UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 24, 1997
APPLIED CELLULAR TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Missouri
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(State or other jurisdiction of incorporation)
000-26020
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(Commission File Number)
43-1641533
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(IRS Employer Identification No.)
Highway 160 & CC, Suite 5, Nixa, Missouri 65714
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(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: 417-725-9888
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Item 1. Changes in Control of Registrant.
Not applicable.
Item 2. Acquisition or Disposition of Assets.
On October 24, 1997, Applied Cellular Technology, Inc. (the "Company")
purchased 100% of the 34,417,242 issued and outstanding common and
preferred shares, $.01 par value, of Alacrity Systems, Inc. ("Alacrity")
from 44 selling shareholders, (the "Sellers"), in exchange for
$5,200,000.00 in the form of restricted shares of Applied Cellular
Technology, Inc.'s common stock. The Sellers received $5,200,000.00 worth
of the Company's restricted shares of common stock, or 622,755 common
shares, valued at $8.35 per share, upon the completion of closing and the
exchange of certain documents, which took place on October 31, 1997.
Item 3. Bankruptcy or Receivership.
Not applicable.
Item 4. Change in Registrant's Certifying Accountant.
Not applicable.
Item 5. Other Events.
Not applicable.
Item 6. Resignation of Registrant's Directors.
Not applicable.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
Financial statements of Alacrity Systems, Inc. for the fiscal
year ended July 31, 1997 are attached as Exhibit 99.2 hereto.
(b) Pro forma financial information.
Pro forma financial information will be filed by amendment to
this Form 8-K, as soon as such information is available.
(c) Exhibits.
23. Independent Auditor's Consent
99.1. Agreement of Sale*
99.2. Financial Statements of Alacrity Systems, Inc. for
the fiscal year ended July 31, 1997.
* Exhibits and schedules are not included with this Exhibit.
The registrant will file such exhibits and schedules
supplementally on request of the Securities and Exchange
Commission.
Item 8. Change in fiscal year.
Not applicable.
PAGE 2
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
APPLIED CELLULAR TECHNOLOGY, INC.
(Registrant)
Date: November 12, 1997 /s/ David A. Loppert
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Vice President
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CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Amendment No. 1 to the
Registration Statement (Form S-8 No. 333-39553) pertaining to the 1996
Non-Qualified Stock Option Plan of Applied Cellular Technology, Inc. and in
Amendment No. 1 to the Registration Statement (Form S-3 No. 333-25431) and
related Prospectus of Applied cellular Technology, Inc. of our report dated
September 29, 1997, with respect to the financial statements of Alacrity
Systems, Inc. included in its Current Report on Form 8-K dated November 12,
1997, all filed with the Securities and Exchange Commission.
Ernst & Young, LLP
Hackensack, New Jersey
November 12, 1997
AGREEMENT OF SALE
This Agreement is entered into this 24th day of October, 1997 by and between
Applied Cellular Technology, Inc., a Missouri corporation ("ACT or Buyer"), the
named shareholders identified in the attached Exhibit A (hereinafter
collectively referred to as "Sellers") and Alacrity Systems Incorporated, a New
Jersey corporation ("Acquiree").
WHEREAS, Sellers own shares, either common or preferred, in the number and at
the par value as indicated in the hereinabove referenced Exhibit A, of the
issued and outstanding stock of Acquiree (representing, collectively, one
hundred percent (100%) of the currently issued and outstanding stock of
Acquiree) (the "Acquiree Shares");
WHEREAS, Sellers desire to sell and Buyer desires to acquire one hundred percent
(100%) of the Acquiree's shares (the "Sale Shares"), such that said acquisition
qualifies as a tax-free reorganization under Section 368 of the Internal Revenue
Code.
NOW, THEREFORE, for the mutual consideration set out herein, the parties agree
as follows:
1. Purchase and Sale of Acquiree Shares; Payment Price
1.1 Purchase and Sale. Subject to the terms and conditions of this
Agreement, Sellers shall sell to Buyer and Buyer shall purchase from Sellers the
Sale Shares at a closing of such sale (the "Closing") to be held at the place
and on the date hereinafter provided (the "Closing Date").
1.2 a. Purchase Price. The purchase price for the Sale Shares shall be
the amount of shares of restricted common stock of Buyer ("ACT Stock"), with
demand registration rights, such shares having a value of Five Million Two
Hundred Thousand Dollars ($5,200,000.00) (the "Purchase Price") (for one hundred
percent [100%] of the Acquiree's shares) based upon the market value of ACT
shares to be set by the mean closing price of the last ten (10) trading days
immediately prior to closing as reflected on the Nasdaq closing price published
in "The Wall Street Journal" ("Valuation Date").
b. Delivery of ACT Stock. At the Closing, each Seller shall receive shares
of ACT Stock, with demand registration rights as provided hereinafter in Section
8 of this Agreement, in proportion to its percentage of ownership, as provided
in attached Exhibit A. The total value of the shares of ACT Stock conveyed
hereunder shall have a value of Five Million Two Hundred Thousand Dollars
($5,200,000.00) as of the Valuation Date.
c. Change in Capitalization. In the event that between the date of this
Agreement and the date of Closing the number of issued and outstanding shares of
ACT shall change due to a recapitalization, stock split, reverse stock split,
stock dividend or similar event, then the number of shares of the ACT Stock to
be received by the Sellers shall be adjusted to reflect fully such event and to
assure that the value of the ACT Stock received by the Sellers at Closing shall
be equal to the Purchase Price.
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AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 2
d. At the Closing Date, Buyer will deliver certificates representing the
ACT Stock duly endorsed so as to make each Seller the sole holders thereof, free
and clear of all claims and encumbrances. The ACT Stock is not registered under
the Securities Act of 1933 as amended (the "Act"). The ACT Stock will be subject
to a usual and appropriate stop transfer order on the books and records of
Acquiree's transfer agent pertaining to securities not registered under the Act.
The certificate for the ACT Stock delivered shall bear on its face the following
restrictive legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and are "restricted
securities" as that term is defined in Rule 144 under the Act. The
shares may not be sold or offered for sale except pursuant to an
effective registration statement under the Securities Act of 1933 or
an opinion of counsel for the corporation that registration is not
required under such Act".
2. Representations of Sellers and Acquiree
Acquiree and each Seller, as and for himself, hereby represent and
warrant as to each Seller, to the extent of the facts known to him, that,
effective this date and the Closing Date, the representations listed below are
true and correct.
2.1 Title to Acquiree Shares. Each Seller has good and valid title to
the Sale Shares, reflected on Exhibit "A" hereto, being sold free and clear of
all liens, claims, encumbrances, security interests, options, charges and
restrictions of any kind. Upon delivery to Buyer at the Closing of certificates
representing the Sale Shares, duly endorsed in blank or accompanied by stock
powers duly endorsed in blank in proper form for transfer, good and valid title
to the Sales Shares will pass to Buyer, free and clear of all liens, claims,
encumbrances, security interests, options, charges and restrictions of any kind.
The Sale Shares are not subject to any voting trust agreement or other contract,
agreement, arrangement, commitment or understanding restricting or otherwise
relating to voting, dividend rights or the disposition of the Sales Shares.
2.2 Financial Statements. Acquiree has previously furnished audited
financial statements dated July 31, 1997 (see separate Disclosure Schedule). The
financial statements are correct and complete and have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis. The financial statements present fairly the financial condition of
Acquiree as of the respective dates of said balance sheets and the results of
operations for the respective periods indicated in said statements of income and
retained earnings.
2.3 Litigation. There are no actions, suits, proceedings or
investigations (whether or not purportedly on behalf of Acquiree) pending or
threatened against or affecting Acquiree, at law, or in equity or admiralty, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau agency or instrumentality, domestic or foreign, which
involve the likelihood of any adverse judgment of liability, not fully covered
by insurance, in excess of Five Thousand Dollars ($5,000.00) in any one case, or
Ten Thousand Dollars ($10,000.00) in the aggregate, or which may result in any
material adverse change aside from the monetary adverse judgment or liability)
in the business, operations, properties or assets or in the condition, financial
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AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 3
or otherwise, of Acquiree, except in each as listed and described in Exhibit 2.3
annexed hereto. To the best of Sellers' knowledge, Acquiree is not in default
with respect to any order, writ, injunction or decree of any court or federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign.
2.4 Compliance with Laws. Acquiree has complied in all material
respects with all laws, regulations and judicial or administrative tribunal
orders applicable to its business of which it is aware except as previously
disclosed to Buyer (see Disclosure Schedule).
2.5 Taxes. As of the date hereof, and as of the Closing Date, all
federal, state and local tax returns required to be filed by Acquiree have been
duly filed, or will be filed, taking into account any extensions of the filing
deadlines which have been granted by to Acquiree. Federal income tax returns of
Acquiree have been submitted to the Internal Revenue Service ("IRS") for all
past fiscal years through and including 1996 (see Disclosure Schedule). All
deficiencies by any taxing authority have either been paid or settled or are
included in the amounts for accrued taxes shown on the respective balance sheet.
2.6 Absence of Changes of Events. Since the date of the balance sheet,
and except as otherwise disclosed on Schedule 2.6, there has not occurred:
a. any undisclosed material and adverse change in the financial
condition or operations of Acquiree;
b. any undisclosed material damage, destruction or loss to or of
any of the assets or properties owned or leased by Acquiree;
c. the creation or attachment of any lien against any of the
currently issued and distributed stock of Acquiree;
d. any waiver, release, discharge, transfer or cancellation by
Acquiree of any rights or claims of material value;
e. any issuance by Acquiree of any securities (including all debt
or equity securities) or any merger or consolidation of Acquiree with
any other person or any acquisition by Acquiree of the business of any
other person;
f. any incurrence, assumption or guarantee by Acquiree of any
indebtedness or liability other than in the ordinary course of
business;
g. any declaration, setting aside or payment by Acquiree of any
dividends on, or any other distribution with respect to, any capital
stock of Acquiree or any repurchase, redemption or other acquisition
of any capital stock of Acquiree; or
h. (i) any payment of any bonus, profit sharing, pension or
similar payment or arrangement or special compensation to any employee
of Acquiree, except in the ordinary course of the business of
Acquiree, (ii) any increase in the compensation payable or to become
payable to any employee of Acquiree.
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AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 4
2.7 No Violation. Except as set forth in the documents listed, referred
to in Exhibits hereto or the Disclosure Schedule, the execution and carrying out
of this Agreement will not conflict with, or result in any breach of any of the
terms, or create a charge or encumbrance upon any of the properties or assets,
or outstanding stock of Acquiree pursuant to any corporate charter, bylaw,
indenture, mortgage or lease to which Acquiree is a party or by which it is
bound. The execution and carrying out of this Agreement will not violate any
provision of law.
2.8 Accuracy of Information. To the best knowledge of both the Sellers
and Acquiree, none of the written information and documents which have been or
will be furnished by Acquiree or by any representatives of Acquiree to Buyer or
any of the representatives of Buyer in connection with the transaction
contemplated by this Agreement contains or will contain, as the case may be, any
untrue statement of a material fact, or omits or will omit to state a material
fact necessary in order to make the statements therein not misleading in light
of the circumstances in which made. To the best of its knowledge, Acquiree has
disclosed to Buyer as the purchaser of the Sale Shares all material information
relating to Acquiree and its activities as currently conducted.
2.9 Capital Stock. The Acquiree is authorized to issue seventy million
(70,000,000) shares consisting of (a) forty-one million (41,000,000) shares of
Common Stock, $.01 par value, and (b) twenty-nine million (29,000,000) shares of
Preferred Stock, $.01 par value, of which (i) two hundred sixty-two thousand
(262,000) shares are designated as Class A Preferred Stock, $.01 par value, (ii)
twelve million six hundred nineteen thousand three hundred seventy-seven
(12,619,377) shares designated as Class B Preferred Stock, $.01 par value, and
(iii) fifteen million (15,000,000) shares designated as Class C Preferred Stock,
$.01 par value.
2.10 Organization and Good Standing. Acquiree is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New Jersey, with all requisite power and authority to own its properties and to
carry on its business as now conducted.
2.11 Officers and Directors. The present officers and directors of
Acquiree are as follows:
Officers: President John F. Reap
Secretary Ludwig J. Kapp
Treasurer John F. Reap
Directors: Alexandra M. Giurgiu
John E. Fox
Harry Edelson
Carol Maurizi
Ludwig J. Kapp
John F. Reap
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AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 5
2.12 Other Agreements. Acquiree is a party to no material agreement
(written or verbal) except (1) as disclosed in this Agreement, (2) orders of
merchandise in normal quantities for use in Acquiree's business, and (3) as set
forth in the separate Disclosure Schedule.
2.13 Insurance Policies. Acquiree has delivered to Buyer true, correct
and complete copies of all policies of fire, liability and other forms of
insurance now in force with respect to Acquiree and its assets, as listed in the
separate Disclosure Schedule. All premiums have been paid and all such policies
are in effect and will remain in effect through the Closing Date. Acquiree shall
amend such policies to add Buyer as an additional insured.
2.14 Employees. All employees of Acquiree and their current rate of
compensation are listed in the separate Disclosure Schedule. Acquiree is not a
party to any union contract.
2.15 Employee Benefit Plans. The employees of Acquiree may participate
in certain employee benefits plans, including health insurance, dental
insurance, short and long term disability plans and a 401k plan (see Disclosure
Schedule).
2.16 Brokers. The Agreement by and between Acquiree and Argentum
Partners, dated March 24, 1997, has expired and that neither Sellers nor
Acquiree have any continued or continuing obligations thereunder.
2.17 True and Correct. The representations and warranties made
hereinabove in this Section 2 will be correct in all material respects on and as
of the Closing Date with the same force and effect as though such
representations and warranties had been made on the Closing Date.
3. Representations of Buyer
Buyer warrants and represents, that, effective this date and the
Closing Date, the representations listed below are true and correct.
3.1 Organization; Good Standing. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Missouri.
3.2 Execution, Delivery and Performance of Agreement; No Conflict;
Authorization. Buyer has full power and authority to carry out the transactions
contemplated by this Agreement and the execution, delivery and performance of
this Agreement has been duly authorized by the Buyer by all necessary corporate
action and will not result in any breach of or violate or constitute a default
under its Certificate of Incorporation or Bylaws and other governing documents
of Buyer, or any statutes, laws or regulations or indenture, mortgage or other
agreement or instrument, or any order, judgment or decree to which it is a party
or may be subject.
3.3 Title to ACT Stock. ACT's Stock, deliverable pursuant to this
Agreement, shall be validly issued and outstanding, fully paid and
nonassessable.
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AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 6
3.4 Capital Stock. The Buyer is authorized to issue forty-five million
(45,000,000) shares consisting of (a) forty million (40,000,000) designated as
Common Stock, $.001 par value, of which seventeen million fifty-seven thousand
four hundred forty-six (17,057,446) are validly issued and outstanding and (b)
five million (5,000,000) are designated as preferred stock, of which one hundred
nine thousand (109,000) are validly issued and nine thousand (9,000) are
outstanding.
3.5 Financial Statements. Annexed hereto as Exhibit 3.5 are the audited
financial statements of Buyer dated December 31, 1996. The financial statements
in Exhibit 3.5 are correct and complete and have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis. The
financial statements present fairly the financial condition of Buyer as of the
respective dates of said balance sheets and the results of operations for the
respective periods indicated in said statements of income and retained earnings.
3.6 Litigation. To the best of Buyer's knowledge, there are no actions,
suits, proceedings or investigations (whether or not purportedly on behalf of
Buyer) pending or threatened against or affecting Buyer at law or in equity or
admiralty or before or by any federal, state, municipal or other governmental
department, commission, board, bureau agency or instrumentality, domestic or
foreign, which involve the likelihood of any adverse judgment of liability, not
fully covered by insurance, in excess of Five Thousand Dollars ($5,000.00) in
any one case or Ten Thousand Dollars ($10,000.00) in the aggregate, or which may
result in any material adverse change aside from the monetary adverse judgment
or liability, in the business, operations, properties or assets or in the
condition, financial or otherwise, of Buyer. Buyer is not in default with
respect to any order, writ, injunction or decree of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.
3.7 Compliance with Laws. Buyer has complied in all material respects
with all laws, regulations and judicial or administrative tribunal orders
applicable to its business of which it is aware.
3.8 Taxes. All federal, state and local tax returns required to be
filed by Buyer have been duly filed. Federal income tax returns of Buyer have
been submitted to the IRS for all past fiscal years through the fiscal year
ended in 1996.
3.9 No Violation. The execution and carrying out of this Agreement will
not conflict with, or result in any breach of any of the terms, or create a
charge or encumbrance upon any of the properties or assets, or outstanding stock
of Buyer pursuant to any corporate charter, bylaw, indenture, mortgage or lease
to which Buyer or any of its stockholders is a party or by which it is bound.
The execution and carrying out of this Agreement will not violate any provision
of law.
3.10 Accuracy of Information. None of the written information and
documents which have been or will be furnished by Buyer or any representatives
of Buyer to Sellers or any of the representatives of Sellers in connection with
the transactions contemplated by this Agreement contains or will contain, as the
case may be, any untrue statement of a material fact, or omits or will omit to
state a material fact necessary in order to make the statements therein not
misleading in light of the circumstances in which made.
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AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 7
3.11 Disclosure of Information. Buyer is fully aware of the condition
and prospects, financial and otherwise, of the Acquiree, having been supplied
with such financial and other data relating to the Acquiree as Buyer considered
necessary and advisable to enable it to form a decision concerning the purchase
herein provided.
3.12 Sale Shares.
a. Buyer has been fully advised by the Sellers that the
Sellers will sell the Sale Shares to Buyer without registration under the Act on
the basis of the statutory exemption in Section 4(2) of the Act relating to
transactions not involving a public offering and that Sellers' reliance upon the
statutory exemption is based in large part upon Buyer's representations made in
this Agreement.
b. Buyer is acquiring the Sale Shares for investment for its
own account and not with a view to resell or otherwise distribute the Sale
Shares. In making the foregoing representations, Buyer understand that, in the
view of the Securities and Exchange Commission, the statutory exemption under
Section 4(2) would not be available if, notwithstanding Buyer's representations,
it had in mind merely acquiring the Sale Shares for resale upon the occurrence
or nonoccurrence of some predetermined event.
c. Buyer has the full right, power and authority to purchase
the Sale Shares in accordance with the terms of this Agreement and otherwise to
consummate and close the transaction provided for in this Agreement in the
manner and upon the terms herein specified.
d. Buyer is acquiring the Sale Shares for the purpose of
controlling Acquiree.
3.13 Buyer represents that copies of all documents which have been
filed with the Securities and Exchange Commission for the past one (1) year
period have been or will be provided to Sellers and that all representations
contained therein remain true and complete.
3.14 True and Correct. The representations and warranties made
hereinabove in this Section 3 will be correct in all material respects on and as
of the Closing Date with the same force and effect as though such
representations and warranties had been made on the Closing Date.
4. Closing Date
The Closing Date herein referred to shall be October 24 1997. At the
Closing, Buyer will be provided with and accept delivery of the Sale Shares, and
in connection therewith, and will exchange the ACT Stock due to Sellers in
accordance with Section 1.2(b). Certain closing documents may be delivered
subsequent to the Closing Date upon the mutual agreement of the parties hereto.
Notwithstanding the foregoing, for purposes of allocating the profits and/or
losses of Acquiree, the effective date shall be deemed the 1st day of October,
1997.
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AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 8
5. Conditions Precedent to the Obligations of Sellers
All obligations of the Sellers under this Agreement are subject to the
fulfillment, prior to or as of the Closing Date, of each of the following
conditions:
5.1 The negotiation and execution of an employment non-compete
agreement with John F. Reap, on terms and conditions agreeable to the parties
thereto, providing for a base salary, benefits and mutually agreed incentive
compensation based on performance measures. A form of said employment agreement
is attached as Exhibit 5.1.
5.2 The representations and warranties by Buyer contained in this
Agreement or in any certificate or document delivered to Sellers pursuant to the
provisions hereof shall be true in all material respects at and as of the time
of Closing. as though such representations and warranties were made at and as of
such time.
5.3 Buyer shall have performed and complied with all covenants,
agreements and conditions required by this Agreement to be performed or complied
with by it prior to or at the Closing including the payment of the Price in
accordance with the terms hereof.
5.4 All instruments and documents delivered to Sellers pursuant to the
provisions hereof shall be reasonably satisfactory to legal counsel for Sellers.
6. Conditions Precedent to the Obligations of Buyer
All obligations of Buyer under this Agreement are subject to the
fulfillment, prior to the, or at the Closing on, the Closing Date, of each of
the following conditions:
6.1 The representations and warranties by Sellers contained in this
Agreement or in any certificate or document delivered to Buyer pursuant to the
provisions hereof shall be true at and as of the time of Closing as though such
representations and warranties were made at and as of such time.
6.2 Buyer shall have received the resignations of all present officers
and directors of, and shall appoint such new officers and directors, of Acquiree
as Buyer shall direct, subject, however, to the requirement that the
resignations of such present officers and directors shall take effect, and such
new officers and directors shall take office, only at such time following the
Closing, as such taking of office shall be lawful and proper following
compliance by Acquiree of all requirements therefor under the Securities
Exchange Act of 1934.
6.3 Acquiree and Sellers shall have performed and complied with all
other covenants, agreement and conditions required by this Agreement to be
performed or complied with by them prior to or at the Closing.
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AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 9
6.4 Acquiree shall have, at the Closing, a minimum of Two Million
Dollars ($2,000,000.00) in cash in hand, accounts payable and accrued expenses
of no more than Three Hundred Thousand Dollars ($300,000.00). Any adjustments to
any of the above accounts shall be reflected as an adjustment to the Price, as
defined in Section 1.2.
6.5 Acquiree shall have terminated the rights conveyed to certain
respective Employees under the Alacrity Systems Incorporated Employee Stock
Compensation Program, such rights to include an option on stock not previously
vested.
6.6 Acquiree shall have executed the Waiver Agreement and shall make
best efforts to cause the execution of the Waiver Agreement by the respective
Warrant Holder.
7. Documents at Closing
At the Closing, the following transactions shall occur, all of such
transactions being deemed to occur simultaneously:
7.1 Sellers and Acquiree, as the case may be, will deliver, or cause to
be delivered, to Buyer the following:
a. stock certificates for the Sale Shares, duly endorsed in
blank with appropriate signature guarantees;
b. all records of Acquiree, including, without limitation,
such books and records, charter documents and New Jersey certificate of good
standing, as may reasonably be available to Sellers and requested by Buyer;
c. certified copies of resolutions by Acquiree's board of
directors or executive committees thereof, thereunto duly authorized,
authorizing this transaction;
d. resignations of the present officers and directors of
Acquiree;
e. a copy of a reasonably current shareholder list of
Acquiree certifying the number of shares outstanding;
f. current financial statements as of July 31, 1997, in
addition to those previously provided by Acquiree showing no assets or debts of
any substance not otherwise disclosed, except for such sums as may be owed to
Acquiree's transfer agent and certain nominal state taxes;
g. such other instruments, documents and certificates, if any,
as are required to be delivered pursuant to the provisions of this Agreement or
which may be reasonably requested in furtherance of the provisions of this
Agreement.
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AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 10
7.2 Buyer will deliver or cause to be delivered to Sellers such other
instruments and documents as are required to be delivered pursuant to the
provisions of this Agreement or which may be reasonably requested in furtherance
of the provisions of this Agreement.
a. Certificates representing the ACT Stock shall be delivered
to the Sellers prorata according to their respective ownership interests in
Acquiree at the time of the Closing.
b. Such secretaries' and officers' certificates or resolutions
as may be provided for under this Agreement or under any other document to be
delivered at Closing under this Agreement.
8. Registration Rights
8.1 Buyer agrees that it will prepare and file with the Securities and
Exchange Commission (the "Commission" an amendment which shall include the ACT
Stock conveyed hereinabove in Section 1.2(b) to its pending registration
statement ("Registration Statement" with respect to the restricted common stock
("Registrable Securities") on or before November 30, 1997. Buyer shall use its
best efforts to cause the Registration Statement to become effective within one
(1) month after the Closing Date. Buyer will give prompt notice (in any event,
within three [3] business days of the receipt of notice of any exercise of
demand registration rights from any person) to the Sellers of its intention to
effect such a registration and will include in such registration all the
Registrable Securities with respect to which Buyer receives a written request
for inclusion, if such request is received within fifteen (15) days after
receipt of Buyer's notice. Buyer shall prepare and file with the Commission such
amendments and supplements to the Registration Statement, including
post-effective amendments and the prospectus used in connection therewith, that
may be necessary to keep such Registration Statement effective for a period of
not less than nine (9) months and to comply with the provisions of the
Securities Act of 1933, as amended, and the regulations promulgated pursuant
thereto (the "Act").
a. Buyer shall use its best efforts to cause all securities
registered pursuant to the Registration Statement to be listed on the Nasdaq
National Market System.
b. In the event of the issuance of any stop order suspending
the effectiveness of the Registration Statement, or any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in the Registration Statement, Buyer will use its best
efforts to promptly obtain the withdrawal of such order.
c. Buyer shall bear all costs, fees and expenses involved in
the preparation and filing of the Registration Statement, including, without
limitation, accounting and auditing fees and expenses, and expenses in
connection with state qualifications, filing fees, legal counsel fees and
expenses and printing expenses. Sellers, however, shall pay all applicable
transfer taxes and brokerage commissions as a result of any sale by the Sellers.
d. In the event that any of the Registrable Shares are sold by
means of the Registration Statement, Buyer agrees to indemnify and hold harmless
the Sellers and their heirs, executors, representatives and assigns (an
<PAGE>
AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 11
"Indemnified Person" from and against any and all claims, demands, actions,
causes of action, losses, costs, damages, liabilities and expenses, including,
without limitation, reasonable legal fees (hereinafter referred to in the
singular as a "claim" and in the plural as "claims") based upon, arising out of
or resulting from any untrue statement of a material fact contained in the
Registration Statement or any failure to state therein a material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading to the extent that such claim is
based upon, arises out of or results from information furnished to Buyer in
writing by Sellers for use in connection with the Registration Statement. Also,
in that connection, Sellers agree to defend and indemnify and hold harmless
Buyer, its officers and directors (Buyer, its officers and directors and any
such other persons being referred to collectively as "Indemnified Person" from
and against any and all claims based upon, arising out of or resulting from any
untrue statement of a material fact contained in the Registration Statement or
any failure to state therein a material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading to the extent that such claim is based upon, arises out of
or results from information furnished to Buyer in writing by Sellers for use in
connection with the Registration Statement. The indemnification set forth herein
shall be in addition to any liability which Buyer or Sellers, respectively, may
otherwise have to the Indemnified Person.
e. Within five (5) days after receiving written notice of any
claim in respect of which an Indemnified Person may seek indemnification under
subsection 8.1(d) above, such Indemnified Person shall submit notice thereof to
Buyer or Sellers, as the case may be (sometimes referred to as an "Indemnifying
Person"). The failure of the Indemnified Person to so notify the Indemnifying
Person of any such claim shall not relieve the Indemnifying Person from any
liability it may have hereunder except to the extent that (i) such liability was
caused or increased by such omission, or (ii) the ability of the Indemnifying
Person to reduce such liability was adversely affected by such omission. The
Indemnified Person and the Indemnifying Person shall cooperate with, and assist,
one another in the defense of any claim and any action, suit or proceeding
arising in connection therewith; provided, however, that the Indemnifying Person
shall have the right to investigate and defend any claim and the Indemnified
Person shall have the right to employ separate counsel and to participate in the
defense of any claim, but the fees and expenses of such counsel shall not be at
the expense of the Indemnifying Person. No settlement of any claim for
indemnification under this Section shall be made without the consent of the
Indemnifying Person.
8.2 The Buyer further agrees that if, on the effective date of the
Registration Statement for the ACT Stock conveyed hereunder, the average closing
price of such shares decreases by more than five percent (5%) from the price
established on the Valuation Date, as defined hereinabove in Section 1.2, Buyer
shall convey additional ACT Stock equal to the number of shares arrived at by
subtracting the number of shares issued at closing from the number of shares
determined by the formula noted below. Such shares shall be issued without the
same right of reevaluation upon their effective date of registration. Price
times ninety-five percent (Price x 95%) divided by the Stock Price at date of
Registration equals the adjusted number of shares to be conveyed. (By way of
example, if the Price at Registration is seven and 50/100ths dollars ($7.50),
5,200,000 x 95% divided by $7.50 = 658,667 - 622,755 = 35,912, the additional
number of shares). If price at registration is greater than ninety-five percent
(95%) of the Valuation Price, no such additional shares of ACT Stock shall be
issued.
<PAGE>
AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 12
9. Indemnification
9.1 Indemnification of Buyer. Each of the Sellers, to the extent of the
value of the ACT Stock received by each of them on the Valuation Date, and
Acquiree, agree to indemnify and hold the Buyer harmless from and against any
damages, liabilities, losses and expenses (including reasonable attorneys' fees)
of any kind or nature whatsoever (the "Losses") which may be sustained or
suffered by the Buyer based upon a breach of any representation, warranty or
covenant made by such Seller or Acquiree, as the case may be, in this Agreement,
or in any Exhibit or document or instrument prepared or given by such Seller or
Acquiree in connection with this Agreement, or by reason of any claim, action or
proceeding asserted or instituted growing out of any matter or thing covered by
such representations, warranties or covenants.
9.2 Indemnification of Sellers and Acquiree. Buyer, to the extent of
the value of the ACT Stock, agrees to indemnify and hold the Sellers and
Acquiree harmless from and against any damages, liabilities, losses and expenses
(including reasonable attorneys' fees) of any kind or nature whatsoever (the
"Losses" which may be sustained or suffered by such Sellers and/or Acquiree, as
the case may be, based upon a breach of any representation, warranty or covenant
made by Buyer in this Agreement, or in any Exhibit or document or instrument
prepared or given by Buyer in connection with this Agreement, or by reason of
any claim, action or proceeding asserted or instituted growing out of any matter
or thing covered by such representations, warranties, or covenants.
9.3 Procedure.
a. Each party claiming indemnification under this Agreement
shall give written notice to the other of the indemnification claims hereunder,
specifying the amount and nature of the claim and giving the other party the
right to contest any such claim. If any third party claim is made to which
indemnification is claimed, such indemnified party will, if a claim is to be
made against an indemnifying party hereunder, give notice to the indemnifying
party of the commencement of such claim, but the failure to notify the
indemnifying party will not relieve the indemnifying party of any liability that
it may have to any indemnified party, except to the extent that the indemnifying
party demonstrates that the defense of such action is prejudiced by the
indemnifying party's failure to give such notice.
b. If any proceeding is brought against an indemnified party
and it gives notice to the indemnifying party of the commencement of such
proceeding, the indemnifying party will, unless the claim involves taxes, be
entitled to participate in such proceeding and, to the extent that it wishes
(unless (i) the indemnifying party is also a party to such proceeding and the
indemnified party determines, in good faith, that joint representation would be
inappropriate, or (ii) the indemnifying party fails to provide reasonable
assurance to the indemnified party of its financial capacity to defend such
proceeding and provide indemnification with respect to such proceeding), to
<PAGE>
AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 13
assume the defense of such proceeding with counsel satisfactory to the
indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such proceeding, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the indemnified party for any fees of other counsel or any other
expenses with respect to the defense of such proceeding, subsequently incurred
by the indemnified party in connection with the defense of such proceeding,
other than reasonable costs of investigation. If the indemnifying party assumes
the defense of a proceeding, (i) it will be conclusively established for
purposes of this Agreement that the claims made in that proceeding are within
the scope of and subject to indemnification; (ii) no compromise or settlement of
such claims may be effected by the indemnifying party without the indemnified
party's consent unless the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any proceeding and the indemnifying party does not, within ten
(10) days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such proceeding, the
indemnifying party will be bound by any determination made in such proceeding or
any compromise or settlement effected by the indemnified party.
c. Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that a
proceeding may adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise or settle such proceeding, but
the indemnifying party will not be bound by any determination of a proceeding so
defended or any compromise or settlement effected without its consent (which may
not be unreasonably withheld).
10. Miscellaneous
10.1 Survival of Representations and Warranties. The respective
representations of Sellers and Buyer contained herein or in any certificates
delivered prior to or at Closing shall survive for a period of twelve (12)
months from the Closing Date, except as may be required by their terms.
10.2 Further Assurances. At any time, and from time to time, after the
effective date, each party will execute such additional instruments and take
such action as may be reasonably requested by the other party to confirm or
perfect title to any property transferred hereunder or otherwise to carry out
the intent and purposes of this Agreement.
10.3 Waiver. Any failure on the part of any party hereto to comply with
any of its obligations, agreements or conditions hereunder may be waived in
writing by the party to whom such compliance is owed.
10.4 Arbitration. Any and all disputes and differences between or among
the parties with respect to the construction or performance of the terms of this
Agreement which cannot be resolved amicably shall be resolved by arbitration
before the American Arbitration Association in accordance with its rule then
sitting in New Jersey.
<PAGE>
AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 14
10.5 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed to have been given if delivered in person or if
sent by prepaid first class registered or certified mail, return receipt
requested, fax or recognized courier then upon receipt thereof to the following
addresses:
To Sellers: See attached Exhibit A
To Acquiree: Alacrity Systems Incorporated
43 Newburg Road
Hackettstown, NJ 07840
with copies to: Paul T. Fader, Esquire
Connell, Foley & Geiser LLP
85 Livingston Avenue
Roseland, NJ 07068-1765
To Buyer: Applied Cellular Technology, Inc.
P. O. Box 2067
James River Professional Center, Suite 5
Nixa, MO 65714
with copies to: Paul D. Creme, Esquire
Merra, Kanakis, Creme & Mellor, P.C.
60 Main Street
Nashua, NH 03060
10.6 Expenses. Whether or not the transaction contemplated hereby are
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such costs and expenses.
10.7 Headings. The section and subsection headings in this Agreement
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.8 Broker's Accomplishment Fees. Buyer shall be solely responsible
for the payment in shares of ACT Stock to Ronald Kaplan of a fee equal in amount
to One Hundred Fifty-Two Thousand Dollars ($152,000.00). Such shares shall be
valued in the same manner as those conveyed to Sellers as determined in Section
1.2 of this Agreement.
10.9 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
10.10 Governing Law. This Agreement shall be governed by the
laws of the State of New Jersey.
<PAGE>
AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 15
10.11 Binding Effect. This Agreement shall be binding upon the parties
hereto and inure to the benefit of the parties, their respective heirs,
administrators, executors, successors and assigns.
10.12 Entire Agreement. This Agreement is the entire agreement of the
parties covering everything agreed upon or understood in the transaction. There
are no oral promises, conditions, representations, understandings,
interpretations or terms of any kind as conditions or inducements to the
execution hereof.
10.13 Severability. If any part of this Agreement is deemed to be
unenforceable the balance of this Agreement shall remain in full force and
effect.
THE BALANCE OF THIS PAGE HAS BEEN
INTENTIONALLY LEFT BLANK
<PAGE>
AGREEMENT OF SALE
ALACRITY SYSTEMS INCORPORATED
PAGE 16
IN WITNESS WHEREOF, the parties have executed this Agreement the day and year
first above written.
SELLERS:
JAMES FOLTS
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
MARK CROWLEY
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
MARK GILLIES
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
DAVID HAGEDORN
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
TODD S. LARCHUK
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
VINCENT RAVO
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
<PAGE>
MATTHEW RUNO
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
EDELSON TECHNOLOGY PARTNERS II
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
4C VENTURES
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
RH INVESTMENT GROUP NO. 1
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
MICHAEL EPSTEIN
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
ROGER MILLER
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
IAN G. MILLER TRUST
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
<PAGE>
HELEN E. MILLER TRUST
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
CHARLES W. MILLER TRUST
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
NICHOLAS J. MILLER TRUST
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
LUDWIG KAPP
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
CHARITABLE LEAD TRUST
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
DOROTHY E. PATTEE
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
BONNIE JENNINGS (BENTLEY)
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
<PAGE>
SCOTT CUSINS
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
EDWARD FELDMAN
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
ELIZABETH B. LENNOX
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
GEORGE S. ANTON
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
SUZANN NIELSEN
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
BRIAN J. DALY
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
WILLIAM H. McEVOY
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
<PAGE>
ROBERT W. LONG
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
SCOTT BARTOLETT
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
JO ANN NICOLETTI
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
CLAIRE L. FREW
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
DEBORA ADAMS
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
ALICE CHRISTENSEN
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
KAREN L. MURPHY
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
<PAGE>
D. SHAFER
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
KEVIN M. STEWART
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
DONALD P. PROEFROCK
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
ALBERT V. NARUSBERG
By: /s/ John F. Reap
------------------------------------
John F. Reap
As Attorney-In-Fact
JOHN F. REAP
By: /s/ John F. Reap
------------------------------------
ACQUIREE:
Alacrity Systems Incorporated
By: /s/ John F. Reap
--------------------------------
John F. Reap
Its duly authorized President
BUYER:
Applied Cellular Technology, Inc.
By: /s/ Garrett A. Sullivan
--------------------------------
Garrett A. Sullivan
Its duly authorized President
Financial Statements
Alacrity Systems Incorporated
July 31, 1997
<PAGE>
Alacrity Systems Incorporated
Financial Statements
July 31, 1997
Contents
Report of Independent Auditors.................................................1
Balance Sheets.................................................................2
Statements of Income...........................................................3
Statements of Changes in Stockholders' Equity..................................4
Statements of Cash Flows.......................................................5
Notes to Financial Statements..................................................6
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
of Alacrity Systems Incorporated
We have audited the accompanying balance sheets of Alacrity Systems Incorporated
as of July 31, 1997 and 1996, and the related statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alacrity Systems Incorporated
at July 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
September 29, 1997
1
<PAGE>
<TABLE>
Alacrity Systems Incorporated
Balance Sheets
<CAPTION>
July 31
1997 1996
----------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,086,907 $ 1,360,587
Accounts receivable, less allowance for doubtful
accounts of $4,150 in 1997 and $4,150 in 1996 204,192 154,360
Deferred tax asset 125,000
Other current assets 23,240 42,614
----------------- ----------------
Total current assets 2,439,339 1,557,561
Equipment, at cost, less accumulated depreciation of
$307,023 in 1997 and $271,804 in 1996 82,913 87,237
Software development costs, less accumulated amortization
of $365,531 in 1997 and $99,996 in 1996 258,796 156,216
Other assets 4,750 4,750
================= ================
$ 2,785,798 $ 1,805,764
================= ================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 67,659 $ 70,771
Accrued expenses 128,352 144,493
----------------- ----------------
Total current liabilities 196,011 215,264
Note payable 70,000 70,000
Stockholders' equity:
Convertible preferred stock, par value $.01; 29,000,000 shares
authorized:
Class A - 262,000 shares issued and outstanding 2,620 2,620
Class B - 12,617,377 shares issued and outstanding 126,173 126,173
Class C - 15,000,000 shares issued and outstanding 150,000 150,000
Common stock, stated value $.01; 41,000,000 shares authorized,
1,300,850 and 1,300,450 shares issued and outstanding in
1997 and 1996, respectively 13,008 13,004
Additional paid-in capital 8,832,936 8,832,930
Accumulated deficit (6,604,950) (7,604,227)
----------------- ----------------
Total stockholders' equity 2,519,787 1,520,500
================= ================
$ 2,785,798 $ 1,805,764
================= ================
See accompanying notes.
</TABLE>
2
<PAGE>
<TABLE>
Alacrity Systems Incorporated
Statements of Income
<CAPTION>
Year ended July 31
1997 1996
--------------------------------
<S> <C> <C>
Revenues $3,043,200 $2,447,663
Costs and expenses:
Cost of goods sold 804,446 569,150
Software, engineering and development expenses 541,752 351,552
Selling, general and administrative expenses 866,894 593,383
---------------------------------
Total costs and expenses 2,213,092 1,514,085
---------------------------------
Income from operations 830,108 933,578
Other income 60,402 18,599
Interest expense (7,233) (7,356)
---------------------------------
Income before income taxes 883,277 944,821
Income tax (benefit) provision (116,000) 10,000
=================================
Net income $ 999,277 $ 934,821
=================================
See accompanying notes.
</TABLE>
3
<PAGE>
<TABLE>
Alacrity Systems Incorporated
Statements of Changes in Stockholders' Equity
Years ended July 31, 1997 and 1996
<CAPTION>
Convertible Preferred Stock
-------------------------------------------------------------------------
Class A Class B Class C
-------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 28, 1995 262,000 $2,620 12,617,377 $126,173 15,000,000 $150,000
Common stock issued in connection
with the exercise of employee
stock options
Net income
-------------------------------------------------------------------------
Balance at July 31, 1996 262,000 2,620 12,617,377 126,173 15,000,000 150,000
Common stock issued in connection
with the exercise of employee
stock options
Net income
-------------------------------------------------------------------------
Balance at July 31, 1997 262,000 $2,620 12,617,377 $126,173 15,000,000 $150,000
=========================================================================
</TABLE>
<PAGE>
<TABLE>
Alacrity Systems Incorporated
Statements of Changes in Stockholders' Equity
Years ended July 31, 1997 and 1996 (Continued)
<CAPTION>
Common Stock Additional
--------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 28, 1995 1,292,850 $12,928 $8,832,854 $(8,539,048) $ 585,527
Common stock issued in connection
with the exercise of employee
stock options 7,600 76 76 152
Net Income 934,821 934,821
----------------------------------------------------------------
Balance at July 31, 1996 1,300,450 13,004 8,832,930 (7,604,227) 1,520,500
Common stock issued in connection
with the exercise of employee
stock options 400 4 6 10
Net income 999,277 999,277
-----------------------------------------------------------------
Balance at July 31, 1997 1,300,850 $13,008 $8,832,936 $(6,604,950) $ 2,519,787
=================================================================
See accompanying notes.
4
</TABLE>
<PAGE>
<TABLE>
Alacrity Systems Incorporated
Statements of Cash Flows
<CAPTION>
Year ended July 31
1997 1996
---------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 999,277 $ 934,821
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 315,927 133,870
Reduction in allowance for doubtful accounts (8,807)
Deferred tax benefit (125,000)
Changes in operating assets and liabilities:
Accounts receivable (49,832) (12,549)
Other current assets 19,374 12,232
Accounts payable (3,112) 11,783
Accrued expenses (16,141) (94,915)
---------------------------------
Net cash provided by operating activities 1,140,493 976,435
Cash flows from investing activities
Equipment purchased (46,068) (81,162)
Expenditures for software development (368,115) (158,762)
---------------------------------
Net cash used in investing activities (414,183) (239,924)
Cash flows from financing activities
Proceeds from issuance of common stock in connection
with the exercise of stock options 10 152
---------------------------------
Net cash provided by financing activities 10 152
---------------------------------
Net increase in cash and cash equivalents 726,320 736,663
Cash and cash equivalents at beginning of year 1,360,587 623,924
---------------------------------
Cash and cash equivalents at end of year $ 2,086,907 $ 1,360,587
=================================
Supplemental disclosures of cash flow information
Cash paid for interest $ 7,233 $ 7,356
=================================
Cash paid for income taxes $ 12,000 $ 23,000
=================================
See accompanying notes.
</TABLE>
5
<PAGE>
Alacrity Systems Incorporated
Notes to Financial Statements
July 31, 1997
1. Organization and Nature of Business
Alacrity Systems Incorporated (the "Company") provides image communication
products for the small office/home office ("SOHO") market. The Company's
business is focused on providing software to Original Equipment Manufacturers
(OEM) of multifunctional equipment, and developing software upgrades marketed
directly to end users. The Company's primary OEM customers are headquartered in
the United States and Far East. These OEMs market their equipment worldwide.
2. Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents of $1,775,000 and $1,200,000 at July 31, 1997 and 1996,
respectively, consist of government money market funds and certificates of
deposits which are readily convertible to cash.
Equipment
Equipment, which consists primarily of test fixtures, office equipment, software
and computer equipment, is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets, which
primarily range from 3 to 5 years.
Equipment accounts and the related accumulated depreciation are adjusted upon
the retirement or disposal of such assets, and the resulting gain or loss is
recognized in the year of disposition.
Capitalized Software Development Costs
In 1997 and 1996, the Company capitalized certain software development costs
totaling approximately $368,000 and $159,000, respectively. These costs related
to the coding and testing of software products developed subsequent to
establishing the products' technological feasibility. Amortization of these
computer software costs totaled approximately $266,000 in 1997 and $100,000 in
1996, and were charged to cost of sales. Amortization of cost begins when
products become available for general release to the customer and is based on
gross revenues earned in relation to total estimated gross revenues of the
product, but in no event less than straight-line amortization based on the
estimated economic life of the product (generally 1-2 years).
6
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Warranty
Estimated future warranty obligations related to the Company's products are
accrued and charged to operations in the period that related revenue is
recognized.
Revenue Recognition
License and royalty revenue is recorded upon delivery to and acceptance by the
customer of the product in accordance with the terms of the license agreements.
Development fee revenue is recorded on the percentage-of-completion method or
where applicable, upon the achievement of specific milestones as stated in the
contract. All other revenue is recorded upon delivery of the product to the
customer. Revenues consist of the following:
Year ended July 31
1997 1996
----------------------------------
License fees and royalties $2,533,127 $1,535,250
Net sales - other 363,373 754,915
Software development services 146,700 157,498
In conjunction with the OEM agreements entered into during 1997 and 1996 (see
Note 8), the Company granted exclusive licenses to copy specific versions of the
object code, and manufacture, market and distribute software supplied by the
Company in exchange for ongoing royalty payments based on sales.
Research and Development
Research and development costs, with the exception of capitalized software
costs, are expensed as incurred.
Advertising
Advertising costs of approximately $69,000 and $24,000 in 1997 and 1996,
respectively, were expensed when incurred.
7
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk and Major Customers
The Company performs periodic credit evaluations of its customers. In fiscal
1997, two customers headquartered in the Far East and one customer headquartered
in the United States accounted for 35%, 27% and 14%, respectively, of total
revenues; in fiscal 1996, one customer located in the Far East accounted for
approximately 71% of total revenues of the Company. At July 31, 1997 and 1996
net accounts receivable relating to these customers were approximately $159,000
and $154,000, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Fiscal Year End
The Company's fiscal year ends on July 31.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of the
grant, as determined by the Compensation Committee of the Board of Directors.
The Company accounts for stock based compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees", and intends to
continue to do so.
In accordance with FASB Statement 123, Accounting for Stock-Based Compensation,
companies are allowed to continue to account for stock-based compensation under
APB 25 but are required to disclose pro forma net income as if the measurement
provisions of Statement 123 had been adopted in their entirety. Under such
measurement provisions, the Company's pro forma net income is not significantly
different than that reported.
3. Income Taxes
The Company recognizes a deferred tax asset or liability for the expected future
tax effects attributable to temporary differences between financial reporting
and tax bases of assets and liabilities. Deferred tax assets and liabilities are
adjusted to reflect changes in tax rates and other provisions of the tax law in
the period when such changes are enacted.
8
<PAGE>
3. Income Taxes (continued)
The 1997 income tax expense represents federal alternative minimum taxes (AMT)
and state income taxes. The Company's federal tax benefit and provision for
federal tax expense in fiscal 1997, ($116,000), and 1996, $10,000, differ from
that which would result from applying the statutory rate to pretax income
principally due to the utilization of net operating loss carryforwards, the AMT
exemption, lower AMT rates and the impact of state income taxes.
The components of the (benefit) provision for income taxes are as follows:
Federal State Total
----------------------------------------------
1997
Current $ 6,100 $ 2,900 $ 9,000
Deferred (106,250) (18,750) (125,000)
----------------------------------------------
$(100,150) $(15,850) $(116,000)
==============================================
1996
Current $ 6,400 $ 3,600 $ 10,000
Deferred B B B
==============================================
$ 6,400 $ 3,600 $ 10,000
==============================================
At July 31, 1997 and 1996, the Company's deferred tax assets (liabilities)
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 2,713,000 $ 2,994,000
Research and development tax credit carryforwards 288,000 263,000
Various accruals and reserves (49,000) 42,000
Capitalized software development costs (41,000) (62,000)
-----------------------------------
2,911,000 3,237,000
Less valuation allowance (2,786,000) (3,237,000)
===================================
Net deferred tax asset $ 125,000 $ ---
===================================
</TABLE>
At July 31, 1997, the Company has federal net operating loss carryforwards of
approximately $6.8 million which expire in years 2005 through 2010.
9
<PAGE>
3. Income Taxes (continued)
The Tax Reform Act of 1986 enacted a complex set of rules providing that
utilization of a Company's net operating loss carryforwards will be subject to
limitation in periods following an "ownership change". An ownership change for
these purposes is defined as a greater than 50 percentage point change in the
Company's ownership. The Company experienced such a change during fiscal year
1992. As a result, utilization of a portion of the Company's net operating loss
carryforwards will be subject to this limitation. In addition, an additional 50
percentage point ownership change in the Company's ownership could cause the
Company's remaining net operating loss carryforwards to be subject to
limitation.
During 1997 and 1996, the Company paid approximately $142,000 and $147,000
relating to foreign withholding taxes. These amounts were recorded as cost of
sales in the statement of income.
4. Note Payable
The Company has outstanding a $70,000 subordinated promissory note issued in
connection with past-due rent. Interest is paid monthly at a rate of prime plus
2% (8.5% at July 31, 1997 and 8.25% at July 31, 1996). Interest expense was
approximately $7,200 and $7,400 in 1997 and 1996, respectively. Principal
payments are due after the Company has achieved annual sales of $5,000,000 in
any twelve month period. Once the annual sales criteria has been satisfied,
principal payments are due within five days after the end of each calendar
quarter at an amount equal to one eighth of the Company's after tax earnings and
depreciation (as defined in the agreement) for the twelve month period ending on
the last day of the calendar quarter with respect to which payment is made. The
Company may, however, limit payment in any year to a total of $17,500 plus any
accrued and unpaid interest. The note is subordinate in right of payment of
principal and interest to the right of payment in full of money borrowed from
third parties.
5. Stockholders' Equity
On June 1, 1995, the Company authorized and issued 15,000,000 shares of
convertible Class C preferred stock to a group of investors that included
certain existing common and preferred stockholders for approximately $273,000 in
cash proceeds net of approximately $27,000 of costs associated with the
issuance. As a condition to the closing of this transaction, the then
outstanding convertible demand notes and accrued interest were converted into
6,260,445 shares of Class B preferred stock and 984,127 warrants to purchase
shares of common stock.
10
<PAGE>
5. Stockholders' Equity (continued)
In conjunction with the financing, the Company filed a Restated Certificate of
Incorporation which stated the rights of the Class C preferred stockholders and
restated the rights of the Class A and Class B preferred stockholders and the
common stockholders as follows:
Dividends
The Class A preferred shares, Class B preferred shares and Class C preferred
shares have preference with regard to dividends over common shares and rank
on a parity with each other.
Liquidation Priority
The Class C preferred shares have preference with regard to liquidation over
all other classes of authorized, issued and outstanding classes of stock.
Specifically, in the event of liquidation, Class C preferred shareholders are
entitled to receive an amount equal to the original issuance price multiplied
by eight, plus declared but unpaid dividends for each share outstanding at
that date. If the distribution proceeds are insufficient to pay the full
liquidation amount, Class C preferred shares will share ratably in the
distribution in proportion to the full amount which they would otherwise be
entitled to receive. Following the priority provided to the Class C preferred
shareholders, all other classes of authorized, issued and outstanding classes
of stock will share all remaining distribution proceeds.
Voting
Holders of each class of preferred stock are entitled to such number of votes
per share equivalent to the number of shares of common stock into which each
share of preferred stock is convertible and are entitled to vote on all
matters as to which holders of common stock are entitled to vote. At all
times, each holder of Class A preferred stock, voting separately as one
class, has the right to elect one member to the Board of Directors of the
Company.
Mergers, Consolidations and Sales of Assets
The Company is prohibited from merging or consolidating with or selling
assets to any entity unless that entity acquires from each holder of Class C
preferred stock, each share of Class C preferred stock outstanding for an
amount equal to the original issuance price ($.02 per share) multiplied by
eight plus declared but unpaid dividends.
11
<PAGE>
5. Stockholders' Equity (continued)
Conversion
The holder of any shares of preferred stock has the right to convert any
shares of preferred stock into common shares on a share-for-share basis. The
conversion may be adjusted if the Company issues any shares of common stock
without consideration or for a consideration per share less than the
preferred conversion price of $.02.
Right of First Refusal
The investors of the Class C preferred stock have the right of first refusal
to future issuance, sale or exchange of the Company's common stock, all
classes of preferred stock, convertible debt securities, combination of debt
and equity securities, options or warrants, except in the case of excluded
securities (as defined).
Demand Registration Rights
The holders of a majority of outstanding capital stock of the Company can
cause the Company to effect a registration under the Securities Act in a firm
commitment underwritten public offering having an anticipated aggregate gross
offering price of at least $10,000,000.
Stock Options
Options to purchase common stock are granted at a price equal to the fair market
value of the Company's common stock at the date of grant as determined by the
Compensation Committee of the Board of Directors, and are exercisable over a
period of not more than ten years from the date of grant. Options vest over a
period of 3-4 years from the date of grant. Options outstanding, granted,
canceled and exercisable under the Incentive Stock Option Plan ("IS0 Plan") are
as follows:
12
<PAGE>
5. Stockholders' Equity (continued)
<TABLE>
<CAPTION>
July 31
--------------------------------------------------------
1997 1996
---------------------------- ---------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
--------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 7,901,350 .02 8,001,000 .02
Options granted 270,500 .05 6,000 .02
Options exercised (400) .02 (7,600) .02
Options cancelled and expired (3,192,900) .02 (98,050) .02
--------------- ---------------
Options outstanding, end of year 4,978,550 .02 7,901,350 .02
=============== ===============
Exercisable, end of year 3,138,567 .02 2,633,783 .02
=============== ===============
</TABLE>
No options have been granted under the Supplemental Stock Option (SSO)
Plan, Stock Appreciation Rights (SAR) Plan or the Performance Plan in 1997 or
1996.
Warrants
There are 984,127 warrants outstanding at July 31, 1997 and 1996. Each of the
warrants may be used to purchase one share of common stock at $.63 per share. In
1996, 15,000 warrants expired. The remaining warrants outstanding at July 31,
1997 expire on June 1, 2001.
Common Stock Reserved
At July 31, 1997, 262,000, 12,617,377 and 15,000,000 shares of common stock are
reserved for issuance in connection with the conversion of the Class A, Class B
and Class C preferred shares, respectively. In addition, 1,019,127 shares of
common stock are reserved for issuance for the exercise of warrants and
10,055,785 shares of common stock are reserved for issuance for the exercise of
options to purchase common stock under the various stock option plans at July
31, 1997.
13
<PAGE>
6. Lease Commitments
In April 1996, the Company entered into a 18 month lease for its Montana office
facility. The lease contains a one-year renewal option and a standard escalation
clause commencing one month after full occupancy and again after one year. The
lease is cancelable on 90 day notice by either party.
In February 1996, the Company entered into an agreement with the new landlord of
its headquarters facility in New Jersey. This agreement calls for a
month-to-month lease at $2,500 per month.
Rent expense for the years ended July 31, 1997 and 1996 amounted to
approximately $52,000 and $36,000, respectively.
7. Software Development Agreements
During 1997 and 1996, the Company entered into one and four, respectively,
domestic and foreign customer OEM software development agreements. Under the
terms of the agreements, the OEMs agreed to pay for certain software research
and development efforts provided by the Company. The Company recognized in
income approximately $147,000 and $157,000 in 1997 and 1996, respectively, in
connection with software development agreements. The amounts recognized in
income were earned over the terms of the agreements as certain
percentage-of-completion milestones were achieved. The costs incurred by the
Company related to these OEM agreements approximated revenues recognized and
were charged to operations during 1997 and 1996.
8. Subsequent Events
The Company signed a letter of intent dated September 10, 1997 for the sale of
100% of the shares of the Company for a purchase price of $5,200,000 payable in
common stock of the acquiror. The closing of this proposed transaction is
subject to, among other things, the successful completion of due diligence
procedures.
Effective August 28, 1997, the Company granted 2,000,000 incentive stock options
to employees. The options vest at 25% per year, are exercisable at a price of
$.08 per share and expire August 2007.
14
<PAGE>
8. Subsequent Events (continued)
In September 1997, the Company entered into a revolving line of credit
arrangement with a bank which enables the Company to borrow up to $250,000 at
the lender's prime rate of interest plus .05% for a term of 48 months. The line
of credit is collateralized by substantially all of the assets of the Company
excluding those intangible rights associated with the Company's software
products.
15
