carried to EXHIBIT A $ 18,929 $ 22,180
----- ========== =========
Accrued Expenses
- ----------------
Commissions $ 16,640 $ 18,126
Payroll and related taxes 40,483 42,969
Other accrued expenses 7,326 5,800
---------- ---------
Total - carried to EXHIBIT A $ 64,449 $ 66,895
----- ========== =========
The accompanying notes are an integral part of this statement.
24
BURLING INSTRUMENTS, INC. EXHIBIT B
------------------------- ---------
STATEMENTS OF INCOME AND EXPENSES
---------------------------------
AND CHANGES IN RETAINED EARNINGS
--------------------------------
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
-----------------------------------------------------------
1995-96 1994-95
------------------------- -------------------------
% OF % OF
AMOUNT SALES AMOUNT SALES
------------ ----- ------------ -----
Net sales $ 1,707,868 100 $ 1,725,449 100
Cost of goods sold 1,021,120 60 962,399 56
------------ --- ------------ ---
Gross profit 686,748 40 763,050 44
------------ --- ------------ ---
Operating expenses
- ------------------
Selling 301,174 17 287,742 17
Administrative 352,520 21 369,149 21
------------ --- ------------ ---
Total operating
expenses 653,694 38 656,891 38
------------ --- ------------ ---
Income from operations 33,054 2 106,159 6
Other income (expenses)
- ----------------------
Interest expense (10,681) (1) (14,857) (1)
Miscellaneous 511 253
------------ --- ------------ ---
Net income before provision
- ---------------------------
for taxes 22,884 1 91,555 5
---------
Provision for taxes (Note 6) (74) - (38,503) 2
------------ --- ------------ ---
Net income for the year 22,810 1 53,052 3
- ----------------------- === ===
Accumulated earnings -
Beginning of year 179,445 126,393
------------ ------------
Accumulated earnings -
End of year - carried
to EXHIBIT A $ 202,255 $ 179,445
============ ============
The accompanying notes are an integral part of this statement.
25
BURLING INSTRUMENTS, INC. EXHIBIT C
------------------------- ---------
COMPARATIVE STATEMENTS OF CASH FLOWS
------------------------------------
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
---------------------------------------
INCREASE (DECREASE) IN CASH
---------------------------
FEBRUARY 28,
----------------------------
1995-96 1994-95
---------- ----------
Cash flows from operating activities
- ------------------------------------
Net income - EXHIBIT B $ 22,810 $ 53,052
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 38,948 39,478
Bad debts 1,200 -
Change in accounts receivable (4,996) (23,365)
Change in inventory (23,345) 22,927
Change in prepaid items (18,049) 7,845
Change in corporate tax payable (3,929) -
Change in accounts payable and accrued expenses (6) (17,153)
Change in deferred taxes payable (11,879) 554
---------- ----------
Net cash provided by operating activities 754 83,338
---------- ----------
Cash flows from investing activities
- ------------------------------------
Additional security deposit - (321)
Capital expenditures (1,137) (10,000)
---------- ----------
Net cash used by investing activities (1,137) (10,321)
---------- ----------
Cash flows from financing activities
- ------------------------------------
Principal payments on long-term debts (20,595) (100,000)
Temporary bank loan 20,000 -
---------- ----------
Net cash used by financing activities (595) (100,000)
---------- ----------
Net increase (decrease) in cash and
- -----------------------------------
cash equivalents (978) (26,983)
----------------
Cash balance - Beginning of year 30,860 57,843
- -------------------------------- ---------- ----------
Cash balance - End of Year $ 29,882 $ 30,860
- -------------------------- ========== ==========
Cash paid for interest $ 10,463 $ 15,404
Cash paid for income taxes $ 13,314 $ 34,020
The accompanying notes are an integral part of this statement.
26
AUDITOR'S REPORT
ON SUPPLEMENTARY INFORMATION
Our examination of the basic financial statements was made primarily to form
an opinion on such financial statements taken as a whole. The supplementary
information contained in the following pages is presented for the purpose of
additional analysis and, although not required for a fair presentation of
financial position, results of operations, and cash flows, was subjected to
the adult procedures applied in the examinations of the basic financial
statements. In our opinion, the supplementary information is fairly
presented in all material respects in relation to the basic financial
statements taken as a whole.
NOKE AND HEARD
27
BURLING INSTRUMENTS, INC. SCHEDULE 1
------------------------- ----------
SCHEDULES OF COST OF GOODS SOLD
-------------------------------
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
-----------------------------------------------------------
1995-96 1994-95
----------------------- -----------------------
% OF % OF
AMOUNT SALES AMOUNT SALES
---------- ----- ---------- -----
Inventories - beginning of year $ 453,630 27 $ 476,557 28
Purchases - net 434,848 25 339,566 20
Direct labor 355,429 21 348,209 20
---------- ---- ---------- ----
Subtotal 1,243,907 73 1,164,332 68
Less: Inventory - end of year 476,975 28 453,630 26
---------- ---- ---------- ----
766,932 45 710,702 42
Depreciation 34,383 2 34,388 2
Factory materials and supplies 14,110 1 15,063 1
Cleaning service 5,140 0 4,130 0
Insurance - general 12,505 1 13,590 1
Insurance - group 45,218 3 46,809 3
Payroll taxes 33,980 2 32,330 2
Real estate taxes 16,106 1 15,411 1
Rent 57,239 3 54,800 3
Repairs and maintenance 7,614 0 9,342 0
Shipping supplies 11,421 1 8,535 0
Utilities 16,472 1 17,299 1
---------- ---- ---------- ----
Cost of goods sold $1,021,120 60 $ 962,399 56
- ------------------ ========== ==== ========== ====
28
BURLING INSTRUMENTS, INC. SCHEDULE 2
------------------------- ----------
SCHEDULE OF SELLING EXPENSES
----------------------------
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
-----------------------------------------------------------
1995-96 1994-95
----------------------- -----------------------
% OF % OF
AMOUNT SALES AMOUNT SALES
---------- ----- ---------- -----
Advertising $ 23,369 1 $ 19,491 1
Automobile expense 5,402 0 5,495 0
Commissions 97,978 6 97,004 6
Freight out 32,082 2 30,698 2
Insurance 6,316 1 9,475 1
Payroll taxes 9,480 1 9,401 1
Printing and sales samples 6,283 0 7,013 0
Salaries 99,060 6 95,828 6
Travel and entertainment 21,204 1 13,337 1
---------- ----- ---------- -----
Total $ 301,174 18 $ 287,742 18
----- ========== ===== ========== =====
29
BURLING INSTRUMENTS, INC. SCHEDULE 3
------------------------- ----------
SCHEDULES OF ADMINISTRATIVE EXPENSES
------------------------------------
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
-----------------------------------------------------------
1995-96 1994-95
----------------------- -----------------------
% OF % OF
AMOUNT SALES AMOUNT SALES
---------- ----- ---------- -----
Salaries and wages
Executive $ 156,982 9 $ 158,607 9
Other 58,217 4 58,411 4
---------- ---- ---------- ----
215,199 13 217,018 13
Agency approval 7,168 1 12,721 1
Amortization 3,251 0 3,251 0
Automobile 10,765 1 11,563 1
Bad debts 1,200 0 1,200 0
Charitable contributions 135 0 94 0
Cleaning service 1,705 0 1,340 0
Computer service 2,205 0 2,717 0
Depreciation 1,314 0 1,506 0
Director's fees 2,722 0 2,951 0
Dues and subscriptions 954 0 1,068 0
Employees' group insurance 16,073 1 17,191 1
General insurance 5,277 1 7,940 1
Miscellaneous 3,482 0 4,084 0
Miscellaneous taxes 386 0 632 0
Office supplies 6,319 1 5,102 0
Payroll taxes 20,236 1 20,038 1
Postage 5,352 0 5,027 0
Professional fees 7,331 0 6,364 0
Real estate taxes 5,368 0 4,791 0
Rent 19,069 1 20,401 1
Repairs and maintenance 928 0 2,734 0
Research and development 75 0 532 0
Service contracts 2,273 0 1,882 0
Telephone 8,257 1 10,530 1
Temporary help - 0 725 0
Utilities 5,476 0 5,747 1
---------- ---- ---------- ----
Total $ 352,520 21 $ 369,149 21
----- ========== ==== ========== ====
30
BURLING INSTRUMENTS, INC.
-------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
---------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
-----------
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Depreciation
------------
Depreciation is provided for on the straight-line method over their
estimated useful lives. The estimated lives used in determining
depreciation are:
Furniture and fixtures 5 years
Machinery and equipment 10 years
Amortization
------------
Intangible assets are amortized on the straight-line method over the
following periods:
Goodwill 480 months
Covenant not to compete 60 months
Deferred loan costs 180 months
Organization costs 60 months
Income Taxes
------------
The deferred income taxes in the accompanying financial statements
reflect the timing differences in reporting results of operations for
income tax and financial accounting purposes. Deferred taxes are
classified as current or noncurrent depending on the classification of
the assets and liabilities which they relate.
2. INVENTORIES
Inventories consists of the following:
1996 1995
---------- ----------
Work-in process (assemblies) $ 184,773 $ 190,190
Raw materials 292,202 263,440
---------- ----------
Totals $ 476,975 $ 453,630
========== ==========
31
BURLING INSTRUMENTS, INC.
-------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
---------------------------------------
3. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consists of the following:
1996 1995
---------- ----------
Building improvements $ 4,988 $ 4,988
Furniture and fixtures 134,966 133,828
Machinery and equipment 349,691 349,691
---------- ----------
Total 489,645 488,507
Less: accumulated depreciation 463,561 427,863
---------- ----------
Net book value $ 26,084 $ 60,644
========== ==========
4. DEBT
Debt consists of the following:
1996 1995
---------- ----------
Note payable with yearly payments of
$100,000 secured by accounts receivable,
inventories and equipment, interest rate
is variable, currently @9.75% $ 80,000 $ 100,000
Note payable due June 30, 1996 bearing
an interest rate of 9.25% 19,405 -
---------- ----------
Less: current maturities 99,405 100,000
---------- ----------
Net long-term debt $ None $ None
========== ==========
The above notes were consolidated into a new $100,000 note March 1, 1996
bearing an interest rate at 1.5 percentage points in excess of the Prime
Rate. Principal will be paid equally over 24 months.
32
BURLING INSTRUMENTS, INC.
-------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
---------------------------------------
5. COMMITMENTS
The Company has a discretionary profit-sharing plan covering
substantially all employees. The Company's contribution to the plan is
determined annually by the Board of Directors. No contribution was
made for the years ended February 29, 1996 or February 28, 1995.
The Company conducts its operations in a leased facility. The Company
exercised the option to extend the lease for an additional five year
period expiring August 31, 1996.
Rent expense for the years ended February 29, 1996 and February 28,
1995 was $76,308 and $75,308 respectively.
The Company maintains 3 automobiles on lease. The lease commitments are
as follows:
1996 1995
---------- ----------
1995-96 $ - $ 10,775
1996-97 10,775 10,775
1997-98 8,824 8,824
1998-99 2,625 2,625
---------- ----------
Total $ 22,224 $ 32,999
========== ==========
6. INCOME TAXES
The components of income tax expense are:
1996 1995
---------- ----------
Current portion $ 11,953 $ 37,949
Deferred taxes (Note 1) (11,879) 554
---------- ----------
Total income tax expense $ 74 $ 38,503
========== ==========
33
VOTING AND SOLICITATION OF PROXIES
Stockholders represented by properly executed proxies received by the Company
prior to or at the Meeting and not duly revoked will be voted in accordance
with the instructions thereon. If proxies will be voted in instructions are
indicated thereon, such proxies will be voted in favor of Items 1 through 5
inclusive. Execution of a proxy will not prevent a stockholder from
attending the Meeting and revoking his proxy by voting in person (although
attendance at the Meeting will not in itself revoke a proxy). Any
stockholder giving a proxy may revoke it at any time before it is voted by
giving to the Company's Secretary/Treasurer written notice bearing a later
date than the proxy, by delivery of a later dated proxy, or by voting in
person at the Meeting. Any written notice revoking a proxy should be sent
to: Proxy Services Corporation; 777 Jersey Avenue; Jersey City, NJ 07310.
The Company's Board of Directors does not know of any other matters which
will be presented for consideration at the Meeting. However, if any other
matters which will be presented for consideration at the Meeting. However,
if any other matters are properly presented for action at the Meeting, it is
the intention of the person(s) named in the accompanying Form of Proxy to
vote the shares represented thereby in accordance with their best judgment on
such matters.
All costs relating to the solicitation of proxies made hereby will be borne
by the Company. Proxies may be solicited by officers and directors of the
Company personally, by mail or by telephone or telegraph, and the Company may
pay brokers and other persons holding shares of stock in their names of those
of their nominees for their reasonable expenses in forwarding soliciting
material to their principals.
It is important that proxies be returned promptly. Stockholders who do not
expect to attend the Meeting in person are urged to sign and date the
accompanying Form of Proxy and mail it in a timely fashion so that their vote
can be recorded.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has approved a resolution retaining Rubin, Brown,
Gornstein & Co. as the independent certified public accountants of the
Company for the fiscal year ending December 31, 1996. This firm has acted
as such accountants for the Company and its predecessor companies for many
years.
In additional to its principal service of examining the financial statement
of the Company, Rubin, Brown, Gornstein & Co. provided certain non-audit
services for the Company during the preceding fiscal year and such services
were approved management. In approving the services, management determined
that the nature of the services and the estimated fees to be charged would
have no adverse effect on the independence of the accountants.
Representatives of Rubin, Brown, Gornstein & Co. are expected to be present
at the Annual Meeting and to have the opportunity to make a statement should
they desire to do so and to be available to respond to appropriate questions.
ADDITIONAL INFORMATION
The Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1995, including the consolidated financial statements and
related notes thereto, together with the report of the independent auditors
and other information with respect to the Company, accompany this Proxy
Statement.
34
OTHER MATTERS
The Company is not aware of any other business to be presented at the Annual
Meeting. If matters other than those described herein should properly
arise at the meeting, the proxies will vote on such matters in accordance
with their best judgment.
SHAREHOLDER PROPOSALS
Proposals by Shareholders intended to be presented at the 1997 Annual Meeting
must be received by the Company no later than November 15, 1996.
35
===============================================================================
APPLIED CELLULAR
TECHNOLOGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
===============================================================================
36
CONTENTS
- -------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Consolidated Balance Sheet 2
Consolidated Statement Of Stockholders' Equity 3 - 4
Consolidated Statement Of Operations 5
Consolidated Statement Of Cash Flows 6
Notes To Consolidated Financial Statements 7 - 29
37
Rubin, Brown, Gornstein & Co. LLP 230 South Bemiston Avenue
Certified Public Accountants St. Louis, Missouri 63105
314/727-8150
314/727-9195 FAX
RBG&CO.
INDEPENDENT AUDITORS' REPORT
Board of Directors
Applied Cellular Technology, Inc. & Subsidiaries
Springfield, Missouri
We have audited the accompanying consolidated balance sheet of
Applied Cellular Technology, Inc. and subsidiaries as of December
31, 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended
December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements
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 financial
position of Applied Cellular Technology, Inc. and subsidiaries as
of December 31, 1995, and the results of its operations and its
cash flows for the years ended December 31, 1994 and 1995, in
conformity with generally accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co. LLP
March 8, 1996
Member: Summit International Associates, Inc., with offices in
principal U.S. and International Cities
American Institute of Certified Public Accountants
38
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 125,469
Accounts receivable 522,548
Unbilled receivables 104,111
Inventories 504,859
Prepaid expenses 51,840
Note receivable - officer 12,982
Note receivable - Cadkey, Inc. 87,057
-----------
TOTAL CURRENT ASSETS 1,408,866
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 138,489
INVESTMENT IN CADKEY, INC. COMMON STOCK 565,413
NOTE RECEIVABLE - CADKEY, INC. 292,627
GOODWILL 906,626
PURCHASED COMPUTER SOFTWARE 667,443
OTHER ASSETS 140,035
-----------
$ 4,119,499
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - line of credit $ 29,999
Notes payable - officers 280,095
Capital lease obligations - current 23,360
Accounts payable 564,692
Accrued expenses 105,146
-----------
TOTAL CURRENT LIABILITIES 1,003,292
-----------
LONG-TERM LIABILITIES
Capital lease obligations 19,251
-----------
MINORITY INTEREST 57,002
-----------
STOCKHOLDERS' EQUITY
Common stock:
Authorized 10,000,000 shares of $.001 par value; issued and
outstanding 2,267,749 shares 2,268
Additional paid-in capital 3,358,072
Retained earnings (deficit) (320,386)
-----------
TOTAL STOCKHOLDERS' EQUITY 3,039,954
-----------
$ 4,119,499
===========
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 2
39
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
PAGE 1 OF 2
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------------- ------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-----------------------------------------------------------------------------------
BALANCE - JANUARY 1, 1994 -- $ -- 487,802 $ 1,161 $ -- $ (5,306) $ (4,145)
NET LOSS -- -- -- -- -- (482,454) (482,454)
ISSUANCE OF PREFERRED STOCK 20,000 200,000 -- -- -- -- 200,000
REDUCTION OF PAR VALUE OF COMMON
STOCK -- -- -- (673) 673 -- --
ISSUANCE OF COMMON STOCK -- -- 212,378 212 279,538 -- 279,750
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 29% OF CADKEY, INC.
(AS RESTATED) -- -- 456,570 457 570,256 -- 570,713
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF PURCHASED SOFTWARE
(AS RESTATED) -- -- 180,000 180 224,820 -- 225,000
- ----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 -
CARRIED FORWARD 20,000 $ 200,000 1,336,750 $ 1,337 $ 1,075,287 $ (487,760) $ 788,864
- ----------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 3
40
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
PAGE 2 OF 2
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------------- ------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-----------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 -
BROUGHT FORWARD 20,000 $ 200,000 1,336,750 $ 1,337 $ 1,075,287 $ (487,760) $ 788,864
NET INCOME -- -- -- -- -- 167,374 167,374
REDEMPTION OF PREFERRED STOCK (20,000) (200,000) 11,765 12 52,596 -- (147,392)
ISSUANCE OF COMMON STOCK -- -- 259,999 260 523,392 -- 523,652
ISSUANCE OF RESTRICTED COMMON
STOCK -- -- 200,000 200 499,800 -- 500,000
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF PURCHASED SOFTWARE -- -- 113,009 113 289,190 -- 289,303
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 80% OF ATLANTIC
SYSTEMS, INC. -- -- 124,066 124 341,058 -- 341,182
ISSUANCE OF COMMON STOCK - IN
ACQUISITION OF 80% OF ELITE
COMPUTER SERVICES, INC. -- -- 102,160 102 456,553 -- 456,655
50% OF PRINCIPAL PAYMENTS RECEIVED
ON NOTE RECEIVABLE - CADKEY, INC. -- -- -- -- 120,316 -- 120,316
CLASS "E" WARRANTS REDEEMED -- -- 120,000 120 (120) -- --
- ----------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 -- $ -- 2,267,749 $ 2,268 $ 3,358,072 $ (320,386) $ 3,039,954
======================================================================================================================
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 4
41
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------
1994 1995
---------------------------
REVENUES
Programming services $ 184,335 $ 442,874
Hardware products 102,661 1,281,101
Software licensing revenue 29,582 151,229
Packaged software sales -- 417,600
Other revenue 6,191 43,195
- ----------------------------------------------------------------------------------------
TOTAL REVENUES 322,769 2,335,999
- ----------------------------------------------------------------------------------------
DIRECT COSTS
Costs of programming services 192,623 271,174
Costs of hardware products 62,265 676,838
Costs of software licensing revenue 7,881 74,306
Cost of packaged software sales -- 159,388
Other costs -- 331
Royalty expense 7,099 4,176
- ----------------------------------------------------------------------------------------
TOTAL DIRECT COSTS 269,868 1,186,213
- ----------------------------------------------------------------------------------------
GROSS PROFIT 52,901 1,149,786
- ----------------------------------------------------------------------------------------
OPERATING EXPENSES
Marketing and sales 83,326 346,836
Administrative 421,864 634,376
Research and development expense 27,856 --
- ----------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 533,046 981,212
- ----------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (480,145) 168,574
AMORTIZATION OF CADKEY, INC. GOODWILL -- (11,986)
INTEREST INCOME -- 74,899
INTEREST EXPENSE (2,309) (15,150)
- ----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAX AND MINORITY INTEREST (482,454) 216,337
PROVISION FOR INCOME TAX -- --
- ----------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST (482,454) 216,337
MINORITY INTEREST -- (48,963)
- ----------------------------------------------------------------------------------------
NET INCOME (LOSS) $(482,454) $ 167,374
========================================================================================
NET INCOME (LOSS) PER COMMON SHARE $ (0.82) $ .09
========================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 587,797 1,792,939
========================================================================================
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 5
42
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS
ENDED DECEMBER 31,
-----------------------------------
1994 1995
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (482,454) $ 167,374
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,912 144,676
Minority interest portion of income -- 48,963
Loss on sale of equipment -- 519
Registration costs - shares issued 129,750 --
Imputed interest - notes payable - officers -- 6,614
Change in assets and liabilities:
(Increase) decrease in accounts receivable 19,528 (232,980)
Increase in unbilled receivables (3,001) (94,011)
Increase in inventories -- (43,668)
Increase in prepaid expenses (13,780) (14,411)
Increase in deposits -- (4,898)
Increase in accounts payable and accrued
expenses 54,062 149,262
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (284,983) 127,440
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in notes receivable - officer 2,832 (792)
(Increase) decrease in note receivable - stockholder (90,058) 108,437
Payments received on note receivable - Cadkey, Inc. -- 240,632
Increase in other assets (450) (107,958)
Insurance proceeds on equipment theft -- 1,650
Payments for equipment and computer software (14,923) (40,199)
Payments for costs of 80% business acquisitions
(net of cash balances acquired) -- (183,208)
Payments for costs related to asset acquisitions -- (119,355)
- ----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (102,599) (100,793)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net amounts borrowed (paid) on line of credit 37,175 (171,048)
Payments on capital lease obligations (886) (15,318)
Decrease in notes payable - officers -- (86,849)
Issuance (redemption) of preferred stock 200,000 (147,392)
Issuance of common stock 150,673 516,778
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 386,962 96,171
- ----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (620) 122,818
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,271 2,651
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,651 $ 125,469
==========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 2,309 $ 15,150
- ----------------------------------------------------------------------------------------------------------
Noncash investing and financing activities (Note 17)
- ----------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements. Page 6
43
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
----------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 And 1995
1. Summary Of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
Tech Tools, Inc. and ACT Financial Corp. which were formed in
November 1994 and April 1995, respectively, and its majority-
owned subsidiaries, Atlantic Systems, Inc. and Elite Computer
Services, Inc., in which an 80% interest was acquired by the
Company in August and September 1995, respectively. All
significant intercompany investments, transactions and account
balances have been eliminated in consolidation.
Use Of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from
those estimates.
Cash And Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
Allowance For Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to
the estimated collection losses that will be incurred in
collection of all receivables. The estimated losses are based on
historical collection experience coupled with a review of the
current status of the existing receivables. There is no
allowance for uncollectible accounts reflected in the balance
sheet as Company management is of the opinion that no allowance
is necessary.
Unbilled Receivables
The Company records an unbilled receivable to account for
salary expenses and certain other expenses that apply to
customer projects not yet billed.
- ------------------------------------------------------------------------------
Page 7
44
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Inventories
The Company's inventories consist mainly of new and used
computers, computer parts and software. The inventory is
valued at the lower of cost or market, determined by the FIFO
(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 listing and
the inventory turns by product. The Company will provide an
allowance for obsolete inventories if deemed necessary from
the analysis.
Equipment And Leasehold Improvements
Equipment and leasehold improvements are carried at cost, less
accumulated depreciation and amortization computed using
straight-line and accelerated methods. The assets are
depreciated and amortized over periods ranging from three to
seven years.
Organization Costs
Organization costs, such as legal fees and incorporation
costs, are capitalized and amortized over five years.
Loan Fees
Loan fees are capitalized using the straight-line amortization
method over the life of the loan.
Investment In Common Stock
The Company acquired a 29% interest in Cadkey, Inc. in
December 1994. The Company accounts for this investment using
the cost method. The resulting goodwill is being amortized
straight-line over 7 years.
The Company's policy for making on-going determinations of the
net realizable value for the investment in Cadkey, Inc.
includes receiving quarterly unaudited financial statements
and annual audited financial statements that management uses
as an integral part of its on-going assessment. Management
also conducts an on-going review of readily available industry
statistics and compares these results to the investee
company's results to assess the investee company's operating
performance relative to other industry participants and to
assess the on-going prospects for the investee company's
industry as a whole.
- ------------------------------------------------------------------------------
Page 8
45
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Note Receivable - Cadkey, Inc.
The Company's policy for making on-going determinations of the
net realizable value of the note receivable from Cadkey, Inc.
is not only to review the overall performance of Cadkey, Inc.
as discussed within the Investment in Common Stock footnote,
but also to closely monitor the note repayment schedule agreed
to by Cadkey, Inc. in order to assess the continuing
likelihood of repayment and the on-going net realizable value
of the Cadkey, Inc. note. The carrying value of the note
receivable has been reduced by 50%, as a result of the
discounting of the value of the shares exchanged to acquire
the note receivable because of the restricted nature and the
limited market of those common shares (Note 16).
Goodwill
The goodwill resulting from the purchase of 80% ownership in
Atlantic Systems, Inc. and Elite Computer Services, Inc. (Note
16) is being amortized over 10 years.
The Company's policy for making on-going determinations of the
net realizable value of the goodwill is to monitor the net
income of Atlantic Systems, Inc. and Elite Computer Services,
Inc. and to determine if the expected income levels over the
remainder of the 10 year amortization period would exceed the
carrying value of the goodwill. If impairment of the goodwill
appears likely, a reduction in the carrying value would be
recorded at that time.
Purchased Computer Software
Purchased computer software is stated at cost less accumulated
amortization. The purchased computer software is at the
stage of technological feasibility which is considered to have
occurred when a product design and working model of the
software product have been completed and the completeness of
the working model and its consistency with the product design
have been confirmed by testing. 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 5 years. The Databoss computer software purchased by
Tech Tools, Inc. in November 1994 (Note 17) has been amortized
beginning in July 1995 when it was available for release to
customers. Amortization began for the software acquired from
Baler Software Corporation in August 1995 at the date of its
acquisition (Note 16).
- ------------------------------------------------------------------------------
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Notes To Consolidated Financial Statements (Continued)
Revenue Recognition
For programming, consulting and software licensing services,
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, the 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 according to the customers contract, billable
upon the occurrence of the post-sale support.
The Company does not experience many product returns, and
therefore, Company 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 given by the manufacturer. The Company does not
offer a warranty policy for their services to customers.
Proprietary Software In Development
In accordance with Statement of Financial Accounting Standards
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 of computer software costs 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. No
amortization was charged against revenue during the year ended
December 31, 1995. Amortization will begin in 1996 when the
products are ready for release to the general public.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based on the
weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of convertible preferred
stock and common stock issuable upon exercise of stock options
and warrants (using the treasury stock method). Under the
rules of the Securities and Exchange Commission, common stock
issued by the Company during the 12-month period prior to the
initial public offering and stock options granted during the
same period, that had an exercise price that was less then the
IPO price, have been included in the calculation of common and
common equivalent shares using the treasury stock method as
if they were outstanding for all applicable periods (pre IPO
period only).
Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consists of taxes
currently due plus deferred taxes related primarily to
differences between the basis of goodwill, investment in 29%
owned company, equipment and leasehold improvements, and net
operating loss carryforwards for financial and income tax
reporting. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and
liabilities are recovered or settled.
The Company and its subsidiaries file consolidated tax
returns. Income taxes are paid by the parent company and
allocated to each subsidiary through intercompany charges.
2. Operations
Applied Cellular Technology, Inc. was incorporated in May 1993
under its former name, Great Bay Acquisition Company. On May
21, 1993, Great Bay Acquisition Company acquired the assets
of Axcom Computer Consultants, Inc. Effective September 1993,
Great Bay Acquisition Company changed its name to Axcom
Information Technology, Inc. and became the sole subsidiary
of Great Bay Technology Group, Inc. Effective March 1994,
Axcom Information Technology, Inc. changed its name to Applied
Cellular Technology, Inc. The Company is a software
development and services company and has applied technologies
in tailored solutions for a number of major American
corporations. The Company's market is primarily retail,
manufacturing and distribution firms and its operations are
conducted from the home office in Missouri, with customers
throughout the United States.
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Notes To Consolidated Financial Statements (Continued)
In November 1994, the Company formed a subsidiary, Kedwell
International, Inc. by issuing 180,000 shares at $1.25 of its
$.001 par value common stock. The subsidiary purchased
software in exchange for its 180,000 shares of Applied
Cellular Technology's common stock valued at $1.25 per share
and for the issuance of 120,000 warrants at no value as
described in Note 17. Effective April 1995, Kedwell
International, Inc. changed its name to Tech Tools, Inc. Tech
Tools, Inc. is a software development and services company.
The Company's office is located in New Hampshire, with
customers throughout the United States.
During 1994, the Company acquired 570,712 shares of Cadkey,
Inc., a software technology company, in exchange for 456,570
shares of its $.001 par value common stock valued at $1.25 per
share, resulting in a 29% investment in this company.
During April 1995, the Company formed a subsidiary, ACT
Financial Corp.
In August 1995, Tech Tools, Inc. purchased software and
certain other related assets and liabilities of Baler Software
Corporation in exchange for the issuance of 113,009 shares of
common stock of Applied Cellular Technology, Inc.
Additionally, in August 1995, the Company issued 124,066
shares of its common stock in exchange for an 80% investment
in Atlantic Systems, Inc., a software support company mainly
for the liquor industry, with customers throughout the United
States.
In September 1995, the Company issued 102,160 shares of its
common stock in exchange for an 80% investment in Elite
Computer Services, Inc., a distributor of computer parts, with
customers throughout the United States.
The acquisitions of Atlantic Systems, Inc. and Elite Computer
Services, Inc. have been accounted for using the purchase
method. The results of operations of the acquired companies
are included in the accompanying financial statements since
the dates of acquisition.
3. Note Receivable - Officer
The note is unsecured, bears interest at the prime lending
rate and is due on demand.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
4. Note Receivable - Cadkey, Inc.
The note is unsecured and bears interest at 10.5%. Principal
and interest payments of $20,483 are due monthly, with the
final payment due October 1, 1999.
The note is valued as follows:
Shares issued (200,000 x $5.00) $ 1,000,000
50% discount given to shares issued (Note 16) (500,000)
----------------
Original carrying value of the note receivable 500,000
50% of principal payments received 120,316
----------------
Balance at December 31, 1995 379,684
Current portion (87,057)
----------------
Long-term portion $ 292,627
================
The 200,000 shares of stock issued were restricted as to
voting rights.
Due to the 50% reduction in the face value of the note, as
payments are received, 50% of the amounts are credited to the
note receivable and the remaining 50% to paid-in capital.
5. Equipment And Leasehold Improvements
Equipment and leasehold improvements consist of:
Furniture, fixtures and equipment $ 180,630
Computer equipment 66,909
Leased vehicles 113,210
Leasehold improvements 1,087
--------------
361,836
Less: Accumulated depreciation and
amortization 223,347
--------------
$ 138,489
==============
Included above are vehicles acquired under capital lease
obligations in the amount of $113,210. Related accumulated
depreciation amounted to $42,777 at December 31, 1995.
Depreciation and amortization charged against income amounted
to $7,718 and $27,613 for the years ended December 31, 1994
and 1995, respectively.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
6. Investment In Cadkey, Inc. Common Stock
Investment in Cadkey, Inc. common stock consists of:
Original investment:
Investment in Cadkey, Inc. common stock $ 500,025
Goodwill 70,688
---------------
570,713
Additional costs of acquisition 6,686
---------------
577,399
Less: Accumulated amortization of goodwill 11,986
---------------
$ 565,413
===============
Amortization charged against income amounted to $11,986 for the year
ended December 31, 1995.
The original investment was calculated as follows:
Shares issued (456,670 x $2.50) $ 1,141,425
50% discount given to shares issued (Note 16) (570,712)
---------------
$ 570,713
===============
7. Goodwill
Goodwill consists of:
Shares issued in the Atlantic Systems, Inc.
80% purchase (124,066 x $5.50) $ 682,363
Shares issued in the Elite Computer Services, Inc.
80% purchase (102,160 x $8.94) 913,310
50% discount given to shares issued (Note 16) (797,836)
---------------
Net value of shares issued 797,837
Additional costs of acquisitions 173,682
80% of net book value of companies acquired (26,825)
Accumulated amortization (38,068)
---------------
Carrying value $ 906,626
===============
Amortization expense amounted to $38,068 for the year ended
December 31, 1995.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
8. Purchased Computer Software
Purchased computer software consists of:
Shares issued in the purchase of the Baler
Software Corporation net assets
(113,009 x $5.125) $ 579,171
Shares issued in the purchase of the Databoss
software (180,000 x $2.50) 450,000
Warrants issued in the purchase of the Databoss
software (120,000 x $1.50) 180,000
50% discount given to the shares issued
(Note 16) (514,586)
100% discount given to the warrants issued
(Note 16) (180,000)
---------------
Net value of shares issued 514,585
Additional costs of acquisitions 217,500
Accumulated amortization (64,642)
---------------
Carrying value $ 667,443
===============
Amortization expense amounted to $64,642 for the year ended
December 31, 1995.
The additional costs of acquisitions include any cash payments
according to the acquisition agreements plus costs for
investment banking services, legal services and accounting
services, that were essential costs in acquiring these assets.
9. Line Of Credit
Elite Computer Services, Inc. has a $100,000 line of credit
with a bank. The credit line is secured by accounts
receivable and inventories and bears interest at the prime
rate plus 2%. Borrowings are due on demand. The line of
credit was paid and terminated in February 1996.
Interest expense on the above debt amounted to $2,309 in 1994
and $9,350 in 1995.
The weighted average dollar amount of borrowings for the year
ended December 31, 1995 was $79,979. The weighted average
interest rate paid was 9% for the year ended December 31,
1995.
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Notes To Consolidated Financial Statements (Continued)
10. Notes Payable - Officers
The notes are non-interest bearing, unsecured and are due on
demand. Imputed interest has been recorded at a market rate
of 7%.
11. Capital Lease Obligations
At December 31, 1995, future payments for capital lease
obligations are as follows:
YEAR AMOUNT
--------------------------------------------------------------
1996 $ 28,337
1997 15,750
1998 8,489
--------------------------------------------------------------
Total minimum lease payments 52,576
Less: Amount representing interest 9,965
--------------------------------------------------------------
Capital Lease Obligation 42,611
Less: current maturities 23,360
--------------------------------------------------------------
Long-term Capital Lease Obligation $ 19,251
==============================================================
Interest expense on the capital leases amounted to $5,800 in
1995.
12. 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.
Accounts Receivable
The carrying amounts approximate fair value.
Note Receivable - Officer
The carrying amount approximates fair value because the stated
interest rate fluctuates with market rates.
Note Receivable - Cadkey, Inc.
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Notes To Consolidated Financial Statements (Continued)
The carrying value of the note approximates fair value because
the interest rate of the note approximates the current rate
that the Company could receive on a similar note, and also
because this agreement was renegotiated in the current year.
Note Payable - Line Of Credit
The carrying amount approximates fair value because the stated
interest rate fluctuates with current market rates.
Notes Payable - Officers
The carrying amount approximates fair value as the interest
being charged is at a current market rate.
Accounts Payable
The carrying amount approximates fair value.
Estimated fair values of the Company's financial instruments,
all of which are held for nontrading purposes, are as follows:
1995
---------------------------
CARRYING FAIR
AMOUNT VALUE
---------------------------
Cash and cash equivalents $ 125,469 $ 125,469
Accounts receivable 522,548 522,548
Note receivable - officer 12,982 12,982
Note receivable - Cadkey, Inc. 379,684 379,684
Note payable - line of credit (29,999) (29,999)
Accounts payable (564,692) (564,692)
Notes payable - officers (280,095) (280,095)
The estimated fair value amounts presented herein have been
determined using available market information and
appropriate valuation methodologies and are not necessarily
indicative of the amount the Company could realize in a
current market exchange.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
13. Income Taxes
The Company has computed its income tax provision in
accordance with Statement of Financial Accounting Standards
No. 109 ("SFAS109"), which was effective for 1993 and years
thereafter.
The provision for income taxes includes current taxes and
deferred taxes computed on the temporary differences in the
basis of certain assets and liabilities between financial
statement and income tax reporting purposes. The principal
source of deferred income taxes as of December 31, 1995
consists of differences in the basis of goodwill and an
investment in a 29%-owned company.
The provision for income taxes consists of:
1994 1995
---------------------------
Current taxes at statutory rates $ -- $ 80,000
Current taxes covered by net
operating loss carryforward -- (80,000)
--------------------------------------------------------------------------
Current income tax provision -- --
Deferred income taxes -- --
--------------------------------------------------------------------------
$ -- $ --
==========================================================================
The components of the deferred tax asset (liability), at
December 31, 1995 are as follows:
DEFERRED TAX ASSET (LIABILITY)
Goodwill basis difference $ 28,000
Cadkey, Inc. investment basis difference (23,000)
Equipment and leasehold improvements
basis differences (5,000)
Net operating loss carryforward 30,000
Valuation allowance (30,000)
---------------
NET DEFERRED TAX ASSET $ --
===============
SFAS109 requires a valuation allowance be recorded when it
is "more likely than not that some portion or all of the
deferred tax assets will not be realized." At December 31,
1995, the Company has elected to record a valuation
allowance of $30,000 to offset the deferred tax asset.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
The reconciliation of the effective tax rate with the
statutory federal income tax rate is as follows:
1994 1995
-------------------------------
% %
-------------------------------
Statutory rate -- 32
Surtax exemptions -- (10)
State income taxes -- 4
-------------------------------
-- 26
===============================
Under the carryforward provisions of the Internal Revenue
Code and applicable state income tax law, the Company has
available for future periods the following carryforwards:
YEAR YEAR OF
INCURRED EXPIRATION AMOUNT
-----------------------------------------------------
Net operating loss 1994 2009 $ 95,000
=============
14. Commitments
The Company was obligated to pay a royalty to Axon
Investments, Inc., formerly Axcom Computer Consultants,
Inc., in the amount of 2% of gross collected revenues for
120 months beginning July 1, 1993. This royalty agreement
was terminated in July 1995. Royalty expense amounted to
$7,099 in 1994 and $4,176 in 1995.
The Company has contracted with a registered broker-dealer
to receive financial consulting and investment banking
services through September 1996. The Company must pay the
broker-dealer $5,000 each month in the form of cash or in
the form of shares of capital stock.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
Applied Cellular Technology, Inc. is obligated under a one-
year lease for its office space, expiring June 1996. Tech
Tools, Inc. is obligated under a one-year lease for its
office space, expiring April 1996. Elite Computer
Services, Inc. is obligated under a five-year lease for its
office space, expiring May 1996. Atlantic Systems, Inc.
is obligated under a three-year lease for its office space,
expiring December 1998. Total lease commitments are
summarized as follows:
YEAR AMOUNT
---------------------------------
1996 $ 68,305
1997 34,800
1998 36,000
---------------------------------
$ 139,105
=================================
Rent expense amounted to $16,047 and $49,375 for the years
ended December 31, 1994 and 1995, respectively.
In September 1995, the Company entered into two employment
contracts with officers of Elite Computer Services, Inc.
which call for services to be provided for a period of two
years, and total annual salaries of $180,000.
15. Profit Sharing Plan
Elite Computer Services, Inc. has a qualified,
noncontributory 401(k) plan for all eligible employees.
The Company contributes, at its discretion, up to 15% of
the participant's annual compensation. Profit sharing
expense amounted to $4,659 in 1995.
Atlantic Systems, Inc. has a qualified, noncontributory
401(k) plan for all eligible employees. The amount of the
employer contribution is determined annually by the
employer at its discretion. There was no employer
contribution in 1995.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
16. Stockholders' Equity
The Board of Directors approved a 420-for-1 stock split
effective March 1994. The Board of Directors also approved
an increase in the number of authorized shares of common
stock to 10,000,000, with par value of .0024 per share, and
authorized the issuance of 20,000 shares of redeemable
preferred stock, par value $10 per share. In April 1994,
the Articles of Incorporation were amended to change the
par value to $.001 per common share. The preferred stock
shares were to be redeemable by the Company at any time but
were required to be redeemed by the Company at such time as
it had received a cumulative total of $500,000 in funding
or capitalization through private placement, warrant
exercise, public offering or any other such means excluding
lines of credit or revenue from sales and excluding funds
received from the sale of said preferred stock.
Subsequently the terms of the preferred stock were changed
to five-year, noncumulative, 6% redeemable shares with the
dividend and redemption solely at the option of the Board
of Directors of Applied Cellular Technology, Inc.
In March 1994, the Company received $200,000 from an
investor for the preferred stock mentioned above.
In 1995 the Company redeemed the preferred shares and
issued 11,765 shares of common stock and paid the preferred
shareholder $147,392.
Effective March 1994, the Company authorized the issuance
of common stock purchase warrants as follows: 200,000 A
warrants exercisable at a rate of 1 warrant plus $4.75 to
purchase one share of common stock and 200,000 B warrants
exercisable at 1 warrant plus $20 to purchase one share of
common stock and 45,000 class C warrants exercisable for a
period of three years from the date of issuance at the rate
of 1 warrant plus $1.50 for one share of common stock.
Both the A & B purchase warrants are effective for a period
of 4 years from the date of issuance and shall be callable
with 30 days notice for a price of $.001 per warrant.
The Company declared a dividend to the shareholders of
record effective March 21, 1994. Said dividend was in the
form of A and B common stock purchase warrants. The
dividend was at a rate of one A and one B warrant for each
.305 shares of common stock owned.
The net loss per common share and all references to the
number of shares of common stock have been restated to
reflect the aforementioned stock split.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
In March 1994, the Company entered into an agreement with
Pratt, Wylce & Lords, Ltd. ("Pratt"), for services to be
provided in connection with the registration (Note 19) and
other consulting services. In March 1994, the Company
issued 86,500 shares to Pratt. The shares were issued at
the fair value as of the date of issuance in direct payment
for services related to the registration. Consulting
expense at December 31, 1994 related to the registration
amounted to $129,750.
In November 1994, 120,000 redeemable E warrants were issued
as part of the acquisition of software by Tech Tools, Inc.
No value was attributed to these warrants because the
exercise price significantly exceeded the fair value of the
underlying common shares. Each warrant can be exercised,
at any time subsequent to Applied Cellular Technology's
market price reaching $7.50 per share, to acquire one
common share of Applied Cellular Technology, Inc. at the
price of $5.00 per common share, or one redeemable class A
convertible preferred share of Tech Tools, Inc. at the
price of $5.00, or, if Tech Tools, Inc. becomes a public
company, into an amount equal to 40% of its total
outstanding common shares. Tech Tools, Inc.'s preferred
stock pays a cumulative dividend, compounded annually, of
8% of the aggregate value of $600,000. The preferred stock
has cash redemption rights five years after issuance at the
option of the holder. The redemption price is $5.00 per
preferred share. In August 1995, the Class E warrants were
redeemed for 120,000 shares of Applied Cellular Technology,
Inc.
In December 1994, 300,000 class F warrants were authorized
for issuance. The class F warrants shall be exercisable
for a period of five years from the date of issuance and
shall be exercisable at the rate of 1 warrant plus $2.50
for each common share.
In March 1995, restricted common stock was issued to
purchase a note receivable. The Company issued 200,000
common shares at a market price of $5.00 with a 50%
discount, due to the limited market of the common shares,
bringing the value down to $2.50 each. The stock was
restricted as to voting rights until the bid price per
share equaled or exceeded $7.50 for a period of 48 hours or
more, which occurred in the third quarter of 1995. Due to
this discount, 50% of all principal payments being received
are recorded as additional paid-in capital. This amount
for 1995 was $120,316.
In August 1995, 350,000 class H warrants were authorized
for issuance. The class H warrants shall be exercisable
for a period of 5 years from the date of issuance and shall
be exercisable at the rate of 1 warrant plus $4.75 for each
common share.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
On August 4, 1995, the Company acquired software and
related net assets of Baler Software Corporation (Baler) in
exchange for the payment of debt of $14,000, the issuance
of 88,009 shares of the Company's common stock, for full
payment of $451,046 debt of Baler's secured creditors and
the issuance of 25,000 shares of the Company's common stock
to one of Baler's shareholders in payment for the acquired
software and certain other assets and liabilities. The
then current market trading value of $5.125 a share has
been discounted by 50% due to limited market of the common
shares, resulting in a value of $2.56 a share.
On August 9, 1995, the Company issued 124,066 shares of its
common stock in exchange for an 80% investment in Atlantic
Systems, Inc. The then current market trading value of
$5.50 a share has been discounted by 50% due to the limited
market of the shares, resulting in a value of $2.75 a
share.
On September 6, 1995, the Company issued 102,160 shares of
its common stock in exchange for an 80% investment in Elite
Computer Services, Inc. The then current market trading
value of $8.94 a share has been discounted by 50% due to
the limited market of the shares, resulting in a value of
$4.47 a share.
17. Supplemental Cash Flow Information
The Company had the following noncash investing and
financing activities:
During 1994, the subsidiary purchased software through the
issuance of 180,000 shares of Applied Cellular Technology's
common stock at $1.25 per share and the issuance of 120,000
warrants, carrying no value.
During 1994, the Company acquired 570,712 shares of Cadkey,
Inc. in exchange for 456,570 shares of its common stock at
$1.25 a share, resulting in a 29% investment in this
company. The investment of $570,713 included approximately
$71,000 of goodwill which is being amortized over 7 years.
Also during 1994, the Company financed a lease for a
vehicle in the amount of $14,424.
In March 1995, the Company acquired a note receivable from
Cadkey, Inc. in exchange for the issuance of 200,000
restricted shares of its common stock valued at $2.50 each.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
In August 1995, the Company acquired software and related
assets from Baler Software Corporation in exchange for the
issuance of 113,009 shares of its common stock at $2.56 per
share.
In August 1995, the Company issued 124,066 shares of its
common stock at $2.75 per share in exchange for an 80%
investment in Atlantic Systems, Inc. The related goodwill
of approximately $442,000 is being amortized over 10 years.
In September 1995, the Company issued 102,160 shares of its
common stock at $4.47 per share in exchange for an 80%
investment in Elite Computer Services, Inc. The related
goodwill of approximately $503,000 is being amortized over
10 years.
In October 1995, the Company entered into two capital
leases for vehicles in the amount of $24,420.
18. Stock Registration
During 1994, the Company completed a registration regarding
distribution of its shares of common stock to shareholders
of Pratt, Wylce & Lords, Ltd., a consultant to the Company.
Additionally, the Company registered on behalf of the
selling shareholders 192,851 shares of common stock,
200,000 class A warrants, 200,000 class B warrants and
45,000 class C warrants. The class A warrants are
exercisable into one common share at the purchase price of
$4.75 and the class B warrants are exercisable into one
common share at the purchase price of $20. The class A and
class B warrants shall be effective for a period of four
years from the date of issuance and shall be redeemable by
the Company at $.001 per class A or class B warrant upon
thirty day's notice. The class C warrants were to be
exercisable for a period of three years from the date of
issuance at the rate of one warrant plus $1.50 for one
share of common stock. The class C warrants were exercised
in December 1994 for $67,500.
In connection with this registration, the Company incurred
$249,722 in stock registration costs for the year ended
December 31, 1994.
The Company is in the process of registering on Form SB-2,
1,000,000 shares of common stock, 300,000 common shares to
be issued upon exercise of the class F warrants, and
1,459,301 common shares being registered on behalf of the
selling security holders.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
19. Related Party Transactions
For services rendered in connection with the three
acquisitions which took place in the third quarter of 1995,
the Company paid a shareholder, Great Bay Technology Group,
Inc., $50,000 for each acquisition for investment banking
services. These payments were included in the total cost
of assets purchased and therefore amortized over the life
of the related assets. In the fourth quarter of 1995, the
Company paid a shareholder, Great Bay Technology Group,
Inc., $76,500 for investment banking services provided for
the acquisitions noted in the subsequent events. These
costs will be capitalized as a direct acquisition cost of
the related assets and amortized over the life of the asset
beginning in 1996.
20. Subsequent Events
In January 1996, the Board of Directors authorized the
issuance of 450,000 class I warrants to certain
shareholders and officers. The warrants will be
exercisable for a period of five years from the date of
issuance at the rate of one warrant plus $2.87.
In February 1996, Atlantic Systems, Inc. purchased 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 common stock of Applied
Cellular Technology, Inc., at $5.50 per share, the then
current market trading price. This value has been
discounted 50% due to the limited market of the shares,
resulting in a value of $2.75 a share, for a total value of
$92,109. Also in February 1996, the Company entered into
an employment contract with an officer of Quality
Solutions, Inc. for a period of three years with an annual
salary of $60,000, and an additional bonus based on 10% of
gross profit of all sales closed during the fiscal year to
be paid in the form of common shares of the Corporation.
Upon issuance of these shares, officer's compensation
expense will be recorded based on the number of shares
issued times the market price of the shares. An additional
bonus may be earned in the first year of service, on sales
from $200,000 to $450,000, with a maximum amount being paid
of $25,000.
In February 1996, the Company entered into two employment
contracts with officers of Atlantic Systems, Inc. which
call for services to be provided for a period of three
years, at annual salaries of $50,000 for each officer with
an additional bonus based on 25% of quarterly earnings
before income taxes in excess of $58,400 not to exceed
$50,000 to each officer.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
In March 1996, the Company entered into an agreement,
pending final shareholder approval of the Company for the
authorization of the redeemable preferred shares, to purchase
80% of Burling Instruments, Inc., in exchange for 9,000 shares
of 8% redeemable preferred stock at $100 per share of Applied
Cellular Technology, Inc. for a total value of $900,000.
The Company will also pay cash of $57,600. The approval of
the redeemable preferred shares is probable, due to the fact
that the majority ownership shareholders have been involved
with the acquisition negotiations, and are in favor of the
transaction.
If and to the extent the Redeemable Preferred shares have not
been converted to Common Stock by the second anniversary of the
initial issuance of the shares, the Company shall redeem the
redeemable preferred shares by paying $100 per share. Each
holder of the redeemable preferred shares may convert their
redeemable preferred shares into Common Stock at a rate of
$5.75 per $100 of redeemable preferred stock, for two years
from the issuance date.
21. Restatement
The Company has restated its balance sheet at December 31,
1994 to reflect the adjustment of the acquisition price of
computer software acquired by Tech Tools, Inc. in exchange
for 180,000 shares of its common stock and for the issuance
of 120,000 warrants. In addition, the Company has adjusted
the value of the acquisition of its 29% investment in
Cadkey, Inc. obtained through issuance of 456,570 shares of
common stock.
The shares and warrants in connection with these
acquisitions were originally valued at $5 each resulting in
recorded acquisition amounts of $2,282,850 for Cadkey, Inc.
and $1,500,000 for the purchased software (Databoss). In
light of prevailing market values of $2.50 to $2.75 per
share during the fourth quarter of 1994 and with
consideration of a 50% discount due to the limited market
which existed for the shares at that date, the Company has
restated the valuation to $1.25 per share. No value was
given to the warrants because the exercise price exceeded
the $1.25 value.
The restatement results in a reduction of the purchase
price of the computer software by $1,275,000 to $225,000
and the investment in Cadkey, Inc. by $1,712,137 to
$570,713 with corresponding reduction in additional paid-in
capital totalling $2,987,137. There was no effect of this
restatement on operations for the year ended December 31,
1994.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
The Company has restated its balance sheet and income statement for
the year ended December 31, 1995 to reflect the recording of the
investment in Cadkey, Inc. on the cost method, instead of as previously
shown under the equity method. The Company does not currently, and has
not since early in 1995, exercised significant influence over Cadkey,
Inc. and therefore should not be recorded under the equity method.
There was no effect on the beginning retained earnings, as of December
31, 1994, as there was no equity picked up within that year.
The effect of this change was to reduce net income for the year ended
December 31, 1995 by $86,668, which reduced the net income per common
share by $.05 per share, from $.14 to $.09 per share.
22. Proforma Information (Unaudited)
The following pro forma consolidated statement of
operations of Applied Cellular Technology, Inc. and
subsidiaries for the year ended December 31, 1995
gives effect to the acquisitions of Atlantic Systems, Inc.,
Elite Computer Services, Inc., and the probable acquisition
of Burling Instruments, Inc. as though they were effective
at January 1, 1995. The statement gives effect to the
acquisitions under the purchase method of accounting and
the assumptions in the accompanying notes to the pro forma
financial statements.
In August 1995, the Company issued 124,066 shares of common
stock at $2.75 per share (which was the prevailing market
price at the time of the acquisition, net of a discount of
50% due to the limited market for the shares) for a total
of $341,182, in exchange for an 80% investment in Atlantic
Systems, Inc. The resulting goodwill of $442,000 is being
amortized over 10 years. Other acquisition costs for this
transaction have also been capitalized in the amount of
$117,523.
In September 1995, the Company issued 102,160 shares of its
common stock at $4.47 per share (which was the prevailing
market price at the time of the acquisition, net of a
discount of 50% due to the limited market for the shares)
for a total of $456,655, in exchange for an 80% investment
in Elite Computer Services, Inc. The resulting goodwill of
$502,625 is being amortized over 10 years. Other
acquisition costs for this transaction have also been
capitalized in the amount of $56,159.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
In March 1996, the Company entered into an agreement,
pending final shareholder approval of the Company for the
authorization of the redeemable preferred shares, to purchase
80% of Burling Instruments, Inc., in exchange for 9,000 shares
of 8% redeemable preferred stock at $100 per share of Applied
Cellular Technology, Inc. for a total value of $900,000.
The Company will also pay cash of $57,600. The approval of
the redeemable preferred shares is probable, due to the fact
that the majority ownership shareholders have been involved
with the acquisition negotiations, and are in favor of the
transaction.
If and to the extent the Redeemable Preferred shares have not
been converted to Common Stock by the second anniversary of the
initial issuance of the shares, the Company shall redeem the
redeemable preferred shares by paying $100 per share. Each
holder of the redeemable preferred shares may convert their
redeemable preferred shares into Common Stock at a rate of
$5.75 per $100 of redeemable preferred stock, for two years
from the issuance date.
The pro forma statement 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 statement should be read in conjunction with the
financial statements and notes thereto of the Company.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
PRO FORMA ADJUSTMENTS
-----------------------------------------------------
ELITE BURLING
ATLANTIC COMPUTER INSTRUMENTS PRO FORMA
AS REPORTED SYSTEMS SERVICES INC. DECEMBER 31,
DECEMBER 31, INC. INC. (UNAUDITED) 1995
1995 <F1> <F2> <F3> (UNAUDITED)
----------------------------------------------------------------------------------------
Revenues $ 2,335,999 $ 649,932 $ 1,255,125 $ 1,707,868 $ 5,948,924
Direct costs 1,186,213 237,298 562,417 1,021,120 3,007,048
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Gross profit 1,149,786 412,634 692,708 686,748 -- 2,941,876
Operating expenses 981,212 419,768 637,821 653,694 109,688<F4> 2,802,183
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Operating income (loss) 168,574 (7,134) 54,887 33,054 (109,688) 139,693
Amortization of Cadkey, Inc.
Goodwill (11,986) -- -- -- -- (11,986)
Interest income 74,899 -- -- 511 -- 75,410
Interest expense (15,150) -- (1,417) (10,681) -- (27,248)
Minority interest (48,963) -- -- -- (13,829)<F5> (62,792)
Provision for income tax -- -- -- (74) (21,400)<F6> (21,474)
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Net income (loss) 167,374 (7,134) 53,470 22,810 (144,917) 91,603
Dividends -- -- -- -- (72,000)<F7> (72,000)
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Net income (loss)
applicable to common
shareholders $ 167,374 $ (7,134) $ 53,470 $ 22,810 $ (216,917) $ 19,603
==========================================================================================================================
Net Income (Loss) Per Common Share $ 0.09 $ 0.01
==========================================================================================================================
Weighted Average Number Of
Common Shares Outstanding 1,792,939 1,898,940
==========================================================================================================================
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
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Notes To Consolidated Financial Statements (Continued)
The Pro Forma Consolidated Statement of Operations gives
effect to the following pro forma adjustments:
<FN>
<F1> Represents the results of operations of Atlantic Systems,
Inc. for the period January 1, 1995 through July 31, 1995
that would have been consolidated with the Company had the
acquisition taken place on January 1, 1995.
<F2> Represents the results of operations of Elite Computer
Services, Inc. for the period January 1, 1995 through
August 31, 1995, that would have been consolidated with the
Company had the acquisition taken place on January 1, 1995.
<F3> Represents the results of operations of Burling
Instruments, Inc. for the fiscal year beginning March 1,
1995 and ended February 29, 1996 (within two months of
December 31, 1995) that would have been consolidated with
the Company if the acquisition would have taken place on
January 1, 1995.
<F4> Represents the amortization expense for the goodwill on
Burling Instruments, Inc. acquisition in the amount of
$49,580 ($495,796 divided by 10 years). Also represents the
additional amortization expense for the goodwill of
Atlantic Systems, Inc. and Elite Computer Services, Inc. in
the amounts of $24,731 and $35,377, respectively.
<F5> Represents the minority interest in the earnings of
Burling Instruments, Inc. for the year ended December 31,
1995 of $4,562. Also represents the additional minority
interest for Atlantic Systems, Inc. of $(1,427) and for
Elite Computer Services, Inc. of $10,694 respectively, for
the periods from January 1, 1995 to the actual dates of
acquisition.
<F6> Represents the additional provision for income taxes
due to the taxable income of Elite Computer Services, Inc.
<F7> Represents the payment of $72,000 of dividends on the 8%
redeemable preferred shares issued in the Burling Instruments,
Inc. acquisition.
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