As Filed with the Securities and Exchange Commission on March 30, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 43-1641533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
James River Professional Center
Highway 160 & CC, Suite 5, P.O. Box 2067
Nixa, Missouri 65714
(417) 725-9888
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 20, 1998, the aggregate market value of the voting and non-voting
stock held by non-affiliates of the registrant was approximately $95,800,000.
At March 20, 1998, 22,187,960 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's definitive proxy statement to be filed
within 120 days of the registrant's year-end, issued in connection with
the registrant's 1998 annual meeting of shareholders (Part III).
1
TABLE OF CONTENTS
Item Description Page
PART I
1. Business 3
2. Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for Registrant's Common Equity and Related 12
Stockholder Matters
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
7A. Quantitative and Qualitative Disclosures About Market Risk 22
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures 22
PART III
10. Directors And Executive Officers of the Registrant 23
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and Management 24
13. Certain Relationships and Related Transactions 25
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
2
PART I
ITEM 1. BUSINESS
GENERAL
Applied Cellular Technology, Inc. (with its subsidiaries, the "Company",
"ACT" or the "Registrant") is a diversified technology company that specializes
in providing services and solutions to the wireless, telecommunications and
digital industry. The Company's overall goal is to acquire the development,
manufacturing and delivery capabilities needed to take full advantage of the
industry's move from analog to digital and from wireline to wireless systems.
The Company currently operates through its subsidiaries in the United States,
Canada and the United Kingdom. The Company is a Missouri corporation and was
incorporated on May 11, 1993.
The Company's business is currently organized into four business groups, or
industry segments: the Services and Solutions Group, the Computer Group, the
Manufacturing Group and the International Group, as follows:
The Services and Solutions Group installs, sells, services and supports
business cellular phone and other wireless services, business telephone
systems, voice mail and interactive voice response systems, flat rate
extended area calling services for business and residential customers,
commercial long distance and local telephone services, residential long
distance telephone services, digital satellite television services to
business and consumer end-users, and computer systems, offering custom and
custom-tailored software and hardware systems for manufacturers,
wholesalers, distributors and field sales and service organizations, and
construction and installation of microwave cellular and digital personal
communication services (PCS) towers.
The Computer Group provides leasing, re-marketing, parts-on-demand,
consulting and business continuity services for mainframe, midrange and PC
systems to industrial, commercial and retail organizations.
The Manufacturing Group manufactures customized analog and digital and
off-the-shelf industrial temperature controls and custom analog and
digital electrical products and controls for factory automation,
combustion and commercial heating and air conditioning systems.
The International Group was formed in 1997 to enable the Company to
become an application service solutions provider to the global wireless
industry.
The principal office of the Company is currently located at Highway 160 and
CC, Suite 5, Nixa, Missouri 65714, phone 417-725-9888. Satellite corporate
offices are located in Amherst, New Hampshire, Cambridge, Massachusetts and St.
Louis, Missouri. The Company is relocating its principal and satellite offices
to Palm Beach, Florida and expects to complete this relocation by June 1, 1998.
Each operating business is conducted through a separate subsidiary company
directed by its own management team, and each subsidiary company has its own
marketing and operations support personnel. Each management team reports to the
Group Vice President and ultimately to the Company's President, who is
responsible for overall corporate control and coordination, as well as financial
planning. The Chairman is responsible for the overall business and strategic
planning of the Company.
3
The largest part of the Company's current operations are the result of
acquisitions completed during the last two years. During 1995, the Company's net
operating revenues were $2.3 million. For 1996, net operating revenues were
$19.9 million For 1997, the Company's net operating revenues were $103.2
million. Since January 1, 1997, the Company has completed fourteen additional
acquisitions of companies whose aggregate net revenues for the year ended
December 31, 1997 were approximately $62.4 million, or 60.5% of the Company's
total revenues for 1997. See the Company's Consolidated Financial Statements on
pages 27 through 55 of this annual report on Form 10-K for the financial
performance of each of the Company's four business groups.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Annual Report on Form 10-K, including the information incorporated
herein by reference, contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including statements
regarding, among other items, (i) the Company's growth strategies, (ii)
anticipated trends in the Company's business and demographics and (iii) the
Company's ability to successfully integrate the business operations of recently
acquired companies. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from these forward-looking statements as a result of the factors
described in Exhibit 99.1 hereto, including, among others, regulatory,
competitive or other economic influences. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this Annual Report on Form 10-K will be accurate.
BUSINESS GROUPS
THE SERVICES AND SOLUTIONS GROUP
The Company's services and solutions group comprises the following
subsidiary companies and divisions:
ACT Missouri - Applied Cellular Technology's
Software and Services Division.
Atlantic Systems, Inc.
ATI Communications, Inc.
Advanced Telecommunications, Inc.
Alacrity Systems, Inc.
City Dial Network Services, Ltd.
C.T. Specialists, Inc.; and
STC Netcom, Inc.
This group is involved in the following activities:
Wireless-Enabled Computer Software Application Development
Business Telephone Systems, Cellular Telephones and Services
Telephony, Fax and E-mail Multi-Function Software
Field Sales and Service
Construction of Cellular, PCS, Microwave and
Fiber Optic Infrastructure
4
Wireless-Enabled Computer Software Applications -
ACT's software and services group provides custom-tailored software for a
variety of applications including:
Warehouse Management
Manufacturing Shop Floor Control
Field Service
Retail Merchandising
Municipal/Utility
In addition to custom projects, ACT develops and markets middleware for
developers and users of portable data collection equipment. ACT's Flex Connect
System links corporate systems to laptops, PDA's, handheld terminals and other
mobile devices via wireless or wireline connections. ACT's SQL-Connect database
connectivity system enables handheld terminals and other portable devices to
function as SQL-compatible clients on such systems as Microsoft SQL-Server,
Oracle and Informix.
ACT is a value-added reseller for several different manufacturers of
wireless portable data collection terminals, bar code printers, computers and
related equipment. ACT integrates this hardware with custom-tailored software,
specific for the customer's needs.
Communications technology is another important part of ACT's business. ACT
integrates diverse systems and protocols to produce integrated systems which
collect data via wireless hand held devices, process the data locally (either on
the hand held unit or on a local LAN-based processor) then transmit the data
in real time to corporate systems. This requires various system design and
programming techniques including client-server computing, operating systems
internal programming and application programming in a variety of languages and
involving a wide range of database systems.
ACT's development of proprietary RF wireless technology and a suite of
software applications position the Company to benefit from the dramatic industry
changes that are now underway. As industry moves from analog to digital and from
wireline to wireless, many companies are considering upgrading their systems.
Spirits `97 Liquor Store Systems for Windows `95 and Windows NT
Atlantic Systems, Inc.'s ("ASI") Spirits `97 System is a comprehensive
liquor store point of sale and inventory control system. With over 500
customers, ASI is emerging as a leader in this niche industry. Spirits `97 is a
comprehensive store management system consisting of an in-store register and
inventory control system networked with a centralized administration center for
control of pricing, inventory, sales, customer services and accounting. An
optional internet module lets customers build a customized web site, offering
users an on-line view of currently available products. Orders can be placed for
pick up today or to reserve an upcoming vintage for delivery as soon as it
arrives. Extensive use of bar coding speeds customer check out and simplifies
checking in products from warehouse shipments and direct store deliveries. An
optional warehouse management system allows for wireless bar code data
collection at an affordable price. From its headquarters in Wall Township, New
Jersey, ASI provides software development, sales, installation, training and
customer support services. ASI also maintains sales and service offices in
Atlanta, Baltimore, Boston and Hartford.
5
Business Telephone Systems, Cellular Telephones and Services
Through its subsidiaries, the Company provides a variety of telephone
related services. ATI Communications, Inc. ("ATI"), founded in Bethel Park, PA
in 1984, is a full-service telecommunications company specializing in complete
telephone systems and solutions for its customers. Through its team of trained
sales and service professionals, ATI offers an array of telecommunications
products and services including interconnect (business telephone systems and
voice mail from Toshiba, Telrad and Applied Voice Technology), business cellular
telephones and other business wireless services as an agent for AT&T Wireless
Services and Cellular One, and commercial long distance service, digital
satellite television, internet access and other network services. ATI serves
corporate customers in Western Pennsylvania, Harrisburg, Philadelphia,
Washington D.C., Baltimore and Northern Virginia.
Advanced Telecommunications, Inc. ("ATI-IL"), founded in 1983 and based in
Naperville, Illinois, provides comprehensive telecommunications solutions to
businesses throughout the Chicago Metropolitan Area. ATI-IL sells and services
Inter-Tel, Toshiba, Panasonic and Fujitsu telephone systems and Octel VMX voice
mail, and represents Amertitech Voice and Data Services, offering ISDN, 56K and
T1 services.
City Dial Network Services, Ltd. ("City Dial") is one of Canada's leading
providers of Flat Rate Extended Area Calling Services. Based in Toronto, Canada,
City Dial provides value-added telecommunications services to over 4,000
customers in Montreal, Calgary and Toronto. City Dial was founded in 1991 to
take advantage of the deregulation of Canada's telecommunications industry. The
company initially positioned itself in the long distance market as an Extended
Area Service (EAS) provider. Since then, City Dial has become a leader in the
EAS market by leasing lines and services from local telephone companies in very
large quantities and then using these lines to expand the local calling area for
industrial and commercial customers. This is a value-added service because it
allows customers to avoid the previous long distance charges associated with
calling these extended areas. In 1993, City Dial expanded into the long distance
market as a reseller and added "800" service to its product offering. City Dial
also recently entered the Residential Flat Rate Extended Area Service Market.
Telephony, Fax and E-Mail Multi-Function Software
Alacrity Systems, Inc. ("Alacrity"), headquartered in Hackettstown, New
Jersey, is a software technology company specializing in the development and
marketing of software for small office/home office (SOHO) and workgroup
applications. Alacrity's software enables users to view, manage, transmit and
process information using fax, scanning, e-mail, printing and copy functions.
Integration of these capabilities into a single multifunction program (MFP) is
particularly advantageous to users in small office/home office and small
workgroup environments.
Alacrity's programs are bundled with MFP hardware units such as combination
fax/copier/scanners on an original equipment manufacturer (OEM) basis.
Alacrity's OEM customers include Panasonic, Sharp, Toshiba and others.
Alacrity's extensive software engineering capabilities enable OEM's to offer
more competitive products with improved price/performance, shortened development
cycles and reduced development cost. Alacrity's staff has capability in the
design, development and marketing of graphics, office automation, electronic
publishing and document management software.
6
Intermatica, Inc. and Tech Tools, Inc., divisions of Alacrity, are software
sales companies offering specialized CAD applications, database code generators,
spreadsheet compilers and installer software to develop business software
applications running under Microsoft's Windows 95, Windows and DOS platforms.
Field Sales and Service
Founded in Sacramento, California in 1977, C. T. Specialists, Inc. ("CTS")
is a distributor and manufacturers representative company, specializing in the
application and sales of controls for factory automation, combustion and
commercial heating and air conditioning (HVAC). CTS also fabricates customized
control panels. CTS sales are divided between industrial customers and HVAC
customers. CTS distributes products manufactured by Omron Electronics,
Honeywell, Siebe, Maxon Corporation and many others. CTS's products are sold to
industrial plants for manufacturing processes and to systems integrators for use
in their end products. HVAC control products are sold to mechanical contractors
for commercial installation and maintenance. Major customers include NEC, E & J
Gallo, Frito Lay, General Foods, Aerojet, Hershey, Stanford University and
Farmers Rice.
Construction of Cellular, PCS, Microwave and Fiber Optic Infrastructure
STC Netcom, Inc. ("STC") is a communications construction contractor, which
builds, installs and maintains PCS, microwave and cellular antennas and fiber
optic systems in North America. As a general contractor, STC designs, installs
and maintains paging, two-way, microwave, cellular, PCS and fiber optic systems.
As part of ACT's Services and Solutions Group, STC's designs incorporate
fabricated enclosures, digital controllers and satellite dish positioning
systems manufactured by Applied Cellular's Cra-Tek, U.S. Electric and Signal
Processor's divisions.
STC carries licenses with multiple classifications in all states where it
does business. This has enabled the company to secure contracts and provide
services for national accounts such as Sprint, AT&T Wireless, GTE, MCI, Wiltel
and Pacific Bell. STC constructed the first cellular system in any U.S. National
Park (Yosemite) and provided construction services for the initial launch of
Sprint's MTA services in the state of Washington.
THE COMPUTER GROUP
The computer group is made up of the following subsidiary companies:
Universal Commodities Corp.
Cybertech Station, Inc.
Elite Computer Services, Inc.
Norcom Resources, Inc.
Pizarro Re-Marketing, Inc.; and
PPL, Ltd.
For computer users who are upgrading to the latest technology, disposing of
their existing equipment can present a variety of challenges. Effective
remarketing of used equipment is an important value-added service which provides
significant advantages to existing owners and prospective buyers of the
equipment and also helps protect the environment.
7
ACT's Computer group deinstalls, refurbishes and reclaims used computer
equipment, especially mainframe systems. These include deinstallation and
transportation logistics, warehousing, test/burn-in and configuration -- even
reclaiming precious metals from equipment which cannot be utilized further.
Universal Commodities Corp. ("UCC"), based in Burlington, New Jersey, is a
buyer, seller and renter of new, off-line and off-lease computer systems ranging
from mainframes to PCs, and related peripheral equipment and devices. UCC is
also a parts supplier and purchases electronic components and other scrap for
de-manufacturing and reclamation of precious materials, steel, aluminum and
copper.
Cybertech Station, Inc. ("Cybertech"), based in Newtown, Pennsylvania,
specializes in new and used computer memory products manufactured for
workstations, servers and midrange computer systems by such industry leaders as
Hewlett-Packard, IBM, Sun Microsystems, Silicon Graphics and Compaq. Cybertech's
products are sold to customers in North America, Canada, the United Kingdom,
Germany and Denmark.
Elite Computer Services, Inc. ("Elite"), based in Randolph, New Jersey, an
authorized IBM "business partner," is a seller of new IBM equipment and parts.
Elite also re-markets used IBM mainframe parts and other components. It acquires
used parts by purchasing used IBM mainframes, monitors, keyboards and printers,
which it then strips down. Elite provides 24-hour parts on demand service.
Norcom Resources, Inc. ("Norcom"), based in St. Paul, Minnesota, is an
integrated organization providing brokerage and engineering services, parts and
technical support. Norcom specializes in servicing the IBM mainframe
after-market with hardware, engineering services on an integrated basis, parts
and technical support
Based in Dallas, Texas, Pizarro Re-Marketing, Inc. ("Pizarro") provides
re-marketing services in the disk and tape industry. Pizarro is also a retailer
and wholesaler in both the domestic and international markets of RAMAC product
and IBM tape product.
Based in New York City, PPL, Ltd. leases and rents computers, computer
accessories and peripherals, wireless phones and exhibition space and facilities
for trade shows and conventions in New York City and in the Greater New York
area.
THE MANUFACTURING GROUP
ACT's manufacturing divisions produce a wide range of products, most of
which involve emerging digital and wireless technologies. As part of the
Manufacturing Group, these divisions give ACT the advantages of advanced
engineering, fabrication and assembly capabilities which are key to the
development of advanced wireless and digital products.
8
The manufacturing group consists of:
Burling Instruments, Inc.
CRA-TEK Company
Hopper Manufacturing Co., Inc.
MVAK Technologies, Inc.; and
US Electrical Products Corp., t/a Gavan-Graham Electric Products.
Burling Instruments, Inc. ("Burling"), based in Chatham, New Jersey, is a
manufacturer of industrial temperature controls. The typical uses of the product
are as temperature controls or safety limit switches. Burling's customer base is
broad based over a variety of OEMs and those in need of replacement units. The
scope of OEM companies range from the manufacturer of tempering ovens for
eyeglass retailers to manufacturers of large steam turbines for the power
industry. Burling has been in business since 1935. Burling has three basic
product lines: Differential Expansion; Solid State; and Thermostats.
Cra-Tek Company ("Cra-Tek"), based in Sacramento, California, is a
specialized manufacturer of custom digital and analog industrial electric
controls and components. Cra-Tek operates through two divisions:
Cra-Tek Industrial Controls provides turn-key, rebuilt and retrofit systems
to manufacturing, water and waste water treatment facilities. It also
provides 24-hour on-call service. It is an authorized factory parts
distributor and custom manufactures design motor control systems for the
industrial manufacturing and utility industries.
Cra-Tek Industrial Electric manufactures and supplies custom digital and
analog electrical products to the water and waste water industry,
government, state and local authorities and private and industrial
commercial enterprises. This division works with the control division to
upgrade and retrofit existing industrial facilities.
Cra-Tek markets its systems through warranty service representatives and
referrals. Electrical contracts are obtained through a bidding process,
referrals and repeat customers. There are a number of electrical contractors in
Northern California; however, Cra-Tek offers custom electrical applications,
system integration, a 24-hour on-site service team, U. L. panel building
abilities, distribution and warranty services at one location.
Hopper Manufacturing Co., Inc. ("Hopper"), based in Sacramento California,
re-manufactures and distributes automotive parts, primarily alternators,
starters, water pumps, distributors and smog pumps, to an established client
base primarily in the Pacific states, but also to customers throughout the
United States.
MVAK Technologies, Inc. ("MVAK"), based in Billerica, Massachusetts,
provides services to the vacuum equipment industry. MVAK re-manufactures vacuum
pumps and provides new and reconditioned equipment, fluids, parts, filtration
equipment, media and engineering and consultative services.
Gavan-Graham Electrical Products ("Gavan-Graham") is a custom manufacturer
of electrical products, specializing in digital and analog panelboards,
switchboards, motor controls and general control panels. Gavan-Graham also
provides custom manufacturing processes such as shearing, punching, forming,
welding, grinding, painting and assembly of various component structures.
9
Gavan-Graham is a 53-year old company located in Maywood, New Jersey.
Gavan-Graham contracts with state and local authorities, primarily the New York
Transit Authority, the New Jersey Mass Transit Authority, the New York and New
Jersey Departments of Transportation and the New Jersey Turnpike Authority. It
also performs work for "Fortune 500" companies and other much smaller clients.
THE INTERNATIONAL GROUP
ACT's International Group was formed in 1997 to enable the Company to
become an application service solution provider to the global wireless industry.
Digital Satellite Technology
Signal Processors Limited ("SPL") designs, manufactures and supports
satellite communication sub-systems and has made contributions to global
satellite communications technology. SPL's core products include satellite
modems (SPL is the largest European manufacturer of this type of device), data
broadcast receivers and antenna controllers. SPL's objective is to build
price-competitive equipment which minimizes the whole life cost of a system
through superior technology and stringent quality control.
SPL's digital signal processor, filter and software designs position it to
benefit as the internet user community migrates to broadband, high throughput
connections during the next few years. SPL believes that it is one of a handful
of companies who possess the technology to put reliable, cost-effective, fast
satellite communications in a desktop PC.
Antenna Control Systems
These devices are used to ensure large antennas at satellite earth stations
aim precisely at their satellites at all times. Most communication satellites
are normally stationary in the sky above the equator; however, increasing
numbers oscillate North-South several degrees every day. These satellites
operate in inclined orbits and consequently demand special tracking devices to
maintain optimum alignment of the antenna at all times.
SPL was the first to develop orbit modeling to maximize accuracy of
tracking. The INTRAC INtelligent TRacking Antenna Controllers are used to
control dishes between 3.5m and 32m in diameter in over 200 sites worldwide.
INTRAC systems provide exceptionally robust and reliable tracking, with well
over four million operational hours recorded in earth stations around the world.
10
INTRAC offers a range of interfaces to accommodate the many different
drives, controllers, position sensors, actuators, etc. used for managing dish
orientation. This flexibility enables SPL to undertake retrofit projects in
which entire control systems on existing installations are swapped out for a
turnkey INTRAC-based solution. In 1993, SPL won and successfully completed a
major retrofit contract from AT&T in the US involving installing SPL controllers
on seven AT&T antennas, including five very large antennas, 100 feet in
diameter. SPL's retrofit teams have to-date retrofitted controllers to fifty
antennas in the United Kingdom, United States, Canada, Hawaii, Thailand, Oman,
Singapore, Aruba and Puerto Rico.
COMPETITION
Each segment of the Company's business is highly competitive, and it is
expected that competitive pressures will continue. Many of the Company's
competitors have far greater financial, technological, marketing, personnel and
other resources than those available to the Company. The areas which the Company
has identified for continued growth and expansion are also target market
segments for some of the largest and most strongly capitalized companies in the
United States, Canada and Europe. There can be no assurance that the Company
will have the financial, technical, marketing and other resources required to
compete successfully in this environment in the future.
EMPLOYEES
At December 31, 1997, the Company and its subsidiaries employed
approximately 650 employees.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
To the best of the Company's knowledge, compliance with federal, state,
local and foreign provisions enacted or adopted for the protection of the
environment has had no material effect upon its operations.
ITEM 2. PROPERTIES
At December 31, 1997, the Company leased approximately 225,000 square feet
of its operating facilities. These leases expire at various dates through 2010.
In March 1997, Burling Instruments purchased its office and manufacturing
facilities, comprising approximately 11,000 square feet, of which 7,500 square
feet is for manufacturing and 3,500 square feet is for office space.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain subsidiaries are parties to various legal actions
as either plaintiff or defendant. In the opinion of management, these
proceedings will not have a material adverse affect on the financial position or
overall trends in results of the Company. The estimate of the potential impact
on the Companies financial position or overall results of operations for these
proceedings could change in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq Small-Cap Market under the
symbol "ACTC." The following table sets forth the high and low sale prices of
the Common Stock as reported by the Nasdaq Small-Cap Market for each of the
quarters during the Company's last two fiscal years.
High Low
1996
First Quarter......... 6-7/8 2-3/4
Second Quarter........ 9-1/8 4
Third Quarter......... 7-7/8 3-3/4
Fourth Quarter........ 7-3/8 4-1/2
1997
First Quarter......... 5-7/8 4
Second Quarter........ 4-3/8 2-5/8
Third Quarter ........ 8-3/4 3-1/16
Fourth Quarter ....... 9-3/4 3-15/16
Current Acquisitions
The Company has acquired companies through the issuance of Common Stock at
the then current market value. These shares of Common Stock have registration
rights and subsequent sale upon registration could have a negative impact on the
market price of the Common Stock.
Holders
As of March 20, 1998, there were approximately 1,100 shareholders of record
and approximately 3,900 beneficial shareholders.
Dividends
Holder's of the Company's Common Stock are entitled to receive such
dividends as may be declared by its Board of Directors. Other than the
distribution of warrants pursuant to the Joint Actions by Unanimous Consent of
the Board of Directors and Shareholders dated March 25, 1994, since the
Company's 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 the
Company's Common Stock in the foreseeable future. Holders of the Company's
redeemable preferred stock are entitled to receive an 8% annual cumulative
dividend.
12
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by the Company
in 1997. These shares were issued without registration in reliance upon the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended,
and Regulation D promulgated thereunder.
Number of
Issued Common
Name/Entity/Nature Note For Shares
Advanced Telecommunications, Inc. 1 Acquisition 2,100,480
Alacrity Systems, Inc. 2 Acquisition 640,959
Canadian Network Services, Inc. 3 Acquisition 1,116,460
Cra-Tek Company 4 Acquisition 5,503
C.T. Specialists, Inc. 5 Acquisition 787,914
Cybertech Station, Inc. 6 Acquisition 167,238
DLS Service Corporation 7 Acquisition 57,600
Hopper Manufacturing Co., Inc. 8 Acquisition 196,572
Intermatica, Inc. 9 Acquisition 710,953
MVAK Technologies, Inc. 10 Acquisition 408,131
Norcom Resources, Inc. 11 Acquisition 300,753
Pizarro re-Marketing, Inc. 12 Acquisition 218,936
PPL, Ltd. 13 Acquisition 528,852
Signal Processors Limited 14 Acquisition 488,162
STC Netcom, Inc. 15 Acquisition 1,670,000
Universal Commodities Corporation 16 Acquisition 260,708
Burling Instruments, Inc. 17 Real Property
Acquisition 36,422
ATI Communications 18 Preferred Stock
Conversion 1,354,167
Warrants Exercised 19 Warrants Exercised 2,323,500
Stock Option Exercise 20 Stock Options 650,000
Employee Stock Sales 21 Employee Stock Sales 175,000
Private Placements 22 Private Placements 172,222
The Bay Group 23 Acquisition Services 193,265
Professional Services 24 Professional Services 261,816
Richard J. Sullivan 25 Salary Election 48,109
==============
Total 14,873,722
==============
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1. Includes 2,048,000 shares issued to the Selling Shareholders and 52,480
shares issued as finder's fees.
2. Includes 622,755 shares issued to the Selling Shareholders and 18,204
shares issued as finder's fees.
3. Represents 1,116,640 shares issued to the Stage I Selling Shareholders.
13
4. Represents shares issued to a Selling Shareholder to acquire such
shareholders minority interest.
5. Includes 757,610 shares issued to the Selling Shareholders and 30,304
shares issued as finder's fees.
6. Includes 158,351 shares issued to the Selling Shareholder and 8,887
shares issued as finder's fees.
7. Represents shares issued to the Selling Shareholders.
8. Includes 179,104 shares issued to the Selling Shareholders and 17,468
shares issued as finder's fees.
9. Represents shares issued to the Selling Shareholders.
10. Includes 389,296 shares issued to the Selling Shareholders and 18,835
shares issued as finder's fees.
11. Includes 284,444 shares issued to the Selling Shareholders and 16,309
shares issued as finder's fees.
12. Includes 190,833 shares issued to the Selling Shareholders and 28,103
shares issued as finder's fees.
13. Includes 503,669 shares issued to the Selling Shareholders and 25,183
shares issued as finder's fees.
14. Includes 475,920 shares issued to the Selling Shareholders and 12,242
shares issued as finder's fees.
15. Includes 1,600,000 shares issued to the Selling Shareholders and 70,000
shares issued as finder's fees.
16. Represents (a) 152,896 "earnout" shares issued to the Selling
Shareholder for the Company having met the earnout amount as set forth in
Agreement of Sale with the Company, and (b) 107,812 shares issued in connection
with Amendments to the Agreement of Sale.
17. Represents shares issued in connection with the Company's subsidiary,
Burling Instruments, Inc.'s, acquisition of its building.
18. Represents shares issued to the Selling Shareholders upon conversion of
their Redeemable Preferred Stock.
19. Represents shares issued upon the exercise of Warrants by the warrant
holders.
20. Represents shares issued upon exercise of Stock Options under the
Company's 1996 Non-Qualified Stock Option Plan.
21. Represents shares sold to an officer of the Company and an officer of a
subsidiary.
22. Represents shares issued in connection with Private Placement
transactions in 1997.
23. Represents shares issued for investment banking services in connection
with acquisitions made by the Company in 1997.
24. Represents shares issued for professional services.
25. Represents shares Mr. Sullivan elected to receive in lieu of cash
compensation for the one-year period commencing June 1, 1997 under the terms of
his employment agreement with the Company.
14
ITEM 6. SELECTED FINANCIAL DATA
December 31,
------------------------------------------------------------------------
Balance Sheets 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Current Assets $39,574,608 $13,886,689 $1,408,866 $180,856 $96,997
Property, Plant & Equipment 5,338,713 2,915,056 138,489 36,270 15,314
Goodwill 12,262,786 14,267,985 906,626 0 0
Other Assets 4,105,469 2,138,363 1,677,504 1,142,560 10,449
====================================================================
Total Assets $61,281,576 $33,208,093 $4,131,485 $1,359,686 $122,760
====================================================================
Current Liabilities $20,112,442 $12,214,536 $1,003,292 $222,596 $126,905
Long Term Liabilities 2,199,837 1,385,602 19,251 9,084 0
Minority Interest 1,784,668 456,139 57,002 0 0
Redeemable Preferred Stock 900,000 10,900,000 0 0 0
Preferred Shares 0 0 0 200,000 0
Common Shares 20,672 5,799 2,268 1,337 1,161
Additional Paid In Capital 33,680,216 7,928,198 3,358,072 1,414,429 0
Retained Earnings 2,586,128 317,819 (308,400) (487,760) (5,306)
Foreign Currency Translation Adjustments (2,387)
====================================================================
Total Liabilities and Stockholders' Equity $61,281,576 $33,208,093 $4,131,485 $1,359,686 $122,760
====================================================================
For the year's ended December 31,
------------------------------------------------------------------------
Statements Of Operations 1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------------------
Net Operating Revenue $103,159,114 $19,883,400 $2,335,999 $322,769 $410,346
Cost Of Goods Sold 69,407,816 10,523,594 1,186,213 269,868 246,043
------------------------------------------------------------------------
Gross Profit 33,751,298 9,359,806 1,149,786 52,901 164,303
Operating Expenses (a) 29,839,044 8,104,754 981,212 533,046 165,040
------------------------------------------------------------------------
Operating Income (Loss) 3,912,254 1,255,052 168,574 (480,145) (737)
Gain On Sale Of Assets 1,679,627
Interest Income 192,646 125,935 74,899 0 0
Interest Expense (978,339) (200,291) (15,150) (2,309) (7,625)
Minority Interest (697,200) (132,331) (48,963) 0 0
Provision for Income Tax (1,768,679) (362,146) 0 0 0
------------------------------------------------------------------------
Net Income (Loss) 2,340,309 686,219 179,360 (482,454) (8,362)
Preferred Dividends (72,000) (60,000) 0 0 0
------------------------------------------------------------------------
Net Income (Loss) Applicable to
Common Stockholders (a) $2,268,309 $626,219 $179,360 ($482,454) ($8,362)
========================================================================
Net Income (Loss) Per Common Share -
Basic (a) $0.18 $0.19 $0.10 ($0.82) ($0.02)
========================================================================
Net Income (Loss) Per Common Share -
Diluted (a) $0.15 $0.15 $0.09 ($0.82) ($0.02)
========================================================================
(a) Includes a one-time non-recurring charge of $1,680,828 in 1997.
Refer to page 38 for a description of the business combinations that took
place in the above years.
Refer to pages 51 through 52 for a description of the segments of business
that the Company operates in.
15
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the accompanying
consolidated financial statements and related notes on pages 27 through 55.
Certain statements made in this report may contain forward-looking statements.
For a description of risks and uncertainties relating to such forward-looking
statements, see Exhibit 99.1 attached hereto.
RESULTS OF OPERATIONS
The Company's results of operations have improved significantly from 1995
to 1997. Most of the increases are attributable to the Company's growth through
acquisition.
Net operating revenue increased 418% in 1997 to $103.2 million from $19.9
million in 1996. Net operating revenue increased 751% from 1995 to 1996. Net
income increased 262% in 1997 to $2.3 million from $626,219 in 1996. Net income
in 1996 increased 249% from 1995. Operating earnings were 31 cents per share
before a one-time non-recurring charge of $1.7 million or 13 cents per share.
After the one-time charge, basic earnings per share were 18 cents per share in
1997, compared to 19 cents per share in 1996. Diluted earnings per share, after
the one-time charge, were 15 cents per share in 1997, equaling 1996 per share
results.
Toward the end of the third quarter of 1997, the Company made a decision to
exit the retail cellular business that its subsidiary ATI Communications was
engaged in. The decision was made to exit this business because of the Company's
inability to compete with the cellular carriers, who have aggressively entered
this market and are now competing with their independent distributors, one of
whom was the Company. At December 31, 1997, the Company had closed or disposed
of all retail locations and disposed of all assets associated with the retail
business. This resulted in a charge against earnings in the fourth quarter of
1997 and for the year of $1.7 million, including provision for termination of
leases and employees and write-downs of the carrying values of inventory and
other assets.
16
The following table summarizes the Company's results of operations as a
percentage of net operating revenue for the years ended December 31, 1997, 1996
and 1995 and is derived from the Consolidated Statements of Operations in Part
IV of this annual report on Form 10-K.
Relationship to Net
Operating Revenue
-----------------------------
Year ended December 31,
-----------------------------
1997 1996 1995
% % %
Net Operating Revenue 100.0 100.0 100.0
Cost of Goods Sold 67.3 52.9 50.8
-----------------------------
Gross Profit 32.7 47.1 49.2
Selling, General and
Administrative Expenses (a) 28.9 40.8 42.0
-----------------------------
Operating Income 3.8 6.3 7.2
Gain On Sale Of Assets 1.6 0.0 0.0
Interest Income 0.2 0.6 3.2
Interest Expense -0.9 -1.0 -0.6
-----------------------------
Income Before Provision for Income Taxes 4.7 5.9 9.8
And Minority Interest
Provision For Income Taxes 1.7 1.8 0.0
-----------------------------
Income Before Minority Interest 3.0 4.1 9.8
Minority Interest 0.7 0.7 2.1
-----------------------------
Net Income 2.3 3.4 7.7
Preferred Stock Dividends 0.1 0.3 0.0
=============================
Net Income Applicable to
Common Stockholders (a) 2.2 3.1 7.7
=============================
- ----------------------
(a) Includes a one-time non-recurring charge of $1.7 million in 1997,
amounting to 1.6% of net operating revenue.
Net Operating Revenue
Net operating revenue was $103.2 million in 1997, up 418% from $19.9
million in 1996. For 1995, net operating revenue was $2.3 million. Net operating
revenue increases are 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, and fourteen acquisitions during 1997.
In the first quarter of 1997, the Company acquired interests in the
following 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 re-manufactures and services
high-end vacuum pumps used in the semiconductor, medical and electronics
manufacturing industries.
17
During the second quarter of 1997, the Company acquired interests in the
following 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.
During the third quarter of 1997, the Company acquired interests in the
following four companies: DLS Service Corporation, a value added reseller of
point-of-sale systems specializing in sales to the retail liquor industry; STC
Netcom, Inc., a builder and installer of PCS (Personal Communication Services),
microwave and cellular antennas in North America; Cybertech Station, Inc., a
reseller of new and used memory products for workstations, servers and midrange
computer systems, and PPL, Ltd., a rental and leasing company specializing in
the leasing and rental of computers, accessories and peripherals.
During the fourth quarter of 1997, the Company acquired interests in three
companies: Alacrity Systems, Inc., a software technology company specializing in
the development and marketing of software, Canadian Network Services, Inc., a
holding company for City Dial Network Services, Ltd., a provider of flat rate
extended area calling services, and C.T. Specialists, Inc., a distributor and
manufacturers representative company specializing in the application and sales
of controls for factory automation, combustion and commercial heating and air
conditioning.
These fourteen acquisitions contributed $62.4 million, or 60.5%, of net
operating revenue in 1997. During 1996, the Company made five acquisitions which
contributed $15.3 million, or 76.8%, of net operating revenue in 1996. During
1995, the Company made two acquisitions which contributed $1.5 million, or 63.9%
of net operating revenue.
During 1997, 45.0% of net operating revenue was contributed by the Services
and Solutions Group, 38.2% was contributed by the Computer Group, 12.0% by the
Manufacturing Group and 4.8% by the International Group. In 1996, these groups
contributed 70.1%, 10.0%, 19.3% and 0% of net operating revenue, respectively.
In 1995 all revenue was from the services and solutions group.
Gross Profit
Gross profit was $33.8 million in 1997, $9.4 million in 1996 and $1.1
million in 1995. The gross profit percentage was 32.7% in 1997, 47.1% in 1996
and 49.2% in 1995. The decline in the gross profit percentage from 1995 to 1997
is attributable to the different business mix and to newly acquired businesses
with lower overall margin contributions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net
operating revenue, was 28.9%, 40.8% and 42.0% in 1997, 1996 and 1995,
respectively, and includes depreciation and amortization of $1.8 million,
$712,237 and $132,690, respectively. Selling, general and administrative expense
in 1997 also includes a one-time non-recurring charge of $1.7 million relating
to the closing and exiting of the retail cellular business as previously
discussed above.
18
Operating Income
Operating income was $3.9 million in 1997, up 211.7% from $1.3 million in
1996. Operating income was $168,574 in 1995. As a percentage of net operating
revenue, operating income was 3.8%, 6.3% and 7.2% in 1997, 1996 and 1995,
respectively. The increase in operating income 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, and the fourteen
acquisitions during 1997.
Gain On Sale Of Assets
In 1997, the Company had a net gain on the sale of assets of $1.7 million,
or 1.6% of net operating revenue.
Interest Income and Expense
Interest income was $192,646, $125,935 and $74,899 in 1997, 1996 and 1995,
respectively. Interest expense was $978,339, $200,291 and $15,150 in 1997, 1996
and 1995, respectively. As a percentage of net operating revenue, interest
expense was 0.9%, 1.0% and 0.6% in 1997, 1996 and 1995, respectively.
Income Taxes
The Company's effective income tax rate was 37% in 1997 and 31% in 1996,
which was lower as a result of benefits from tax net operating loss
carryforwards which expired in 1996. In 1995, the Company benefited from tax net
operating loss carryforwards and was therefore not subject to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, cash and cash equivalents totaled $7.7 million, up
from $809,711 at December 31, 1996. Cash of $4.7 million and $1.5 million was
used in operating activities in 1997 and 1996, respectively. During 1995,
$127,440 of cash was provided by operations. During 1997, 1996 and 1995, cash
was used to reduce accounts payable and invest in accounts receivable,
inventory, prepaid expenses and deferred taxes. The net effect of these
activities was to use $7.9 million, $3.0 million and $234,092 of operating cash
in 1997, 1996 and 1995, 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.
19
Accounts and unbilled receivables increased 182.0% from 1996 to 1997.
Inventory levels increased by 153.4% from 1996 to 1997. Prepaid expenses
increased 378.5% from 1996 to 1997. These increases were primarily attributable
to growth through acquisitions and to the resulting increased level of business.
The increase in accounts and unbilled receivables from 1996 to 1997 additionally
reflects revenue growth from both existing and acquired businesses. Accounts
payable and accrued expenses increased by 98.9% during this period, again
attributable to the Company's growth and the resulting increased level of
business.
Investing activities provided $5.5 million and $771,669 of cash in 1997 and
1996 and used $100,793 of cash in 1995. In 1997, investing activities consisted
principally of cash acquired upon acquisition of subsidiaries, decreases in
notes receivable from officers, increases in other assets and a net cash inflow
from the sale of equipment and leasehold improvements. In 1996, investing
activities consisted principally of payments received on notes receivable offset
by payments for equipment and leasehold improvements, increases in other assets
and the costs associated with acquisitions. In 1995, investing activities
consisted principally of costs associated with acquisitions, increases in other
assets, payments for equipment and leasehold improvements, offset with cash
received from notes receivable.
The Company obtained positive cash flows of $6.0 million, $1.4 million and
$96,171 from financing activities in 1997, 1996 and 1995, respectively. The
major financing source of cash in 1997 was proceeds from the sale of the
Company's Common Stock. The major financing applications of cash in 1997 were
the repayment on notes payable and long-term debt. The major financing sources
of cash in 1996 were proceeds from the sale of the Company's Common Stock,
short-term bank borrowings and capital received from a private placement of
convertible debt, while the major financing application of cash in 1996 was the
repayment of long-term debt. The major financing source of cash in 1995 was from
the sale of Common Stock, and the major financing applications of cash in 1995
were for payments on long-term debt, notes payable and the redemption of
preferred stock.
One of the Company's stated objectives is to grow and strengthen its
balance sheet without significant leverage. The following table reflects the
more commonly applied liquidity ratios, as follows:
Ratio December 31,
-------------------------------------------------------
1997 1996
---- ----
Current ratio 1.97 1.14
Quick ratio 1.35 0.63
Debt to equity ratio 0.22 0.70
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 stock and preferred stock, the exercise of warrants and the raising of
other forms of debt or equity through private placements. The Company believes
that its current cash position, augmented by financing activities such as the
exercise of warrants and stock options, will provide it with sufficient
resources to finance its working capital requirements for the foreseeable
future. The Company's capital requirements depend on a variety of factors,
including but not limited to, the rate of increase or decrease in its existing
business base; the success, timing, and amount of investment required to bring
new products on-line; revenue growth or decline; and potential acquisitions. The
Company believes that it has the financial resources to meet its future business
requirements.
20
OUTLOOK
The Company's objective is to continue to grow from growth in 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 acquisitions in the last twelve months. The
Company's financial results are substantially dependent on not only its ability
to sustain and grow existing businesses, but to continue to grow through
acquisition. The Company expects to continue to pursue its acquisition strategy
in 1998 and future years, but there can be no assurance that management will be
able to continue to find, acquire and integrate high quality companies at
attractive prices.
While the Company has been profitable for the last three fiscal years,
future financial results are uncertain. There can be no assurance that the
Company will continue to be operated in a profitable manner. Profitability
depends upon many factors, including the success of the Company's various
marketing programs, the maintenance or reduction of expense levels and the
ability of the Company to successfully coordinate the efforts of the different
segments of its business.
The Company has engaged in a continuing program of acquisitions of other
businesses which are considered to be complementary to the lines of business
carried on by the Company, and it is anticipated that such acquisitions will
continue to occur. As of December 31, 1997, the total assets of the Company were
approximately $61.3 million. As of December 31, 1996, the total assets of the
Company were approximately $33.2 million, compared to approximately $4.1 million
at the end of 1995. Net operating revenues for 1997 were approximately $103.2
million compared to approximately $19.9 million in 1996 and $2.3 million in
1995. Managing these dramatic changes in the scope of the business of the
Company will present ongoing challenges to management, and there can be no
assurance that the Company's operations as currently structured, or as affected
by future acquisitions, will be successful. The businesses acquired by the
Company may require substantial additional capital, and there can be no
assurance as to the availability of such capital when needed, nor as to the
terms on which such capital might be made available to the Company. It is the
Company's policy to retain existing management of acquired companies and to
allow the new subsidiary to continue to operate in the manner which has resulted
in its success in the past, under the overall supervision of senior management
of the Company. Accordingly, the success of the operations of these subsidiaries
will depend, to a great extent, on the continued efforts of the management of
the acquired companies.
The Company is constantly looking at opportunities to improve operating
efficiencies and synergies within its existing business segments. The Company
also plans to divest itself of business entities that are not critical to its
long-term strategy. In order to ensure that the value to the Company's
shareholders is maximized, the Company has retained an investment banking firm
to determine what options, if any, are available to it. The Company will review
all alternatives to ensure appreciation of its shareholders' investments.
21
Competition
Each segment of the Company's business is highly competitive, and it is
expected that competitive pressures will continue. Many of the Company's
competitors have far greater financial, technological, marketing, personnel and
other resources than are available to the Company. The areas which the Company
has identified for continued growth and expansion are also target market
segments for some of the largest and most strongly capitalized companies in the
United States, Canada and Europe. There can be no assurance that the Company
will have the financial, technical, marketing and other resources required to
compete successfully in this environment in the future.
Dependence on Key Individuals
The future success of the Company is highly dependent upon the Company's
ability to attract and retain qualified key employees. The Company is organized
with a small senior management team, with each of its separate operations under
the day-to-day control of local managers. If the Company were to lose the
services of any members of its central management team, the overall operations
of the Company could be materially adversely affected, and the operations of any
of the individual facilities of the Company could be materially adversely
affected if the services of the local managers should become unavailable.
Year 2000 Compliance
The Company believes that its business systems, including its computer
systems, are not subject to significant year 2000 problems, because the computer
programs used by the Company are primarily off-the-shelf, recently-developed
programs from third party vendors. However, the Company has begun a process of
confirming with such vendors whether the programs are year 2000 compliant and
identifying and addressing problems that may arise in this regard. The Company
expects to complete this process during 1998, and does not believe that it will
cause any material expense or significant disruption to the business of the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Company at December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997, and
the Report of Management and the Report of Independent Auditors thereon are
incorporated by reference from the Company's 1997 and 1996 Consolidated
Financial Statements on pages 27 through 55 of this annual report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The principal directors and executive officers of the Company are as
follows:
Name Age Position/Committees Position Held Since
- ------------------------------- ------------------------------- ----------------
Richard J. Sullivan 58 Chairman, CEO (1,2) May 1993
Garrett A. Sullivan 63 Director, President, COO (1,3) March 1995
David A. Loppert 43 Vice President, Treasurer, CFO February 1997
Daniel E. Penni 50 Director (1,2,3) March 1995
Angela M. Sullivan 38 Director (1,2) April 1996
Arthur F. Noterman 56 Director (1,3) February 1997
- -------------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Following is a summary of the background and business experience and
descriptions of the directors and principal executive officers:
Richard J. Sullivan: Mr. Sullivan was elected to the Board of Directors,
and named Chief Executive Officer, in May 1993. He is Chairman of the Executive
and Compensation Committees of the Company's Board of Directors. He was
appointed Secretary in March 1996. Mr. Sullivan is currently Chairman of Great
Bay Technology, Inc., an affiliate of the Company. 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, Massachusetts and was Chairman and CEO of Encode Technology, a
"Computer-Aided Manufacturing" Company, in Nashua, New Hampshire from February
1984 to August 1986.
Garrett A. Sullivan: Mr. Sullivan was named President, Secretary and Acting
Chief Financial Officer in March 1995. He was elected to the Board of Directors
in August 1995. He was an Executive Vice President of Envirobusiness, Inc., an
environmental consulting firm, from 1993 to 1994. From 1988 to 1993, he served
as president and chief operating officer of two medium sized companies in the
electronics and chemical industries which were owned by Philips North America.
He was previously a partner in the Bay Group, a merger and acquisition firm in
New Hampshire from 1988 to 1993. Mr. Sullivan was President of Granada Hospital
Group, Burlington, Massachusetts, the world's largest television system
supplier, from 1981 to 1988. Mr. Sullivan received a Bachelor of Arts degree
from Boston University in 1960 and obtained an MBA from Harvard University in
1962.
David A. Loppert: Mr. Loppert joined the Company as Vice President,
Treasurer and Chief Financial Officer in February 1997. From 1996 to 1997, he
was Chief Financial Officer of Bingo Brain, Inc., a manufacturer of a hand held
electronic bingo card manager. From 1994 to 1996, he was Chief Financial Officer
of C.T.A. America, Inc., and Ricochet International, L.L.C., affiliated
companies in the retail footwear business. From 1991 to 1994, he was a business
23
recovery consultant. From 1984 to 1991, he was Senior Vice President,
Acquisitions and Due Diligence, of Associated Financial Corporation, a
California real estate syndicator. Mr. Loppert started his financial career with
Price Waterhouse in 1978, in Johannesburg, South Africa, before moving to their
Los Angeles Office in 1980 where he rose to the position of Senior Manager. He
holds Bachelor degrees in both Accounting and Commerce, as well as a Higher
Diploma in Accounting, all from the University of the Witwatersrand,
Johannesburg. Mr. Loppert, a United States citizen, is designated a Chartered
Accountant (South Africa).
Daniel E. Penni: Mr. Penni has served as a Director since March 1995. He is
currently an Insurance Branch Manager for Arthur J. Gallagher & Co. He has
worked in many sales and administrative roles in the insurance business since
1969. He was President of the Boston Insurance Center, Inc., an insurance
company until 1988. Mr. Penni was founder and President of BIC Equities, Inc., a
broker/dealer registered with the NASD. Mr. Penni graduated with a Bachelor of
Sciences degree in 1969 from the School of Management at Boston College.
Angela M. Sullivan: Ms. Sullivan was elected to the Board of Directors in
April 1996. From 1988 to the present, Ms. Sullivan has been a partner in the Bay
Group, a private merger and acquisition firm, President of Great Bay Technology,
Inc., an affiliate of the Company, and President of Spirit Saver, Inc. Ms.
Sullivan received a Bachelor of Science degree in Business Administration in
1980 from Salem State College.
Arthur F. Noterman: Mr. Noterman, a Chartered Life Underwriter, was
appointed, in February 1997 as Director of the Company to fill a vacancy and is
Chairman of the Audit Committee. Since 1965, Mr. Noterman has represented
various national insurance companies in assisting primarily high net worth
individuals and smaller companies in determining appropriate insurance and
investment strategies. An operator of his own insurance agency, Mr. Noterman is
a registered NASD broker affiliated with a Chicago, IL registered broker/dealer.
Mr. Noterman attended Northeastern University from 1965 to 1975 and obtained the
Chartered Life Underwriters Professional degree in 1979 from The American
College, Bryn Mawr, Pennsylvania. Mr. Noterman is a licensed Life and Health
Insurance Broker and holds NASD Series 6, 7 and 63 licenses.
Certain of the other information required by this Item 10 will be included
in the Company's definitive proxy statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's
definitive proxy statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Company's
definitive proxy statement and is incorporated herein by reference.
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's
definitive proxy statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Schedules
The consolidated financial statements listed in the accompanying index to
the consolidated financial statements as set forth under Item 8 of this
annual report on Form 10-K are filed or incorporated by reference as part
of this annual report on Form 10-K.
(a)(2) Financial statement schedules have been omitted since they are either not
required, not applicable or the information is otherwise included.
(a)(3) Exhibits
See Index to Exhibits filed as part of this annual report on Form 10-K on
page 56.
(b) Reports on Form 8-K
On November 13, 1997, the Company filed a current report on Form 8-K dated
November 12, 1997, reporting Item 2, Acquisition or Disposition of Assets,
and Item 7, Financial Statements and Exhibits. The filing was for the
Company's acquisition of Alacrity Systems, Inc. On January 8, 1998, the
Company filed a current report on Form 8-K/A dated January 6, 1998,
reporting Item 7, Financial Statements and Exhibits. The filing was to file
the required pro-forma financial information resulting form the Company's
acquisition of Alacrity Systems, Inc.
(c) Exhibits - Included in Item (a)(3) above.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 St. Louis County,
State of Missouri, on March 27, 1998.
APPLIED CELLULAR TECHNOLOGY, INC.
By: /S/ DAVID A. LOPPERT
David A. Loppert, Vice President, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
Chairman of the Board of Directors,
Chief Executive Officer and
Secretary(Principal Executive
/S/ RICHARD J. SULLIVAN Officer) March 27, 1998
- -----------------------------------
(Richard J. Sullivan)
President and Director (Principal
/S/ GARRETT A. SULLIVAN Operating Officer) March 27, 1998
- -----------------------------------
(Garrett A. Sullivan)
Vice President, Treasurer and Chief
/S/ DAVID A. LOPPERT Financial Officer (Principal
- ----------------------------------- Accounting Officer) March 27, 1998
(David A. Loppert)
/S/ ANGELA M. SULLIVAN Director March 27, 1998
- -----------------------------------
(Angela M. Sullivan)
/S/ DANIEL E. PENNI Director March 27, 1998
- -----------------------------------
(Daniel E. Penni.)
/S/ ARTHUR F. NOTERMAN Director March 27, 1998
- -----------------------------------
(Arthur F. Noterman)
26
INDEX TO FINANCIAL STATEMENTS
(ITEM 14 (a))
Contents
----------------------------------------------------------
Financial
Statements 10-K
Page Page
-------- --------
Report Of Management................................... 1 28
Independent Auditors' Report........................... 2 29
Financial Statements
Consolidated Balance Sheets....................... 3 30
Consolidated Statements Of Operations ............ 4 31
Consolidated Statements Of Stockholders' Equity... 5 32
Consolidated Statements Of Cash Flows............. 6 33
Notes To Consolidated Financial Statements... 7 - 28 34 - 55
10-K Page 27
Report Of Management
The management of Applied Cellular Technology, Inc. is responsible for the
integrity and objectivity of the accompanying consolidated financial statements
and related information. The statements have been prepared in conformity with
generally accepted accounting principles, and include amounts that are based on
our best judgments with due consideration given to materiality.
Management maintains a system of internal accounting controls. This system is
designed to provide reasonable assurance, at reasonable cost, that assets are
safeguarded and that transactions and events are recorded properly. While the
Company is organized on the principles of decentralized management, appropriate
control measures are also evidenced by well-defined organizational
responsibilities, management selection, development and evaluation processes,
communicative techniques, financial planning and reporting systems and
formalized procedures.
It has always been the policy and practice of the Company to conduct its affairs
ethically and in a socially responsible manner.
Rubin, Brown, Gornstein & Co. LLP., (RBG & Co.) independent auditors, is engaged
to audit our financial statements. RBG & Co. obtains and maintains an
understanding of our internal controls and conducts such tests and other
auditing procedures considered necessary in the circumstances to express their
opinion in the report that follows.
The Audit Committee of the Board of Directors, composed of a majority of outside
directors, may meet periodically with the independent auditors and management to
review their work and confirm that they are properly discharging their
responsibilities. In addition, the independent auditors are free to meet with
the Audit Committee without the presence of management to discuss the results of
their work and observations on the adequacy of internal financial controls, the
quality of financial reporting and other relevant matters.
/s/ Richard J. Sullivan /s/ Garrett A. Sullivan /s/ David A. Loppert
Richard J. Sullivan Garrett A. Sullivan David A. Loppert
Chairman, Board of Directors President and Chief Vice President, Treasurer
and Chief Executive Officer Operating Officer And Chief Financial Officer
February 24, 1998
10-K Page 28
Independent Auditors' Report
Board of Directors and Stockholders
Applied Cellular Technology, Inc.
We have audited the accompanying consolidated balance sheets of Applied Cellular
Technology, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of Applied
Cellular Technology, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31 1997, in conformity with
generally accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co., LLP
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 24, 1998
10-K Page 29
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Assets
December 31,
------------------------------
1997 1996
------------------------------
Current Assets
Cash and cash equivalents $ 7,656,850 $ 809,711
Accounts receivable and unbilled receivables
(net of allowance for doubtful accounts of
$675,000 in 1997 and $101,000 in 1996) 19,388,820 6,874,808
Inventories 10,872,007 4,290,681
Notes receivable 390,269 1,646,773
Prepaid expenses 1,266,662 264,716
- -----------------------------------------------------------------------------
Total Current Assets 39,574,608 13,886,689
Property, Plant And Equipment 5,338,713 2,915,056
Notes Receivable 575,000 575,000
Goodwill 12,262,786 14,267,985
Other Assets 3,530,469 1,563,363
- -----------------------------------------------------------------------------
$ 61,281,576 $ 33,208,093
=============================================================================
Liabilities And Stockholders' Equity
Current Liabilities
Notes payable $ 4,783,350 $ 3,920,057
Current maturities of long-term debt 842,515 493,060
Accounts payable and accrued expenses 14,486,577 7,280,419
Other current liabilities -- 521,000
- -----------------------------------------------------------------------------
Total Current Liabilities 20,112,442 12,214,536
Long-Term Liabilities 2,199,837 1,385,602
- -----------------------------------------------------------------------------
Total Liabilities 22,312,279 13,600,138
- -----------------------------------------------------------------------------
Minority Interest 1,784,668 456,139
- -----------------------------------------------------------------------------
Redeemable Preferred Shares 900,000 10,900,000
- -----------------------------------------------------------------------------
Stockholders' Equity
Common shares:
Authorized 40,000,000 and 20,000,000
shares in 1997 and 1996, respectively,
of $.001 par value; issued and outstanding
20,672,423 and 5,798,701 shares in 1997
and 1996, respectively 20,672 5,799
Additional paid-in capital 33,680,216 7,928,198
Retained earnings 2,586,128 317,819
Foreign currency translation adjustment (2,387) --
- -----------------------------------------------------------------------------
Total Stockholders' Equity 36,284,629 8,251,816
- -----------------------------------------------------------------------------
$ 61,281,576 $ 33,208,093
===============================================================================
Page 3
See the accompanying notes to consolidated financial statements.
10-K Page 30
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years
Ended December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
Net Operating Revenue $103,159,114 $ 19,883,400 $ 2,335,999
Costs Of Goods Sold 69,407,816 10,523,594 1,186,213
- -------------------------------------------------------------------------------
Gross Profit 33,751,298 9,359,806 1,149,786
Selling, General And
Administrative Expenses 29,839,044 8,104,754 981,212
- -------------------------------------------------------------------------------
Operating Income 3,912,254 1,255,052 168,574
Gain on sale of assets 1,679,627 -- --
Interest Income 192,646 125,935 74,899
Interest Expense (978,339) (200,291) (15,150)
- -------------------------------------------------------------------------------
Income Before Provision For Income
Taxes And Minority Interest 4,806,188 1,180,696 228,323
Provision For Income Taxes 1,768,679 362,146 --
- -------------------------------------------------------------------------------
Income Before Minority Interest 3,037,509 818,550 228,323
Minority Interest 697,200 132,331 48,963
- -------------------------------------------------------------------------------
Net Income 2,340,309 686,219 179,360
Preferred Stock Dividends 72,000 60,000 --
- -------------------------------------------------------------------------------
Net Income Available To
Common Stockholders $ 2,268,309 $ 626,219 $ 179,360
===============================================================================
Net Income Per
Common Share - Basic $ .18 $ .19 $ .10
===============================================================================
Net Income Per
Common Share - Diluted $ .15 $ .15 $ .09
===============================================================================
Weighted Average Number Of Common
Shares Outstanding - Basic 12,632,130 3,329,099 1,792,939
================================================================================
Weighted Average Number Of Common
Shares Outstanding - Diluted 15,245,183 4,640,773 1,966,971
================================================================================
- --------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
Page 4
10-K Page 31
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1997, 1996 And 1995
Preferred Stock Common Stock Additional Retained Foreign Total
--------------------- -------------------- Paid-In Earnings Currency Stockholders'
Number Amount Number Amount Capital (Deficit) Translation Equity
----------------------------------------------------------------------------------------------
Balance - December 31, 1994 20,000 $ 200,000 1,336,750 $ 1,337 $ 1,075,287 $ (487,760) $ -- $ 788,864
Net income -- -- -- -- -- 179,360 -- 179,360
Redemption of preferred shares (20,000) (200,000) 11,765 12 52,596 -- -- (147,392)
Issuance of common shares -- -- 259,999 260 523,392 -- -- 523,652
Issuance of common shares
- note receivable -- -- 200,000 200 499,800 -- -- 500,000
Issuance of common shares
for acquisitions -- -- 339,235 339 1,086,801 -- -- 1,087,140
Payments received on note receivable -- -- -- -- 120,316 -- -- 120,316
Warrants redeemed -- -- 120,000 120 (120) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 -- -- 2,267,749 2,268 3,358,072 (308,400) -- 3,051,940
Net income -- -- -- -- -- 686,219 -- 686,219
Issuance of common shares -- -- 483,357 483 131,917 -- -- 132,400
Issuance of common shares
for acquisitions -- -- 2,787,595 2,788 3,604,200 -- -- 3,606,988
Warrants redeemed -- -- 260,000 260 649,740 -- -- 650,000
Payments received on note receivable -- -- -- -- 71,898 -- -- 71,898
Settlement of note receivable -- -- -- -- 112,371 -- -- 112,371
Preferred stock dividends paid -- -- -- -- -- (60,000) -- (60,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 -- -- 5,798,701 5,799 7,928,198 317,819 -- 8,251,816
Net income -- -- -- -- -- 2,340,309 -- 2,340,309
Issuance of common shares -- -- 1,571,729 1,572 5,533,721 -- -- 5,535,293
Issuance of common shares to redeem
preferred stock -- -- 1,354,167 1,354 2,498,646 -- -- 2,500,000
Issuance of common shares
for acquisitions -- -- 9,624,326 9,624 10,263,475 -- -- 10,273,099
Warrants redeemed -- -- 2,323,500 2,323 7,456,176 -- -- 7,458,499
Preferred stock dividends paid -- -- -- -- -- (72,000) -- (72,000)
Foreign currency translation adjustment -- -- -- -- -- -- (2,387) (2,387)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 -- -- 20,672,423 $20,672 $ 33,680,216 $ 2,586,128 $ (2,387) $36,284,629
===================================================================================================================================
- --------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
Page 5
10-K Page 32
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years
Ended December 31,
---------------------------------------------
1997 1996 1995
---------------------------------------------
Cash Flows From Operating Activities
Net income $ 2,340,309 686,219 $ 179,360
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,874,373 712,237 132,690
Minority interest 697,200 132,331 48,963
(Gain) loss on sale of assets (1,679,627) 2,399 519
Net change in operating assets and liabilities (7,898,966) (2,974,846) (234,092)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating Activities (4,666,711) (1,441,660) 127,440
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Decrease in notes receivable - officers and stockholder 1,471,580 607,678 107,645
Proceeds from sale of assets 2,295,537 563,953 240,632
Payments for property, plant and equipment (915,570) (109,483) (40,199)
Payments for asset and business acquisitions
(net of cash balances acquired) 3,983,426 (81,147) (302,563)
Increase in other assets (1,326,710) (209,332) (106,308)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Investing Activities 5,508,263 771,669 (100,793)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net amounts borrowed (paid) on notes payable (2,847,450) 662,801 (257,897)
Proceeds from long-term debt 335,390 20,875 --
Payments for long-term debt (494,467) (214,048) (15,318)
Proceeds from investment company -- 521,000 --
Issuance of common shares 9,084,114 423,605 516,778
Redemption of preferred shares -- -- (147,392)
Preferred stock dividends paid (72,000) (60,000) --
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 6,005,587 1,354,233 96,171
- -----------------------------------------------------------------------------------------------------------------------
Net Increase In Cash 6,847,139 684,242 122,818
Cash And Cash Equivalents - Beginning Of Year 809,711 125,469 2,651
- -----------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents - End Of Year $ 7,656,850 $ 809,711 $ 125,469
=======================================================================================================================
Supplemental Disclosure Of Cash Flow Information
Income taxes paid $ 964,221 $ 2,518 $ --
Interest paid 1,012,413 161,924 15,150
- -----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
Page 6
10-K Page 33
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 And 1996
1. Organization And Summary Of Significant Accounting Policies
Organization
Applied Cellular Technology, Inc. and subsidiaries (the Company or
ACTC) is a diversified technology company operating in four market
segments; the Services and Solutions Group, the Computer Group, the
Manufacturing Group and the International Group, as further described
in Note 20.
Principles of Consolidation
The consolidated financial statements include the accounts of Applied
Cellular Technology, Inc. and its wholly owned and majority owned
subsidiaries. All significant intercompany accounts and transactions
are eliminated upon consolidation.
As further discussed in Note 2, the Company acquired subsidiaries
during 1997 and 1996 all of which have been accounted for under the
purchase method of accounting.
Basis of Preparation
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year's presentation.
Use of Estimates
In conformity with generally accepted accounting principles, the
preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Although these estimates
are based on the knowledge of current events and actions the Company
may undertake in the future, they may ultimately differ from actual
results.
Foreign Currencies
The Company's foreign subsidiaries use their local currency as their
functional currency. Assets and liabilities recorded in foreign
currencies are translated at the exchange rate on the balance sheet
date. Translation adjustments resulting from this process are charged
or credited to equity.
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.
Unbilled Receivables
Unbilled receivables consist of certain direct costs incurred in
connection with projects not yet billed.
Inventories
Inventories consist of raw materials, work in process and finished
goods. Inventory is valued at the lower of cost or market, determined
by the first-in, first-out method. The Company closely monitors and
analyzes inventory for potential obsolescence and slow-moving items
based upon the aging of the inventory listing and the inventory turns
by product.
- --------------------------------------------------------------------------------
Page 7
10-K Page 34
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Property, Plant And Equipment
Property, plant and equipment are carried at cost, less accumulated
depreciation and amortization computed using straight-line and
accelerated methods. Property, plant and equipment are depreciated and
amortized over periods ranging from three to forty years.
Organization Costs
Organization costs are capitalized and amortized over five years.
Goodwill And Other Intangible Assets
Goodwill and other intangible assets are stated on the cost basis and
are amortized, principally on a straight-line basis, over the estimated
future periods to be benefitted (not exceeding 20 years). Goodwill and
other intangible assets are periodically reviewed for impairment based
on an assessment of future operations to ensure that they are
appropriately valued.
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 has been
completed and the completeness of the working model and its consistency
with the product design has 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 five years.
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 is provided based on
the greater of the ratios that current gross revenues for a product
bear to the total of current and anticipated future gross revenues for
that product, or the straight-line method over the estimated useful
life of the product. The straight-line life is determined to be 2 to 5
years.
- --------------------------------------------------------------------------------
Page 8
10-K Page 35
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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, 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. Revenue from royalties is
recognized when licensed products are shipped.
The Company does not experience many product returns, and therefore,
management is of the opinion that no allowance for sales returns is
necessary. The Company has no obligation for warranties on hardware
sales, because the warranty is given by the manufacturer. The Company
does not offer a warranty policy for services to customers.
Advertising Costs
The Company generally expenses production costs of print advertisements
as of the first date the advertisements take place. Advertising
expense, included in selling, general and administrative expenses, was
$882,741 in 1997, $497,494 in 1996 and $97,733 in 1995.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
which requires the asset and liability approach for the financial
accounting and reporting for income taxes. Income taxes include U.S.
and international taxes. The Company and its U.S. subsidiaries file a
consolidated federal income tax return. Income taxes are paid by the
parent company and are allocated to each subsidiary through
intercompany charges.
Earnings Per Common And Common Share Equivalent
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share",
effective December 31, 1997. SFAS 128 requires the presentation of
basic and diluted earnings per share (EPS). Basic EPS is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
is computed giving effect to all dilutive potential common shares that
were outstanding during the period. Dilutive potential common shares
consist of incremental shares issuable upon exercise of stock options
and warrants, conversion of preferred stock outstanding and
contingently issuable shares. All prior period earnings per share
amounts have been restated to comply with SFAS 128.
- --------------------------------------------------------------------------------
Page 9
10-K Page 36
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and No. 131, "Disclosure about Segments of an
Enterprise and Related Information." These statements, which are
effective for fiscal years beginning after December 15, 1997, expand or
modify disclosures and will have no impact on the Company's
consolidated financial position, results of operations or cash flows.
- --------------------------------------------------------------------------------
Page 10
10-K Page 37
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
2. Acquisitions
The following represent acquisitions which occurred in 1997 by segment:
Common/
Preferred
Date Of Percent Acquisition Shares
Acquisition Acquired Price Issued Business Description
------------- ---------- -------------- --------- ------------------------------------------------
Services And Solutions
Advanced Telecommunications, Inc. 05/01/97 80% $ 6,400,000 2,048,000 Telecommunications solutions provider
Alacrity Systems, Inc. 10/01/97 100% 5,200,000 622,755 Software developer and marketer
C. T. Specialists, Inc. 10/01/97 100% 3,500,000 757,610 Distributor of control systems
Canadian Network Services, Ltd. 10/01/97 88.32% 5,208,987 1,116,460 Provider of extended area calling services
DLS Service Corp. 07/01/97 100% 180,000 57,600 Value added reseller of computer software
Intermatica, Inc. 07/01/97 100% 2,500,000 710,953 Software sales company
STC Netcom, Inc. 07/01/97 80% 4,800,000 1,600,000 Communications construction contractor
Computer
Cybertech Station, Inc. 07/01/97 80% 960,000 158,351 Provider of computer memory products
Norcom Resources, Inc. 01/01/97 80% 1,280,000 284,444 Sales, service and support of mainframe computers
Pizarro Re-Marketing, Inc. 01/01/97 80% 900,500 190,833 Remarketing services for the computer disc
and tape industry
PPL, Ltd. 07/01/97 80% 2,660,000 503,669 Leasing and rental services
Manufacturing
Hopper Manufacturing Co., Inc. 01/01/97 100% 750,000 179,104 Remanufacture and distributor of automotive parts
MVAK Technologies, Inc. 02/01/97 100% 1,922,149 389,296 Remanufacture of vacuum pumps
International
Signal Processors, Ltd. 05/01/97 80% 1,477,350 475,920 Manufacturer of satellite communication technology
The following represent acquisitions
which occurred in 1996 by segment:
Services And Solutions
ATI Communications 09/01/96 100% 18,090,900 1,718,180 Telecommunications solutions provider
Computer
Universal Commodities Corp. 11/01/96 80% 4,356,930 581,818 Remarketer of computer systems
Manufacturing
Burling Instruments 03/01/96 80% 900,000 9,000 Manufacture of industrial temperature controls
CRA-TEK Company, Inc. 09/01/96 81.90% 1,433,745 295,115 Manufacture of electric controls and components
US Electrical Products Corp. 12/01/96 80% 1,424,434 258,988 Manufacture of customized electrical products
All of the above acquisitions have been accounted for using the
purchase method of accounting and, accordingly, the consolidated
financial statements reflect the results of operations of each company
from the date of acquisition. Goodwill resulting from these
acquisitions is being amortized straight-line, over twenty years.
Certain acquisition agreements include the issuance of additional
shares contingent on profits of the acquired subsidiary. Upon issuance
of these shares, the value will be recorded as additional goodwill.
See Note 23 for unaudited pro forma information for the above
acquisitions that occurred in 1997.
- --------------------------------------------------------------------------------
Page 11
10-K Page 38
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
3. Restructuring
Towards the end of the third quarter of 1997, the Company made a
decision to exit the retail cellular operations of its Services and
Solutions business segment. During the fourth quarter of 1997, the
Company completed its exit strategy and incurred costs related to the
restructuring of these operations, including provisions for
terminations of leases and employees and writedown of the carrying
values of inventory and other assets. Costs totaling $1,680,828 have
been included in selling, general and administrative expenses.
4. Inventories
1997 1996
--------------------------------------
Raw materials $ 1,962,148 $ 504,020
Work in process 1,085,011 203,401
Finished goods 7,824,848 3,583,260
------------------------------------------------------------------
$ 10,872,007 $ 4,290,681
==================================================================
5. Notes Receivable
1997 1996
---------------------------------------
Due from officers of a subsidiary, secured by 100,000
shares of ACTC preferred stock, bears interest at 8%,
any outstanding principal balance was originally due
in April 1997 $ -- $ 1,633,776
Due from officers of subsidiaries, unsecured, bears
interest at varying interest rates, due on demand 328,300 12,997
Due from customer, unsecured, bears interest at the
prime rate, due on demand 61,969 --
Due from other, secured by maker's assets, bears interest
at 8.7% and provides for monthly payments of principal
and interest equal to 10% of the maker's net
cash revenue for each preceding month, balance
due October 2001 575,000 575,000
- -----------------------------------------------------------------------------------------------
965,269 2,221,773
Less: current portion 390,269 1,646,773
- -----------------------------------------------------------------------------------------------
$ 575,000 $ 575,000
===============================================================================================
- --------------------------------------------------------------------------------
Page 12
10-K Page 39
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
6. Property, Plant And Equipment
1997 1996
------------------------------
Land $ 758,800 $ 490,000
Building and leasehold improvements 874,887 627,922
Equipment 8,691,173 3,705,122
- --------------------------------------------------------------------------------
10,324,860 4,823,044
Less: Accumulated depreciation and amortization 4,986,147 1,907,988
- --------------------------------------------------------------------------------
$ 5,338,713 $ 2,915,056
================================================================================
Included above are vehicles and equipment acquired under capital lease
obligations in the amount of $908,210 and $553,353 at December 31, 1997
and 1996, respectively. Related accumulated depreciation amounted to
$428,426 and $242,197 at December 31, 1997 and 1996, respectively.
Depreciation and amortization charged against income amounted to
$845,742, $206,587, $27,613 for the years ended December 31, 1997, 1996
and 1995, respectively.
7. Goodwill
Goodwill consists of the excess of cost over book value of companies
purchased. The Company applies the principles of Accounting Principles
Board Opinion No. 16, "Business Combinations," and uses the purchase
method of accounting for acquisitions of wholly owned and majority
owned subsidiaries.
1997 1996
-----------------------------
Gross value of common shares, warrants or
preferred shares issued as consideration $ 65,724,629 $ 31,922,802
Discount applied to the common shares and warrants (48,172,340) (16,695,684)
- -------------------------------------------------------------------------------
Net book value of shares issued 17,552,289 15,227,118
Costs of acquisitions 3,786,463 1,198,190
Net book value of companies acquired (8,073,115) (1,824,147)
Accumulated amortization (1,002,851) (333,176)
- -------------------------------------------------------------------------------
Carrying value $ 12,262,786 $ 14,267,985
===============================================================================
Amortization expense amounted to $669,675, $295,108 and $38,068 for the
years ended December 31, 1997, 1996, and 1995, respectively.
The gross value of common shares, warrants and preferred shares issued
as consideration for acquisitions has been discounted due to lack of
marketability and registration rights of the related shares.
The costs of acquisitions include all cash payments according to the
acquisition agreements plus costs for investment banking services,
legal services and accounting services, that were essential costs of
acquiring these assets.
- --------------------------------------------------------------------------------
Page 13
10-K Page 40
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
8. Other Assets
1997 1996
---------------------------------
Proprietary software $ 2,722,268 $ 290,902
Existing goodwill of acquired subsidiaries 691,133 259,800
Purchased computer software 387,289 874,104
Organization costs and other assets 272,118 181,872
- -----------------------------------------------------------------------------
4,072,808 1,606,678
Less: Accumulated amortization 1,143,490 363,405
- -----------------------------------------------------------------------------
2,929,318 1,243,273
Deposits 127,500 119,628
Cash surrender value of officer's life
insurance policies 73,651 117,862
Deferred tax asset 400,000 82,600
- -----------------------------------------------------------------------------
$ 3,530,469 $ 1,563,363
=============================================================================
Amortization of other assets charged against income amounted to
$358,956, $210,542, and $67,009 for the years ended December 31, 1997,
1996 and 1995, respectively.
9. Notes Payable
1997 1996
-------------------------------------
Revolving credit lines - banks, secured by business assets and by personal
guarantees of officers/stockholders of certain subsidiaries. Interest is payable
monthly at rates varying from prime plus 1/2% to prime plus 2% in 1997 and prime
plus 1.25% to prime plus 1.5% in 1996. The credit lines are due through December
1998. Certain borrowings in 1996 were limited to the lesser of $5,000,000 or 80%
of Qualified accounts receivable. $ 4,504,529 $ 3,785,000
Notes payable - officers, unsecured, non-interest bearing,
due on demand 278,821 51,497
Notes payable - bank and individual, unsecured, bearing
interest at rates of 8% and prime plus 1.5%, due on demand -- 83,560
- -----------------------------------------------------------------------------------------------------------------------
$ 4,783,350 $ 3,920,057
=======================================================================================================================
- --------------------------------------------------------------------------------
Page 14
10-K Page 41
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
10. Long-Term Debt
1997 1996
----------------------------------
Notes payable - banks, secured by subsidiaries'
business assets, payable in monthly installments
totaling $27,779 plus interest at rates of prime plus 1.5%
and prime plus 2.5% in 1997 and $28,640 plus interest
at rates of 9.85%, prime plus 2% and prime plus 2.75%
in 1996, due through May 2001 $ 1,105,158 $ 1,512,162
Note payable - bank, secured by building,
payable in monthly installments of
principal and interest totalling $4,652,
bearing interest at 9.5%, due April 2002 528,907 --
Notes payable - finance companies and banks,
secured by vehicles, payable in
monthly principal installments of $5,823,
bearing interest at rates ranging from
9.75% to 10.9% in 1997 and ranging from
$330 to $523, bearing interest at rates
ranging from 9% to 9.75% in 1996, due through July 2001 114,442 68,829
Notes payable - bank, secured by business assets, payable in 868,942 -
monthly installments of principal and interest totaling
$22,541, bearing interest at rates ranging from prime to
prime plus 2%, due through June 2003 --
Capital lease obligations 424,903 297,671
- ---------------------------------------------------------------------------------------------------
3,042,352 1,878,662
Less: Current maturities 842,515 493,060
- ---------------------------------------------------------------------------------------------------
$ 2,199,837 $ 1,385,602
===================================================================================================
The scheduled maturities of long-term debt at December 31, 1997 are as
follows:
Year Amount
--------------------------------------------------------------------
1998 $ 842,515
1999 934,414
2000 494,308
2001 182,628
2002 573,637
Thereafter 14,850
--------------------------------------------------------------------
$ 3,042,352
====================================================================
Interest expense on the long and short-term notes payable (including
notes payable in Note 9) amounted to $891,093, $193,579 and $9,350 for
the years ended December 31, 1997, 1996 and 1995, respectively.
The weighted average dollar amount of all borrowings (including notes
payable in Note 9) for the years ended December 31, 1997 and 1996 was
approximately $9,111,000 and $1,618,000, respectively. The weighted
average interest rate was 9.8% for the years ended December 31, 1997
and 1996.
- --------------------------------------------------------------------------------
Page 15
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
11. Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the short
maturity of those instruments.
Accounts Receivable and Unbilled Receivables
The carrying amounts approximate fair value.
Notes Receivable
The carrying value of the notes approximate fair value because either
the interest rates of the notes approximate the current rate that the
Company could receive on a similar note, or because of the short-term
nature of the notes.
Notes Payable
The carrying amount approximates fair value because of the short-term
nature of the notes.
Long-term Debt
The carrying amount approximates fair value because either the stated
interest rates fluctuate with current market rates or the interest
rates approximate the current rates at which the Company could borrow
funds on a similar note.
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value.
12. Income Taxes
The provision for income taxes consists of:
1997 1996 1995
----------------------------------------------------
United States at statutory rates $ 1,570,452 $ 477,046 $ 80,000
International 533,043 -- --
Current taxes covered by net operating loss (328,462) (32,300) (80,000)
Acquired tax benefits 239,646 -- --
- ----------------------------------------------------------------------------------------------------
Current income tax provision 2,014,679 444,746 --
Deferred income taxes (credit) (246,000) (82,600) --
- ----------------------------------------------------------------------------------------------------
$ 1,768,679 $ 362,146 $ --
====================================================================================================
- --------------------------------------------------------------------------------
Page 16
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred tax assets and liabilities
consist of the following:
1997 1996
-----------------------------------
Deferred Tax Assets:
Goodwill $ -- $ 136,918
Liabilities and reserves 269,178 107,746
Net operating loss carryforwards 3,749,000 --
- ---------------------------------------------------------------------------
Gross deferred tax assets 4,018,178 244,664
Valuation allowance (3,514,200) --
- ---------------------------------------------------------------------------
503,978 244,664
- ---------------------------------------------------------------------------
Deferred Tax Liabilities:
Property, plant and equipment 44,695 162,064
Intangible assets 59,283 --
- ---------------------------------------------------------------------------
103,978 162,064
- ---------------------------------------------------------------------------
Net Deferred Tax Asset $ 400,000 $ 82,600
===========================================================================
The reconciliation of the effective tax rate with the statutory federal
income tax rate is as follows:
1997 1996 1995
---- ----------------------------
% % %
---- ----------------------------
Statutory rate 34 34 34
State income taxes, net of federal benefits 7 4 4
International tax rates different from the
the statutory US federal rate (3) -- --
Income taxes covered by net operating
loss carryforward -- -- (38)
Realization of deferred tax asset valuation
allowance (5) (3) --
Other 4 (4) --
- ------------------------------------------------ ----------------------------
37 31 --
================================================ ============================
- --------------------------------------------------------------------------------
Page 17
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
13. Earnings Per Share
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted
EPS is provided as follows:
1997 1996 1995
------------------------------------------
Numerator:
Net income $ 2,340,309 $ 686,219 $ 179,360
Preferred stock dividends (72,000) (60,000) --
- --------------------------------------------------------------------------------
Numerator for basic earnings per share
net income available to common
stockholders 2,268,309 626,219 179,360
Effect of dilutive securities:
Preferred stock dividends 72,000 60,000 --
- --------------------------------------------------------------------------------
Numerator For Diluted Earnings
Per Share - Income Available To
Common Stockholders $ 2,340,309 $ 686,219 $ 179,360
================================================================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 12,632,130 3,329,099 1,792,939
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Redeemable preferred stock 998,109 579,708 --
Warrants 778,839 628,229 174,032
Employee stock options 450,790 103,737 --
Contingent stock - acquisitions 385,315 -- --
- --------------------------------------------------------------------------------
Dilutive potential common shares 2,613,053 1,311,674 174,032
- --------------------------------------------------------------------------------
Denominator For Diluted Earnings
Per Share - Adjusted Weighted-
Average Shares And Assumed
Conversions 15,245,183 4,640,773 1,966,971
================================================================================
Basic Earnings Per Share $ .18 $ .19 $ .10
================================================================================
Diluted Earnings Per Share $ .15 $ .15 $ .09
================================================================================
14. Commitments
Rentals of space, vehicles, and office equipment under operating leases
amounted to approximately $2,664,000, $828,000, and $49,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.
- --------------------------------------------------------------------------------
Page 18
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APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
The Company has entered into employment contracts with key officers and
employees of the Company and certain subsidiaries. The agreements are
for periods of one to ten years through June 2009. Some of the
employment contracts also call for bonus arrangements based on earnings
of the particular subsidiary.
The approximate minimum payments required under operating leases and
employment contracts that have initial or remaining terms in excess of
one year at December 31, 1997 are:
Minimum Employment
Year Rental Payments Contracts
--------------------------------------------------------------
1998 $ 1,855,000 $ 3,100,000
1999 1,685,000 2,900,000
2000 1,425,000 1,800,000
2001 1,052,000 1,200,000
2002 693,000 700,000
Thereafter 2,735,000 1,000,000
-------------------------------------------------------------
$ 9,445,000 $ 10,700,000
=============================================================
The Company has entered into various earnout arrangements with the
selling shareholders of certain acquired subsidiaries. These
arrangements provide for additional consideration to be paid in future
years if certain earnings levels are met.
The Company has entered into put options with the selling shareholders
of various companies in which the Company acquired 80% interest. These
options provide for the Company to acquire the 20% it does not own
after periods ranging from 4 to 5 years from the dates of acquisition
at amounts generally equal to 20% of the average annual earnings of the
company before income taxes for the two year period to the put
multiplied by a multiple ranging from 4 to 5.
The Company entered into a three-year consulting agreement for $10,000
a month, expiring in October 1999, with an acquisition/consulting
partnership whose partners are related parties.
15. Profit Sharing Plan
Several subsidiaries have qualified, noncontributory 401(k) plans for
all eligible employees. There were no employer contributions in 1997 or
1996. A contribution of $4,659 was made in 1995. On January 1, 1998,
the Company adopted a company-wide qualified, noncontributory 401(k)
plan for all eligible employees.
16. Redeemable Preferred Shares
The Company has authorized 5,000,000 and 1,000,000 shares in 1997 and
1996, respectively, of preferred stock to be issued from time to time
on such terms as is specified by the Board of Directors.
- --------------------------------------------------------------------------------
Page 19
10-K Page 46
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In March 1996, the Company issued 9,000 8% convertible preferred shares
at $100 per share, in exchange for 80% of Burling Instruments, Inc. If,
and to the extent, the 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 preferred shares by paying $100
per share. Each holder of the preferred shares may convert their
preferred shares into common shares by dividing the redemption price
($100) by $5.75 per common share.
In October 1996, the Company issued 100,000 8% redeemable preferred
shares at $100 per share as partial consideration for the 100% purchase
of ATI Communications. The 8% preferred dividend was waived by the
holders in 1996. For purposes of redemption of the preferred shares,
each share of ACT Communications, Inc.'s common stock was valued at
$10,000. During 1997, the 100,000 shares of preferred stock were
redeemed for 1,354,167 of the Company's common shares.
- --------------------------------------------------------------------------------
Page 20
10-K Page 47
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
17. Stockholders' Equity
Warrants
The Company has issued warrants convertible into shares of common stock
for consideration, as follows:
Exercise Exercisable
Class Authorized Issued Exercised Price Date Of Issue Period
- --------------------------- ------------------------------------------ --------------------- -----------------
Class A 200,000 200,000 198,536 $ 4.750 March 1994 5 years
Class B 200,000 200,000 -- 20.000 March 1994 5 years
Class C 45,000 45,000 45,000 1.500 March 1994 N/A
Class F 300,000 300,000 260,000 2.500 December 1994 5 years
Class H 450,000 450,000 350,000 2.000 August 1995 N/A
Class I 450,000 450,000 450,000 2.000 January 1996 N/A
Class J 200,000 200,000 200,000 5.350 September 1996 N/A
Class K 250,000 250,000 -- 5.310 September 1996 5 years
Class L 125,000 125,000 123,500 5.350 October 1996 5 years
Class M 1,000,000 1,000,000 1,000,000 3.000 October 1996 N/A
Class N 800,000 800,000 -- 3.000 August 1997 5 years
Class O 200,000 200,000 200,000 3.000 August 1997 N/A
Class P 520,000 520,000 -- 3.000 September 1997 5 years
Class Q 250,000 250,000 -- 8.375 September 1997 5 years
Class R 125,000 125,000 -- 8.375 October 1997 5 years
Stock Option Plans
During 1996, the Company adopted a non-qualified stock option plan (the
Option Plan) and applies APB Opinion No. 25 and related Interpretations
in accounting for the Option Plan. Accordingly, no compensation cost
has been recognized. Had compensation cost for the Option Plan been
determined based on the fair value at the grant dates for awards under
the Option Plan, consistent with the alternative method set forth under
SFAS 123, the Company's net income applicable to common stockholders
and net income per common and common equivalent share would have been
reduced. The pro forma amounts are indicated below:
1997 1996
---------------------------------------
Net Income Available To Common
Stockholders
As reported $ 2,268,309 $ 626,219
Pro forma $ 1,613,910 $ 430,713
Net Income Per Common Share
As reported $ 0.18 $ 0.19
Pro forma $ 0.13 $ 0.13
- ----------------------------------------------------------------------------
Page 21
10-K Page 48
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Under the Option Plan, options for 5,000,000 and 2,000,000 common
shares were available for issuance to certain officers and employees of
the Company at December 31, 1997 and 1996 respectively, of which
3,855,100 had been issued through December 31, 1997. The options may
not be exercised until one to three years after the options have been
granted, and are exercisable for a period of five years.
In June 1996, the Company granted the Company's Chairman an option to
acquire 630,000 shares of the Company's common shares at $4.46 per
share. These options may be exercised for a period of five years
through June 2001.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996: dividend
yield of 0 percent in both years; expected volatility of 44.03 and 69.8
percent; risk-free interest rate of 8.5 percent for both years; and
expected lives of 5 years for both years. The weighted-average fair
value of options granted was $1.53 for the year ended December 31, 1997
and $1.29 for the year ended December 31, 1996.
A summary of stock option activity for 1997 and 1996 is as follows:
1997 1996
---------------------------- ---------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------------------------------------------------------
Outstanding on January 1 2,180,200 $ 4.40 -- $ --
Granted 2,486,600 4.62 2,180,200 4.40
Exercised (650,000) 4.25 -- --
Forfeited/expired (181,700) 4.23 -- --
- -------------------------------------------------------------------------------------------------
Outstanding on December 31 3,835,100 4.39 2,180,200 4.40
- -------------------------------------------------------------------------------------------------
Exercisable on December 31 705,000 4.44 -- --
- -------------------------------------------------------------------------------------------------
Shares available on December 31 for
options that may be granted 1,144,900 449,800
- -------------------------------------------------------------------------------------------------
The following table summarizes information about stock options at
December 31, 1997:
Outstanding Stock Options Exercisable Stock Options
------------------------------------------------ ----------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range Of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
- -------------------- --------------- ---------------- ------------------------------------------------------
$2.50 to $3.00 345,000 5 $ 2.68 -- $ --
$3.01 to $4.00 1,005,000 5 3.91 -- --
$4.01 to $5.00 1,655,100 5 4.40 705,000 4.44
$5.01 to $6.00 780,000 5 5.57 -- --
$6.01 to $7.00 50,000 5 6.99 -- --
------------- -------------- ----------------------------------
$2.50 to $7.00 3,835,100 $ 4.39 705,000 $ 4.44
============= ============== ==================================
Page 22
10-K Page 49
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
18. Legal Proceedings
The Company is party to various legal proceedings. In the opinion of
management, these proceedings are not likely to have a material adverse
affect on the financial position or overall trends in results of the
Company. The estimate of potential impact on the Company's financial
position or overall results of operations for the above legal
proceedings could change in the future.
19. Supplemental Cash Flow Information
The changes in operating assets and liabilities are as follows:
For The Years Ended December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
(Increase) decrease in accounts receivable
and unbilled receivables $ (5,342,120) $ 64,278 $ (326,991)
Increase in inventories (656,886) (826,310) (43,668)
Increase in prepaid expenses (676,575) (140,229) (19,309)
Increase in deferred tax asset (120,803) (82,600) --
Increase (decrease) in accounts payable
and accrued expenses (1,102,582) (1,989,985) 155,876
- --------------------------------------------------------------------------------------------------
$ (7,898,966) $ (2,974,846) $ (234,092)
==================================================================================================
In the years ended December 31, 1997, 1996 and 1995, the Company had
the following noncash investing and financing activities:
1997 1996 1995
-----------------------------------------------
Payment of debt* $ 521,000 $ 300,000 $ --
Purchase of note receivable* -- -- 500,000
Assets acquired for long-term debt 490,217 -- --
Assets acquired* 162,857 92,109 --
Employment services* -- 132,323 --
Capital leases 124,709 128,000 24,420
Other* -- 37,500 --
*The Company issued shares of stock in exchange for this item.
Assets acquired, liabilities assumed and consideration paid for
acquisitions were:
1997 1996 1995
-------------- ---------------------------------
Fair value of assets acquired $ 26,908,830 $ 29,095,084 $ 2,291,273
Cash acquired (5,037,124) (903,276) (11,174)
Liabilities assumed (12,533,128) (13,806,808) (890,396)
Issuance of common stock (13,322,004) (14,303,853) (1,087,140)
-------------- ---------------------------------
Net cash paid (received) $ (3,983,426) $ 81,147 $ 302,563
============== =================================
- ------------------------------------------------------------------------------
Page 23
10-K Page 50
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
In 1997, 100,000 shares of the Company's 8% redeemable preferred
shares, as discussed in Note 16, were redeemed for 1,354,167 common
shares. This resulted in a net decrease in goodwill of $7,500,000.
20. Industry Segment Reporting
The Company's business is currently organized into four business
groups, or industry segments, that operate in the United States, Canada
and Europe; the Services and Solutions Group, the Computer Group, the
Manufacturing Group, and the International Group, as follows:
o The Services and Solutions Group installs, sells, services and
supports business cellular phone and other wireless services, business
telephone systems, voice mail and interactive voice response systems,
flat rate extended area calling services for business and residential
customers, commercial long distance and local telephone services,
residential long distance telephone services, digital satellite
television services to business and consumer end-users, and computer
systems, offering custom and custom-tailored software and hardware
systems for manufacturers, wholesalers, distributors and field sales
and service organizations. The Company also constructs and installs
microwave cellular and digital PCS towers.
o The Computer Group provides leasing, re-marketing, parts-on-demand,
consulting and business continuity services for mainframe, midrange
and PC systems to industrial, commercial and retail organizations.
o The Manufacturing Group manufactures customized analog and digital and
off-the-shelf industrial temperature controls and custom analog and
digital electrical products, and controls for factory automation,
combustion and commercial heating and air conditioning systems.
o The International Group was formed in 1997 to enable the Company to
become an application service solutions provider to the global
wireless industry.
Information about the Company's operations in 1997, 1996 and 1995, by
segment of business, is as follows:
Net Operating Revenue(1)
---------------------------------------------------
1997 1996 1995
------------------ --------------------------------
Services and Solutions $ 46,382,593 $ 13,931,345 $ 1,691,450
Computer 39,444,662 1,992,501 644,549
Manufacturing 12,350,085 3,839,356 --
International 4,981,774 -- --
- --------------------------------------------- --------------------------------
Segments total 103,159,114 19,763,202 2,335,999
Other -- 120,198 --
- --------------------------------------------- --------------------------------
$ 103,159,114 $ 19,883,400 $ 2,335,999
============================================= ================================
(1) No single customer represents 10% or more of sales.
- -------------------------------------------------------------------------------
Page 24
10-K Page 51
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Operating Profit Identifiable Assets
------------------------------------------- ---------------------------------
1997 1996 1995 1997 1996
------------------------------------------- ------------------------------------
Services and Solutions $ 1,684,026 $ 828,137 $ 17,856 $ 27,665,937 $ 13,995,490
Computer 2,061,257 504,435 226,990 8,735,616 1,913,968
Manufacturing 225,059 443,889 -- 6,975,554 2,608,040
International 1,407,022 -- 3,851,316
- ---------------------------- ------------------------------------------- ------------------------------------
Segments total 5,377,364 1,776,461 244,846 47,228,423 18,517,498
Amounts not allocated(2) (571,176) (595,765)) (16,523) -- --
General corporate(3) -- -- -- 14,053,153 14,690,595
- ---------------------------- ------------------------------------------- ------------------------------------
Total $ 4,806,188 $ 1,180,696 $ 228,323 $ 61,281,576 $ 33,208,093
============================ =========================================== ====================================
(2) Amounts not allocated to segments include interest expense,
interest income and general corporate income and expense. (3) Includes
goodwill of $12,262,786 and $14,267,985 in 1997 and 1996.
Additions To Property, Depreciation And
Plant And Equipment Amortization
-------------------------------- ---------------------------------------------
1997 1996 1997 1996 1995
--------------------------------------------------- ----------------------------
Services and Solutions $ 213,517 $ 113,687 $ 617,621 $ 323,781 $ 23,302
Computer 364,416 20,000 108,245 1,703 3,695
Manufacturing 872,542 28,573 177,776 36,820 --
International 144,807 -- 240,597 --
- -------------------------------------------------------------------------------- ----------------------------
Segments total 1,595,282 162,260 1,144,239 362,304 26,997
General corporate 98,152 75,223 730,134 349,933 105,693
Noncash additions (777,864) (128,000) -- -- --
- -------------------------------------------------------------------------------- ----------------------------
Total $ 915,570 $ 109,483 $ 1,874,373 $ 712,237 $ 132,690
================================================================================ ============================
21. Related Party Transactions
In connection with the acquisitions which took place in 1997, 1996 and
1995, the Company paid a related party, The Bay Group, $473,750,
$457,152 and $126,500, respectively, for investment banking services.
These payments were included in the total cost of assets purchased and
are being amortized over the life of the related assets.
22. Subsequent Events
Effective as of January 1, 1998, the Company purchased 100% of
Information Products Center, Inc. in exchange for approximately
551,000 shares of common stock at closing and 551,000 additional
shares in subsequent years if certain earnings targets are reached.
Information Products Center, Inc. is a computer network solutions
provider.
Effective as of January 1, 1998, the Company was in negotiations to
acquire an electrical contractor, specializing in the installation of
data and fiber optics networks, in exchange for approximately
2,200,000 shares of common stock.
- --------------------------------------------------------------------------------
Page 25
10-K Page 52
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
23. Pro Forma Information (Unaudited)
The following pro forma balance sheet of the Company at December 31,
1997 gives effect to the subsequent acquisition of Information Products
Center, Inc. and the probable acquisition of an electrical contractor,
as if they were effective at December 31, 1997. 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.
The following pro forma consolidated statement of operations of the
Company for the year ended December 31, 1997 gives effect to the
acquisitions, disclosed in Note 2, as if they were effective at January
1, 1997 and also gives effect to the subsequent acquisitions, disclosed
in Note 22, as if they were effective at January 1, 1997. 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.
The pro forma financial statements 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 financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto of the Company.
- --------------------------------------------------------------------------------
Page 26
10-K Page 53
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Pro Forma Consolidated Balance Sheet
(Unaudited)
As Reported Subsequent Pro Forma
December 31, Acquisitions December 31,
1997 (1) 1997
------------------------------------------------------------ --------------------
Current assets $ 39,574,608 $ 7,614,099 $ -- $ 47,188,707
Property, plant and equipment 5,338,713 658,207 -- 5,996,920
Notes receivable 575,000 -- -- 575,000
Goodwill 12,262,786 -- 2,346,331 (2) 14,609,117
Other assets 3,530,469 334,590 -- 3,865,059
- --------------------------------------------------------------------------------------------------- --------------------
Total Assets $ 61,281,576 $ 8,606,896 $ 2,346,331 $ 72,234,803
=================================================================================================== ====================
Current liabilities $ 20,112,442 $ 5,833,464 $ -- $ 25,945,906
Long-term debt 2,199,837 342,514 -- 2,542,351
Minority interest 1,784,668 -- -- 1,784,668
Preferred stock 900,000 350,000 (350,000) (3) 900,000
Common stock 20,672 30,425 (28,318) (4) 22,779
Additional paid-in capital 33,680,216 388,540 4,359,355 (5) 38,428,111
Retained earnings 2,586,128 1,661,953 (1,634,706) (6) 2,613,375
Foreign currency translation
adjustment (2,387) -- -- (2,387)
- --------------------------------------------------------------------------------------------------- --------------------
Total Liabilities And Stockholders'
Equity $ 61,281,576 $ 8,606,896 $ 2,346,331 $ 72,234,803
=================================================================================================== ====================
NOTE:The Pro Forma Consolidated Balance Sheet gives effect to the
following pro forma adjustments:
(1) Represents the December 31, 1997 Balance Sheet of subsequent
acquisitions that would have been consolidated with the Company
if the acquisition would have taken place on December 31, 1997.
(2) Represents the amount of goodwill to be recorded on each of the
acquisitions net of 1997 amortization
of goodwill.
(3) Represents the elimination of preferred stock on the books of
each of the acquired companies at December 31, 1997.
(4) Represents the total issuance of 2,107,433 shares of the
Company's $.001 par value common stock for the acquisitions
above, less the elimination of the total common stock on the
books of each of the acquired companies at December 31, 1997 in
the total amount of $30,425.
(5) Represents the total value of the shares issued, less their par
value, for the acquisitions, in the amount of $4,747,895, less
the elimination of the total additional paid-in capital on the
books of the acquired companies at December 31, 1997 in the
amount of $388,540.
(6) Represents the elimination of the retained earnings on the books
of each of the acquired companies at December 31, 1997.
- --------------------------------------------------------------------------------
Page 27
10-K Page 54
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
Pro Forma Consolidated Statement Of Operations
(Unaudited)
Proforma
Adjustments Proforma
Of 1997 Adjustments
As Reported Acquired Of Subsequent Pro Forma
December 31, Subsidiaries Acquisitions December 31,
1997 (1) (2) 1997
------------------------------------------------------------------------------------
Net operating revenue $ 103,159,114 $ 27,604,698 $ 33,011,387 $ -- $ 163,775,199
Cost of goods sold 69,407,816 18,248,579 26,651,019 -- 114,307,414
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 33,751,298 9,356,119 6,360,368 -- 49,467,785
Operating expenses 29,839,044 8,738,188 5,198,282 221,126 (3) 43,996,640
- ----------------------------------------------------------------------------------------------------------------------
Operating income 3,912,254 617,931 1,162,086 (221,126) 5,471,145
Gain on sale of assets 1,679,627 -- -- -- 1,679,627
Interest income 192,646 106,882 76,315 -- 375,843
Interest expense (978,339) (123,210) (142,809) -- (1,244,358)
Minority interest (697,200) -- -- 28,136 (4) (669,064)
Provision for income taxes (1,768,679) (145,519) (548,571) 66,127 (5) (2,396,642)
- ----------------------------------------------------------------------------------------------------------------------
Net income 2,340,309 456,084 547,021 (126,863) 3,216,551
Dividends (72,000) -- -- -- (72,000)
- ----------------------------------------------------------------------------------------------------------------------
Net income available
to common stockholders $ 2,268,309 $ 456,084 $ 547,021 $ (126,863) $ 3,144,551
======================================================================================================================
Net income per common share -
basic 0.18 0.17
======================================================================================================================
Net income per common share -
diluted 0.15 0.15
======================================================================================================================
Weighted average number of
common shares outstanding -
basic 12,632,130 18,944,757
======================================================================================================================
Weighted average number of
common shares outstanding -
diluted 15,245,183 21,557,810
======================================================================================================================
NOTE: The Pro Forma Consolidated Statement of Operations gives effect to
the following pro forma adjustments:
(1) Represents the Statement of Operations of the subsidiaries acquired in
1997, disclosed in Note 2, that would have been consolidated with the
Company if the acquisitions would have taken place on January 1, 1997.
(2) Represents the Statement of Operations of the two subsequent acquisitions
for the twelve months ended December 31, 1997 that would have been
consolidated with the Company if the acquisition would have taken place on
January 1, 1997.
(3) Represents the amortization expense for goodwill. Goodwill is being
amortized straight-line, over 20 years.
(4) Represents the minority interest in the earnings of less than 100%-owned
subsidiaries.
(5) Represents the increase in the tax provision due to the proforma additional
earnings, before nondeductible dividend expense.
- --------------------------------------------------------------------------------
Page 28
10-K Page 55
LIST OF EXHIBITS
(Item 14 (c))
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-3 (File No. 333-37713) filed with the Commission on November 19,
1997)
3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 3 to the
Company's Registration Statement on Form S-1 (File No. 33-79678) filed with
the Commission on June 3, 1994)
*10.1 1996 Non-Qualified Stock Option Plan of Applied Cellular Technology, Inc.,
as amended as of August 20, 1997 (incorporated herein by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-8 (File No.
333-39553) filed with the Commission on November 5, 1997)
*10.2 Richard J. Sullivan Employment Agreement
*10.3 Garret A. Sullivan Employment Agreement
*10.4 David A. Loppert Employment Agreement
12 Statement Re Computation of Ratios
21 List of Subsidiaries of Applied Cellular Technology, Inc.
27 Financial Data Schedule
99 Cautionary Statements
* Management contract or compensatory plan.
10-K Page 56