SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 3)
Filed by Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/x/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ALANCO TECHNOLOGIES, INC.
- -------------------------------------------------------------------------------
Name of Registrant as Specified in its Charter
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
1. Title of each class of securities to which transaction applies:
----------------------------------------------------------------
2. Aggregate number of securities to which transaction applies:
----------------------------------------------------------------
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
----------------------------------------------------------------
4. Proposed maximum aggregate value of transaction:
----------------------------------------------------------------
5. Total fee paid:
----------------------------------------------------------------
/x/ Fee paid previously with preliminary materials.
/x/ Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
$460.00
---------------------------------------
2. Form, Schedule or Registration Statement No.:
PREM14A
---------------------------------------
3. Filing Party:
Registrant
---------------------------------------
4. Date Filed:
January 28, 2002
---------------------------------------
April 17, 2002
Dear Shareholder,
You are cordially invited to attend a special meeting of shareholders of Alanco
Technologies, Inc. ("Alanco" or the "Company") to be held on May 14, 2002, at
10:00 a.m. local time at 15575 North 83rd Way, Suite 3, Scottsdale, Arizona
85260.
The purpose of this special meeting is to approve: 1) an amendment to Article IV
of Alanco's Articles of Incorporation so that the authorized capital stock of
the Corporation shall consist of 75,000,000 shares of Class A Common Stock,
25,000,000 shares of Class B Common Stock, and 25,000,000 shares of Preferred
Stock; 2) the issuance of shares of the Company's Class A and Class B common
stock to Technology Systems International, Inc. ("TSI") in connection with the
acquisition of the assets of TSI in accordance with the terms and conditions of
the TSI Amended Acquisition Agreement ("Acquisition Agreement") dated March 15,
2002, which is attached as Appendix B to the proxy statement; and 3) the
issuance of up to 75,000 shares of Alanco's Series B Convertible Preferred Stock
in support of the TSI acquisition and subsequent working capital requirements of
the Company.
The Alanco Board of Directors has determined that the amendment to Alanco's
Articles of Incorporation, the TSI Acquisition Agreement, and the issuance of
Series B Convertible Preferred Stock are advisable, fair to, and in the best
interests of the Alanco shareholders. THEREFORE, THE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE AMENDMENT TO THE ARTICLES OF INCORPORATION, THE TSI
ACQUISITION, AND THE ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK, AND
RECOMMENDS THAT YOU VOTE IN FAVOR OF THE AMENDMENT TO ALANCO'S ARTICLES OF
INCORPORATION, THE ISSUANCE OF SHARES OF ALANCO'S CLASS A AND CLASS B COMMON
STOCK IN CONNECTION WITH CONSUMMATION OF THE ACQUISITION AGREEMENT, AND THE
ISSUANCE OF SHARES OF ALANCO'S SERIES B CONVERTIBLE PREFERRED STOCK. The
accompanying notice of meeting and proxy statement explain the proposals and
provide specific information about the special meeting.
YOUR VOTE is important! WE CANNOT COMPLETE THE ACQUISITION OR THE ISSUANCE OF
COMMON STOCK AND PREFERRED STOCK UNLESS A MAJORITY OF THE VOTES CAST BY THE
HOLDERS OF OUR OUTSTANDING SHARES OF COMMON STOCK AT THE SPECIAL MEETING ARE IN
FAVOR OF THE PROPOSALS. IT IS VERY IMPORTANT THAT YOUR SHARES BE REPRESENTED AT
THE SPECIAL MEETING, WHETHER OR NOT YOU PLAN TO ATTEND PERSONALLY. THEREFORE,
YOU SHOULD COMPLETE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT AS SOON AS
POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE. THIS WILL ENSURE THAT YOUR
SHARES ARE REPRESENTED AT THE SPECIAL MEETING.
On behalf of our Board of Directors, we thank you for your continued support.
Sincerely yours,
Robert R. Kauffman
Chairman of the Board and
Chief Executive Officer
ALANCO TECHNOLOGIES, INC.
15900 North 78th Street, Suite 101
Scottsdale, Arizona 85260
(480) 607-1010
PROXY STATEMENT
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held May 14, 2002
TO THE SHAREHOLDERS OF ALANCO TECHNOLOGIES, INC.
NOTICE HEREBY IS GIVEN that a Special Meeting of Shareholders of Alanco
Technologies, Inc., an Arizona corporation ("Alanco" or the "Company"), will be
held at 15575 North 83rd Way, Suite 3, Scottsdale, Arizona 85260, on May 14,
2002, at 10:00 a.m., Mountain Standard Time, and at any adjournment or
postponement thereof, for the purpose of considering and acting upon the
following Proposals:
(1) APPROVAL OF AN AMENDMENT TO ARTICLE IV OF ALANCO'S ARTICLES OF
INCORPORATION.
The proposal amends Article IV of Alanco's Articles of Incorporation
wherein the authorized capital stock of the Corporation shall consist of
Seventy-Five Million (75,000,000) shares of Class A Common Stock, each
entitled to one vote per share, Twenty-Five Million (25,000,000) shares of
Class B Common Stock, each entitled to one-one hundredth (1/100th) of one
vote per share, and Twenty-Five Million (25,000,000) shares of Preferred
Stock, the voting and other rights of which may be determined by Alanco's
Board of Directors.
NOTE: THE COMPANY CANNOT PROCEED WITH PROPOSAL NOS. 2 AND 3 WITHOUT
THE APPROVAL OF PROPOSAL NO. 1.
(2) APPROVAL OF THE ISSUANCE OF SHARES OF ALANCO'S CLASS A AND CLASS B COMMON
STOCK IN CONNECTION WITH THE ACQUISITION OF TECHNOLOGY SYSTEMS
INTERNATIONAL, INC.
The proposal relates to the acquisition of the Technology Systems
International, Inc. ("TSI") monitoring business by Alanco's purchase of
substantially all of the assets and the assumption of specified liabilities
of TSI pursuant to the Amended Acquisition Agreement ("Acquisition
Agreement") dated March 15, 2002, through the issuance of shares of
Alanco's Class A and Class B common stock to TSI. A copy of the Acquisition
Agreement is attached as Appendix B.
(3) APPROVAL OF THE ISSUANCE OF UP TO 75,000 SHARES OF ALANCO'S SERIES B
CONVERTIBLE PREFERRED STOCK IN SUPPORT OF THE TSI ACQUISITION AND
SUBSEQUENT WORKING CAPITAL REQUIREMENTS OF THE COMPANY.
The proposal relates to issuance of shares of Alanco's Series B Convertible
Preferred Stock, the proceeds of which will be used to support the TSI
acquisition and the working capital requirements of the Company. A
description of the relative rights and privileges of the Series B
Convertible Preferred Stock is attached to this proxy statement as Appendix
C.
Holders of the outstanding Common Stock of the Company of record at the close of
business on March 18, 2002, will be entitled to notice of and to vote at the
Meeting or at any adjournment or postponement thereof.
THE ALANCO BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS APPROVE
THE AMENDMENT TO ARTICLE IV OF ALANCO'S ARTICLES OF INCORPORATION, THE ISSUANCE
OF SHARES OF ALANCO'S CLASS A AND CLASS B COMMON STOCK IN CONNECTION WITH THE
PROPOSED ACQUISITION, AND THE ISSUANCE OF SHARES OF ALANCO'S SERIES B
CONVERTIBLE PREFERRED STOCK IN SUPPORT OF THE TSI ACQUISITION AND SUBSEQUENT
WORKING CAPITAL REQUIREMENTS OF THE COMPANY.
Under Arizona law, shareholders do not have any dissenters' rights of appraisal
with respect to the actions to be taken. All shareholders, whether or not they
expect to attend the Special Meeting of Shareholders in person, are urged to
sign and date the enclosed Proxy and return it promptly in the enclosed
postage-paid envelope which requires no additional postage if mailed in the
United States. The giving of a proxy will not affect your right to vote in
person if you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
ADELE L. MACKINTOSH
CORPORATE SECRETARY
Scottsdale, Arizona April 17, 2002
ALANCO TECHNOLOGIES, INC.
15900 North 78th Street, Suite 101
Scottsdale, Arizona 85260
(480) 607-1010
PROXY STATEMENT
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held May 14, 2002
TABLE OF CONTENTS
Page No.
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS (i)
1. SUMMARY TERM SHEET 1
2. INTRODUCTION 5
3. SPECIAL FACTORS 5
4. THE COMPANIES 7
Information Concerning Alanco 7
Information Concerning TSI 8
5. THE SPECIAL MEETING 9
Date, Time and Place 9
Matters to be Considered 9
Record Date, Shares Outstanding and Entitled to Vote 10
Quorum, Vote Required 10
Share Ownership of Management and Certain Stockholders 10
Voting and Revocation of Proxies 10
Proxy Solicitation 10
6. ISSUANCE OF COMMON SHARES 10
7. PROPOSAL NO. 1: AMENDMENT OF ALANCO'S ARTICLES OF
INCORPORATION 11
Purpose of Amendment to Article IV 11
Amendment to Article IV 12
Recommendations of the Alanco Board of Directors 12
8. PROPOSAL NO. 2: THE TSI ACQUISITION 12
Purpose, Structure and Effect of the Acquisition 12
Background of the Acquisition 13
Recommendations of the Alanco Board of Directors 15
Certain Financial Projections 15
Regulatory Approvals 16
Antitrust 16
Accounting Treatment 16
Independent Appraisals and/or Opinions 16
Interests of Certain Persons in the Acquisition,
Possible Conflicts of Interest 16
9. PROPOSAL NO. 3: SERIES B CONVERTIBLE PREFERRED STOCK 16
Purpose of Issuance of Preferred Stock 16
Description of Series B Preferred Rights 17
Accounting Presentation 17
Recommendations of the Alanco Board of Directors 17
10. CHANGE OF CONTROL 18
11. THE TSI ACQUISITION DOCUMENTS 18
11.1 Amended Acquisition Agreement 18
11.2 Registration Rights Agreement 19
11.3 EMS Assignment Agreement 20
11.4 TSI Amended Loan Agreement 20
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 20
Security Ownership of Certain Beneficial Owners 20
Projected Security Ownership of Certain Beneficial
Owners After TSI Acquisition 21
Security Ownership of Management 23
Alanco Ownership of TSI Stock 23
13. SELECTED FINANCIAL DATA AND PRO FORMA INFORMATION 24
Selected Historical Financial Data 24
Pro Forma Financial Data 24
14. INDEPENDENT PUBLIC ACCOUNTANTS 27
15. OTHER MATTERS 27
16. STOCKHOLDER PROPOSALS 28
17. WHERE YOU CAN FIND MORE INFORMATION 28
APPENDIX A-- CURRENT ALANCO ARTICLES OF INCORPORATION 29
APPENDIX B-- AMENDED ACQUISITION AGREEMENT 32
APPENDIX C-- DESCRIPTION OF SERIES B PREFERRED RIGHTS 51
APPENDIX D-- REGISTRATION RIGHTS AGREEMENT 55
APPENDIX E-- EMS ASSIGNMENT AGREEMENT 60
APPENDIX F-- TSI AMENDED LOAN AGREEMENT 66
APPENDIX G-- Alanco Quarterly Report on Form 10-QSB
for QUARTER endED 12/31/01 72
APPENDIX H-- Alanco Annual Report on Form 10-KSB
for the year ended 06/30/01 82
APPENDIX I-- TSI AUDITED FINANCIAL STATEMENTS 106
APPENDIX J-- TSI INTERIM FINANCIAL STATEMENTS 122
APPENDIX K-- CONSENT LETTER FROM SEMPLE & COOPER LLP 131
APPENDIX L-- CONSENT LETTER FROM BILLIE ALLRED, CPA 132
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q: What am I being asked to vote on?
A: You are being asked to vote to:
1) approve the amendment to Article IV of Alanco's Articles of
Incorporation so that the authorized capital stock of the Corporation shall
consist of 75,000,000 shares of Class A Common Stock, each entitled to one
vote per share, 25,000,000 shares of Class B Common Stock, each entitled to
one-one hundredth (1/100th) of one vote per share, and 25,000,000 shares of
Preferred Stock, the voting and other rights of which may be determined by
Alanco's Board of Directors. (A copy of the current Articles of
Incorporation is attached as Appendix A. The proposed amended Article IV is
shown in its entirety in Section 7 of this Proxy Statement.)
2) approve the issuance of shares of Alanco's Class A and Class B common
stock to Technology Systems International, Inc. ("TSI"), a Nevada
corporation, in connection with the acquisition of substantially all of the
assets of TSI by Alanco, pursuant to the Acquisition Agreement dated March
15, 2002, a copy of which is attached as Appendix B.
3) approve the issuance of up to 75,000 shares of Alanco's Series B
Convertible Preferred Stock in support of the TSI acquisition and
subsequent working capital requirements of the Company. A description of
the Convertible Preferred Stock is attached as Appendix C.
Q: Who is TSI?
A: Technology Systems International, Inc. ("TSI") is a Scottsdale, Arizona,
developer of proprietary, wireless RF (radio frequency) identification, location
and tracking technology utilized currently for area security management and
information systems, primarily focusing on the correctional facilities market.
Q: How will Alanco complete the purchase of TSI?
A: Pursuant to the Acquisition Agreement, TSI's business and substantially all
of its assets will be transferred to a wholly owned subsidiary of Alanco in
exchange for shares of Alanco's Class A and Class B common stock and the
assumption by Alanco of certain liabilities of TSI.
Q: What would be the effect of amending Article IV of Alanco's Articles of
Incorporation?
A: The present Article IV of the Company's Articles of Incorporation provides
for the following capital stock of the Corporation: 1) 100,000,000 shares of no
par value Common Stock, each entitled to one vote per share, 2) 5,000,000 shares
of Class A Cumulative Convertible Preferred Stock, and 3) 20,000,000 shares of
Class B Cumulative Preferred Stock. The proposed amended Article IV would
provide for the following capital stock of the Corporation: 1) 75,000,000 shares
of Class A Common Stock, each entitled to one vote per share, 2) 25,000,000
shares of Class B Common Stock, each entitled to one-one hundredth of one vote
per share, and 3) 25,000,000 shares of Preferred Stock, the voting and other
rights of which may be determined by Alanco's Board of Directors. The
authorization of Class B Common Stock of the Corporation allows for the issuance
of shares of the Company's stock that have limited voting rights as compared to
Class A Common Stock. The Company's intent is to establish a separate class of
common stock whereby control of the Company will not be significantly affected
by issuance of such stock.
Q: Why is the Board of Directors recommending that I vote to approve and adopt
the proposals?
A: In the opinion of the Alanco Board of Directors, the terms and provisions of
the Acquisition Agreement are fair and in the best interests of Alanco and its
stockholders. The Board of Directors reviewed the proposed transaction, and
approved the terms of the acquisition, the proposal to issue the Series B
Convertible Preferred Stock, and the proposed amendment to Article IV of
Alanco's Articles of Incorporation. To review the background of and reasons for
the acquisition, see Section 8 of this proxy statement.
(i)
Q: What are the special interests or possible conflicts of interest of any
of Alanco's officers or Board of Directors with regard to the TSI acquisition?
A: Robert R. Kauffman, Chairman of the Board and Chief Executive Officer of
Alanco, has certain interests in the TSI acquisition that may be different from
or in addition to the interests of other Alanco stockholders, which may create
potential conflicts. Mr. Kauffman is a member of the Board of Directors of TSI,
owns 455,000 shares (less than 2%) of TSI's outstanding shares, and has options
to purchase 62,500 shares of TSI common stock at a price of approximately $1.00
per share. Pursuant to the TSI Acquisition Agreement, upon closing and
shareholder approval of the TSI acquisition, Mr. Kauffman, as a TSI shareholder,
will be issued approximately 133,600 shares of Alanco Class A common stock,
valued at approximately $89,500 based on the closing market price as of March
15, 2002. If TSI achieves certain financial goals in 2002 as outlined in the TSI
Acquisition Agreement, Mr. Kauffman would receive up to an additional
approximately 378,500 shares of Alanco Class B common stock, valued at
approximately $253,600 based on the closing market price as of March 15, 2002.
Alanco's Board of Directors was aware of Mr. Kauffman's interests in the
transaction and considered them when they approved the TSI acquisition.
Q: When and where is the special meeting?
A: The special meeting of stockholders of Alanco will be held at 10:00 a.m.,
Mountain Standard Time, on Tuesday, May 14,2002, at 15575 North 83rd Way,
Suite 3, Scottsdale, Arizona 85260.
Q: Who can vote at the Alanco special meeting?
A: You can vote at the special meeting if you owned shares of Alanco common
stock at the close of business on the record date, which is March 18, 2002. As
of the close of business on that day, approximately 10,200,083 shares of Alanco
common stock were outstanding.
Q: How many votes are required to approve the proposals?
Provided a quorum is present, approval of the amendment to Alanco's Articles of
Incorporation, completion of the acquisition, and approval of the issuance of
Alanco's Series B Convertible Preferred Stock requires an affirmative vote by
the majority of the votes cast by the holders of our outstanding shares of
common stock at the special meeting. THE COMPANY CANNOT PROCEED WITH THE TSI
ACQUISITION OR ISSUANCE OF THE PREFERRED STOCK WITHOUT THE APPROVAL OF PROPOSAL
NO. 1 - AMENDMENT TO ARTICLE IV OF THE ARTICLES OF INCORPORATION.
Q: What happens if I do not vote?
A: Your vote is important. We cannot amend Alanco's Articles of Incorporation,
complete the acquisition, or the issuance of Alanco's Series B Convertible
Preferred Stock unless a majority of the votes cast at the special meeting by
the holders of our outstanding shares of common stock are in favor of the
approval and consummation of the proposals.
Q: What rights do I have if I oppose the proposals?
A: Under Arizona law, shareholders do not have any dissenters' rights of
appraisal with respect to the actions to be taken.
Q: When will the acquisition occur?
A: We plan to close the acquisition as soon as is reasonably practicable after
the special meeting. For accounting consolidation purposes, the acquisition is
anticipated to have an effective date of May 1, 2002.
Q: What do I need to do now?
A: You should thoroughly read this proxy statement and indicate on your proxy
card how you want to vote your shares of Alanco stock. You should then sign and
mail your proxy card in the enclosed return envelope as soon as possible so that
your shares of Alanco stock may be represented at the special meeting. The
meeting will take place on May 14, 2002, at 10:00 a.m., Mountain Standard Time.
Alanco's Board of Directors unanimously recommends that you vote FOR approval of
the amendment to Article IV of Alanco's Articles of Incorporation, FOR approval
of the issuance of shares of Alanco's Class A and Class B common stock to TSI in
connection with the proposed acquisition, and FOR approval of the issuance of
Alanco's Series B Convertible Preferred Stock in support of the TSI acquisition
and subsequent working capital requirements of the Company.
(ii)
Q: Can I change my vote after I have mailed in my signed proxy card?
A: Yes. You can change your vote at any time before we vote your proxy at the
special meeting. You can do so in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy to the Corporate
Secretary of Alanco at the address given below. Second, you can request a new
proxy card and complete and send it to the Corporate Secretary of Alanco at the
address given below. Third, you can attend the special meeting and vote in
person. You should send any written notice or request for a new proxy card to
the attention of Adele L. Mackintosh, Corporate Secretary, Alanco Technologies,
Inc., 15900 North 78th Street, Suite 101, Scottsdale, Arizona 85260.
Q: What are the inherent risks involved in this proposed transaction?
A: Several risk factors should be considered with regard to the proposed TSI
acquisition, including, but not limited to, integration of the existing and
proposed businesses, general economic conditions, availability of capital,
losses incurred by the Company and by TSI, safeguarding intellectual property,
dependence on key personnel, business competition, dilutive effect of the
transaction, employee stock option dilution, unforeseen expenses, and future
payment of cash dividends. All, or any, of these factors could have a material
adverse effect on the business, operating results and financial condition of the
Company, which could result in a decline of the trading price of Alanco's Class
A common stock. Refer to Section 3 of this Proxy Statement for further
discussion of risk factors.
Q: What are the tax consequences of the acquisition to me?
A: There are no tax consequences for the holders of Alanco stock with regard
to this acquisition.
Q: Who can answer further questions?
A: If you have questions about Alanco Technologies, Inc. ("Alanco") or the
proposals, you should contact Robert R. Kauffman, Chairman of the Board and
Chief Executive Officer, or John A. Carlson, Executive Vice President and Chief
Financial Officer, Alanco Technologies, Inc., 15900 North 78th Street, Suite
101, Scottsdale, Arizona 85260, 480-607-1010.
If you have questions about Technology Systems International, Inc. ("TSI"), you
should contact Greg M. Oester, Chief Executive Officer, Technology Systems
International, Inc., 15575 North 83rd Way, Suite 4, Scottsdale, Arizona 85260,
480-998-7700.
(iii)
30
1. SUMMARY TERM SHEET
This summary term sheet highlights selected information about the proposals
contained in this proxy statement and may not contain all of the information
that is important to you. To understand the proposals more fully and for a
complete description of the legal terms of the proposals, you should read
carefully this entire proxy statement, including Appendices, and the documents
we refer you to. We have included page number references parenthetically to
direct you to the place in this proxy statement where you can find a more
complete description of the topics presented in the summary.
Special Factors (Page 5)
There are several risk factors that should be considered with regard to the
proposed TSI acquisition. Among those risk factors are the integration of the
existing storage businesses of the Company and the proposed TSI business, the
general economic conditions at present and in the future, THE FINANCIAL
CONDITION OF TSI, the availability of capital to meet the future financial needs
of the Company, the past losses incurred by the Company AND TSI, the ability to
safeguard the Company's intellectual property, the Company's dependence on key
personnel, the competitive environment of the Company's businesses, the dilution
caused by the transaction and by the exercise of outstanding employee stock
options, the possibility of expenses incurred with regard to the indemnification
of the Company's officers and directors, and the possible future payment of cash
dividends on the Company's stock. All, or any, of these factors could have a
material adverse effect on the business, operating results and financial
condition of the Company, which could result in a decline of the trading price
of Alanco's Class A common stock.
The Companies (Page 7)
Alanco Technologies, Inc. ("Alanco"or the "Company"), a publicly traded (NASDAQ:
ALAN) company incorporated under the laws of the State of Arizona, focuses on
high-growth information technology markets. Through its wholly-owned
subsidiaries, Alanco provides comprehensive Storage Area Network (SAN) solutions
from SanOne, Inc.; complementary Network Attached Storage (NAS) from
Excel/Meridian Data, Inc. and NetZerver, Inc.; and storage upgrade solutions for
legacy computer systems from Arraid, Inc.
TSI is a privately owned corporation, incorporated under the laws of the state
of Nevada and based in Scottsdale, Arizona. TSI has developed a proprietary,
wireless RF (radio frequency) identification, location and tracking technology
utilized for area security management and information systems, primarily
focusing on the correctional facilities market ("Business"). TSI initiated
marketing of the systems in 2001 and has recently completed installation of the
first commercially sold system in the state of Michigan.
The Special Meeting (Page 9)
Date, Time and Place, and Matters To Be Considered. The special meeting will be
held at 15575 North 83rd Way, Suite 3, Scottsdale, Arizona 85260, at 10:00 a.m.,
Mountain Standard Time, on Tuesday, May 14, 2002. Stockholders will be asked to
consider and vote upon the proposed amendment to Article IV of Alanco's Articles
of Incorporation, the proposed issuance of shares of Alanco's Class A and Class
B common stock in connection with the acquisition of TSI, the proposed issuance
of Series B Convertible Preferred Stock in support of the TSI acquisition and
subsequent working capital requirements of the Company, and to transact such
other business as may properly come before the special meeting.
Record Date, Shares Entitled to Vote. You are entitled to vote at the meeting if
you owned shares of Alanco common stock as of the close of business on the
record date, which is March 18, 2002. On the record date, there were 10,200,083
shares of Alanco common stock outstanding and entitled to vote at the special
meeting.
Vote Required. The affirmative vote of a majority of the votes cast,
providing a quorum is present, is required to approve the proposals.
Solicitation of Proxies. The costs and expenses incurred in connection with
printing, filing with the SEC and mailing the proxy statements shall be borne by
the Company. In addition to solicitation by mail, our directors, officers, and
regular employees may solicit proxies from stockholders by telephone, personal
interview or otherwise. Our directors, officers, and employees will not receive
additional compensation, but may be reimbursed for out-of-pocket expenses in
connection with their solicitation of proxies. Brokers, nominees, fiduciaries,
and other custodians have been requested to forward soliciting material to the
beneficial owners of shares of Alanco common stock held of record by them, and
such custodians will be reimbursed by us for their reasonable expenses.
Issuance of Common Shares (Page 10)
Upon Alanco shareholder approval of the issuance of Alanco shares in connection
with the TSI acquisition and upon satisfaction of the other conditions to
closing, Alanco will issue to TSI 6,000,000 shares of Alanco Class A common
stock. In addition, Alanco will issue to EMS Technologies, Inc., a TSI vendor
and shareholder, 1,000,000 shares of Alanco Class A common stock for the
conversion of approximately $900,000 of debt into equity pursuant to the terms
of the EMS Assignment Agreement, attached as Appendix E. Upon achievement of
certain financial goals as outlined in the Acquisition Agreement, Alanco will
issue up to an additional 17,000,000 shares of Class B common stock to TSI.
Every share of Alanco common stock is currently entitled to equal voting rights,
i.e., one vote per share, and no share has preemptive rights as to any stock
thereafter authorized to be issued. The proposed amendment to Article IV of
Alanco's Articles of Incorporation provides for the holders of Class A Common
Stock to continue to be entitled to one vote for each share and the holders of
Class B Common Stock to be entitled to one-one hundredth (1/100th) of one vote
for each share. The Alanco Board of Directors has sole authority to determine
the manner and method of declaring dividends for all issued stock. At this time,
the Alanco Board has declared no dividend with respect to the common stock.
This transaction will be recorded under the purchase method of accounting, which
requires the allocation of the purchase price to the assets acquired and
liabilities assumed, based on their estimated fair values at the completion of
the acquisition (with the excess of the purchase price after the allocations
being recorded as goodwill). To calculate the purchase price of the transaction
for accounting purposes, only the 6 million Class A common shares to be issued
to TSI at closing are valued at fair market value as determined under Company
policy. (See footnote 3 to the Consolidated Balance Sheet as of December 31,
2001 in Section 13 of this proxy statement for an additional discussion of the
recording of the acquisition.)
In the event Class B common shares are earned under the requirements of the
Acquisition Agreement and are issued based upon TSI achieving the financial
goals, the Class B Common Shares issued will be valued at fair market value, as
determined under Company policy, on the date they are earned. It is anticipated
that any additional shares issued will result in additional goodwill that will
be evaluated pursuant to Company policy as guided by FAS 141 and 142. The Class
B common shares to be issued are not convertible into Class A common stock and
there is no intention or requirement to make them convertible at a future date.
Additional discussion and explanation of the Class B common shares is presented
in Section 7 under the heading Proposal 1. See Section 13 for a more detailed
discussion of the accounting treatment for this transaction.
The Company has reached a tentative agreement, pending bank approval, with Mr.
James Ricketts, a TSI shareholder, to exchange the Company's investment in
Preferred Stock of Gold and Minerals, Inc. for 2,070,774, or approximately 9%,
of the outstanding shares of TSI. The completion of the transaction would result
in write-down of the G&M investment to approximately 9% of the initial purchase
valuation and an approximate 9% reduction in the number of Class A Common Shares
issued at closing and the number of Class B Common Shares that may be issued per
the earn-out provision of the Acquisition Agreement. See Sections 6, 8, 12 and
13 for additional discussion of this potential transaction.
Proposal No. 1: Amendment to Article IV of
Alanco's Articles of Incorporation (Page 11)
Purpose of Amendment to Article IV. Currently, the Company is authorized to
issue 100,000,000 shares of Common Stock, all of which is entitled to equal
voting rights, i.e., one vote per share. The proposed authorization of Class B
Common Stock of the Corporation allows for the issuance of shares of the
Company's stock that have limited voting rights as compared to Class A Common
Stock. The Company's intent is to establish a separate class of common stock
whereby control of the Company will not be significantly affected by issuance of
such stock.
Amended Article IV. The amendment to Article IV of Alanco's Articles of
Incorporation provides for the authorized capital stock of the Corporation to
consist of 75,000,000 shares of Class A Common Stock entitled to one vote per
share, 25,000,000 shares of Class B Common Stock entitled to one-one hundredth
of one vote per share, and 25,000,000 shares of Preferred Stock, the voting and
other rights of which may be determined by Alanco's Board of Directors. Refer to
Appendix A to review the current Articles of Incorporation of Alanco
Technologies, Inc. and Section 7 below to review the proposed amendment to
Article IV.
All outstanding shares of the Company's Common Stock, upon approval of the
amendment, will automatically be converted into shares of the Company's Class A
Common Stock. There are no outstanding shares of the Company's Preferred Stock.
Recommendations of the Alanco Board of Directors. The Alanco Board of Directors
has determined that the amendment to Article IV of Alanco's Articles of
Incorporation is in the best interests of Alanco and its shareholders and
thereby unanimously recommends that you vote in favor of the proposal. THE
APPROVAL OF THIS AMENDMENT TO THE ARTICLES OF INCORPORATION IS ESSENTIAL IN
ORDER FOR THE COMPANY TO PROCEED WITH THE TSI ACQUISITION AND ISSUANCE OF
PREFERRED SHARES.
Proposal No. 2: The TSI Acquisition (Page 12)
Purpose & Structure of the Acquisition. The purpose of the acquisition is for
Alanco to acquire substantially all of TSI's Business. A wholly owned subsidiary
of Alanco will acquire TSI's Business by purchasing substantially all of the
assets (and assuming specific liabilities) of TSI. The transaction will be
completed by Alanco issuing shares of its Class A and Class B common stock to
TSI. Alanco has no other significant pending acquisitions, other than TSI, at
this time.
Recommendations of the Alanco Board of Directors. Our Board of Directors has
unanimously (i) determined that the Acquisition Agreement and acquisition are
advisable, fair to, and in the best interests of Alanco and its stockholders,
and (ii) approved the Acquisition Agreement and the acquisition, and (iii)
recommended that you vote in favor of the issuance of shares of Alanco's Class A
and Class B common stock in connection with the proposed acquisition.
Accounting Treatment. The Acquisition will be accounted for under the purchase
method of accounting.
Interests of Certain Persons in the Acquisition, Possible Conflicts of Interest.
Robert R. Kauffman, Chairman of the Board and Chief Executive Officer of Alanco,
has certain interests in the acquisition that may be different from or in
addition to the interests of Alanco's other stockholders. Mr. Kauffman owns an
equity interest in, and is also a director of, TSI. As Mr. Kauffman owns
approximately 2% of the outstanding shares of TSI stock, he would receive
approximately 2% of the Alanco Class A and Class B common stock issued in
connection with the proposed acquisition. These interests may create potential
conflicts of interest and have been considered by Alanco's Board of Directors in
their unanimous approval of the proposed transaction.
Conduct of TSI Business Prior to Acquisition Close. TSI has agreed that during
the interim period from the date of the Acquisition Agreement until the closing
of the transaction, TSI will conduct business diligently and in the ordinary
course, discussing all material contracts and transactions with Alanco prior to
executing. Pending the closing, Alanco has authority to approve all
disbursements by TSI in excess of $500.
Conditions to the Acquisition. Consummation of the acquisition is subject to
various conditions, including the approval of the proposed acquisition by the
requisite vote of Alanco stockholders and the absence of (i) any law, court
order, or injunction prohibiting the acquisition and (ii) any material adverse
effect on Alanco.
Proposal No. 3: Series B Convertible Preferred Stock (Page 16)
Purpose of Issuance of Preferred Stock. To support the TSI acquisition and
subsequent working capital requirements, the Company Board of Directors is
recommending the approval of the issuance of up to 75,000 shares of Series B
Convertible Preferred Stock. The shares will be sold at prices based upon market
conditions at the time of sale, which may result in the as converted price per
share being less than the current closing price of the Company's common stock.
If that were to occur, the value of any embedded beneficial conversion feature
would be recognized and amortized as additional cost of financing over the
minimum period from the date of issuance to the date at which the preferred
shareholders can realize that return. The Preferred stock has certain priority
in liquidation and dividends, can be converted into common shares, and is
subject to certain redemption requirements. The Company has received a
commitment, contingent on closing the TSI acquisition, for the purchase of
50,000 shares of the Series B Convertible Preferred Stock. The transaction is
expected to result in a common stock converted price in excess of the market
price on date of commitment, resulting in no embedded beneficial conversion
feature.
Description of Series B Preferred Rights. Attached to this proxy statement as
Appendix C is the Description of Series B Preferred Rights, which sets forth the
preferences, rights and limitations of the Series B Convertible Preferred Stock.
Recommendations of the Alanco Board of Directors. The Alanco Board of Directors
has determined that the issuance of shares of Series B Convertible Preferred
Stock in support of the TSI acquisition and subsequent working capital
requirements is in the best interests of Alanco and its shareholders and thereby
unanimously recommends that you vote in favor of the proposal.
Change of Control (Page 18)
Under the terms of the Acquisition Agreement, TSI will be issued an initial
payment of 6,000,000 shares of Alanco's Class A common stock upon closing the
TSI Acquisition. In addition, EMS Technologies, Inc. ("EMS"), a TSI vendor and
stockholder, will be issued 1,000,000 shares of Alanco's Class A common stock
pursuant to an agreement to convert debt to equity. Issuance of these 7,000,000
shares of Alanco's Class A common stock will result in the TSI stockholders
owning approximately 40.7% of Alanco's outstanding Class A common stock. If
TSI's business meets certain specified financial goals as outlined in the
Acquisition Agreement, up to 17,000,000 additional shares of Alanco's Class B
common stock would be issued to TSI. Upon approval of Proposal 1, amendment to
Article IV of Alanco's Articles of Incorporation, the Class B common stock
issued to TSI would be entitled to one-one hundredth (1/100th) of one vote per
share, which will result, assuming all potential Class B common shares are
issued, in TSI shareholders owning shares having approximately 41.3% of Alanco's
outstanding voting rights. Assuming all potential Class B common shares are
issued, the total TSI acquisition transaction results in the potential ability
of TSI shareholders to elect a maximum of two directors to Alanco's seven-member
Board of Directors, if they voted cumulatively as a block; therefore, the
acquisition does not result in a change of control. Alanco has made no
commitments to have TSI represented on its Board of Directors.
The TSI Acquisition Documents (Page 18)
The Amended Acquisition Agreement. The Amended Acquisition Agreement sets forth
the specific details of the transaction between Alanco and TSI. The original TSI
Acquisition Agreement, dated January 23, 2002, has been amended and restated and
appears in its entirety as the Amended Acquisition Agreement, attached to this
proxy statement as Appendix B, hereinafter referred to as the "Acquisition
Agreement." Pursuant to the Acquisition Agreement, Alanco will acquire the
business and substantially all of the assets of TSI in exchange for an initial
payment of 6,000,000 shares of Alanco Class A common stock to TSI at closing.
Subsequent potential payments are comprised of 1) an additional 5,000,000 shares
of Alanco Class B common stock to TSI payable upon TSI achieving an aggregate
gross profit of $3,000,000 during calendar year 2002, and 2) an additional four
(4) shares of Alanco Class B common stock to TSI payable for each dollar of
gross profit in excess of $3,000,000 achieved by TSI during 2002, up to a
maximum of an additional 12,000,000 shares of Alanco Class B common stock.
EMS Technologies, Inc. ("EMS"), a TSI creditor, has agreed to convert
approximately $1,250,000 of TSI debt into 1,000,000 shares of Alanco Class A
common stock and $350,000 in Alanco long-term promissory notes.
Registration Rights Agreement. The Acquisition Agreement and the EMS Assignment
Agreement ("EMS Agreement") include provisions whereby the 6,000,000 shares of
Alanco Class A common stock issued to TSI shareholders and the 1,000,000 shares
issued to EMS pursuant to the EMS Agreement have certain stock registration
rights. Both Agreements use the same Registration Rights Agreement, attached as
Appendix D to this proxy statement. In the Registration Rights Agreement Alanco
commits to use commercially reasonable efforts to file a securities registration
statement on Form S-3 (or other suitable forms) within 90 days following the
closing of the Acquisition Agreement. Expenses incurred in this registration
process, other than underwriting discounts and commissions, if applicable, will
be borne by the Company.
Class B common shares issued subsequent to the closing, as determined under the
Acquisition Agreement deferred payout formula, shall also have certain stock
registration rights. Upon the written request of the holders of at least 25% of
the deferred payout shares issued, the Company agrees to file a Registration
Statement on Form S-3 (or other suitable form), at the Company's discretion,
using commercially reasonable efforts to have the Registration Statement
declared effective within 90 days after the date the Company receives written
notice triggering the registration rights. Expenses incurred in the registration
process for shares issued under the deferred payout provision shall be borne by
the participating holders on a pro-rata basis based upon the number of shares
owned compared to the total shares registered at the time. The Class B common
shares are not convertible into Class A common shares and there is no intention
or requirement to make them convertible at a future date.
EMS Assignment Agreement. As a condition of the acquisition, Alanco agreed to
negotiate with EMS, a major supplier of electronic products for the TSI
technology and a stockholder of TSI, to convert current liabilities into equity.
At TSI's request and to assist in the transaction between TSI and EMS, Alanco
representatives entered into discussion with both TSI and EMS, reaching an
agreement for EMS to convert approximately $1,250,000 of current TSI debt into
debt and equity. This conversion is to be accomplished through assignment of the
TSI notes, including accrued interest, to Alanco, in exchange for 1,000,000
shares of Alanco Class A common stock and Alanco long-term promissory notes in
the amount of $350,000 upon closing of the proposed acquisition. The assignment
agreement is attached to this proxy statement as Appendix E.
TSI Amended Loan Agreement. In connection with the acquisition, the Alanco Board
of Directors agreed to provide TSI a secured credit facility, whereby Alanco
would advance TSI up to $360,000. The secured credit facility is to be utilized
for pre-closing funding of TSI's business operations. As of March 15, 2002, TSI
had drawn $360,000 under the facility. The secured credit facility is documented
in a loan agreement that is attached to this proxy statement as Appendix F.
Advances under the secured credit facility bear interest at the rate of 1 1/2%
per month until paid. The secured credit facility will expire and become
immediately payable upon the earlier of May 31, 2002 or when an offer from a
party other than Alanco is received to acquire all or substantially all of the
assets of TSI. If not paid when due, Alanco has the right to convert the unpaid
balance due, including interest, into TSI common stock at a conversion price of
$.10 per share.
As additional consideration to induce Alanco to enter into the secured credit
facility agreement, TSI has agreed to pay Alanco a termination fee of $500,000
or 2,000,000 shares of TSI (at Alanco's option) if the Acquisition Agreement is
terminated for any circumstances other than Alanco's withdrawal from the
transaction or if any injunction, ruling or other legal restraint or prohibition
preventing the completion of the acquisition is in effect and has become final
and cannot be appealed.
Security Ownership of Certain Beneficial Owners and of Management (Page 20)
Security Ownership of Certain Beneficial Owners. As of March 15, 2002, to the
best of our knowledge, there are two beneficial owners of 5% or more of the
outstanding shares of Alanco common stock, each owning approximately 8% of the
outstanding shares.
Projected Security Ownership of Certain Beneficial Owners After TSI Acquisition.
Tables presented in Section 12 of this Proxy Statement project ownership of
major shareholders of Alanco following the issuance of shares pursuant to the
terms of the Acquisition Agreement.
Security Ownership of Management. As of March 15, 2002, the directors and
executive officers of Alanco owned, in the aggregate, 1,286,324 shares of Alanco
common stock, or 12.6% of the outstanding shares of Alanco common stock on that
date.
Alanco Ownership of TSI Stock. In a transaction pending approval by Alanco's
bank, Alanco would acquire approximately 2.07 million shares, about 8.9% of
TSI's outstanding common stock, from James G. Ricketts, a TSI officer and
shareholder, in exchange for the Company's investment in the Preferred Stock of
Gold and Minerals Company, Inc. ("G&M"). See Section 6, 8, 12 and 13 for
additional discussion of the proposed transaction.
Selected Financial Data and Pro Forma Information (Page 24)
Selected Historical and Pro Forma Financial Data. The unaudited Alanco financial
statements for thequarter ended December 31, 2001 were filed timely with the SEC
(File No. 000-09347) on Form 10-QSB. The audited financial statements of Alanco
for the fiscal years ended June 30, 2001 and 2000 were filed timely on Form
10-KSB. Form 10-QSB for the period ended December 31, 2001, and Form 10-KSB for
the year ended June 30, 2001, are included in this Proxy Statement as Appendix G
and H, respectively.
The audited financial statements of Technology Systems International, Inc. for
the six months ended June 30, 2001 and the years ended December 31, 2000 and
1999, (attached to this proxy statement as Appendix I) are provided to assist
you in your analysis of the financial aspects of the acquisition.
TSI condensed interim unaudited financial data for the six months ended December
31, 2001 and 2000 is presented in Appendix J of this proxy statement. The
interim financial statements should be read in conjunction with the historical
financial statements and related notes of TSI contained in the audited financial
statements, attached as Appendix I.
Selected unaudited condensed pro forma combining Statement of Operations for TSI
and Alanco for the twelve months ended June 30, 2001 and the six months ended
December 31, 2001 and the pro forma Balance Sheet as of December 31, 2001 are
presented in this proxy statement in Section 13.
2. INTRODUCTION
The enclosed Proxy is solicited by and on behalf of the Board of Directors of
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or the "Company"),
for use at the Company's Special Meeting of Shareholders to be held at 15575
North 83rd Way, Suite 3, Scottsdale, Arizona 85260, on the 8th day of May, 2002,
at 10:00 a.m., Mountain Standard Time, and at any adjournment or postponement
thereof. It is anticipated that this Proxy Statement and the accompanying Proxy
will be mailed to the Company's shareholders on or before April 8, 2002.
This Proxy Statement contains detailed information about the proposals,
including documents attached as Appendices with a full description of the
details of the proposed acquisition transaction. This information, as well as
the Risk Factors outlined in Section 3, should be reviewed to fully understand
the proposals.
3. SPECIAL FACTORS
The proposed acquisition involves a high degree of risk. By voting in favor of
the acquisition, Alanco stockholders will be choosing to make a significant
investment in the TSI proprietary, wireless RF (radio frequency) identification,
location and tracking technology utilized for an area security and management
system designed initially for the corrections market. In considering whether to
approve the proposed acquisition, you should carefully consider the following
risk factors described in this section, together with a review of Form 10-QSB
for the quarter ended December 31, 2001, and Form 10-KSB for the year ended June
30, 2001, attached as Appendix G and H, respectively, as well as other
information contained in this proxy statement. If any of the following risks
actually occur, the consolidated business, financial condition and results of
operations of Alanco may be seriously harmed. In such case, the trading price of
Alanco's Class A common stock may decline, and you may lose all or part of your
investment.
TSI Acquisition.
o The Company must integrate and successfully operate the storage
businesses that the company previously acquired, as well as
integrate and successfully operate the TSI operations as
contemplated by the proposed acquisition. The process of
integrating management operations; facilities; accounting, billing
and collection systems; and other information systems requires
continued investment of time and resources and can involve
difficulties, which could have a material adverse effect on the
Company's business, financial condition, cash flows and results of
operations.
o The TSI business model projects significant growth in the
corrections market for the TSI patented technology. The Company
does not have experience in increasing market share in the
corrections market and there is no certainty that the Company will
be able to capture the required market share for TSI to achieve
its anticipated financial success.
o TSI purchases sub components for the location and tracking system
technology from a limited number of subcontractors that have the
required technology to produce the sub components in the
quantities required. The Company cannot be assured that required
sub components for the TSI technology will be available in the
quantities and at the prices and terms anticipated.
o TSI has made a substantial investment in design and development of
its proprietary tracking technology, which has resulted in a
history of losses. TSI's ability to continue as a going concern is
dependent upon the success of its future business efforts and its
ability to attract adequate capital to finance its continuing
operation.
o TSI products are reliant on key personnel who developed and
understand the technology. The loss of the services of those key
technology personnel could have an adverse effect on the business,
operating results and financial condition of the Company.
General Economic Conditions. Recent unfavorable economic conditions and reduced
information technology spending by customers have adversely affected Alanco's
business in recent quarters. If the economic conditions in the United States
worsen or if a wider or global economic slowdown occurs, Alanco may experience a
material adverse impact on its business, operating results, and financial
condition.
Future Capital and Liquidity Needs; Uncertainty of Proceeds and Additional
Financing. Management believes that, based on its fiscal 2002 operating plan,
the proceeds of the anticipated issuance of the Series B Convertible Preferred
Stock, cash flow from operations and other available cash will be adequate to
meet the Company's anticipated future requirements for working capital
expenditures, scheduled lease payments and scheduled payments of interest on its
indebtedness. The Company will need to materially reduce the expense elements of
its fiscal 2002 operating plan, or raise additional funds through public or
private debt or equity financing, or both, if the revenue and cash flow elements
of its 2002 operating plan, or the anticipated issuance of the Series B
Convertible Preferred Stock, are not met. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the then current
shareholders of the Company will be reduced, and such equity securities may have
rights, preferences or privileges senior to those of the holders of the Common
Stock. If the Company needs to seek additional financing to meet working capital
requirements, there can be no assurance that additional financing will be
available on terms acceptable to the Company, or at all. If adequate funds are
not available or are not available on acceptable terms, the Company's business,
operating results, financial condition and ability to operate will be materially
adversely affected.
Recent Losses; Fluctuations in Operating Results. Alanco had a consolidated net
loss of $2,994,500 for the fiscal year ending June 30, 2001 and a consolidated
net loss of $1,353,800 for the fiscal year ending June 30, 2000, as well as a
consolidated net loss of $1,186,600 for the six months ended December 31, 2001.
In addition, Alanco's quarterly operating results have fluctuated significantly
in the past and could fluctuate significantly in the future. As a result,
Alanco's past quarterly operating results should not be used to predict future
performance.
Intellectual Property. Alanco's business strategy is to continue the growth of
the Company's data storage businesses and exploit the related TSI business
opportunity. The long-term success of this strategy will be dependent in part
upon the TSI intellectual property acquired. Third parties may hold United
States or foreign patents which may be asserted in the future against the TSI
technology, and there is no assurance that any license that might be required
under such patents could be obtained on commercially reasonable terms, or
otherwise. Alanco's competitors may also independently develop technologies that
are substantially equivalent or superior to its technology. In addition, the
laws of some foreign countries do not protect Alanco's proprietary rights to the
same extent as the laws of the United States.
Despite the Company's efforts to safeguard and maintain its proprietary rights
both in the United States and abroad, there can be no assurance that the Company
will be successful in doing so or that the steps taken by the Company in this
regard will be adequate to deter infringement, misuse, misappropriation or
independent third-party development of the Company's technology or intellectual
property rights or to prevent an unauthorized third party from copying or
otherwise obtaining and using the Company's products or technology. Litigation
may also become necessary to defend or enforce Alanco's proprietary rights. Any
of such events could have a material adverse effect on Alanco's business,
operating results and financial condition.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the services and performance of its executive officers and key
employees. The loss of the services of any of the Company's executive officers
or key employees could have a material adverse effect on the business, operating
results and financial condition of the Company. The Company's future success
will depend on its ability to attract, integrate, motivate and retain qualified
technical, sales, operations and managerial personnel. None of the Company's
executive officers are bound by an employment agreement or covered by key-man
insurance.
Competition. Although early in the market development cycle, the TSI
business/technology has no current, identified competitors. However, it can be
expected that if and to the extent that the demand for the TSI technology
increases, the number of competitors will likely increase. Increasing
competition could adversely affect the amount of new business the Company is
able to attract, the rates it is able to charge for its services and/or
products, or both.
Relative to the Company's data storage businesses, the Company operates in a
very competitive environment, competing against numerous other companies, many
of whom have greater financial resources and market position than the Company.
Dilutive Effect of Transaction on Alanco Shareholders. Under the terms of the
transaction, 7,000,000 shares of Alanco Class A common stock will be issued
within close proximity of the closing. If certain financial goals are achieved
by TSI, up to an additional 17,000,000 shares of Alanco's Class B common stock,
which upon approval of Proposal No. 1 will have one-one hundredth (1/100th) of
one vote per share, could be issued. Issuance of these Class A and Class B
common shares may cause a dilutive effect on the value of your investment in
Alanco stock.
Possible Issuance of Options May Dilute Interest of Shareholders. As of the date
of this Proxy Statement, options to purchase approximately 3,800,000 shares of
Common Stock were outstanding, and the weighted average exercise price of such
options was $1.06. To the extent that any stock options currently outstanding or
granted in the future are exercised, dilution to the interests of the Company's
shareholders may occur.
Active Trading Market. The Company's Common Stock currently trades on the NASDAQ
SmallCap Market under the symbol "ALAN." However, there can be no assurance that
an active trading market in the Company's Common Stock will be available at any
particular future time.
Indemnification of Officers and Directors. The Company's articles of
incorporation and bylaws provide for the indemnification of officers and
directors to the fullest extent permitted by law. It is possible that the
Company will be required to pay certain judgments, fines, and expenses incurred
by an officer or director, including reasonable attorneys' fees, as a result of
actions or proceedings in which such officers and directors acted in good faith.
Payment of Dividends. The Company does not anticipate that it will pay cash
dividends on the Common Stock in the foreseeable future. The payment of
dividends by the Company will depend on its earnings, financial condition, and
such other factors, as the Board of Directors of the Company may consider
relevant. The Company currently plans to retain earnings to provide for the
development of the Company.
4. THE COMPANIES
Information Concerning Alanco. Alanco Technologies, Inc., a publicly traded
(NASDAQ: ALAN) company incorporated under the laws of the State of Arizona,
focuses on high-growth information technology markets. Through its wholly-owned
subsidiaries, Alanco provides comprehensive Storage Area Network (SAN) solutions
from Phoenix-based SanOne, Inc.; complementary Network Attached Storage (NAS)
from Dallas-based Excel/Meridian Data, Inc. and Phoenix-based NetZerver, Inc.;
and storage upgrade solutions for legacy computer systems from Phoenix-based
Arraid, Inc. The principal executive offices of Alanco are located at 15900
North 78th Street, Suite 101, Scottsdale, Arizona 85260, telephone number
480-607-1010.
For further information regarding Alanco, refer to Form 10-KSB for the year
ended June 30, 2001, included in this Proxy Statement as Appendix H, and our
website at www.alanco.com.
Information Concerning TSI. Technology Systems International, Inc. ("TSI"), a
privately owned corporation, incorporated under the laws of the state of Nevada
in 1994, is a developer of proprietary, wireless RF (radio frequency)
identification, location and tracking technology utilized for area security
management and information systems, primarily focusing on the correctional
facilities market. TSI initiated marketing of the systems in 2001 and has
completed installing the first commercially sold system in the state of
Michigan. TSI's office is located at 15575 North 83rd Way, Suite 4, Scottsdale,
Arizona 85260, telephone number 480-998-7700.
TSI Technology: Proprietary and Patented
TSI's real time locating system addresses the weaknesses of
conventional facility security with wireless technology; the system
provides instantaneous location, tracking and management of people at
two-second intervals twenty-four hours per day, 365 days per year.
The foundation of the system's technology was developed for the U.S.
Department of Defense by Motorola, Inc. Concurrently, TSI had received
a methods and use patent incorporating radio frequency technology for
locating individuals in confined areas. In conjunction with its own
patent and seven (7) licensed patents from Motorola, TSI has conducted
extensive product research to miniaturize components of the original
system and develop proprietary software programs. In addition, TSI also
licenses certain tamper detecting technology from BI Incorporated. To
date, approximately $26,000,000 has been invested in the TSI
Technology, including $9,000,000 by Motorola, Inc. in pre-TSI research
and design and approximately $17,000,000 by TSI shareholders.
TSI's state of the art wireless tracking and locating system is made up
of five components: a tamper detecting wristwatch sized RF (radio
frequency) transmitter, a belt mounted transmitter worn by security
staff, a strategically placed array of receiving antennae, a computer
module and TSI's proprietary application software. By utilizing TSI's
copyright protected algorithm, the TSI system simultaneously processes
multiple thousands of unique radio signals received every two seconds
from the wrist and belt worn transmitters.
By continuously monitoring signals from the transmitters, the TSI
system can pinpoint a person's location to within 15 feet and can track
that person in real time as they move about the facility. Sensors at
exit points, restricted areas or attempts to remove the device, signal
alarms to the monitoring computer. In the case of campus and officer
equipment, forced removal or manually activated emergency buttons
signal similar alarms.
TSI's technology provides much more than real time tracking and
location with its array of database and software applications. The
system automatically records and archives details of all activities in
a monitored facility in a permanent database for accurate post-incident
reporting and future reference. A host of management reporting tools
are available that include medicine and meal distribution, adherence to
pre-determined time schedules, out of place/out of bounds and specific
location, arrival and departure information.
Secure facility management requires managers to know where people are
at all times. The TSI system tracks the movement and location of
monitored persons, be they children, students, patients, security staff
or inmates.
Initial Market Opportunity: Corrections Industry
TSI believes that the corrections industry provides the greatest,
initial opportunity for TSI to exploit its technological advantage. To
exploit this market TSI has assembled an experienced management team
and has secured the services of a professional sales staff that is
highly experienced in the corrections market.
The number one priority of corrections administrators is the safety and
security of the public and employed staff. The industry has embraced
and employed numerous technology advances aimed at this priority
concern. Nothing offered before, however, has addressed the issue of
security to the level of monitoring inmates' exact location,
continuously, or the added features of improved staff utilization.
The TSI system may reduce escapes and inmate violence thereby providing
savings in medical, litigation and investigation expenses. Inefficient
staff time can be redirected to areas that promote security. Costs
involved with a single escape can run into hundreds of thousands of
dollars if sheriff, municipal and state police are called in to search
for an escapee.
The corrections market represents an ideal initial application for the
TSI technology for the following reasons:
o The current marketplace requires new technology to augment
security and better utilize scarce staffing resources.
o Legislation over the past ten years has swelled prison
populations to all time highs.Larger populations, greater
facility density and new facility construction demand modern
management tools.
o According to the U.S. Department of Justice, there are over 5,000
correctional facilities in the United States and Canada. The
initial target market for the TSI system is the approximate 1,400
existing minimum, medium and close security Federal or State
prison facilities with over 500 inmates each, that cumulatively,
represent a $1.5 Billion market potential.
o The TSI system is proprietary and patented. TSI is unaware of any
competitor that has, or is developing, a tracking system capable
of monitoring thousands of persons simultaneously.
Commercialization Phase
After a six-year history of extensive research, product development and
successful pilot installations, TSI commenced an approximate $1,000,000
contract in November 2001 with a juvenile correctional facility in
Michigan, with completion scheduled for March 2002. TSI is currently
engaged in a comprehensive national marketing program.
TSI has operated a pilot site at a minimum security California State
Prison, Calipatria since late 1999. The site was selected by the State
of California to monitor the performance of the TSI system in extreme
humidity. After a period of evaluation, California may purchase the
pilot site and schedule up to thirty-one (31) additional minimum
security prisons for TSI system development.
California represents an extremely significant milestone for TSI in
that California's technology committee is recognized as a national
leader for the corrections industry. Larry Cothran, Executive Officer
of the Technology Transfer Committee, California Department of
Corrections, has stated, "This technology will change not only the way
inmates live, but how staff run the institutions. This will
revolutionize prisons in California and nationwide." (As quoted in
CDC's Correction News.) Several states and the Federal Bureau of
Prisons accept reports and recommendations from the California agency.
Competition
TSI is aware of several firms that offer RF or GPS technology devices
that have the ability to locate a transmitter when the transmitter is
manually activated or signal a receiving unit if the transmitter leaves
pre-determined boundary limits. GPS technology is limited to outdoor
applications only, and there are other systems that identify only when
a transmitter or smart card passes a stationary "reader." TSI is
unaware of any competitor that can track, locate and identify thousands
of persons, simultaneously, regardless of indoor or outdoor
environments.
5. THE SPECIAL MEETING
Date, Time and Place. The special meeting of stockholders of Alanco will be held
at 10:00 a.m., Mountain Standard Time, on Tuesday, May 14, 2002, at 15575 North
83rd Way, Suite 3, Scottsdale, Arizona 85260.
Matters to be Considered. At the special meeting on May 14, 2002, Alanco
stockholders will be asked to consider and vote upon 1) the proposed amendment
to Article IV of Alanco's Articles of Incorporation, 2) the proposed issuance of
shares of Alanco's Class A and Class B common stock in connection with the
acquisition of TSI, and 3) the proposed issuance of Series B Convertible
Preferred Stock in support of the TSI acquisition and subsequent working capital
requirements of the Company. Approval of the proposals by the stockholders of
Alanco is a condition to Alanco's completion of the acquisition.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDMENT TO THE ARTICLES OF
INCORPORATION, THE TSI ACQUISITION, AND THE ISSUANCE OF SERIES B CONVERTIBLE
PREFERRED STOCK AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE AMENDMENT TO
ARTICLE IV OF ALANCO'S ARTICLES OF INCORPORATION, THE ISSUANCE OF SHARES OF
ALANCO'S CLASS A AND CLASS B COMMON STOCK IN CONNECTION WITH CONSUMMATION OF THE
ACQUISITION AGREEMENT, AND THE ISSUANCE OF SHARES OF ALANCO'S SERIES B
CONVERTIBLE PREFERRED STOCK.
Our Board of Directors knows of no other matters that will be presented for
consideration at the special meeting.
Record Date, Shares Outstanding and Entitled to Vote. Our Board of Directors has
fixed the close of business on March 18, 2002, as the record date for the
determination of the holders of Alanco's common stock entitled to notice of and
to vote at the special meeting. On the record date, there were 10,200,083 shares
of Alanco common stock outstanding, each of which is entitled to one vote.
Quorum, Vote Required. The presence, in person or represented by proxy, of the
holders of a majority of the Alanco common stock outstanding and entitled to
vote at the special meeting will constitute a quorum. The affirmative vote of a
majority of the votes cast, providing a quorum is present, is required to
approve the amendment to Article IV of Alanco's Articles of Incorporation, the
issuance of Alanco Class A and Class B common stock in connection with the
proposed acquisition, and the issuance of Alanco Series B Convertible Preferred
Stock in support of the TSI acquisition and subsequent working capital
requirements of the Company.
Share Ownership of Management and Certain Stockholders. As of March 15, 2002,
the directors and executive officers of Alanco owned, in the aggregate,
1,286,324 shares of Alanco common stock, or 12.6% of the outstanding shares of
Alanco common stock on that date. The directors and executive officers have
informed Alanco that they intend to vote all of their shares of Alanco stock FOR
approval of all proposals. Refer to Section 12, "Security Ownership of Certain
Beneficial Owners and Management."
Voting and Revocation of Proxies. Stockholders are requested to complete, date,
sign and promptly return the accompanying form of proxy in the enclosed
envelope. Shares represented by properly executed proxies by Alanco and not
revoked will be voted at the special meeting in accordance with the instructions
contained in the proxy cards. If instructions are not given, proxies will be
voted FOR amendment to Article IV of Alanco's Articles of Incorporation, FOR
authorization to issue shares of Alanco's Class A and Class B common stock in
connection with the proposed TSI acquisition, and FOR authorization to issue
shares of Alanco's Series B Convertible Preferred Stock in support of the TSI
acquisition and subsequent working capital requirements of the Company. However,
absent instructions to the contrary, brokers do not have discretionary authority
to vote shares of Alanco common stock held in street name. Therefore, failure of
beneficial owners of such shares held in street name to give voting instructions
to brokers will result in broker non-votes. Broker non-votes, abstentions, and
the failure to vote will result in your vote not counting.
We do not expect any changes to the terms of any of the proposals outlined in
this proxy statement, and the persons named in the enclosed form of proxy will
not use their discretionary authority to approve any changes to the proposals
that are materially different than the terms described in this proxy statement
without giving stockholders an opportunity to change their vote.
Any proxy card signed and returned by a stockholder may be revoked at any time
before it is voted either by delivering to Adele L. Mackintosh, Corporate
Secretary, Alanco Technologies, Inc., 15900 North 78th Street, Suite 101,
Scottsdale, Arizona 85260, written notice of such revocation or a duly executed
proxy bearing a later date or by attending the special meeting and voting in
person. Attendance at the special meeting will not, in and of itself, constitute
revocation of a proxy.
Proxy Solicitation. The expense of soliciting proxies, including the cost of
preparing, assembling and mailing this proxy material to shareholders, will be
borne by Alanco. It is anticipated that solicitations of proxies for the meeting
will be made only by use of the mails; however, Alanco may use the services of
its directors, officers and employees to solicit proxies personally or by
telephone without additional salary or compensation to them. Brokerage houses,
custodians, nominees and fiduciaries will be requested to forward the proxy
soliciting materials to the beneficial owners of the Company's shares held of
record by such persons, and the Company will reimburse such persons for their
reasonable out-of-pocket expenses incurred by them in that connection.
6. ISSUANCE OF COMMON SHARES
Upon Alanco shareholder approval of the issuance of Alanco shares in connection
with the TSI acquisition and upon satisfaction of the other conditions to
closing, Alanco will issue to TSI 6,000,000 shares of Alanco Class A common
stock. In addition, pursuant to the terms of the EMS Assignment Agreement,
attached as Appendix E, Alanco will issue to EMS Technologies, Inc., a TSI
vendor and shareholder, 1,000,000 shares of Alanco Class A common stock. Upon
achievement of certain financial goals as outlined in the Acquisition Agreement,
Alanco will issue up to an additional 17,000,000 shares of Class B common stock
to TSI. Every share of Alanco common stock is currently entitled to equal voting
rights, i.e., one vote per share, and no share has preemptive rights as to any
stock thereafter authorized to be issued. The proposed amendment to Article IV
of Alanco's Articles of Incorporation provides for the holders of Class A common
stock to continue to be entitled to one vote for each share and the holders of
Class B common stock to be entitled to one-one hundredth (1/100th) of one vote
for each share. The Class B common shares are not convertible into Class A
common shares and there is no intention or requirement to make them convertible
at a future date. The Alanco Board of Directors has sole authority to determine
the manner and method of declaring dividends for all issued stock. At this time,
the Alanco Board has declared no dividend with respect to the common stock.
The purchase method of accounting, the method to be used to record this
transaction, requires the allocation of the purchase price to the fair value of
the assets acquired and liabilities assumed. To calculate the purchase price,
only the shares that are assumed beyond a reasonable doubt to be issued under
the agreement are valued. Since the only shares that are guaranteed to be issued
to TSI are the 6 million shares of Class A common stock to be issued at closing,
the purchase price of the transaction will be based upon those shares valued at
fair market value. It is the Company's policy to use a 10% discount from market
price in determining fair market value for unregistered Class A common shares.
(It is anticipated that Class B common shares will be discounted by 15% in
determining fair market value due to the reduced voting rights when compared to
the Class A Common Stock.) See note (3) to the Condensed Pro Forma Consolidated
Balance Sheet as of December 31, 2001 in Section 13 of this proxy for additional
discussion of the method of accounting and allocations of the purchase price.
In the event Class B shares are issued based upon TSI achieving the financial
goals as specified in the agreement, the shares to be issued will be valued at
fair market value, as determined under Company policy, on the date they are
earned. It is anticipated that any additional purchase price resulting from the
issuance of Class B common shares will be recorded as additional goodwill and
evaluated pursuant to the Company's goodwill policy. Commencing in fiscal year
2002, the Company ceased writing off goodwill balances over a specific period
pursuant to FAS 141 & 142. Goodwill balances are reviewed at least annually to
determine appropriateness of valuation and presentation based upon anticipated
cash flows of the related assets. In the event the additional goodwill is not
supported by the appropriate projected cash flows of TSI, the value of the
additional Class B common shares would be expensed.
The Company has reached a tentative agreement, not reflected in the discussion
above as it is subject to bank approval and therefore not assured, with Mr.
James Ricketts, a TSI shareholder, to exchange the Company's investment in
Preferred Stock of Gold and Minerals, Inc. for 2,070,774, or approximately 9%,
of the outstanding shares of TSI. The Company's investment in Preferred Stock of
Gold and Minerals, Inc. ("G&M") is recorded at December 31, 2001 as "Investments
at Cost" in the amount of $2,475,200. Completion of the transaction would result
in a write down of the G&M investment to approximately 9% of the purchase
consideration paid at closing and a reduction, approximately 9%, in the number
of Class A Common Shares issued at closing and the number of Class B Common
Shares that may be issued per the earn-out provision of the Acquisition
Agreement. Based upon the purchase method of accounting, only shares whose
issuance is beyond a reasonable doubt, are considered as the purchase price for
the transaction. Any future Class B common shares issued and returned to the
Company as a result of Alanco acquiring the TSI common shares under this
agreement would result in a reduction of goodwill and the recording of treasury
shares. If the transaction is not completed due to the failure of the bank to
approve, the G&M investment would remain as an asset of Alanco to be valued at
the lower of cost or net realizable value. Alanco management anticipates bank
approval of this transaction prior to closing of the TSI acquisition. See
footnote 4 to the Condensed Pro Forma Consolidated Balance Sheet as of December
31, 2001 in Section 13 for additional discussion of this potential transaction.
Alanco management believes the separate agreement with Mr. Ricketts is
appropriate considering Mr. Ricketts' unique interest in the G&M investment, the
Company's difficulty in valuing the G&M investment due to the lack of a publicly
traded market value for G&M stock, the Company's estimate of the value of Mr.
Rickett's portion of the Alanco Class A Common Stock to be issued at closing and
the significant number of Alanco Class B Common Shares that Mr. Ricketts would
receive upon TSI reaching certain financial goals, and finally, the fact that
Mr. Ricketts has agreed to vote his TSI shares in favor of the acquisition,
based partly upon the agreement. Based upon the discussion above, Alanco
management believes the per share value for TSI stock exchanged by Mr. Ricketts
for the G&M investment approximately equates to the value to be received by
other TSI shareholders. It is anticipated that a writedown of the G&M investment
to approximately $350,000, or 9% of the current value of the shares projected to
be issued at closing, will be recorded during the quarter ended March 31, 2002
whether or not the acquisition is approved at the special shareholders' meeting
or whether or not bank approval is obtained.
7. PROPOSAL NO. 1: AMENDMENT TO ARTICLE IV OF ALANCO'S ARTICLES OF
INCORPORATION
Purpose of Amendment to Article IV. The authorization of Class B Common Stock of
the Corporation allows for the issuance of shares of the Company's stock that
have diminished voting rights as compared to Class A Common Stock. The Company's
intent is to establish a separate class of common stock whereby control of the
Company will not be significantly affected by issuance of such stock. Issuance
of Class B common stock for the earn-out portion of the TSI Acquisition
Agreement will not significantly change the effective voting control of the
Company.
In addition, the amendment eliminates unnecessary language with respect to the
various rights and privileges of any shares of the Company's Preferred Stock to
be issued. Under the current articles, as well as the amendment, the Company's
Board of Directors will have the right to establish the selective rights and
privileges of any series of Preferred Stock. The only change in this regard is
elimination of the requirement that shares of Preferred Stock each have one vote
on all corporate matters.
Upon adoption of the amendment, all outstanding shares of the Company's Common
Stock shall automatically be converted into shares of Class A Common Stock.
There are no shares of Preferred Stock currently outstanding.
Amendment to Article IV. Proposal No. 1 would amend Article IV of Alanco's
Articles of Incorporation as follows:
The authorized capital stock of the Corporation shall consist of
Seventy-Five Million (75,000,000) shares of Class A Common Stock,
Twenty-Five Million (25,000,000) shares of Class B Common Stock, and
Twenty-Five Million (25,000,000) shares of Preferred Stock.
Upon filing of Articles of Amendment to the Corporation's Articles of
Incorporation with the Arizona Corporation Commission adopting this
Article IV in replacement of the former Article IV of the Corporation's
Articles of Incorporation, each issued and outstanding share of the
Corporation's former Common Stock shall automatically be converted into
one share of Class A Common Stock.
The holders of the Class A Common Stock shall be entitled to one vote
for each share held by them of record on the books of this corporation,
and subject to any preferential rights of the Preferred Stock, shall
participate equally with all other holders of shares of Class A Common
Stock and Class B Common Stock with respect to dividends and receiving
the net assets of the Corporation upon dissolution.
The holders of the Class B Common Stock shall be entitled to one-one
hundredth (1/100th) of one vote for each share held by them on the
books of this corporation, and subject to any preferential rights of
the Preferred Stock, shall participate equally with all other holders
of shares of Class A Common Stock and Class B Common Stock with respect
to dividends and receiving the net assets of the Corporation upon
dissolution.
The Preferred Stock shall be issued in such series with such
designation, preferences, voting rights, privileges, and such other
restrictions and qualifications as the Board of Directors may by
resolution establish in accordance with Arizona Revised Statutes
Section 10-602, or its successor.
Recommendations of the Alanco Board of Directors. The Alanco Board of Directors
has determined that the amendment to Article IV of Alanco's Articles of
Incorporation is in the best interests of Alanco and its shareholders and
thereby unanimously recommends that you vote in favor of the proposal.
8. PROPOSAL NO. 2: THE TSI ACQUISITION
Purpose, Structure and Effect of the Acquisition. The purpose of the acquisition
is for Alanco to acquire TSI's radio frequency based technology utilized to
track, identify and locate persons in a confined or controlled environment
(e.g., prisons). Pursuant to the Acquisition Agreement, a wholly owned
subsidiary of Alanco will acquire substantially all of the assets (and also
assume specific liabilities) of TSI in exchange for the issuance of shares of
Alanco common stock to TSI. Alanco has no other significant pending
acquisitions, other than TSI, at this time.
Pursuant to the Acquisition Agreement dated March 15, 2002, by and among Alanco
and TSI, Alanco proposes to acquire the business and substantially all of the
assets of TSI in exchange for an initial payment of 6,000,000 shares of Alanco
Class A common stock to TSI at closing. In addition, pursuant to the EMS
Assignment Agreement, attached as Appendix E, Alanco will issue 1,000,000 shares
of Alanco Class A common stock to a TSI vendor and shareholder, EMS
Technologies, Inc., for the conversion of approximately $900,000 of debt into
equity. Subsequent potential payments to TSI are comprised of 1) an additional
5,000,000 shares of Alanco Class B common stock to TSI payable upon TSI
achieving an aggregate gross profit of $3,000,000 during calendar year 2002, and
2) an additional four (4) shares of Alanco Class B common stock to TSI payable
for each dollar of gross profit in excess of $3,000,000 achieved by TSI in 2002,
and, under certain limited circumstances, extended into the first quarter of
2003, up to a maximum of an additional 12,000,000 shares of Alanco Class B
common stock.
The Company has reached a tentative agreement, not reflected in the discussion
above as it is subject to bank approval and therefore not assured, with Mr.
James Ricketts, a TSI shareholder, to exchange the Company's investment in
Preferred Stock of and Minerals, Inc. for 2,070,774, or approximately 9%, of the
outstanding shares of TSI. The Company's investment in Preferred Stock of Gold
and Minerals, Inc. ("G&M") is recorded at December 31, 2001 as "Investments at
Cost" in the amount of $2,475,200. The completion of the transaction would
result in a reduction of approximately 9% in the number of Class A Common Shares
issued at closing and the number of Class B Common Shares that may be issued per
the earn-out provision of the Acquisition Agreement. Based upon the purchase
method of accounting, only shares whose issuance is beyond a reasonable doubt,
are considered as the purchase price for the transaction. If the tentative
agreement is executed, a write down of the G&M investment to a value determined
as approximately 9% of the 6 million Class A Common Shares to be issued at
closing, will be completed resulting in an asset impairment charge of
approximately $2.1 million, which will be recorded during the quarter ended
March 31, 2002 whether or not the acquisition is approved at the special
shareholders' meeting or whether or not bank approval is obtained. Any future
Class B shares issued and returned to the Company as a result of Alanco
acquiring the TSI common shares under this agreement would result in a reduction
of goodwill and the recording of treasury shares. If the transaction is not
completed due to the failure of the bank to approve, the G&M investment would
remain as an asset of Alanco to be valued at the same value as would be
determined under the acquisition. Alanco management anticipates bank approval of
this transaction prior to closing of the TSI acquisition. See footnote 4 to the
Condensed Pro Forma Consolidated Balance Sheet as of December 31, 2001 in
Section 13.
Alanco management believes the separate agreement with Mr. Ricketts is
appropriate considering Mr. Ricketts' unique interest in the G&M investment, the
Company's difficulty in valuing the G&M investment due to the lack of a publicly
traded market value for G&M stock, the Company's estimate of the value of Mr.
Rickett's portion of the Alanco Class A Common Stock to be issued at closing and
the significant number of Alanco Class B Common Shares that Mr. Ricketts would
receive upon TSI reaching certain financial goals, and finally, the fact that
Mr. Ricketts has agreed to vote his TSI shares in favor of the acquisition,
based partly upon the agreement. Based upon the discussion above, Alanco
management believes the per share value for TSI stock exchanged by Mr. Ricketts
for the G&M investment approximately equates to the value to be received by
other TSI shareholders.
In support of the Acquisition, EMS Technologies, Inc. ("EMS"), a TSI creditor,
has agreed to convert approximately $1,250,000 of TSI debt into 1,000,000 shares
of Alanco Class A common stock and $350,000 in Alanco long-term promissory
notes.
Background of the Acquisition. The Company's Chief Executive Officer, Robert R.
Kauffman, has been a director of TSI since 1998, and consequently, has extensive
personal knowledge of its business development from 1998 to the present. As
Alanco proceeded to reposition itself into the Information Technology industry
during 1999 and 2000, Mr. Kauffman had informal discussions with other TSI
directors and major shareholders relative to a possible combination of the two
companies. These discussions did not evolve beyond an informal stage, primarily
due to relatively high valuations the TSI shareholders had placed on that
business compared with Alanco's public NASDAQ market value.
In early November 2001, several meetings between Mr. Kauffman and TSI's Chief
Executive Officer, Greg M. Oester, concluded that, in the current significantly
changed economic environment, coupled with other developments affecting both
companies, reconsideration of a possible acquisition of TSI by Alanco could be
mutually attractive to their respective shareholders. The primary factor
contributing to TSI's renewed interest in a possible transaction was their
immediate requirement for, and difficulty in securing, additional financing to
maintain their business development plan, including short-term operating losses.
Several factors influenced Alanco's renewed interest in a possible TSI
acquisition. First, due to the current lack of financing alternatives, the
present TSI valuation would probably be significantly reduced from the 1999/2000
period and, therefore, perhaps more conducive to a potentially attractive
acquisition transaction. Second, TSI's business prospects appeared to be
substantially enhanced since 1999/2000 due to a successful pilot installation in
California, a first commercial contract for approximately $1,000,000 in
Michigan, and a growing list of prospects for 2002 revenues. Finally, the recent
recession and particularly, the severe slowdown in the technology sector,
diminished the near term prospects for Alanco's data storage businesses, thereby
enhancing the relative attractiveness of TSI's proprietary technology and
business potential.
During the week of November 26, 2001, Messrs. Kauffman and Oester held
additional meetings to discuss the preliminary terms and conditions of a
possible transaction. The Company's Chief Financial Officer, John A. Carlson,
participated in several of these meetings.
On December 3, 2001, Mr. Kauffman and Mr. Oester discussed various possible
transactions in which Alanco could acquire the operations of TSI. Discussions
included TSI shareholders' perception of the market value of TSI, which, as
recently as mid-2001, was in the range of $50-75 million. Mr. Kauffman believed
this value was unsupportable in light of the prevailing market conditions and
countered that this valuation range was only reasonable if certain sales and
profit projections were fully achieved. A preliminary proposal, conditioned upon
further due diligence, was presented to Mr. Oester to acquire TSI's business in
an all-stock transaction that included an initial stock payment of 6 million
shares of Alanco stock, which valued TSI's business at approximately $5 million
based upon the then current Alanco stock price, plus a very significant
"earn-out" formula, whereby TSI shareholders could receive up to an additional
17 million Alanco shares based upon specified TSI calendar year 2002 gross
profit results. Issuance of the maximum 17 million shares would require TSI's
business to achieve a gross profit of $6 million during calendar year 2002. No
additional shares would be issued unless TSI achieved a $3 million gross profit
for the calendar year. It was emphasized by Mr. Kauffman that through the
proposed transaction, the TSI shareholders could possibly achieve their value
perception depending upon Alanco stock performance in future years as affected
by the TSI business growth and financial results. This proposal further provided
Alanco shareholders with the protection that significant operating results by
TSI were required prior to the issuance of additional shares.
On December 4 and 5, 2001, further discussion and negotiations between Messrs.
Kauffman and Carlson and TSI's Mr. Oester resulted in a preliminary agreement
regarding the major terms and conditions of a proposed transaction.
On December 5, 2001, Confidentiality Agreements were executed by Alanco and TSI
as part of the due diligence process.
On December 6, 2001, in a meeting at TSI's headquarters, Messrs. Kauffman and
Carlson presented Alanco's preliminary acquisition proposal to Mr. Oester and
Mr. Richard C. Jones, a major TSI shareholder. After discussion and explanation,
Alanco's proposal was endorsed by both Messrs. Oester and Jones, including the
proposed price and terms of the transaction. No material modifications to the
acquisition were requested by TSI shareholders.
During the period of December 7 through December 12, 2001, Messrs. Kauffman and
Carlson, assisted by Alanco's attorney and director, Steven P. Oman, conducted
numerous due diligence inquiries, including discussions with TSI employees, to
evaluate all aspects of TSI's business, operations, technology, finances and
other pertinent issues. The result of this due diligence activity was the
conclusion by Alanco's senior management that the preliminary Acquisition
Agreement remained an attractive proposition for Alanco and would be presented
to Alanco's Board for authorization to proceed.
On December 13, 2001, at a regularly scheduled meeting of Alanco's Board of
Directors, the Board unanimously approved management's proposal of the terms and
conditions of the proposed TSI acquisition and authorized management to proceed
with further due diligence and negotiations towards closing within the
parameters of the approved transaction. The Board additionally approved the
basic terms and conditions of a secured credit facility of up to $360,000 to be
provided to TSI by Alanco and utilized, if necessary, for pre-closing funding of
TSI's business operations.
A condition of the Acquisition Agreement called for TSI's major creditor (and
approximately 15% shareholder), EMS, to agree to restructure approximately
$1,250,000 of TSI's overdue debt. During the week of December 17, 2001, numerous
discussions between Alanco senior management and EMS senior management, Messrs.
Don Scartz, CFO, and Bill Jacobs, Chief Counsel, resulted in a December 28, 2001
preliminary agreement whereby the TSI notes would be assigned to Alanco and
Alanco would issue to EMS at the closing of the TSI acquisition 1,000,000 shares
of Alanco common stock and two long-term 5% notes totaling $350,000 in exchange
for TSI's outstanding and overdue debt obligation totaling approximately
$1,250,000.
On January 23, 2002, the preliminary Acquisition Agreement was executed by Mr.
Kauffman for the Company and Mr. Oester for TSI.
Further due diligence and review of the preliminary Acquisition Agreement
resulted in mutually agreed modifications to the transaction whereby Alanco
stock issued to TSI shareholders would include two separate classes of Alanco
common stock. These modifications to the transaction, which were approved by
Alanco's Board of Directors, resulted in an Amended TSI Acquisition Agreement
("Acquisition Agreement"), which was executed by Mr. Kauffman for the Company
and Mr. Oester for TSI on March 15, 2002. Under the modified terms of the
acquisition and upon approval of an amendment to Article IV of Alanco's Articles
of Incorporation by Alanco's shareholders, the initial 6,000,000 shares issued
to TSI and the 1,000,000 shares issued to a TSI vendor, EMS Technologies, Inc.,
will be Class A common stock entitled to one vote per share. The potential
17,000,000 shares issued to TSI shareholders upon achievement of certain
financial goals in 2002, as set forth in the Acquisition Agreement, will be
Class B common stock entitled to one-one hundredth of one vote per share. The
Class B common shares are not convertible into Class A common shares and there
is no intention or requirement to make them convertible at a future date.
From December 17, 2001, through March 15, 2002, Alanco provided financing to TSI
in the amount of $360,000 under the terms of the Company's Board approved TSI
secured credit facility.
On February 18, 2002, the Company scheduled a special shareholders meeting to be
held on May 14, 2002, to approve the amendment to Article IV of Alanco's
Articles of Incorporation, the issuance of shares of Alanco Class A and Class B
common stock in connection with the TSI acquisition, and the issuance of shares
of Alanco's Series B Convertible Preferred Stock in support of the TSI
acquisition and subsequent working capital requirements of the Company. The
record date for such meeting was scheduled as March 18, 2002.
Recommendations of the Alanco Board of Directors. At a meeting on December 13,
2001, the Alanco Board of Directors determined that the acquisition of TSI by
Alanco under the terms proposed was advisable, fair to, and in the best
interests of Alanco and its stockholders, and it unanimously approved a motion
that authorized Alanco management to negotiate an acquisition agreement within a
set of proposed guidelines. Subsequently, after amending and reconfirming the
specifics of the Acquisition Agreement, the Alanco Board of Directors hereby
unanimously recommends that holders of Alanco common stock vote FOR the issuance
of shares of Alanco's Class A and Class B common stock to be issued in
connection with consummation of the Acquisition Agreement. Robert R. Kauffman,
Chairman of the Board of Directors and Chief Executive Officer of Alanco, has
interests in the acquisition that may create possible conflicts of interest. See
"Interests of Certain Persons in the Acquisition, Possible Conflicts of
Interest" below.
In reaching its decision to approve the Acquisition Agreement and to recommend
that holders of Alanco common stock vote to approve the issuance of Alanco Class
A and Class B common stock in connection with Acquisition Agreement, the Alanco
Board of Directors considered the following factors:
o Presentations by Alanco management and in-depth discussions relative to
TSI's anticipated revenue and earnings growth rates, financing alternatives
and other market opportunities for the TSI monitoring technology (as well
as risks involved in capitalizing on the opportunities and in achieving the
anticipated revenue and earnings growth).
o The fact that a significant portion of the acquisition consideration is
contingent on TSI achieving certain minimum gross profit results within
calendar year 2002, which regulates the potential shares of Alanco common
stock that may be issued under the proposed Acquisition Agreement.
o The Alanco Board of Directors was aware that the proposed all-stock
transaction could be structured in a manner that would not be taxable to
stockholders of TSI for state and federal income tax purposes.
o The relative potential Alanco stockholder value that could be expected from
other options available to the Company, including continuing Alanco's
singular focus on the data storage market segment or pursuing other
strategic alternatives, which included appropriate review of the financial
condition, competitive position, strategy, and prospects of the current
Alanco subsidiaries.
o The financial condition of TSI, its history of net losses, and its
ability to continue as a going concern.
o The potential dilutive effect this transaction could have on the existing
Alanco shareholders and what that could mean to their proportionate share
of the Company.
o The uncertainty involved in the TSI patented technology that has not yet
been proven via successful long-term installations.
o The possibility that the TSI technology, which is the basis for the TSI
system, could become obsolete sooner than anticipated.
In view of the variety of factors and the amount of information considered, the
Alanco Board of Directors did not find it practicable to make specific
assessments of or otherwise assign relative weights to the specific factors and
analyses considered in reaching its determination. The determination to approve
the Acquisition Agreement was made after consideration of all of the factors and
analyses as a whole. In addition, individual members of the Alanco Board of
Directors may have given different weights to different factors.
Certain Financial Projections. Alanco does not, as a matter of course, make
public forecasts as to its future financial performance. However, in connection
with the preliminary discussions concerning the feasibility of the acquisition,
TSI furnished Alanco with certain financial projections. The following TSI
projections were developed by TSI senior management and are based on numerous
assumptions concerning future events. TSI projects total net sales of $14.3
million, gross profit of $6.1 million and pretax operating income of $1.5
million for calendar year 2002. The projections for calendar year 2002 were
utilized in determining future share payouts based upon operating performance.
The projections have not been adjusted to reflect the effects of the acquisition
and should be read together with the information contained in Section 13,
"Selected Financial Data and Pro Forma Information."
THESE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR
COMPLIANCE WITH PUBLISHED GUIDELINES OF THE SECURITIES AND EXCHANGE COMMISSION
OR THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS REGARDING PROJECTIONS OR FORECASTS. THESE FORWARD-LOOKING STATEMENTS
ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THE PROJECTIONS. THE PROJECTIONS REFLECT NUMEROUS
ASSUMPTIONS, ALL MADE BY MANAGEMENT OF TSI, WITH RESPECT TO INDUSTRY
PERFORMANCE, GENERAL BUSINESS, ECONOMIC, MARKET AND FINANCIAL CONDITIONS AND
OTHER MATTERS, ALL OF WHICH ARE DIFFICULT TO PREDICT, AND MANY OF WHICH ARE
BEYOND TSI'S CONTROL. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE
ASSUMPTIONS MADE IN PREPARING THE PROJECTIONS WILL PROVE ACCURATE, AND ACTUAL
RESULTS MAY BE MATERIALLY GREATER OR LESS THAN THOSE CONTAINED IN THE
PROJECTIONS.
Regulatory Approvals. Alanco is not aware of any pending legal proceeding
relating to the acquisition. Alanco is not aware of any governmental license or
regulatory permit that appears to be material to its business that might be
adversely affected by Alanco's acquisition of TSI assets as contemplated herein
or of any approval or other action by any governmental, administrative or
regulatory authority or agency, domestic or foreign, that would be required for
such actions as contemplated herein.
Antitrust. Under the provisions of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations promulgated thereunder by
the Federal Trade Commission, certain acquisition transactions may not be
consummated unless certain information has been furnished to the Antitrust
Division of the United States Department of Justice and the FTC and certain
waiting requirements have been satisfied. Because the aggregate acquisition
price of the contemplated transaction is under $50 million, the transaction is
not subject to such requirements.
Accounting Treatment. The acquisition of assets will be accounted for under the
purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, 'Business Combinations,' as amended. Under this method of
accounting, the purchase price will be allocated to assets acquired and
liabilities assumed based on their estimated fair values at the completion of
the acquisition (with the excess of the purchase price after the allocations
being recorded as goodwill).
Independent Appraisals and/or Opinions. Independent opinions and/or appraisals
have not been obtained by Alanco due to TSI's stage of development and the fact
that a significant portion of the acquisition consideration is contingent on TSI
achieving certain minimum gross profit results within calendar year 2002, which
regulates the potential shares of Alanco common stock that may be issued under
the proposed Acquisition Agreement.
Interests of Certain Persons in the Acquisition, Possible Conflicts of Interest.
Robert R. Kauffman, Chairman and Chief Executive Officer of Alanco, has certain
interests in the acquisition that may be different from or in addition to the
interests of Alanco's other stockholders, which may create potential conflicts.
These additional interests relate to Mr. Kauffman's position as a director of
TSI, his ownership of 455,000 shares (less than 2%) of TSI's outstanding shares,
and his options to purchase 62,500 shares of TSI common stock at a price of
approximately $1.00 per share. Pursuant to the TSI Acquisition Agreement, upon
closing, Mr. Kauffman, as a TSI shareholder, will be issued approximately
133,600 shares of Alanco Class A common stock, valued at approximately $89,500,
based on the closing market price as of March 15, 2002. If TSI achieves certain
financial goals as outlined in the TSI Acquisition Agreement, Mr. Kauffman would
receive up to an additional approximately 378,500 shares of Alanco Class B
common stock, valued at approximately $253,600 based on the closing market price
as of March 15, 2002. (See Section 12 "Security Ownership of Management" for
Alanco shares owned by Mr. Kauffman on the record date.) The Alanco Board of
Directors was aware of these interests and considered them in approving the
Acquisition Agreement and the transaction contemplated thereby.
9. PROPOSAL NO. 3: SERIES B CONVERTIBLE PREFERRED STOCK
Purpose of Issuance of Preferred Stock. In support of the TSI acquisition and
subsequent working capital requirements, the Alanco Board of Directors is
recommending the approval of the issuance of up to 75,000 shares of Series B
Convertible Preferred Stock. The shares have a stated value of $10.00 per share
and will be sold at a price based upon market conditions at the time of sale,
which may result in the as converted price per share being less than the current
closing price of the Company's common stock. If that were to occur, the value of
any embedded beneficial conversion feature would be recognized and amortized as
additional cost of financing over the minimum period from the date of issuance
to the date at which the preferred shareholders can realize that return. The
Company currently has a commitment, contingent on closing the TSI acquisition,
for the sale of 50,000 shares of the proposed Series B Convertible Preferred
Stock. The transaction is not expected to result in the recognition of an
embedded beneficial conversion feature since the as converted price is in excess
of market price on the date of commitment.
If the Company is unable to raise the needed capital by selling the Series B
Convertible Preferred Stock or the revenue and cash flow elements of its 2002
operating plan are not achieved, the Company will need to materially reduce its
fiscal 2002 operating plan expenses, or raise additional funds through public or
private debt or equity financing, or both. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the then
current shareholders of the Company will be reduced, and such equity securities
may have rights, preferences or privileges senior to those of the holders of the
Common Stock. If the Company needs to seek additional financing to meet working
capital requirements, there can be no assurance that additional financing will
be available on terms acceptable to the Company, or at all. If adequate funds
are not available or are not available on acceptable terms, the Company's
business, operating results, financial condition and ability to operate will be
materially adversely affected.
Description of Series B Preferred Rights. A description of the Series B
Convertible Preferred Stock, outlining the powers, preferences, rights and
limitations of the series of Preferred Stock is attached to this proxy statement
as Appendix C. The Preferred Stock will have the following preferences, rights
and limitations:
(a) Priority. The Series B Convertible Preferred Stock shall have a
priority ranking superior to the Common Stock of the Company and all other
series of Preferred Stock of the Company with respect to payment of dividends
and upon dissolution, liquidation and winding-up of the Company.
(b) Dividends. Holders of shares of Series B Convertible Preferred
Stock shall be entitled to receive, when declared by the Board of Directors, a
dividend of ten (10%) percent per annum, payable quarterly. At the option of the
Company, any dividends on the Series B Convertible Preferred Stock may be paid
either in cash or in kind. In addition, the holders of Series B Convertible
Preferred Stock shall participate on an as-converted basis in any dividends
payable with respect to the Company's common stock.
(c) Conversion. Each share of Series B Convertible Preferred Stock may
be convertible into thirteen (13) shares of Class A Common Stock of the Company.
(d) Voting. The holders of shares of Series B Convertible Preferred
Stock shall be entitled to vote upon matters submitted to shareholders for a
vote, in the same manner and with the same effect as the holders of shares of
Class A Common Stock, voting together with the holders of Class A Common Stock
as a single class to the extent permitted by law. Holders of Series B
Convertible Preferred Stock shall have that number of votes equal to the number
of shares of Class A Common Stock into which such preferred stock is
convertible.
(e) Redemption.
(i) By the Company. The Company may redeem all or any part of the
outstanding Series B Convertible Preferred Stock at any time after either (i)
the third (3rd) anniversary of the date of issuance of the shares to be
redeemed, or (ii) after the average NASDAQ closing market price for the
Company's Common Stock for twenty (20) consecutive trading days equals $2.00 per
share, at the redemption price equal to $10.00 per share of the Series B
Convertible Preferred Stock to be redeemed, plus accrued unpaid dividends, if
any.
(ii)By the Shareholder. Each holder of Series B Convertible
Preferred Stock may, at any time after the third (3rd) anniversary of the date
of issuance of the shares to be redeemed, demand that the Company redeem all or
any part of such holder's Series B Convertible Preferred Stock at a redemption
price of $10.00 per share, plus accrued unpaid dividends, if any. The Company
shall redeem the number of shares of Series B Convertible Preferred Stock
specified in the holder's demand notice in either of the following methods:
(a) By paying the aggregate redemption price in cash; or
(b) By paying the aggregate redemption price in common stock
of the Company valued for such purpose at the average NASDAQ closing market
price for the twenty (20) trading days immediately prior to the date of receipt
of the holder's redemption demand.
Accounting Presentation. The issuance of the Series B Convertible Preferred
Stock will be classified as Redeemable Preferred Stock (Stock Subject to
Mandatory Redemption Requirements or Whose Redemption is Outside the Control of
the Issuer). The Redeemable Preferred Stock will be presented above the equity
section in the Consolidated Balance Sheet; and in the event the terms of sale
result in the as converted price per common share being less than market price
on date of commitment (embedded beneficial conversion feature), a portion of the
proceeds from the issuance of the Preferred Stock equal to the intrinsic value
will be allocated to additional paid in capital and reduce the proceeds for the
sale of Redeemable Preferred Stock. Because the Preferred Stock is redeemable by
the holder after 3 years, the Redeemable Preferred Stock discount will be
amortized as financing expense over the three-year period.
Recommendations of the Alanco Board of Directors. The Alanco Board of Directors
unanimously approved that it was advisable and in the best interests of Alanco
and its stockholders to approve a proposal to issue up to 75,000 shares of
Alanco's Series B Convertible Preferred Stock in support of the TSI acquisition
and subsequent working capital requirements of the Company. Accordingly, the
Alanco Board of Directors hereby unanimously recommends that holders of Alanco
common stock vote FOR the issuance of shares of Alanco's Series B Convertible
Preferred Stock in support of the TSI acquisition and subsequent working capital
requirements of the Company.
10. CHANGE OF CONTROL
Under the terms of the Acquisition Agreement, TSI will be issued an initial
payment of 6,000,000 shares of Alanco's Class A common stock upon closing of the
transaction. In addition, EMS Technologies, Inc. ("EMS"), a TSI vendor and
stockholder, will be issued 1,000,000 shares of Alanco's Class A common stock.
Issuance of these 7,000,000 shares of Alanco's Class A common stock will result
in the TSI stockholders owning approximately 40.7% of Alanco's outstanding Class
A common stock. If TSI shareholders voted cumulatively as a block, they would
have the means of electing two members to Alanco's seven-member Board of
Directors. According to the "earn-out" formula in the Acquisition Agreement, TSI
could receive deferred payment of up to an additional 17,000,000 shares of
Alanco Class B common stock upon achievement of certain financial goals as
specified in the Acquisition Agreement. If TSI achieves these financial goals
and is issued all 17,000,000 shares of Alanco Class B common stock, which Class
upon approval of Proposal No. 1 is entitled to one-one hundredth of one vote per
share, TSI shareholders would have the potential of owning shares having 41.3%
of Alanco's outstanding voting rights, thereby still having the ability to elect
two directors to Alanco's seven-member Board, if they voted cumulatively as a
block.
In a transaction pending Bank approval, Alanco would acquire approximately 2.07
million shares of TSI stock in exchange for the Company's investment in G&M
preferred stock with TSI officer and shareholder, James G. Ricketts. Alanco's
pending ownership of this TSI stock represents approximately 8.9% of TSI's
outstanding stock, thereby further reducing the impact of the TSI ownership.
11. THE TSI ACQUISITION DOCUMENTS
THE FOLLOWING DESCRIPTIONS OF THE TSI ACQUISITION DOCUMENTS DESCRIBE THE
MATERIAL PROVISIONS OF THE DOCUMENTS BUT DO NOT PURPORT TO DESCRIBE ALL OF THE
TERMS OF THE AGREEMENT. THE FULL TEXT OF THESE ACQUISITION DOCUMENTS ARE
ATTACHED TO THIS PROXY STATEMENT AS APPENDICES. ALL ALANCO STOCKHOLDERS ARE
URGED TO READ THE TSI ACQUISITION DOCUMENTS IN THEIR ENTIRETY BECAUSE THEY ARE
THE LEGAL DOCUMENTS THAT GOVERN THE ACQUISITION.
11.1 Amended Acquisition Agreement. The Amended Acquisition Agreement
("Acquisition Agreement") between Alanco and TSI, attached to this Proxy
Statement as Appendix B, provides that a new wholly owned subsidiary corporation
of Alanco will acquire substantially all of the assets of TSI in exchange for
Alanco's Class A and Class B Common Stock and assumption of certain specified
liabilities of TSI. In particular, Alanco will acquire all of TSI's inventories,
tangible personal property, intangible personal property (including TSI's
patents and patent rights, developed software and know-how, and the name
"Technology Systems International"), contracts and other agreements, accounts
receivable, cash and cash equivalents, and goodwill of TSI as a going concern.
Alanco will assume certain general liabilities of TSI aggregating approximately
$1.2 million. This amount includes approximately $325,000 of contingent
non-interest bearing notes payable due upon TSI achieving an annual net income
of $1 million; and excludes TSI obligations of $1,250,000 to EMS Technologies,
Inc. ("EMS"), which are assumed pursuant to a separate agreement between Alanco
and EMS. (See Section 11.3 below.) Liabilities not specifically assumed by
Alanco remain liabilities of TSI.
In addition to the assumption of certain liabilities, Alanco will issue to TSI
6,000,000 shares of Alanco's Class A Common Stock at closing. In addition, when
the TSI business acquired achieves an aggregate gross profit, as defined in the
Acquisition Agreement, of $3,000,000 during calendar year 2002, Alanco will
issue to TSI an additional payment of 5,000,000 shares of Alanco's Class B
Common Stock.
Thereafter, for each dollar of additional gross profit from the business in
excess of $3,000,000 achieved during calendar year 2002, Alanco will issue to
TSI an additional four (4) shares of Class B Common Stock, up to the maximum of
an additional 12,000,000 shares of Class B Common Stock. In the event that the
maximum number of additional shares of Class B Common Stock have not been earned
by December 31, 2002, but certain specified conditions have been met, then gross
profit produced during the first quarter of calendar year 2003 in excess of
$1,000,000 will earn additional shares of Class B Common Stock at the same rate
of four (4) shares of Class B Common Stock for each dollar of such additional
excess gross profit, provided, however, that not more than the maximum of
12,000,000 shares of Class B Common Stock shall be payable aggregately under
this paragraph.
The Company has reached a tentative agreement, not reflected in the discussion
above as it is subject to bank approval, with Mr. James Ricketts, a TSI
shareholder, to exchange the Company's investment in Preferred Stock of Gold and
Minerals, Inc. for 2,070,774, or approximately 9%, of the outstanding shares of
TSI. Refer to Sections 6, 8, 12 and 13 for further discussion of this
transaction.
The Acquisition Agreement contains representations and warranties of TSI to
Alanco, including representations relating to TSI's organization and standing,
capitalization, authority, financial statements, title to assets, patents and
other intangible intellectual property, employees and employee benefit plans,
and compliance with all laws. Alanco also makes similar representations to TSI
in the Acquisition Agreement.
Pending closing of the transaction, the Acquisition Agreement restricts TSI from
conducting business other than in the ordinary course without Alanco's prior
approval, including specifically the disbursement of funds in excess of $500.
The closing is to occur on or before the third business day following the date
of the Alanco Shareholders Meeting at which the shareholders of Alanco approve
issuance of the shares of Alanco Common Stock to be issued to TSI. On the
closing date, the parties will exchange all of the documents necessary to
transfer title to the acquired assets to Alanco's subsidiary and the initial
6,000,000 shares of Alanco's Class A Common Stock will be issued to TSI. In
addition, such further instruments or documents as the parties or their counsel
may reasonably request to assure the effective carrying out of the transactions
will be delivered.
The Acquisition Agreement provides that each of the parties will indemnify, and
hold harmless the other party against claims, losses, expenses, and liabilities
which arise from any breach by the indemnifying party of the agreement.
Conditions to the Acquisition. The obligations of Alanco and TSI to complete the
acquisition are subject to approval of the issuance of shares of Alanco's common
stock in connection with the Acquisition Agreement by a majority of the votes
cast by the holders of Alanco's outstanding shares of common stock at the
special meeting, completion of the conditions precedent to closing, and
verification of the representations and warranties contained in the Acquisition
Agreement as of the closing of the acquisition, except for those failures to
perform or to be true and correct that would not reasonably be expected to have
a material adverse effect on Alanco and its subsidiaries taken as a whole.
Termination. The Acquisition Agreement may be terminated and the acquisition
may be abandoned at any time:
1. By mutual consent of Alanco and TSI;
2. If any injunction, ruling or other legal restraint or prohibition
preventing the completion of the acquisition is
in effect and has become final and cannot be appealed;
3. If the shareholders of TSI or Alanco do not approve the Acquisition
Agreement; or
4. Alanco's inability to satisfactorily complete due diligence.
Amendment. The Acquisition Agreement may be amended only by written agreement of
the parties. Any amendment may be made at any time before the completion of the
acquisition. After the Alanco stockholders adopt the Acquisition Agreement,
however, no amendment or waiver that requires further approval of the Alanco
stockholders may be made without the further approval of the Alanco
stockholders.
11.2 Registration Rights Agreement. The Acquisition Agreement and the EMS
Assignment Agreement ("EMS Agreement") include the Registration Rights
Agreement, whereby the 6,000,000 shares issued to TSI shareholders at closing
and the 1,000,000 shares issued to EMS pursuant to the EMS Agreement have
certain stock registration rights. Both the Acquisition Agreement and the EMS
Agreement use the same Registration Rights Agreement. In the Registration Rights
Agreement Alanco has committed to use commercially reasonable efforts to file a
securities registration statement on Form S-3 (or other suitable forms) or a
post-effective amendment to an effective registration (collectively, a
"Registration Statement") within 90 days following the closing of the
Acquisition Agreement.
Class B Common Shares issued subsequent to the closing as determined under the
Acquisition Agreement deferred payout formula shall also have certain stock
registration rights. Upon the written request of the holders of at least 25% of
the deferred payout shares issued, the Company agrees to file a Registration
Statement on Form S-3 (or other suitable form), at the Company's discretion,
covering the resale of those requested shares, using commercially reasonable
efforts to have the Registration Statement declared effective within 90 days
after the date the Company receives written notice triggering the registration.
Expenses incurred, other than underwriting discounts and commissions, in the
Registration Statement process pursuant to registering the 7 million shares
issued to TSI and EMS at the close, shall be borne by the Company. Expenses
incurred in the Registration Statement process for the shares issued under the
deferred payout provision shall be borne by the participating holders on a
pro-rata basis based upon the number of shares of Registrable Securities owned
compared to the total shares to be registered at the time. The Class B common
shares are not convertible into Class A common shares and there is no intention
or requirement to make them convertible at a future date.
The Registration Rights Agreement, attached to this proxy statement as Appendix
D, includes a limitation on the obligations of the Company to register
securities, an explanation as to other obligations of the Company under this
agreement, discussion of potential black out period issues and indemnification
provisions. The Registration Rights Agreement includes various other provisions
and should be reviewed in detail.
11.3 EMS Assignment Agreement. As a condition of the acquisition, Alanco agreed
to negotiate with EMS, a major supplier of electronic products for the TSI
technology and a stockholder of TSI, to convert a substantial portion of TSI
current liabilities into equity. At TSI's request and to assist in the
transaction between TSI and EMS, Alanco representatives entered into discussion
with both TSI and EMS, reaching an agreement for EMS to convert approximately
$1,250,000 of TSI debt into debt and equity. This conversion is to be
accomplished through assignment of the TSI notes, including accrued interest, to
Alanco, in exchange for 1,000,000 shares of Alanco common stock and Alanco
long-term promissory notes in the amount of $350,000 upon closing of the
proposed acquisition. The assignment agreement is attached to this proxy
statement as Appendix E.
11.4 TSI Amended Loan Agreement. In connection with the acquisition, Alanco
agreed to provide TSI a secured credit facility, whereby Alanco would advance
TSI up to $360,000. The secured credit facility is to be utilized for
pre-closing funding of TSI's business operations. As of March 15, 2002, TSI had
drawn $360,000 under the facility. The secured credit facility is documented in
a loan agreement that is included in this proxy statement as Appendix F.
Advances under the secured credit facility bear interest at the rate of 1 1/2%
per month until paid. The secured credit facility will expire and become
immediately payable upon the earlier of May 31, 2002 or when an offer from a
party other than Alanco is received to acquire all or substantially all of the
assets of TSI. If not paid when due, Alanco has the right to convert the unpaid
balance due, including interest, into TSI common stock at a conversion price of
$.10 per share.
As additional consideration to induce Alanco to enter into the secured credit
facility agreement, TSI has agreed to pay Alanco a termination fee of $500,000
or 2 million shares of TSI (at Alanco's option) if the Acquisition Agreement is
terminated for any circumstances other than Alanco's withdrawal from the
transaction or if any injunction, ruling or other legal restraint or prohibition
preventing the completion of the acquisition is in effect and has become final
and cannot be appealed.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND OF MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets forth
certain information with respect to each shareholder known by Alanco to be the
beneficial owner of more than 5% of the outstanding Alanco common stock as of
March 15, 2002. Information regarding the stock ownership of Robert R. Kauffman,
Alanco Chairman and Chief Executive Officer, is also shown in the table in the
following subsection, "Security Ownership of Management."
Five Percent Owners
<c> <c> <c> <c> <c>
Shares Exercisable Total Total Stock
Owned Stock Stock Owned and Options
Name of Number of Percent of Options & And Options & Warrants
Beneficial Owner Shares Owned Class (2) Warrants & Warrants Percent of Class (3)
- ---------------------- ------------ ---------- ----------- ----------- --------------------
Robert R. Kauffman 796,632 7.8% 1,505,000 2,301,632 19.7%
Donald E. Anderson (1) 816,322 8.0% 400,000 1,216,322 10.7%
(1) The number of shares owned includes The Anderson Family Trust, owner of
496,322 shares of Alanco common stock and 200,000 exercisable warrants,
and Programmed Land, Inc., owner of 320,000 shares of Alanco common
stock, and 200,000 exercisable warrants, both of which Mr. Anderson
claims beneficial ownership. Mr. Anderson's address is 11804 North
Sundown Drive, Scottsdale, Arizona 85260.
(2) The percentages shown are calculated based upon 10,200,083 shares of
common stock outstanding on March 15, 2002.
(3) In calculating the percentage of ownership, option and warrant shares are
deemed to be outstanding for the purpose of computing the percentage of
shares of common stock owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of shares of
common stock owned by any other stockholders.
Projected Security Ownership of Certain Beneficial Owners after TSI Acquisition.
The following table sets forth certain information known by Alanco with respect
to beneficial ownership of Alanco's common stock after shareholder approval of
the TSI acquisition and issuance of 6,000,000 shares of Alanco Class A common
stock to TSI shareholders and 1,000,000 shares of Alanco Class A common stock to
a TSI creditor and shareholder, EMS Technologies, Inc. Information presented in
this table assumes that TSI will distribute the 6,000,000 shares on a pro-rata
basis to existing TSI shareholders.
Five Percent Owners After Shareholder Approval of TSI Acquisition
(7,000,000 Shares of Class A Common Stock Issued)
Alanco Alanco Shares Total Total Stock
Class A Class A Owned Alanco Stock and Options
Common Common Percent of Exercisable Owned & Warrants
Shares Shares Class A Stock And Percent of
Name of Issued Per Owned After Common Options & Options & Class A Common
Beneficial Owner TSI Acquisition TSI Acquisition Stock (4) Warrants Warrants Stock (5)
- -------------------- --------------- --------------- ---------- ---------- --------- --------------
EMS Technologies (1) 1,812,314 1,812,314 10.5% 0 1,812,314 10.5%
Richard C. and Anna M. 1,229,623 1,229,713 7.1% 0 1,229,713 7.1%
Jones Family Trust (2)
Robert R. Kauffman (3) 133,586 930,218 5.4% 1,505,000 2,435,218 13.0%
Donald E. Anderson 0 816,322 4.7% 400,000 1,216,322 6.9%
(1) The address for EMS Technologies, Inc. is 660 Engineering Drive, Norcross,
GA 30092.
(2) The number of Alanco shares issued per the TSI acquisition shown above
assumes the exercise of 65,000 TSI stock options with a purchase price of
$1.00 per share held by Mr. Jones. Mr. Jones address is 12084 North 119th
Street, Scottsdale, AZ 85259.
(3) The number of Alanco shares issued per the TSI acquisition shown above
assumes the exercise of 62,500 TSI stock options with an average purchase
price of approximately $1.00 per share held by Mr. Kauffman.
(4) The percentages shown are calculated based upon 10,200,083 shares of common
stock outstanding as of March 15, 2002, plus 7,000,000 shares issued in
connection with the TSI acquisition.
(5) In calculating the percentage of ownership, option and warrant shares are
deemed to be outstanding for the purpose of computing the percentage of
shares of common stock owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of shares of common
stock owned by any other stockholders.
The following table sets forth certain information known by Alanco with respect
to projected beneficial ownership of Alanco's common stock after shareholder
approval of the TSI acquisition and issuance of the above-described 7,000,000
shares of Alanco Class A common stock and assumes the issuance of 17,000,000
shares of Alanco Class B common stock to TSI shareholders upon attainment of
certain financial goals as outlined in the Amended Acquisition Agreement.
Information presented in this table assumes that TSI will distribute all shares
issued to TSI on a pro-rata basis to existing TSI shareholders.
Five Percent Owners After Shareholder Approval of TSI Acquisition & Upon Attainment of Financial Goals
(17,000,000 Shares of Class B Common Stock Issued)
Alanco Total
Alanco Class B Alanco Shares Shares Total Stock and
Class A Common Class A Owned Owned Alanco Class A Options &
Common Shares Common Percent Percent % of Exercisable Common Warrants
Shares Issued Shares of of Common Stock Stock Percent of
Issued After TSI Owned Class A Class B Stock Options Owned And Class A
Name of Per TSI Financial Goals After TSI Common Common Voting & Options & Common
Beneficial Owner Acquisition Attained Acquisition Stock(4) Stock(5) Power Warrants Warrants Stock
- --------------------- ------------ --------------- ----------- --------- --------- ------ ---------- --------- ---------
EMS Technologies 1,812,314 2,301,556 1,812,314 10.5% 13.5% 10.6% 0 1,812,314 10.5%
Richard C. and Anna M. 1,229,623 3,483,932 1,229,713 7.1% 20.5% 7.3% 0 1,229,713 7.1%
Jones Family Trust
Robert R. Kauffman 133,586 378,494 930,218 5.4% 2.2% 5.4% 1,505,000 2,435,218 13.0%
Donald E. Anderson 0 0 816,322 4.7% 0.0% 4.7% 400,000 1,216,322 6.9%
James G. Ricketts (1) 535,986 1,518,627 535,986 3.1% 8.9% 3.2% 0 535,986 3.1%
Alfred Peeper (2) 408,852 1,158,415 408,874 2.4% 6.8% 2.4% 0 408,874 2.4%
Evert Eggink (3) 354,110 1,003,312 354,110 2.1% 5.9% 2.1% 0 354,110 2.1%
(1) In a transaction pending Bank approval, Alanco would acquire 2,070,774
shares of TSI stock from a TSI shareholder, James G. Ricketts, in exchange
for Alanco's investment in Preferred Stock of Gold and Minerals Company,
Inc. If this transaction is finalized, all shares assumed to be issued to
Mr. Ricketts would be issued to Alanco Technologies, Inc. See Section 6, 8,
and 12 and footnote 4 to the Condensed Pro Forma Consolidated Balance Sheet
as of December 31, 2001 in Section 13 for additional discussion of the
tentative agreement between Alanco and Mr. Ricketts. Mr. Ricketts' address
is 23210 North Las Lavatas, Scottsdale, AZ 85255.
(2) The number of Alanco shares issued per the TSI acquisition and after the
TSI financial goals are attained shown above assumes the exercise of
200,000 TSI stock options held by Mr. Peeper. Mr. Peeper's address is
Hogeweg 76-1 2042 GJ Zandvoort, Netherlands.
(3) The number of Alanco shares issued per the TSI acquisition and after the
TSI financial goals are attained shown above assumes the exercise of
205,000 TSI stock options with an average purchase price of approximately
$1.00 held by Mr.Eggink. Mr. Eggink's address is Jan Van Nassaustraat
32-2596 BT, The Hague, Netherlands.
(4) The percentages shown are calculated based upon 17,200,083 shares of common
stock outstanding, determined as 10,200,083 shares of common stock
outstanding as of March 15, 2002, plus 7,000,000 shares of Class A Common
Stock issued in connection with the TSI acquisition.
(5) The percentages shown are calculated based upon the assumption that
17,000,000 shares of Class B Common Stock are issued in connection with
TSI's attainment of certain financial goals in 2002 as outlined in the TSI
Acquisition Agreement.
(6) In calculating the percentage of ownership, option and warrant shares are
deemed to be outstanding for the purpose of computing the percentage of
shares of common stock owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of shares of common
stock owned by any other stockholders.
Security Ownership of Management. The following table sets forth certain
information known to us with respect to beneficial ownership of Alanco's common
stock by each of our directors and executive officers, and all of our directors
and executive officers as a group.
The number of shares beneficially owned by each director or executive officer is
determined under rules of the Securities and Exchange Commission, and the
information is not necessarily indicative of the beneficial ownership for any
other purpose. Unless otherwise indicated, each person has sole investment and
voting power (or shares such power with his or her spouse) with respect to the
shares set forth in the following table.
Securities of the Registrant Beneficially Owned
By Directors and Executive Officers (1)
Exercisable Total
Shares Stock Stock and
Owned Options Total Options &
Number of Percent & Stock Owned Warrants
Name of Shares of Class Warrants And Options Percent of
Beneficial Owner Title (2) Owned (6) (7) & Warrants Class (8)
- ---------------------- ----------- --------- -------- --------- ---------- --------
Robert R. Kauffman (3) Dir/COB/CEO 796,632 7.8% 1,505,000 2,301,632 19.7%
John A. Carlson Dir/EVP/CFO 152,958 1.5% 500,000 652,958 6.1%
Harold S. Carpenter Dir 126,641(4) 1.2% 80,000 206,641 2.0%
James T. Hecker Dir 27,393(5) 0.3% 80,000 107,393 1.0%
Steven P. Oman Dir 20,000 0.2% 80,000 100,000 1.0%
Thomas C. LaVoy Dir 91,930 0.9% 60,000 151,930 1.5%
Robert H. Friesen Dir 70,470 0.7% 40,000 110,470 1.1%
Officers and Directors as a Group 1,286,324 12.6% 2,345,000 3,631,324 28.9%
(7 individuals)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally includes voting
or investment power with respect to securities. In accordance with SEC
rules, shares that may be acquired upon conversion or exercise of stock
options, warrants or convertible securities that are currently
exercisable or that become exercisable within 60 days are deemed
beneficially owned. The "Number of Shares Owned" shown above indicates
shares beneficially owned by the persons named for which they have voting
rights as of the record date of March 18, 2002. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons or entities named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned.
(2) Dir is Director; COB is Chairman of the Board; CEO is Chief Executive
Officer; EVP is Executive Vice President; CFO is Chief Financial Officer.
(3) The address for Mr. Kauffman is: c/o Alanco Technologies, Inc., 15900
North 78th Street, Suite 101, Scottsdale, AZ 85260.
(4) Excludes 432,632 shares of Common Stock and 20,000 exercisable warrants
owned by Heartland Systems Co., a company for which Mr. Carpenter serves
as an officer. Mr. Carpenter disclaims beneficial ownership of such
shares.
(5) Excludes 344,474 shares of Common Stock and 20,000 exercisable
warrants owned by Rhino Fund LLLP. The fund is controlled by Rhino
Capital Incorporated, for which Mr. Hecker serves as Treasurer and
General Counsel. Mr. Hecker disclaims beneficial ownership of such
shares.
(6) The percentages shown are calculated based upon 10,200,083 shares of
common stock outstanding on March 15, 2002.
(7) Represents unexercised stock options and warrants issued to named
executive officers and directors. All options and warrants issued to the
executive officers and directors were exercisable at March 15, 2002.
(8) The number and percentages shown include the shares of common stock
actually owned as of March 15, 2002 and the shares of common stock that
the identified person had a right to acquire within 60 days after March
15, 2002. In calculating the percentage of ownership, option and warrant
shares are deemed to be outstanding for the purpose of computing the
percentage of shares of common stock owned by such person, but are not
deemed to be outstanding for the purpose of computing the percentage of
shares of common stock owned by any other stockholders.
Alanco Ownership of TSI Stock. The Company has reached a tentative agreement,
subject to bank approval and therefore not assured, with Mr. James Ricketts, a
TSI shareholder, to exchange the Company's investment in Preferred Stock of Gold
and Minerals, Inc. for 2,070,774, or approximately 9%, of the outstanding shares
of TSI. The Company's investment in Preferred Stock of Gold and Minerals, Inc.
("G&M") is recorded at December 31, 2001 as "Investments at Cost" in the amount
of $2,475,200. Completion of the transaction would result in a write down
(extraordinary item) of the G&M investment to approximately 9% of the purchase
consideration paid at closing and a reduction, approximately 9%, in the number
of Class A Common Shares issued at closing and the number of Class B Common
Shares that may be issued per the earn-out provision of the Acquisition
Agreement. Based upon the purchase method of accounting, only shares whose
issuance is beyond a reasonable doubt, are considered as the purchase price for
the transaction. Any future Class B common shares issued and returned to the
Company as a result of Alanco acquiring the TSI common shares under this
agreement would result in a reduction of goodwill and the recording of treasury
shares. If the transaction is not completed due to the failure of the bank to
approve, the G&M investment would remain as an asset of Alanco to be valued at
the lower of cost or net realizable value. Alanco management anticipates bank
approval of this transaction prior to closing of the TSI acquisition. See
footnote 4 to the Condensed Pro Forma Consolidated Balance Sheet as of December
31, 2001 in Section 13 for additional discussion of this potential transaction.
Alanco management believes the separate agreement with Mr. Ricketts is
appropriate considering Mr. Ricketts' unique interest in the G&M investment, the
Company's difficulty in valuing the G&M investment due to the lack of a publicly
traded market value for G&M stock, the Company's estimate of the value of Mr.
Rickett's portion of the Alanco Class A Common Stock to be issued at closing and
the significant number of Alanco Class B Common Shares that Mr. Ricketts would
receive upon TSI reaching certain financial goals, and finally, the fact that
Mr. Ricketts has agreed to vote his TSI shares in favor of the acquisition,
based partly upon the agreement. Based upon the discussion above, Alanco
management believes the per share value for TSI stock exchanged by Mr. Ricketts
for the G&M investment approximately equates to the value to be received by
other TSI shareholders.
13. SELECTED FINANCIAL DATA AND PRO FORMA INFORMATION
Selected Historical Financial Data. The unaudited Alanco financial statements
for the quarter ended December 31, 2001 were filed timely with the SEC (File
No.000-09347) on Form 10-QSB. The audited financial statements of Alanco for the
fiscal years ended June 30, 2001 and 2000 were filed timely on Form 10-KSB. Form
10-QSB for the period ended December 31, 2001, and Form 10-KSB for the year
ended June 30, 2001, are included in this Proxy Statement as Appendix G and H,
respectively.
The audited financial statements of Technology Systems International, Inc. for
the six months ended June 30, 2001 and the years ended December 31, 2000 and
1999 (attached to this proxy statement as Appendix I) and the unaudited interim
financial statements for the period ended December 31, 2001 (attached to this
proxy statement as Appendix J) are provided to assist you in your analysis of
the financial aspects of TSI.
Pro Forma Financial Data.
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following unaudited pro forma condensed combining financial statements
reflect the Alanco acquisition of the TSI assets recorded under the purchase
method of accounting, assuming the transaction had occurred at the beginning of
the periods presented. The pro forma statements of operations combine the
operations of TSI and the consolidated Alanco operations for the year ended June
30, 2001 and the six months ended December 31, 2001. The pro forma balance sheet
combines TSI with the consolidated balance sheet of Alanco as of December 31,
2001.
The historical information for TSI has been obtained from unaudited financial
statements conforming with the periods indicated. The pro forma statements
should be read in conjunction with TSI's financial statements and attached notes
thereto (attached as Appendix I and J) and the financial statements of Alanco
that have been filed on Form 10-QSB and Form 10-KSB and are attached as Appendix
G and H, respectively. The pro forma financial statements are not necessarily
indicative of the financial position or operating results that would have been
achieved had the acquisition occurred as of the dates indicated, nor are they
indicative of future operating results or financial position.
Summary Financial Information
Pro Forma Condensed Consolidated
Statement of Operations
-------Six Months Ended December 31, 2001-------
Pro Forma Pro Forma
TSI Alanco Adjustments (2) Combined
--------------- --------------- --------------- ----------------
Net Sales $60,100 $3,614,000 --- $3,674,100
Cost of Sales (59,200) (2,186,200) --- (2,245,400)
--------------- --------------- --------------- ----------------
Gross Profit 900 1,427,800 --- 1,428,700
Other Direct Costs (929,400) (2,614,700) --- (3,544,100)
--------------- --------------- --------------- ----------------
Operating Loss (928,500) (1,186,900) --- (2,115,400)
Other Income (Loss) (169,200) (10,300) 45,000 (1) (134,500)
--------------- --------------- --------------- ----------------
Net Loss - Continuing Operations ($1,097,700) ($1,197,200) $45,000 ($2,249,900)
=============== =============== =============== ================
Weighted Average Shares Outstanding 8,738,700 7,000,000 (3) 15,738,700
=============== =============== ================
Loss Per Share - Basis & Diluted ($0.14) ($0.14)
=============== ================
Summary Financial Information
Pro Forma Condensed Consolidated
Statement of Operations
-------Fiscal Year Ended June 30, 2001-------
Pro Forma Pro Forma
TSI Alanco Adjustments (2) Combined
--------------- --------------- -------------- ---------------
Net Sales $287,700 $9,135,300 --- $9,423,000
Cost of Sales (253,200) (5,426,800) --- (5,680,000)
--------------- --------------- -------------- ---------------
Gross Profit 34,500 3,708,500 --- 3,743,000
Other Direct Costs (2,260,500) (6,972,300) --- (9,232,800)
--------------- --------------- -------------- ---------------
Operating Loss (2,226,000) (3,263,800) --- (5,489,800)
Other Income (Loss) (712,600) 27,000 90,000 (1) (595,600)
--------------- --------------- -------------- ---------------
Net Loss - Continuing Operations ($2,938,600) ($3,236,800) $90,000 (4) ($6,085,400)
=============== =============== ============== ===============
Weighted Average Shares Outstanding 6,800,600 7,000,000 (3) 13,800,600
=============== ============== ===============
Loss Per Share - Basis & Diluted ($0.48) ($0.44)
=============== ===============
The following footnotes pertain to the Pro Forma Condensed Consolidated
Statement of Operations for both the twelve months ended June 30, 2001 and the
six months ended December 31, 2001.
(1) Adjustment to reflect the conversion of interest bearing debt to equity at
the beginning of the period per the EMS agreement.
(2) The above condensed pro forma combining statement of operations have not
been adjusted for the proposed sale of Series B Convertible Preferred Stock
because there is no assurance the Preferred Stock will be sold. If the sale
of 50,000 shares of Preferred Stock were to be completed, the Company would
incur an obligation for quarterly dividends on the Preferred Stock at an
annual rate of 10%, which would reduce earnings attributable to common
stockholders by a like amount. Theconversion and redemption features of the
Series B Convertible Preferred Stock could also restrict the Company's
ability to pay future common stock dividends and the future cash
availability to the Company. See Section 9 for a complete description of
the Series B Convertible Preferred Stock.
(3) Assumes the issuance of 6,000,000 Class A Common Shares to TSI at closing
and 1,000,000 Class A Common Shares to EMS for the conversion of
approximately $900,000 of debt to equity.
(4) No dividends were declared or paid by either TSI or Alanco for the period
indicated.
Summary Financial Information
Condensed Pro Forma
Consolidated Balance Sheet
As of December 31, 2001
Pro Forma Pro Forma
TSI Alanco Adjustments Combined
--------------- -------------- ---------------- --------------
ASSETS:
Cash $15,000 $748,000 $763,000
Accounts Receivables, net 55,600 1,317,600 1,373,200
Notes Receivable 0 783,700 (75,000)(5) 708,700
Inventories 816,700 1,362,500 2,179,200
Prepaid Expenses 43,100 69,300 112,400
-------------- --------------- ---------------- --------------
Total Current Assets 930,400 4,281,100 (75,000) 5,136,500
PROPERTY, PLANT AND EQUIPMENT, NET 80,600 371,800 452,400
OTHER ASSETS
Intangible Assets, net 0 1,582,800 3,427,700 (3) 5,010,500
Patents & Licenses 204,900 0 200,000 (3) 404,900
Software 525,100 0 200,000 (3) 725,100
Notes Receivables, Assets held for Sale & Other 10,500 1,076,200 1,086,700
Investments at cost 2,475,200 (4) 2,475,200
-------------- --------------- --------------- --------------
TOTAL ASSETS $1,751,500 $9,787,100 $3,752,700 $15,291,300
============== =============== =============== ==============
CURRENT LIABILITIES
Accounts Payable & Accruals $389,300 $1,553,200 $1,942,500
Current Notes & Bank Line 1,596,500 1,273,900 (1,250,000)(1) 1,220,900
(324,500)(2)
(75,000)(5)
Deferred Credits 60,000 589,700 649,700
-------------- --------------- ---------------- --------------
Total Current Liabilities 2,045,800 3,416,800 (1,649,500) 3,813,100
Deferred gain, pollution control products 0 378,000 378,000
Long term Debt 65,000 0 324,500 (2) 739,500
350,000 (1)
-------------- --------------- --------------- --------------
Total Liabilities 2,110,800 3,794,800 (975,000) 4,930,600
Shareholders' Equity (359,300) 5,992,300 3,827,700 (3) 10,360,700
900,000 (1)
-------------- --------------- --------------- --------------
TOTAL LIABILITIES & EQUITY $1,961,200 $9,787,100 $3,752,700 (6) $15,291,300
============== =============== =============== ==============
Shares Outstanding 9,691,600 7,000,000 16,691,600
============== =============== ==============
Book Value Per Share $0.62 $0.62
============== ==============
(1) Adjustment to reflect the conversion of approximately $900,000 of debt to
equity via Alanco issuing 1 million shares of Class A common stock and the
reclassification of $350,000 of current notes payable pursuant to the EMS
agreement attached to this proxy as Appendix E. The value of the shares
issued was determined by the amount of debt EMS negotiated to convert for
the shares to be issued. The value of approximately $.90 per share was
determined through negotiations among TSI, EMS and Alanco.
(2) Reflects the reclassification of certain notes payable that are payable
contingent on bank approval and TSI achieving an annual operating net
income of $1 million.
(3) Adjustments to reflect the purchase accounting method of recording the
proposed transaction. The purchase price allocation is based only upon the
6 million Class A Common Shares, whose issuance at closing is beyond a
reasonable doubt.
The $3.618 million value of the transaction was determined by valuing the
Class A common shares at 90% of the closing March 15, 2002 market price of
$.67 per share. The discount from market reflects management's estimate of
the reduction required to reflect the unregistered nature of the shares
The purchase method of accounting requires the allocation of the purchase
price to the fair value of the assets to be acquired and the liabilities to
be assumed. A detailed allocation evaluation is not as yet completed. To
present the above pro forma balance sheet, assumptions were made relative
to the shares issued, the valuation method used, as discussed above, and
the value in excess of net historical costs allocated to Patents, licenses
and software. If Class B Common Shares are issued based upon TSI achieving
the financial goals identified in the Agreement, the issued shares will be
valued at fair market value determined by Company policy on date earned and
recorded as an adjustment to goodwill.
The net historical cost basis of the patents, licenses and software has
been increased by $400,000 to reflect estimated development costs for those
assets. The post allocation asset values are expected to be written off
over the estimated remaining useful life of the assets. The remaining value
of the purchase price of approximately $3.218 million has been allocated to
goodwill in recognition of the earnings potential of contracts executed,
contracts currently being negotiated, proposals outstanding and additional
contracts that are being pursued. The fair market value on date earned of
the Class B Common Stock that may be earned under the agreement will be
recorded as an adjustment to goodwill upon issuance or for the quarter
ended December 31, 2002.
Commencing in fiscal year 2002, the Company ceased writing off goodwill
balances over a specific period pursuant to FAS 141 & 142. The Company's
current policy is to review goodwill balances at least annually to
determine appropriateness of valuation and presentation based upon
anticipated cash flows of assets related to the goodwill.
(4) The above condensed pro forma combining balance sheet has not been adjusted
to reflect the proposed exchange, pending bank approval, of approximately
2.07 million shares of TSI common stock for the Company's investment in the
preferred stock of Gold & Minerals Company, Inc. (G&M), because the
approval is not assured. If the contemplated stock exchange is completed,
the "Investments at Cost" recorded on the books of Alanco will be written
down to reflect a value equal to 9%, or $350,000, of the assumed purchase
price, resulting as write down of "Investments at Cost" by approximately
$2.1 million, which will be recorded during the quarter ended March 31,
2002 whether or not the acquisition is approved at the special
shareholders' meeting or whether or not bank approval is obtained.
(See Sections 6, 8, and 12 for further discussion of this transaction.)
(5) To eliminate intercompany notes balances payable to Alanco by TSI at
December 31, 2001.
(6) The above condensed pro forma combining balance sheet has not been adjusted
for the proposed sale of Series B Convertible Preferred Stock because there
is no assurance the Preferred Stock will be sold. If the sale of 50,000
shares of Preferred Stock were to be completed at the $10 per share price,
the Company would have an additional $500,000 of Redeemable Preferred Stock
presented on the balance sheet above the equity section. The costs related
to that Preferred Stock would be dividends payable at 10% per annum, or
$50,000 per year, which would reduce net earnings available to common
shareholders. See Section 9 for a discussion relative to embedded
beneficial conversion and redemption features of the Series B Convertible
Preferred Stock. The issuance of the Series B Convertible Preferred Stock
will be classified as Redeemable Preferred Stock (Stock Subject to
Mandatory Redemption Requirements or Whose Redemption is Outside the
Control of the Issuer). The Redeemable Preferred Stock will be presented
above the equity section in the Consolidated Balance Sheet; and in the
event the terms of sale result in the as converted price per common share
being less than market price on date of commitment (embedded beneficial
conversion feature), a portion of the proceeds from the issuance of the
Preferred Stock equal to the intrinsic value will be allocated to
additional paid in capital and reduce the proceeds for the sale of
Redeemable Preferred Stock. Because the Preferred Stock is redeemable by
the holder after 3 years, the Redeemable Preferred Stock discount will be
amortized as financing expense over the three-year period.
14. INDEPENDENT PUBLIC ACCOUNTANTS
The Certified Public Accountants for Alanco and TSI have been invited to attend
the special meeting. The representatives will have the opportunity to make a
statement if so desired and are expected to be available to respond to
appropriate questions.
15. OTHER MATTERS
The Alanco Board of Directors is not aware of any other business that will be
presented for consideration at the special meeting other than as described in
this proxy statement.
16. STOCKHOLDER PROPOSALS
Pursuant to Alanco's By-Laws, only such business will be conducted at a special
meeting of the stockholders as shall have been properly brought before the
meeting. At a special meeting of the stockholders, a stockholder may properly
bring business before such a meeting if, and only if, the notice for a special
meeting provides for business to be brought before the meeting by a stockholder.
Accordingly, the Alanco Board of Directors has discretion whether or not to
permit the submission of stockholder proposals in connection with this special
meeting and, at this time, does not intend to permit any stockholder proposals.
Therefore, the notice for this special meeting does not permit the submission of
stockholder proposals.
Any shareholder who intends to present a proposal at the annual meeting of
shareholders for the year ending June 30, 2002 and have it included in the
Company's proxy materials for that meeting must deliver the proposal to us for
our consideration no later than June 29, 2002 and must comply with Rule 14a-8
under the Securities Exchange Act of 1934, as amended.
17. WHERE YOU CAN FIND MORE INFORMATION
Alanco is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith, is
obligated to file reports and other information with the SEC relating to its
business, financial condition, and other matters. Information as of particular
dates concerning Alanco's directors and officers, their remuneration, stock
options granted to them, the principal holders of Alanco's securities, any
material interests of such persons in transactions with Alanco, and other
matters is required to be disclosed in reports, proxy statements or other
filings distributed to Alanco's stockholders and filed with the SEC. Such
reports, proxy statements, and other information should be available for
inspection at the SEC's Public Reference Room, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies should be obtainable upon payment of
the SEC's customary charges by writing to the SEC's principal office at 450
Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a World Wide
Web site on the Internet at http://www.sec.gov that contains reports, proxy
statements and other information regarding registrants that file electronically
with the SEC. Further information about Alanco can also be viewed on our
website, www.alanco.com.
If you have questions about Alanco Technologies, Inc. ("Alanco") or the
proposals, you should contact Robert R. Kauffman, Chairman of the Board and
Chief Executive Officer, or John A. Carlson, Executive Vice President and Chief
Financial Officer, Alanco Technologies, Inc., 15900 North 78th Street, Suite
101, Scottsdale, Arizona 85260, 480-607-1010.
If you have questions about Technology Systems International, Inc. ("TSI"), you
should contact Greg M. Oester, Chief Executive Officer, Technology Systems
International, Inc., 15575 North 83rd Way, Suite 4, Scottsdale, Arizona 85260,
480-998-7700.
<page>
APPENDIX A
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ALANCO TECHNOLOGIES, INC.
ARTICLE I
The name of the Corporation shall be ALANCO TECHNOLOGIES, INC..
ARTICLE II
The known place of business of the Corporation shall be 15900 North
78th Street, Scottsdale, Arizona 85260.
ARTICLE III
The Corporation initially intends to engage in the business of
researching, designing, manufacturing and selling environmental technology and
related equipment, to engage in the business of mining, and to perform any and
all things related to said business.
ARTICLE IV
The capital stock of the Corporation shall consist of the following:
1) One Hundred Million (100,000,000) shares of no par value Common Stock;
2)
Five Million (5,000,000) shares of Class A Cumulative Convertible Preferred
Shares;
3) Twenty Million (20,000,000) shares of Class B Cumulative
Preferred Shares.
All such stock shall be paid in from time to time upon such conditions
as may be determined by the Board of Directors. The stock may be issued in
payment for real or personal property, services, or any other right or things of
value for the use and purpose of the Corporation, and all such stock, when so
issued, shall become and be fully paid as though paid for in cash, the Board of
Directors to be the sole judges, in the absence of fraud, of the value of any
property or rights acquired in exchange for capital stock, and all such stock
when issued shall be deemed fully paid and non-assessable.
All of the above stock shall be entitled to one vote per share,
provided, however, that in the case of the election of directors of the
Corporation, every shareholder shall be entitled to cumulate their votes and
give one (1) candidate for election as a director a number of votes equal to the
number of directors to be elected, multiplied by the number of votes to which
their shares are entitled, or distribute their votes on the same principle among
as many candidates as said shareholder deems fit.
Subject to the terms and provisions of this Article, the Board of
Directors is authorized to provide from time to time for the issuance of shares
of any class of Preferred Stock in series and to fix from time to time before
issuance or if after issuance upon the mutual written consent of all the
designated series shareholders of the series for which said amended designation,
preferences and/or privileges is sought, the designation, preferences and
privileges of the shares of each series of Preferred Stock and the restrictions
or qualifications thereof, including, without limiting the generality of the
foregoing, the following:
(a) The series designation and authorized number of shares;
(b) The dividend rate, the date or dates on which such dividends will be
payable, and the extent to which such dividends may be cumulative;
(c) The amount or amounts to be received by the holders in the event of
voluntary or involuntary dissolution or liquidation of the Corporation;
(d) The price or prices at which shares may be redeemed and any terms,
conditions and limitations upon such redemption;
(e) Any sinking fund provisions for redemption or purchase of shares of each
series; and
(f) The terms and conditions, if any, on which shares may be converted at the
election of the holders thereof into shares of other capital stock, or of
other series of Preferred Stock, or other debt securities of the
Corporation.
Each series of Preferred Stock, in preference to the Common Stock, will
be entitled to dividends, from funds or other assets legally available therefor,
at such rates, payable at such time and cumulative to such extent as may be
fixed by the Board of Directors pursuant to the authority herein conferred upon
it. In the event of dissolution or liquidation of the Corporation, voluntary or
involuntary, the holders of the Preferred Stock, in preference to the Common
Stock, will be entitled to receive such amount or amounts as may be fixed by the
Board of Directors pursuant to the authority herein conferred upon it.
Each series of Preferred Stock may be subject to redemption in whole or
in part at such price or prices and on such terms, conditions and limitations,
as may be fixed by the Board of Directors pursuant to the authority herein
conferred upon it, of such series. If less than all of the shares of any series
of the Preferred Stock are to be redeemed, they will be selected in such manner
as the Board of Directors shall then determine. Nothing herein contained is to
limit any right of the Corporation to purchase or otherwise acquire any shares
of any series of the Preferred Stock. Any shares of the Preferred Stock redeemed
or otherwise acquired by the Corporation and which revert to the status of
authorized and unissued shares shall be undesignated as to series, and may
thereafter, in the discretion of the Board of Directors and to the extent
permitted by law, be sold or reissued from time to time as part of another
series or (unless prohibited by the terms of such series as fixed by the Board
of Directors) of the same series, subject to the terms and conditions therein
set forth.
Notice of the intention of the Corporation to redeem shares of any
series of the Preferred Stock shall be mailed at least thirty (30) days before
the date of redemption to each holder of record of shares to be redeemed at his
or her last known post office address as shown by the records of the
Corporation. At any time after such notice has been mailed as aforesaid, the
Corporation may deposit (separately as to the series) the aggregate redemption
price payable with respect to the shares to be redeemed (or the portion thereof
not already paid in the redemption of such shares) with any bank or trust
company in the United States named in the notice of redemption. Such deposits
are to be payable in amounts as aforesaid to the respective orders of the
holders of record of the shares to be redeemed on endorsement (if required) and
surrender of their certificates, thereupon such holders will cease to be
shareholders with respect to said shares and, from and after the making of such
deposit, such holders will have no interest or claim against the Corporation
with respect to said shares, but will be entitled only to receive from such bank
or trust company, without interest, the moneys so deposited with it.
Dividends may be paid upon the Common Stock only when dividends have
been paid, or funds have been set apart for the payment of dividends, on the
Preferred Stock from the date after which dividends on the Preferred Stock
became cumulative to the beginning of the then current dividend period, but
whenever there shall have been paid, or funds shall have been set apart for the
payment of, all such dividends upon the Preferred Stock, then dividends upon the
Common Stock may be declared for payment then or thereafter out of remaining
funds or other assets legally available for such payments. After the payment of
the designated dividends, and amounts payable upon dissolution or liquidation,
if any, to which the shares of the Preferred Stock are expressly entitled in
preference to the Common Stock in accordance with the provisions herein set
forth, the Common Stock is to receive all further such dividends and amounts.
Neither a consolidation, merger or amalgamation of this Corporation
with or into any other corporation or corporations, nor the sale, lease or
conveyance of all or part of its assets shall be deemed a liquidation,
dissolution or winding up of the affairs of the Corporation within the meaning
of any provision herein.
ARTICLE V
The business and affairs of this Corporation shall be conducted by a
Board of Directors of not less than three (3) and no more than nine (9) members.
The directors need not be shareholders. The Board of Directors shall have the
power to increase or decrease the Board within the limits above provided. The
Board of Directors may also fill any vacancies which may occur in the Board of
Directors resulting from an increase in the Board of Directors or otherwise,
pending the next annual meeting of the stockholders.
The Board of Directors shall be elected at the regular annual meetings
of the stockholders.
The Directors shall each year upon their election organize into a Board
of Directors and elect a President and/or Chief Executive Officer, one or more
Vice Presidents, a Secretary and a Treasurer, any two (2) of which offices,
except the offices of the President and/or Chief Executive Officer and Vice
President, or President and/or Chief Executive Officer and Secretary, may be
held by the same persons. All officers shall serve for one (1) year or until
their successors are elected and qualified.
The Board of Directors of this Corporation shall have power without any
action on the part of the stockholders to make, alter, amend or repeal By-Laws
of the Corporation.
ARTICLE VI
Pursuant to the vote of the holders of a majority in interest of the
capital stock issued and outstanding, the Board of Directors shall have the
power and authority to lease, sell, assign, transfer, convey or otherwise
dispose of the entire property of the Corporation, irrespective of the effect
thereof upon the continuance of the business of the Corporation and the exercise
of its franchise; but the Corporation shall not be dissolved, except as provided
by the laws of the State of Arizona.
ARTICLE VII
No director of the Corporation shall be liable to the Corporation or
its shareholders for money damages for the breach of fiduciary duty as a
director, except for liability for any of the following: (i) the amount of a
financial benefit received by a director to which such director is not entitled;
(ii) an intentional infliction of harm on the Corporation or its shareholders;
(iii) a violation of A.R.S. ? 10-833; or (iv) an intentional violation of
criminal law. The directors of the Corporation shall be indemnified for
liability, as defined in A.R.S. ? 10-850, to any person for any action taken, or
any failure to take any action as a director, except liability for any of the
exceptions described in the prior sentence and except in connection with any
matter for which indemnification is prohibited under A.R.S. ? 10-851(D), to the
fullest extent permitted by the Arizona Business Corporation Act, A.R.S. ?
10-101 et seq. The officers of the Corporation shall be indemnified to the same
extent as directors of the Corporation; and any officer who is not also a
director or who is a party to a proceeding on the basis of an act or omission
solely as an officer shall further be indemnified against liability for any of
the exceptions described in the first sentence of this Article VII, except that
an officer who is not also a director shall not be indemnified for (a) liability
in connection with a proceeding by or in the right of the Corporation other than
for reasonable expenses incurred in connection with the proceeding; or (b)
liability arising out of conduct that constitutes: (i) receipt by the officer of
a financial benefit to which the officer is not entitled; (ii) an intentional
infliction of harm on the Corporation or the shareholders; or (iii) an
intentional violation of criminal law. If the Arizona Business Corporation Act
is amended to authorize corporate actions further eliminating or limiting the
personal liability of officers or directors, or to expand the matters for which
indemnification is permissible, then the liability of an officer or director of
the Corporation shall be automatically eliminated or limited and the
indemnification of the officers and directors shall be automatically expanded,
to the fullest extent permitted by the Arizona Business Corporation Act, as so
amended, without any further corporate or shareholder action being required. Any
repeal or modification of this Article VII by the shareholders of the
Corporation shall not adversely affect any right or protection of an officer or
director of the Corporation existing at the time of such repeal or modification.
ARTICLE VIII
The private property of the officers, directors and stockholders of the
Corporation shall be exempt from all corporate debts of any kind whatsoever.
ARTICLE IX
The name and address of the statutory agent of the Corporation is:
Steven P. Oman, 15900 North 78th Street, Scottsdale, Arizona 85260. The
statutory agent may be changed by the Corporation at any time by the filing of
an appointment of a successor statutory agent.
<page>
APPENDIX B
AMENDED ACQUISITION AGREEMENT
THIS AMENDED ACQUISITION AGREEMENT ("Agreement") is made and entered
into as of the 15th day of March, 2002, by and among ALANCO TECHNOLOGIES, INC.,
an Arizona corporation ("Alanco"), and TECHNOLOGY SYSTEMS INTERNATIONAL, INC., a
Nevada corporation ("TSI").
RECITALS:
The respective Boards of Directors of Alanco and TSI, have concluded
that it is to their respective mutual advantage and benefit to effect a
transaction whereby TSI shall transfer its business and substantially all of its
assets to a wholly owned subsidiary of Alanco to be formed as provided herein
("Alanco Subsidiary") solely in exchange for voting shares of Alanco and the
assumption by Alanco Subsidiary of certain liabilities of TSI in a transaction
intended to qualify as a "reorganization" within the meaning of IRC Section
368(a)(1)(C) of the 1986 Code, it being contemplated by Alanco and TSI that TSI
will thereafter, as an integral part of the transaction, distribute the shares
of Alanco to TSI's shareholders in complete liquidation of TSI and dissolve.
The parties have entered into that certain Acquisition Agreement, dated
January 23, 2002, concerning the transaction, and have agreed to certain
amendments to said Acquisition Agreement which are reflected in this Agreement.
This Agreement reflects the amended and restated agreement of the parties in its
entirety and is intended to replace the former agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements and subject
to the terms and conditions set forth in this Agreement, the parties agree as
follows:
1.0 Sale of Assets of TSI to Alanco Subsidiary. Upon and subject to the
terms and conditions herein stated, Alanco, through Alanco Subsidiary agrees to
acquire from TSI and TSI agrees to transfer, assign and convey to Alanco
Subsidiary upon the Closing Date (as hereinafter defined), free and clear of all
debts, liens and encumbrances (except as otherwise provided in this Agreement),
all of the assets and properties of TSI (the "Assets") including all of the
business, goodwill, assets, properties and rights of every nature, kind and
description, whether tangible or intangible, real, personal or mixed, wherever
located and whether or not carried or reflected on the books and records of TSI,
which are owned by TSI or in which TSI has any interest (including the right to
use), accepting only the Excluded Assets and any of the foregoing which relate
exclusively to the Excluded Assets. The Assets shall include, but are not
limited to, the following:
1.1 Inventories. All inventories, including, without limitation,
inventory of raw materials, work in process, storehouse stocks, materials,
supplies, finished goods and consigned goods owned by TSI or in which TSI has
any interest, whether located on TSI's business premises, in transit to or from
such premises, in storage facilities or otherwise. A complete current list of
such Inventory acceptable to Alanco shall be delivered to Alanco at the Closing.
1.2 Tangible Personal Property. All tangible personal property
including all machinery, equipment, trucks, automobiles, furniture, supplies,
spare parts, tools, stores and other tangible personal property owned by TSI or
in which TSI has any interest, other than the Inventories. A complete current
list of such Tangible Personal Property acceptable to Alanco shall be delivered
to Alanco at the Closing.
1.3 Intangible Personal Property. All intangible personal property
including all intangible properties owned by TSI or in which TSI has any
interest, including, but not limited to (i) the name "Technology Systems
International" and any other registered or unregistered trademarks, service
marks, trade names and slogans, all applications therefor, and all associated
goodwill; (ii) all statutory, common law or registered copyrights, all
applications therefore and all associated goodwill; (iii) all patents and patent
applications, all associated technical information, shop rights, know-how, trade
secrets, processes, operating, maintenance, and other manuals, drawings and
specifications, process flow diagrams and related data, and all associated
goodwill; (iv) all "software" and documentation thereof, (including all
electronic data processing systems and program specifications, source codes,
input data and report layouts and formats, records, files, layouts, or diagrams,
functional specifications and narrative descriptions, or flow charts); (v) all
other inventions, discoveries, improvements, processes, formulae (secret or
otherwise), data, drawings, specifications, trade secrets, confidential
information know-how and ideas (including those in possession of third-parties,
but which are the property of TSI), and all drawings, records, books or other
tangible media embodying the foregoing. A complete current list of such
Intangible Personal Property acceptable to Alanco shall be delivered to Alanco
at the Closing.
1.4 Prepaid Items. All prepaid items including insurance deposits,
municipal or local tax payments or deposits, utility deposits and the like,
deferred charges, reserve accounts and other security or similar deposits owned
by TSI or in which TSI has any interest. A complete current list of such Prepaid
Items acceptable to Alanco shall be delivered to Alanco at the Closing.
1.5 Licenses and Permits. All licenses and permits issued to TSI
in which TSI has any interest.
1.6 Contracts and Other Agreements. All contracts and other agreements,
including contracts, agreements, warranties, guarantees, indentures, bonds,
options, leases, subleases, easements, mortgages, plans, licenses, purchase
orders, sales orders, commitments or binding arrangements of any nature
whatsoever, express or implied, written or unwritten, and all amendments
thereto, entered into by or binding upon TSI or to which any of its properties
may be subject, other than those, if any, which constitute Excluded Assets or
relate exclusively to the Excluded Assets. A complete current list of such
Contracts and Other Agreements acceptable to Alanco shall be delivered to Alanco
at the Closing.
1.7 Accounts Receivable. All accounts receivable of TSI, including all
accounts, notes, accounts receivable, contract rights, drafts, and other forms
of claims, demands, instruments, receivables and rights to the payment of money
or other forms of consideration, whether for goods sold or leased, services
performed or to be preformed, or otherwise, owned by TSI or in which TSI has any
interest, together with all guarantees, security agreements and rights and
interests securing the same. A complete current Accounts Receivable Aging Report
acceptable to Alanco shall be delivered to Alanco at the Closing.
1.8 Cash and Cash Equivalents. All cash and cash equivalents, including
actual cash, bank accounts, certificates of deposits, banker's acceptances,
United States Government (or agency) securities, or other securities owned by
TSI or in which TSI has any interest, other than those, if any, which constitute
Excluded Assets or relate exclusively to the Excluded Assets.
1.9 Tax Refunds. All of TSI's rights to refunds of all or any
part of any taxes paid by TSI in relation toperiods prior to the Closing Date.
1.10 Books and Records. All books and records of TSI including ledgers,
employee records, customer lists, files, correspondence, and other written
records of every kind owned by TSI or in which TSI has any interest, other than
those, if any, which constitute Excluded Assets or relate exclusively to the
Excluded Assets.
1.11 Warranties. All warranties or other rights of TSI under express or
implied warranties from suppliers or contractors with respect to the Assets to
the extent assignable.
1.12 Goodwill. All goodwill of TSI as a going concern.
1.13 Other Properties. All other properties, tangible and intangible,
not otherwise referred to above which are owned by TSI or in which it has any
interest, other than those, if any, which constitute Excluded Assets or relate
exclusively to the Excluded Assets.
Excluded specifically from the Assets which TSI has agreed to sell to
Alanco are the following Assets ("Excluded Assets") which shall be retained by
TSI:
1.14 Corporate Records. The stock record books, the corporate seal,
minute books and other documents and records relating to the organization of
TSI, all of TSI's tax and information returns; all correspondence between TSI
and its shareholders; and all other financial records of TSI which do not relate
in any way to TSI's ownership and operation of the Assets or its business;
provided, however, that upon reasonable notice from Alanco to TSI or its
successors in interest based upon reasonable cause, TSI or its successors in
interest shall provide Alanco with access at no charge to any of the foregoing
described material and with copies of said documents.
1.15 Agreement Rights. The rights of TSI under this Agreement,
including the shares of Alanco stock to be received hereunder.
1.16 Treasury Shares. Any shares of TSI's capital stock held in
treasury.
1.17 Claims Against Shareholders, Etc. All of TSI's claims, causes of
action, chosen in action, and rights of set-off of any kind against or
pertaining to its shareholders, officers and directors.
2.0 Assumption of Liabilities.
2.1 Assumed Liabilities. Upon and subject to the terms and conditions
herein stated, Alanco agrees to assume as of the Closing Date and to pay,
perform and discharge all the liabilities of TSI which are specifically set
forth on Schedule 2.1 attached hereto and made a part hereof (the "Assumed
Liabilities"). The Assumed Liabilities include obligations owed to EMS, Inc,
which obligations will be settled in part by Alanco issuing 1,000,000 shares of
its Common Stock as well as its promissory notes aggregating $350,000 in
accordance with an agreement between Alanco and EMS, Inc. The parties
acknowledge that the Assumed Liabilities may change due to changes in TSI's
liabilities prior to the Closing Date and that an updated list of Assumed
Liabilities as of the Closing Date shall be delivered to Alanco upon the Closing
Date, which updated list, upon approval by Alanco, shall become the Assumed
Liabilities.
2.2 Excluded Liabilities. All of the liabilities not specifically
assumed by Alanco pursuant to paragraph 2.1 above shall remain the liabilities
of TSI (the "Excluded Liabilities"). TSI agrees to indemnify and hold harmless
Alanco, as well as its successors and assigns, from any and all claims, charges,
liabilities and expenses, including reasonable attorney's fees, relating in any
way to the Excluded Liabilities. The Excluded Liabilities include, but are not
limited to the following:
(a) All obligations and liabilities with respect to employee
wages and benefits, including accrued vacation pay, including specifically,
employee stock options, unfunded employee benefit plan obligations, and any
taxes related thereto accrued prior to the Closing Date or severance obligation
for any personnel whose severance occurs prior to or on the Closing Date.
(b) Any obligations of TSI to perform this Agreement.
(c) Any obligation or liability of TSI that is not accrued or
incurred by TSI on or before the Closing Date. Notwithstanding the foregoing,
Alanco shall pay for goods in transit to TSI as of the Closing Date upon their
receipt.
(d) Any liability of TSI to its stockholders not set forth on
Schedule 2.1.
(e) Any liability of TSI with respect to its outstanding
shares or any warrants, obligations, or rights to purchase its shares.
(f) Any liability of TSI with respect to any options or
warrants to purchase any of its capital stock.
(g) Any liability for taxes, except as may be expressly
assumed hereunder.
(h) Any liability known or unknown, not assumed by Alanco
under the provisions of Section 2.1 above.
3.0 Consideration For Assets. In consideration of and in exchange for
the transfer, assignment and conveyance of the Assets, in addition to the
assumption of Assumed Liabilities, Alanco shall issue to TSI the number of
shares of Alanco's Class A Common Stock and Class B Common Stock at such times
as indicated in sub-sections 3.1 through 3.5 below. Whenever the term "Common
Stock" is used in this Agreement without reference to either Class A or Class B
it shall refer to both Class A and Class B Common Stock of Alanco.
3.1 Initial Payment at Closing. Alanco shall issues and deliver to
TSI 6,000,000 shares of Class A Common Stock at Closing.
3.2 Second Payment Upon Achievement of $3,000,000 of Gross Profit From
TSI Business. TSI's financial projections for calendar year 2002 are attached
hereto as Exhibit "A" and incorporated herein by reference. As soon as
reasonably possible after the Alanco Subsidiary, through operation of TSI's
Assets and business to be acquired as contemplated herein (the "Business"),
achieves an aggregate Gross Profit of $3,000,000 from the Business during
calendar year 2002 (including pre-Closing calendar year 2002 revenues), Alanco
shall issue and deliver to TSI (or to the TSI's shareholders if the right to
receive the deferred payment of Class B Common Stock has been assigned to them
upon liquidation of TSI) an additional payment of 5,000,000 shares of Class B
Common Stock.
For purposes of this section 3.2 and sections 3.3 and 3.4 below, "Gross
Profit" shall mean revenue received or to be received from sales of systems,
products and services from the Business, less the cost of sales employed with
respect to such sales, all as determined in accordance with generally accepted
accounting principles (under the percentage of completion contract method where
applicable), with royalty expenses included in cost of sales and the EMS
Corporation surcharge up to a cumulative $500,000 excluded from cost of sales.
The EMS Surcharge is the amount charged by EMS for its products incorporated in
TSI sales which exceeds the cost of such products from another source, where
such excess cost is attributable to EMS recovering its research and development
expenses related to its products. Gross Profit shall not be benefitted by write
down of any beta test site property or inventory upon its subsequent
disposition. Further, revenue from system sales and installation contracts shall
be separately reported as contemplated in the TSI financial projections attached
as Exhibit A. Alanco shall maintain accurate books and records covering all
transactions relating to Gross Profit. No more than once per calendar quarter
through the second calendar quarter of 2003, TSI and its duly authorized
representatives shall have the right, upon reasonable notice and at reasonable
times, to audit such records.
3.3 Final Payment Upon Achievement of Additional Gross Profit From TSI
Business. For each dollar of additional Gross Profit from the Business in excess
of $3,000,000 achieved during calendar year 2002, Alanco shall issue and deliver
to TSI (or to the TSI's shareholders if the right to receive the deferred
payment of Class B Common Stock has been assigned to them upon liquidation of
TSI) an additional four (4) shares of Class B Common Stock, up to the maximum of
an additional 12,000,000 shares of Class B Common Stock. All shares of Class B
Common Stock earned under this section 3.3 shall be issued by Alanco on a
quarterly basis within sixty (60) days following the end of each calendar
quarter occurring during the earning period.
3.4 Final Payment Extension. In the event that the maximum number of
additional shares of Class B Common Stock as provided in section 3.3 above have
not been earned by December 31, 2002 and both of the following have occurred:
(i) at least $4,500,000 of Gross Profit was achieved during calendar year 2002
from the Business, and (ii) a minimum of $15,000,000 in gross sales of the
Business have been contracted for (through binding contracts and/or purchase
orders received) during calendar year 2002, then Gross Profit produced during
the first quarter of calendar year 2003 in excess of $1,000,000 shall earn
additional shares of Class B Common Stock at the same rate of four (4) shares of
Class B Common Stock for each dollar of such additional excess Gross Profit;
provided, however, that not more than the maximum of 12,000,000 shares of Class
B Common Stock shall be payable aggregately under sections 3.3 and this section
3.4.
All shares of Class B Common Stock earned under this section 3.5 shall
be issued by Alanco within sixty (60) days following the end of the first
quarter of calendar year 2003.
3.5 Registration of Shares. The Common Stock of Alanco to be issued to
TSI hereunder shall be registered in accordance with the Registration Rights
Agreement attached hereto as Exhibit B. Until so registered, said shares shall
have the status of unregistered shares under the Securities Act of 1933 or any
similar state securities laws, and may not be sold unless an exemption from such
registration is available.
3.6 Restrictions Concerning Resale. Notwithstanding the registration of
the Common Stock pursuant to the Registration Rights Agreement, or any exemption
available from such registration, no single holder of the Class A Common Stock
to be issued hereunder shall sell more Alanco Common Stock in any ninety (90)
day period than the average weekly reported volume of trading for Alanco Common
Stock on NASDAQ and/or through the automated quotation system for the four
calendar weeks preceding any sale thereof, and Alanco shall have the right to
issue instructions to its transfer agent or take such other actions, including
placing a restrictive legend upon share certificates, to assure that said resale
limitation is honored.
3.7 Adjustments to Number of Shares to be Issued.
(a) Adjustment Due to Stock Split, Stock Dividend, Etc. If,
prior to the date that any shares are to be issued by Alanco to TSI under this
section 3.0, the number of outstanding shares of Common Stock is increased by a
stock split, stock dividend, or other similar event, the number of shares to be
issued shall be proportionately increased, or if the number of outstanding
shares of Common Stock is decreased by a combination or reclassification of
shares, reverse stock split, or other similar event, the number of shares to be
issued shall be proportionately reduced.
(b) Adjustment Due to Merger, Consolidation, Etc. If, prior to
the issuance of all shares to be issued pursuant to this section 3.0, there
shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common
Stock of Alanco shall be changed into the same or a different number of shares
of the same or another class or classes of stock or securities of Alanco or
another entity, then TSI, or its shareholders as the case may be, shall
thereafter have the right to receive, upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore to have been receivable, such stock, securities or other
assets which TSI would have been entitled to receive in such transaction had the
shares been issued immediately prior to such transaction.
4.0 Representations and Warranties of TSI. TSI represents and warrants
to Alanco as follows, and acknowledges and confirms that Alanco is relying upon
such representations and warranties in connection with the execution, delivery
and performance of this Agreement, notwithstanding any investigation made by
Alanco or on its behalf:
4.1. Organization and Standing. TSI is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada, has
all of the requisite corporate power and authority and has all of the licenses,
permits, authorities and consents that are necessary to own, operate and lease
its properties and to carry on its business as now being conducted. TSI is duly
qualified to do business and is in good standing as a foreign corporation in all
jurisdictions in which the property owned, leased or operated by TSI or the
nature of the business conducted by TSI makes such qualification necessary. TSI
is not a party to or subject to any agreement, consent decree or order, or other
understanding or arrangement with, or any directive of, any governmental
authority or other person which imposes any restriction or otherwise affects in
any material way the conduct of its business in any jurisdiction or location.
4.2. Capitalization. Presently and at the Closing Date, the authorized
capital of TSI consists solely of 35,000,000 shares of Common Stock, $0.001 par
value, of which as of March 6, 2002, 23,180,919 shares have been validly issued
and are outstanding. All issued shares of capital stock have been validly
authorized and issued and are fully paid and nonassessable.
4.3. Subsidiaries. TSI has no subsidiaries or affiliated
companies and does not otherwise presently own or control, directly or
indirectly, any other corporation, association, or other business entity.
4.4. Authorization. TSI has all the requisite legal and corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. All corporate action on the part of TSI and
its officers, directors and stockholders necessary for the authorization,
execution, delivery, and performance of all obligations of TSI under this
Agreement has been (or will be) taken prior to the Closing. This Agreement, when
executed and delivered, shall constitute a legal, valid and binding obligation
of TSI, enforceable in accordance with its terms.
4.5. Governmental Consents. No consent, approval, order, or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority is required on
the part of TSI in connection with the execution, delivery or performance of
this Agreement or consummation of the transactions contemplated hereby.
4.6. Compliance with Other Instruments. TSI will not be, as a result of
the execution, delivery or performance of this Agreement, in violation of or
default under any provision of its Articles of Incorporation or By-laws, as
amended and in effect on the date hereof, or of any provision of any instrument,
contract or lease to which it is a party, or of any provision of any federal or
state judgment, writ, decree, order, statute, rule, or governmental regulation
applicable to TSI.
4.7. Financial Statements. An audited balance sheet, income statement
and statement of cash flows as of and for the six-month period ending June 30,
2001, and each of the fiscal years ending December 31, 2000 and 1999 (The "TSI
Audited Financials"), and an unaudited balance sheet and income statement as of
and for the period ending December 31, 2001, have been provided to Alanco (The
"TSI Unaudited Financials"). The TSI Audited Financials and the TSI Unaudited
Financials are hereinafter referred to collectively as the "TSI Financials."
The TSI Audited Financials have been prepared in accordance with
generally accepted accounting principles consistently applied, are true and
correct and fairly present the financial position of TSI as of their respective
dates and the results of its operations for the periods then ended. The TSI
Unaudited Financials have also been prepared in accordance with generally
accepted accounting principles consistently applied and are true and correct and
fairly present the financial position of TSI as of their respective dates and
the results of operations for the period then ended and contain all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation. TSI has established and will continue to maintain a standard
system of accounting to be carried out and administered in accordance with
generally accepted accounting principles. Except to the extent reflected or
reserved against or disclosed in the TSI Financial Statements, as of their
respective dates, TSI has not incurred any material liabilities or obligations
of any kind, whether accrued, absolute, contingent or otherwise, which under
generally accepted accounting principles should have been so reflected or
reserved against or disclosed.
4.8 Undisclosed Liabilities. TSI has no liabilities or obligations,
either absolute, accrued, contingent or otherwise, which individually or in the
aggregate are materially adverse to the financial condition and business of TSI,
which (i) have not been reflected in the TSI Financial Statements, (ii) have not
been described in this Agreement or in any of the Schedules hereto, or (iii)
have not been incurred in the ordinary course of business since December 31,
2001, consistent with past practices.
4.9 Inventory. The inventory of TSI, as reflected in the Financial
Statements, consists of a quality and quantity usable and saleable in the
ordinary course of business. The inventory does not include any obsolete or
discontinued items. The inventory is stored and/or located at premises owned or
leased by TSI or at TSI's suppliers. The value at which TSI's inventory is
reflected in the TSI Financial Statements is the cost thereof on a first-in,
first-out basis and reflects write-offs or write-downs for damaged or obsolete
items in accordance with the historical inventory policy and practices of TSI.
TSI has not transferred inventory on consignment or granted return privileges to
any purchaser of its goods, other than in the ordinary course of business.
4.10 Accounts Receivable. No amount included in the accounts receivable
of TSI as of December 31, 2001 or thereafter, has been released for an amount
less than the value at which it was included or is or will be regarded as
unrecoverable in whole or in part except to the extent there shall have been an
appropriate bad debt reserve therefor. Such receivables are not, to the best
knowledge of TSI, subject to any counterclaim, refusal to pay or setoff not
reflected in the reserves set forth on the TSI Financial Statements.
4.11. No Prebillings. Except as set forth on Schedule 4.11, TSI has not
prebilled or received payment, and TSI will not prebill or receive payment, from
any of its accounts for goods to be delivered or for services to be rendered or
for expenses to be incurred subsequent to the Closing Date, other than in the
ordinary course of business, which shall amount to not more than $5,000 as of
the Closing Date. TSI does not book any such prebilling received as a sale, nor
does it book any profit therefrom prior to its actual shipment of the products
ordered.
4.12. Changes. Since December 31, 2001:
(a) TSI has not entered into any transaction which was not in
the ordinary course of business;
(b) There has been no adverse change in the condition
(financial or otherwise), business, property, assets or liabilities of TSI other
than changes in the ordinary course of business, none of which, individually or
in the aggregate, has been material;
(c) There has been no damage to, destruction of or loss of
physical property (whether or not covered by insurance) adverse to the
business or operations of TSI;
(d) TSI has not increased the compensation of any of its
officers or the rate of pay of their employees as a group, except as part of
regular compensation increases in the ordinary course of business;
(e) There has been no resignation or termination of employment
of any key officer or employee of TSI, and TSI does not know of any impending
resignation or termination of employment of any such officer or employee that if
consummated would have an adverse effect on the business of TSI;
(f) There has been no labor dispute involving TSI or any of
its employees and none is pending or, to the best of TSI's knowledge,
threatened;
(g) There have not been any changes, except in the ordinary
course of business, in the contingent obligations of TSI, by way of guaranty,
endorsement, indemnity, warranty or otherwise;
(h) There have not been any loans made by TSI to any of its
employees, officers or directors other than travel advances and office advances
made in the ordinary course of business;
(i) There has been no administrative agency charges or
proceedings commenced involving, relating to or affecting the business of
TSI; and
(j) There has been no other event or condition of any
character pertaining to and materially adverse to the Assets or business
of TSI.
4.13 Title to Assets; Liens, etc. The Assets, both real, personal and
mixed, tangible and intangible, necessary or useful to the operation of the
business of TSI are in good condition and repair, ordinary wear and tear
excepted, and suitable for the uses intended. The Assets are being maintained in
a state of good repair, and, in all respects, comply with and are operated in
conformity with all applicable laws, ordinances, regulations, orders, permits
and other requirements relating thereto adopted or currently in effect. TSI has
good and marketable title to the Assets, free and clear of all liens, other than
the lien for current taxes not yet due and payable and liens for goods used in
TSI's Michigan installations. The buildings and improvements owned or leased by
TSI and the uses thereof do not contravene any zoning or building law or
ordinance or violate any restrictive covenant. Each lease of real property
creates a legal, valid and enforceable leasehold interest in favor of TSI, free
and clear of all liens. No default or event of default on the part of TSI, as
lessee or mortgagor, as the case may be, exists with respect to any lease or
mortgage (and related loan documents) with respect to such real property.
4.14 Patents and Other Intangible Intellectual Assets.
(a) Schedule 4.14 sets forth a complete and correct list of
TSI's intellectual property, including but not limited to domestic and foreign
patents, patent applications, written records of inventions, registered and
unregistered trademarks, trade names, service marks, certification marks,
copyrights and registration applications for the above, and licenses to and from
third parties relating to any of the above.
(b) Except as set forth in Schedule 4.14, TSI (i) has legal
and equitable title to, or has by license or other grant, the right to use, free
and clear of all liens, all proprietary technology or information, patents, both
domestic and foreign, all registered and unregistered trademarks, trade names,
service marks, certification marks, copyrights, and applications for any and all
of the above used in the conduct of its business as now conducted; (ii) does
not, to the best of TSI's knowledge, infringe upon the patent, trademark, trade
name, service mark, copyright or proprietary information rights of any third
party in the conduct of its business as now conducted; (iii) is not obligated or
under any liability whatsoever to make any payments by way of royalties, fees or
otherwise to any owner of, licensor of, or other claimant to any patent,
trademark, trade name, service mark, certification mark, copyright or
proprietary technology or information with respect to the use thereof or in
connection with the conduct of its business or otherwise; (iv) has not licensed
or granted any rights to any third parties under its patents, trademarks, trade
names, service marks, certification marks, copyrights or proprietary technology
or information used in the conduct of its business; (v) has no notice, knowledge
or belief that any of TSI's patents, trademarks, trade names, service marks,
certification marks or copyrights are invalid, and all registrations, where
filed, are subsisting and are registered in the name of TSI; and (vi) has no
notice, knowledge or belief that any of the technology or information used in
the conduct of its business was illegally obtained.
(c) TSI employs procedures in its daily operations to maintain
the proprietary nature of, owns and has the unrestricted right to use all trade
secrets, including know-how, inventions, designs, processes, computer software
and documentation for such software and technical data required for or incident
to the development, manufacture, operation and sale of all products and services
sold by TSI, free and clear of any liens, including without limitation, all
claims of current and former employees, consultants, officers, directors and
stockholders of TSI.
4.15. Contracts and Obligations. Set forth in Schedule 4.15 is a list
of all material written and oral agreements, contracts, indebtedness,
liabilities and other obligations to which TSI is a party or by which it is
bound which (a) obligate TSI to share, license or develop any product or
technology; (b) involve transactions or proposed transactions between TSI and
its officers, directors, stockholders, affiliates or any affiliate thereof; (c)
involve strategic arrangements or cooperation agreements; (d) involve
commitments for inventory items or supplies in excess of $5,000; (e) are for a
term longer than twelve (12) months; (f) are written distribution or dealer
agreements; (g) are with the United States of America; or (h) involve receipts
or expenditures by TSI greater than $50,000 in any twelve-month period. Copies
of written, and summaries of oral, agreements, contracts, indebtedness,
liabilities and obligations have been made available for inspection by Alanco.
True and correct copies of the foregoing shall be delivered to Alanco at
Closing. All such agreements are legal, valid and binding obligations and are in
full force and effect in all respects. Except as set forth in Schedule 4.15, TSI
has avoided every condition and has not performed any act the occurrence of
which would result in TSI's loss of any right granted under any license,
distribution or other agreement.
4.16 Catalogs and Promotional Literature. Neither the use nor the
distribution of any advertising or promotional materials, including catalogs,
violates, infringes or conflicts with any statutory or common law copyright,
trademark, or other intellectual, proprietary, personal or other right of any
person. TSI has provided Alanco with, or made available to Alanco, copies of
each catalog distributed by TSI during the past two (2) years.
4.17 Conflicts of Interest; Transactions with Principals. No officer,
director or stockholder of TSI and no affiliate (as defined under the Securities
Act of 1933, as amended) of any such officer, director or stockholder has,
either directly or indirectly, (a) an interest in any corporation, partnership,
proprietorship, association or other person or entity which furnishes or sells
services or products to TSI or which purchases services or products from TSI or
whose services or products are similar to those furnished or sold by TSI, or (b)
a beneficial interest in any contract, agreement or commitment to which TSI may
be bound.
4.18 Outstanding Indebtedness. TSI has no indebtedness for borrowed
money (including deferred compensation) which TSI has directly or indirectly
created, incurred, assumed or guaranteed, or with respect to which TSI has
otherwise become directly or indirectly liable, other than as disclosed in
Schedule 4.18 or the TSI Financial Statements.
4.19 Employees. Except as set forth in Schedule 4.19, TSI has no
employment contracts with any of its employees which are not terminable at will
or any consulting or independent contractor agreements with any individual or
entity, and it does not have any collective bargaining agreements covering any
of its employees. There are no employee or labor disagreements or union
organization activities pending or threatened between TSI and its employees, and
TSI is not a party to any union or collective bargaining agreement. TSI complied
with all applicable federal and state equal employment opportunity laws and
other laws related to employment. TSI is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with TSI (or Alanco if Alanco elects to employ said persons
subsequent to the Closing Date), whether as a result of the transactions
contemplated hereby or otherwise, nor does TSI have a present intention to
terminate the employment of any of the foregoing (except subsequent to the
Closing Date). To TSI's knowledge, no employee of TSI is in violation of any
term of any employment contract, patent, proprietary information disclosure
agreement or any other contract or agreement relating to the right of any such
employee to be employed by TSI because of the nature of the business conducted
by TSI or for any other reason, and the continued employment by TSI of its
present employees will not result in any such violation.
4.20 Employee Benefit Plans.
(a) No TSI Employee Benefit Plan (defined as "employee welfare
benefit plans," as defined in Section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and any other employee benefit
arrangements or payroll practices, including, without limitation, sick leave,
vacation pay, salary continuation for disability, severance hospitalization,
medical insurance, and life insurance programs maintained by TSI, and "employee
pension benefit plans," as defined in Section 3(2) of ERISA, maintained by TSI,
including, without limitation, retirement, pension, savings, profit sharing,
severance and stock purchase programs) is required to be qualified under ERISA
or other applicable laws. There is no violation of ERISA with respect to the
filing of any applicable reports, documents and notices regarding the Employee
Benefit Plans with the Secretary of Labor and the Secretary of the Treasury or
the furnishing of such documents to the participants or beneficiaries of the
Employee Benefit Plans.
(b) TSI does not maintain retiree life or retiree health
insurance plans which provide for continuing benefits or coverage for any
participant or any beneficiary of a participant after termination of employment
except as may be required under the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended ("COBRA").
(c) TSI is in compliance with the notice and continuation
requirements of COBRA and the regulations thereunder.
(d) TSI has no formal plan or commitment, whether legally
binding or not, to create any additional Employee Benefit Plans or arrangement
or modify or change any existing Employee Benefit Plan, which would affect any
employee or former employee of TSI.
(e) Neither the execution or delivery of this Agreement nor
the consummation of the transactions contemplated hereby will result in any
rights under any of the Employee Benefit Plans becoming exercisable by the
holders thereof or result in the creation or vesting of any rights in such
holder under any of the Employee Benefit Plans, or accelerate the time of
payment or vesting or increase the amount of compensation or benefits due to any
director, officer, employee or former employee of TSI.
4.21 Taxes. TSI has filed all federal, state, county, local and foreign
tax returns, reports and forms for income, excise, social security, property,
payroll, unemployment and other taxes which are required to be filed by it,
including all sales tax returns with respect to direct sales made by TSI ("Tax
Returns"). TSI has paid, or adequate provision has been made on the TSI
Financial Statements for the payment of, all federal, state, county, local and
foreign taxes, assessments, levies or duties, howsoever measured or imposed, and
related interest and penalties, if any (collectively, "Taxes"). No Taxes in
addition to those so paid or provided for shall be assessed or levied against or
become due or payable by TSI on or after the Closing Date in respect to the
period prior to and including the Closing Date, except as shall be paid by TSI.
No unexpired waiver of the applicable statute of limitations with respect to any
taxable year has been executed by TSI. There are no tax examinations or audits
underway involving TSI.
4.22 No Sales or Conveyance Tax Due. No sales, use or other transfer or
conveyance taxes are or will become payable by any of the parties to this
Agreement as a consequence of the execution, delivery or performance of this
Agreement, other than taxes based upon the net income of the parties.
4.23 Insurance. All Assets of TSI are covered by such fire, casualty,
product liability, environmental liability and other insurance policies issued
by reputable insurers as are customarily obtained to cover comparable properties
and assets by businesses in the region in which the Assets are located, in
amounts, scope and coverage which are reasonable in light of existing
conditions. There are no outstanding written requirements or written
recommendations by any insurance company that issued a policy with respect to
any of the Assets, by any Board of Fire Underwriters or other body exercising
similar functions or by any governmental authority requiring or recommending any
repairs or other work to be done on or with respect to any of the Assets or
requiring or recommending any equipment or facilities to be installed on or in
connection with any of the Assets. TSI does not have any knowledge of any
proposed increase therein and does not know of any conditions or circumstances
applicable to its business which might result in such increase, except for those
conditions generally applicable to the industry in which TSI is engaged in
business. There are no material claims, actions, suits or proceedings arising
out of or based upon any of such policies of insurance, and, to the knowledge of
TSI, no basis for any such material claim, action, suit or proceeding exists.
There are no notices of any pending or threatened terminations or substantial
premium increases with respect to any of such policies, and TSI is in compliance
with all conditions contained therein.
4.24 Compliance With Laws.
(a) TSI is in full compliance with all laws, rules and
regulations applicable to or affecting it or the conduct of its business and has
secured all governmental licenses, permits and approvals necessary to its
business.
(b) Other than sales tax licensing and corporate approvals to
do business, no government licenses, permits or appraisals are otherwise issued
to or relied upon by TSI to conduct its business.
4.25 Litigation. Except as set forth in Schedule 4.25, there is no
action, suit, arbitration, proceeding or investigation pending or threatened
against TSI before any court or administrative agency, nor does TSI know or have
any reason to know of any basis for any such action, proceeding or
investigation. TSI has not received any opinion or memorandum or legal advice or
notice from legal counsel to the effect that it is likely, from a legal
standpoint, that it will incur any liability which may be material to its
business.
4.26 Full Disclosure; No Misrepresentation. TSI has fully provided
Alanco with all the information which Alanco has requested for deciding whether
to enter into this Agreement. Neither this Agreement nor any certificate or
Schedule or other information furnished by or on behalf of TSI pursuant to this
Agreement contains any untrue statement of a material fact or, when this
Agreement and such certificates, Schedules and other information are taken in
their entirety, omits to state a material fact necessary to make the statements
contained herein or therein not misleading.
5.0 Representations and Warranties of Alanco. Alanco represents and
warrants to TSI as follows, and acknowledges and confirms that TSI is relying
upon such representations and warranties in connection with the execution,
delivery and performance of this Agreement, notwithstanding any investigation
made by TSI or on its behalf:
5.1. Organization and Standing. Alanco is a corporation duly organized,
validly existing and in good standing under the laws of the State of Arizona,
has all of the requisite corporate power and authority and has all of the
licenses, permits, authorities and consents that are necessary to own, operate
and lease its properties and to carry on its business as now being conducted and
as proposed to be conducted. Alanco is duly qualified to do business and is in
good standing as a foreign corporation in all jurisdictions in which the
property owned, leased or operated by Alanco or the nature of the business
conducted by Alanco makes such qualification necessary. Neither Alanco nor any
Subsidiary (as defined in Section 5.3) is a party to or subject to any
agreement, consent decree or order, or other understanding or arrangement with,
or any directive of, any governmental authority or other person which imposes
any restriction or otherwise affects in any material way the conduct of their
business in any jurisdiction or location.
5.2. Capitalization. All issued and outstanding shares of capital stock
of Alanco have been validly authorized and issued and are fully paid and
nonassessable. At Closing, the authorized capital of Alanco will consist solely
of (i) seventy-five million (75,000,000) shares of Class A Common Stock, of
which, as of February 12, 2002, 10,212,600 shares were validly issued and
outstanding, fully paid and nonassessable, (ii) twenty-five million (25,000,000)
shares of Class B Common Stock, which has 1/100th of one vote per share, of
which none are presently issued and outstanding, provided, however, 17,000,000
of which will be issued to TSI or its shareholders pursuant to sections 3.2, 3.3
and 3.4 above, and (iii) twenty-five million (25,000,000) shares of Preferred
Stock, none of which are presently issued and outstanding.
5.3. Subsidiaries. Except for Arraid, Inc., an Arizona corporation,
SanOne, Inc., an Arizona corporation, Excel/Meridian Data, Inc., an Arizona
corporation, Netzerver, Inc. an Arizona corporation, and Fry Guy, Inc., a
Nevada corporation (each a "Subsidiary" and together the "Subsidiaries"),
Alanco has no subsidiaries or affiliated companies and does not otherwise
presently own or control, directly or indirectly, any other corporation,
association, or other business entity. Each Subsidiary is duly organized,
validly existing and in good standing under the laws of the state of its
incorporation and is wholly owned by Alanco. Each Subsidiary is duly qualified
to do business and is in good standing as a foreign corporation in all
jurisdictions in which the property owned, leased or operated by the
Subsidiary or the nature of the business conducted by the Subsidiary makes such
qualification necessary. Each Subsidiary has all the requisite corporate
power, authority, licenses and permits that are necessary to own, operate and
lease its properties and to carry on its business as now being conducted.
5.4. Validity of Common Stock. The Alanco Common Stock, when issued,
sold and delivered to TSI in accordance with this Agreement for the
consideration expressed herein, will be validly issued, fully paid and
nonassessable and will be free and clear of all liens.
5.5 Authorization. Alanco has all the requisite legal and corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. All corporate action on the part of Alanco and
its officers, directors and stockholders necessary for the authorization,
execution, delivery, and performance of all obligations of Alanco under this
Agreement and for the authorization, issuance and delivery of the Common Stock
being issued and sold under this Agreement by Alanco has been (or will be) taken
prior to the Closing. This Agreement, when executed and delivered, shall
constitute a legal, valid and binding obligation of Alanco, enforceable in
accordance with its terms.
5.6 Governmental Consents. No consent, approval, order, or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority is required on
the part of Alanco in connection with the execution, delivery or performance of
this Agreement or consummation of the transactions contemplated hereby other
than filing of a notice of issuance of the Common Stock with NASDAQ. Based in
part upon the accuracy of the Buyer's representations and warranties as set
forth in Section 6.1, the sale and issuance of the Common Stock by Alanco in
conformity with the terms of this Agreement is exempt from the registration
requirements of all applicable federal and state securities laws.
5.7 Compliance with Other Instruments. Neither Alanco nor any
Subsidiary will be, as a result of the execution, delivery or performance of
this Agreement, in violation of or default under any provision of its Articles
of Incorporation or By-laws, as amended and in effect on date hereof, or of any
provision of any instrument, contract or lease to which it is a party, or of any
provision of any federal or state judgment, writ, decree, order, statute, rule,
or governmental regulation applicable to Alanco or any Subsidiary.
5.8 Financial Statements. A consolidated audited balance sheet, income
statement and statement of cash flows as of and for the fiscal year ending June
30, 2001 (the Alanco Audited Financials"), with related opinion of Alanco's
independent public accountants, and consolidated unaudited balance sheets and
income statements as of and for the periods ending September 30, 2001 and
December 31, 2001 (the "Alanco Unaudited Financials"), have been provided to
TSI. The Alanco Audited Financials and the Alanco Unaudited Financials are
hereinafter referred to collectively as the "Alanco Financials."
The Alanco Audited Financials have been prepared in accordance with
generally accepted accounting principles consistently applied, are true and
correct and fairly present the financial position of Alanco and its Subsidiaries
as of their respective dates and the results of their operations for the periods
then ended. The Alanco Unaudited Financials have also been prepared in
accordance with generally accepted accounting principles consistently applied
and are true and correct and fairly present the financial position of Alanco and
its Subsidiaries as of their respective dates and the results of operations for
the period then ended and contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation. Alanco and its
Subsidiaries have established and will continue to maintain a standard system of
accounting to be carried out and administered in accordance with generally
accepted accounting principles. Except to the extent reflected or reserved
against or disclosed in the Alanco Financial Statements, as of their respective
dates, neither Alanco nor any Subsidiary has incurred any material liabilities
or obligations of any kind, whether accrued, absolute, contingent or otherwise,
which under generally accepted accounting principles should have been so
reflected or reserved against or disclosed (including, without limitation, all
liabilities to vendors and customers of Alanco and its Subsidiaries).
5.9 Undisclosed Liabilities. Neither Alanco nor any Subsidiary has any
liabilities or obligations, either absolute, accrued, contingent or otherwise,
which individually or in the aggregate are materially adverse to the financial
condition and business of Alanco or its Subsidiaries, which (i) have not been
reflected in the Alanco Financial Statements, (ii) have not been described in
this Agreement or in any of the Schedules hereto, or (iii) have not been
incurred in the ordinary course of business since December 31, 2001, consistent
with past practices.
5.10 Changes. Except as set forth in Schedule 5.10, since December
31, 2001:
(a) Neither Alanco nor any subsidiary has entered into any transaction
which was not in the ordinary course of business;
(b) There has been no adverse change in the condition (financial or
otherwise), business, property, assets or liabilities of Alanco or any
Subsidiary other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been material;
(c) There has been no damage to, destruction of or loss of physical
property (whether or not covered by insurance) adverse to the business or
operations of Alanco or any Subsidiary;
(d) Neither Alanco nor any Subsidiary has declared or paid any
dividend or made any distribution on its stock;
(e)There has been no litigation or administrative agency charges or
proceedings commenced involving, relating to or affecting their business; and
(f) There has been no other event or condition of any character
pertaining to and materially adverse to the assets or business of Alanco and its
Subsidiaries.
5.11 Title to Properties and Assets; Liens, etc. The properties and
assets of Alanco and its Subsidiaries, both real, personal and mixed, tangible
and intangible, necessary or useful to the operation of their business are in
good condition and repair, ordinary wear and tear excepted, and suitable for the
uses intended. The properties and assets are being maintained in a state of good
repair, and, in all respects, comply with and are operated in conformity with
all applicable laws, ordinances, regulations, orders, permits and other
requirements relating thereto adopted or currently in effect.
5.12 Taxes. Alanco and its Subsidiaries have filed all federal, state,
county, local and foreign tax returns, reports and forms for income, excise,
social security, property, payroll, unemployment and other taxes which are
required to be filed by them, including all sales tax returns with respect to
direct sales made by Alanco or its Subsidiaries ("Tax Returns"). Alanco and its
Subsidiaries have paid, or adequate provision has been made on the Alanco
Financial Statements for the payment of, all federal, state, county, local and
foreign taxes, assessments, levies or duties, howsoever measured or imposed, and
related interest and penalties, if any (collectively, "Taxes"). No unexpired
waiver of the applicable statute of limitations with respect to any taxable year
has been executed by Alanco or its Subsidiaries. There are no tax examinations
or audits underway involving Alanco or any Subsidiary.
5.13 Compliance With Laws.
(a) Alanco and its Subsidiaries are in full compliance with all laws,
rules and regulations applicable to or affecting them or the conduct of their
business and have secured all governmental licenses, permits and approvals
necessary to their business.
(b) Other than sales tax licensing and corporate approvals to do
business, no government licenses, permits or appraisals are otherwise issued to
or relied upon by Alanco or its Subsidiaries to conduct their business.
5.14 Filings. Alanco has previously delivered to TSI an accurate and
complete copy of each final registration statement, report and definitive proxy
statement, together with all amendments or supplements required to be made with
respect thereto, filed since June 30, 1997 and prior to the date hereof by
Alanco with the Securities and Exchange Commission (the "SEC") pursuant to the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended (collectively, the "Company Reports"). Alanco Reports: (i) comply as to
form with the requirements of the Exchange Act, and the regulations promulgated
thereunder; (ii) contain all exhibits required to be included therein by the
Exchange Act and the regulations promulgated thereunder; and (iii) do not
contain any misstatement of a material fact or omit to state any material fact
necessary, in light of the circumstances under which they were made, to make
such statements not misleading.
5.15 Litigation. There is no material action, suit, arbitration,
proceeding or investigation pending or threatened against Alanco or any
Subsidiary before any court or administrative agency, nor does Alanco, after due
investigation, know or have any reason to know of any basis for any such action,
proceeding or investigation. Neither Alanco or its Subsidiaries have received
any opinion or memorandum or legal advice or notice from legal counsel to the
effect that it is likely, from a legal standpoint, that it will incur any
liability or disadvantage which may be material to their business.
5.16 Full Disclosure; No Misrepresentation. Alanco has fully provided
TSI with all the information which TSI has requested for deciding whether to
enter into this Agreement and all information which Alanco believes is
reasonably necessary to enable TSI to make such decision. Neither this Agreement
nor any certificate or Schedule or other information furnished by or on behalf
of Alanco pursuant to this Agreement contains any untrue statement of a material
fact or, when this Agreement and such certificates, Schedules and other
information are taken in their entirety, omits to state a material fact
necessary to make the statements contained herein or therein not misleading.
6.0 Private Placement Status; Representations and Warranties of TSI.
6.1 TSI represents and warrants as follows and acknowledges and
confirms that Alanco is relying upon such representations and warranties in
connection with the execution, delivery and performance of this Agreement,
notwithstanding any investigation made by Alanco or on its behalf:
(a) TSI has such knowledge and experience in financial and
business matters, or has relied upon advisors who are so qualified, that it is
capable of evaluating the merits and risks of the investment in Alanco as
contemplated by this Agreement and is able to bear the economic risk of such
investment for an indefinite period of time. TSI and the TSI Shareholders have
been furnished access to such information and documents as they have requested
and have been afforded an opportunity to ask questions of and receive answers
from representatives of Alanco concerning the business and financial condition
of Alanco and the terms and conditions of this Agreement and the issuance of
securities contemplated hereby.
(b) TSI is acquiring the Common Stock of Alanco for investment
for its own account and to transfer the same to its shareholders in connection
with the liquidation of TSI. TSI understands that the Common Stock of Alanco to
be issued to TSI hereunder has not been registered under the Act by reason of a
specific exemption from the registration provisions of the Act which depends
upon, among other things, the accuracy of TSI's representations expressed
herein.
(c) TSI acknowledges that, until registered pursuant to the
Registration Rights Agreement attached hereto as Exhibit B, the Common Stock of
Alanco may not be sold or offered for sale in the absence of an effective
registration statement as to such securities under said Act and any applicable
state securities laws or an exemption from such registration is available.
(d) TSI has received from Alanco and has reviewed the
following public disclosure documents and reports of Alanco: Alanco's 2001
Annual Report including Form 10KSB, Alanco's Proxy Statement delivered to its
shareholders for the Annual Meeting of Shareholders held December 14, 2001, and
Alanco's Form 10-Q for the Quarters ended September 30, 2001 and December 31,
2001. TSI has had an opportunity to discuss the business, management and
financial affairs of Alanco and its Subsidiaries with their management and an
opportunity to review the facilities of Alanco and its Subsidiaries.
(e) TSI and the TSI Shareholders (other than some of the TSI
employees not in excess of 35) are accredited investors within the meaning
ascribed to such term in Regulation D of the Securities Act of 1933, and possess
such knowledge and experience in financial and business matters so as to be
capable of evaluating the merits and risks of a prospective investment in the
Common Stock of Alanco and capable of bearing the economic risks of such
investment.
(f) TSI has been solely responsible for its "due diligence"
investigation of Alanco and its management and business, for the analysis of the
merits and risks of an investment in the Common Stock of Alanco; that in taking
any action or performing any role relative to the arranging of the investment,
has acted solely in its interest, and that neither it nor any of its agents or
employees have acted as an agent of Alanco or any subsidiary, or as an issuer,
underwriter, broker, dealer or investment advisor relative to the Common Stock
of Alanco.
6.2.Legend. Each certificate representing the Common Stock of
Alanco shall be endorsed with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY OTHER SECURITIES LAWS,
AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND OTHER APPLICABLE SECURITIES
LAWS COVERING SUCH SECURITIES, OR THE ISSUER RECEIVES AN OPINION OF COUNSEL
SATISFACTORY TO IT THAT ANOTHER EXEMPTION FROM REGISTRATION IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESALE VOLUME
LIMITATIONS SO THAT THE HOLDER HEREOF SHALL NOT SELL MORE SHARES IN ANY NINETY
(90) DAY PERIOD THAN THE AVERAGE WEEKLY REPORTED VOLUME OF TRADING FOR ALANCO
COMMON STOCK ON NASDAQ AND/OR THROUGH THE AUTOMATED QUOTATION SYSTEM FOR THE
FOUR CALENDAR WEEKS PRECEDING ANY SUCH SALE.
Alanco shall not register a transfer of the Common Stock of Alanco unless the
conditions specified in the foregoing legend are satisfied. Alanco may instruct
its transfer agent not to register the transfer of any of such securities,
unless the conditions specified in the foregoing legend are satisfied.
7.0 Bulk Sales Law. Based upon the warranties and representations of
TSI contained herein, the assumption of the Assumed Liabilities by Alanco, and
the nominal amount of TSI inventory, the Arizona bulk sales law is not
applicable to this transaction.
8.0 Pre-Closing Covenants.
8.1 Access to Information; Confidentiality. (a) From the date hereof to
the Closing Date, TSI will (i) afford to representatives of Alanco, including
its counsel and auditors, during normal business hours, access to any and all of
the Assets and information with respect to the business so that Alanco may have
a reasonable opportunity to make such a full investigation of the Assets and of
the business in advance of the Closing Date as it shall reasonably desire, and
(ii) cause the directors and officers of TSI to confer with representatives of
Alanco and will furnish to Alanco, either orally or by means of such records,
documents, and memoranda as are available or reasonably capable of preparation,
such information as Alanco may reasonably request, and TSI will furnish to
Alanco's auditors all consents and authority that they may reasonably request in
connection with any examination of TSI by Alanco.
(b) Alanco hereby acknowledges that any TSI information
provided to Alanco by TSI that has been designated as confidential and
proprietary (the "Confidential Information"), shall be kept in confidence by
Alanco, and Alanco shall use the Confidential Information solely for the
purposes of completing its due diligence inquiry pursuant to this Agreement.
Alanco hereby agrees not to disclose the Confidential Information to any person
except those of its employees and advisors who have a reasonable need to know
such information to advise Alanco in connection with the transactions
contemplated hereby. This Section 8.1(b) shall be inoperative as to such
portions of Confidential Information which (i) are or become generally available
to the public, other than as a result of a disclosure by Alanco or its employees
or advisors; (ii) become available to Alanco on a non-confidential basis from a
third party who has the right to disclose the same; or (iii) were known to
Alanco on a non-confidential basis prior to its disclosure by TSI or one of its
representatives.
8.2 Interim Operations of the Business. Except as provided in Schedule
8.2, TSI hereby covenants and agrees that between the date hereof and the
Closing Date, without the prior written consent of Alanco:
(a) TSI shall conduct its business diligently and in the
ordinary course and in accordance with past practice, and use its best efforts
to (i) preserve its business organization intact, and (ii) keep available the
services of its present employees. Notwithstanding the foregoing, TSI shall not
make any disbursement of funds in excess of $500.00 without Alanco's prior
approval.
(b) TSI shall not mortgage or encumber any Asset.
(c) All Assets shall be used, operated, maintained and
repaired in accordance with normal and prudent business practices.
(d) TSI shall use its best efforts to preserve TSI's
relationships and goodwill with its customers, suppliers, licensors and others
having business relationships with TSI.
(e) TSI shall (i) maintain all Assets in substantially the
same condition as they are now (reasonable wear and tear, which are not such as
to adversely affect the operation of its business, excepted), (ii) maintain
insurance upon the Assets and with respect to the conduct of the business, all
such insurance to be comparable in amount, scope and coverage to that in effect
on the date of this Agreement, and (iii) give Alanco immediate written notice of
any material damage to TSI's Assets by fire or other casualty.
(f) TSI shall maintain its books, records and accounts in the
usual, regular and ordinary manner, on a basis consistent with prior periods,
and shall not make any changes in the accounting methods or practices followed
by TSI or any change in the depreciation or amortization policies or rates
theretofore adopted or applied.
(g) TSI shall duly comply with all laws applicable to it, the
Assets and the conduct of its business.
(h) TSI shall perform all of its obligations without default.
(i) TSI shall not grant any power of attorney with respect to
its business or the Assets.
(j) TSI shall not enter into any new material contracts or
agreements, or cancel, amend, modify adversely, waive any material rights under,
assign, encumber or terminate any of the existing contracts or agreements.
(k) TSI shall not (i) make any loan, or otherwise extend
credit to any person, firm or corporation, (ii) give any guarantee or indemnity,
or make any other similar commitment with respect to a debt or other liability
of any person, firm or corporation, or (iii) pay, discharge or satisfy any
liability for borrowed money other than the payment, discharge or satisfaction
other than in the ordinary and regular course of business.
(l) TSI shall not, directly or indirectly, sell, lease or
otherwise dispose of any of the Assets or make any capital expenditures, except
in the ordinary course of business and consistent with the past practices of
TSI, or acquire any other business.
(m) TSI shall not increase the compensation payable or to
become payable to any employee, officer or director of TSI.
(n) TSI will not authorize or permit: (i) the Articles of
Incorporation or By-Laws of TSI to be amended, (ii) the merger, consolidation or
other combination of TSI with any other entity, (iii) the character of its
business to be changed, (iv) TSI to issue, sell or deliver, or authorize the
issuance, sale or delivery of, or redeem, any shares of any class of its capital
stock or any securities convertible into or exercisable or exchangeable for any
such shares, or any warrants, calls, options, stock appreciation rights or other
rights calling for the issuance, sale or delivery of any such shares or
convertible, exercisable or exchangeable securities, (v) TSI to pay any dividend
or other distribution with respect to its capital stock, other than regularly
scheduled dividends consistent with past practices or redeem or repurchase any
of the capital stock, or (vi) TSI to organize a subsidiary.
(o) TSI shall not write-down, cancel or forgive, in full or in
part, any accounts or notes receivable of TSI, other than in the ordinary course
of business.
(p) TSI will not engage in any transaction which would be
inconsistent with any representation, warranty or covenant of TSI set forth
herein or which would cause a breach of any such representation, warranty or
covenant.
8.3. No Public Disclosure. The parties hereto hereby covenant and agree
that they shall not publicly disclose the existence of this Agreement or the
terms (including, without limiting the generality of the foregoing, the Purchase
Price) of the transactions contemplated by this Agreement except: (i) with the
prior written consent of the other parties, (ii) if such disclosure is compelled
by an order of a court or governmental agency having competent jurisdiction, and
after consultation by the disclosing party with the other parties, (iii) if such
disclosure shall be determined by such party's counsel to be required or
necessary for purposes of such party's compliance with applicable stock exchange
regulations or foreign, federal or state securities laws and the rules and
regulations promulgated thereunder, and after consultation by such party with
the other parties (including appropriate news releases required by such
authorities with respect to Alanco's Common Stock), (iv) if such disclosure is
required by lawful discovery in any judicial proceeding, and after consultation
by the disclosing party with the other parties, or (v) in any action by any
party to enforce this Agreement.
9.0 Agreement Expenses. Each of the parties shall bear its own expenses
in connection with the transactions covered or contemplated by this Agreement,
including attorneys and accountants fees, and each represents and warrants to
the other that there is no broker, agent or other person entitled to
compensation or a fee in connection with this Agreement or with the transactions
contemplated hereby, except such fees or compensations as each of the parties is
hereby representing and warranting that it is exclusively liable to pay.
10.0 Conditions Precedent to Closing.
10.1. Conditions to the Obligations of Alanco. The performance of the
obligations of Alanco hereunder is subject to the fulfillment, or waiver by
Alanco, on or before the Closing Date of the following conditions:
(a) Authorization of Alanco. All corporate action necessary to
authorize the execution, delivery and performance of this Agreement by Alanco
and the consummation of the transactions contemplated hereby shall have been
duly and validly taken by Alanco, and Alanco shall have full power and right to
consummate the transactions contemplated hereby.
(b) Authorization of TSI. All corporate action necessary to
authorize the execution, delivery and performance of this Agreement by TSI and
the consummation of the transactions contemplated hereby shall have been duly
and validly taken by TSI, and TSI shall have full power and right to consummate
the transactions contemplated hereby.
(c) Conduct of Business in Ordinary Course. To the Closing
Date, TSI shall have conducted its business only in the ordinary course,
consistent with the past practices of TSI, the limitations of Section 8.2, and
the other covenants and representations made by TSI herein, except for actions
expressly permitted by this Agreement, matters incident to carrying out this
Agreement, or such further matters as may be consented to in writing by Alanco.
(d) Consents and Approvals. TSI shall have obtained all
consents and approvals and waivers and given such notices as may be necessary to
consummate the transactions contemplated hereby, including but not limited to
the consent to the transactions contemplated hereby of the parties to all
material agreements under which TSI would otherwise be in default as a result of
the transactions contemplated hereby. All consents, authorizations, orders or
approvals of, and filings or registrations with, any federal, state or local
governmental commission, board or other regulatory body which is required for or
in connection with the execution, delivery, and performance of this Agreement by
TSI and the consummation of the transactions contemplated hereby shall have been
obtained.
(e) No Litigation or Legislation. No federal, state, local or
foreign statute, rule or regulation shall have been enacted or litigation,
proceeding, government inquiry or investigation commenced or threatened which
prohibits, restricts or delays the consummation of the transactions contemplated
by this Agreement or any of the conditions to the consummation of such
transactions or adversely affects the desirability of consummating the
transactions contemplated hereby and thereby.
(f) Accuracy of Representations and Warranties. Each of the
representations and warranties of TSI set forth in Sections 4 and 6 hereof shall
be true and correct in all material respects on and as of the Closing Date.
(g) Delivery of Closing Documents. Alanco shall have
received the closing documents set forth in Section 12.1 hereof.
(h) Due Diligence. Alanco shall be satisfied in its
sole discretion with its due diligence inquiry of TSI, its business and the
Assets.
(i) No Adverse Change. There shall not have occurred a
material adverse change to TSI, its business, or the Assets.
10.2. Conditions to the Obligations of TSI. The performance of the
obligations of TSI hereunder is subject to the fulfillment, or waiver by TSI, on
or before the Closing Date of the following conditions:
(a) Authorization by TSI Shareholders. All corporate action
necessary to authorize the execution, delivery and performance of this Agreement
by TSI and the consummation of the transactions contemplated hereby shall have
been duly and validly taken by TSI (including the necessary approval of its
shareholders), and TSI shall have full power and right to consummate the
transactions contemplated hereby.
(b) Authorization of Alanco. All action necessary to authorize
the execution, delivery and performance of this Agreement by Alanco, and the
consummation of the transactions contemplated hereby, shall have been duly and
validly taken by Alanco, and Alanco shall have full power and right to
consummate the transactions contemplated hereby.
(c) Delivery of Closing Documents. TSI shall have
received the closing documents set forth in Section 12.2 hereof.
(d) No Litigation or Legislation. No federal, state, local or
foreign statute, rule or regulation shall have been enacted or litigation,
proceeding, government inquiry or investigation commenced or threatened which
prohibits, restricts or delays the consummation of the transactions contemplated
by this Agreement or any of the conditions to the consummation of such
transactions or adversely affects the desirability of consummating the
transactions contemplated hereby.
(e) Accuracy of Representations and Warranties. Each of the
representations and warranties of Alanco set forth in Section 5 hereof shall be
true and correct in all respects on and as of the Closing Date.
10.3. Option to Terminate. Only in the event any of the conditions
precedent to the obligation of the parties to consummate the transactions
contemplated hereby as set forth in sections 10.1 and 10.2 above is not
satisfied and/or waived on or before the Closing Date, then the party whose
obligation is subject to such conditions shall have the right to terminate this
Agreement by written notice to the other party. The other party shall have five
(5) business days from the receipt of such notice to cure the defect. If the
defect has not been cured by the end of the fifth business day from receipt of
the notice, neither of the parties to this Agreement shall have any further
liability or obligation to the other hereunder, unless otherwise specifically
stated, provided, however, any termination of this Agreement by TSI is subject
to the obligations of TSI to pay a termination fee to Alanco pursuant to the
Loan Agreement between the parties.
11.0 Closing. The closing ("Closing") shall occur at the offices of
Alanco,15900 North 78th Street, Suite 101, Scottsdale, Arizona 85260 at 10:00
a.m. on the third business day following the date of the Alanco Shareholders
Meeting at which the shareholders of Alanco approve issuance of the shares of
Alanco Common Stock to be issued hereunder, or such other time as the parties
mutually agree (the "Closing Date"). The Closing shall constitute the acts which
take place on the Closing Date by which the transactions contemplated by this
Agreement are consummated. Notwithstanding the actual Closing Date, for all
accounting purposes the closing shall be deemed to be effective as of May 1,
2002.
12.0 Closing Documents. On the Closing Date, the parties shall
exchange documents as follows:
12.1 Delivery by TSI. TSI shall deliver to Alanco:
(a) A copy of the resolutions duly adopted by the Board of
Directors and shareholders of TSI authorizing and approving the execution,
delivery and performance of this Agreement, and the execution and delivery of
any and all other documents and agreements contemplated hereunder and
thereunder, certified by the Secretary of TSI.
(b) A certificate signed by an authorized officer of TSI to
the effect that TSI has fully performed all of its pre-closing commitments
hereunder and that all its warranties and representations contained herein
continue to be true and accurate as of the Closing Date.
(c) The opinion of counsel to TSI dated as of the Closing Date
to Alanco to the following effect:
(1) TSI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada,
and is entitled to own its properties and to carry on its business in
the places where such properties are located and where such business is
being conducted.
(2) The execution, delivery and performance of this
Agreement have been duly authorized by all necessary corporate action
of TSI and this Agreement has been duly executed and delivered by TSI
and constitutes a valid and binding obligation of TSI in accordance
with its terms, except as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditor's rights and the remedies of
specific performance and injunction and other forms of equitable relief
which may be subject to equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought. No further
corporate authorization or by any other person is necessary with
respect to the execution and delivery of this Agreement by TSI or its
obligations hereunder.
(3) To the best of said counsel's knowledge TSI has the right
to transfer the business, properties and assets as set forth in
paragraph 1.0 hereof to Alanco pursuant hereto.
(4) Except as may be specified by such counsel, they do not
know of any litigation, proceeding or governmental investigation
pending or threatened against, or relating to, TSI or TSI's properties
or business or the transactions contemplated under this Agreement.
(d) The Assets to be conveyed pursuant hereto shall be
conveyed by bills of sale, assignments or other instruments of transfer as shall
be appropriate to carry out the intent of this Agreement and as shall be
sufficient to convey to Alanco all of the rights, title and interest of TSI in
and to the Assets to be conveyed hereunder.
(e) Such further instruments or documents as Alanco or its
counsel may reasonably request to assure the effective carrying out of the
transactions contemplated hereby.
12.2.Delivery by Alanco. Alanco shall deliver to TSI:
(a) A copy of the resolutions duly adopted by the Board of
Directors of Alanco authorizing and approving the execution, delivery and
performance of this Agreement, and the execution and delivery of any and all
other documents and agreements contemplated hereunder and thereunder, certified
by the Secretary or an Assistant Secretary of Alanco.
(b) A copy of the letter of instructions to Alanco's transfer
agent (original to be sent to the transfer agent) requesting the prompt issuance
and delivery to TSI of a stock certificate representing 6,000,000 shares of
Alanco Class A Common Stock issued in the name of TSI. The stock certificate
shall contain a restrictive legend to the effect that the shares represented by
said certificate have not been registered under either the federal or state
securities laws and are not transferable except pursuant to an exemption from
said securities laws or subsequent registration of said shares.
(c) A certificate signed by an authorized officer of Alanco to
the effect that Alanco has fully performed all of its pre closing commitments
hereunder and that all of its warranties and representations contained herein
continues to be true and correct as of the Closing Date.
(d) The opinion of counsel to Alanco dated as of the Closing
Date to TSI to the following effect:
(1) Alanco is a corporation duly organized, validly
existing and in good standing under the laws of the State of Arizona,
and is entitled to own its properties and to carry on its business in
the places where such properties are located and where such business is
being conducted.
(2) The execution, delivery and performance of this
Agreement have been duly authorized by all necessary corporate action
of Alanco and this Agreement has been duly executed and delivered by
Alanco and constitutes a valid and binding obligation of Alanco in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditor's rights and the
remedies of specific performance and injunction and other forms of
equitable relief which may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought. No further corporate authorization or by any other person is
necessary with respect to the execution and delivery of this Agreement
by Alanco or its obligations hereunder.
(3) Except as may be specified by such counsel, they
do not know of any material litigation, proceeding or governmental
investigation pending or threatened against, or relating to, Alanco or
Alanco's properties or business or the transactions contemplated under
this Agreement.
(4) The shares of Alanco Common Stock to be issued to
TSI, when issued, shall be fully paid, non assessable, and validly
issued.
(e) The Registration Rights Agreement.
(f) Such further instruments or other documents as TSI or its
counsel may reasonably request to assure the effective carrying out of the
transactions contemplated hereby.
12.3 Form of Closing Documents. All closing documents shall be in
form and substance reasonably satisfactory
to counsel for the respective parties.
12.4 Additional Documents. The parties further agree that at any time
subsequent to the date hereof, they will, upon request and at the expense of the
requesting party, do, execute, acknowledge and deliver, or cause to be done,
executed, acknowledged and delivered, all such further acts, assignments,
transfers, conveyances, powers of attorney or assurances as may be required for
the better assigning, transferring, granting, conveying and assuring to the
parties any of the properties and assets to be conveyed pursuant hereto.
13.0 Post-Closing Requirements of TSI. TSI shall immediately following
the Closing cause its registered corporate name to be changed to a name other
than one using "Technology Systems International."
14.0 Indemnification.
14.1 TSI . TSI agrees to and does hereby indemnify, and hold harmless
Alanco, its directors, officers, employees and agents, against and in respect to
any claims, losses, expenses, obligations and liabilities, including reasonable
attorney's fees, which arise or result from or relate to any breach of or
failure by TSI to perform any of its warranties, representations, guarantees,
commitments, covenants, or conditions under this Agreement. TSI shall remain
liable for all claims, liabilities, debts, defaults and obligations, whether or
not known, which are not expressly assumed hereunder by Alanco and TSI shall
defend at its entire expense, including reasonable attorney's fees and other
costs of litigation, and indemnify and hold harmless Alanco against any and all
such claims, debts, defaults, obligations, liabilities or suits.
14.2 Alanco. Alanco agrees to and hereby indemnifies and holds harmless
TSI, its officers, directors, employees and agents, against and in respect to
any claims, losses, expenses, costs, obligations and liabilities, including
reasonable attorney's fees, which TSI, its officers, directors, employees and
agents may incur or suffer by reason of the breach or failure by Alanco to
perform any of its warranties, representations, guarantees, commitments or
covenants in this Agreement, or by reason of any act or omission of Alanco
subsequent to the Closing Date which constitutes a breach or default hereunder.
15.0 Benefits of this Agreement. Nothing in this Agreement shall be
construed to give any benefits to any person (including, without limiting the
generality of the foregoing, any present or former employee of TSI) or
corporation or other entity, other than TSI, Alanco and Alanco Subsidiary, and
this Agreement shall be for the sole and exclusive benefit of TSI, Alanco and
Alanco Subsidiary.
16.0 Successors and Assigns. This Agreement shall inure to the benefit
of, and be binding upon, the successors, heirs, executors, administrators and
permitted assigns of the parties hereto. This Agreement may not be assigned by
any of the parties hereto without the prior written consent of the other
parties.
17.0 Notices. Any notice from one party to the other shall be given in
writing and be deemed given when delivered in person, or on the next business
day after being sent by a nationally recognized overnight courier service, or on
the second business day following deposit in the U.S. Mail system if sent by
certified mail, postage prepaid, and in each case addressed to the recipient at
the address listed below or to such other person and/or address as may be
designated from time to time in writing:
(a) if to TSI:
15575 North 83rd Way, Suite 4
Scottsdale, Arizona 85260
with a copy to:
Lynne Bolduc, Esq.
Oswald & Yap
16148 Sand Canyon Avenue
Irvine, CA 92618
(b) if to Alanco:
15900 North 78th Street, Suite 101
Scottsdale, Arizona 85260
Attn: Robert R. Kauffman, President
with a copy to:
Steven P. Oman, Esq.
14001 N. 50th Street
Scottsdale, Arizona 85254
18.0 Severability. In the event any covenant, condition or other
provision of this Agreement is held to be invalid or unenforceable by a final
judgment of a court of competent jurisdiction, then such covenant, condition or
other provision shall be automatically terminated and performance thereof
waived, and such invalidity or unenforceability shall in no way affect any of
the other covenants, conditions or provisions hereof, and the parties hereto
shall negotiate in good faith to agree to such amendments, modifications or
supplements of or to this Agreement or such other appropriate actions as, to the
maximum extent practicable, shall implement and give effect to the intentions of
the parties as reflected herein.
19.0 Entire Agreement. This Agreement contains all of the terms agreed
upon by the parties with respect to the subject matter hereof and there are no
representations or understandings between the parties except as provided herein.
This Agreement may not be amended or modified in any way except by a written
amendment to this Agreement duly executed by the parties.
20.0 Waiver. No waiver of a breach of, or default under, any provision
of this Agreement shall be deemed a waiver of such provision or of any
subsequent breach or default of the same or similar nature or of any other
provision or condition of this Agreement.
21.0 Applicable Law. This Agreement shall be governed by and
construed (both as to validity and performance)
and enforced in accordance with the laws of the State of Arizona.
22.0 Attorneys' Fees. In any action brought to enforce the provisions
of this Agreement, the prevailing party
shall be entitled to recover its attorneys' fees and costs as determined by the
court and not the jury.
23.0 Equitable Relief. The parties agree that the remedies at law for
any breach of the terms of this Agreement are inadequate. Accordingly, the
parties consent and agree that an injunction may be issued to restrain any
breach or alleged breach of such provisions. The parties agree that terms of
this Agreement shall be enforceable by a decree of specific performance. Such
remedies shall be cumulative and not exclusive, and shall be in addition to any
other remedies which the parties may have at law or in equity.
24.0 Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument, but all of such counterparts taken together shall be
deemed to constitute one and the same instrument. No party shall be bound until
each party has signed at least one (1) such counterpart.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in
their respective names as of the day and year first above written.
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
a Nevada corporation
By: ____________________________________
Greg Oester, Chief Executive Officer
ALANCO TECHNOLOGIES, INC.
an Arizona corporation
By: ____________________________________
Robert R. Kauffman, Chairman and
Chief Executive Officer
\3401\025\Amd TSI Acq Agr4.wpd
Schedule Description
2.1 Assumed liabilities
4.11 Pre-Billed Items
4.14 Intellectual Property
4.15 Material Contracts
4.19 Employment Contracts
4.25 Litigation
5.10 Changes
Exhibit Description
A TSI Proforma
B Registration Rights Agreement
C Restated Article IV of Alanco's
Articles of Incorporation
APPENDIX C
THE POWERS, PREFERENCES, RIGHTS AND LIMITATIONS
OF THE SERIES OF THE PREFERRED STOCK
OF
ALANCO TECHNOLOGIES, INC.
DESIGNATED
SERIES B CONVERTIBLE PREFERRED STOCK
The series designated "Series B Convertible Preferred Stock" of the
Company's Preferred Stock, to be issued as the Board of Directors may determine,
shall have the following preferences, rights and limitations in addition to
those applicable generally to the preferred stock of the Company:
(a) Number of Authorized Shares in Series. There shall be a
total of 500,000 authorized shares of Series B
Convertible Preferred Stock.
(b) Priority. The Series B Convertible Preferred Stock shall have a
priority ranking superior to the Common Stock of the Company and all other
series of Preferred Stock of the Company with respect to payment of dividends
and upon dissolution, liquidation and winding-up of the Company.
(c) Dividends. Holders of shares of Series B Convertible Preferred
Stock shall be entitled to receive, when declared by the Board of Directors, out
of funds and assets of the Company legally available therefore, an annual
dividend (calculated on the basis of the redemption price of $10.00 per share of
Series B Convertible Preferred Stock) of ten (10%) percent per annum, payable on
a calendar quarter basis on or before the 20th day following each calendar
quarter for the quarter just ended quarter, to stockholders of record on the
respective record dates (which shall be the tenth day of the last month for the
calendar quarter just ended. Notwithstanding anything herein to the contrary, at
the option of the Company, any dividends on the Series B Convertible Preferred
Stock may be paid either in cash or in kind and if paid in kind each share of
Series B Convertible Preferred Stock to be received shall be valued at $10.00
per share for purposes of such dividend payment. No fractional shares shall be
issued for dividends paid in kind and such dividends to be paid to any
shareholder shall be rounded up to the next whole share of Series B Convertible
Preferred Stock. Dividends on each share of the Series B Convertible Preferred
Stock shall accrue and be cumulative from the date of issue and shall be
appropriately prorated with respect to the period between such date of issue and
the first dividend payment date. Accumulations of dividends shall not bear
interest. In addition, the holders of Series B Convertible Preferred Stock shall
participate on an as-converted basis in any dividends payable with respect to
the Company's Common Stock.
So long as any shares of Series B Convertible Preferred Stock are
outstanding, the Company shall not declare and pay or set apart for payment any
dividends or make any other distribution on the Common Stock and shall not
redeem, retire, purchase or otherwise acquire, any shares of common stock or
preferred stock, unless at the time of making such declaration, payment,
distribution, redemption, retirement, purchase or acquisition dividends on all
outstanding shares of Series B Convertible Preferred Stock for all past
quarterly dividend periods shall have been paid or declared and sufficient funds
set apart for the payment thereof.
(d) Conversion. Each share of Series B Convertible Preferred Stock
shall be convertible into thirteen (13) shares of Class A Common Stock of the
Company, without the payment of any additional consideration by the holder
thereof and at the option of the holder thereof, subject to readjustment as
provided herein below. The right to convert any shares of Series B Convertible
Preferred Stock called for redemption shall expire at the close of business on
the redemption date thereof.
The holder of a share or shares of Series B Convertible Preferred Stock
may exercise the conversion rights by delivering to the Company during regular
business hours, at the principal office of the Company, or at such other places
as may be designated by the Company, the certificate or certificates for the
shares to be converted, duly endorsed or assigned in blank or to the Company (if
required by it), accompanied in any event by written notice stating that the
holder elects to convert such shares and stating the name or names (with
address) in which the certificate or certificates for Class A Common Stock are
to be issued. Conversion shall be deemed to have been effected on the date when
such delivery is made, and such date is referred to herein as the "Conversion
Date". As promptly as practicable thereafter the Company shall issue and deliver
to or upon the written order of such holder, at such office or other place
designated by the Company, a certificate or certificates for the number of full
shares of Class A Common Stock to which he is entitled and a check in respect of
any fraction of shares provided below. The person in whose name the certificate
or certificates for Class A Common Stock are to be issued shall be deemed to
have become a holder of Class A Common Stock of record on the Conversion Date
unless the transfer books of the Company are closed on that date, in which event
he shall be deemed to have become a holder of Class A Common Stock of Record on
the next succeeding date on which the transfer books are open, but the
conversion rate shall be that in effect on the Conversion Date.
The issuance of Class A Common Stock on conversion of Series B
Convertible Preferred Stock shall be without charge to the converting holder of
Series B Convertible Preferred Stock for any fee, expense or tax in respect of
the issuance therefore, but the Company shall not be required to pay any fee,
expense or tax which may be payable with respect of any transfer involved in the
issuance and delivery of shares in any name other than that of the holder of
record on the books of the Company of the shares of Series B Convertible
Preferred Stock converted, and the Company shall not, in any such case, be
required to issue or deliver any certificate for shares of Class A Common Stock
unless and until the person requesting the issuance thereof shall have paid to
the Company the amount of such fee, expense or tax or shall have established to
the satisfaction of the Company that such fee, expense or tax has been paid.
The number of shares of Class A Common Stock deliverable upon
conversion of each share of Series B Convertible Preferred Stock shall be
subject to adjustment from time to time upon the happening of certain events as
follows:
(i) Merger, Sale of Assets, Consolidation. If the Company at any
time shall consolidate with or merge into or sell or convey all or substantially
all its assets to any other entity, the Series B Convertible Preferred Stock
shall thereafter evidence the right to be converted into capital stock in such
number and kind of securities and property as would have been issuable or
distributable on account of such consolidation, merger, sale or conveyance upon
or with respect to the securities subject to the conversion or purchase right
immediately prior to such consolidation, merger, sale or conveyance. The
foregoing provision shall similarly apply to successive transactions of a
similar nature by any such successor or purchaser. Without limiting the
generality of the foregoing, the anti-dilution provisions of the Series B
Convertible Preferred Stock shall apply to such securities of such successor or
purchaser after any such consolidation, merger, sale or conveyance.
(ii)Reclassification. If the Company at any time shall, by
subdivision, combination reclassification of securities or otherwise, change any
of the securities then purchasable upon the exercise of the conversion right
associated with the Series B Convertible Preferred Stock into the same or a
different number of securities of any class or classes, the Series B Convertible
Preferred Stock shall thereafter evidence the right to purchase such number and
kind of securities as would have been issuable as the result of such change with
respect to the securities which were subject to the conversion right immediately
prior to such subdivision, combination, reclassification or other change. If
shares of Class A Common Stock are subdivided or combined into a greater or
smaller number of shares of Class A Common Stock, the number of shares of Class
A Common Stock deliverable upon conversion of each share of Series B Convertible
Preferred Stock shall be proportionately reduced or increased, as appropriate,
by the ratio which the total number of shares of Class A Common Stock to be
outstanding immediately after such event bears to the total number of shares of
Class A Common Stock outstanding immediately prior to such event.
Whenever any adjustment is required in the number of shares into which
each share of the Series B Convertible Preferred Stock is convertible, the
Company shall forthwith file a statement describing in reasonable detail the
adjustment and the method of calculation used at the office or agency maintained
for the purpose for conversion of the Series B Convertible Preferred Stock, and
shall mail a copy thereof to the holders of the Series B Convertible Preferred
Stock.
The Company shall at all times keep available for issue and delivery
the full number of shares of Class A Common Stock into which all outstanding
shares of Series B Convertible Preferred Stock are convertible.
No certificate for a fraction of a share of Class A Common Stock shall
be issued upon any conversion, but in lieu of any fractional share that would
otherwise be required to be issued in accordance with the foregoing provisions,
the Company shall make a cash payment for any such fractional share interest
based upon a value for such Class A Common Stock equal to the average NASDAQ
closing market price for ten (10) trading days prior to the conversion date.
(e) Voting. The holders of shares of Series B Convertible Preferred
Stock shall be entitled to notice of any stockholders' meeting and to vote upon
matters submitted to shareholders for a vote, in the same manner and with the
same effect as the holders of shares of Class A Common Stock, voting together
with the holders of Class A Common Stock as a single class to the extent
permitted by law. Holders of Series B Convertible Preferred Stock shall have
that number of votes equal to the number of shares of Class A Common Stock into
which such preferred stock is convertible, as adjusted from time to time
pursuant to paragraph (d) above.
So long as any shares of the Series B Convertible Preferred Stock are
outstanding, the Company shall not, without the affirmative vote or written
consent of the holders of at least two thirds of the aggregate number of shares
at the time outstanding of the Series B Convertible Preferred Stock:
(i) authorize, create or increase any class of capital stock
ranking equal or prior to the Series B Convertible Preferred Stock as to
dividends or upon liquidation, dissolution or winding-up; or
(ii)alter or change any of the powers, preferences or special
rights given to the Series B Convertible Preferred Stock so as to affect the
same adversely.
(iii) issue any additional shares of Series B Convertible
Preferred Stock, other than dividends in kind on outstanding shares of Series B
Convertible Preferred Stock.
(f) Redemption.
(i) By the Company. The Company may, at the option of the Board of
Directors, redeem all or any part of the outstanding Series B Convertible
Preferred Stock at any time after either (i) the third (3rd) anniversary of the
date of issuance of the shares to be redeemed, or (ii) after the average NASDAQ
closing market price for the Company's Class A Common Stock for twenty (20)
consecutive trading days having a trading volume greater than 10,000 shares,
equals $2.00 per share, at the redemption price equal to $10.00 per share of the
Series B Convertible Preferred Stock to be redeemed, plus accrued unpaid
dividends, if any, provided that notice of redemption is sent by certified mail
to the holders of record of the Series B Convertible Preferred Stock to be
redeemed at least thirty (30) days prior to the date of redemption specified in
such notice, addressed to each such holder at his address as it appears in the
records of the Company. In case of the redemption of a part only of the Series B
Convertible Preferred Stock, the shares of such series to be redeemed shall be
selected pro rata or by lot or in such other manner as the Board of Directors
may determine. The Board of Directors shall have full power and authority to
prescribe the manner in which and subject to the provisions and limitations
herein contained, the terms and conditions upon which such stock shall be
redeemed from time to time.
(ii)By the Shareholder. Each holder of Series B Convertible
Preferred Stock may, at any time after the third (3rd) anniversary of the date
of issuance of the shares to be redeemed, demand that the Company redeem all or
any part of such holder's Series B Convertible Preferred Stock at a redemption
price of $10.00 per share, plus accrued unpaid dividends, if any, by delivering
written notice thereof to the Company at the Company's then known main corporate
office, accompanied by the holder's stock certificate for the shares to be
redeemed. The company, within thirty (30) days after receipt of such notice (the
"date of redemption"), shall redeem the number of shares of Series B Convertible
Preferred Stock specified in the holder's demand notice in either of the
following methods:
(a) By paying the aggregate redemption price in cash; or
(b) Provided that the average volume of trading of the
Company's Common Stock on NASDAQ is at least 10,000 shares per day for the
twenty (20) trading days immediately prior to the date of receipt of the
holder's redemption demand; by paying the aggregate redemption price in Class A
Common Stock of the Company valued for such purpose at the average NASDAQ
closing market price for said twenty (20) trading days immediately prior to the
date of receipt of the holder's redemption demand.
On or after the redemption date each holder of shares of Series B
Convertible Preferred Stock to be redeemed shall present and surrender his
certificate or certificates for such shares to the Company and thereupon the
redemption price of such shares shall be paid to or on the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be canceled. In case less than all of the
shares represented by any such certificates are redeemed, a new certificate
shall be issued representing the unredeemed shares. From and after the
redemption date (unless default shall be made by the Company in the payment of
the redemption price) all dividends on the shares of Series B Convertible
Preferred Stock designated for redemption in such notice shall cease to accrue,
and all rights of the holders thereof as stockholders of the Company, except the
right to receive the redemption price thereof upon the surrender of the
certificates representing the same, without interest, shall cease and terminate
and such shares shall not thereafter be transferred (except with the consent of
the Company) on the books of the Company, and such shares shall not be deemed to
be outstanding for any purpose whatsoever.
(g) No Sinking Fund. The shares of the Series B Convertible
Preferred Stock shall not be entitled to benefit of any sinking or purchase
fund to be applied to the redemption or purchase of such stock.
(h) Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, holders of Series B
Convertible Preferred Stock shall be entitled to be paid out of the assets of
the Company available for distribution to its stockholders before any payment
shall be made in respect of any class or series of stock which shall rank
subordinate thereto as to assets the fixed sum of $10.00 for each share of
Series B Convertible Preferred Stock held by them plus accrued and unpaid
dividends, if any, thereon; and shall also participate on an "as converted"
basis with the Common Stock with respect to additional liquidation
distributions.
If upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Company, the assets of the Company available for distribution
to its Series B Convertible Preferred Stock holders shall be insufficient to pay
the holders of Series B Convertible Preferred Stock the full amount to which
they are entitled hereunder, the holders of Series B Convertible Preferred Stock
shall share ratably in any distribution of assets according to the respective
amounts which would be payable in respect of the shares of Series B Convertible
Preferred Stock held by them upon such distribution if all amounts payable on or
with respect to such stock were paid in full. If upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Company payments shall
have been made to the holders of the Series B Convertible Preferred Stock of the
full amount to which they shall respectively be entitled hereunder, such holders
shall not be entitled to any further participation in the distribution of the
remaining assets of the Company available for distribution to its stockholders.
Neither the merger or consolidation of the Company into or with another
corporation nor the merger or consolidation of any other corporation into or
with the Company, nor the sale, transfer or lease of all or substantially all of
the assets of the Company, shall be deemed to be a voluntary or involuntary
liquidation, dissolution or winding-up of the Company.
(i) Redeemed Shares. Shares of the Series B Convertible Preferred Stock
redeemed or purchased by the Company or surrendered to the Company on the
conversion thereof into shares of Class A Common Stock as herein above provided
shall, upon appropriate filing and recording to the extent required by law, have
the status of authorized and unissued shares of Series B Convertible Preferred
Stock.
<page>
APPENDIX D
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
__________________, 2002, by and between ALANCO TECHNOLOGIES, INC., a
corporation duly incorporated and existing under the laws of the State of
Arizona (the "Company"), and TECHNOLOGY SYSTEMS INTERNATIONAL, INC., a Nevada
corporation ("TSI"), on behalf of itself and its shareholders, creditors or
others who may receive shares of the Company's Common Stock upon liquidation of
TSI (TSI and its shareholders, creditors and such others are hereinafter
collectively referred to as "Subscriber") pursuant to the Acquisition Agreement
between the Company and TSI, dated January 23, 2002r (the "Acquisition
Agreement").
1. Definitions. For purposes of this Agreement:
(a) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933 (the
"Act"), and pursuant to Rule 415 under the Act or any successor rule, and the
declaration or ordering of effectiveness of such registration statement or
document;
(b) For purposes hereof, the term "Registrable Securities"
means the shares of the Company's Common Stock, no par value, together with any
capital stock issued in replacement of, in exchange for or otherwise in respect
of such Common Stock (the "Common Stock"), issuable to TSI, or EMS Technologies,
Inc. in connection the Acquisition Agreement. Further, Registrable Securities is
comprised of two groups, the first group being the 6,000,000 shares of Common
Stock to be issued by the Company to TSI and the 1,000,000 shares of Common
Stock to be issued by the Company to EMS Technologies, Inc. upon closing of the
Acquisition Agreement ("Group One Registrable Securities"), and the second group
being the balance of the Common Stock to be issued to TSI based upon the
earn-out provisions of sections 3.2, 3.3 and 3.4 of the Acquisition Agreement
("Group Two Registrable Securities")
Notwithstanding the above:
1. Common Stock which would otherwise be deemed to
be Registrable Securities shall not constitute Registrable Securities if
those shares of Common Stock may be resold in a public transaction without
registration under the Act, including without limitation, pursuant to Rule 144
under the Act; and
2. any Registrable Securities resold in a public
transaction shall cease to constitute Registrable Securities.
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock which
have been issued or are issuable under the Acquisition Agreement at the time of
such determination; and
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any permitted assignee thereof.
2. Required Registration.
Group One Registrable Securities: The Company agrees to file a registration
statement on Form S-3 (or other suitable form) or a post-effective amendment to
an effective registration statement (collectively, a "Registration Statement")
at the Company's discretion, covering the resale of all shares of Group One
Registrable Securities then outstanding. The Company shall use commercially
reasonable efforts to have the Registration Statement declared effective within
90 days after the date hereof.
Group Two Registrable Securities: Within ten (10) days following the receipt of
a written request of Holders owning at least 25% of the Group Two Registrable
Securities any time subsequent to issuance by the Company of all shares of Group
Two Registrable Securities to be issued pursuant to the Acquisition Agreement
(the "Request Notice"), the Company shall advise all other Holders of the Group
Two Registrable Securities that a registration of such securities will be made
by the Company at the expense of the Holders participating in such registration.
The Group Two Registrable Securities owned by such Holders who respond to the
Company in writing within ten (10) days of such notice from the Company that
they desire their Group Two Registrable Securities to be included in such
registration shall be so included. The Company agrees to file a registration
statement on Form S-3 (or other suitable form) or a post-effective amendment to
an effective registration statement (collectively, a "Registration Statement")
at the Company's discretion, covering the resale of all shares of Group Two
Registrable Securities included within the Request Notice and those owned by the
other Holders responding affirmatively to the Company's notice. The Company
shall use commercially reasonable efforts to have the Registration Statement
declared effective within 90 days after the date the Company receives the
Request Notice.
(a) Each Registration Statement shall be prepared as a "shelf"
registration statement under Rule 415, and shall be maintained effective until
all Registrable Securities covered thereby cease to exist.
(b) The Company represents that it is presently eligible to
effect the registration contemplated hereby on Form S-3 and will use its best
efforts to continue to take such actions as are necessary to maintain such
eligibility.
3. Limitation on Obligations to Register. If the Company believes
that shares sought to be registered under Section 2 by Holders do not constitute
"Registrable Securities" by virtue of Section 1(b) of this Agreement, and the
status of those shares as Registrable Securities is disputed, the Company shall
provide, at its expense, an opinion of counsel, reasonably acceptable to the
Holders of the securities at issue (and satisfactory to the Company's transfer
agent to permit the sale and transfer) that those securities may be sold
immediately, without volume limitation, without registration under the Act, by
virtue of Rule 144 or similar provisions.
4. Obligations of the Company. Whenever required under this
Agreement, or a post-effective amendment to an effective registration statement,
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the Securities and Exchange
Commission ("SEC") a registration statement, or such a post-effective amendment,
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement, or such a post-effective amendment,
and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(e) As promptly as practicable after becoming aware of such
event, notify each Holder of Registrable Securities of the happening of any
event of which the Company has knowledge, as a result of which the prospectus
included in the registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and subject to Section
5 use its best efforts promptly to prepare a supplement or amendment to the
registration statement to correct such untrue statement or omission, and deliver
a number of copies of such supplement or amendment to each Holder as such Holder
may reasonably request.
(f) Provide Holders with written notice of the date that a
registration statement registering the resale of the Registrable Securities is
declared effective by the SEC and the date or dates when the Registration
Statement is no longer effective.
(g) Provide Holders and their representatives the opportunity
to conduct a reasonable due diligence inquiry of Company's pertinent financial
and other records and make available its officers, directors and employees for
questions regarding such information as it relates to information contained in
the registration statement.
(h) Provide Holders and their representatives the opportunity
to review the registration statement and all amendments thereto a reasonable
period of time prior to their filing with the SEC if so requested by Holder in
writing.
5. Black Out. In the event that, during the time that the
Registration Statement is effective, the Company reasonably determines, based
upon advice of counsel, that due to the existence of material non-public
information, disclosure of such material non-public information would be
required to make the statements contained in the Registration Statement not
misleading, and the Company has a bona fide business purpose for preserving as
confidential such material non-public information, the Company shall have the
right to suspend the effectiveness of the Registration Statement, and no Holder
shall be permitted to sell any Registrable Securities pursuant thereto, until
such time as such suspension is no longer advisable; provided, however, that
such time shall not exceed a period of sixty (60) days. As soon as such
suspension is no longer advisable, the Company shall, if required, promptly, buT
in no event later than the date the Company files any documents with the SEC
referencing such material information, file with the SEC an amendment to the
Registration Statement disclosing such information and use its best efforts to
have such amendment declared effective as soon as possible.
If the effectiveness of the Registration Statement is suspended by the
Company pursuant hereto, the Company shall promptly notify all Holders whose
securities are covered by the Registration Statement of such suspension, and
shall promptly notify each such Holder as soon as the effectiveness of the
Registration Statement has been resumed. The Company shall be entitled to effect
no more than two such suspensions during the one (1) year period following the
Last Closing.
6. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
regard to each selling Holder that such selling Holder shall furnish to the
Company such information regarding Holder, the Registrable Securities held by it
and the intended method of disposition of such securities as shall be required
to effect the registration of its Registrable Securities or to determine that
registration is not required pursuant to Rule 144 or other applicable provision
of the Act.
7. Expenses. All expenses other than underwriting discounts and
commissions incurred in connection with registrations, filings or qualifications
pursuant hereto, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company shall be borne by the Company with respect to the Group
One Registrable Securities, and by the participating Holders on a prorata basis
based upon the number of shares of Registrable Securities owned by each such
Holder compared to the total number of Registrable Securities being registered
with respect to the Group Two Registrable Securities.
8. Indemnification. If any Registrable Securities are
included in a Registration Statement or a post-effective amendment to an
effective registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the officers and directors of each Holder, any
underwriter (as defined in the Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act"), against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements or
omissions: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, and the Company will promptly reimburse, as such
expenses are incurred and payable, each such Holder, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, officer, director, underwriter or
controlling person.
(b) To the extent permitted by law, each selling Holder,
severally and not jointly, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed the registration statement,
each person, if any, who controls the Company within the meaning of the Act, any
underwriter and any other Holder selling securities in such registration
statement or any of its directors or officers or any person who controls such
Holder, against any losses, claims, damages, or liabilities (joint or several)
to which the Company or any such director, officer, controlling person, or
underwriter or controlling person, or other such Holder or director, officer or
controlling person may become subject, under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon (i) any statement
or omission in each case to the extent (and only to the extent) that such
statement or omission is made in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration statement, or (ii) any sale by a Holder after the Company has given
notice to the Holder under Section 4(f) or 5 herein and prior to the filing by
the Company of a supplement or the effectiveness of a post-effective amendment
as necessary in connection with such notice; and each such Holder will reimburse
any legal or other expenses reasonably incurred by the Company and any such
director, officer, controlling person, underwriter or controlling person, other
Holder, officer, director, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subsection
8(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonably incurred fees and
expenses of one such counsel to he paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflicting
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
8, but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 8.
(d) If the indemnity provided in paragraph (a) or (b) of this
Section 8 is unavailable to or insufficient to hold harmless an indemnified
party for any reason, the Company and each Holder agree to contribute to the
aggregate claims, losses, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which the Company and one or more of the Holder may
be subject in such proportion as is appropriate to reflect the relative fault of
the Company and the Holders in connection with the statements or omissions which
resulted in such Losses. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by the Company or by the Holders. The Company and the Holders agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 10(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person who controls a
Holder of Registrable Securities within the meaning of either the Securities Act
or the Exchange Act and each director, officer, partner, employee and agent of a
Holder shall have the same rights to contribution as such holder, and each
person who controls the Company within the meaning of either the Act or the
Exchange Act and each director of the Company, and each officer of the Company
who has signed the registration statement, shall have the same rights to
contribution as the Company, subject in each case to the applicable terms and
conditions of this paragraph (d).
(e) The obligations of the Company and Holders under this
Section 8 shall survive the completion of any offering of Registrable Securities
in a Registration Statement under this Agreement, and otherwise.
9. Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration,
the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in Rule 144; and
(b) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the Act and
the 1934 Act.
10. Amendment of Registration Rights. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
a majority of the Registrable Securities provided that the amendment treats all
Holders equally. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each Holder, each future Holder,and the Company.
11. Notices. All notices or other communications required or
permitted pursuant to this Agreement shall be in writing and shall be deemed
given to a party when (a) delivered by hand or by nationally recognized
overnight courier service (costs prepaid); or (b) received or rejected by the
addressee, if sent by certified mail, return receipt requested. Such notice or
other communication shall be sent to the Company, Attention: Chief Financial
Officer, 15900 North 78th Street, Suite 101, Scottsdale, Arizona 85260 or to
the Holder at the address set forth in the Company's records (or to such other
address as either party may designate by notice to the other party).
12. Termination. This Agreement shall terminate on the date all
Registrable Securities cease to exist; but without prejudice to (1) the parties'
rights and obligations arising from breaches of this Agreement occurring prior
to such termination (ii) other indemnification obligations under this Agreement.
13. Assignment. No assignment, transfer or delegation, whether by
operation of law or otherwise, of any rights or obligations under this Agreement
by the Company or any Holder, respectively, shall be made without the prior
written consent of the majority in interest of the Holders or the Company,
respectively; provided that the rights of a Holder may be transferred to a
subsequent holder of the Holder's Registrable Securities (provided such
transferee shall provide to the Company, a writing executed by such transferee
agreeing to be bound as a Holder by the terms of this Agreement); and provided
further that the Company may transfer its rights and obligations under this
Agreement to a purchaser of all or a substantial portion of its business if the
obligations of the Company under this Agreement are assumed in connection with
such transfer, either by merger or other operation of law (which may include
without limitation a transaction whereby the Registrable Securities are
converted into securities of the successor in interest) or by specific
assumption executed by the transferee.
14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Arizona applicable to
agreements made in and wholly to be performed in that jurisdiction, except for
matters arising under the Act or the Securities Exchange Act of 1934, which
matters shall be construed and interpreted in accordance with such laws.
15. Execution in Counterparts Permitted. This Agreement may be
executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
this ____ day of ___________________, 2002.
ALANCO TECHNOLOGIES, INC., TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
an Arizona corporation a Nevada corporation
By: ---------------------------- By: ----------------------------
Name Name
Title: Title
<page>
APPENDIX E
EMS Assignment Agreement
This Assignment Agreement is made this 15th day of March, 2002, by
and among EMS Technologies, Inc., a Georgia corporation("EMS"), Technology
Systems International, Inc., a Nevada corporation ("TSI"), and Alanco
Technologies, Inc., an Arizona corporation ("Alanco").
Whereas, EMS holds a promissory note in the principal amount of
$1,167,000 dated December 23, 2000 and maturing December 31, 2001, executed to
its order by TSI (the "TSI Note"), which TSI Note was issued to EMS to evidence
amounts owed by TSI for products heretofor delivered by EMS to TSI;
Whereas, Alanco and TSI are parties to an Acquisition Agreement, of
even date herewith, providing for the acquisition by Alanco of all assets and
assumption of certain identified liabilities of TSI (the "Acquisition
Agreement"), subject to, among other things, the negotiation of arrangements
acceptable to Alanco concerning TSI's rights and obligations under supply
arrangement between EMS and TSI and the TSI Note; and
Whereas, the parties have agreed to the transfer of the TSI Note to
Alanco, all on the terms and conditions set forth in this Agreement.
Now, therefore, in consideration of the mutual promises and benefits
set forth herein, the parties hereby agree as follows:
1. Assignment of TSI Note. Effective simultaneously with and subject
to the closing of the Acquisition Agreement following the approval
thereof by the shareholders of Alanco (the "Closing"), EMS hereby assigns and
transfers the TSI Note to Alanco, free and clear of any liens, encumbrances or
other interests of any third party. Such transfer shall be further evidenced
by delivery to Alanco of the TSI Note, duly endorsed for transfer to the order
of Alanco.
2. Consideration to EMS. In consideration of the assignment of the
TSI Note, Alanco shall:
a. Deliver to EMS, at the Closing, 1,000,000 shares of Alanco
Common Stock, no par value (the "Alanco Stock");
b. Deliver to EMS, at the Closing, its promissory notes (the
"Alanco Notes"), on the terms and in the forms attached as Annexes A and B to
this Agreement; and
c. Deliver to EMS, not later than the seventh calendar day after
the Closing, $25,000 paid by check or wire transfer.
3. Restricted Status of Alanco Common Stock. EMS acknowledges that the
Alanco Stock, together with any shares of Alanco Common Stock issued upon
conversion of the Alanco Note in the form attached as Annex B, will be
"restricted securities" under the Securities Act of 1933, as amended (the "1933
Act"), and will bear a legend worded substantially as follows:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ISSUED WITHOUT REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES
LAWS OF ARIZONA OR ANY OTHER STATE, PURSUANT TO EXEMPTIONS THEREUNDER. SUCH
SHARES MAY NOT BE TRANSFERRED OTHER THAN IN A TRANSACTION THAT IS REGISTERED
UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR AS TO WHICH IT
IS ESTABLISHED TO THE SATISFACTION OF COUNSEL TO THE ISSUER THAT SUCH
TRANSACTION IS EXEMPT FROM REGISTRATION THEREUNDER.
The foregoing legend on the certificates representing Alanco Common
Stock shall be removed by delivery of substitute certificates without such
legend, at such time as such legend is not required for purposes of the 1933
Act. It is agreed that such restrictive legends and related stop orders will be
removed if (i) Alanco has received either a written opinion of counsel, which
such counsel and opinion shall be reasonably satisfactory to Alanco, or a "no
action" letter obtained from the SEC, to the effect that the Alanco Common Stock
subject thereto may be transferred free of the restrictions imposed by Rule 144,
or (ii) in the event of a sale of the Alanco Common Stock which has been
registered under the Securities Act or made in conformity with the provisions of
Rule 144.
4. Registration of Alanco Stock. Alanco and EMS agree that the rights
and obligations of Alanco and EMS with respect to the registration by Alanco of
the Alanco Stock, under the 1933 Act and applicable state laws, for resale by
EMS shall be as set forth in Exhibit B to the Acquisition Agreement.
5. Representations and Warranties of Alanco. Alanco represents and
warrants to EMS that each of the following statements is true and accurate on
the date hereof and will be true and accurate as of the Closing:
a. Corporate Status. Alanco is a corporation duly incorporated,
organized, subsisting and in good standing under the laws of the State of
Arizona, and is duly qualified to transact business in all jurisdictions in
which such qualification is required, except where the failure to qualify could
not be reasonably expected to have a material adverse effect on the business
operations or financial condition of Alanco.
b. Authority. Alanco has all necessary power and authority
(corporate and otherwise) to own, lease and operate its assets and other
properties and to carry on business as it is now being conducted. Alanco is duly
authorized to enter into this Agreement and to perform all its obligations and
do all other things and take all other actions required or contemplated hereby
or thereby. This Agreement has been duly executed and delivered by Alanco and,
assuming the due authorization, execution and delivery hereof by the other
parties to this Agreement, constitutes the legal, valid and binding obligation
of Alanco, enforceable against Alanco in accordance with its terms.
c. Authorized Alanco Stock. The authorized capital stock of Alanco
consists of 100,000,000 shares of common stock, no par value, of which there are
(i) 10,220,100 shares issued and outstanding, (ii) 5,000,000 shares of Class A
Cumulative Convertible Preferred Shares, of which there are no shares issued and
outstanding, and (iii) 20,000,000 shares of Class B Cumulative Convertible
Preferred Shares, of which there are no shares issued and outstanding. Upon
delivery pursuant to this Agreement, the Alanco Stock, together with any shares
of the Alanco Common Stock issued upon conversion of the Alanco Note in the form
attached as Annex B, will be duly authorized, validly issued, fully-paid and
non-assessable shares of the Common Stock, no par value per share, of Alanco,
free of preemptive rights.
d. No Violations. Neither this Agreement nor Alanco's performance
of its obligations hereunder will contravene, violate or result in a breach of
(i) the Articles of Incorporation, Bylaws or other organizational documents of
Alanco, (ii) any agreement, obligation or commitment to which Alanco is a party
or by which it is bound, or (iii) any applicable requirement, judgment, order or
restriction of any court or other governmental entity, and no consent of, notice
to or filing with any person is required for the performance by Alanco of the
transactions contemplated by or its obligations under this Agreement, other than
filings under the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934, as amended (the "1934 Act"), or as required by
the rules and regulations of the National Association of Securities Dealers,
Inc.
e. Alanco Public Filings; Financial Statements.
(i) Since December 31, 1999, Alanco has filed all forms,
reports, statements and other documents required to be filed with the SEC,
including without limitation (i) all Annual Reports on Form 10-K, (ii) all
Quarterly Reports on Form 10-Q, (iii) all proxy statements relating to meetings
of shareholders (whether annual or special), (iv) all Current Reports on Form
8-K and (v) all other reports, schedules, registration statements or other
documents (collectively referred to as the "Alanco Public Filings"). The Alanco
Public Filings were prepared in all material respects in accordance with the
requirements of applicable legal requirements (including the 1933 Act or 1934
Act, as the case may be, and the applicable rules and regulations of the SEC
thereunder, and the Alanco Public Filings did not at the time they were filed
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading.
(ii)Each of the historical consolidated financial statements
(including, in each case, any related notes thereto) contained in the Alanco
Public Filings (i) have been prepared in accordance with the published rules and
regulations of the SEC and GAAP applied on a consistent basis throughout the
periods involved (except (A) to the extent disclosed therein or required by
changes in GAAP, (B) as may be indicated in the notes thereto and (C) in the
case of the unaudited financial statements, as permitted by the rules and
regulations of the SEC) and (ii) fairly present the consolidated financial
position of Alanco and its subsidiaries as of the respective dates thereof and
the consolidated results of operations and cash flows for the periods indicated
(subject, in the case of unaudited consolidated financial statements for interim
periods, to adjustments, consisting only of normal, recurring accruals,
necessary to present fairly such results of operations and cash flows).
(iii) Except as disclosed in the Alanco Public Filings filed
prior to the date of this Agreement or as contemplated by this Agreement, since
June 30, 2001, Alanco and its subsidiaries have conducted their respective
businesses only in the ordinary course and in a manner consistent with past
practice and there has not been any event causing or constituting a material
adverse effect on the business operations or financial condition of Alanco,
other than issuance of shares of Alanco common stock in connection with a
private offering thereof, and general market conditions in Alanco's computer
storage businesses.
6. Representations and Warranties of EMS. EMS represents and warrants
to Alanco that each of the following statements is true and accurate on the date
hereof and will be true and accurate as of the Closing:
a. Corporate Status. EMS is a corporation duly incorporated,
organized, subsisting and in good standing under the laws of the State of
Georgia, and is duly qualified to transact business in all jurisdictions in
which such qualification is required, except where the failure to qualify could
not be reasonably expected to have an material adverse effect on the business
operations or financial condition of EMS.
b. Authority. EMS is duly authorized to enter into this Agreement
and to perform all its obligations and do all other things and take all other
actions required or contemplated hereby or thereby. This Agreement has been duly
executed and delivered by EMS and, assuming the due authorization, execution and
delivery hereof by the other parties to this Agreement, constitutes the legal,
valid and binding obligation of EMS, enforceable against EMS in accordance with
its terms.
c. No Violations. Neither this Agreement nor EMS's performance of
its obligations hereunder will contravene, violate or result in a breach of (i)
the Articles of Incorporation, Bylaws or other organizational documents of EMS,
(ii) any agreement, obligation or commitment to which EMS is a party or by which
it is bound, or (iii) any applicable requirement, judgment, order or restriction
of any court or other governmental entity, and no consent of, notice to or
filing with any person is required for the performance by EMS of the
transactions contemplated by or its obligations under this Agreement, other than
filings under the 1933 Act, 1934 Act or as required by the rules and regulations
of the National Association of Securities Dealers, Inc.
d. Purchase for Investment; Accredited Investor Status. EMS is
acquiring the Alanco Stock, the Alanco Notes, and any share of Alanco Common
Stock issued upon conversion of the Alanco Note in the form of Annex B, for
investment for its own account and not with a view to, or in connection with, a
distribution thereof within the meaning of Section 2(11) of the 1933 Act, other
than in transactions registered under or exempt from registration under such
Act. EMS acknowledges that such shares of Alanco Common Stock have not been
registered under the 1933 Act, or the securities laws of any state. EMS confirms
that Alanco has given EMS and its representatives the opportunity to ask
questions of the directors, officers and management employees of Alanco, and to
acquire such additional information about the business and financial condition
of Alanco as EMS has requested, and that all such information has been received
by EMS. EMS further confirms that it constitutes and "accredited investor" as
such term is defined for the purposes of Regulation D under the 1933 Act.
In Witness Whereof, the parties have caused this Assignment Agreement
to be executed and delivered on their respective behalves by their duly
authorized officers, on the date set forth above.
EMS TECHNOLOGIES, INC. ALANCO TECHNOLOGIES, INC.
By: ________________________ By: ____________________________
Name: Don T. Scartz Name:
Title: Senior Vice President and Title:
Chief Financial Officer
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
By: ________________________________
Name: Greg M. Oester
Title: Chief Executive Officer
Exhibit A
Promissory Note
Principal Scottsdale, Arizona
$250,000
FOR VALUE RECEIVED, the undersigned, Alanco Technologies, Inc. an
Arizona corporation (hereafter referred to as "Borrower"), promises to pay to
the order of EMS Technologies, Inc., a Georgia corporation (hereinafter,
together with any holder hereof, referred to as "Lender"), the principal sum of
Two Hundred Fifty Thousand Dollars ($250,000), said sum being payable on the
earlier of (i) the third anniversary of the date hereof; and (ii) to the extent
of funds received by Borrower from the State of California with respect to
installation of Borrower's system in the Calipatria prison, net of any expenses
incurred after the date of this note in completing said installation or
collecting said funds.
Interest shall accrue and be payable on the principal amount of this
Promissory Note outstanding from time to time at the rate of 5% per annum.
Accrued interest hereunder shall be payable on March 31, 2003, at the last day
of each calendar quarter thereafter, and at maturity.
Amounts due hereunder are payable to Lender at the Lender's offices at
660 Engineering Drive, Norcross, Georgia 30092, or at such other place as the
Lender may designate in writing.
The entire unpaid principal balance of this Promissory Note, or partial
payments in even thousands of dollars, may be paid at any time prior to maturity
without penalty.
If for any reason the principal balance together with all accrued
interest is not paid promptly on or before the due date, the Borrower shall be
in default hereunder. The Borrower shall also be in default hereunder if the
Borrower (i) files a voluntary petition in bankruptcy, (ii) is adjudicated as
bankrupt or insolvent, (iii) files a petition or answer seeking or acquiescing
in any reorganization or arrangement under the bankruptcy laws, (iv) seeks or
acquiesces in the appointment of a trustee or receiver, (v) makes a general
assignment for the benefit of creditors, (vi) admits in writing of its inability
to pay debts generally as they become due, or (vii) is the subject of an
involuntary petition in bankruptcy that is not withdrawn or dismissed within
sixty (60) days from the filing thereof.
Upon default and at any time thereafter, the Lender may declare the
entire unpaid balance of this Promissory Note immediately due and payable
without presentment, demand, protest, notice of default, notice of intent to
accelerate, notice of acceleration, or any other notice of any kind, all of
which are hereby expressly waived. Upon default, said principal sum, or so much
thereof as may remain unpaid at the time of such default, shall thereafter bear
interest at the lesser of the maximum rate allowed by applicable law or the rate
of 12% per annum.
If this Promissory Note is placed in the hands of an attorney for
collection, the borrower shall pay all costs of collection incurred by the
Lender, including reasonable attorneys' fees.
This Promissory Note is to be construed in all respects and enforced
according to the laws of the State of Arizona.
Notwithstanding any provision contained in this Note or any other
document executed or delivered in connection with this Note, the Lender shall
never be deemed to have contracted for or be entitled to receive, collect or
apply as interest on this Note, any amount in excess of the maximum rate of
interest permitted to be charged by applicable law, and, if the Lender ever
receives, collects or applies as interest any such excess, then the amount that
would be excessive interest shall be applied to reduce the unpaid principal
balance of this Note, and, if the principal balance of this Note is paid in full
by that application, then any remaining excess shall promptly be paid to
Borrower. In determining whether the interest paid or payable under any specific
contingency exceeds the highest lawful rate, Borrower and the Lender shall, to
the maximum extent permitted under applicable law, (i) characterize any
non-principal payment (other than payments expressly designated as interest
payments hereunder) as an expense or fee rather than as interest, (ii) exclude
voluntary prepayments and the effect thereof, and (iii) spread the total amount
of interest throughout the entire contemplated term of this Note so that
interest rate is uniform throughout that term.
Executed this ____ day of _________, 2002.
Signed, sealed and delivered BORROWER
in the presence of:
ALANCO TECHNOLOGIES, INC.
______________________________ By:__________________________________
Chief Executive Officer
Exhibit B
Promissory Note
Principal Scottsdale, Arizona
$100,000
FOR VALUE RECEIVED, the undersigned, Alanco Technologies, Inc. an
Arizona corporation (hereafter referred to as "Borrower"), promises to pay to
the order of EMS Technologies, Inc., a Georgia corporation (hereinafter,
together with any holder hereof, referred to as "Lender"), the principal sum of
One Hundred Thousand Dollars ($100,000), said sum being payable on the fifth
anniversary of the date hereof.
Interest shall accrue and be payable on the principal amount of this
Promissory Note outstanding from time to time at the rate of 5% per annum.
Accrued interest hereunder shall be payable on March 31, 2003, on the last day
of each calendar quarter thereafter, and at maturity.
Amounts due hereunder are payable to Lender at the Lender's offices at
660 Engineering Drive, Norcross, Georgia 30092, or at such other place as the
Lender may designate in writing.
The entire unpaid principal balance of this Promissory Note, or partial
payments in even thousands of dollars, may be paid at any time prior to maturity
without penalty.
Lender may at its option, exercised at any time and from time to time
prior to payment in full of all amounts owed under this Promissory Note, and
Borrower may at its option, exercised on any date on which the shares of the
common stock, no par value, of the Borrower (the "Common Shares") shall have
traded on the five preceding trading days at a closing price equal to or
exceeding $1.10 per share, as reported on NASDAQ, convert all or any portion of
the outstanding principal balance of, and unpaid accrued interest under, this
Promissory Note into the Common Shares, at a conversion rate of $1.00 per Share,
subject as to both conversion rate and the closing price triggering Borrower's
option to (i) proportionate adjustment to prevent any dilution of Lender's
potential interest in the equity of Borrower caused by any share split or share
dividend, and (ii) reduction equal to the per-Share value of any other
distribution (whether as a dividend or otherwise, and whether in cash or in
kind) to shareholders of record on a date prior to the date of conversion and
issuance of Shares pursuant thereto. In the event of any merger, reorganization
or other transaction resulting in the holders of the Common Shares receiving or
holding any security or other property different from or in addition to the
Common Shares, this conversion right shall entitle the Lender to receive, at the
adjusted conversion price then in effect, such security or a Common Share and
such other property received or held as a result of such transaction with
respect to each Common Share.
If for any reason the principal balance together with all accrued
interest is not paid promptly on or before the due date, the Borrower shall be
in default hereunder. The Borrower shall also be in default hereunder if the
Borrower (i) files a voluntary petition in bankruptcy, (ii) is adjudicated as
bankrupt or insolvent, (iii) files a petition or answer seeking or acquiescing
in any reorganization or arrangement under the bankruptcy laws, (iv) seeks or
acquiesces in the appointment of a trustee or receiver, (v) makes a general
assignment for the benefit of creditors, (vi) admits in writing of its inability
to pay debts generally as they become due, or (vii) is the subject of an
involuntary petition in bankruptcy that is not withdrawn or dismissed within
sixty (60) days from the filing thereof.
Upon default and at any time thereafter, the Lender may declare the
entire unpaid balance of this Promissory Note immediately due and payable
without presentment, demand, protest, notice of default, notice of intent to
accelerate, notice of acceleration, or any other notice of any kind, all of
which are hereby expressly waived. Upon default, said principal sum, or so much
thereof as may remain unpaid at the time of such default, shall thereafter bear
interest at the lesser of the maximum rate allowed by applicable law or the rate
of 12% per annum.
If this Promissory Note is placed in the hands of an attorney for
collection, the borrower shall pay all costs of collection incurred by the
Lender, including reasonable attorneys' fees.
This Promissory Note is to be construed in all respects and enforced
according to the laws of the State of Arizona.
Notwithstanding any provision contained in this Note or any other
document executed or delivered in connection with this Note, the Lender shall
never be deemed to have contracted for or be entitled to receive, collect or
apply as interest on this Note, any amount in excess of the maximum rate of
interest permitted to be charged by applicable law, and, if the Lender ever
receives, collects or applies as interest any such excess, then the amount that
would be excessive interest shall be applied to reduce the unpaid principal
balance of this Note, and, if the principal balance of this Note is paid in full
by that application, then any remaining excess shall promptly be paid to
Borrower. In determining whether the interest paid or payable under any specific
contingency exceeds the highest lawful rate, Borrower and the Lender shall, to
the maximum extent permitted under applicable law, (i) characterize any
non-principal payment (other than payments expressly designated as interest
payments hereunder) as an expense or fee rather than as interest, (ii) exclude
voluntary prepayments and the effect thereof, and (iii) spread the total amount
of interest throughout the entire contemplated term of this Note so that
interest rate is uniform throughout that term.
Executed this ____ day of________, 2002.
Signed, sealed and delivered BORROWER
in the presence of:
ALANCO TECHNOLOGIES, INC.
______________________________ By: ______________________________________
Chief Executive Officer
<page>
APPENDIX F
AMENDED LOAN AGREEMENT
THIS AMENDED LOAN AGREEMENT ("Agreement") is entered into this 15th day
of March 2002, between ALANCO TECHNOLOGIES, INC., an Arizona corporation
("Alanco"), and TECHNOLOGY SYSTEMS INTERNATIONAL, INC., a Nevada corporation
("TSI").
RECITALS:
Alanco and TSI have executed an Amended Acquisition Agreement, of even
date herewith (the "Acquisition Agreement"), pursuant to which Alanco will
acquire substantially all of the assets and assume specific liabilities of TSI
in exchange for shares of Alanco's common stock.
Alanco and TSI have previously entered into a Loan Agreement, dated
January 3, 2002, pursuant to which Alanco agreed to loan up to $350,000 to TSI
to assist TSI with its working capital requirements pending the closing of the
Acquisition Agreement, which loan was repayable as stated in the Loan Agreement.
Additional funds may be required by TSI pending the closing, and the parties are
willing to amend and restate the Loan Agreement as set forth herein. This
Agreement, and the Promissory Note attached hereto, are intended to replace the
former Loan Agreement and earlier Promissory Note attached thereto in their
entirety.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree as follows:
1. Loan. TSI agrees to borrow from Alanco and Alanco agrees to loan to
TSI funds from time to time upon the terms and conditions set forth herein.
Notwithstanding anything to the contrary, advances under this agreement shall be
at the sole discretion of Alanco. The existing promissory note of TSI in favor
of Alanco in the amount of $350,000 plus interest, shall be amended upon the
execution hereof, and a new replacement Promissory Note in the form attached
hereto as Exhibit A (the "Note") shall be executed and delivered to Alanco upon
the execution hereof.
2. Security Agreement. The Note shall be secured by a security
interest in all of the assets of TSI pursuant to a Security Agreement in the
form attached hereto as Exhibit B. The Security Agreement shall be duly
executed by TSI and delivered to Alanco upon the execution hereof.
3. Additional Consideration; Conversion of Note. TSI understands that
Alanco is advancing monies to TSI in anticipation of the transaction described
in the Acquisition Agreement. The Note (including outstanding principal and
accrued interest thereof) may, at Alanco's sole option, be convertible into TSI
common shares by written notice to TSI at any time upon the earlier of (i) May
31, 2002 or, (ii) when an offer from a party other than Alanco is received to
acquire all or substantially all the assets of TSI. Alanco shall have the right
to convert the Note into shares of TSI common stock at a conversion price of
$0.10 per share of TSI common stock.
As additional consideration to induce Alanco to loan monies to TSI and
to reimburse Alanco for costs and opportunities lost in the event the
Acquisition Agreement is not consummated, due to any factor other than Alanco's
decision not to proceed with the transaction, Alanco shall be entitled, at
Alanco's option, to payment of $500,000 or 2,000,000 shares of TSI, upon demand.
4. Warranties and Representations of TSI. TSI represents and warrants
to Alanco as follows, and acknowledges and confirms that Alanco is relying upon
such representations and warranties in connection with the execution, delivery
and performance of this Agreement, notwithstanding any investigation made by
Alanco or on its behalf:
4.1. Organization and Standing. TSI is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada, has
all of the requisite corporate power and authority and has all of the licenses,
permits, authorities and consents that are necessary to own, operate and lease
its properties and to carry on its business as now being conducted. TSI is duly
qualified to do business and is in good standing as a foreign corporation in all
jurisdictions in which the property owned, leased or operated by TSI or the
nature of the business conducted by TSI makes such qualification necessary.
4.2. Capitalization. The authorized capital of TSI consists solely
of 25 million shares of common stock, of which approximately 23,180,919 were
validly issued and outstanding as of March 6, 2002.
4.3. Authorization. TSI has all the requisite legal and corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. All corporate action on the part of TSI and
its officers, directors and stockholders necessary for the authorization,
execution, delivery, and performance of all obligations of TSI under this
Agreement has been taken. This Agreement, the Note and the Security Agreement,
when executed and delivered, shall constitute legal, valid and binding
obligations of TSI, enforceable in accordance with their terms.
4.4. Governmental Consents. No consent, approval, order, or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority is required on
the part of TSI in connection with the execution, delivery or performance of
this Agreement or consummation of the transactions contemplated hereby.
4.5. Compliance with Other Instruments. TSI will not be, as a result of
the execution, delivery or performance of this Agreement, in violation of or
default under any provision of its Articles of Incorporation or By-laws, as
amended and in effect on the date hereof, or of any provision of any instrument,
contract or lease to which it is a party, or of any provision of any federal or
state judgment, writ, decree, order, statute, rule, or governmental regulation
applicable to TSI.
5. Notices. All notices and other communications required or permitted
to be given hereunder shall be in writing and shall be hand delivered or mailed
certified mail, return receipt requested, postage prepaid, addressed as follows
(or to such other address as either party may designate by written notice):
If to TSI: 15575 North 83rd Way, Suite 4
Scottsdale, AZ 85260
Attn: Greg Oester, Chief Executive Officer
If to Alanco:15900 N. 78th Street, Suite 101
Scottsdale, AZ 85260
Attn: Robert R. Kauffman, President
Any such notice shall be deemed given upon receipt if hand delivered or
two business days following deposit in the US mail if sent by mail.
6. General Provisions.
6.1. In the event of any controversy, claim or dispute between the
parties hereto, arising out of or relating to this Agreement or the breach
thereof, the prevailing party shall be entitled to recover from the losing party
reasonable expenses, attorneys' fees and costs.
6.2. This Agreement is being executed and delivered and is intended to
be performed in the State of Arizona, and shall be construed and enforced in
accordance with the laws of such State.
6.3. Time is of the essence of this Agreement and each and every term
and provision hereof.
6.4. The terms hereof are enforceable by specific performance.
6.5. It is expressly agreed that failure to exercise any right
hereunder shall not constitute a waiver of the right to the later exercise
thereof.
6.6. Any provision hereof which may be invalid or unenforceable under
any applicable law or governmental regulation shall be omitted herefrom or be
deemed modified as appropriate, but such omission shall not invalidate the
remaining provisions of this Agreement.
6.7. This Agreement may not be changed orally but only by an
agreement in writing and signed by the party against whom enforcement of waiver,
change, modification or discharge is sought; and
6.8. This Agreement shall be binding upon and inure to the benefit of
the parties hereto, their heirs, personal representatives, successors and
assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement the day
herein first above written.
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
a Nevada corporation
By: _________________________________________
Greg Oester, Chief Executive Officer
ALANCO TECHNOLOGIES, INC.
an Arizona corporation
By: __________________________________________
Robert R. Kauffman, President
EXHIBIT A
PROMISSORY NOTE
$360,000.00 Scottsdale, Arizona
March 15, 2002
FOR VALUE RECEIVED, the undersigned, TECHNOLOGY SYSTEMS INTERNATIONAL, INC., a
Nevada corporation (hereinafter the "Maker"), promises and agrees to pay to the
order of ALANCO TECHNOLOGIES, INC., an Arizona corporation ("Holder"), at
Scottsdale, Arizona, or at such other place as the Holder hereof may designate,
the principal sum of Three Hundred Sixty Thousand and no/100 Dollars
($360,000.00), or so much thereof as has been advanced hereunder as reflected on
a schedule of advances maintained by Holder, together with interest on the
outstanding principal at the rate of eighteen (18%) percent per annum from the
date advanced even if such advance predates this Note, payable in full on or
before May 31, 2002. Notwithstanding the foregoing, in the event Maker receives
payment from the state of Michigan with respect to its project known as Maxi I,
Makers shall pay Holder the sum of $150,000 to reduce the outstanding balance
hereof.
All sums payable hereunder shall be paid in lawful money of the United States of
America. This Note may be prepaid, in whole or in part, at any time and from
time to time, without penalty.
Notwithstanding anything herein to the contrary, the Note (including outstanding
principal and accrued interest thereof) may, at Alanco's sole option, be
convertible into TSI common shares by written notice to TSI upon the earlier of
(i) May 31, 2002 or, (ii) when an offer from a party other than Alanco is
received to acquire all or substantially all the assets of TSI. Alanco shall
have the right to convert into shares of TSI common stock at a conversion price
of $0.10 per share of TSI common stock.
In the event holder hereof utilizes the services of an attorney in attempting to
collect the amounts due hereunder or to enforce the terms hereof or if any
holder hereof becomes party plaintiff or defendant in any legal proceeding in
relation to this Note or for the recovery or protection of the indebtedness
evidenced hereby, Maker agrees to pay, in addition to the principal and interest
due hereunder, all costs and a reasonable amount as attorneys' fees, whether or
not suit is brought, and shall further pay all costs, expenses and attorneys'
fees incurred after the filing by or against the Maker of any proceeding under
any Chapter of the Bankruptcy Code, or any similar federal or state statute.
This Note shall be governed by, construed and interpreted in accordance with the
laws of the state of Arizona.
The Maker and all endorsers hereof and all others who may become liable for all
or any part of these obligations hereby severally waive demand, presentment for
payment, protest and demand, notice of protest, demand and dishonor, and
nonpayment of this Note and all other notice and specifically agree that the
maturity of this Note or any payment hereunder may be extended from time to time
without in any way affecting the liability of Maker or any endorses or
guarantors.
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
By: _____________________________
Its: ____________________________
EXHIBIT B
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is entered this 15th day of March, 2002, between ALANCO
TECHNOLOGIES, INC., an Arizona corporation ("Secured Party") and TECHNOLOGY
SYSTEMS INTERNATIONAL, INC., a Nevada corporation ("Debtor").
RECITALS:
Secured Party and Debtor have entered into a Secured Credit Facility Agreement
pursuant to which Secured party has loaned monies to Debtor to be repaid in
accordance with the terms of a Promissory Note, of even date herewith in the
amount of $360,000.00 (the "Note"). The Note is secured by, among other things,
the security interests granted herein.
NOW, THEREFORE, in consideration of the Secured Credit Facility Agreement, the
Note and the mutual covenants contained herein, the parties agree as follows:
1. Grant of Security Interest. The Debtor hereby grants to the Secured
Party a security interest in the Collateral described below to secure the
payment and performance of the obligations set out in this Agreement.
2. Collateral. The property serving as collateral and subject to the
above security interest is as follows:
All of Debtors property, whether real or personal, tangible or
intangible, and wherever located, all goodwill associated therewith, and all
Products and Proceeds thereof.
3. Obligations of Debtor. The obligations of the Debtor that are subject to
this Security Agreement are as follows: This Security Agreement secures
repayment of the Note in the amount of $360,000.00, together with interest on
the outstanding balance existing from time to time at the rate stated in the
Note.
4. Warranties and Commitments.
a. Title. The Debtor is the owner of the Collateral, which is
free and clear of any and all liens, claims, encumbrances, and the like, and
has all authority to use the same as Collateral.
b. Liens and Encumbrances. The Debtor agrees that during the
course of this Agreement, the Debtor will keep the Collateral free from any
and all other liens, encumbrances, and the like.
c. Sale of Collateral. The Debtor will not sell, offer for sale,
transfer, or dispose of the Collateral or any interest in the Collateral, other
than in the ordinary course of Debtor's business, without the prior written
consent of the Secured Party, which shall not be unreasonably withheld.
d. Unlawful Uses of Collateral. The Debtor will not use or permit
any person to use the Collateral in a manner prohibited by law, in violation
of any insurance policy, or in any manner inconsistent with the Secured
Party's security interest.
e. Care of Collateral. The Debtor agrees to maintain the
Collateral in good order and repair at all times, reasonable wear and tear
accepted, and will not waste or destroy the Collateral or any part of it.
f. Location of Collateral. The Debtor agrees not to remove the
Collateral from the business premises located at 15575 North 83rd Way, Suite 4,
Scottsdale, AZ 85260 without the Secured Party's written permission. Secured
Party's consent shall not be required for the replacement of the Collateral with
reasonably equivalent Collateral of like description.
5. Certificate of Title. The Debtor agrees that Secured Party's security
interest in the Collateral shall be shown on the certificate of title for the
same, if any, and that the Debtor shall take all steps necessary to reflect such
lien on the title certificate.
6. Financing Statements. The Debtor authorizes Secured Party to execute one
or more financing statements in a form satisfactory to the Secured Party who is
authorized to file a financing statement in any location deemed necessary or
advisable to perfect the Secured Party's security interest in the Collateral or
proceeds.
7. Default. It is agreed that the following events shall constitute a
default under this Agreement:
a. Nonpayment. Any failure of the Debtor to pay when due any
obligation secured by this Agreement shall constitute a default. This
includes, but is not limited to, any failure to pay principal or
interest when due in connection with the Note or other document evidencing
obligations contained in this Agreement.
b. Nonperformance. Any failure of the Debtor to perform or
observe fully and in a satisfactory manner the material terms of this
Agreement shall constitute a default.
c. Levy and Attachments. Seizure, attachment, or levy on any
property of the Debtor whether or not such property is covered by this Agreement
shall operate as a default under this Agreement.
d. Insolvency and the Like. It shall operate as a default under
this Agreement if for any reason:
(1) The Debtor becomes unable to pay its obligations as they
become due;
(2) The Debtor becomes subject to any proceeding under the
bankruptcy or insolvency laws, including an assignment for the benefit of
creditors; or
(3) The Debtor has its property placed under the custody of a
receiver or trustee.
e. Unauthorized Use of Collateral or Proceeds. The sale,
transfer, or use of the Collateral or its proceeds except as authorized in
this Agreement shall operate as a default under this Agreement.
8. Acceleration on Default. In the event of any default under this
Agreement, the entire indebtedness secured by this Agreement shall become
immediately due and payable.
9. Secured Party's Remedies. On default or acceleration, the
Secured Party shall have the following rights and remedies, which are
cumulative in nature and are immediately available to the Secured Party:
(1) All rights and remedies provided by law, including but not limited
to those provided by the Uniform Commercial Code, especially those provided in
Part 5 of Article 9;
(2) All rights and remedies provided in this Agreement;
(3) All rights and remedies provided in the Note or other instrument
secured by this Agreement; and
(4) All rights and remedies provided in any other applicable security
agreement.
Among those rights are specifically included:
a. Right to Control Proceeds. The Secured Party may, at its
option, take control of any and all proceeds to which it is entitled under
Section 9-306 of the Uniform Commercial Code and the Debtor agrees to cooperate
fully in executing any commercially reasonable direction made in the exercise of
this right.
b. Right to Take Possession of Collateral. This shall include
but is not limited to:
i. Right to Take Possession. The Secured Party shall
have the right to take possession of the Collateral.
ii. Debtor's Cooperation. The Debtor will cooperate fully with
the Secured Party in the exercise of the Secured Party's right to take
possession of the Collateral. Failure to cooperate shall constitute a breach of
this Agreement and the Debtor shall be liable for any and all expenses incident
to such failure of cooperation.
c. Right to Dispose of Collateral. This shall include but is
not limited to:
i. Right of Disposition. The Secured Party has a right to
dispose of the Collateral by public or private proceeding and by way of one or
more contracts. Such sale or other disposition of the Collateral may be made as
a unit or in parcels and at any time and place and on any terms provided only
that the disposition effected is commercially reasonable. Any actions so taken
shall be considered commercially reasonable if made in the good faith exercise
of the Secured Party's best business judgment in the matter.
ii. Place of Disposition. The Secured Party remains free to
dispose of the Collateral from any location provided such location is
commercially reasonable. Any location normally employed by the Secured Party in
the disposition of like goods shall be considered a commercially reasonable
location.
iii.Notice of Disposition. The Secured Party shall give the
Debtor notice of the time and place of any public sale of the Collateral or, in
the case of a private sale or disposition, the time after which such private
sale or disposition is intended. It shall be considered commercially reasonable
if such notice is sent to the Debtor by first class mail ten (10) days prior to
the public sale or the time after which the private sale or other disposition is
intended.
iv. Proceeds of the Disposition. The proceeds of any
disposition shall be applied as provided in Section 9-504 of the Uniform
Commercial Code and shall include any and all expenses provided in this
Agreement. They shall also include reasonable attorney's fees and legal fees to
the extent such items are not prohibited by law.
v. Deficiency. In the event of any deficiency, the
Debtor shall be liable for such deficiency with interest at the rate of
interest set forth in the Note, which shall accrue ten (10) days after
receipt of written demand for payment of the deficiency.
10. Waiver of Rights.
a. All rights and remedies of the Secured Party as provided in this
Agreement, or as found in any promissory note or other instrument executed in
connection with this Agreement, or arising by operation of law shall continue in
full force and effect during the full course of this Agreement unless
specifically waived by the Secured Party in a signed writing to that effect.
b. Forbearance, failure, or delay on the part of the Secured Party in
the exercise of any such right or remedy shall not constitute a waiver of that
right or remedy. Such a waiver may be affected only by a specific written
agreement to that effect that is signed by the Secured Party.
c. The exercise or partial exercise of any right or remedy shall
not preclude the further exercise of such right or remedy.
11. Choice of Law. This Agreement shall be governed by and interpreted
in accordance with the law of the state of Arizona.
12. Severability. In the event that any provision of this Agreement
shall be found to be unenforceable in any legal proceeding, the remaining
provisions shall remain in force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and year
first above written.
DEBTOR:
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
a Nevada corporation
By: _________________________________________
Greg Oester, President
SECURED PARTY:
ALANCO TECHNOLOGIES, INC.
an Arizona corporation
By: __________________________________________
Robert R. Kauffman, President
<page>
APPENDIX G
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
The Securities and Exchange Act of 1934
For the quarter ended . . . . . . . . . . . . . . . . . December 31, 2001
Commission file number. . . . . . . . . . . . . . . . . . . . . . . . . .0-9347
ALANCO TECHNOLOGIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
(Formerly reporting as Alanco Environmental Resources Corporation)
Arizona 86-0220694
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15900 North 78th Street, Suite 101, Scottsdale, Arizona 85260
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 607-1010
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES XX NO
---- ----
As of February 12, 2002 there were 10,212,600 shares of common stock
outstanding.
ALANCO TECHNOLOGIES, INC.
INDEX
Page Number
<c> <c>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 2001 and June 30, 2001 .............3
Consolidated Statements of Operations
For the three months ended December 31,
2001 and 2000.................................4
Consolidated Statements of Operations
For the six months ended December 31,
2001 and 2000.................................5
Consolidated Statements of Cash Flows
For the six months ended December 31,
2001 and 2000..................................6
Notes to Consolidated Financial Statements ........7
Note A - Basis of Presentation
Note B - Inventories
Note C - Loss per Share
Note D - Sale of Common Shares
Note E - Acquisition and Business Development
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........8
PART II. OTHER INFORMATION
Item 6. Exhibits ............................................10
Signature ...........................................10
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31 AND JUNE 30, 2001
<c> <c>
ASSETS
Dec 31, 2001 June 30, 2001
-------------- --------------
(Unaudited)
CURRENT ASSETS
Cash $ 748,000 $ 81,000
Accounts receivable, net 1,267,600 1,209,400
Subscriptions receivable 50,000 563,500
Notes receivable, net 783,700 677,500
Inventories 1,362,500 1,218,500
Prepaid expenses 69,300 35,000
-------------- ---------------
Total current assets 4,281,100 3,784,900
-------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, NET 371,800 496,000
-------------- ---------------
OTHER ASSETS
Intangible assets, net 1,582,800 1,420,400
Notes Receivable, net 450,000 966,100
Investment at cost 2,475,200 2,475,200
Net assets held for sale 593,600 603,300
Other assets 32,600 35,500
-------------- ---------------
Total other assets 5,134,200 5,500,500
-------------- ---------------
TOTAL ASSETS $ 9,787,100 $ 9,781,400
============== ===============
CURRENT LIABILITIES
Accounts payable & accruals $ 1,553,200 $ 1,010,600
Bank line 1,273,900 885,600
Notes payable, current -- 248,600
Deferred gain, pollution control products 589,700 589,700
-------------- ---------------
Total Current Liabilities 3,416,800 2,734,500
LONG TERM LIABILITIES
Deferred gain, pollution control products 378,000 378,000
-------------- ---------------
TOTAL LIABILITIES 3,794,800 3,112,500
-------------- ---------------
SHAREHOLDERS' EQUITY
Preferred Stock:
Class A, cumulative convertible
preferred stock; 5,000,000 shares
authorized, of which none are -- --
issued and outstanding at 12/31/01.
Class B, cumulative preferred stock:
2,000,000 authorized and none outstanding -- --
Common Stock, no par value, 100,000,000 shares
authorized 9,691,600 and 8,720,300
shares issued, respectively 58,122,900 57,653,000
Treasury Stock -- (40,000)
Accumulated deficit (52,130,600) (50,944,100)
-------------- ---------------
Total shareholders' equity 5,992,300 6,668,900
-------------- ---------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 9,787,100 $ 9,781,400
============== ===============
</table>
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31,
2001 2000
-------------- ---------------
NET SALES $ 1,475,400 $ 2,562,700
Cost of goods sold 938,800 1,559,500
-------------- ---------------
GROSS MARGIN 536,600 1,003,200
Selling, general and administrative 1,341,100 1,797,400
-------------- ---------------
OPERATING LOSS (804,500) (794,200)
Other income (expense), net (12,900) 23,000
-------------- ---------------
LOSS - CONTINUING OPERATIONS (817,400) (771,200)
Preferred stock dividend -- (56,500)
-------------- ---------------
LOSS - CONTINUING OPERATIONS ATTRIBUTABLE
TO COMMON SHAREHOLDERS (817,400) (827,700)
-------------- ---------------
Operating income (loss) - disc. operations 12,000 (30,500)
Gain - sale of pollution control products -- 252,000
-------------- ---------------
INCOME - DISCONTINUED OPERATIONS 12,000 221,500
-------------- ---------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (805,400) $ (606,200)
============== ===============
EARNINGS (LOSS) PER SHARE-BASIC AND DILUTED
- Continuing Operations $ (0.09) $ (0.12)
============== ===============
- Discontinued Operations $ 0.00 $ 0.03
============== ===============
- Net Loss $ (0.09) $ (0.09)
============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,738,733 6,777,900
============== ===============
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31,
<s> <c>
2001 2000
-------------- --------------
NET SALES $ 3,614,000 $ 5,309,100
Cost of goods sold 2,186,200 3,135,300
-------------- --------------
GROSS MARGIN 1,427,800 2,173,800
Selling, general and administrative 2,614,700 3,264,700
-------------- --------------
OPERATING LOSS (1,186,900) (1,090,900)
Other income (expense), net (10,300) 15,200
-------------- --------------
LOSS - CONTINUING OPERATIONS (1,197,200) (1,075,700)
Preferred stock dividend -- (56,500)
-------------- --------------
LOSS - CONTINUING OPERATIONS ATTRIBUTABLE
TO COMMON SHAREHOLDERS (1,197,200) (1,132,200)
Operating income (loss)-disc. operations 10,600 6,500
Gain - sale of pollution control products -- 252,000
-------------- --------------
INCOME - DISCONTINUED OPERATIONS 10,600 258,500
-------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,186,600) $ (873,700)
============== ==============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
- Continuing Operations $ (0.14) $ (0.17)
============== ==============
- Discontinued Operations $ 0.00 $ 0.04
============== ==============
- Net Loss $ (0.14) $ (0.13)
============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,738,733 6,772,400
============== ==============
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31,
<s> <c> <c>
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (1,197,200) $ (1,075,700)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 131,500 197,700
Stock issued for services 26,000 3,300
Other 2,900 --
(Increase) decrease in:
Accounts receivable 455,300 (966,400)
Inventory (28,800) (208,900)
Net assets of disposed operations 9,700 153,900
Prepaid expenses and other assets (34,300) (37,100)
Increase (decrease) in:
Accounts payable and accrued expenses 542,600 213,800
------------- -------------
Net cash used in continuing operations (92,300) (1,719,400)
Income from discontinued operations 10,600 258,500
------------- -------------
Net cash used in operating activities (81,700) (1,460,900)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 358,900 1,587,300
Purchase of property, plant and equipment (122,200) (59,300)
Intangible Assets, related to acquisitions (162,700) (6,100)
Deferred Gain -- 967,700
Investments -- --
Purchase of treasury stock (24,000) (7,800)
------------- -------------
Net cash provided by investing activities 50,000 2,481,800
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from borrowings 1,215,000 --
Repayment on borrowings (1,075,300) (1,028,300)
Issuance of Stock 578,300 --
Proceeds from sale of preferred stock -- 96,500
Nasdaq listing fee (19,300) --
Dividends on preferred stock -- (56,500)
Proceeds from exercise of options -- 11,000
------------- -------------
Net cash provided by (used in) financing
activities 698,700 (977,300)
------------- -------------
NET INCREASE IN CASH $ 667,000 $ 43,600
CASH, beginning of period $ 81,000 $ 176,700
------------- -------------
CASH, end of period $ 748,000 $ 220,300
============= =============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 42,700 $ 32,100
============= =============
Stock issued for services $ 26,000 $ 3,300
============= =============
Computer equipment transferred from PP&E to
Inventory $ 115,200 $ --
============= =============
Note receivable repaid through surrender of
options $ 51,000 $ --
============= =============
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED DECEMBER 31, 2001
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles for interim
financial information and in accordance with the instructions to Form 10-QSB.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with Generally Accepted Accounting
Principles have been condensed or omitted. These interim consolidated financial
statements should be read in conjunction with the Company's June 30, 2001,
Annual Report on Form 10-KSB. In the opinion of management, the accompanying
consolidated financial statements include all adjustments consisting of normal
recurring accruals necessary to present fairly the financial position, results
of operations and statements of cash flows as of December 31, 2001, and for all
periods presented. The results of operations for the six months ending
December 31, 2001, are not necessarily indicative of the operating results to be
expected for an entire year.
All significant intercompany balances, transactions and stock holdings
have been eliminated from the accompanying interim financial statements.
Note B - Inventories
Inventories have been recorded at the lower of cost or market. The
composition of inventories as of December 31, 2001, and June 30, 2001, is listed
below:
December 31, 2001 June 30, 2001
Finished goods $ 860,300 $ 824,200
Work-in-process 114,300 109,500
Raw material 387,900 284,800
----------- -----------
$1,362,500 $1,218,500
=========== ===========
Note C - Loss per Share
Basic loss per share of common stock was computed by dividing net
loss by the weighted average number of shares outstanding of common stock.
Diluted earnings per share were computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during the
period. Dilutive securities are options and warrants that are freely
exercisable into common stock at less than the prevailing market price.
Dilutive securities are not included in the weighted average number of shares
when inclusion would increase the earnings per share or decrease the loss per
share.
Note D - Sale of Common Shares
During December 2001 and January 2002, the company raised a
total of $925,000 through the sale, to accredited investors, of common stock
at a price of $.625 per share. As of December 31, 2001 the Company had raised
$600,000 and had incurred expenses related to the stock issuance of $21,700.
The purchasers of the restricted common shares were also issued 3 year
warrants to purchase shares of common stock. The Company issued, with
respect to the full fund raising through January, warrants to purchase
805,000 shares of the Company's common stock at a price of $1.00 per share.
Note E - Acquisition and Business Development
Continuing the Company's acquisition strategy, the Company announced in
December 2001, an agreement to acquire Technology Systems International, Inc.
("TSI"), a Scottsdale, Arizona based developer of proprietary, wireless RF
(radio frequency) identification, location and tracking technology utilized for
area security management and information systems primarily focusing on the
correctional market. The acquisition, which is anticipated to be effected by the
Company purchasing substantially all the assets of TSI, is conditional on final
structuring and shareholder approval of both companies. The basic structure of
the acquisition will consist of an initial payment of Alanco common stock at the
close with additional future stock payments based upon financial performance.
Alanco believes the addition of the TSI patented technology (named the
TSI PRISM (TM) System) significantly enhances the Company's proprietary
intellectual property and represents a strategic expansion of the Company's
information technology activities. TSI recently completed both a seven-year
development program, investing over $14 million in the patented technology, and
two successful pilot projects, one in Texas and one in California. Currently,
TSI is completing an installation of the system at a correctional facility in
Michigan.
In November 2001, the Company's Excel/Meridian Data, Inc., Dallas,
Texas based subsidiary announced the commercial availability of its new SecurNAS
7200 Network Attached Storage (NAS) filer. The SecurNAS 7200 is a fault
tolerant, 4U Rack Mount filer with a powerful, low overhead, Linux-based
operating system coupled with hardware RAID backplane and controller. It can be
installed and configured in less than 15 minutes and offers a very affordable
fault tolerant data storage solution, readily scalable from 30 GB to 1 TB with
cost-effective IDE hard drives.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information, the statements contained herein are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. All such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by those
statements. These risks and uncertainties include, but are not limited to, the
following factors: general economic and market conditions; reduced demand for
information technology equipment; competitive pricing and difficulty managing
product costs; development of new technologies which make the Company's products
obsolete; rapid industry changes; failure by the Company's suppliers to meet
quality or delivery requirements; the inability to attract, hire and retain key
personnel; failure of an acquired business to further the Company's strategies;
the difficulty of integrating an acquired business; undetected problems in the
Company's products; the failure of the Company's intellectual property to be
adequately protected; unforeseen litigation; the ability to maintain sufficient
liquidity in order to support operations; the ability to maintain satisfactory
relationships with lenders and to remain in compliance with financial loan
covenants and other requirements under current banking agreements; and the
ability to maintain satisfactory relationships with suppliers.
1. Results of Operations
In accordance with Generally Accepted Accounting Principles, the Company
has limited its reported consolidated revenues to revenues from its Computer
Data Storage segment, the only operation classified as a continuing operation.
To maintain comparability, certain balances from the Consolidated Statement of
Operations and Consolidated Statement of Cash Flows for the comparable period
of the prior year may have been restated.
(A) Three months ended 12/31/2001 versus 12/31/2000
Consolidated revenue for the quarter ended December 31, 2001 was
$1,475,400, compared to $2,562,700 for the comparable quarter of the previous
year, a decrease of $1,087,300 or 42.4%. The net loss attributable to common
stockholders for the quarter was $805,400, or $.09 per share, compared to a loss
of $606,200, or $.09 per share, for the same quarter of the prior year. The
reduction in revenues was attributed to recent unfavorable economic conditions
that have resulted in deferred and cancelled purchase orders. Alanco's
business in recent quarters. If the economic conditions in the United States
worsen, Alanco may experience a material adverse impact on its operating
results and business conditions.
The Company reported a net loss from continuing operations for the current
quarter of $817,400, or $.09 per share, compared to $827,700, or $.12 per share,
for the comparable quarter in the prior fiscal year. The comparable prior year
quarter reflected a $56,500 charge for dividends on preferred stock that were
converted to common stock during the final quarter of the fiscal year ended June
30, 2001. The net loss from continuing operations for the quarter ended December
31, 2001 was attributable primarily to reductions in revenues related to current
economic conditions, offset by reduced overhead expenses and investment related
to the implementation of the SanOne Storage Area Network (SAN) market
development initiative.
Operating results for the quarter reflected a gain from discontinued
operations of $12,000, or nil per share, compared to income from discontinued
operations of $221,500, or $.03 per share, for the comparable quarter in 2000.
The results from discontinued operations for the quarter ended December 31, 2000
included a gain on sale of pollution control products of $252,000.
Selling, general and administrative expenses for the current quarter
decreased to $1,341,100, compared to $1,797,400 incurred in the comparable
quarter of 2000. The decrease of $456,300, or 25.4%, was attributable primarily
to reduction in sales commissions, costs associated with the SanOne Storage Area
Network (SAN) market development initiative and general overhead.
(B) Six months ended 12/31/2001 versus 12/31/2000
Consolidated revenue for the six months ended December 31, 2001 was
$3,614,000, compared to $5,309,100 for the comparable period of the previous
year, a decrease of $1,695,100 or 31.9%. The net loss attributable to common
stockholders for the six-month period was $1,186,600, or $.14 per share,
compared to a loss of $873,700, or $.13 per share, for the same period of the
prior year. The reduction in revenues and increase in losses were attributed to
recent unfavorable economic conditions that have resulted in deferred and
cancelled purchase orders. Recent unfavorable economic conditions and reduced
capital spending have adversely affected Alanco's business in recent quarters.
If the economic conditions in the United States worsen, Alanco may experience
continued adverse impact on its operating results and business conditions.
The Company reported a net loss from continuing operations for the current
six months of $1,197,200, or $.13 per share, compared to $1,132,200, or $.17 per
share, for the comparable period in the prior fiscal year. The comparable period
for the prior fiscal year included a $56,500 charge for dividends on preferred
stock. The preferred stock was converted to common stock during the final
quarter of fiscal year ended June 30, 2001. The net loss from continuing
operations for the six-months ended December 31, 2001 was attributable primarily
to reductions in revenues related to current economic conditions, offset by
reduction in expenses, including sales commissions and investment related to the
implementation of the SanOne Storage Area Network (SAN) market development
initiative.
Income from discontinued operations for the six-month period reflects a gain
from discontinued operations of $10,600, or nil per share, compared to income
from discontinued operations of $258,500, or $.04 per share, for same period in
2000. The results from discontinued operations for the prior year period
included a gain on sale of pollution control products of $252,000.
Gross profit for the six-months ended December 31, 2001 amounted to
$1,427,800, or 39.5%, compared to $2,173,800, or 40.9%, for the comparable
six-month period a year earlier. The decrease in gross profit percentage
resulted from a change in product mix that the Company believes is temporary.
The decrease in gross profit dollars resulted from the reduction in sales
related to current economic conditions.
Selling, general and administrative expenses for the current six-month
period decreased to $2,614,700, compared to $3,264,700 incurred in the
comparable six-month period of 2000. The decrease of $650,000, or 19.9%, was
attributable primarily to reduction in sales commissions, market development
costs and general overhead costs.
A significant element of the Company's future growth plan will continue
to be strategic acquisitions. Company management believes that the present
technology slowdown has resulted in a unique opportunity for potential
acquisitions at attractive terms among the numerous private information
technologies companies in the under $25 million sales revenue range. The
Company's acquisition program focuses on two complementary objectives: (1) to
consolidate acquired company product lines and/or distribution channels with
current subsidiary company operations; and (2) to identify companies with
proprietary intellectual property complementary to that of existing
subsidiaries. The Company currently anticipates that the purchase price of any
additional acquisitions will be payable primarily in the form of shares of the
Company's Common Stock. While the Company has a number of acquisitions under
serious consideration,completion of acquisitions and successful post-acquisition
operation of the acquired business are subject to uncertainties and risks,
including among others those mentioned in the "safe harbor" statement at the
beginning of this Management's Discussion and Analysis.
2. Liquidity and Capital Resources
The Company's current assets at December 31, 2001 exceeded current
liabilities by $864,300, or a current ratio of 1.25 to 1, compared to a current
ratio of 1.38 to 1 at Fiscal Year End June 30, 2001. The decrease in current
ratio resulted primarily from the loss for the quarter.
The Company's cash position at December 31, 2001 had increased to
$748,000, compared to the $81,000 at June 30, 2001, due to cash collected
immediately prior to December 31, 2001 related to an equity offering that is
discussed below. Collection of notes receivable during the period amounted to
$358,900, compared to $1,587,300 for the previous year. The significant decrease
was due to significant collections of notes receivable in the prior year related
to the sale of pollution control assets.
Cash used in operating activities for the six-month period ended
December 31, 2001 was $81,700, a decrease of $1,379,200 when compared to cash
used in operating activities of $1,460,900 for the comparable period in the
prior year. The decrease in cash used in operating activities was due primarily
to decreases in receivables resulting from the collection during the period of
subscription receivables recorded at June 30, 2001, and increases in accounts
payable and accrued expenses.
During the six-month period the Company purchased approximately
$122,200 of additional equipment and transferred excess interoperability lab
equipment, with a net book value of approximately $115,000, to inventory.
Repayment on borrowing during the quarter amounted to $1,075,300, while advances
from borrowing amounted to $1,215,000. The Company recorded goodwill of $160,000
during the current period related to the acquisition of the assets and
technology of Microtest Inc.'s FileZerver network attached storage (NAS)
business.
The Company's bank line of credit agreement expired in December of 2001
and a new $1.25 million formula-based revolving bank line of credit agreement
(the "Agreement") was executed in January 2002. At December 31, 2001, the
Company had an outstanding balance of $1,175,600, which had been drawn under the
previous line of credit agreement and was transferred to the new line of credit.
The new line of credit formula is based upon accounts receivables and inventory
asset values and is used to finance acquisitions and working capital. The new
line of credit arrangement carries an interest rate of prime plus 2.0%;
contains loan covenants related to net worth and debt to equity; and
expires on June 30, 2002. While the Company believes that it will be able to
negotiate an extension of the Agreement prior to its June 30, 2002 expiration
date, there can be no assurance that an extension will be obtained on
satisfactory terms, or at all. If the Company is unable to obtain an extension,
the Company likely will need to raise additional funds through public or private
debt or equity financing. There can be no assurance that additional financing
will be available on terms acceptable to the Company, or at all. If adequate
funds are not available or are not available on acceptable terms, the Company's
business, operating results and financial condition could be materially
adversely affected. The Company believes the new bank Agreement, projected cash
flow from operations and existing cash resources will be sufficient to meet its
capital needs through fiscal year 2002.
During the period December 2001 and continuing into January 2002, the
Company raised a total of $925,000 by issuing common shares to accredited
investors at a price of $.625 per share. At December 31, 2001 the Company had
raised $600,000 through the capital raising activity with the balance of
$325,000 raised in January 2002. The purchasers of the restricted common shares
were also issued stock warrants giving the holders the right to purchase 805,000
shares at a price of $1.00 per share.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
During the six-month period ended December 31, 2001, the company
issued 26,000 shares of common stock for consultant services rendered and 12,000
shares for settlement of accounts payable balances. In addition, the company
purchased 23,900 shares of common stock during the quarter at a price of
approximately $24,000. All shares purchased, as well as treasury shares held at
June 30, 2001, were cancelled prior to September 30, 2001. Also during the
period the company raised $578,300 net of $21,700 of expenses, through the
sale of common stock, to accredited investors, at a price of $.625 per share.
Item 6. EXHIBITS 10.9
Exhibit A - Bank Loan Agreement dated January 24, 2002
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 thereunder duly authorized.
ALANCO TECHNOLOGIES, INC.
(Registrant)
/s/ John A. Carlson
--------------------
John A. Carlson
Chief Financial Officer
<page>
APPENDIX H
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2001
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
(Formerly Alanco Environmental Resources Corporation
(Exact name of registrant as specified in its charter)
Arizona 86-0220694
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15900 North 78th Street, Suite 101, Scottsdale, AZ 85260
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (480)607-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB.
Yes X No
-------- --------
The Registrant's revenues for the fiscal year ended June 30, 2001 were
$9,135,300.
State the aggregate market value, based upon the closing bid price of
the Common Stock as quoted on NASDAQ, of the voting stock held by non-affiliates
of the registrant: $9,592,300 as of September 7, 2001.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock: 8,720,300 shares as of September 7, 2001.
Documents incorporated by reference: Part III of this Report is
incorporated by reference from the Registrant's Proxy Statement to be filed on
or before October 29, 2001.
<page>
Except for historical information, the statements contained herein are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements, which
are other than statements of historical facts. From time to time, the
Company may publish or otherwise make available forward-looking statements of
this nature. All such forward-looking statements are based on the
expectations of management when made and are subject to, and are qualified by,
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied by those statements. These risks and
uncertainties include, but are not limited to, the following factors, among
others, that could affect the outcome of the Company's forward-looking
statements: general economic and market conditions; reduced demand for
information technology equipment; competitive pricing and difficulty managing
product costs; development of new technologies which make the Company's products
obsolete; rapid industry changes; failure by the Company's suppliers to meet
quality or delivery requirements; the inability to attract, hire and retain key
personnel; failure of an acquired business to further the Company's strategies;
the difficulty of integrating an acquired business; undetected problems in the
Company's products; the failure of the Company's intellectual property to be
adequately protected; unforeseen litigation; the ability to maintain sufficient
liquidity in order to support operations; the ability to maintain satisfactory
relationships with lenders and to remain in compliance with financial loan
covenants and other requirements under current banking agreements; the ability
to maintain satisfactory relationships with suppliers; federal and/or state
regulatory and legislative actions; customer preferences and spending patterns;
the ability to implement or adjust to new technologies and the ability to secure
and maintain key contracts and relationships.
PART 1
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Alanco Technologies, Inc. (formerly Alanco Environmental Resources
Corporation) was incorporated in 1969 under the laws of the State of Arizona.
Unless otherwise noted, the "Company" refers to Alanco Technologies, Inc. and
its wholly owned subsidiaries.
The Company continued the implementation of a new business strategy,
adopted in fiscal year 2000, to reposition itself as an information technology
company with specific focus on the high-growth computer data storage market. The
Company's strategy has been to divest its non-data storage business assets and
reinvest the proceeds into the computer data storage market. The reinvestment is
in the form of strategic acquisitions and targeted expansion into high-growth
data storage markets, such as Storage Area Networking (SAN) and Network Attached
Storage (NAS).
Implementation of the strategic business plan over the past two
fiscal years was significant. First, the Company acquired Arraid, Inc.
("Arraid"), a Phoenix, Arizona, manufacturer of proprietary data storage
subsystems. Second, the Company capitalized on Arraid's data storage experience
and customer base by creating the SanOne entity and entering the Storage Area
Network (SAN) market. Third, the Company acquired Excel/Meridian Data, Inc.
("Excel/Meridian"), a manufacturer and integrator of data storage networking
products and services, including Network Attached Storage (NAS) solutions.
<page>
During the first quarter of fiscal year 2000, the Company sold its
principal mining property known as the "COD" mine to Gold & Minerals, Inc.
("G&M"), an Arizona based mining company, in exchange for G&M shares of Series
A, 10% Cumulative, Convertible Preferred Stock. Based upon G&M projected
operating results and a review of the major G&M mining operations, management
believes the sale offered the best opportunity for the Company to maximize the
return on its mining assets; however, there can be no assurance as to when the
Company will liquidate the investment, or as to what value the company will
receive upon liquidation.
Effective June 30, 2000, the Company sold the assets of its wholly
owned subsidiary, Alanco Environmental Manufacturing, Inc. ("AEMI"). AEMI,
located in Falls City, Nebraska, represented a substantial portion of the assets
in the Company's pollution control products segment. The sale for cash and
notes, valued at approximately $3.7 million, resulted in a "gain on sale" of
$815,100.
During fiscal year ended June 30, 2001, the Company completed the sale
of its subsidiary, Alanco Environmental Technologies (Beijing) Co., Ltd., and
the patents related to Charged Dry Sorbent Injection (CDSI) technology to a
private New Jersey corporation. The sales proceeds, valued at $1.45 million,
consist of cash and notes receivable through 2004. $252,000 of the projected
gain of approximately $1.2 million was recognized during fiscal year ended June
30, 2001 with the balance of the gain deferred until payment is received. The
transaction completed the sale of the Company's remaining Pollution Control
Products assets.
RECENT BUSINESS DEVELOPMENTS
In July, 2001, the Company's Arraid, Inc. subsidiary announced the
commercial availability of its new ESP-1 single board computer. The ESP-1
computer is the common platform for a family of proprietary data storage
products targeting significant new market niches, such as data systems for
military reconnaissance and surveillance, commercial flight recorder systems,
telecom data storage and specialized storage applications requiring internet
communications.
The Company acquired, in August of 2001, the assets and technology of
Microtest Inc.'s FileZerver network attached storage (NAS) business. The Company
believes the addition of the FileZerver technology and business significantly
enhances the Company's computer data storage proprietary intellectual property
and represents a strategic fit for Alanco, complementing current SAN and NAS
market activities, as well as Arraid's Linux-based single board computer (SBR)
technology. The FileZerver product is considered a leading NAS technology and,
previous to the acquisition, had been incorporated into the Company's NAS
product line. In addition, a substantial portion of FileZerver's revenues had
been to international customers, a new market for the Company's data storage
business. The Company has created a new subsidiary called NetZerver, Inc. to
assist in the sales and marketing efforts of this new product.
<page>
DESCRIPTION OF BUSINESS
COMPUTER DATA STORAGE SEGMENT
The acquisition of two separate entities, Arraid, Inc. and
Excel/Meridian Data, Inc., and the launching of an expansion into the Storage
Area Network (SAN) market during fiscal year 2000 established the Computer Data
Storage Segment. Phoenix, Arizona-based Arraid, manufacturer of legacy computer
data storage solutions, was acquired effective October 1, 1999. Excel/Meridian,
a Dallas, Texas-based provider of data storage networking products and services,
was acquired effective June 1, 2000. The Company's expansion into the Storage
Area Network market accelerated during fiscal year 2001 with the formation of
SanOne, Inc. to focus the SAN initiative.
Arraid designs and manufactures proprietary data storage subsystems
called "emulators" that serve as translators between older "legacy" computers
and state-of-the-art storage devices and provide unique, cost-effective storage
system solutions. Arraid's unique products are targeted at users of special
application legacy computers, such as airplane flight simulators, nuclear power
control systems, missile tracking computer systems, etc. Its competitive
position was recently enhanced by the development of its new ESP-1 single board
computer, which will reduce product development time and costs, as well as allow
Arraid to enter significant new market niches.
Excel/Meridian is a manufacturer and integrator of data storage
networking products and services and is recognized as a leading provider of
optical storage devices, such as CD/DVD-ROM servers. Excel/Meridian markets a
NAS product line that incorporates the FileZerver product discussed under
"Recent Business Developments" above. Excel/Meridian's NAS product line is
directed towards midsize and smaller company requirements.
SanOne is a provider of leading edge SAN technologies and storage
solutions. SanOne provides customized SAN solutions, for multi-platform
environments for storage of mission critical data. Utilizing proven AIM (R)
methodology and partnering with leading SAN vendors, SanOne is expertly
positioned to deliver the advanced functionality of fibre technology, along
with technical support and training services. SanOne products are marketed to
enterprise level companies.
Marketing.
Excel/Meridian markets NAS products and services primarilyin the United
States, through direct national advertising, telemarketing and independent
sales representatives supported by Company personnel. Arraid markets
legacy storage solutions nationally and internationally through an organization
of independent distributors, supported by Company personnel and Company direct
sales representatives. SanOne markets SAN-related products, primarily in
Southwestern United States, through Company direct sales representatives.
Raw Materials.
Both Arraid and Excel/Meridian have numerous domestic sources for
materials and parts used to manufacture its legacy and NAS products.
However, one domestic supplier represented approximately 10.6% of the Company's
purchases for fiscal year 2001. The Company believes that it has an adequate
supply of materials and parts and does not foresee any significant shortages or
substantial price increases that cannot be passed on to the customers. SanOne's
<page>
unique systems integration capabilities require strategic alliances with the
leading SAN technology companies in the world. The Company believes that
SanOne's significant strategic alliances with worldwide providers of SAN
technology will continue to expand and that SanOne will continue to provide its
industry leading independent SAN systems analysis and unique systems integration
capabilities. For fiscal year 2000, there were no suppliers identified as
providing more than 10% of the Company's cost of sales.
Competitive Conditions.
There are numerous competitors in the same market as Excel/Meridian,
with no company dominating the market. Arraid provides a unique solution
to a limited market with minimal direct competitors. SanOne is targeting a
new and very fast growing market. Although there are numerous significant
competitors in the general storage product market (IBM, EMC, etc.),
the identification of specific direct competitors decreases as SanOne focuses on
providing customized SAN solutions for multi-platform environments for storage
of mission critical data.
The Company competes with many established companies in the general
storage market and many of these companies may have substantially greater
financial, marketing and technological resources, larger distribution
capabilities, earlier access to customers and more opportunities to address
customers' various information storage requirements than the Company. The
Company also competes with many smaller, less established companies in
specific storage product segments. Some of these companies may have earlier
access to new technologies or products than the Company. The announcement or
introduction of new products and/or implementation of effective marketing
strategies by its competitors may materially adversely affect the Company's
business.
Employees
As of June 30, 2001, the Company employed in the computer
data storage business fifty two individuals on a full-time basis and two
employees on a part-time basis.
Seasonality of Business.
Computer data storage products have minimal seasonality. However,
many of the products in this segment are marketed to business customers,
which in some cases may be affected by budget restraints and
economic conditions.
Dependence Upon Key Customers.
During fiscal years ended June 30, 2001 and 2000, no customer
accounted for more than 10% of revenues.
Backlog Orders.
The Company operates using customer purchase orders that in some
cases may not be considered firm and non-cancelable. Methods of defining a firm
"Backlog Order" are being evaluated, and if the Company utilizes that
information in evaluating sales activity, the information will be reported.
Research & Development.
The Company estimates it spent approximately $250,000 and
$85,000 in research and development expenditures in fiscal years 2001
and 2000, respectively.
<page>
DISCONTINUED OPERATIONS
The Company's continuing operations are limited to the Computer Data
Storage segment discussed above. Pollution Control Products, Restaurant
Equipment, and Mining segments are reported as "discontinued operations" for
both the current and prior fiscal years.
At June 30, 2001 all the pollution control products and substantially
all the mining assets had been sold. Assets classified at year-end on the
Company's balance sheet as "net assets held for sale" consist of the remaining
Restaurant Equipment segments assets, which are valued at the lower of cost or
net realizable value.
ITEM 2. PROPERTIES
The Company's corporate office is currently located in an approximate
2275 square foot leased facility in Scottsdale, Arizona. The current lease
expires during fiscal year 2002.
Arraid and SanOne are currently located in a 12,000 square foot leased
office/manufacturing building located in Phoenix, Arizona. Arraid had been
located in the building prior to its acquisition by Alanco and was leasing
approximately 9,000 square feet. The Company has a two-year lease that expires
October 31, 2001. We are currently in discussions to extend the lease.
During the current fiscal year, Excel/Meridian Data, Inc. entered into
an office/manufacturing space lease for 11,328 square feet in Carrollton, Texas.
The five-year lease expires March 15, 2006.
Mining Claim Properties
The Company's only remaining mining property consists of 15 claims that
were filed on land known as the Tombstone mill site located in Cochise County,
Arizona. At June 30, 2001, management believes the claims have minimal value.
During the first quarter of fiscal year 2000, the Company sold its
principal mining property, the C.O.D. mine located near Kingman, Arizona, to
Gold & Minerals, Inc. (G&M) for $4.5 million of G&M Series A, 10% Cumulative,
Convertible Preferred Stock, which is recorded as investments on the balance
sheets. See "Management's Discussion and Analysis - Liquidity and Capital
Resources".
Environmental Disclosure.
There are numerous federal and state laws and regulations relating to
environmental protection that have direct application to mining, milling and
mineralized material processing operations. The more significant of these laws
deals with mined land reclamation and wastewater discharge from such operations.
Expenditures during fiscal year 2001 related to environmental regulations
amounted to less than $20,000.
<page>
The Tombstone Metallurgical Facility is located on federal lands that
are administered by the BLM and requires limited environmental and/or surface
reclamation. The mill site facility was constructed in the 1970's when no
permitting was required from the BLM. The Company believes it has complied with
all regulations, as they existed. There can be no assurance that environmental
problems will not be discovered in the future; however, the Company is not
currently aware of any environmental claim or violation. At present, the mill
site is being dismantled and cleaned up in exchange for the building material
and equipment salvage value.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party in any litigation that is
considered material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Shareholders during the
fourth quarter of the fiscal year ended June 30, 2001.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Alanco's common stock is traded on the NASDAQ Small Cap Market under
the symbol "ALAN."
The following table sets forth high and low sale prices for each fiscal
quarter for the last two fiscal years. Such quotations represent inter-dealer
price without retail mark-ups, mark-downs, or commissions and, accordingly, may
not represent actual transactions.
Fiscal 2001 Fiscal 2000
---------- ----------
Quarter Ended High Low High Low
------------- ---- ---- ---- ----
September 30 $2.63 $1.59 $1.88 $1.00
December 31 $1.87 $0.50 $5.00 $ .88
March 31 $3.12 $1.00 $6.62 $1.88
June 30 $1.73 $1.06 $3.44 $1.28
As of September 1, 2001, Alanco had approximately 1,800 holders of
record of its Common Stock. This does not include beneficial owners holding
shares in street name.
During the fiscal year ended June 30, 2001, the Company issued
1,916,200 shares of its unregistered, restricted common stock to accredited
investors. Of those shares, 1,901,400 were issued pursuant to the conversion of
100% of the Company's outstanding restricted Series B cumulative preferred
stock. The balance of the shares was issued for services rendered. The shares
issued for services were valued at fair market value based on an average closing
price. The Company claimed exemption from registration for these securities
under Section 4 (2) of the Securities Act of 1933.
Alanco has paid no common stock cash dividends and has no current plans
to do so. Under the terms of its bank line of credit agreement that expires in
December 2001, the Company may not declare or pay any cash dividend or make any
other distribution on any of its capital stock.
<page>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management discussion and analysis of financial condition
contains statements that may be considered "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are inherently uncertain, and the actual results may
differ from management's expectations.
Results of Operations
In accordance with Generally Accepted Accounting Principles, the
Company has limited its reported consolidated revenues for fiscal years ended
June 30, 2001 and 2000 to revenues from its Computer Data Storage segment, the
only business classified as a continuing operation.
Revenues for fiscal year 2001 were $9,135,300, an increase of 223% when
compared to $2,828,600 for fiscal year 2000. Consolidated net loss for fiscal
year ended June 30, 2001 was $2,994,500, compared to a net loss of $1,353,800,
for the prior year. Net loss for the fiscal year 2001 attributable to common
stockholders was $3,136,600, or $.46 per share, compared to $1,353,800, or $.23
per share, for the prior year.
Fiscal year 2001 interest income, net of interest expense, was $27,800
compared to net interest expense of $39,400 for the previous year. The decrease
in net interest expense resulted primarily from an increase in interest income
generated from notes receivable related to the sale of pollution control
products assets.
The loss from continuing operations for the fiscal year ended June 30,
2001 was $3,236,800, or $.48 per share, compared to a loss of $1,825,600, or
$.31 per share, for fiscal year 2000. The current year's loss from continuing
operations is primarily attributable to SanOne operating losses related to
market development expense and fourth quarter restructuring costs of $225,000,
including costs associated with personnel restructuring. In addition, the
reduced demand for storage related products during the second half of the fiscal
year have negatively affected the Company's revenues andearnings. The loss
from continuing operations for the prior year represented primarily
operating investments related to SanOne market development program.
The Consolidated Statement of Operations for fiscal year 2001 reflects
income from discontinued operations of $242,300, or $.04 per share, compared to
income from discontinued operations in the prior year of $471,800, or $.08 per
share. Income from discontinued operations for fiscal years 2001 and 2000
reflect gains on sale of pollution control products assets of $252,000 and
$815,100, respectively. Fiscal year 2000 also includes a $400,000 non-cash asset
impairment charge related to the restaurant equipment assets held for sale at
year-end.
Operating results included in discontinued operations section was a
loss of $9,700 for fiscal year ended June 30, 2001 compared to income of $56,700
for the prior year. The decrease in income from discontinued operations was due
to the loss of income from operations of the Pollution control segments that
have been sold.
Net cash flow from operating activities for the current fiscal year
end was a negative $3,144,400, compared with a negative cash flow from operating
activities for the prior fiscal year of $1,111,900. The decrease in cash flow
<page>
from operations resulted primarily from the Company's increased losses from
continuing operations. In addition, increases in accounts receivable and
inventory for the current year resulted in decreased cash flow while a
significant inventory reduction in the prior year increased cash flow. See
"Liquidity and Capital Resources" below for management's discussion of major
items affecting the Consolidated Statement of Cash Flow.
Any new Statements of the Financial Accounting Standards affecting the
Company are disclosed in the "Notes to Consolidated Financial Statements".
Liquidity and Capital Resources
At June 30, 2001, the Company's current assets exceeded current
liabilities by $1,050,400, a current ratio of 1.38 to 1. At June 30, 2000, the
Company's current assets exceeded current liabilities by $2,961,600, reflecting
a current ratio of 2.2 to 1. The reduction in current ratio, when compared to
the prior year, was due primarily to operating losses incurred and the deferred
gain recorded during the current fiscal year related to the sale of Pollution
Control Product assets.
The Company's cash position at June 30, 2001 was $81,000, compared to
$176,700 at the end of the prior fiscal year. Collection of notes receivable
during the year amounted to $2,940,000, compared to $93,900 for the previous
year. The significant increase was due to payment related to the sale of
Pollution Control assets, recorded effective June 30, 2000, and closed
subsequent to year end. During the year, $1,118,100 of cash was used to repay
borrowings and capital lease obligations, compared to $431,000 during the prior
fiscal year. Advances from borrowings amounted to $885,700 during the year,
compared to $1,248,500 in advances from borrowing during the prior year. In
addition, proceeds from the sale of stock and exercise of stock options amounted
to $154,800 compared to $1,412,500 raised during the previous year.
Cash used to purchase property, plant and equipment during fiscal year
2001 was $146,800, compared to $681,300 in the prior year. During the prior
fiscal year, the SanOne division created a SAN laboratory to test, evaluate and
demonstrate leading edge Storage Area Networking technology. In addition, the
prior year reflects the investment in equipment and leasehold improvements to
support the expansion of the SAN market development.
The Company has a $1.5 million formula-based revolving bank line of
credit agreement with interest calculated at prime plus 1.25%. The line of
credit agreement formula is based upon current asset values and is used to
finance acquisitions and working capital. At June 30, 2001 the Company had drawn
$885,600 under the line of credit, which expires December 28, 2001. The Company
has received a formal compliance waiver as of June 30, 2001, and a modification
to the Agreement covenants has been reached whereby the Company is in
compliance. While the Company believes that it will be able to negotiate an
extension of the line of credit prior to its expiration date, there can be no
assurance that an extension can be obtained on satisfactory terms, or at all. If
the Company is unable to obtain an extension, the Company likely will need to
raise additional funds through public or private debt or equity financing. There
can be no assurance that additional financing will be available on terms
acceptable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company's business, operating results and
financial condition could be materially adversely affected.
Assuming that the Company obtains an extension of its line of credit,
obtains alternative financing as discussed above, or a combination thereof, the
Company believes that cash flow from operations and existing cash resources will
be sufficient to meet its capital needs through fiscal year 2002.
<page>
Reflected under other assets in the Company's balance sheet is an
investment of $2.475 million related to the sale of its mining property during
the prior fiscal year. In fiscal year 2000, the Company sold its principal
mining asset, a mine located in Cochise County, Arizona, to Gold & Minerals,
Inc. in exchange for $4.5 million of G&M Series A, 10% Cumulative, Convertible
Preferred Stock. The G&M Series A Preferred Stock received is valued at cost and
is convertible into a variable number of shares of G&M common stock determined
by dividing the $4.5 million face value of the Preferred Stock (plus accrued
"paid-in-kind" dividends) by the share market price at time of conversion. Based
upon G&M projected operating results and a review of the major G&M mining
operations, management believes the sale offered the best opportunity for the
Company to maximize the return on its mining assets; however, there can be no
assurance as to when the Company will liquidate the investment, or as to what
value the Company will receive upon liquidation of the G&M Preferred Stock.
Furthermore, based on preliminary unaudited financial information the Company
has received, G&M will require additional debt/equity financing to increase its
mining production to achieve planned production levels on its existing operating
mine. There is no assurance G&M will receive the required additional debt/equity
financing. If G&M is unable to sufficiently develop the property or if ore
reserves prove to be inadequate, the Company's preferred stock could ultimately
have minimal value.
Product and Environmental Contingencies
The Company is not aware of any material liabilities, either product or
environmental related. Expenditures during the year related to environmental
regulations amounted to less than $20,000. Also refer to the environmental
disclosure section of the mining properties segment under Item 2.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements.
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports....................................11
Consolidated Balance Sheets - As of June 30, 2001 and 2000.......12
Consolidated Statements of Operations - For the Years Ended
June 30, 2001 and 2000 .....................................14
Consolidated Statement of Changes in Shareholders' Equity - For
the Years Ended June 30, 2001 and 2000......................17
Consolidated Statements of Cash Flows - For the Years Ended
June 30, 2001 and 2000 .....................................18
Notes to Consolidated Financial Statements.......................19
</table>
Semple & Cooper, LLP
Certified Public Accountants and Consultants
2700 North Central Avenue, Ninth Floor
Phoenix, Arizona 85004
Telephone (602) 241-1500 Fax (602) 234-1867
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Alanco Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Alanco
Technologies, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the years ended June 30, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial position of Alanco
Technologies, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the
results of its operations, changes in shareholders' equity, and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Semple & Cooper LLP
Certified Public Accountants
Phoenix, Arizona
August 30, 2001
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2001 AND JUNE 30, 2000
June 30, 2001 June 30, 2000
---------------- ----------------
ASSETS
CURRENT ASSETS
Cash $ 81,000 $ 176,700
Accounts receivable, net 1,209,400 1,078,300
Subscriptions receivable 563,500 --
Notes receivable, net 677,500 3,019,000
Inventories 1,218,500 1,112,700
Prepaid expenses 35,000 38,300
----------------- -----------------
Total current assets 3,784,900 5,425,000
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT, NET 496,000 628,600
----------------- -----------------
OTHER ASSETS
Intangible assets, net 1,420,400 1,558,000
Notes Receivable, net 966,100 560,000
Investments at cost 2,475,200 2,465,700
Net assets held for sale 603,300 770,900
Other assets 35,500 26,000
----------------- -----------------
Total other assets 5,500,500 5,380,600
----------------- -----------------
TOTAL ASSETS $ 9,781,400 $ 11,434,200
================= =================
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES
Accounts payable & accruals $ 1,010,600 $ 1,096,800
Bank line 885,600 498,500
Notes payable, current 248,600 868,100
Deferred gain, pollution control
products 589,700 --
----------------- -----------------
Total Current Liabilities 2,734,500 2,463,400
LONG TERM LIABILITIES
Deferred gain, pollution control
products 378,000 --
----------------- -----------------
TOTAL LIABILITIES 3,112,500 2,463,400
----------------- -----------------
<page>
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2001 AND JUNE 30, 2000
June 30, 2001 June 30, 2000
---------------- ----------------
SHAREHOLDERS' EQUITY
Preferred Stock:
Class A, cumulative convertible
preferred stock; 5,000,000 shares
authorized, of which 500,000 have
been classified as Series B. No
shares issued or outstanding at
June 30, 2001. 260,000 Series B
shares issued and outstanding at
June 30, 2000. -- 1,040,000
Class B, cumulative preferred stock:
2,000,000 authorized and none issued
or outstanding -- --
Common Stock, no par value,
100,000,000 shares authorized,
8,740,300 and 6,778,900 issued, and
8,720,300 and 6,778,900 shares out-
standing, respectively 57,653,000 55,738,300
Treasury Stock-20,000 shares, at cost (40,000) --
Accumulated deficit (50,944,100) (47,807,500)
----------------- -----------------
Total shareholders' equity 6,668,900 8,970,800
----------------- -----------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 9,781,400 $ 11,434,200
================= =================
</table>
The accompanying notes are an integral part of these consolidated
financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
2001 2000
-------------- -------------
NET SALES $ 9,135,300 $ 2,828,600
Cost of goods sold 5,426,800 1,661,400
-------------- -------------
GROSS MARGIN 3,708,500 1,167,200
Selling, general and administrative 6,747,300 2,951,200
Restructuring expense 225,000 --
-------------- -------------
OPERATING LOSS (3,263,800) (1,784,000)
Interest Income 86,100 22,900
Interest Expense (58,300) (62,300)
Other expense, net (800) (2,200)
-------------- -------------
LOSS - CONTINUING OPERATIONS (3,236,800) (1,825,600)
-------------- -------------
INCOME FROM DISCONTINUED OPERATIONS
Operating income (loss) - disc. operations (9,700) 56,700
Impairment of Restaurant Equipment held for
Sale -- (400,000)
Gain - sale of pollution control products 252,000 815,100
-------------- --------------
INCOME FROM DISCONTINUED OPERATIONS 242,300 471,800
-------------- --------------
NET LOSS (2,994,500) (1,353,800)
-------------- --------------
Preferred Stock Dividends (142,100) --
-------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (3,136,600) $ (1,353,800)
============== ==============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
- Continuing Operations $ (0.48) $ (0.31)
============== =============
- Discontinued Operations $ 0.04 $ 0.08
============== =============
- Net Loss Attributable to Common
Stockholders $ (0.46) $ (0.23)
============== =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,800,619 5,906,305
============== =============
The accompanying notes are an integral part of these consolidated
financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------------------------ --------------------- ----------------------- ---------------------------
Balances July 1, 1999 5,120,100 $ 53,790,200 $ 157,200 $ (172,300) $(46,453,700) $ 7,164,200
Stock issued for services 88,200 125,800 125,800
Exercise of options 486,200 372,500 372,500
Retire Treasury Stock (157,200) (172,300) (157,200) 172,300 0
Preferred stock issued 260,000 1,040,000 1,040,000
Acquisitions 1,225,000 1,536,300 1,536,300
Services rendered & other -- 85,800 85,800
Net loss (1,353,800) (1,353,800)
------------------------ --------------------- ----------------------- ---------------------------
Balances, June 30, 2000 6,762,300 55,738,300 260,000 1,040,000 0 0 (47,807,500) 8,970,800
Stock issued for services 14,800 14,300 14,300
Exercise of options 61,800 44,500 44,500
Purchase Treasury Stock 20,000 (40,000) (40,000)
Preferred Stock Issued 10,000 40,000 40,000
Preferred Stock Dividends 35,500 142,100 142,100
Conversion Preferred Stock 1,901,400 1,855,900 (305,500) (1,222,100) 633,800
Net loss (3,136,600) (3,136,600)
------------------------ --------------------- ----------------------- ---------------------------
8,740,300 $ 57,653,000 0 $ 0 20,000 $ (40,000) $(50,944,100) $ 6,668,900
======================== ===================== ======================= ===========================
The accompanying notes are an integral part of these consolidated financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended June 30,
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
- - Net income (loss) from continuing operations $ (3,236,800) $ (1,825,600)
- - Adjustments to reconcile net loss to net
Cash provided by (used in) operating
activities:
Depreciation and amortization 417,100 414,200
Gain on sale - discontinued operations (252,000) (815,100)
Impairment of Inventory -- 400,000
Stock issued for services 14,300 2,200
(Increase) decrease in:
Accounts receivable (131,100) (378,000)
Inventory (105,800) 1,691,400
Net assets of disposed operations -- (983,400)
Prepaid expenses and other assets (6,200) 164,500
Increase (decrease) in:
Accounts payable and accruals (86,200) (80,500)
Billings in excess of costs & est. earnings -- (173,400)
------------- -------------
Net cash provided by (used in) operations (3,386,700) (1,583,700)
Income from discontinued operations 242,300 471,800
------------- -------------
Net cash used in operating activities (3,144,400) (1,111,900)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 2,940,000 93,900
Proceeds on sale of assets 260,000 --
Purchase of property, plant and equipment (146,800) (681,300)
Investments (9,500) (940,800)
Net cash forfeited from sale & acquisitions -- (69,800)
Proceeds on Net assets held for sale 82,600 (5,100)
------------- -------------
3,126,300 (1,603,100)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from borrowings 885,700 1,248,500
Repayments on borrowings (1,118,100) (96,000)
Capital leases -- (335,000)
Proceeds from sale of preferred stock 40,000 1,040,000
Net Proceeds received by 6-30-2001 from
conversion of preferred stock 70,300 --
Proceeds from exercise of options 44,500 372,500
------------- -------------
Net cash provided by (used in) financing
activities (77,600) 2,230,000
------------- -------------
Net increase (decrease) in cash $ (95,700) $ (485,000)
CASH, beginning of year 176,700 661,700
------------- -------------
CASH, end of year $ 81,000 $ 176,700
============= =============
</table>
<page>
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended June 30,
2001 2000
------------- -------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid for interest $ 58,300 $ 62,300
============= =============
Stock issued for services $ 14,300 $ 125,800
============= =============
Stock issued for acquisition of subsidiaries $ -- $ 1,536,300
============= =============
Preferred stock dividend in kind $ 142,100 $ --
============= =============
Note received in sale of subsidiary $ 1,450,000 $ 3,495,000
============= =============
Fryer units transferred - inventory to net
assets held for sale $ -- $ 675,000
============= =============
The accompanying notes are an integral part of these consolidated
financial statements
<page>
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------------------
Principles of Consolidation - The consolidated financial statements
include the accounts of Alanco Technologies, Inc., (formerly Alanco
Environmental Resources Corporation) and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
Nature of Operations - Alanco Technologies, Inc. was incorporated in
Arizona in 1969.
During fiscal year 2000, the Company implemented a strategic
restructuring plan by acquiring Arraid, Inc., a computer data storage
company, initiating the roll-out of a multi-year storage area network
(SAN) expansion plan, and the acquisition of a second computer data
storage company, Excel/Meridian Data, Inc., effective June 1, 2000.
Concurrently with the implementation of the strategic restructuring, the
Company established a formal plan to sell the assets of all previously
reported business segments. At June 30, 2000 and 2001, the Company had
either sold the mining, pollution control product and restaurant
equipment assets or reclassified them as "net assets held for sale."
Therefore, fiscal years 2001 and 2000 have continuing operations only in
the computer data storage segment.
Cash Equivalents - The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Accounts Receivable Trade - The Company provides for potentially
uncollectible accounts receivable by use of the allowance method. An
allowance is provided based upon a review of the individual accounts
outstanding, and the Company's prior history of uncollectible accounts.
As of June 30, 2001 a provision for uncollectible accounts receivable
has been established in the amount of $100,000.
Subscription Receivables - Subscription receivables represent
receivables arising at the time of the conversion of the Company's
preferred stock to common stock. All monies due were received prior to
issuance of the financial statements.
Inventories - Inventories consist of purchased materials and parts,
work-in-process, and finished goods. Inventories are stated at the lower
of cost or market. Cost is calculated using the average-cost method.
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method generally over a 3 to 10-year
period. Leasehold improvements are amortized on the straight-line method
over the lesser of the lease term or the useful life. Expenditures for
ordinary maintenance and repairs are charged to expense as incurred.
Betterments or renewals are capitalized as incurred. Upon retirement or
disposal of assets, the cost and accumulated depreciation are eliminated
from the account and any gain or loss is reflected in the statement of
operations.
<page>
Fair Value of Financial Instruments - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The carrying amounts of accounts
receivable, notes receivable, accounts payable, accrued liabilities, and
notes payable approximate fair value. (See note below for fair value
discussion of investments.)
Intangible Assets - Intangibles consist of the excess of purchase price
over fair value of net assets acquired (goodwill) in connection with the
acquisition of its wholly owned subsidiaries.
Investments - In fiscal year 2000, the Company sold its principal mining
property known as the "COD mine" for convertible preferred stock in Gold
& Minerals, Inc., an Arizona-based mining company with mining assets in
the Southwest. Based on preliminary, unaudited financial information the
Company has received, the entity will require additional debt or equity
financing to increase its mining production to achieve planned
production levels on its existing operating mine. There is no assurance
the entity will receive the required additional debt or equity
financing. If the entity is unable to sufficiently develop the property
or if ore reserves prove to be inadequate, the Company's preferred stock
could ultimately have minimal value.
The G&M Series A Preferred Stock received is valued at cost and is
convertible into a variable number of shares of G&M common stock
determined by dividing the $4.5 million face value of the Preferred
Stock (plus accrued "paid-in-kind" dividends) by the share market price
at time of conversion.
Based upon a review of the information available and discussion with the
entity's principals, management of the Company believes that the value
of the underlying convertible preferred stock at year-end equals or
exceeds the carrying value of the mining property.
Net Assets Held For Sale - During fiscal 2000, the Company implemented a
plan to divest all non-data storage assets and reinvest the proceeds
into the computer data storage market. At June 30, 2000, the "net assets
held for sale" consisted of restaurant equipment and pollution control
products assets. The remaining assets of the Restaurant Equipment
segment, as of June 30, 2001, constituted the "net assets held for sale"
and are valued at the lower of cost or market.
Discontinued Operations - Discontinued operations for fiscal years 2001
and 2000 consisted of the remaining mining, restaurant equipment and
pollution control operations. Based upon a formal plan of disposal
adopted by management in fiscal year 2000, management concluded that
income or loss from operations and any gain from the disposal of the
<page>
segment assets should be reported separately from the Company's results
of continuing operations. Therefore, the results of operations for the
segments identified above, as well as the gain on the sale of a
substantial portion of the pollution control product assets, are
presented as "Discontinued Operations" for the years ended June 30, 2001
and 2000, respectively.
Income Taxes - The Company accounts for income taxes under the asset and
liability method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Use of Estimates - The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company makes significant assumptions concerning the realizability
of its intangible assets, deferred tax, investments and assets held for
sale. Due to the uncertainties inherent in the estimation process and
the significance of these items, it is at least reasonably possible that
its estimates in connection with these items could be further materially
revised within the next year.
Impairment of Intangible and Other Long-Lived Assets - The Company
performs an assessment for impairment whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset
may not be recoverable. If the net carrying value exceeds estimated
discounted future net cash flows, then impairment is recognized to
reduce the carrying value to the estimated fair value. During fiscal
2000, a $400,000 asset impairment charge related to the fryer equipment
units was recorded.
Revenue Recognition - The Company recognizes revenue from computer
storage area network equipment sales, net of anticipated returns, at the
time products are shipped to customers, or at the time service is
provided. Revenues from material long-term contracts are recognized on
the percentage-of-completion method for individual contracts, commencing
when progress reaches a point where experience is sufficient to estimate
final results with reasonable accuracy. Revenues are recognized in the
ratio that costs incurred bear to total estimated costs. Changes in job
performance, estimated profitability and final contract settlements
would result in revisions to costs and income, and are recognized in the
period in which the revisions were determined.
Contract costs include all direct materials, subcontracts, labor costs
and those indirect costs related to contract performance. General and
administrative costs are charged to expense as incurred.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss on both short and long-term contracts is
accrued.
<page>
Foreign Currency Translation - The Company sold its only foreign entity,
which had been classified as "net assets held for sale" at June 30,
2000, during the current fiscal year. The entity's functional currency
was the U.S. dollar and translates monetary assets and liabilities at
year-end exchange rates. Non-monetary items were translated at
historical rates. Income and expense amounts were translated at the
average rates in effect during the year, except for depreciation, which
is translated at historical rates. Gains or losses from changes in
exchange rates were recognized in consolidated income in the year of
occurrence. Foreign currency gains (losses) for the years ended June 30,
2001 and 2000 were immaterial.
Income (Loss) Per Share - The income (loss) per share is presented in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. Basic EPS is calculated
by dividing the income or loss available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. Basic and diluted EPS were the same for
fiscal 2001 and 2000 as the Company had losses from operations and
therefore, the effect of all potential common stock equivalents was
antidilutive. Stock options representing 3,359,200 shares were
outstanding at year-end with exercise prices ranging between $13.23
and $0.43. The weighted average exercise price for all outstanding
options was $1.19.
Stock-Based Compensation - As permitted under the Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based
Compensation, the Company accounts for its stock-based compensation to
employees in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. As
such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. Certain pro forma net income and EPS disclosures for employee
stock option grants are also included in the notes to the financial
statements as if the fair value method as defined in SFAS No. 123 had
been applied. Transactions in equity instruments with non-employees for
goods or services are accounted for by the fair value method.
Concentrations of Credit Risks and Significant Customers - The Company
sells products and extends credit based on an evaluation of the
customer's financial condition, generally without requiring collateral.
Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
During the current fiscal year, no customer accounted for more than 10%
of Company revenues. The two largest customers represent 8% and 7% of
revenues, respectively. The largest accounts receivable balance at June
30, 2001 represented 5.7% of consolidated accounts receivables.
Segment Information - In 1999, the Company adopted SFAS No. 131,
Disclosure About Segments of an Enterprise and Related Information. SFAS
No. 131 establishes standards on the way that public companies report
financial information about operating segments in annual financial
statements and requires reporting of selected information about
<page>
operating segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products and
services, geographic areas, and major customers. SFAS No. 131 defines
operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and
in assessing performance. The Company has identified the data storage
segment as the only continuing operation unit of the Company. All assets
related to previously disclosed segments have either been sold during
the year or have been classified as "net assets of discontinued
operations held for sale" at June 30, 2001.
Pending Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), as amended by FAS No. 137 and FAS No. 138. FAS
133 requires the Company to record all derivatives on the balance sheet
at fair value commencing with the first quarter of 2001. Changes in
derivative fair values will either be recognized in earnings as offsets
to the changes in fair value of related hedged assets, liabilities and
firm commitments or, for forecasted transactions, deferred and recorded
as a component of stockholders' equity until the hedged transactions
occur and are recognized in earnings. The ineffective portion of a
hedging derivative change in fair value will be immediately recognized
in earnings. Based on our current analysis, FAS 133 will not have a
material impact on the financial statements of the Company.
In June 2001, the Financial Accounting Standards Board adopted Opinion
No. 141, Business Combinations, and Opinion No. 142, Goodwill and Other
Intangibles. The pronouncements provide for the cessation of the pooling
method of accounting for business combinations as well as providing that
goodwill and other intangible assets that have indefinite useful lives
will not be amortized but rather will be tested at least annually for
impairment. The Company has yet to determine what effect, if any, the
adoption of these financial standards will have on the financial
statements. The effective dates for Financial Accounting Standards Nos.
141 and 142 are July 1, 2001 and for fiscal years beginning after
December 15, 2001, respectively.
Reclassification - Certain reclassifications have been made to conform
fiscal 2000 financials to the presentation in fiscal 2001. The
reclassifications had no effect on net income.
2. LIQUIDITY:
---------
During fiscal 2001, the Company incurred significant losses and has
experienced significant losses in prior years. Although management
cannot assure that future operations will be profitable or that
additional debt and/or equity capital will be raised, it believes that
its capital resources will be adequate to maintain and realize its
business strategy. Should, however, the Company incur future losses or
if additional working capital is not obtained through either long-term
debt or equity capital, it could adversely affect future operations.
<page>
The company sold its principal mining asset during the first quarter of
fiscal year 2000 to Gold & Minerals, Inc. in exchange for $4.5 million
of G&M Series A, 10% Cumulative, Convertible Preferred Stock. Based upon
G&M projected operating results and a review of the major G&M mining
operation, management believes the sale offered the best opportunity for
the Company to maximize the return on its mining assets; however, there
can be no assurance as to when the Company will liquidate the
investment, or as to what value the Company will receive upon
liquidation of the G&M Preferred Stock. Furthermore, based on
preliminary unaudited financial information the Company has received,
G&M will require additional debt/equity financing to increase its mining
production to achieve planned production levels on its existing
operating mine. There is no assurance G&M will receive the required
additional debt/equity financing. If G&M is unable to sufficiently
develop the property or if ore reserves prove to be inadequate, the
Company's preferred stock could ultimately have minimal value.
3. NET ASSETS HELD FOR SALE:
------------------------
During fiscal 2000, management of the Company formally adopted a plan to
actively pursue the sale of all business segment assets not related to
the computer data storage segment. The assets to be sold included the
pollution control product assets and restaurant equipment assets. The
mining assets had been classified as "net assets held for sale" as of
June 30, 1999. During fiscal year 2000, the mining assets, a portion of
the restaurant equipment assets and a significant portion of the
Pollution Control Products assets were sold. During the current fiscal
year, the remaining Pollution Control Products assets and additional
restaurant equipment assets were sold. At June 30, 2001, "net assets
held for sale" consisted of the remaining restaurant equipment assets.
Based upon management's decision to pursue the sale of all assets not
related to the computer data storage, only revenues for the computer
data storage segment were considered as continuing operations. For the
year ended June 30, 2001 and 2000, the segment operating results of
Pollution Control Products, Restaurant Equipment Distribution, and
Mining were considered as discontinued operations.
4. NOTES RECEIVABLE
----------------
Notes receivable at June 30, 2001 and 2000 consisted of the following:
2001 2000
-------------- --------------
Notes receivable - sale of assets $ 1,698,900 $ 3,495,000
Notes receivable - other 69,700 84,000
-------------- --------------
1,768,600 3,579,000
Less - allowance for uncollectible (125,000) --
-------------- --------------
Net notes receivable 1,643,600 3,579,000
Less - current portion (677,500) (3,019,000)
-------------- --------------
Notes receivable - long-term $ 966,100 $ 560,000
============== ==============
<page>
At June 30, 2001, Notes receivable - sale of assets consisted of notes
receivable in the amount of $1.15 million related to the fiscal year
2001 sale of the remaining assets in the Pollution Control Products
segment and approximately $549,000 remaining balance associated with the
sale of the Company's Pollution Control segment assets in the prior
year. The $1.15 million notes bear interest from 5% to 7% and are
payable through 2004. The $549,000 remaining balance bears interest at
prime plus 4%.
Notes receivable balances at June 30, 2000 consist primarily of notes
related to the sale of assets. The Company closed on the sale of its
principal asset in the Pollution Control Products segment subsequent to
June 30, 2000. The transaction had an effective date of June 30, 2000.
To properly record the sale in fiscal year 2000, two notes receivable
were recorded. First, a note, without interest, was recorded to
represent the cash amount that was received at closing, subsequent to
year-end, of $2,895,000. A second, seven-year, $600,000 note receivable
was recorded to represent the balance of the purchase price due to the
Company. The note has a variable interest rate from prime plus 1% to
prime plus 4% (prime plus 4% at June 30, 2001) and is being amortized
over a 10-year period with a balloon payment due on or before July 5,
2007.
5. INVENTORIES
-----------
Inventories consisted of the following at June 30:
2001 2000
------------- ---------------
Raw materials and purchased parts $ 284,800 $ 1,008,100
Work-in-process 109,500 87,100
Finished goods 824,200 17,500
Fryer equipment -- 675,000
------------- ---------------
Total 1,218,500 1,787,700
Less transfer of fryer equipment to
net assets held for sale -- (675,000)
------------- ---------------
$ 1,218,500 $ 1,112,700
============= ===============
During the fourth quarter of fiscal year ended June 30, 2000, the
Company reclassified the remaining fryer units from inventory to "assets
held for sale" and recorded a charge for asset impairment of $400,000.
The amount of fryer units held at June 30, 2001 net of the $400,000
impairment charge, totaled $603,300.
<page>
6. PROPERTY AND EQUIPMENT:
----------------------
At June 30, Property, Plant and Equipment consists of the following:
2001 2000
------------- ------------
Machinery and Equipment $ 338,900 $ 344,800
- - Furniture and office equipment 481,100 459,300
Leasehold improvements 90,900 89,300
------------- -------------
910,900 893,400
Less accumulated depreciation (414,900) (264,800)
------------- -------------
Net Book Value $ 496,000 $ 628,600
============= =============
Related depreciation expense for the years ended June 30, 2001 and 2000,
was $273,300 and $414,200, respectively.
7. NOTES PAYABLE AND BANK LINE OF CREDIT:
---------------------------------------
At June 30, 2001 and 2000, the Company had a note payable to a bank of
$248,600 and $110,100, respectively, with interest calculated at prime
plus 2% per annum. The repayment terms have been renegotiated with
monthly principal payments, commencing in August 2001, of $25,000 plus
interest. In addition, at June 30, 2000, the Company had a $750,000
note, 10% per annum, relative to the June 2000 acquisition of
Excel/Meridian Data, Inc. The note maturity was tied to the sale of the
Company's pollution control products asset and was paid in full during
the quarter ended September 30, 2000.
The Bank Line of Credit balance at June 30, 2001 and 2000 was $885,600
and $498,500, respectively. These balances represent borrowing under a
one year (currently $1.5 million) Bank Line of Credit Agreement
("Agreement") initially entered into in September 1999 and renewed in
December 2000. The formula-based line of credit is based upon accounts
receivables and inventory values and has an interest rate of prime plus
1.25%. The Agreement expires in December 2001.
During fiscal year 2001, the Company was in violation of certain
financial covenants under the Agreement. At June 30, 2001 the bank had
formally waived those covenants and a modification to the Agreement has
been reached. The Company is currently in compliance with all Agreement
covenants.
8. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company leases certain facilities and equipment under non-cancelable
operating lease agreements that expire through fiscal year 2006. The
Company also leases certain equipment under non-cancelable capital lease
arrangements. Future minimum payments under non-cancelable operating
leases are $182,200 for fiscal year 2002, $116,000 for fiscal years 2003
through 2005 and $87,000 for fiscal year 2006. Total minimum payments
under non-cancelable operating leases through March 2006 amount to
$617,000.
<page>
9. ACQUISITIONS:
-------------
The Company acquired two companies in the computer data storage
industry, Arraid, Inc., effective October 1, 1999, and Excel/Meridian
Data, Inc., effective June 1, 2000, for a combined purchase price,
consisting of cash and stock, valued at approximately $2.73 million.
Both acquisitions were recorded using the purchase method of accounting
and resulted in goodwill, representing the value of the purchase price
in excess of net assets acquired. The net value of goodwill as of June
30, 2001 and 2000 was $1,420,400 and $1,558,000, respectively, net of
accumulated amortization of $191,600 and $48,000.
10. PREFERRED STOCK:
---------------
The Company is authorized to issue a total of 5,000,000 shares of Class
A cumulative convertible preferred stock and 2,000,000 shares of Class B
cumulative preferred stock. These shares may be issued in such series
and preferences as determined by the Board of Directors.
11. SHAREHOLDERS' EQUITY:
--------------------
Preferred Shares - During fiscal years 2001 and 2000, the Company issued
270,000 shares of series B cumulative preferred stock ("Series B") to
accredited investors at $4.00 per share for a value received of
$1,080,000. The shares are characterized as "restricted securities"
under federal securities laws as they were acquired from the Company in
a transaction not involving a public offering and that under such laws
and applicable regulations such shares may be resold without
registration under the Securities Act of 1933, as amended, only in
certain limited circumstances.
Holders of shares of Series B shall be entitled to receive, when
declared by the Board of Directors, out of funds and assets of the
Company legally available therefore, an annual dividend of 15% per annum
based upon a per share value of $5 for purposes of such dividend
payment. Dividends shall accrue, be cumulative from the date of issue
and may be paid "in kind." Dividends on Preferred Shares paid "in-kind"
during the current fiscal year amounted to 35,500 preferred shares with
a value of $142,100.
During the fourth quarter of fiscal 2001, the holders of shares of the
Company's Series B Preferred Stock accepted an offer to convert their
preferred shares and $633,800 into 1,901,400 shares of the Company's
common stock. The conversion into Common shares is recorded effective at
year-end. Subscription receivables at June 30, 2001, related to the
conversion, were $563,500. All subscription receivables were paid during
July 2001.
Common Shares - In November 2000, the Company's shareholders authorized
the Company's Board of Directors to effect, if the Board believes
necessary, up to a 1 for 3 reverse stock split at a future date through
October 2002. As of June 30, 2001 no split was effected.
<page>
Warrants - During fiscal 1998, the Company issued 60,715 warrants to a
director for consideration of a $300,000 line-of-credit. These warrants
expire in five years and are exercisable at $2.80 per share. During
fiscal 2000, the Company issued a total of 50,000 warrants to two
consultants for services rendered. 25,000 of the warrants are
exercisable at $3.00 per share and expire in February 2003. The
remaining 25,000 warrants are exercisable at $1.75 and expire in October
2004.
Stock Options - In 1995, the Company adopted an Incentive Stock Option
Plan that authorizes the issuance of up to 142,858 shares of common
stock. Pursuant to the plan, the Company may only grant "incentive stock
options" (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended). Incentive and non-qualified stock options may
not be granted at an exercise price of less than the fair market value
of the common stock on the date of grant. Each option must be granted
within five years from the effective date of the Plan. The term of the
options may not exceed five years. As of June 30, 2001, the Company has
granted 121,788 options under the plan, of which all have vested
and 112,500 have been exercised. Options outstanding for this plan at
June 30, 2001 all had an exercise price of $13.23.
In 1996, the Company adopted a Directors and Officers Stock Option Plan
(1996 D&O Plan). Only executive officers and directors of the Company
shall be eligible to be granted options under this plan. An aggregate of
107,143 shares of common stock are reserved for issuance under this
Plan. The exercise price of the options will be 60% of the NASDAQ
closing bid price per share on the date of grant or such other price the
Board of Directors may determine. Each option must be granted within
five years from the effective date of the plan and the term may not
exceed five years. No one officer or director shall have more than
21,429 options granted under this plan. As of June 30, 2001, the Company
had granted options under the 1996 D&O Plan to purchase 106,074 shares
of which all options are vested. Exercise prices for the directors and
officers options outstanding at June 30, 2001 range from $1.00 to $6.30.
In 1998, the Company adopted another Directors and Officers Stock Option
Plan (1998 D&O Plan) that authorizes the issuance of up to 750,000
shares of common stock. Only executive officers and directors of the
Company shall be eligible to be granted options under the Plan. Each
option must be granted at or above fair market value within 10 years
from the effective date of the Plan, with the term of the option not
exceeding 10 years. As of June 30, 2001, the Company has granted options
under the Plan to purchase 750,000 shares, of which all have vested and
370,000 have been exercised. Options outstanding for this Plan at June
30, 2001 have exercise prices that range from $.50 to $1.75.
In 1998, the Company also adopted another Incentive Stock Option Plan
(1998 Stock Option Plan) that authorizes the issuance of up to 750,000
shares of common stock. Pursuant to the Plan, incentive and
non-qualified stock options may be granted, with the incentive stock
options intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended. The Plan provides for a vesting schedule for
incentive stock options of 25% after six months from the date of grant,
25% after one year, and 50% after two years. No one person shall be
granted incentive stock options with a fair market value of more than
$100,000 during any single calendar year and the maximum number of
shares granted to any one employee shall be 100,000. The Board of
Directors shall determine the exercise price, which may not be less than
the fair market value of the common stock at the date of grant. Each
option must be granted within 10 years from the effective date of the
<page>
Plan, with the term of the options not exceeding 10 years. As of June
30, 2001, the Company has granted options under the Plan to purchase
954,500 shares, of which 279,250 have been canceled, 47,500 have been
exercised, and 480,000 have been vested. Options outstanding for this
Plan at June 30, 2001 have exercise prices that range from $.50 to
$3.36.
During fiscal 2000, the Company adopted another Directors and Officers
Stock Option Plan (1999 D&O Plan) that authorizes the issuance of up to
500,000 shares of common stock. Only executive officers and directors of
the Company shall be eligible to be granted options under the Plan. Each
option must be granted at or above fair market value within 10 years
from the effective date of the Plan, with the term of the option not
exceeding 10 years. As of June 30, 2001, the Company has granted options
under the Plan to purchase 400,000 shares, of which all have vested, and
none have been exercised. Options outstanding for this Plan at June 30,
2001 have exercise prices that range from $1.50 to $2.00.
In fiscal 2000, the Company also adopted another Incentive Stock Option
Plan (1999 Stock Option Plan) that authorizes the issuance of up to
1,500,000 shares of common stock. Pursuant to the Plan, incentive and
non-qualified stock options may be granted, with the incentive stock
options intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended. The Plan provides for a vesting schedule for
incentive stock options of 25% after six months from the date of grant,
25% after one year, and 50% after two years. No one person shall be
granted incentive stock options with a fair market value of more than
$100,000 during any single calendar year and the maximum number of
shares granted to any one employee shall be 100,000. The Board of
Directors shall determine the exercise price, which may not be less than
the fair market value of the common stock at the date of grant. Each
option must be granted within 10 years from the effective date of the
Plan, with the term of the options not exceeding 10 years. As of June
30, 2001, the Company has granted options under the plan to purchase
785,250 shares, of which 411,000 have been canceled, none have been
exercised, and 282,250 are vested. Options outstanding for this Plan at
June 30, 2001 have exercise prices that range from $1.15 to $3.36.
During fiscal 2001, the Company adopted another Directors and Officers
Stock Option Plan (2000 D&O Plan) that authorizes the issuance of up to
500,000 shares of common stock. Only executive officers and directors of
the Company shall be eligible to be granted options under the Plan. Each
option must be granted at or above fair market value within 10 years
from the effective date of the Plan, with the term of the option not
exceeding 10 years. As of June 30, 2001, the Company has not granted any
options under the Plan.
In fiscal 2001, the Company also adopted another Incentive Stock Option
Plan (2000 Stock Option Plan) that authorizes the issuance of up to
1,000,000 shares of common stock. Pursuant to the Plan, incentive and
non-qualified stock options may be granted, with the incentive stock
options intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended. The Plan provides for a vesting schedule for
incentive stock options of 25% after six months from the date of grant,
25% after one year, and 50% after two years. No one person shall be
<page>
granted incentive stock options with a fair market value of more than
$100,000 during any single calendar year and the maximum number of shares
granted to any one employee shall be 100,000. The Board of Directors
shall determine the exercise price, which may not be less than the fair
market value of the common stock at the date of grant. Each option must
be granted within 10 years from the effective date of the Plan, with the
term of the options not exceeding 10 years. As of June 30, 2001, the
Company has granted options under the plan to purchase 320,000 shares, of
which 99,500 have been canceled, 500 have been exercised, and 100,000 are
vested. Options outstanding for this Plan at June 30, 2001 have exercise
prices that range from $1.25 to $1.60.
The Company also has granted options to officers and other employees
outside of any plan as an inducement at the time of their employment. As
of June 30, 2001, the Company has granted options under the plan to
purchase 1,295,000 shares, all of which have vested, none have been
exercised, and none have expired. Exercise prices for these options
outstanding at June 30, 2001 range from $.43 to $4.69. All of these
options, except for 185,000 shares, have been registered on form S-8
filings.
The following is a table of activity of all options:
Weighted
Number of Average
Shares Exercise Price
------------- -------------
OPTIONS OUTSTANDING, June 30, 1999 2,023,575 $ 0.73
Granted 1,261,500 1.79
Exercised (484,250) 0.77
Canceled (79,071) 2.23
------------- -------------
OPTIONS OUTSTANDING, June 30, 2000 2,721,754 1.15
Granted 1,343,250 1.68
Exercised (63,750) 0.71
Canceled (642,108) 2.13
------------- -------------
3,359,146 $ 1.19
OPTIONS OUTSTANDING, June 30, 2001 ============== =============
For all options granted during fiscal years 2001 and 2000, the option
price equaled the market price, as defined in the stock option plan, of
the Company's common stock on the grant date. At June 30, 2001, options
for 2,964,459 shares were exercisable and options for the remaining
shares become exercisable within the next two years. If not previously
exercised, options outstanding at June 30, 2001 will expire as follows:
<page>
Weighted
Number of Average
Year of Expiration Shares Exercise Price
------------------ --------------- ---------------
2002 17,858 $ 7.69
2003 34,288 5.18
2004 20,000 1.00
2005 385,000 1.43
2006 100,000 1.25
2009 1,415,000 0.51
2010 726,000 1.50
2011 661,000 1.77
---------------- ---------------
3,359,146 $ 1.19
================ ===============
Additional information about outstanding options to purchase the
Company's common stock as of June 30, 2001 is as follows:
Options Outstanding Options Exercisable
------------------------------------- -------------------------
Weighted Avg. Weighted Weighted
Remaining Average Number Average
Exercise Number of Contractual Exercise of Exercise
Price Shares Life (in years) Price Shares Price
- -------------- ---------- ----------------- --------- ------------ ------------
$0.43-$.75 1,325,000 7.25 $ 0.47 1,325,000 $ 0.47
$1.00-$1.95 1,486,300 6.94 $ 1.31 119,100 $ 1.27
$2.00-$2.75 453,200 9.16 $ 2.10 367,000 $ 2.05
$3.36-$13.23 94,600 4.41 $ 4.84 73,400 $ 5.26
Company stock options are issued to employees at an exercise price not
less than the fair market value, as determined under the option plan,on
the date of grant. In accordance with accounting for such options
utilizing the intrinsic value method, there is no related compensation
expense recorded in the Company's financial statements for the current
fiscal year.
Pro Forma Stock-Based Compensation Disclosures - The Company applies
APB Opinion 25 and related interpretations in accounting for its stock
options and warrants which are granted to employees. Accordingly, no
compensation cost has been recognized for grants of options and warrants
to employees since the exercise prices were not less than the fair value
of the Company's common stock on the grant dates. Had compensation cost
been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123, the
Company's net loss and loss per share would have been reduced to
the pro forma amounts indicated below.
<page>
Year Ended June 30
2001 2000
--------------- ---------------
Net income (loss) applicable to common
shareholders:
As reported $ (3,136,600) $ (1,358,800)
Pro forma $ (4,244,425) $ (2,350,400)
Net income (loss) per common share - basic
As reported $ (0.46) $ (0.23)
Pro forma $ (0.62) $ (0.40)
Net income (loss) per common share - diluted
As reported N/A N/A
Pro forma N/A N/A
The fair value of each employee option granted in 2001 and 2000 was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Year Ended June 30,
2001 2000
--------------- ---------------
Expected volatility 78.93% 81.25%
Risk-free interest rate 5.67% 6.00%
Expected dividends - -
Expected terms (in years) 3 3
13. INCOME TAXES:
------------
The Company's actual effective tax rate differs from U.S. Federal
corporate income tax rate of 34% as follows for the year ended June 30:
2001 2000
---------- ---------
Statutory rate 34.0% 34.0%
State income taxes, net of Federal income 3.3% 3.3%
tax benefit
Increase (reduction) in valuation
allowance related to net operating
loss carry-forwards and change in
temporary differences (37.3%) (37.3%)
----------- ----------
0% 0%
----------- ----------
<page>
The components of the net deferred tax asset recognized as of June 30
are as follows:
2001 2000
------------- -------------
Long-term deferred tax assets (liabilities):
$ Net operating loss carryforwards $ 8,516,000 $ 8,324,000
Goodwill 1,364,000 1,364,000
Mining properties 1,702,000 1,702,000
Equipment and other (40,000) (36,000)
Other -- 10,000
Less: Valuation allowance (11,542,000) (11,364,000)
-------------- ------------
Net long-term deferred tax $ -- $ --
=============== =============
The valuation allowance was increased by $178,000 for the year ended
June 30, 2001. At June 30, 2001, the Company had net operating loss
carryforwards for Federal tax purposes of approximately $22,770,000. The
loss carryforwards, unless utilized, will expire from 2000 through 2020.
14. SUBSEQUENT EVENTS:
------------------
FileZerver NAS. The Company acquired, in August of 2001, the assets and
technology of a Phoenix-based company's FileZerver network attached
storage (NAS) business. The Company believes the addition of the
FileZerver technology and business significantly enhances the Company's
computer data storage proprietary intellectual property and represents
a perfect strategic fit for Alanco, complementing current SAN and NAS
market activities, as well as Arraid's Linux-based single board
computer (SBR) technology.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE NONE
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference
from the Registrant's Proxy Statement to be filed on or before October 29, 2001.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 29, 2001.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 29, 2001.
<page>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 29, 2001.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Exhibits
3.1 Restated and Amended Articles of Incorporation (1)
3.2 By-Laws of Corporation (2)
10.1 Form of "Convertible Preferred stock Subscription and Purchase
Agreement (3)
10.2 Contract for Sale of Principal mining property to Gold & Minerals,
Inc. (4)
10.3 Asset Purchase Agreement related to sale of assets of Alanco
Environmental Resources, Inc. (5)
10.4 Agreement and Plan of Reorganization, dated as of June 21, 2000, by
and among the Company, Excel Computer Corporation, and the holders
of the capital stock of Excel. (6)
10.5 1996 Directors and Officers Stock Option Plan and & Kauffman and
Carlson Stock Option Agreements. (7)
10.6 1998 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (8)
10.7 1999 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (9)
10.8 2000 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (10)
21 Subsidiaries of the Registrant
Name State of Incorporation
Arraid, Inc. Arizona
Excel/Meridian Data, Inc. Arizona
Fry Guy Inc. Nevada
SanOne, Inc. Arizona
NetZerver, Inc. Arizona
Alanco Environmental Manufacturing, Inc. Nebraska
Footnotes:
(1) Incorporated by reference to Annual Report on Form 10-KSB for
the Fiscal Year Ended June 30, 1998
(2) Incorporated by reference to Annual Report on Form 10-KSB for
the Fiscal Year Ended June 30, 1998
(3) Incorporated by reference to Annual Report on Form 10-KSB for
the Fiscal Year Ended June 30, 2000
(4) Incorporated by reference to Annual Report on Form 10-KSB for
the Fiscal Year Ended June 30, 1999
(5) Incorporated by reference to Form 8-KSB filed August 15, 2000
(6) Incorporated by reference to Form 8-KSB filed August 15, 2000
(7) Incorporated by reference to Form S-8 filed October 22,1998
(8) Incorporated by reference to Form S-8 filed November 30,1998
(9) Incorporated by reference to Form S-8 filed November 29, 1999
(10) Incorporated by reference to Form S-8 filed December 14, 2000
<page>
B. Schedules NONE
C. Reports on Form 8-K NONE
Exhibits or schedules other than those mentioned above are omitted because the
conditions requiring their filing do not exist or because the required
information is given in the financial statements, including the notes thereto.
SIGNATURES
Alanco Technologies, Inc.
DATE: September 27, 2001
/s/Robert R. Kauffman
Robert R. Kauffman, CEO,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/Robert R. Kauffman Director & September 27, 2001
------------------ Chief Executive Officer
Robert R. Kauffman
/s/James T. Hecker Director September 27, 2001
---------------
James T. Hecker
/s/Harold S. Carpenter Director September 27, 2001
-------------------
Harold S. Carpenter
/s/Thomas C. LaVoy Director September 27, 2001
---------------
Thomas C. LaVoy
/s/Steven P. Oman Director September 27, 2001
--------------
Steven P. Oman
/s/Robert H. Friesen Director September 27, 2001
------------------
Robert H. Friesen
/s/John A. Carlson Director & September 27, 2001
--------------- Chief Financial Officer
John A. Carlson
<page>
APPENDIX I
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
FINANCIAL STATEMENTS
WITH INDEPENDENT AUDITOR'S REPORT
June 30, 2001 and December 31, 2000 and 1999
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
TABLE OF CONTENTS
Independent Auditor's Report
1
Balance Sheets 2
Statements of Operations` 4
Statements of Stockholders' Equity 5
Statements of Cash Flow 6
Notes to Financial Statements 7
Exhibit A - Unaudited Management's Discussion and Analysis 13
INDEPENDENT AUDITOR'S REPORT
To the shareholders and Board of Directors of
Technology Systems International, Inc.
Scottsdale, Arizona
I have audited the accompanying balance sheets of Technology Systems
International, Inc. as of June 30, 2001 and December 31, 2000 and 1999 and the
related statements of operations and cash flows for the six months and years
then ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based upon my audits.
I conducted my audits in accordance with generally accepted auditing standards.
These standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from 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.
I believe that my audits provide a reasonable assurance for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Technology Systems International,
Inc. as of June 30, 2001 and December 31, 2000 and 1999 and the results of their
operations and cash flows for the six months and years then ended in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company incurred a net loss of $706,790 for the six months ended June 30, 2001
and has incurred substantial net losses for the seven years ended June 30, 2001
totaling $13,314,725. These factors, and others discussed in Note 15, raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
/s/ Billie J. Allred
Billie J. Allred
Certified Public Accountant
April 12, 2002
Pima, Arizona
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
BALANCE SHEETS
June 30, 2001 and December 31, 2000 and 1999
June 30,2001 December 31,2000 December 31,1999
-------------- ---------------- ----------------
<c> <c> <c>
ASSETS
CURRENT ASSETS
Cash $ 339,146 $ 1,967 $ 12,865
Accounts Receivable 5,147 9,571 633
Inventory 746,504 326,827 98,489
Prepaid Expenses 45,932 14,829 -
----------- ----------- -----------
Total Current Assets 1,136,729 353,194 111,987
PROPERTY AND EQUIPMENT
Furniture and Fixtures 17,520 17,855 18,573
Computer Equipment 95,550 98,016 86,116
Leasehold Improvements 10,062 10,062 10,062
Office Equipment 23,301 - -
Marketing Equipment 23,106 23,106 23,106
----------- ----------- -----------
Total Property and Equipment 169,539 149,039 137,857
Less Accumulated Depreciation (111,382) (108,278) (82,862)
----------- ----------- -----------
Net Property and Equipment 58,157 40,761 54,995
DEVELOPMENT COSTS
Software Development 716,044 716,044 600,909
Less Accumulated Amortization (119,341) (47,736) -
----------- ----------- -----------
Total Development Costs 596,703 668,308 600,909
NON-CURRENT ASSETS
Beta installations - 694,224 1,148,283
Deposits 10,664 5,560 8,245
Manufacturing License 470,000 470,000 470,000
Patent License 169,000 169,000 169,000
Organization Costs - 9,816 9,816
----------- ----------- -----------
Total Other Assets 649,664 1,348,600 1,805,344
Less Accumulated Amortization (401,337) (375,441) (309,577)
----------- ----------- -----------
Net Other Assets 248,327 973,159 1,495.767
----------- ----------- -----------
Total Assets $ 2,039,916 $ 2,035,422 $ 2,263,658
=========== =========== ===========
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
BALANCE SHEETS
June 30, 2001 and December 31, 2000 and 1999
LIABILITIES
June 30,2001 December 31,2000 December 31,1999
-------------- ---------------- ----------------
<c>
CURRENT LIABILITIES
Trade Accounts Payable $ 42,522 $ 139,833 $ 562,045
Other Accounts Payable 29,690 18,950 4,258
Royalties Payable - 13,934 -
Current Maturities of Long-Term Debt 1,264,542 3,925,646 1,810,852
----------- ----------- -----------
Total Current Liabilities 1,336,754 4,098,363 2,377,155
LONG-TERM LIABILITIES
Note Payable to Related Party 65,000 65,000 -
Note and Obligation Due
Officer and Shareholders 24,671 129,228 100,000
European Investors Trust - 2,609,418 1,141,852
BI Incorporated 15,000 20,000 30,000
EMS Technologies, Inc. 1,224,871 1,167,000 539,000
----------- ----------- -----------
Total Long-Term Liabilities 1,329,542 3,990,646 1,810,852
Less Current Maturities (1,264,542) (3,925,646) (1,810,852)
----------- ----------- -----------
Net Long-Term Debt 65,000 65,000 -
----------- ----------- -----------
Total Liabilities 1,401,754 4,163,363 2,377,155
----------- ----------- -----------
EQUITY
Common Stock - 25,000,000 Shares Authorized:
$.001 par value; shares issued and outstanding:
at June 30,2001 21,715,010 shares $ 21,715 $ - $ -
at December 31,2000 18,369,691 shares - 18,370 -
at December 31, 1999 18,194,102 shares - - 18,194
Preferred Stock - 10,000,000 Shares Authorized:
$.001 par value; 0 shares issued and outstanding - - -
Common Stock Subscribed 530,408 - -
Additional Paid In Capital 13,400,764 9,767,400 9,589,075
Common Stock Warrants - - -
Common Stock Options - - -
Retained (Deficit) (13,314,725) (11,913,711) (9,720,766)
----------- ----------- -----------
Total Stockholders' Equity (Deficit) 638,162 (2,127,941) (113,497)
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 2,039,916 $ 2,035,422 $ 2,263,658
=========== =========== ===========
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2001 and
2000 (Unaudited) and the Years Ended December 31, 2000 and 1999
Six months
Six months June 30, Year Year
June 30, 2000 December 31, December 31,
2001 (Unaudited) 2000 1999
--------------- --------------- -------------- ----------------
SALES AND SERVICE INCOME $ 25,000 $ 210,312 $ 472,982 $ 2,100
DIRECT COSTS (21,444) (35,766) (267,526) -
--------------- --------------- -------------- ----------------
Gross operating income 3,556 174,546 205,456 2,100
GENERAL AND ADMINISTRATIVE
EXPENSES (920,118) (618,065) (1,745,038) (1,313,068)
--------------- --------------- -------------- ----------------
Net operating income (loss)
before depreciation and
amortization (916,562) (443,519) (1,539,582) (1,310,968)
Less depreciation and amortization (118,367) (46,570) (141,614) (90,865)
--------------- --------------- -------------- ----------------
Net operating income (loss) (1,034,929) (490,089) (1,681,196) (1,401,833)
OTHER INCOME (EXPENSE)
Income(loss) on Beta test
site installations (209,594) - - -
Loss on disposition of assets (7,201) - - -
Interest expense (114,839) (165,696) (408,775) (121,550)
Other income (expense) (34,450) 467 (102,974) 1,356
--------------- --------------- -------------- ----------------
Total other income (expense) (366,084) (165,229) (511,749) (120,194)
--------------- --------------- -------------- ----------------
Net income (loss) $ (1,401,013) $ (655,318) $ (2,192,945) $ (1,522,027)
=============== =============== ============== ================
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2001 and the Years Ended
December 31, 2000 and 1999
Additional Retained
Preferred Stock Common Stock Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit) Total
------- -------- ----------- -------- ---------- ------------ ----------
Balance, January 1, 1999 - $ - 16,727,782 16,727 8,294,062 (8,198,740) 112,049
Shares issued for cash - - 434,667 435 489,513 - 489,948
Shares issued for services - - 155,166 155 172,835 - 172,990
Cost of stock sales - - (39,860) - (39,860)
Shares issued for conversion
of debt - - 854,732 855 659,145 - 660,000
Shares issued for conversion
relating to sale of stock - - 21,755 22 13,380 - 13,402
Net (loss) - - - - - (1,522,026) (1,522,026)
------- -------- ----------- -------- ---------- ------------ ----------
Balance, December 31, 1999 - $ - 18,194,102 $ 18,194 $9,589,075 $ (9,720,766) (113,497)
Shares issued for cash - - 90,000 90 103,410 - 103,500
Shares issued for services - - 75,000 75 74,925 - 75,000
Shares issued to
EMS Technologies, Inc.
to maintain 15% ownership
in accordance with
contractual agreements - - 10,589 11 (11) - -
Net loss - - - - - (2,192,945) (2,192,945)
------- -------- ----------- -------- ---------- ------------ ----------
Balance, December 31, 2000 - $ - 18,369,691 18,370 9,767,400 (11,913,711) (2,127,942)
Shares issued for cash - - 600,000 600 479,400 - 480,000
Shares issued to European
Investors Trust for
conversion of debt at
$1.15 per share - - 2,745,319 2,745 3,154,372 - 3,157,117
Common stock subscribed - - - - (408) - 530,000
Net (loss) - - - - - (1,401,013) (1,401,013)
------- -------- ----------- -------- ---------- ------------ ----------
Balance, June 30, 2001 - - $21,715,010 $ 21,715 $13,400,764 ($13,314,723) $ 638,161
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2001 and 2000 (Unaudited) and the Years
Ended December 31, 2000 and 1999
Six months
Six months June 30, Year Year
June 30, 2000 December 31, December 31,
2001 (Unaudited) 2000 1999
-------------- ------------ -------------- ----------------
Cash flows from operating activities
Net (loss) $ (1,401,013) $ (655,318) $ (2,192,945) $ (1,522,027)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 11,050 13,639 25,417 24,981
Amortization 99,371 32,932 113,599 65,863
Common shares issued for:
Commissions - - - 13,402
Services - - - 172,990
(Increase) decrease in assets
Accounts receivable 4,424 (118,435) (8,938) (633)
Inventory (64,993) (10,075) (228,338) (775)
Prepaid expenses (31,103) - (14,829) -
Deposits (5,104) (1,064) 2,685 3,095
Increase (decrease) in liabilities
Accrued expenses 10,740 (1,569) 14,692 (6,675)
Trade accounts payable (97,311) 13,243 (422,212) 374,852
Royalties payable (13,934) - 13,934 -
-------------- ------------ -------------- ----------------
Total adjustments (86,860) (71,329) (503,990) 647,100
-------------- ------------ -------------- ----------------
Net cash (used) in
operating activities (1,487,873) (726,647) (2,696,935) (874,927)
Cash flows from investing activities
Purchase of property and equipment $ (20,500) $ (2,166) $ (11,182) $ (13,350)
Software development - (85,342) (115,135) (145,366)
Beta test installations 339,539 (88,823) 454,059 (703,843)
-------------- ------------ -------------- ----------------
Net cash provided (used) in
investing activities 319,039 (176,331) 327,742 (862,559)
-------------- ------------ -------------- ----------------
Cash flow from financing activities
Proceeds from corporate loans 496,013 867,553 2,189,794 1,901,852
Corporate loans paid - (60,536) (10,000) (668,000)
Common stock subscribed 530,000 - - -
Sale of common shares 480,000 92,001 178,501 489,948
Cost relating to shares sold - - - (39,860)
-------------- ------------ -------------- ----------------
Net cash provided by
financing activities 1,506,013 899,018 2,358,295 1,683,940
-------------- ------------ -------------- ----------------
Net increase (decrease) in cash 337,179 (3,960) (10,898) (53,546)
Cash at beginning of period - 1,967 12,865 12,865 66,411
-------------- ------------ -------------- ----------------
Cash at end of period $ 339,146 $ 8,905 $ 1,967 $ 12,865
============== ============ ============== ================
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and December 31, 2000 and 1999
NOTE 1 NATURE OF BUSINESS
HISTORY
Technology Systems International, Inc. (TSI) was incorporated on May 16, 1994,
in the state of Nevada.
The primary business of the Company is marketing products to be used in the
identification, location, monitoring, tracking and personal safety of confined
populations. The products will be sold primarily to U.S. prisons and jails.
The Company's roots date back to 1985 when Dr. James Ricketts left public
service. He had completed 6 1/2 years as Director of Corrections for the states
of Colorado and Arizona. In addition, he served 1 1/2 years as Deputy Director
and 6 years as a warden of medium or maximum security prisons within the states
of Georgia and Florida. His personal experience gave him a vision of providing
technological solutions to help overcrowded and under-staffed prison facilities
become safer and more efficient by using state of the art technology to identify
prison populations and to automate the data management process.
Dr. Ricketts started a patent search in September 1990, filed the patent
application in July 1991 and received United States Patent No. 5,218,344 in June
1993. Motorola, Inc. (Motorola) was selected as the exclusive supplier of this
product because it was active in developing and implementing similar technology
for the U.S. Government Department of Defense. In August 1990, Motorola agreed
to assist in developing the product. Using their existing Combined Arms Training
Integrated Evaluation System (CATIES) technology, which is successfully
operating in Fort Ervin, California, they were able to develop a product which
included computer hardware devices and software to identify, locate and manage
confined populations.
On March 30, 1995, TSI successfully completed an agreement with Motorola that
changed its business intent from marketing rights to an exclusive manufacturing
license. TSI, under this license, controls the development of the system, which
utilizes Motorola technology. TSI defines the hardware and software components
of the system. Strategic partners complete the hardware designs and manufacture
the products. TSI develops the system software internally.
The Company entered into an agreement effective March 30, 1995 with BI
Incorporated, a Colorado corporation to license the patents and intellectual
property relating to tamper technology used in home arrest programs.
On September 15, 1995, the Company signed a Teaming Agreement and Product
Development Contract with EMS Technologies, Inc. (EMS), a division of
Electromagnetic Sciences, Inc. of Atlanta, Georgia. Under this agreement, EMS
provides the engineering designs for the Motorola technology, completes all
Alpha and Beta testing and manufactures the hardware devices.
In conjunction with the license agreement with Motorola, the Company assumes the
service and support responsibility for the system, which was installed by
Motorola at the California State Prison-Corcoran. This arrangement provides the
Company potential service revenue and a proven base for evaluating equipment
performance.
Early in the year 2000, the Company developed and implemented a comprehensive
national sales and distribution strategy. Multi-state distribution contracts
have been awarded to ISI Systems, Inc. of San Antonio, Texas and Maximum
Security Response Technologies, Inc. (SRT), Inc. of Middleton, Massachusetts.
SRT is a well known sales, consulting and marketing firm to the correction
industry. Ownership of SRT is divided among members who are former Directors of
Corrections in several eastern states.
Also, during 2000, Beta testing of the Company's products was brought to a
conclusion and the TSI PRISMTM system was released for sale. Beta team systems
at the Arizona prison site were removed as the cost of retrofitting the site
with product conforming to technology released for sale, was prohibitive. The
first commercial sale of a TSI PRISM system occurred in August of 2000, to a
juvenile corrections unit operated by the City of Littlefield, Texas. The
Company continues to operate two pilot prison sites at Cal patria and Mule
Creek, California.
The Company continues with research and design activities directed toward
improving accuracy of its tracking system and developing additional features and
enhancements. However, the primary emphasis of the organization has shifted to
sales and marketing and the accelerated growth of revenues.
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and December 31, 2000 and 1999
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING METHOD
The Company's financial statements are prepared using the accrual method of
accounting on a fiscal year basis. (See Note 14)
PROVISION FOR TAXES
The Company has a net operating loss in the amount of $11,007,893 which may be
carried forward to reduce taxable income in future years. No provision for
income taxes has been recorded for the seven years and one month ended June 30,
2001.
DEPRECIATION
The useful lives of property and equipment for purposes of computing
depreciation on the straight-line method are:
<table>
<s> <c> <c>
Furniture and fixtures 5-7 years
Computers 5 years
Leasehold improvements 5 years
Marketing equipment 5 years
</table>
INVENTORIES
Inventories are stated at the lower of cost or market determined by the LIFO
method or market.
NON-CURRENT ASSETS
The cost of the manufacturing license is being amortized on the straight-line
method over the remaining life of 5 years. Amortization expense charged to
operations for the six months ended June 30, 2001 and the years ended December
31, 2000 and 1999 were $23,500, $47,000 and $47,000 respectively.
The cost of the patent license is being amortized on the straight-line method
over the remaining life of 5 years. Amortization expense is charged to
operations for the six months ended June 30, 2001, and the years ended December
31, 2000 and 1999 were $8,450, $16,900 and $16,900 respectively. Payment for the
patent license was a one-time fee paid to BI, Incorporated for the right to use
and embody 11 patents that deal with a tamper technology that transmits an alarm
into the TSI technology. Management has reviewed the patent license agreement
and even though the Company receives the benefit of paying no royalty under the
agreement for the first 28,166 units produced and then pays a fee of up to $6.00
per unit it has elected to use the straight-line method until the number of
units produced exceeds the remaining value, at which time the difference will be
expensed and charged to operations.
REVENUE RECOGNITION
The Company follows the completed-contract method of accounting for contracts.
From inception of the Company, it has not entered into any contracts that extend
beyond one year and it does not anticipate doing so. Accordingly, revenue and
costs of individual contracts are included in operations in the year during
which they are completed. Losses expected to be incurred on contracts in
progress are charged to operations in the period such losses are determined. The
aggregate of costs of uncompleted contracts in excess of related billings is
shown as a current asset, and the aggregate of billings on uncompleted contracts
in excess of related costs is shown as a current liability. Because of the
limited number of contracts completed through June 30, 2001, there are no costs
or billings on uncompleted contracts.
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and December 31, 2000 and 1999
NOTE 3 INVENTORIES
Inventories at June 30, 2001, December 31, 2000 and 1999 consist of finished
component parts and are stored at the following locations.
June 30, Dec. 31 Dec. 31
2001 2000 1999
--------- ---------- ----------
T.S.I. warehouse 366,852 $ 282,560 $ 98,489
EMS Technologies, Inc. 24,968 44,267 -
Calpatria prison facility 239,040 - -
Mule Creek prison facility 115,644 - -
--------- ---------- ----------
Total $ 746,504 $ 326,827 $ 98,489
The inventories at the Calpatria and Mule Creek prison sites are the
non-permanent components of the TSI PRISM system that may be removed and resold.
NOTE 4 BETA TEST SITE INSTALLATIONS
Beta test sites for the TSI PRISM system have been installed at the Calpatria
and Mule Creek, California prison facilities. The systems in these facilities
are available for demonstration purposes to all potential customers. Because of
the uncertainty relating to the eventual sale of these installations, the net
costs of the installations have been expensed and charged to operations as of
June 30, 2001.
NOTE 5 REMOVAL OF COLLATERAL PLEDGE ON ASSETS
Effective January 31, 2001, the pledge of assets as collateral was removed
on the note payable due European Investors Trust (a related party). The
note in the amount of $3,157,117 was converted to common stock. (See Note 9)
NOTE 6 RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE
The Company capitalizes internally developed and purchased software costs in
accordance with Statement of Financial Standards (SFAS) No. 86. Capitalization
of development costs of software products begins once the technological
feasibility of the product is established. Management has determined that
technological feasibility was attained on the Company's software products at the
time of the purchase of license agreements in 1994 (Note 1). Additionally, all
amounts expended for software development from inception to December 31, 2000
are considered to be enhancements to the original purchase and are also
capitalized. Software development expenditures are as follows:
<table>
<s> <c> <c>
1995 $ 12,316
1996 143,027
1997 149,245
1998 150,955
1999 145,366
2000 115,135
-------
$ 716,044
</table>
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and December 31, 2000 and 1999
NOTE 7 NOTE AND OBLIGATION DUE EMS TECHNOLOGIES, INC.
Note dated December 23, 2000 bearing interest at the rate of 10% annum.
The note is due on the earlier of:
1) December 31, 2001 $1,167,000
2) The date on which the Company closes funding
of at least $2,500,000 in additional debt
or equity financing
3) Up to $562,000 of the principal balance, to the
extent of funds received by the Company from the
State of California, Cal patria or Mule Creek
prisons.
Accrued interest at June 30, 2001 57,871
-----------
$1,224,871
===========
NOTE 8 NOTE PAYABLE DUE BI INCORPORATED
A note in the amount of $15,000 is due under the Patent Licensing Agreement to
BI Incorporated payable in quarterly installments of $2,500.
NOTE 9 NOTE PAYABLE DUE EUROPEAN INVESTORS TRUST (A RELATED PARTY)
Certain shareholders and members of the Company Board of Directors collectively
own 90% of the European Investors Trust.
Effective May 1, 1999 the Company entered into a loan agreement in the amount of
$2,000,000 with European Investors Trust (EIT). The terms of the agreement
stipulate that certain shareholders shall provide shares of TSI common stock
owned by them for sale through the Trust, the proceeds of which will be loan to
TSI.
On December 28, 2000 the loan agreement was amended to extend the due date of
the loan to January 31, 2001. It was also agreed that the original $2,000,000
amount of the loan would be increased sufficiently to allow for the Company to
meet its operational needs through January 31, 2001.
Interest at the rate of 18% per annum accrued on all loan advances.
Additionally, a loan origination fee of 15% of each loan advance was paid to the
shareholders by including the origination fee in the principal of the loan
balance.
Effective January 31, 2001, the principal amount of the loan balance in the
amount of $3,157,117 was converted to 2,745,319 shares of common stock at the
rate of $1.15 per share.
NOTE 10 NOTES PAYABLE TO RELATED PARTIES
At June 30, 2001 notes are payable to the following shareholders and related
parties:
Short-Term Long-Term
Note due Evert Eggink, dated April 22,
1999 at 8% per annum interest, due on demand 10,000 -
Note due James Ricketts, dated June 28,
1999, at 10% per annum interest - 65,000
Accrued Interest due shareholders 14,228 -__
---------- -----------
$ 129,228 $ 65,000
========== ===========
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2001 and December 31, 2000 and 1999
NOTE 11 COMMITMENTS AND CONTINGENCIES
Lease Commitments
Effective May 1, 2001, the Company renewed the lease on expanded office
facilities at the Scottsdale Airpark, Scottsdale, Arizona. The office space
comprises 7,221 square feet and is leased at the rate of $4.337 per month
escalating to $8,094 per month.
Commitments on this lease, which expires August 31, 2004 are as follows:
Year Ending Lease Commitment
------------- ----------------
June 30, 2002 $ 82,254
June 30, 2003 91,976
June 30, 2004 96,392
June 30, 2005 16,188
--------
Total $ 286,810
========
NOTE 12 COMMON STOCK WARRANTS
A warrant to acquire 800,000 common shares was granted to Electromagnetic
Sciences, Inc. to secure payment of the Company's obligation under a Stock
Purchase Agreement dated December 23, 1998. Effective December 31, 1999 the
warrant was neither exercised or extended and was therefore expired.
NOTE 13 COMMON STOCK OPTIONS
The Company has an Employee Stock Option Plan where 2,661,000 shares have been
granted of which 1,773,000 shares are fully vested and 888,000 shares remain to
be distributed according to various vesting provisions.
NOTE 14 CAPITAL STOCK SUBSCRIBED
530,000 shares of common stock have been sold at June 30, 2001 at $1 per share
but have not been issued to the investor. Additionally, 408,409 shares of common
stock are to be issued to EMS Technologies, Inc. to maintain a 15% ownership in
accordance with contractual agreements.
NOTE 15 UNCERTAINTIES
The accompanying financial statements have been prepared on the basis of a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. At June 30, 2001, the Company was
in a deficit position from accumulated operating losses in the amount of
$13,314,725 and was experiencing a negative cash flow from ongoing operations.
Continuation of the Company as a going concern is dependent upon obtaining
additional capital and achieving satisfactory levels of profitable operations.
The financial statements do not include any adjustments relating to the
realization of assets and liquidation of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Although a successful resolution of these uncertainties is not assured,
management is of the opinion that additional capital can be raised.
NOTE 16 SUBSEQUENT EVENTS
On August 14, 2001, the Company applied with the Internal Revenue Service and
the Arizona Department of Revenue to change from a calendar year to a fiscal
year ending June 30. Management has determined that the fiscal year would more
accurately coincide with the Company's natural business cycle. Federal and
Arizona income tax returns were timely filed for the six month short period
ending June 30, 2001.
EXHIBIT A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
1. Liquidity and Capital Resources.
As of June 30, 2001, the Company's current liabilities exceeded current assets
by $200,025, (17.59%). The major component of the current liabilities (94.60%)
are debt instruments owed to either Officers, Shareholders, or other related
parties who have continued to support the Company's effort to sell its
proprietary security system. The ability to continue to borrow working capital
or revenues generated from sales will be required for the Company to continue
operations, neither of which can be assured at this time.
Manufacturing License
The Manufacturing License is an agreement entered into between Motorola, Inc. -
Government Space Technology Group and TSI, which agreement was finalized on
March 27, 1995. The agreement called for an initial payment of $470,000, which
has been made, in exchange for the following:
For a period of ten (10) years from the date of the last signature to
this Agreement, MOTOROLA grants TSI an exclusive (except as to
MOTOROLA) license and right within the Licensed Market, without right
to sub-license to: (1) use, copy and modify License Technology; and (2)
use, make, have made, sell, lease, and otherwise dispose of, and repair
products embodying the Licensed Technology and Licensed Technology
modified by TSI.
"Licensed Technology" shall mean MOTOROLA Intellectual Property
uniquely relating to the Prison Headcount, Identification and Location
System (PHILS) product, as defined by MOTOROLA, arising solely from the
efforts of the Government and Space Technology employees and fixed in a
tangible medium of expression on or before March 27, 1995, as listed in
Attachment A, regardless of the stage of development or completion, but
shall not include MOTOROLA Intellectual Property related to
semiconductor devices, integrated circuits, surface acoustical wave
devices, voltage regulators or transmitting antennas.
"Licensed Market", singular or plural shall mean guarded secure
facilities anywhere in the world for housing persons whose freedom is
restricted as a result of criminal incarceration. Such guarded secure
facilities included correctional institutions, detention centers,
prisons, hospitals, psychiatric institutions, juvenile facilities, work
camps, prison schools, rehabilitation centers, secure courtrooms and
other locations so long as they are guarded and secure and directly
associated with a criminal justice system, but exclude home-arrest
facilities or systems.
And a royalty payment of up to 3.5% of the retail selling price of components
sold based upon the licensed technology. At June 30, 2001, the complete contract
price has been paid.
The Company is amortizing this to expense n a straight-line method over the
initial life of the contract, which is ten years, and the book value at June 30,
2001, net of accumulated amortization is approximately $176,000.
Patent License
The patent license was a one-time fee paid to BI, Incorporated for the right to
use and embody 11 patents dealing with tamper technology that will transmit an
alarm all of which can be incorporated into the TSI technology. The Patent
License was fully executed on the 30th day of March 1995. Similar in many
respects to the agreement reached with Motorola, TSI was supplied with detailed
drawings, test information and data, which ensured the Company of the ability to
incorporate the technology.
Management has reviewed the patent license agreement and even though the Company
receives the benefit of paying no royalty under the agreement for the first
28,166 PASS units produced and then pays a fee of up to $6.00 per unit it has
chosen to use the straight-line method until such time as the number of units
actually produced exceeds the remaining value, wherein it would expense any
difference.
The approximate book value, net of accumulated amortization, at June 30, 2001
is $63,000
Software Development
The software system was acquired from Motorola as part of the Manufacturing
License Agreement. This system interprets signals sent by transmitters worn by
either staff and officers or the inmates and then indicates this information on
a display, which offered a unique management tool for the Corrections Industry.
Upon acquisition of the Manufacturing and Patent Licenses the Company laid out a
plan to further refine the system. The plan incorporated the miniaturization of
certain electronic and hardware components, the creation of the PASS unit (the
unit to be worn by inmates), and a plan to further develop the software
capabilities.
Over the course of the next five years, the Company continued to refine the
software system and display techniques spending approximately $716,000. The
complexity of the interaction of the signals, recognition of signal strengths,
differentiation on time of arrival signal stamping lead to internal software
interaction coding and decoding algorithms adjustments to ensure accuracy and
reliability.
The Company ceased capitalizing expenses upon the first sale of a system, which
was to the Town of Littlefield, Texas in Calendar Year 2000. Since that time the
Company is amortizing to expense on a straight line method over a period of five
years. At June 30, 2001 the approximate book value of the Software Development,
net of amortization is $596,000.
The Company is a Member of the American Correctional Association which was
founded in 1870. As a member the Company receives a wealth of information
regarding the Corrections Industry, which includes, among other things,
statistical information on the number of individuals incarcerated, the number
and type of current facilities, the number and type of facilities to be built in
the near future, capital budgets and differentiation of adult and juvenile
facilities by state within the United States. In the ACA's publication for the
year 2000, there were 1,203,198 adult individuals incarcerated in the United
States by the states and another 130,378 adult individuals incarcerated by the
Federal Bureau of Prisons. The juvenile population accounts for another 52,699
individuals, most of whom are in secure facilities. The number of Adult
facilities in the United States in 2000, was 874 male only population
institutions, 84 female only population institutions and 60 coed institutions
for a total of 1,018 institutions total whose Capital expenditure budgets for
new facilities and major renovation was almost 3 Billion Dollars US. These
Facilities Operating Budgets exceeded 26 Billion Dollars US in the year of 2000.
Management of the Company reviews the net values of intangible assets to
determine if the net carrying values are supported by net future cash flows. To
complete this review, management assumes the remaining useful life and projected
amortization expense, when applicable, competitive conditions, production lead
times and the projected sales revenue to be achieved utilizing those assets.
To date the Company has not had substantial cash flows, however, based upon
currently completed contracts, contracts under negotiations, proposals
outstanding and potential market, management believes the carrying values are
exceeded by the net future cash flows.
If for some reason the Company is unable to achieve its projected market
penetration in the near future (over the next five years), then the value of
these assets might be diminished.
The Company continues operations with a limited amount of working capital and
has relied upon investment capital from shareholders, loans from Officers,
Directors and Shareholders, and the continued cooperation of suppliers. Provided
that these Individuals and entities continue to support the Company, it believes
that it can maintain operations until such time as revenues generated from sales
will sustain the Company.
However, there can be no assurance that these Officers, Directors, Shareholders
and suppliers will continue or can continue to support the Company.
2. Results of Operations.
For the six months ending June 30, 2001 compared to June 30, 2000.
Revenues were down $185,312 (88.11%). The component of revenue for the period
ending June 30, 2000 was from the sale of a system to the City of Littlefield in
Texas versus the site engineering contract entered into with the State Of
Michigan on the WJ Maxey School for Boys Training for the period ending June 30,
2001. The Company does not believe that any particular significance should be
placed on the reduced revenue at this time as the Company's Marketing efforts
have just begun to coincide with several state's procurement processes.
Direct costs were down by $14,322 (40.04%) The Direct cost component at June 30,
2001, ($21,444) were costs incurred on the site design for the State Of
Michigan, WJ Maxey School for Boys Training versus the $35,766 incurred in the
beginning stage of the contract for installation of a system with the City of
Littlefield in Texas.
General and Administrative costs increased $302,053 (48.87%) over the prior
period. This increase can be attributed to an increase in the number of
management and marketing personnel and the fact that all software engineers have
been retained by the Company to continue to improve the system, design
installations and support installations as they come on line.
Interest expense decreased by $50,857 (30.69%) and can be attributed to the
reduction in borrowings which reduced interest expense.
For the year ending December 31, 2000 compared to December 31, 1999.
Revenues at December 31, 2000 were $472,982 as compared to $2,100 for the same
period in the prior year. Revenue for the period ending December 31, 2000 was
from the sale of a system to the City of Littlefield in Texas, which is the
Company's first commercial sale. Revenue for the prior period is from a
maintenance contract the responsibility of which the Company assumed from
Motorola during the acquisition of the Manufacturing License. The Company
believes that revenues for the next twelve to eighteen months may fluctuate
radically as acceptance of new technology in any industry can not be predicted.
Direct costs were $267,526 for the period ended December 31, 2000 and were all
associated with components purchased to fulfill the City of Littlefield, Texas
contract.
General and Administrative costs increased $431,970 (32.90%) over the prior
period. This increase can be attributed to an increase in the number of
management and marketing personnel and the fact that all software engineers have
been retained by the Company to continue to improve the system, design
installations and support installations as they come on line.
Interest expense increased by $287,335 (236.3 9%) and can be attributed to the
increase in borrowings to maintain operations. The increase in other expense is
associated with an adjustment in the carrying value of inventory.
<page>
APPENDIX J
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
UNAUDITED INTERIM FINANCIAL STATEMENTS
For the Three and Six Month Periods
Ended December 31, 2000 and 2001
INDEX
Financial Statements
Condensed Balance Sheets
December 31, 2001 (Unaudited) and
June 30, 2001 Audited................................. 3 - 4
Condensed Statement of Operations
For the Three Month Period Ended
December 31, 2001 and 2000 (Unaudited). .............. 5
Condensed Statement of Operations
For the Six Month Period Ended
December 31, 2001 and 2000 (Unaudited)................ 6
Condensed Statement of Cash Flows
For the Six Month Period Ended
December 31, 2001 and 2000 (Unaudited)................ 7
Notes to Condensed Financial Statements (Unaudited)............ 8
Management's Discussion and Analysis of Financial Condition
And Results of Operations............................... 9
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
A Nevada Corporation
BALANCE SHEET
as of June 30, 2001 (Audited) and December 31, 2001 (Unaudited)
ASSETS
December 31, June 30,
2001 2001
----------- -----------
CURRENT ASSETS
Cash $ 14,957 $ 339,146
Accounts receivable 55,577 5,147
Inventory 816,735 746,504
Prepaid expense 43,063 45,932
----------- -----------
Total current assets 930,332 1,136,729
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and fixtures 12,731 17,520
Computer equipment 87,278 95,550
Leasehold improvements 10,062 10,062
Office equipment 60,996 23,301
Marketing equipment 23,106 23,106
----------- -----------
Total property and equipment 194,173 169,539
----------- -----------
Accumulated depreciation (113,573) (111,382)
----------- -----------
Total property and equipment,
less accumulated depreciation 80,600 58,157
----------- -----------
DEVELOPMENT COSTS
Software development 716,044 716,044
Accumulated amortization (190,945) (119,341)
----------- -----------
Total development costs, less
accumulated amortization 525,099 596,703
----------- -----------
NON-CURRENT ASSETS
Deposits 10,525 10,664
Manufacturing license 470,000 470,000
Prepaid royalty expense 169,000 169,000
----------- -----------
Total other assets 649,525 649,664
----------- -----------
Accumulated Amortization (434,106) (401,337)
----------- -----------
Total other assets, less
accumulated amortization 215,419 248,327
----------- -----------
Total assets $ 1,751,450 $ 2,039,916
=========== ===========
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
A Nevada Corporation
BALANCE SHEET
as of June 30, 2001 (Audited) and December 31, 2001 (Unaudited)
LIABILITIES
December 31, June 30,
2001 2001
----------- -----------
CURRENT LIABILITIES
Trade accounts payable $ 180,656 $ 42,522
Other accounts payable 59,729 29,690
Accrued expenses payable 148,919
Taxes payable 37
Deferred Income 59,951
Royalties payable
Current maturities of long-term debt 1,596,500 1,264,542
----------- -----------
Total current liabilities 2,045,792 1,336,754
----------- -----------
LONG-TERM LIABILITIES
Note payable to related party 65,000 65,000
Note and obligation due to:
Officers and shareholders 419,500 24,671
European investor trust
BI Incorporated 10,000 15,000
EMS Technologies, Inc. 1,167,000 1,224,871
----------- -----------
Total long-term liabilities 1,661,500 1,329,542
Current maturities (1,596,500) (1,264,542)
----------- -----------
Total long-term liabilities, less
current maturities 65,000 65,000
----------- -----------
Total liabilities 2,110,792 1,401,754
----------- -----------
Preferred stock - 10,000,000 shares authorized $.001
par value; 0 shares issued and outstanding
Common stock - 25,000,000 shares authorized
$.001 par value; shares issued and outstanding
at June 30, 2001 21,715,010 shares 21,715
at December 31, 2001 21,715,010 shares 22,983
Addditional paid-in-capital 14,030,267 13,400,764
Common stock subscribed 530,408
Accumulated defecit (14,202,870) (13,105,130)
----------- -----------
Total stockholders' equity (deficit) (359,342) 638,162
----------- -----------
Total liabilities and stockholders' equity $ 1,751,450 $ 2,039,916
=========== ===========
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
A Nevada Corporation
STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 2001 AND 2000
BOTH PERIODS ARE UNAUDITED
December 31, December 31,
2001 2000
----------- -----------
Revenues
Sales income $ 55,532 $
Service income
Other discounts given (3,684)
Sales discounts given (2,513)
----------- -----------
Gross Revenue 55,532 (6,196)
----------- -----------
Direct Costs
Sales income 55,448 100,552
Royalty
Service income 30
----------- -----------
Total direct costs 55,478 100,552
----------- -----------
Gross Profit 54 (106,748)
----------- -----------
General and Administrative Expenses 399,452 793,518
----------- -----------
Net operating income (loss) (399,398) (900,266)
----------- -----------
Depreciation and amortization (57,263) (58,160)
----------- -----------
Other income (expense)
loss on disposition of assets (1,522)
Interest expense (45,622) (136,320)
Other income (expense) 9,259 (72,453)
----------- -----------
Total other income (expense) (37,884) (208,773)
----------- -----------
Net Income $ (494,545) $(1,167,199)
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.02) $ (0.06)
=========== ===========
Weighted average number of shares outstanding
during period reported on 22,533,923 18,293,061
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
A Nevada Corporation
STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2001 AND 2000
BOTH PERIODS ARE UNAUDITED
December 31, December 31,
2001 2000
----------- -----------
Revenues
Sales income $ 60,127 $ 268,867
Service income
Other discounts given (3,684)
Sales discounts given (2,513)
----------- -----------
Gross Revenue 60,127 262,670
----------- -----------
Direct Costs
Sales income 59,168 231,759
Royalty
Service income 30
----------- -----------
Total direct costs 59,198 231,759
----------- -----------
Gross Profit 929 30,911
----------- -----------
General and Administrative Expenses 814,507 1,126,973
----------- -----------
Net operating income (loss) (813,579) (1,096,063)
----------- -----------
Depreciation and amortization (114,885) (95,044)
----------- -----------
Other income (expense)
Loss on disposition of assets (1,522)
Interest expense (79,563) (243,079)
Other income (expense) (88,191) (103,441)
----------- -----------
Total other income (expense) (169,276) (346,520)
----------- -----------
Net Income (Loss) $(1,097,740) $(1,537,626)
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.05) $ (0.08)
=========== ===========
Weighted average number of shares outstanding
during period reported on 22,405,771 18,288,876
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
A Nevada Corporation
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2001 AND 2000
BOTH PERIODS ARE UNAUDITED
December 31, December 31,
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,097,867) $(1,537,626)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Gain on sale of asset (150)
Loss on sale of inventory 1,672
Write-off/scrap unusable inventory 94,430 358,393
Depreciation 10,513 11,777
Amortization 94,557 80,668
(Increase) decrease in assets:
Current assets (213,893) (60,894)
Increase (decrease) in liabilities:
Current liabilities 316,163 383,258
----------- -----------
Total adjustments 303,291 894,990
----------- -----------
Net cash (used in) operating activities: (794,576) (642,636)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (32,956) (9,734)
Additions to software development (29,793)
Addition to deposits (1,519) (1,488)
----------- -----------
Net cash (used in) investing activities: (34,476) (41,015)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 404,500 690,215
Payments on borrowings (100,000)
Proceeds from sale of stock 100,363 86,500
----------- -----------
Net cash provided by financing activities: 504,863 676,715
----------- -----------
(DECREASE) INCREASE IN CASH (324,189) (6,936)
----------- -----------
CASH AT BEGINNING OF PERIOD 339,146 8,903
----------- -----------
CASH AT END OF PERIOD $ 14,957 $ 1,967
=========== ===========
TECHNOLOGY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2001 AND 2000 (Unaudited)
Note 1 - Condensed Financial Statements
The condensed balance sheet as of December 31, 2001, the condensed statements of
operations for the three and six months ended December 31, 2001 and 2000, and
the condensed statements of cash flows for the three and six months ended
December 31, 2001 and 2000, have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, changes in shareholders' equity and statements of cash flows at
December 31, 2001 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's June 30, 2001 Audited Financial Statements.
The results of operations for the periods ending December 31, 2001, are not
necessarily indicative of the operating results for the full year.
Note 2 - Accounts Receivable
Of the current receivable, $55,000 is due TSI from the State of
Michigan, Family Independence Agency for the installation of cabling at the WJ
Maxey School for Boys Training.
Note 3 - Current Liabilities
The majority of the increase in accounts payable and accrued
expenses payable is as a result of the ongoing contract for installation at the
WJ Maxey School for Boys Training in the State of Michigan. Deferred income of
$59,951 has been recorded and represents the first year service and maintenance
contract on the WJ Maxey School for Boys. The deferred income will be
recognized, along with its expense, over the course of the contract, which is
one year from certification by the State of Michigan of acceptance of the
installation.
Note 4 - Note and Obligations due to Officer and Shareholders
Notes and obligations due to Officers and Shareholders increased by
$394,829, which funds were primarily used to fund ongoing operations.
Note 5 - Common Stock Subscribed
The decrease in Common Stock Subscribed is as a result of the
issuance of shares that were subscribed and paid for prior the Company's June
30, 2001 year end, but which shares were issued doing the period ending December
31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
1. Liquidity and Capital Resources.
As of December 31, 2001, the Company's current liabilities exceeded current
assets by $1,115,460, a ratio of 2.2:1. Over 75% of the current liabilities are
debt instruments owed to either Officers, Shareholders, or other related parties
who have continued to support the Company's effort to sell its proprietary
security system. The ability to continue to borrow working capital or revenues
generated from sales will be required for the Company to continue operations,
neither of which can be assured at this time.
The Company had completed a separate site preparation contract for the WJ Maxey
School for the Boys Training in the State of Michigan at December 31, 2001.
During the quarter ended March 31, 2002, the Company was in the process of
completing a system installation and certification at the same location related
to a $1 million contract.
During the period hereon reported, Officials from the Federal Bureau of Prisons
(FBOP), Corrections Corporation of America ("CCA") (a publicly traded company)
and Canada's Correctional Agency have all visited the Company's installation at
Calpatria in California. As a result of these visits, the Company is in
negotiations with FBOP for two installations, negotiating a potentially viable
private arrangement with CCA and has scheduled a second visit with Officials
from the Canadian Corrections Agency.
The Company entered into an Agreement to be acquired by a public company known
as Alanco Technologies, Inc. (Alanco) in December of 2001. Under the Agreement,
the Shareholders will receive approximately 1 share of Alanco's common stock for
every 4 shares of TSI outstanding and could earn an additional 3 shares of a new
class of common stock being created by Alanco if sales of TSI's system reach
goals which have been agreed to (See "Alanco - TSI Memorandum of Agreement")
Subsequent to period ending hereon reported, Alanco has loaned TSI $360,000 for
continuing operations and on March 14, 2001, Officials for the State of Michigan
certified the installation at the WJ Maxey School for Boys Training as
acceptable and the company should see the additional revenue shortly. Also
subsequent to period ending hereon reported, the Company received an advance of
$150,000 from State of Michigan, Family Independence Agency on a new contract
for a second installation.
These factors along with the continued support of the Company's shareholders
leads management to believe that it can continue to fund operations until such
time as revenues generated from sales will sustain the Company
2. Results of Operations.
Six months ending December 31, 2001 compared to six months ending December 31,
2000.
Revenues were down $202,543 (77.11%). The component of revenue for the period
ending December 31, 2000 was the sale of a system to the City of Littlefield in
Texas versus a separate site preparation contract entered into and completed
this period with the State Of Michigan on the WJ Maxey School for Boys Training.
Direct costs decreased by $172,561 (74.46%), most of which can be attributed to
the decrease in work associated with the corresponding component of Revenues.
General and Administrative expenses for the six months ended December 31, 2001
decreased by $312,399 or 27.7%, when compared to the comparable period of the
prior year. During the six months ended December 31, 2000, the Company expensed
$454,058 related to a beta test site located in Arizona. General &
administrative expense, net of the beta test site charge, actually increased by
$141,719, or 129%, dur to increases in personnel and related items.
Interest expense decreased by $163,516 (67.27%), most of which is associated
with the conversion of debt to equity which occurred prior to the end of the
Company's audited year ending June 30, 2001.
APPENDIX K
Semple & Cooper, LLP
Certified Public Accountants and Consultants
2700 North Central Avenue, Ninth Floor
Phoenix, Arizona 85004
Telephone (602) 241-1500 Fax (602) 234-1867
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report, dated August 30, 2001 on the financial statements
of Alanco Technologies, Inc. and Subsidiaries included in the Form DEF 14A.
/s/ Semple & Cooper
Certified Public Accountants
Phoenix, Arizona
March 18, 2002
APPENDIX L
Billie J. Allred
Certified Public Accountant
Post Office Box 1141
232 East 300 South
Pima, Arizona 85543
Telephone (928) 485-0678 Fax (928) 485-0105
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
As an independent certified public accountant, I hereby consent to the
incorporation of my report, dated August 5, 2001 on the financial statements of
Technology Systems International, Inc. included in the Form DEF 14A.
/s/ Billie J. Allred
Certified Public Accountant
Phoenix, Arizona
March 18, 2002