UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-26020
APPLIED CELLULAR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State or other jurisdiction of incorporation or organization
43-1641533
(IRS Employer Identification number)
James River Professional Center,
Highway 160 & CC, Suite 5, Nixa, Missouri 65714
(Address of principal executive offices)
Issuer's telephone number: (417) 725-9888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [x] No [ ]
As of August 11, 1997 there were 12,592,542 shares of the registrant's Common
Stock ($.001 par value) outstanding.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
- -------- ------------------------------------------------------------- -------
PART I - FINANCIAL INFORMATION
1. Financial Statements 3 - 9
2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10 - 14
PART II - OTHER INFORMATION
2. Changes in Securities 14
5. Other Information 14
6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBITS 17
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1. ITEM FINANCIAL STATEMENTS
Interim unaudited consolidated financial statements of the Company appear on
pages 4 through 9 of this report.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Assets
June 30, December 31,
1997 1996
(Unaudited) (Audited)
------------ ------------
Current Assets
Cash and cash equivalents ........................................................................... $ 1,798,255 $ 809,711
Accounts receivable and unbilled receivables (net of allowance for
doubtful accounts of $75,000 in 1997 and $101,000 in 1996) ....................................... 12,583,694 6,874,808
Inventories ......................................................................................... 9,531,732 4,290,681
Notes receivable .................................................................................... 1,451,825 1,646,773
Prepaid expenses and other current assets ........................................................... 939,474 264,716
------------ ------------
Total Current Assets .......................................................................... 26,304,980 13,886,689
Land, Equipment And Leasehold Improvements .................................................... 4,443,498 2,915,056
Notes Receivable .............................................................................. 575,000 575,000
Goodwill ...................................................................................... 16,922,677 14,267,985
Purchased Computer Software ................................................................... 457,272 638,397
Other Assets .................................................................................. 2,697,766 924,966
------------ ------------
$ 51,401,193 $ 33,208,093
============ ============
Liabilities And Stockholders' Equity
Current Liabilities
Notes payable ....................................................................................... $ 6,917,456 $ 3,920,057
Current maturities of long-term debt ................................................................ 364,375 333,833
Current portion of capital lease obligations ........................................................ 134,556 159,227
Accounts payable and accrued expenses ............................................................... 13,106,960 7,280,419
Due to investment company ........................................................................... -- 521,000
------------ ------------
Total Current Liabilities ..................................................................... 20,523,347 12,214,536
------------ ------------
Long-Term Liabilities
Long-term debt ...................................................................................... 2,219,002 1,247,158
Capital lease obligations ........................................................................... 261,424 138,444
------------ ------------
Total Long-Term Liabilities ................................................................... 2,480,426 1,385,602
------------ ------------
Total Liabilities ............................................................................. 23,003,773 13,600,138
------------ ------------
Minority Interest ............................................................................. 1,069,457 456,139
------------ ------------
Redeemable Preferred Shares ................................................................... 6,100,000 10,900,000
------------ ------------
Stockholders' Equity
Common shares:
Authorized 20,000,000 shares in 1997 and 1996,
of $.001 par value; issued and outstanding 9,458,000
and 5,798,701 shares in 1997 and 1996, respectively ........................................... 9,458 5,799
Additional paid-in capital .......................................................................... 20,075,430 7,928,198
Retained earnings ................................................................................... 1,116,206 317,819
Foreign currency translation adjustment ............................................................. 26,869 --
------------ ------------
Total Stockholders' Equity .................................................................... 21,227,963 8,251,816
------------ ------------
$ 51,401,193 $ 33,208,093
============ ============
See accompanying notes to consolidated financial statements.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For The Three Months For The Six Months
Ended June 30, Ended June 30,
----------------------------- ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net Operating Revenue .......................................... $ 24,743,566 $ 1,966,769 $ 42,870,363 $ 3,200,003
Cost of Goods Sold ............................................. 16,433,619 1,247,392 28,513,054 1,995,529
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Gross Profit ................................................... 8,309,947 719,377 14,357,309 1,204,474
Selling, General and Administrative Expenses ................... 7,201,081 644,049 12,542,036 1,082,566
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Operating Income ............................................... 1,108,866 75,328 1,815,273 121,908
Interest Income ................................................ 38,702 21,437 87,947 42,106
Interest Expense ............................................... (262,867) (16,913) (444,387) (25,221)
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Income Before Provision For Income Taxes
And Minority Interest ....................................... 884,701 79,852 1,458,833 138,793
Provision For Income Taxes .................................. 207,295 -- 414,360 --
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Income Before Minority Interest ............................. 677,406 79,852 1,044,473 138,793
Minority Interest ........................................... 139,768 17,723 210,086 37,197
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Net Income .................................................. 537,638 62,129 834,387 101,596
Preferred Stock Dividends ................................... 18,000 -- 36,000 --
- ---------------------------------------------------------------- ------------ ------------ ------------ ------------
Net Income Applicable To Common
Stockholders ................................................ $ 519,638 $ 62,129 $ 798,387 $ 101,596
================================================================ ============ ============ ============ ============
Net Income Per Common Share ................................. $ .07 $ .03 $ .12 $ .04
================================================================ ============ ============ ============ ============
Weighted Average Number Of
Common Shares Outstanding ................................... 7,547,408 2,313,042 6,849,921 2,300,200
================================================================ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY For The Six Month
Periods Ended June 30, 1997 And 1996
(Unaudited)
Foreign
Common Stock Additional Retained Currency Total
------------------------ Paid-In Earnings Translation Stockholders'
Number Amount Capital (Deficit) Adjustment Equity
----------- ----------- ----------- ----------- ----------- -------------
Balance - January 1, 1996 ........................... 2,267,749 $ 2,268 $ 3,358,072 $ (308,400) $ -- $ 3,051,940
Net Income ....................................... -- -- -- 101,596 -- 101,596
Issuance Of Common Stock ......................... 138,677 139 208,791 -- -- 208,930
Issuance Of Common Stock - In
Acquisition Of Purchased Software ............. 33,494 33 92,076 -- -- 92,109
50% Of Principal Payments Received
On Note Receivable - Cadkey, Inc. ............. -- -- 42,487 -- -- 42,487
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 1996 ............................. 2,439,920 $ 2,440 $ 3,701,426 $ (206,804) $ -- $ 3,497,062
=========== =========== =========== =========== =========== ===========
Balance - January 1, 1997 ........................... 5,798,701 $ 5,799 $ 7,928,198 $ 317,819 $ -- $ 8,251,816
Net Income ....................................... -- -- -- 798,387 -- 798,387
Issuance Of Common Stock ......................... 727,532 728 1,708,800 -- -- 1,709,528
Issuance Of Common Stock to Redeem
Preferred Stock ............................... 650,000 650 4,799,350 -- -- 4,800,000
Issuance of Common Stock for
Acquisitions .................................. 1,871,767 1,871 4,819,492 -- -- 4,821,363
Class "H" Warrants Exercised ..................... 60,000 60 119,940 -- -- 120,000
Class "I" Warrants Exercised ..................... 350,000 350 699,650 -- -- 700,000
Foreign Currency Translation Adjustment .......... -- -- -- -- 26,869 26,869
----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 1997 ............................. 9,458,000 $ 9,458 $20,075,430 $ 1,116,206 $ 26,869 $21,227,963
=========== =========== =========== =========== =========== ===========
See the accompanying notes to consolidated financial statements.
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For The Six Months
Ended June 30,
-------------------------
1997 1996
----------- -----------
Cash Flows From Operating Activities
Net income ................................................................ $ 798,387 $ 101,596
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ....................................... 720,087 182,823
Minority interest ................................................... 210,086 37,197
Loss on sale of equipment ........................................... 6,939 --
Change in assets and liabilities:
Increase in accounts receivable and unbilled receivables ......... (1,658,035) (452,784)
Increase in inventories .......................................... (1,072,057) (206,505)
Increase in prepaid expenses ..................................... (73,940) (59,125)
Increase in deferred tax asset ................................... (69,732) (22,000)
Increase in accounts payable and accrued expenses ................ 4,840 366,458
- ------------------------------------------------------------------------------ ----------- -----------
Net Cash Used In Operating Activities ........................................ (1,133,425) (52,340)
- ------------------------------------------------------------------------------ ----------- -----------
Cash Flows From Investing Activities
Increase in notes receivable - officers ................................... (305,052) (20)
Payments received on note receivable - Cadkey, Inc. ....................... -- 84,974
Increase in other assets .................................................. (232,656) (64,220)
Payments for equipment, computer software
and leasehold improvements ............................................. (659,519) (9,548)
Proceeds from sale of equipment, computer software
and leasehold improvements ............................................. 21,510 --
Payments for costs of asset and business acquisitions
(net of cash balances acquired) ........................................ (23,801) (59,483)
- ------------------------------------------------------------------------------ ----------- -----------
Net Cash Used In Investing Activities ........................................ (1,199,518) (48,297)
- ------------------------------------------------------------------------------ ----------- -----------
Cash Flows From Financing Activities
Net amounts borrowed on notes payable and long-term debt .................. 1,410,621 278,096
Payments on capital lease obligations ..................................... (97,651) (16,396)
Decrease in notes payable - officers ...................................... -- (106,417)
Issuance of common stock .................................................. 2,008,517 (66,070)
- ------------------------------------------------------------------------------ ----------- -----------
Net Cash Provided By Financing Activities .................................... 3,321,487 89,213
- ------------------------------------------------------------------------------ ----------- -----------
Net Increase (Decrease) In Cash And Cash Equivalents ......................... 988,544 (11,424)
Cash And Cash Equivalents - Beginning Of Period .............................. 809,711 125,469
- ------------------------------------------------------------------------------ ----------- -----------
Cash And Cash Equivalents - End Of Period .................................... $ 1,798,255 $ 114,045
============================================================================== =========== ===========
Supplemental Disclosure Of Cash Flow Information
Interest paid $ 482,754 $ 25,221
- ------------------------------------------------------------------------------ ----------- -----------
See the accompanying notes to consolidated financial statements.
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APPLIED CELLULAR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Introductory Note
This quarterly report on Form 10-Q of Applied Cellular Technology, Inc. (the
"Company"), contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby. These forward-looking
statements assume (i) the continued ability of the Company to sustain its growth
through product development and business acquisitions, (ii) the continued
development of the Company's technical, manufacturing, sales, marketing and
management capabilities, and (iii) anticipated competition. Actual results could
differ materially from these forward-looking statements as a result of, among
others, regulatory or economic influences, the Company's ability to manage and
integrate newly acquired businesses and retain existing management, business
conditions and growth in the industries in which the Company operates, changes
in customer order patterns, competition from competitors with far greater
financial and other resources than that of the Company, risk of inventory
obsolescence due to shifts in market demand, litigation and other economic
factors.
Assumptions with respect to the foregoing involve judgements with respect to,
among other things, future economic, competitive and market conditions, all of
which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. In addition, the business and operations of
the Company are subject to substantial risks which increase the uncertainty
inherent in forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company, or any other person, that the objectives or plans of the Company will
be achieved.
INTERIM ACCOUNTING POLICY
In the opinion of management of Applied Cellular Technology, Inc., the
accompanying unaudited consolidated financial statements contain all adjustments
necessary to fairly present the consolidated financial position of the Company
at June 30, 1997, and the consolidated statements of operations, cash flows and
stockholders' equity for the six month period ended June 30, 1997. These
consolidated financial statements do not include all the disclosures normally
presented under generally accepted accounting principles and, therefore, should
be read in conjunction with the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996.
-8-
Principles of Consolidation
The financial statements include the accounts of Applied Cellular Technology,
Inc. and wholly owned and eighty percent owned subsidiaries. All significant
intercompany accounts and transactions are eliminated upon consolidation. The
Company acquired interests in four companies during the first quarter of 1997,
and interests in three companies during the second quarter of 1997. The
financial position and results of operations of these acquisitions are included
in the Company's consolidated financial statements as of their effective date of
acquisition. Net operating revenue of these companies included in total revenue
were $12,299,685 and $20,056,395 for the three and six month periods ended June
30, 1997, respectively.
Earnings Per Share Information
Earnings per share information is based upon the weighted average common
shares outstanding during the quarters and the six month periods ended June 30,
1997 and 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is required to be adopted in the fourth
quarter of 1997. The Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options will be excluded. The impact of the adoption is not expected to
materially impact basic earnings per share. The Company has not yet determined
what the impact of Statement No. 128 will be on the calculation of fully diluted
earnings per share.
Subsequent Event
Subsequent to June 30, 1997, the Company acquired an 80 percent interest in
DLS Service Corporation ("DLS") in exchange for 57,600 shares of the Company's
restricted common stock at closing and up to an additional 28,800 shares on each
of the first and second anniversaries of closing if certain profit targets are
met. DLS is a value added reseller of PC based computer systems to independent
retailers of liquor, wine and beer.
The financial condition as at June 30, 1997 and the results of operations for
the three and six month periods ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full fiscal year.
-9-
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Summary
The following table summarizes the Company's results of operations as a
percentage of Net Operating Revenue for the quarters and six month periods ended
June 30, 1997 and 1996, and is derived from the unaudited consolidated
statements of operations in Part I of this report.
RELATIONSHIP TO NET
OPERATING REVENUE
-------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net Operating Revenue ............................ 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold ............................... 66.4% 63.4% 66.5% 62.4%
---------- ---------- ---------- ----------
Gross Profit ..................................... 33.6% 36.6% 33.5% 37.6%
Selling, General and Administrative Expenses ..... 29.1% 32.7% 29.3% 33.8%
---------- ---------- ---------- ----------
Operating Income ................................. 4.5% 3.9% 4.2% 3.8%
Interest Income .................................. 0.2% 1.1% 0.2% 1.3%
Interest Expense ................................. -1.1% -0.9% -1.0% -0.8%
---------- ---------- ---------- ----------
Income Before Provision For Income Taxes And
Minority Interest .............................. 3.6% 4.1% 3.4% 4.3%
Provision For Income Taxes ....................... 0.8% 0.0% 1.0% 0.0%
---------- ---------- ---------- ----------
Income Before Minority Interest .................. 2.8% 4.1% 2.4% 4.3%
Minority Interest ................................ 0.6% 0.9% 0.5% 1.2%
---------- ---------- ---------- ----------
Net Income ....................................... 2.2% 3.2% 1.9% 3.1%
Preferred Stock Dividends ........................ 0.1% 0.0% 0.1% 0.0%
---------- ---------- ---------- ----------
Net Income Applicable To Common Stockholders ..... 2.1% 3.2% 1.8% 3.1%
---------- ---------- ---------- ----------
General
The Company's results of operations improved significantly from the second
quarter of 1996 to the second quarter of 1997, and from the six month period
ended June 30, 1996 to the same period in 1997. The significant increases are
all attributable to the Company's growth of existing businesses and to its
growth through acquisition.
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The Company had net income of $519,638, or $0.07 per share, during the second
quarter of 1997, compared to net income of $62,129, or $0.03 per share, during
the same period in 1996. For the six month periods ended June 30, 1997 and 1996,
the Company had net income of $798,387, or $0.12 per share, and $101,596, or
$0.04 per share, respectively.
During the first quarter of 1997, the Company acquired interests in four
companies: Hopper Manufacturing, Co., Inc., a re-manufacturer and distributor of
automotive parts; Norcom Resources, Inc., which provides computer brokerage and
engineering services, parts and technical support for main frame computer
systems; Pizarro Re-Marketing, Inc., which provides re-marketing services of
internal disk drives and tape storage devices for main frame computer systems;
and MVAK Technologies, Inc. which remanufactures and services high-end vacuum
pumps used in the semiconductor, medical and electronics manufacturing
industries.
During the second quarter, the Company acquired interests in three companies:
Advanced Telecommunications, Inc., an installer of telecommunication equipment
and voice messaging/voice response systems, and a distributor of voice and data
network services; Signal Processors Limited, a United Kingdom manufacturer of
satellite communications equipment, including satellite modems and satellite
tracking systems; and Intermatica, Inc., a developer of industry compatible
original equipment manufacturer software tool kits.
These seven acquisitions contributed $12,299,685 or 49.7 percent of NOR in
the second quarter of 1997, and $20,056,395 or 46.8 percent of revenue for the
six months ended June 30, 1997.
Results of Operations
Net operating revenue (NOR) for the three months ended June 30, 1997 was
$24,743,566, a 1,158 percent increase over NOR of $1,966,769 for the same period
in 1996. For the six months ended June 30, 1997, NOR was $42,870,364, compared
to $3,200,003 for the same period in 1996, a 1240 percent increase. NOR
increases are attributable to the growth of our existing businesses and to the
growth contributed by the five acquisitions the Company made during the latter
half of 1996, four acquisitions during the first quarter of 1997, and three
acquisitions made during the second quarter of 1997.
During the second quarter of 1997, 42.0 percent of NOR was contributed by the
retail group, 39.3 percent was contributed by the computer group and 18.7
percent by the manufacturing group. In the second quarter of 1996, these groups
contributed 50.0 percent, 15.0 percent and 35.0 percent of NOR, respectively.
For the six months ended June 30, 1997, 42.0 percent of NOR was contributed by
the retail group, 41.3 percent was contributed by the computer group and 16.7
percent by the manufacturing group. In the same period in 1996, these groups
contributed 58.0 percent, 20.5 percent and 21.5 percent,
Cost of goods sold (COGS) increased by 1217 percent from the second quarter
of 1996 to the second quarter of 1997. The increase in COGS is attributable to
the growth of the Company's existing businesses and to the growth contributed by
the five acquisitions the Company made during the latter half of 1996, four
acquisitions during the first quarter of 1997, and three acquisitions made
during the second quarter of 1997. COGS as a percentage of NOR was 66.4 percent
in the second quarter of 1997 compared to 63.4 percent in the comparable period
in 1996. For the six month period ended June 30, 1997, COGS was 66.5 percent of
NOR, compared to 62.4 percent of NOR in the same period in 1996.
For the current quarter, the gross profit, as a percentage of NOR, was
33.6 percent compared to 36.6
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percent in the same period in 1996. For the six month period ended June 30,
1997, such gross profit percentage was 33.5 percent compared to 37.6 percent in
the same period in 1996. The decline in the gross profit percentage from 1996 to
1997 is attributable to the different business mix and to newly acquired
businesses with lower overall margin contributions.
Selling, general and administrative expenses (SG&A), as a percentage of NOR,
was 29.1 percent and 32.7 percent in the second quarters of 1997 and 1996,
respectively, and includes depreciation and amortization of $390,626 and
$99,407, respectively. For the six months ended June 30, 1997, SG&A, as a
percentage of NOR, was 29.3 percent and 33.8 percent, respectively, and includes
depreciation and amortization of $720,087 and $182,823, respectively.
Operating income increased 1,372 percent from the second quarter of 1996 to
the second quarter of 1997, and 1,389 percent from the six month period ended
June 30, 1996 to the six month period ended June 30, 1997. The increase in
operating income is attributable to the growth of the Company's businesses and
to the growth contributed by the five acquisitions the Company made during the
latter half of 1996, four acquisitions during the first quarter of 1997, and
three acquisitions made during the second quarter of 1997. Operating income as a
percentage of NOR was 4.5 percent and 3.9 percent in the second quarters of 1997
and 1996, respectively, and 4.2 percent and 3.8 percent for the six month
periods ended June 30, 1997 and 1996, respectively.
Interest income was $38,702 and $21,437 for the second quarters of 1997 and
1996, respectively, and $87,947 and $42,106 for the six month periods ended June
30, 1997 and 1996, respectively.
Interest expense was $262,837 and $16,913 for the second quarters of 1997 and
1996, respectively, and $444,387 and $25,221 for the six month periods ended
June 30, 1997 and 1996, respectively. Interest expense increased 1454 percent
from the second quarter of 1996 to the second of 1997, and by 1662 for the six
months ended June 30, 1996 to 1997. As a percentage of NOR, interest expense was
1.1 percent and 0.9 percent in the second quarters of 1997 and 1996,
respectively, and 1.0 percent and 0.8 percent for the six months ended June 30,
1997 and 1996, respectively.
The Company's effective income tax rate was 23.4 percent in the second
quarter of 1997 compared to 0 percent in the second quarter of 1996, and was
28.4 percent for the six month period ended June 30, 1997 compared to 0 percent
in 1996. In 1997 and 1996 the Company benefitted from tax net operating loss
carryforwards.
Financial Condition
As of June 30, 1997, cash and cash equivalents totaled $1,798,255, up from
$809,711 at December 31, 1996. Cash of $1,133,425 and $52,340 was used in
operating activities in the six months ended June 30, 1997 and 1996,
respectively. This use of cash during these periods reflects increases in
accounts receivable and unbilled receivables, inventory and prepaid expenses.
These activities accounted for the use of $2,840,032 and $691,410 of operating
cash in 1997 and 1996, respectively. One of the Company's objectives is to
maximize its cash flow as management believes it offers evidence of financial
strength. However, as the Company experiences substantial growth, its investment
needs are more substantial than those of more mature companies with modest
investment needs. Consequently, the Company will continue, in the foreseeable
future, to continue to use cash from operations and to continue to finance this
use of cash through financing activities such as the sale of common stock and/or
bank borrowing.
-12-
Inventory levels increased by 122 percent from December 31, 1996 to June 30,
1997. This increase was primarily attributable to growth through acquisitions
and to the resulting increased level of business. The 83 percent increase in
accounts and unbilled receivables from December 31, 1996 to June 30, 1997
reflects revenue growth from both existing and acquired businesses. Accounts
payable and accrued expenses increased by 80 percent during this period, again
attributable to the Company's growth and the resulting increased level of
business.
Investing activities used $1,199,518 and $48,297 of cash in the six months
ended June 30, 1997 and 1996. During this period in 1997, investing activities
consisted principally of increases in notes receivable from officers, increases
in other assets and payments for equipment, computer software and leasehold
improvements. In the same period in 1996, investing activities consisted
principally of costs associated with acquisitions, and increases in other
assets, offset by cash received from notes receivable.
The Company obtained positive cash flows of $3,321,487 and $89,213 from
financing activities in the six months ended June 30, 1997 and 1996,
respectively. The major financing sources of cash in the 1997 period were
proceeds from the sale of the Company's common shares and net bank borrowing,
offset by payments on capital lease obligations. The major financing sources of
cash in the 1996 period were net bank borrowing and proceeds from the sale of
common shares, offset by payments on notes payable to officers and capital lease
obligations.
Other sources of liquidity include the Company's ability to obtain term loans
and revolving lines of credit for its operating subsidiaries, the sale of common
and preferred shares, the exercise of warrants, and the raising of other forms
of debt or equity through private placement. The Company believes that its
current cash position, augmented by financing activities, will provide it with
sufficient resources to finance its working capital requirements for the
remainder of the year. The Company's capital requirements depend on a variety of
factors, including but not limited to, the rate of increase or decrease in its
existing business base; the success, timing, and amount of investment required
to bring new products on-line; revenue growth or decline; and potential
acquisitions. The Company believes that it has the financial resources to meet
its future business requirements.
Outlook
The Company's objective is to continue to grow from existing business
segments and through acquisitions, both domestically and abroad. The Company's
strategy has been, and continues to be, to invest in, and acquire, businesses
that complement and add to its existing business base. The Company has expanded
significantly through acquisition in the last twelve months and continues to do
so. The Company's financial results are substantially dependent on not only its
ability to sustain and grow existing businesses, but to continue to grow through
acquisition. The Company expects to continue to pursue its acquisition strategy
for the remainder of 1997, but there can be no assurance that management will be
able to continue to find, acquire and integrate high quality companies at
attractive prices.
-13-
PART II - OTHER INFORMATION
Item 2 - Changes in Securities
Effective as of January 1, 1997, the Company entered into agreements with
Bruce Reale and Vincent A. Lo Castro, under which the Company agreed to pay
consulting fees to each of them in the amount of $96,000 per calendar quarter,
in lieu of dividends otherwise payable in respect of shares of preferred stock
of the Company owned by Mr. Lo Castro and a trust affiliated with Mr. Reale.
Effective June 30, 1997, the Company exchanged an aggregate of 650,000 shares of
its common stock for 48,000 shares of such preferred stock held by Mr. Lo
Castro, and in exchange for certain related warrants. The Company's obligation
to pay the consulting fees to Mr. Lo Castro described above was terminated as
part of such exchange.
An aggregate of 3,292,473 shares of the Company's restricted common stock was
issued as consideration for the businesses acquired as discussed in Item 5
below.
On April 18, 1997, the Company filed a Registration Statement on Form S-3
under the Securities Act of 1933, (Registration No. 333-25431), to register
1,918,053 outstanding Common Shares on behalf of selling shareholders. The
registration statement became effective on May 30, 1997.
Item 5 - Other Information
On July 30, 1997, the Company entered into an agreement to purchase eighty
percent of the 1,000 issued and outstanding common shares of Advanced
Telecommunications, Inc., from two selling shareholders in exchange 2,048,000
shares of the Company's restricted common stock. The shares were issued on July
30, 1997, and the transaction was consummated on August 1, 1997. For accounting
purposes, the effective date of the transaction was May 1, 1997.
On July 30, 1997, the Company entered into an agreement to purchase eighty
percent of the 313,757 issued and outstanding ordinary shares of Signal
Processors Limited from eleven selling shareholders in exchange for 475,920
shares of the Company's restricted common stock at closing and additional
consideration to be determined at the end of calendar years 1997 and 1998 in the
form of shares of the Company's restricted common stock dependent upon Signal
Processors operating profits for 1997 and 1998. The shares were issued to the
selling shareholders on July 30, 1997, and the transaction was consummated on
August 6, 1997. For accounting purposes, the effective date of the transaction
was May 1, 1997.
Effective as of July 31, 1997, the Company's wholly owned subsidiary, ACT
Acquisition Corp., ("Acquisition Corp."), entered into an Agreement of Plan and
Merger with the seven selling shareholders of Intermatica, Inc. ("Intermatica"),
whereby Intermatica was merged with and into Acquisition Corp. in consideration
for the Company issuing 710,953 shares of its restricted common stock. For
accounting purposes, the effective date of the transaction was June 30, 1997.
On July 28, 1997, the Company entered into an agreement to acquire eighty
percent of the 500 issued and outstanding common shares of DLS Service
Corporation from the two selling shareholders in consideration for 57,600 shares
of the Company's restricted common stock issued at closing and up to an
additional 28,800 shares of the Company's restricted common stock on each of the
first and second anniversaries of closing if certain profit targets are met. For
accounting purposes, the effective date of the transaction was July 1, 1997.
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Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit 27 - Financial Data Schedule - on page 18 of this report is
incorporated herein by reference
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company between
April 1, 1997 and the date of filing this report:
(1) the Company's current report on Form 8-K filed on April 2, 1997;
(2) the Company's current report on Form 8-K filed on April 11, 1997; and
(3) the Company's current report on Form 8-K filed on April 15, 1997.
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of St.
Louis, State of Missouri, on August 13, 1997.
APPLIED CELLULAR TECHNOLOGY, INC.
By: /s/ David A. Loppert
-----------------------------------
David A. Loppert, Vice President,
Treasurer and Chief Financial
Officer (Principal Financial
and Accounting Officer)
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