UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-26020
APPLIED CELLULAR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State or other jurisdiction of incorporation or organization
43-1641533
(IRS Employer Identification number)
400 Royal Palm Way
Suite 410
Palm Beach, Florida 33480
(Address of principal executive offices)
Issuer's telephone number: (561) 366-4800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of
common stock as of the close of business on November 6, 1998:
Class Number of Shares
Common Stock; $.001 Par Value 33,771,952
APPLIED CELLULAR TECHNOLOGY, INC.
TABLE OF CONTENTS
Item Description Page
- ----- ----------- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets - 3
September 30, 1998 (unaudited) and December 31, 1997
Consolidated Statements of Operations - 4
Three and Nine Months ended September 30, 1998 and 1997
(unaudited)
Consolidated Statements of Stockholders' Equity - 5
Nine Months ended September 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - 6
Nine Months ended September 30, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
1. Legal Proceedings 20
2. Changes In Securities and Use Of Proceeds 20
3. Defaults Upon Senior Securities 22
4. Submission of Matters to a Vote of Security Holders 22
5. Other Information 22
6. Exhibits and Reports on Form 8-K 22
SIGNATURE 24
EXHIBITS 25
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except for number of shares and share value data)
Assets
September 30, December 31,
1998 1997
(unaudited) (audited)
------------- ------------
Current Assets
Cash and cash equivalents .................................................. $ 5,407 $ 7,657
Accounts receivable (net of allowance for
doubtful accounts of $913 in 1998 and $675 in 1997)...................... 38,954 19,389
Inventories ................................................................ 19,842 10,872
Notes receivable ........................................................... 1,164 390
Prepaid expenses and other current assets .................................. 4,927 1,267
-------- --------
Total Current Assets.................................................. 70,294 39,575
Property, Plant And Equipment ................................................. 16,001 5,339
Notes Receivable .............................................................. 1,139 575
Goodwill ...................................................................... 25,634 12,263
Other Assets .................................................................. 9,148 3,530
-------- --------
$122,216 $ 61,282
======== ========
Liabilities And Stockholders' Equity
Current Liabilities
Notes payable............................................................... $ 20,492 $ 4,783
Current maturities of long-term debt........................................ 1,274 843
Accounts payable and accrued expenses ...................................... 25,791 14,487
-------- --------
Total Current Liabilities ............................................ 47,557 20,113
Long-Term Liabilities ......................................................... 2,925 2,200
-------- --------
Total Liabilities..................................................... 50,482 22,313
-------- --------
Minority Interest.............................................................. 3,527 1,785
-------- --------
Redeemable Preferred Shares ....... ................................... -- 900
-------- --------
Stockholders' Equity
Preferred shares:
Special voting, $10 par value, issued and outstanding 1 share in 1998.... -- --
Class B voting, $10 par value, issued and outstanding 1 share in 1998 ... -- --
Common shares:
Authorized 80,000,000 and 40,000,000 shares in 1998 and 1997 of $.001
par value; issued and outstanding 33,660,425 and 20,672,423 in 1998 and
1997, respectively....................................................... 34 21
Additional paid-in capital ................................................. 60,791 33,680
Retained earnings........................................................... 7,188 2,586
Unrealized gain on marketable securities ................................... 6 --
Foreign currency translation adjustment .................................... 188 (3)
------- --------
Total Stockholder' Equity ............................................... 68,207 36,284
------- --------
$122,216 $ 61,282
======== ========
See the accompanying notes to consolidated financial statements.
3
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, except per share amounts)
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- --------- --------- ----------
Net Operating Revenue ........................ $ 59,044 $ 29,195 $ 151,508 $ 72,065
Cost of Goods Sold ........................... 40,095 18,826 104,617 47,339
- ---------------------------------------------- -------- -------- --------- --------
Gross Profit.................................. 18,949 10,369 46,891 24,726
Selling, General and Administrative Expenses . 15,637 7,704 38,041 20,246
- ---------------------------------------------- -------- -------- --------- --------
Operating Income ............................. 3,312 2,665 8,850 4,480
Interest Income .............................. 94 46 313 134
Interest Expense ............................. (461) (295) (1,127) (739)
- ---------------------------------------------- -------- -------- --------- --------
Income Before Provision For Income Taxes
And Minority Interest ..................... 2,945 2,416 8,036 3,875
Provision For Income Taxes ................... 1,021 980 2,763 1,395
- ---------------------------------------------- -------- -------- --------- --------
Income Before Minority Interest .............. 1,924 1,436 5,273 2,480
Minority Interest............................. 258 244 627 454
- ---------------------------------------------- -------- -------- --------- --------
Net Income.................................... 1,666 1,192 4,646 2,026
Preferred Stock Dividends .................... 12 18 44 54
- ---------------------------------------------- -------- -------- --------- --------
Net Income Applicable to Common
Stockholders .............................. $ 1,654 $ 1,174 $ 4,602 $ 1,972
============================================== ======== ======== ========= ========
Net Income Per Common Share - Basic .......... $ 0.05 $ 0.09 $ 0.15 $ 0.21
============================================== ======== ======== ========= ========
Net Income Per Common Share - Diluted ....... $ 0.05 $ 0.08 $ 0.15 $ 0.17
============================================== ======== ======== ========= ========
Weighted Average Number Of
Common Shares Outstanding - Basic ......... 36,369 12,896 30,721 9,619
============================================== ======== ======== ========= ========
Weighted Average Number Of Common
Shares Outstanding - Diluted .............. 36,863 14,929 32,041 12,226
============================================== ======== ======== ========= ========
See the accompanying notes to consolidated financial statements.
4
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Nine Month Periods Ended September 30, 1998 And 1997
(Unaudited)
(In Thousands, except for number of shares)
Common Stock Preferred Stock Additional Total
-------------------- ----------------- Paid-In Retained Stockholders'
Number Amount Number Amount Capital Earnings Other Equity
--------- ------- ------ ------ --------- --------- ----- ------------
Balance - January 1, 1997 ............. 5,798,701 $ 6 $ -- $ -- $ 7,928 $ 318 $ -- $ 8,252
Net income.......................... -- -- -- -- -- 2,026 -- 2,026
Issuance of common stock............ 7,128,981 7 -- -- 9,039 -- -- 9,046
Issuance of common stock to
redeem preferred stock.......... 1,354,167 1 -- -- 2,499 -- -- 2,500
Warrants redeemed .................. 2,000,000 2 -- -- 7,109 -- -- 7,111
Foreign currency translation
adjustment...................... -- -- -- -- -- -- (9) (9)
Preferred stock dividends paid...... -- -- -- -- -- (54) -- (54)
---------- ---- ------ ----- -------- ------- ----- --------
Balance - September 30, 1997........... 16,281,849 $ 16 -- $ -- $26,575 $ 2,290 $ (9) $ 28,872
========== ==== ====== ===== ======== ======= ===== ========
Balance - January 1, 1998.............. 20,672,423 $ 21 $ -- $ -- $33,680 $ 2,586 $ (3) $ 36,284
Net income -- -- -- -- -- 4,646 -- 4,646
Issuance of common stock............ 12,138,002 12 -- -- 18,265 -- -- 18,277
Issuance of preferred stock......... -- -- -- -- 6,897 -- -- 6,897
Warrants redeemed................... 850,000 1 2 -- 1,949 -- -- 1,950
Foreign currency translation
adjustment...................... -- -- -- -- -- -- 191 191
Unrealized gain on marketable
securities...................... -- -- -- -- -- -- 6 6
Preferred stock dividends paid...... -- -- -- -- -- (44) -- (44)
---------- ---- ------ ----- -------- ------- ----- --------
Balance - September 30, 1998........... 33,660,425 $ 34 2 -- $60,791 $ 7,188 $ 194 $ 68,207
========== ==== ====== ===== ======== ======= ===== ========
See the accompanying notes to consolidated financial statements.
5
APPLIED CELLULAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
For The Nine Months
Ended September 30,
---------------------------
1998 1997
Cash Flows From Operating Activities
Net income ............................................... $ 4,646 $ 2,026
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization........................ 3,087 1,286
Minority interest ................................... 627 454
Gain on sale of property, plant and equipment ....... (76) (1,235)
Change in assets and liabilities:
Increase in accounts receivable ................... (4,557) (3,082)
Increase in inventories............................ (2,522) (1,391)
Increase in prepaid expenses....................... (2,711) (323)
Increase in deferred tax asset .................... (107) (72)
Decrease in accounts payable and accrued expenses.. (1,597) (1,381)
------------------------------------------------------------ -------- -------
Net Cash Used In Operating Activities ...................... (3,210) (3,718)
------------------------------------------------------------ -------- -------
Cash Flows From Investing Activities
(Increase) decrease in notes receivable........... ....... (1,086) 346
Increase in other assets.................................. (2,615) (589)
Proceeds from sale of property, plant, and equipment ..... 191 1,437
Payments for property, plant and equipment ............... (1,640) (1,049)
Proceeds from costs of asset and business acquisitions
(net of cash balances acquired) ....................... 29 193
------------------------------------------------------------ -------- -------
Net Cash Provided By (Used In) Investing Activities ........ (5,121) 338
------------------------------------------------------------ -------- -------
Cash Flows From Financing Activities
Net amounts borrowed (paid) on notes payable ............ 8,173 (59)
Proceeds from long-term debt............................. 891 --
Payments for long-term debt ............................. (4,389) --
Redemption of preferred shares........................... (900) --
Preferred stock dividends paid .......................... (44) (72)
Issuance of common shares ............................... 2,350 8,028
------------------------------------------------------------ -------- -------
Net Cash Provided By Financing Activities .................. 6,081 7,897
------------------------------------------------------------ -------- -------
Net Increase (Decrease) In Cash And Cash Equivalents ....... (2,250) 4,517
Cash And Cash Equivalents - Beginning Of Period ............ 7,657 810
------------------------------------------------------------ -------- -------
Cash And Cash Equivalents - End Of Period .................. $ 5,407 $ 5,327
============================================================ ======== ========
Supplemental Disclosure Of Cash Flow Information
Income taxes paid ....................................... $ 2,052 $ 778
Interest paid ........................................... 1,046 444
Noncash investing and financing activities:
Property acquired for long-term debt .................. 1,775 496
Property acquired through issuance of stock............ -- 163
------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
6
APPLIED CELLULAR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Applied
Cellular Technology, Inc. (the "Company") have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, all adjustments (consisting of only normal recurring adjustments)
considered necessary to present fairly the consolidated financial statements
have been made.
The consolidated balance sheet at December 31, 1997 has been derived from
the audited consolidated financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The consolidated statements of
operations for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year.
These statements should be read in conjunction with the consolidated financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
2. Principles of Consolidation
The financial statements include the accounts of Applied Cellular
Technology, Inc. and its wholly owned and majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. During the nine-month periods ended September 30, 1998 and 1997,
the Company acquired interests in fourteen and seven companies, respectively.
The financial position and results of operations of these acquisitions are
included in the Company's consolidated financial statements as of their
effective date of acquisition.
3. Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income", and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". These statements, which are
effective for fiscal years beginning after December 31, 1997, expand or modify
disclosures and will have no impact on the Company's consolidated financial
position, results of operations or cash flows. The only component of
comprehensive income is foreign currency translation which, for the nine months
ended September 30, 1998, amounted to $191.
4. Inventory
September 30, December 31,
1998 1997
-------------------- ------------------
Raw materials $ 5,405 $ 1,962
Work in process 2,750 1,085
Finished goods 11,687 7,825
==================== ==================
$ 19,842 $ 10,872
==================== ==================
7
APPLIED CELLULAR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
5. Notes Payable
During the third quarter of 1998, the Company entered into a twenty million
dollar line of credit with a trust company secured by all assets of the Company
(the "Credit Agreement") at the prime lending rate or at the London Interbank
Offered Rate, as elected by the Company. The Credit Agreement expires on July
31, 1999 and contains standard debt covenants relating to financial position and
performance as well as restrictions on the declarations and payment of
dividends. As of September 30, 1998, the outstanding balance was $16,130 and the
availability was $3,870. The Company is currently in compliance with all
covenants under the Credit Agreement.
6. Stockholders' Equity
The Company has authorized 5,000 shares of preferred stock, $10.00 par
value, to be issued from time to time on such terms as is specified by the Board
of Directors.
In May 1998, in connection with the Company's acquisition of Commstar
Limited, an Ontario corporation ("Commstar"), the Board of Directors authorized
the issuance of one share of the Company's Preferred Stock ($10.00 par value)
designated as the Company's Special Voting Preferred Stock (the "Special
Preferred Share"). The Special Preferred Share is entitled to a number of votes
equal to the number of outstanding Exchangeable Shares not owned by the Company.
The holder of the Special Preferred Share is not entitled to receive any
dividends or participate in any distribution of assets to the stockholders of
the Company. When all Exchangeable Shares have been exchanged or redeemed for
shares of the Company's Common Stock, the Special Preferred Share will be
cancelled. The Company initially reserved 3,418 shares of its Common Stock to be
exchanged for Exchangeable Shares held by the Commstar selling shareholders, 652
of which have been exchanged into shares of Common Stock and 2,765 are reserved
at September 30, 1998. On July 30, 1998, Commstar acquired certain assets from
Western Inbound Network, Inc., an Ontario corporation, in consideration for 432
Exchangeable Shares. The Company initially reserved 432 shares of its Common
Stock, 288 of which have been exchanged into shares of Common Stock and 144 are
reserved at September 30, 1998.
In June 1998, in connection with the Company's acquisition of Ground
Effects Limited, an Ontario corporation ("Ground Effects"), the Board of
Directors authorized the issuance of one share of the Company's Preferred Stock
($10.00 par value) designated as the Company's Class B Voting Preferred Stock
(the "Class B Special Preferred Share"). The Class B Special Preferred Share is
entitled to a number of votes equal to the number of outstanding Exchangeable
Shares not owned by the Company. The holder of the Class B Special Preferred
Share is not entitled to receive any dividends or participate in any
distribution of assets to the stockholders of the Company. When all Exchangeable
Shares have been exchanged or redeemed for shares of the Company's Common Stock,
the Special Preferred Share will be cancelled. The Company has reserved 1,106
shares of its Common Stock to be exchanged for Exchangeable Shares held by the
Ground Effects selling shareholders, none of which had been exchanged at
September 30, 1998.
8
APPLIED CELLULAR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
7. Earnings Per Share
The following is a reconciliation of the numerator and denominator of
basic and diluted earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------------------------------------
NUMERATOR:
Net income $ 1,666 $ 1,192 $ 4,646 $2,026
Preferred stock dividends 12 18 44 54
------------------------------------------------
Numerator for basic earnings per share -
Net income available to common stockholders 1,654 1,174 4,602 1,972
Effect of dilutive securities:
Preferred stock dividends 12 18 44 54
------------------------------------------------
Numerator for diluted earnings per share -
Net income available to common stockholders $ 1,666 $ 1,192 $ 4,646 $2,026
================================================
DEMONINATOR:
Denominator for basic earnings per share -
Weighted-average shares (1) 36,369 12,896 30,721 9,619
------------------------------------------------
Effect of dilutive securities -
Redeemable preferred stock 74 868 114 1,869
Warrants 208 654 621 626
Employee stock options -- 511 275 111
Contingent stock - acquisitions 211 -- 310 --
------------------------------------------------
Dilutive potential common shares 493 2,033 1,320 2,606
------------------------------------------------
Denominator for diluted earnings per share - Adjusted
Weighted-average shares and assumed conversions
36,862 14,929 32,041 12,225
================================================
Basic earnings per share $ 0.05 $ 0.09 $ 0.15 $ 0.21
================================================
Diluted earnings per share $ 0.05 $ 0.08 $ 0.15 $ 0.17
================================================
- -----------------------
<FN>
1. Includes, for the three and nine month periods ended September 30,
1998, 2,909 shares of common stock reserved for issuance to the holders
of Commstar's Exchangeable Shares and 1,106 shares of common stock
reserved for issuance to the holder's of Ground Effects' Exchangeable
Shares.
</FN>
9
8. Pro-Forma Information
The following pro-forma condensed consolidated statement of operations
of the Company for the nine months ended September 30, 1998 gives effect to the
acquisitions of the following companies as if they were effective at January 1,
1998:
Effective Date
Acquired Company of Acquisition
-------------------------------------------- -------------------
The Americom Group, Inc. April 1, 1998
Aurora Electric, Inc. April 1, 1998
Blue Star Electronics, Inc. April 1, 1998
Commstar Limited May 1, 1998
Consolidated Micro Components, Inc. April 1, 1998
Data Path Technologies, Inc. April 1, 1998
The Fromehill Company dba Winward Electric January 1, 1998
GDB Software Services, Inc April 1, 1998
Ground Effects Limited April 1, 1998
Information Products Center, Inc. January 1, 1998
Innovative Vacuum Solutions, Inc. April 1, 1998
Service Transportation Company April 1, 1998
Signature Industries Limited June 1, 1998
Teledata Concepts, Inc. April 1, 1998
The pro-forma condensed consolidated statement of operations gives
effect to the acquisitions under the purchase method of accounting, and is not
indicative of the results that would have occurred had the acquisitions been
effective on the dates indicated or of the results that may be obtained in the
future.
--------------------------------------------------------
Applied Cellular Technology, Inc.
Pro-Forma Condensed Consolidated Statement Of Operations
For The Nine Months Ended September 30, 1998
(Unaudited)
(In Thousands, except per share amounts)
--------------------------------------------------------
Net operating revenue $174,852
Cost of goods sold 119,407
--------
Gross profit 55,445
Selling, general and administrative expenses 49,387
--------
Operating income 6,058
Interest income 328
Interest expense (1,339)
Minority interest ( 548)
Provision for income taxes (1,741)
--------
Net income 2,758
Dividends ( 44)
--------
Net income available to common stockholders $ 2,714
Net income per common share ========
- basic $0.08
- diluted $0.08
Weighted average number of common shares outstanding
- basic 34,883
- diluted 36,203
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the accompanying
consolidated financial statements and related notes in Item 1 of this report as
well as the Company's Annual Report on Form 10-K for the year ended December 31,
1997. 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. All amounts are
in thousands, except per share data.
Results of Operations
The Company's results of operations improved significantly from the third
quarter of 1997 to the third quarter of 1998. The significant increases are all
attributable to the Company's growth of existing businesses and to its growth
through acquisition. Net operating revenue for the third quarter of 1998 was
$59,044, an increase of $29,849, or 102.2 percent, from $29,195 the third
quarter of 1997. Net income applicable to common stockholders was $1,654, an
increase of $480, or 40.9 percent, from $1,174 a year earlier. Basic earnings
per share were $0.05 per share in 1998 compared to $0.09 per share in 1997.
Diluted earnings per share were $0.05 per share in 1998, compared to $0.08 per
share in 1997. The weighted-average number of diluted shares outstanding
increased by 146.9 percent from 1997 to 1998.
Net operating revenue for the nine months ended September 30, 1998 was
$151,508, an increase of $79,443, or 110.2%, from $72,065 for the nine months
ended September 30, 1997. Net income applicable to common stockholders for the
nine months ended September 30, 1998 was $4,602, an increase of $2,630, or 133.4
percent, from $1,972 for the same period of 1997. Basic earnings per share for
the nine months ended September 30, 1998 were $0.15 per share compared to $0.21
per share for the same period in 1997. Diluted earnings per share for the nine
months ended September 30, 1998 were $0.15 per share, compared to $0.17 per
share for the same period in 1997. The weighted-average number of diluted shares
outstanding increased by 162.1 percent from 1997 to 1998.
11
The following table summarizes the Company's results of operations as a
percentage of net operating revenue for the three and nine-month periods ended
September 30, 1998 and 1997, and is derived from the unaudited consolidated
statements of operations in Part I, Item 1 of this report.
Relationship to Net Operating Revenue
--------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
1998 1997 1998 1997
------ ----- ----- -----
% % % %
Net Operating Revenue 100.0 100.0 100.0 100.0
Cost of Goods Sold 67.9 64.5 69.1 65.7
-------------------------------------
Gross Profit 32.1 35.5 30.9 34.3
Selling, General and Administrative 26.5 26.4 25.1 28.1
Expenses
-------------------------------------
Operating Income 5.6 9.1 5.8 6.2
Interest Income 0.2 0.2 0.2 0.2
Interest Expense (0.8) (1.0) (0.7) (1.0)
-------------------------------------
Income Before Provision for Income
Taxes 5.0 8.3 5.3 5.4
And Minority Interest
Provision For Income Taxes 1.7 3.4 1.8 2.0
-------------------------------------
Income Before Minority Interest 3.3 4.9 3.5 3.4
Minority Interest 0.5 0.8 0.4 0.6
-------------------------------------
Net Income 2.8 4.1 3.1 2.8
Preferred Stock Dividends 0.0 0.1 0.1 0.1
=====================================
Net Income Applicable to Common
Stockholders 2.8 4.0 3.0 2.7
=====================================
Net Operating Revenue
The Company operates in four business groups or segments. A fifth business
group, ACT Financial Group, is being developed to provide financial services for
end users and each ACT business unit:
ACT Communications Group
This group contains companies that provide products and services including
telephone systems, voice mail, computer telephony, interactive voice response
systems, telephone services, calling cards, paging services, cellular services,
digital satellite services, call centers, networking systems, fiber optic
cabling, power distribution services and communication towers.
ACT Software and Services Group
This group contains companies that develop and market software products and
services for wireless-enabled applications, data acquisition, field service,
decision support, corporate enterprise access and multi-function peripheral
devices.
ACT Computer Group
This group contains companies that provide computer systems, peripherals,
components, specialty systems, cabling, consulting, rental services, system
integration, transportation, and de-installation services.
ACT Specialty Manufacturing Group
This group contains companies that manufacture and market electrical
12
components, control panels, global positioning systems, satellite modems,
transceivers, controllers, communication devices, orbit modeling applications,
as well as provide design and manufacturing engineering services.
The following table summarizes the net operating revenue by business group:
Nine Months Ended September 30,
-------------------------------------------
Business Group 1998 % 1997 %
---------------------------- ---------- ------- --------- -------
ACT Communications Group $ 73,812 48.7 $29,488 40.9
ACT Software and Services
Group 6,336 4.2 3,080 4.3
ACT Computer Group 43,043 28.4 27,029 37.5
ACT Specialty Manufacturing
Group 28,317 18.7 12,468 17.3
======== ===== ======= =====
$151,508 100.0 $72,065 100.0
======== ===== ======= =====
Three Months Ended September 30,
--------------------------------------------
Business Group 1998 % 1997 %
----------------------- --------- ------- --------- -------
ACT Communications Group $ 27,348 46.3 $13,647 46.7
ACT Software and Services
Group 2,844 4.8 944 3.2
ACT Computer Group 14,814 25.1 9,314 31.9
ACT Specialty Manufacturing
Group 14,038 23.8 5,290 18.2
======== ===== ======= =====
$ 59,044 100.0 $29,195 100.0
======== ===== ======= =====
The Company did not make any acquisitions in the third quarter of 1998.
In the first quarter of 1998, the Company acquired interests in the following
two companies:
-- Information Products Center, Inc. is a provider of services and
products designed to build and manage personal computer network
infrastructures.
-- The Fromehill Company, dba Winward Electric is a full service
electrical and communications systems contractor for residential,
commercial, institutional and industrial markets.
During the second quarter of 1998, the Company acquired interests
in the following twelve companies:
-- The Americom Group, Inc. provides communications infrastructure
construction, maintenance, installation and training services for the
telecommunications industry.
-- Aurora Electric, Inc. is a full service electrical and communications
system contractor for residential, commercial, institutional and
industrial markets.
13
-- Blue Star Electronics, Inc. is a cable assembly manufacturer
specializing in custom voice and data cabling applications
-- Commstar Limited provides call centers, voice messaging and one
number dialing services throughout Canada.
-- Consolidated Micro Components, Inc. specializes in buying new and
surplus memory, processors and mass storage devices from auctions and
liquidation events and reselling the products to end users in the
commercial, institutional and government market sectors.
-- Data Path Technologies, Inc. specializes in marketing and servicing
computer systems, peripherals, components and business software
applications.
-- GDB Software Services, Inc. provides data processing consulting
services for mainframe, midrange and personal computer networks for
financial institutions.
-- Ground Effects Limited specializes in aluminum and steel tubular
manufacturing primarily for the automotive industry.
-- Innovative Vacuum Solutions, Inc. re-manufactures and services
high-end vacuum pumps used in the semiconductor, optical, electronics
and general manufacturing industry.
-- Service Transportation Company is a shipping company specializing in
the packaging and transportation of computer systems and electronics.
-- Signature Industries Limited is a manufacturer of high-grade
communication and safety devices.
-- Teledata Concepts, Inc. is a full service telecommunications provider
of PBX, computer telephony integration and call center technology.
Gross Profit
Gross profit for the third quarter of 1998 was $18,949, an increase of
$8,580, or 82.8 percent, from $10,369 for the third quarter of 1997. As a
percentage of revenue, gross profit was 32.1 percent and 35.5 percent for the
quarters ended September 30, 1998 and 1997, respectively. Gross profit for the
nine months ended September 30, 1998 was $46,891, an increase of $22,165, or
89.6 percent, from $24,726 for the same period of 1997. As a percentage of
revenue, gross profit was 30.9 percent and 34.3 percent for the nine months
ended September 30, 1998 and 1997, respectively. The decline in the gross profit
percentage from 1997 to 1998 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 for the third quarter of 1998
were $15,637, an increase of $7,933, or 103.0 percent, from $7,704 for the third
quarter of 1997. As a percentage of revenue, selling, general and administrative
expenses were 26.5 percent and 26.4 percent for the quarters ended September 30,
1998 and 1997, respectively. Selling, general and administrative expenses for
the nine months ended September 30, 1998 were $38,041, an increase of $17,795,
or 87.9 percent, from $20,246 for the same period of 1997. As a percentage of
revenue, selling, general and administrative expenses were 25.1 percent and 28.1
percent for the nine months ended September 30, 1998 and 1997, respectively. The
changes in selling, general and administrative expenses from the prior year are
due to continued internal growth and growth through acquisition, offset by
economies of scale achieved with higher operating revenues.
Operating Income
Operating income for the third quarter of 1998 was $3,312, an increase of
$647, or 24.3 percent, from $2,665 for the third quarter of 1997. As a
14
percentage of revenue, operating income was 5.6 percent and 9.1 percent for the
quarters ended September 30, 1998 and 1997, respectively. Operating income for
the nine months ended September 30, 1998 was $8,850, an increase of $4,370, or
97.5 percent, from $4,480 for the same period of 1997. As a percentage of
revenue, operating income was 5.8 percent and 6.2 percent for the nine months
ended September 30, 1998 and 1997, respectively. The increase in operating
income is attributable to the growth of the Company's existing businesses and to
the growth contributed by the acquisitions the Company made during 1998.
Interest Income and Expense
Interest income for the third quarter of 1998 was $94, an increase of $48,
or 104.4 percent, from $46 for the third quarter of 1997. As a percentage of
revenue, interest income was 0.2 percent for the quarters ended September 30,
1998 and 1997. Interest income for the nine months ended September 30, 1998 was
$313, an increase of $179, or 133.6 percent, from $134 for the same period of
1997. As a percentage of revenue, interest income was 0.2 percent for the nine
months ended September 30, 1998 and 1997.
Interest expense for the third quarter of 1998 was $461, an increase of
$166, or 56.3 percent, from $295 for the third quarter of 1997. As a percentage
of revenue, interest expense was 0.8 percent and 1.0 percent for the quarters
ended September 30, 1998 and 1997, respectively. Interest expense for the nine
months ended September 30, 1998 was $1,127, an increase of $388, or 52.5
percent, from $739 for the same period of 1997. As a percentage of revenue,
interest expense was 0.7 percent and 1.0 percent for the nine months ended
September 30, 1998 and 1997, respectively.
The changes in interest income and interest expense are a factor of the
amount of cash invested or borrowed during a stated period.
Income Taxes
The Company's effective income tax rate was 34.7 percent and 40.6 percent
in the third quarter of 1998 and 1997, respectively. For the nine months ended
September 30, 1998 and 1997, the Company's effective income tax rate was 34.4
percent and 36.0 percent, respectively. The decrease in the effective rate for
the third quarter of 1998 was primarily a result of reducing the valuation
allowance for certain net operating loss carryforwards.
Financial Condition
As of September 30, 1998, cash and cash equivalents totaled $5,407, down
$2,250, or 29.4 percent, from $7,657 at December 31, 1997.
Operating activities used cash of $3,210 and $3,718 during the nine months
ended September 30, 1998 and 1997, respectively. As of September 30, 1998,
accounts receivable totaled $38,954, an increase of $19,565, or 100.9 percent,
from $19,389 at December 31, 1997. As of September 30, 1998, inventory totaled
$19,842, an increase of $8,970, or 82.5 percent, from $10,872 at December 31,
1997. As of September 30, 1998, accounts payable and accrued expenses totaled
$25,791, an increase of $11,304, or 78.0 percent, from $14,487 at December 31,
1997. These increases were primarily attributable to growth through acquisitions
and to the resulting increased level of business.
15
Investing activities used cash of $5,121 during the nine months ended
September 30, 1998 and provided cash of $338 during the nine months ended
September 30, 1997. During these periods, investing activities consisted
principally of changes in notes receivable from officers; purchases of property,
plant and equipment; and increases in other assets, all of which were partially
offset by cash acquired in acquisitions.
Financing activities provided cash of $6,081 and $7,897 during the nine
months ended September 30, 1998 and 1997, respectively. The major financing
sources of cash in 1998 were proceeds from bank borrowings and the sale of
common stock. The major financing uses of cash were the repayment of long-term
debt, the redemption of preferred shares and the payment of preferred stock
dividends. In 1997, the major financing source of cash was the sale of common
stock, offset by the payment of preferred stock dividends.
During the third quarter of 1998, the Company entered into a twenty million
dollar line of credit with a trust company secured by all assets of the Company
(the "Credit Agreement") at the prime lending rate or at the London Interbank
Offered Rate, as elected by the Company. The Credit Agreement expires on July
31, 1999 and contains standard debt covenants relating to financial position and
performance as well as restrictions on the declarations and payment of
dividends. As of November 6, 1998, the outstanding balance was $15,094 and the
availability was $4,906. The Company is currently in compliance with all
covenants under the Credit Agreement.
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 to use cash from operations for the foreseeable future.
The Company's sources of liquidity include, but are not limited to, funds
available under the Credit Agreement, its ability to obtain additional bank
borrowings, the sale of common and preferred shares, the exercise of warrants,
and the raising of other forms of debt or equity through private placement.
There can be no assurance however, that these options will be available, or if
available, on terms favorable to the Company. The Company believes that its
current cash position, augmented by financing activities, will provide it with
sufficient resources to finance its working capital requirements for the
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.
Outlook
The Company's objective is to continue to grow internally through its
existing business groups 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 and
continues to do so. The Company's financial results are substantially dependent
on not only its ability to sustain and grow existing businesses, but to continue
to grow through acquisition. The Company expects to continue to pursue its
acquisition strategy in 1998 and future years, but there can be no assurance
that management will be able to continue to find, acquire, finance and integrate
high quality companies at attractive prices.
16
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 September 30, 1998, the total assets of the Company
were $122,216. Total assets were $61,282, $33,208 and $4,131 as of December 31,
1997, 1996 and 1995, respectively. Net operating revenue for the nine months
ended September 30, 1998 was $151,508. Net operating revenue was $103,159,
$19,883 and $2,336 for the years ended December 31, 1997, 1996 and 1995,
respectively. 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 for ways to maximize stockholder value.
As such, it is continually seeking operational efficiencies and synergies within
existing business segments as well as evaluating acquisitions of businesses and
customer bases which complement the operations of the Company. The Company has
retained the services of an investment banking firm to help evaluate strategic
initiatives and maximize stockholder value. These strategic initiatives may
include acquisitions, raising additional funds through debt or equity offerings,
or the divestiture of non-core business units that are not critical to the
Company's long term strategy. The Company will review all alternatives to ensure
maximum appreciation of its shareholders' investments. There can be no assurance
however, that any initiatives will be found, or if found, on terms favorable to
the Company.
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 and other resources than 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 adversely affected, and the operations of any of the
individual facilities of the Company could be adversely affected if the services
of the local managers should be unavailable.
17
Year 2000 Compliance
Background. Some computers, software, and other equipment include programming
code in which calendar year data is abbreviated to only two digits. As a result
of this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches, and are commonly referred to as the "Millenium Bug" or
"Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems to ensure that
the programs and systems will be Year 2000 compliant. The Company presently
believes that its computer systems will be Year 2000 compliant in a timely
manner. However, while the estimated cost of these efforts are not expected to
be material to the Company's financial position or any year's results of
operations, there can be no assurance to this effect.
Software Sold to Consumers. The Company is in the process of identifying
and resolving all potential Year 2000 Problems with any of the software products
which it develops and markets. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company's software products will be identified or corrected due to
the complexity of these products and the fact that these products interact with
other third party vendor products and operate on computer systems which are not
under the Company's control.
Internal Infrastructure. The Company believes that its major computers,
software applications, and related equipment used in connection with its
internal operations 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. The Company is in the process of
obtaining assurances from such vendors as to the Year 2000 compliance of their
products. Although some vendors make verbal assurances of Year 2000 compliance,
there can be no certainty that the systems utilized by the Company will not be
affected. The Company intends to continue confirming with vendors, testing,
replacing or enhancing its internal applications to ensure that risks related to
such software are minimized. This process is expected to be completed in early
1999.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 Problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 Problem on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
18
Suppliers. The Company has initiated communications with third party
suppliers of the major computers, software, and other equipment used, operated,
or maintained by the Company to identify and, to the extent possible, to resolve
issues involving the Year 2000 Problem. However, the Company has limited or no
control over the actions of these third party suppliers. Thus, while the Company
expects that it will be able to resolve any significant Year 2000 Problems with
these systems, there can be no assurance that these suppliers will resolve any
or all Year 2000 Problems with these systems before the occurrence of a material
disruption to the business of the Company or any of its customers. Any failure
of these third parties to resolve Year 2000 problems with their systems in a
timely manner could have a material adverse effect on the Company's business,
financial condition, and results of operation.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are simply too
numerous. In addition, one cannot accurately predict how many Year 2000
Problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures. As a result, management
expects that the Company could likely suffer the following consequences:
1. a significant number of operational inconveniences and inefficiencies
for the Company and its clients that may divert management's time and attention
and financial and human resources from its ordinary business activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company or its customers to prevent or alleviate material
business disruptions.
Contingency Plans. The Company is currently developing contingency plans to
be implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by the end of the first quarter of 1999. Depending on the systems
affected, these plans could include accelerated replacement of affected
equipment or software, short to medium-term use of backup equipment and
software, increased work hours for Company personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000 Problems that
arise or to provide manual workarounds for information systems, and similar
approaches. If the Company is required to implement any of these contingency
plans, it could have a material adverse effect on the Company's financial
condition and results of operations.
Based on the activities described above, the Company does not believe that
the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
With its Canadian and UK subsidiaries, the Company has operations and sales
in various regions of the world. Additionally, the Company may export and import
to and from other countries. The Company's operations may therefore be subject
to volatility because of currency fluctuations, inflation and changes in
political and economic conditions in these countries. Sales and expenses may be
denominated in local currencies and may be affected as currency fluctuations
affect the Company's product prices and operating costs or those of its
competitors. The financial position and results of operations of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency, although United States dollars would be used if any of these countries
were deemed hyperinflationary.
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None pursuant to Item 103 of regulation S-K.
Item 2. Changes in Securitie and Use of Proceeds
On September 29, 1998, the Company filed a Registration Statement on Form
S-3 under the Securities Act of 1933, (Registration No. 333-64605), to register
1,105,708 Common Shares to be issued from time to time upon exchange or
redemption of Class A exchangeable shares and Class B exchangeable shares
(together, the "Exchangeable Shares") of ACT-GFX Canada, Inc., an Ontario
corporation ("ACT-GFX"), a wholly owned subsidiary of the Company. The
Exchangeable Shares have been issued by ACT-GFX in exchange for eighty percent
of the issued and outstanding shares in the capital of Ground Effects Ltd. The
Company has issued a single share of Special Voting Preferred Stock (the
"Special Preferred Share") to the Montreal Trust Company of Canada, (the "Voting
Trustee"). Except as otherwise required by law or the Company's Articles of
Incorporation, the Special Preferred Share will be entitled to a number of votes
equal to the number of outstanding Exchangeable Shares not owned by the Company,
and may be voted in the election of directors and on all other matters submitted
to a vote of the Company's stockholders. When all Exchangeable Shares have been
exchanged or redeemed for shares of the Company's Common Stock, the Special
Preferred Share will be cancelled. This registration statement is subject to
completion and is not yet effective.
On September 30, 1998, the Company filed a Registration Statement on Form
S-3 under the Securities Act of 1933, (Registration No. 333-64755), to register
7,796,119 outstanding Common Shares on behalf of selling shareholders. This
registration statement is subject to completion and is not yet effective.
Recent Sales of Unregistered Securities
The following table lists all unregistered securities sold by the Company
from January 1, 1998 through September 30, 1998. 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
Alacrity Systems, Inc. 1 Acquisition 321,768
The Americom Group, Inc. 2 Acquisition 169,167
Amherst Systems 3 Assets 66,667
Advanced Telecommunications, Inc. 4 Acquisition 775,822
ATI Communications, Inc. 5 Acquisition 200,000
Aurora Electric, Inc. 6 Acquisition 1,116,923
Blue Star Electronics, Inc. 7 Acquisition 222,643
Canadian Network Services, Inc. 8 Acquisition 322,512
Commstar Limited 9 Acquisition 3,849,590
Consolidated Micro Components, Inc. 10 Acquisition 429,805
20
CT Specialists, Inc. 11 Acquisition 7,328
Cybertech Station, Inc. 12 Acquisition 49,847
Data Path Technologies, Inc. 13 Acquisition 403,077
The Fromehill Company 14 Acquisition 1,816,400
GDB Software Services, Inc. 15 Acquisition 412,308
Ground Effects Limited 16 Acquisition 1,105,708
Innovative Vacuum Solutions, Inc. 17 Acquisition 270,769
Information Products Center, Inc. 18 Acquisition 576,410
Norcom Resources, Inc. 19 Acquisition 74,667
Pizarro Re-Marketing, Inc. 20 Acquisition 42,723
Service Transportation Company 20 Acquisition 37,181
Signature Industries Limited 21 Acquisition 2,362,785
Signal Processors Limited 22 Acquisition 928,293
Teledata Concepts, Inc. 23 Acquisition 144,828
The Bay Group 24 Acquisition Services 218,682
Warrants Exercised 25 Warrants Exercised 850,000
Services 26 Services 256,115
Employee Stock Sale 27 Stock Purchase 100,000
===========
Total 17,132,018
===========
- --------------------------
1. Includes (a) 312,630 additional shares issued to the selling shareholders
and (b) 9,138 additional shares issued as finder's fees in connection with
the "price protection" provision of the Agreement of Sale.
2. Represents shares issued to the selling shareholder to acquire such
shareholder's 80 percent interest in the company.
3. Represents shares issued to Amherst Systems to acquire customer lists for
the Company's subsidiary, Atlantic Systems, Inc.
4. Represents shares issued in connection with the "price protection"
provision of the Agreement of Sale.
5. Represents the first and second installments of shares issued to a selling
shareholder in connection with the earnout provision under the Agreement
and Plan of Merger.
6. Includes (a) 1,076,923 shares issued to selling shareholders to acquire
such shareholders' 100 percent interest in the company, and (b) 40,000
shares issued as a finder's fee.
7. Includes (a) 202,667 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, (b) 19,394 shares
issued as a finder's fee, and (c) 582 shares issued for services in
connection with the acquisition.
8. Includes (a) 7,530 shares issued to the Stage I selling shareholders to
correct the initial issuance of shares, (b) 170,683 shares issued to the
Stage II selling shareholders upon acquisition of their minority interest
in 1998, (c) 109,774 shares issued to the Stage I and Stage II selling
shareholders in connection with the "price protection" provision of the
Agreement of Sale, and (d) 34,525 shares issued as a finder's fee.
9. Represents shares of stock reserved for issuance in exchange for
Exchangeable Shares of Commstar Limited, in connection with the Company's
acquisition of 100 percent of Commstar Limited, and Commstar's acquisition
of certain assets from Western Inbound Network, Inc. As of September 30,
1998, 1,201,826 shares had been Exchangeable Shares had been converted into
shares of the Company's common stock.
10. Includes (a) 392,157 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 37,648
shares issued as a finder's fee.
11. Represents additional shares issued as finder's fees in connection with the
"price protection" provision of the Agreement of Sale.
12. Includes (a) 26,444 additional shares issued to the selling shareholder and
805 additional shares issued as finder's fees in connection with the "price
protection" provision of the Agreement of Sale, and (b) 22,598 shares
issued to the selling shareholder as part of the earnout provision in the
Agreement of Sale.
13. Represents (a) 384,616 shares issued to selling shareholders to acquire
such shareholders' 100 percent interest in the company, and (b) 18,461
shares issued as a finder's fee.
14. Includes (a) 1,778,543 shares issued to the selling shareholder to acquire
such shareholder's 100 percent interest in the company, and (b) 37,857
shares issued as a finder's fee.
21
15. Includes (a) 384,616 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, and (b) 27,692
shares issued as a finder's fee.
16. Represents shares of stock reserved for issuance in exchange for
Exchangeable Shares of ACT-GFX Canada, Inc., in connection with the
Company's acquisition of 80 percent of Ground Effects Limited. As of
September 30, 1998, no shares had been exchanged into shares of the
Company's common stock.
17. Represents shares issued to selling shareholders to acquire such
shareholders' 80 percent interest in the company.
18. Represents shares issued to the selling shareholder to acquire such
shareholder's 100 percent interest in the company.
19. Represents earnout payments under the Agreements of Sale of these
companies.
20. Includes (a) 35,000 shares issued to the selling shareholder to acquire
such shareholder's 80 percent interest in the company, (b) 2,181 shares
issued for acquisition services.
21. Includes (a) 2,339,703 shares issued to selling shareholders to acquire
such shareholders' 85 percent interest in the company, and (b) 23,082
shares issued as a finder's fee.
22. Includes (a) 915,167 shares issued to the selling, and (b) 13,126 shares
issued as finder's fees in connection with the "price protection" provision
of the Agreement of Sale.
23. Includes (a) 140,138 shares issued to the selling shareholder to acquire
such shareholder's 100 percent interest in the company, and (b) 4,690
shares issued as a finder's fee.
24. Represents shares issued for investment banking services in connection with
acquisitions made by the Company in 1998.
25. Represents shares issued upon the exercise of Warrants by the warrant
holders.
26. Represents shares issued for professional services or under employment or
other such agreements.
27. Represents shares sold to an officer of the Company.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Effective as of August 25, 1998, the Company entered into a Credit
Agreement with State Street Bank and Trust Company (the "Bank"). The Credit
Agreement provides that the Company may borrow from the Bank from time to time
up to twenty million dollars at either the Bank's then prime lending rate or at
a rate calculated on the basis of the London Interbank Offered Rate, as elected
by the Company. All unpaid principal and accrued interest is due and payable on
July 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 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)
4.2 Amendment of Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (File No. 333-59523) filed with the
Commission on July 21, 1998)
4.3 Amended and Restated Bylaws of the Company dated March 31, 1998
(incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998)
10.1 Credit Agreement between Applied Cellular Technology, Inc. and State
Street Bank and Trust Company dated as of August 25, 1998*
27.1 Financial Data Schedule
99.1 Cautionary Statements
-----------
* The registrant agrees to provide the exhibits and schedules to this
Agreement on request of the Staff
22
(b) Reports on Form 8-K
1. The Company's Current Report on Form 8-K/A filed with the Commission
on September 23, 1998 reporting the Company's acquisition of Signature
Industries Limited.
2. The Company's Current Report on Form 8-K/A filed with the Commission
on September 23, 1998 reporting the Company's acquisition of Commstar
Limited.
3. The Company's Current Report on Form 8-K filed with the Commission on
November 4, 1998 reporting the engagement of PricewaterhouseCoopers
LLP as the company's independent accountants.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED CELLULAR TECHNOLOGY, INC.
(Registrant)
Date: November 13, 1998 By: /s/ David A. Loppert
-------------------------------------
David A. Loppert, Vice President,
Treasurer and Chief Financial Officer
24
Exhibit Index
Number Description of Exhibits
4.1 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)
4.2 Amendment of Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (File No. 333-59523) filed with the
Commission on July 21, 1998)
4.3 Amended and Restated Bylaws of the Company dated March 31, 1998
(incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (File No. 333-51067) filed with the
Commission on April 27, 1998)
10.1 Credit Agreement between Applied Cellular Technology, Inc. and State
Street Bank and Trust Company dated as of August 25, 1998*
27.1 Financial Data Schedule
99.1 Cautionary Statements
-----------
* The registrant agrees to provide the exhibits and schedules to this
Agreement on request of the Staff
25