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 . . . . . . . . . . . . . . . . . . . .September 30, 1999
Commission file number. . . . . . . . . . . . . . . . . . . . . . . . . .0-9347
ALANCO TECHNOLOGIES, INC.
-------------------------
(Formerly reporting as Alanco Environmental Resources Corporation)
(Exact name of registrant as specified in its charter)
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)
(480) 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 November 12, 1999 there were 5,356,236 shares of common stock
outstanding.
Forward-Looking Statements: Some of the statements in this Form 10-QSB
Quarterly Report, as well as statements by the Company in periodic press
releases, oral statements made by the Company's officials to analysts and
shareholders in the course of presentations about the Company constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Words or phrases denoting the anticipated
results of future events such as "anticipate," "believe," "estimate," "will
likely," "are expected to," "will continue," "project," "trends" and similar
expressions that denote uncertainty are intended to identify such forward-
looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
the forward-looking statements. Such factors include, among other things,
(i) general economic and business conditions; (ii) changes in industries
in which the Company does business; (iii) the loss of market share and
increased competition in certain markets; (iv) governmental regulation
including environmental laws; and (v) other factors over which the Company
has little or no control.
ALANCO TECHNOLOGIES, INC.
INDEX
Page Number
PART I.FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets
September 30, 1999 and June 30, 1999 . . . . . 3
Consolidated Statements of Operations
For the three months ended September 30,
1999 and 1998 . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
For the three months ended September 30,
1999 and 1998 . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . 6
Note A - Basis of Presentation
Note B - Inventories
Note C - Sale of C.O.D. Mine
Note D - Segment Information
Note E - Year 2000 Issues
Note F - Subsequent Events
Acquisition of Arraid, Inc.
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . 8
PART II.OTHER INFORMATION
Item 1.Legal Proceedings . . . . . . . . . . . . . . . . 9
Item 4.Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . 9
Item 6.Exhibits . . . . . . . . . . . . . . . . . . . . . 9
Signature . . . . . . . . . . . . . . . . . . . . . . . . . .10
2
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND JUNE 30, 1999
ASSETS Sept 30, 1999 June 30, 1999
-----------------------------
Current Assets:
Cash and cash equivalents $ 953,859 $ 661,696
Accounts receivable, net 708,376 714,107
Notes receivable, net 187,447 178,692
Inventories 2,009,258 2,069,707
Prepaid expenses and other current assets 42,895 68,805
------------ -----------
Total current assets 3,901,835 3,693,007
Property, plant and equipment, net 1,643,906 1,696,949
Intangible assets 201,113 199,579
Other assets 108,561 123,517
Net assets of discontinued operations held for sale -- 2,443,000
Investments at cost (See Note C) 2,465,674 --
------------ ------------
Total assets $ 8,321,089 $ 8,156,052
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Capital lease & notes payable, current portion $ 269,991 $ 416,461
Accounts payable and accrued expenses 557,111 392,610
Billings in excess of costs and est earnings 142,153 173,395
----------- -----------
Total current liabilities 969,255 982,466
Capital lease and notes payable, long-term -- 9,394
Shareholders' equity
Preferred Stock, Class B, cumulative voting;
20,000,000 shares authorized and none issued
Common Stock, no par value, 100,000,000 shares
authorized;5,342,486 shares issued and
outstanding 54,097,719 53,790,219
Treasury stock, at cost;157,214 shares in 1999 (172,323) (172,323)
Accumulated deficit 46,573,562) (46,453,704)
------------- -------------
Total shareholders' equity 7,351,834 7,164,192
------------- -------------
Total liabilities & shareholders'
equity $ 8,321,089 $ 8,156,052
============ =============
The accompanying notes are an integral part of these financial statements.
3
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1999 and 1998
September 30
---------------------------
1999 1998
---------------------------
Net sales $ 1,682,342 $ 2,325,600
------------- -------------
Operating expenses:
Direct service and cost of goods sold 1,081,242 1,101,536
Selling, general and administrative 638,165 880,662
Depreciation and amortization 70,818 154,956
------------ -----------
Total operating expenses 1,790,225 2,137,154
Income (Loss) from operations (107,883) 188,446
Gain(loss) from disposal of assets (5,749) 7,588
Interest expense net of interest income (6,227) (44,669)
------------- ------------
Net income (loss) $ (119,859) $ 151,365
============= ============
Net income (loss) per common share $ (0.02) $ 0.03
============= ============
Weighted average common shares outstanding
(net of treasury stock)
Basic 5,049,225 5,050,683
Diluted 5,049,225 5,149,576
The accompanying notes are an integral part of these financial statements.
4
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 1999 and 1998
September 30
----------------------
1999 1998
----------------------
Cash flows from operating activities:
Net income(loss)from continuing operations $ (119,859) $ 151,365
Adjustments to reconcile net income(loss) to net cash
provided by operating activities:
Depreciation and amortization 54,305 154,955
(Increase) decrease in:
Accounts receivable 5,731 (215,604)
Cost & est earnings in excess of billing -- 105,070
Inventory 60,449 10,002
Prepaid expenses and other current assets 25,910 (71,898)
Other assets 14,956 16,744
Increase (decrease) in:
Accounts payable and accrued expenses 164,501 112,526
Billings in excess of costs and est earnings (31,242) 136,250
---------- ----------
Net cash provided by (used in) continuing operation 174,751 399,410
Cash flows from investing activities:
Purchase of property, plant and equipment (2,795) (8,997)
Other (31,249) (6,126)
---------- ----------
Net cash provided by investing activities (34,224) (15,123)
Cash flows from financing activities:
Payments on obligations, net (155,864) (440,928)
Exercise of stock options 307,500 --
---------- ----------
Net cash provided by (used in) financing activities 151,636 (440,928)
Net increase (decrease) in cash 292,163 (56,641)
---------- ----------
Cash and cash equivalents, beginning of period 661,696 1,116,216
----------- -----------
Cash and cash equivalents, end of period $ 953,859 $ 1,060,216
============ ============
Supplemental disclosure of non-cash operating,
investing activities:
Exchange of principal mining property for
Gold and Minerals, Inc. Convertible, Preferred
Stock. (See Note C.) $ 2,465,674 --
The accompanying notes are an integral part of these financial statements.
5
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED SEPTEMBER 30, 1999
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, 1999,
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 September 30, 1999, and for all
periods presented. The results of operations for the three months ending
September 30, 1999, 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 September 30, 1999, and June 30, 1999, is listed below:
September 30, 1999 June 30, 1999
-----------------------------------
Finished goods $1,361,844 $1,445,800
Work-in-process 208,722 243,100
Raw material 438,692 380,800
---------- ----------
$2,009,258 $2,069,700
========== ==========
Note C - Sale of C.O.D. Mine
During the quarter ended September 30, 1999, 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. Although management of the Company believes the
value of the underlying convertible preferred stock equals or exceeds the
carrying value of the mining property of approximately $2.5 million, the Company
is deferring recognition of any potential gain until such time as there exists
an active public market for G&M common stock. Furthermore, based on preliminary
G&M 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.
6
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.
Note D - Segment Information
Operating
Net Sales Income(Loss)
For Quarter Ended September 30, 1999 1998 1999 1998
------------------- -----------------
Pollution Control Products $ 1,606,500 $1,392,700 $ 151,600 $ 96,200
Food/Machinery Distribution 75,800 932,900 (56,600) 274,000
Mining -- -- (14,400) (15,900)
Corporate -- -- (149,500) (202,900)
---------------------- ---------------------
$1,682,300 $2,325,600 $ (68,900) $ 151,400
Note E: Year 2000 Issues
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, process invoices,
or engage in similar normal business activities.
Based on a recent assessment, including consultation with outside Management
Information Systems Analysts, the Company has made a determination to upgrade or
replace certain portions of its software so that the computer systems will
properly utilize dates beyond December 31, 1999. (The Company is currently
upgrading or replacing the identified software.) The Company believes that with
upgrades of existing software and conversions to new software, the Year 2000
Issue can be mitigated. However, if such upgrades and conversions are not made,
or are not completed or available timely, the Year 2000 Issue could have a
material impact on the operation of the Company.
The Company has initiated formal communications with its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. Expenditures in fiscal 1999 for the year 2000 project were nominal, and
management expects that completion of the project may result in additional
expenditures; however, the amount should not be material.
In view of the foregoing, there is reasonable assurance that the Year 2000
issues will not have a material adverse effect upon the Company. However, there
can be no guarantee that the systems of other companies on which the Company's
business relies will be timely converted, or that failure to convert by another
company, or a conversion that is incomplete with the Company's systems, would
not have a material adverse effect on the Company. The Company does not have a
formal contingency plan to resolve this issue. However, due to the Company's
diverse customer base, management anticipates the problems should be limited in
scope.
7
Note F - Subsequent Acquisition of Arraid, Inc.
During October 1999, the Company announced the acquisition, effective
October 1,1999, of Arraid, Inc. (Arraid), a provider of data storage
solutions for mid-range and mainframe computer systems. Arraid, established
in 1993, is located in Phoenix, Arizona.
Alanco acquired Arraid in an all-stock transaction consisting of an
initial payment of 800,000 shares of the Company's common stock, with
additional share payment dependent upon Arraid achieving its business plan
objectives for the year period beginning November 1, 1999.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1.Liquidity and Capital Resources
The Company's current assets at September 30, 1999 exceeded current
liabilities by $2.9 million, or a current ratio of 4 to 1, compared to
a current ratio of 3.8 to 1 at Fiscal Year End June 30, 1999. The
increase in the current ratio resulted from an increase in cash on hand,
primarily due to the exercise of stock options, and a reduction in current
liabilities due to the pay-down of note payable under normal terms.
Cash provided from continuing operations was approximately $174,800 for
the quarter compared to approximately $399,400 for the comparable quarter
ended September 30, 1998.
Net cash provided by financing activities was $151,600, compared to cash
used in financing activities of $440,900, an increase of $592,500. The
increase resulted from stock options exercised during the quarter and a
reduction in payments for capital lease obligations.
Results of Operations - Three months ended 9/30/99 versus 9/30/98
Consolidated revenue for the quarter ended September 30, 1999, was
$1,682,300 compared to $2,325,600 for the comparable quarter of the previous
year, a decreased revenue of $643,300, or 28%. The decreased revenues resulted
from a $857,100 decrease in food service revenue primarily due to the
termination of the Wal-Mart Contract. The pollution control segment increased
revenue by $213,800.
During fiscal year 1998, Wal-Mart, which accounted for approximately 45%
of the Company's consolidated revenue, terminated its contract with the Fry Guy
food service operations. Revenues for the quarter ended September 30, 1998
included significant Wal-Mart contract revenues, even though the contract had
ended prior to the current quarter.
The Company reported a net loss of $119,900, or $.02 per share for the
current quarter, compared to a net profit of $151,600, or $.03 per share, for
the comparable quarter in 1998. The net loss resulted from the decrease in
revenues and gross margin associated with the loss of the Wal-Mart contract.
Operating expenses decreased $346,900, or 16.2%, from the same time period
last year. The decrease was primarily in selling, general and administrative
expense, which decreased by $242,500, or 28%, and in depreciation and
amortization expense which decreased by $84,100, or 54%.
8
PART II.OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - none
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Alanco Environmental Resources Corporation was held
on November 5, 1999. During the meeting, the previously elected members of the
Board of Directors were re-elected (Proposal #1), with all directors receiving
at least 4,106,347 votes, or 78% of shares outstanding as of the record date.
The following additional proposals were voted upon with the indicated
results:
Proposal #2 Authorize the Board of Directors to declare,
only if necessary, a reverse split of up to
3 to 1.
Shares
------
For 3,936,718
Against 186,387
Abstain 12,257
Proposal #3 Approval of the Alanco 1999 Stock Option Plan
Shares
------
For 1,102,708
Against 107,020
Abstain 11,978
Broker not voted 2,913,657
Proposal #4 Approval of the Alanco 1999 Directors and Officers
Stock Option Plan.
Shares
------
For 1,084,223
Against 122,376
Abstain 15,107
Broker not voted 2,913,657
Proposal #5 Change Name to Alanco Technologies, Inc.
Shares
------
For 4,108,660
Against 16,940
Abstain 9,763
Item 6. EXHIBITS
(A) (27) Financial Data Schedule
(B) Reports on Form 8-K - none
(C) Reports on Form S-8 - none
(D) (10) Arraid, Inc. Acquisition Agreement and Plan of Reorganization
(E) (3.1) Articles of Amendment to Articles of Incorporation
9
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
Date: November 15, 1999
10
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<TOTAL-REVENUES> 1682342
<CGS> 1081242
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<LOSS-PROVISION> 30904
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and
entered into as of the 1st day of October, 1999, by and among ALANCO
ENVIRONMENTAL RESOURCES CORPORATION, an Arizona corporation
("Alanco"), AI ACQUISITION COMPANY, an Arizona corporation (AI),
ARRAID, INC., an Arizona corporation ("Arraid"), FRANK B MEIJERS
(Meijers), JOHN C. DAHL (Dahl), KEITH F. BLAICH (Blaich), BYRON
STOESER (Stoeser) and MICHAEL FLANNERY (Flannery),(Meijers, Dahl,
Blaich, Stoeser, and Flannery are sometimes collectively referred to
herein as the Arraid Shareholders").
RECITALS:
Arraid has identified significant new business opportunities related to
its present markets and technical expertise in an emerging high-growth
potential market termed "Storage Area Networks", or "SAN", and other computer
storage related business. Arraid has developed a business plan to
aggressively enter the SAN market that will require substantial additional
financing of up to $2,000,000 for the initial plan year, and self-funding
thereafter (the "Business Plan"). A copy of the Business Plan is attached
hereto as Exhibit A.
Alanco has been seeking new business areas for investment and is in the
process of divesting its primary assets and re-deploying its capital into new
business areas.
The respective Boards of Directors of Alanco and Arraid, as well as the
Arraid Shareholders, who own all of the issued and outstanding stock of
Arraid, have concluded that it is to their respective mutual advantage and
benefit to effect a reorganization whereby Arraid shall transfer its business
and substantially all of its assets to AI, which is a wholly owned subsidiary
of Alanco newly formed to receive the assets of Arraid as described herein,
solely in exchange for voting shares of Alanco and the assumption by AI of
the liabilities of Arraid 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 the parties that Arraid will thereafter, as an
integral part of the transaction, distribute the shares of Alanco to Arraid
Shareholders in complete liquidation of Arraid and dissolve.
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 Arraid to AI. Upon and subject to the terms and
conditions herein stated, Alanco, through AI, agrees to acquire from Arraid
and Arraid agrees to transfer, assign and convey to AI upon the date hereof,
free and clear of all debts, liens and encumbrances (except as otherwise
provided in this Agreement), all of the assets and properties of Arraid (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 Arraid, which are owned by Arraid or in
which Arraid has any interest (including the right to use), excepting only
the Excluded Assets (described in Sections 1.14 through 1.17 below) and any
of the foregoing which relate exclusively to the Excluded Assets. The Assets
shall include, but are not limited to, the following:
1
1.1 Inventories. All inventories, including, without limitation,
inventory of raw materials, work in process, storehouse stocks, materials,
supplies, finished goods and consigned goods owned by Arraid or in which
Arraid has any interest, whether located on Arraid's business premises, in
transit to or from such premises, in storage facilities or otherwise.
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
Arraid or in which Arraid has any interest, other than the Inventories.
1.3 Intangible Personal Property. All intangible personal property
including all intangible properties owned by Arraid or in which Arraid has
any interest, including, but not limited to (i) the name "Arraid" 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 Arraid), and all
drawings, records, books or other tangible media embodying the foregoing.
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 Arraid or in which Arraid has any interest.
1.5 Licenses and Permits. All licenses and permits issued to Arraid in
which Arraid 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 Arraid 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. Attached
hereto as Schedule 1.6 is a complete list of such Contracts and Other
Agreements.
1.7 Accounts Receivable. All accounts receivable of Arraid, 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 Arraid or in
which Arraid has any interest, together with all guarantees, security
agreements and rights and interests securing the same.
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
2
securities owned by Arraid or in which Arraid has any interest, other than
those, if any, which constitute Excluded Assets or relate exclusively to the
Excluded Assets.
1.9 Books and Records. All books and records of Arraid including
ledgers, employee records, customer lists, files, correspondence, and other
written records of every kind owned by Arraid or in which Arraid has any
interest, other than those, if any, which constitute Excluded Assets or
relate exclusively to the Excluded Assets.
1.10 Warranties. All warranties or other rights of Arraid under express
or implied warranties from suppliers or contractors with respect to the
Assets to the extent assignable.
1.11 Goodwill. All goodwill of Arraid as a going concern.
1.12 Tax Refunds. All of Arraid's rights to refunds of all or any part
of any taxes paid by Arraid in relation to periods prior to the date hereof.
1.13 Other Properties. All other properties, tangible and intangible,
not otherwise referred to above which are owned by Arraid 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 Arraid has agreed to sell to
Alanco are the following Assets ("Excluded Assets") which shall be retained
by Arraid:
1.14 Corporate Records. The stock record books, the corporate seal,
minute books and other documents and records relating to the organization of
Arraid, all of Arraid's tax and information returns; all correspondence
between Arraid and its shareholders; and all other financial records of
Arraid which do not relate in any way to Arraid's ownership and operation of
the Assets or its business; provided, however, that upon reasonable notice
from Alanco to Arraid or its successors in interest based upon reasonable
cause, Arraid 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 Arraid under this Agreement,
including the shares of Alanco stock to be received hereunder.
1.16 Treasury Shares. Any shares of Arraid's capital stock held in
treasury.
1.17 Claims Against Shareholders, Etc. All of Arraid's claims, causes
of action, choses in action, and rights of set-off of any kind against or
pertaining to its shareholders, officers and directors.
1.18 Specifically Excluded Assets. In addition to the assets set forth
in sections 1.4 through 1.7 above, the assets listed on Schedule 1.18
attached hereto shall also be Excluded Assets.
2.0 Assumption of Liabilities.
2.1 Assumed Liabilities. Upon and subject to the terms and conditions
herein stated, AI agrees to assume as of the date hereof and to pay, perform
and discharge all the liabilities of Arraid which are specifically set forth
on Schedule 2.1 attached hereto and made a part hereof (the "Assumed
Liabilities"). In the event that Arraid or the Arraid Shareholders have
3
personally guaranteed any of the Assumed Liabilities, Alanco and AI shall use
its best reasonable efforts to obtain their novation on such liabilities if
the same are not promptly paid by AI following the date hereof and shall
indemnify the Arraid Shareholders from any and all liabilities, costs or
expenses resulting from any such personal guarantees of the Assumed
Liabilities.
2.2 Excluded Liabilities. All of the liabilities not specifically
assumed by AI pursuant to paragraph 2.1 above shall remain the liabilities of
Arraid (the "Excluded Liabilities"). Arraid agrees to indemnify and hold
harmless AI, 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) Except as set forth in Schedule 2.1, all obligations and
liabilities with respect to employee wages and benefits, including
specifically, unfunded employee benefit plan obligations, and any taxes
related thereto accrued prior to the date hereof or severance obligation for
any personnel whose severance occurs prior to or on the date hereof.
(b) Any obligations of Arraid to perform this Agreement.
(c) Except as set forth in Schedule 2.1, any obligation or
liability of Arraid that is not accrued or incurred by Arraid on or before
the date hereof. Notwithstanding the foregoing, AI shall pay for goods in
transit to Arraid as of the date hereof upon their receipt. Arraid shall
provide a list of such goods in transit upon the date hereof.
(d) Any liability of Arraid to its stockholders not set forth on
Exhibit 2.1.
(e) Any liability of Arraid with respect to its outstanding shares
or any warrants, obligations, or rights to purchase its shares.
(f) Any liability for taxes, except as may be expressly assumed
hereunder.
(g) 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 Arraid the number of
shares of its common stock, no par value ("Common Stock"), and at such times
as follows:
3.1 Initial Payment at Closing. Alanco shall issue to Arraid 800,000
Common Shares upon the date hereof. Said issuance shall be in the form of
written instructions to Alanco's transfer agent instructing said agent to
promptly issue and forward a certificate for said shares to Arraid.
3.2 Deferred Payment Due On Or Before January 31, 2001. As soon as
reasonably possible after December 31, 2000, but on or before January 31,
2001, Alanco shall issue and deliver to Arraid (or to the Arraid Shareholders
if the right to receive the deferred payment of Common Shares has been
assigned to them upon liquidation of Arraid) up to 2,500,000 Common Shares,
the exact number of which (the "Deferred Common Shares") shall be determined
in accordance with the following formula (the "Deferred Payment Formula"):
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P = $[(A-B) - 5C] x 2,500,000 shares
$5,000,000
Where P =The number of Deferred Common Shares to be
issued.
A =The total sales revenue for AI for the
eleven (11)month period beginning November 1, 1999,
plus the average monthly sales revenue for the
months of October, November and December, 2000,
which total 12-month sales revenue must be no less
than $5,000,000.
B =The additional financing provided by Alanco pursuant
to Section 13.3 below, in the assumed amount of
$2,000,000 unless adjusted pursuant to Section 3.3
below.
C =The operating loss (based upon Arraid's current
accounting practices consistently applied) before
interest and income taxes of AI for the eleven month
period beginning November 1, 1999, plus the average
monthly operating losses for the months of October,
November and December, 2000.
In the event that the total sales revenue (A) is less than $5,000,000, then
no deferred payment shall be due hereunder.
Said shares shall not be registered under the Securities Act of 1933 or
any similar state securities laws, shall be registered in the name of Arraid
or the Arraid shareholders as instructed by Arraid, and shall be issued from
unreserved authorized, but unissued Common Stock of Alanco. Registration
rights for the Common Shares and Deferred Common Shares shall be in
accordance with the Registration Rights Agreement described below.
Notwithstanding the foregoing, the parties understand that issuance of
the Deferred Common Shares must be approved by the shareholders of Alanco
prior to the issuance thereof. It is the present intent of the Alanco Board
of Directors to recommend to the Alanco shareholders that they approve
issuance of the Deferred Common Shares pursuant to this Agreement. In the
event that such shareholder approval is not obtained, then Alanco shall pay
the Deferred Payment in cash in the amount equal to the value of the Deferred
Common Shares which would have been issued under the Formula. The value of
the Deferred Common Shares shall be determined by multiplying (i) the average
bid price for Alanco common stock as reported by NASDAQ for the twenty (20)
consecutive trading days ending on December 31, 2000, by (ii) the number of
the Deferred Common Shares which were to be issued under the Deferred payment
Formula.
3.3 Deferred Payment Dispute Resolution. The Arraid Business Plan
(attached hereto as Exhibit A), which is the basis for the Deferred Payment
Formula, projects total sales revenue for twelve (12) months commencing
November 1, 1999 (the "First Year of the Plan") of approximately $10,000,000
and a loss before interest and taxes of approximately $600,000. The Business
Plan assumes the availability of up to $2,000,000 in additional financing to
finance losses and meet additional working capital requirements. As set
forth in section 13.3 below, Alanco will provide such additional financing on
a best efforts basis through a variety of methods.
If, during the First Year of the Plan, Arraid, or a majority of the
Arraid Shareholders believe that Alanco is not properly funding the financing
requirements for the Business Plan, they shall immediately notify Alanco, in
5
writing, of the specific financing deficiency. Alanco and Arraid shall use
their best efforts to resolve the dispute on a mutually acceptable and timely
basis, and if they are not able to do so within ten days of the written
notice from Arraid or the Arraid Shareholders, they shall engage Ted
Nicholson to act as a mediator between the parties.
Following December 31, 2000, if Arraid, or the Arraid Shareholders
continue to believe that Alanco did not fund the financing requirements for
the Arraid Business Plan as agreed resulting in a smaller number of Deferred
Common Shares to be issued under the Formula, Arraid, or a majority of the
Arraid Shareholders may so notify Alanco and the parties shall use their best
efforts to resolve the dispute by determining the actual financing provided
by Alanco and the effect, if any, of any financing shortfall on the total
sales revenue realized, and using such determinations in the Deferred Payment
Formula. Again, if the parties are not able to resolve the issue within ten
days of the written notice from Arraid or the Arraid Shareholders, they shall
engage Ted Nicholson to act as a mediator between the parties. In the event
the parties are unable to satisfactorily resolve the dispute by January 31,
2001, Arraid may initiate resolution of the dispute through arbitration
before the American Arbitration Association in accordance with said
Association's Rules of Commercial Arbitration to interpret application of the
Deferred Payment Formula. In no event shall Alanco be obligated to issue
more than 2,500,000 Common Shares pursuant to Section 3.2 above. Such
arbitration shall be initiated on or before February 28, 2001 or forever be
barred.
4.0. Representations and Warranties of Arraid and the Arraid
Shareholders. Arraid and the Arraid Shareholders (other than Byron Stoeser)
represent and warrant to Alanco and AI as follows, and acknowledge and
confirm that Alanco and AI are relying upon such representations and
warranties in connection with the execution, delivery and performance of this
Agreement, notwithstanding any investigation made by Alanco or AI or on their
behalf:
4.1. Organization and Standing. Arraid 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. Arraid 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 Arraid or the nature of the business conducted
by Arraid makes such qualification necessary. Arraid 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. True and
accurate copies of Arraid's Articles of Incorporation, as amended, and
By-laws, as presently in effect, are attached as Schedule 4.1 to this
Agreement.
4.2. Capitalization. The authorized capital of Arraid consists solely
of 10,000,000 shares of Class A Common Stock, voting, $0.01 par value, all of
which are owned by the Arraid Shareholders, and 25,000 shares of Class B
Common Stock, non-voting, $0.01 par value, none of which have been validly
issued or are outstanding. All issued shares of capital stock have been
validly authorized and issued and are fully paid and nonassessable.
4.3. Subsidiaries. Arraid 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.
6
4.4. Authorization. Arraid 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
Arraid and its officers, directors and stockholders necessary for the
authorization, execution, delivery, and performance of all obligations of
Arraid under this Agreement has been taken prior to the Closing. This
Agreement, when executed and delivered, shall constitute a legal, valid and
binding obligation of Arraid and the Arraid Shareholders, 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 Arraid in connection with the execution, delivery or
performance of this Agreement or consummation of the transactions
contemplated hereby.
4.6. Compliance with Other Instruments. Arraid 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 to Arraid's
knowledge, of any provision of any federal or state judgment, writ, decree,
order, statute, rule, or governmental regulation applicable to Arraid.
4.7. Financial Statements. An unaudited balance sheet, income
statement and statement of cash flows as of and for each of the fiscal years
ending December 31, 1998, 1997 and 1996, and an unaudited balance sheet,
income statement and statement of cash flows as of and for the period ending
September 30, 1999 (collectively, the "Arraid Financials"), are attached
hereto as Schedule 4.7.
The Arraid Financials have been prepared by management, are true and
correct and fairly present the financial position of Arraid as of their
respective dates and the results of its operations for the periods then ended
and contain all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation. Arraid has established a
standard system of accounting and has consistently carried out and
administered the same. Except to the extent reflected or reserved against or
disclosed in the Arraid Financial Statements, as of their respective dates,
Arraid has not incurred any material liabilities or obligations of any kind,
whether accrued, absolute, contingent or otherwise, which should have been so
reflected or reserved against or disclosed (including, without limitation,
all liabilities to vendors and customers of Arraid).
It is anticipated that the current financial statements of Arraid for
the period ending as of September 30, 1999, including detailed supporting
schedules for inventory, assets and libilities, will be reviewed by
independent auditors selected by Alanco shortly after Closing. Such reviewed
financial statements shall reflect a net tangible book value for Arraid of
not less than $300,000.
4.8 Undisclosed Liabilities. Arraid 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 Arraid, which (i) have not been reflected in the Arraid 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 September 30, 1999, consistent with past practices.
7
4.9 Inventory. The inventory of Arraid, 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 Arraid or at Arraid's suppliers. The value at which Arraid's
inventory is reflected in the Arraid 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 Arraid. Arraid 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. Except as set forth in Schedule 4.10, no
amount included in the accounts receivable of Arraid as of September 30,
1999, has been released for an amount less than the value at which it was
included or is currently 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 Arraid, subject to any
counterclaim, refusal to pay or setoff not reflected in the reserves set
forth on the Arraid Financial Statements.
4.11. No Prebillings. Arraid has not prebilled or received payment,
and Arraid 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 date hereof, other than in the ordinary course of
business, which shall amount to not more than $5,000. Arraid 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. Except as set forth in Schedule 4.12, since September
30, 1999:
(a) Arraid has not entered into any transaction which was not in
the ordinary course of business;
(b) There has been no material adverse change in the condition
(financial or otherwise), business, property, assets or liabilities of Arraid
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 material damage to, destruction of or loss
of physical property (whether or not covered by insurance) adverse to the
business or operations of Arraid;
(d) Arraid 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 Arraid, and Arraid 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
Arraid;
(f) There has been no labor dispute involving Arraid or any of its
employees and none is pending or, to the best of Arraid's knowledge,
threatened;
(g) There have not been any changes, except in the ordinary course
of business, in the contingent obligations of Arraid, by way of guaranty,
endorsement, indemnity, warranty or otherwise;
8
(h) There have not been any loans made by Arraid to any of its
employees, officers or directors other than travel advances and office
advances made in the ordinary course of business;
(I) To Arraid's knowledge, there has been no litigation or
administrative agency charges or proceedings commenced involving, relating to
or affecting the business of Arraid; and
(j) There has been no other event or condition of any character
pertaining to and materially adverse to the Assets or business of Arraid.
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 Arraid are in good condition and repair, ordinary wear and tear
excepted, and suitable for the uses intended. The Assets have been
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. Arraid 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 set forth on Schedule 4.13. Schedule 4.13 identifies and
sets forth a complete list of each parcel of real estate or interest therein
owned or leased by Arraid. The buildings and improvements owned or leased by
Arraid 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 Arraid,
free and clear of all liens. No default or event of default on the part of
Arraid, 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
Arraid'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, Arraid (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 Arraid'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 Arraid'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 Arraid; and (vi) has
9
no notice, knowledge or belief that any of the technology or information used
in the conduct of its business was illegally obtained.
(c) Arraid 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 Arraid, free and clear of any liens, including
without limitation, all claims of current and former employees, consultants,
officers, directors and stockholders of Arraid.
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 Arraid is a party or by which it
is bound which (a) obligate Arraid to share, license or develop any product
or technology; (b) involve transactions or proposed transactions between
Arraid 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 $10,000; (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 Arraid 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 material
respects. Except as set forth in Schedule 4.15, Arraid has avoided every
condition and has not performed any act the occurrence of which would result
in Arraid's loss of any right granted under any license, distribution or
other agreement.
4.16 Catalogs and Promotional Literature. To Arraid's knowledge,
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. Arraid has provided
Alanco with, or made available to Alanco, copies of each catalog distributed
by Arraid during the past two (2) years.
4.17 Products; Warranty Provisions.
(a)Other than the standard warranties of Arraid as set forth in
Schedule 4.17 or product manufacturer warranties, there are no product
warranties applicable to its business, whether express, implied or otherwise.
There is adequate provision in the Arraid Financial Statements for
liabilities and obligations for damaged, defective or returned goods, or for
replacement of goods.
(b) Arraid has no pattern of claims or actions based upon
allegations of the same or similar product defect for any of its products.
(c) There has not been any material product recall, rework or
retrofit relating to any line of product manufactured, shipped or sold by
Arraid, nor, to Arraid's knowledge, is there any basis for any such product
recall, rework or retrofit.
4.18 Conflicts of Interest; Transactions with Principals. Except as
described in Schedule 4.18, no officer, director or stockholder of Arraid and
no affiliate (as defined under the Securities Act of 1933, as amended) of any
10
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
Arraid or which purchases services or products from Arraid or whose services
or products are similar to those furnished or sold by Arraid, or (b) a
beneficial interest in any contract, agreement or commitment to which Arraid
may be bound.
4.19 Outstanding Indebtedness. Arraid has no indebtedness for borrowed
money (including deferred compensation) which Arraid has directly or
indirectly created, incurred, assumed or guaranteed, or with respect to which
Arraid has otherwise become directly or indirectly liable, other than as
disclosed in Schedule 4.19 or the Arraid Financial Statements.
4.20 Employees. Except as set forth in Schedule 4.20, Arraid 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
Arraid and its employees, and Arraid is not a party to any union or
collective bargaining agreement. Arraid complied with all applicable federal
and state equal employment opportunity laws and other laws related to
employment. Arraid is not aware that any officer or key employee, or that
any group of key employees, intends to terminate their employment with Arraid
(or Alanco if Alanco elects to employ said persons subsequent to the date
hereof), whether as a result of the transactions contemplated hereby or
otherwise, nor does Arraid have a present intention to terminate the
employment of any of the foregoing (except subsequent to the date hereof).
To Arraid's knowledge, no employee of Arraid 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 Arraid because of the nature of the business conducted by
Arraid or for any other reason, and the continued employment by Arraid of its
present employees will not result in any such violation.
4.21 Employee Benefit Plans.
(a) Schedule 4.21 sets forth:
(I) all "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 Arraid or each trade or business under
common control with Arraid (as determined under Section 4001(b)(1) of ERISA,
an "ERISA Affiliate") or to which Arraid or any ERISA Affiliate has made
contributions during the preceding five (5) years (the "Welfare Plans"); and
(ii) all "employee pension benefit plans," as defined in Section
3(2) of ERISA, maintained by Arraid or any ERISA Affiliate or to which Arraid
or any ERISA Affiliate has made contributions during the preceding five (5)
years thereunder, including, without limitation, retirement, pension,
savings, profit sharing, severance and stock purchase programs (the "Pension
Plans"). The Welfare Plans and Pension Plans are hereinafter collectively
referred to as the "Employee Benefit Plans."
(b) No Arraid Employee Benefit Plan 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
11
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.
(c) Arraid 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").
(d) Arraid is in compliance with the notice and continuation
requirements of COBRA and the regulations thereunder.
(e) Arraid 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 Arraid.
(f) 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 Arraid.
4.22 Taxes. Arraid 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 Arraid ("Tax Returns"). Arraid has paid, or adequate provision has
been made on the Arraid 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 Arraid on
or after the date hereof in respect to the period prior to the date hereof,
except as shall be paid by Arraid. No unexpired waiver of the applicable
statute of limitations with respect to any taxable year has been executed by
Arraid. There are no tax examinations or audits underway involving Arraid.
4.23 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 or any of the Additional Agreements (as hereinafter defined), other
than taxes based upon the net income of the parties. Arraid shall be
responsible for and shall promptly pay any such sales, use, transfer or
conveyance taxes which become payable with respect thereto.
4.24 Insurance. All Assets of Arraid 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. Schedule 4.24 sets forth a list and
description of all of the policies of insurance and fidelity or surety bonds
carried by Arraid, including, but not limited to, fire, liability, product
liability, workers' compensation, officers' life, and directors' and
officers' liability insurance policies. Arraid has not failed to give any
notice or present any material claim under any insurance policy in due and
timely fashion and all insurance premiums due and payable by Arraid in
connection with the policies set forth on Schedule 4.24 prior to the date
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hereof have been paid. During the past five (5) years, Arraid has not
experienced any uninsured losses in respect of any claims against Arraid,
coverage for which claims customarily would be provided by the policies set
forth in Schedule 4.24 or predecessors thereto. 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. Arraid 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 Arraid 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
Arraid, 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
Arraid is in compliance with all conditions contained therein.
4.25 Disposal of Waste. Arraid has not disposed, spilled or deposited
at any time on any of the properties previously or currently owned or leased
by it, nor does it have any knowledge of such disposal, spill or deposit on
any of the properties currently owned or leased by it, any "Hazardous
Substance" in excess of the corresponding "Reportable Quantity" (as those
terms are defined in the Comprehensive Environmental Response compensation
and Liability Act, as amended ("CERCLA") or its state or local equivalent),
oil or petroleum in excess of 100 kilograms, or "Hazardous Waste" in any
quantity (as that term is defined in the Resource Conservation and Recovery
Act, as amended, or its state or local equivalent), or disposed, spilled or
deposited any Hazardous Substances, oil, petroleum, or Hazardous Waste
(collectively, "Materials"), the nature, amount, or concentration of which
would enable the United States Environmental Protection Agency or any state
regulatory agency to undertake or require the removal or remediation of such
Materials.
4.26. Other Environmental Matters. As to all operations relating to the
Business: (a) to Arraid's knowledge, Arraid has complied with all applicable
federal, state and local laws, regulations, rulings and guidelines
(collectively referred to as "Environmental Laws") in all material respects
relating to any Materials used, generated, managed, handled, treated, stored
or disposed of at, or moved or transported from, the sites where its business
is conducted; (b) Arraid has not received any notices that it has been
designated as a "Potentially Responsible Party," a "Responsible Party," (as
those terms are defined, used or construed pursuant to CERCLA or its state or
local counterparts) or a defendant in any action, suit or proceeding pursuant
to any Environmental Law; (c) to Arraid's knowledge, no Materials have been
delivered to any site listed by the United States Environmental Protection
Agency (i.e., CERCLA) or by any state as a site that actually or potentially
requires investigation or remedial action; (d) Arraid is not a party to, have
received notice of, or is aware of any actual or threatened litigation or
administrative proceedings concerning environmental claims or liabilities;
and (e) there are no environmental studies or reports in the possession or
control of Arraid.
4.27 Compliance With Laws.
(a) To Arraid's knowledge, Arraid 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.
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(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 Arraid to conduct its business.
4.28 Litigation. Except as set forth in Schedule 4.28, to Arraid's
knowledge, there is no action, suit, arbitration, proceeding or investigation
pending or threatened against Arraid before any court or administrative
agency, nor does Arraid know or have any reason to know of any basis for any
such action, proceeding or investigation. Arraid 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.
4.29 Full Disclosure; No Misrepresentation. Arraid 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
Arraid 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 and AI. Alanco and AI
represent and warrant to Arraid as follows, and acknowledge and confirm that
Arraid is relying upon such representations and warranties in connection with
the execution, delivery and performance of this Agreement, notwithstanding
any investigation made by Arraid or on its behalf:
5.1. Organization and Standing. Alanco and AI are corporations duly
organized, validly existing and in good standing under the laws of the State
of Arizona, have all of the requisite corporate power and authority and have
all of the licenses, permits, authorities and consents that are necessary to
own, operate and lease their properties and to carry on their 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. True and accurate copies of Alanco's and AI's Articles of
Incorporation, as amended, and By-laws, as presently in effect, are attached
as Schedule 5.1-1 and 5.1-2 to this Agreement.
5.2. Capitalization. (a) All issued and outstanding shares of capital
stock of Alanco have been validly authorized and issued and are fully paid
and nonassessable. The authorized capital of Alanco will consist solely of
(i) one hundred million (100,000,000) shares of Common Stock, of which, as of
October 6, 1999, 5,342,486 shares were validly issued and outstanding, fully
paid and nonassessable, (ii) five million (5,000,000) shares of Class A
Cumulative Convertible Preferred Shares, none of which are issued and
outstanding, and (iii) twenty million (20,000,000) shares of Class B
Cumulative Preferred Shares, none of which are issued and outstanding.
(b) The shares of Common Stock of Alanco to be acquired by the Arraid
pursuant to this Agreement are not subject to any transfer restrictions or
limitations except as provided in section 6 of this Agreement.
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5.3. Subsidiaries. Except for Alanco Environmental Manufacturing,
Inc., a Nebraska corporation, Alanco Environmental Technology (Beijing) Co.
Ltd., a People's Republic of China coporation, Fry Guy, Inc., a Nevada
corporation, and AI, an Arizona 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 Arraid 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 and AI have 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 AI and their officers, directors and stockholders
necessary for the authorization, execution, delivery, and performance of all
obligations of Alanco and AI 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 taken. This Agreement, when executed and
delivered, shall constitute a legal, valid and binding obligation of Alanco
and AI, 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 or AI in connection with the execution, delivery or
performance of this Agreement or consummation of the transactions
contemplated hereby. 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. Alanco' s Form 10-KSB for the fiscal year
ending June 30, 1999 (the "Alanco Financials"), is attached hereto as
Schedule 5.8.
The Alanco 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
the dates indicated therein and the results of their operations for the
15
periods represented. 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
Financials, 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 Financials, (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 June 30, 1999,
consistent with past practices.
5.10 Changes. Except as set forth in Schedule 5.10, since June 30,
1999:
(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, other than regularly scheduled
dividends on Alanco's preferred stock;
(e) There has been no litigation or administrative agency charges or
proceedings commenced involving, relating to or affecting their business; and
(k) 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
16
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 Disposal of Waste. Neither Alanco nor any Subsidiary has
disposed, spilled or deposited at any time on any of the properties
previously or currently owned or leased by them, nor do any of them have any
knowledge of such disposal, spill or deposit on any of the properties
currently owned or leased by it, any "Hazardous Substance" in excess of the
corresponding "Reportable Quantity" (as those terms are defined in the
Comprehensive Environmental Response compensation and Liability Act, as
amended ("CERCLA") or its state or local equivalent), oil or petroleum in
excess of 100 kilograms, or "Hazardous Waste" in any quantity (as that term
is defined in the Resource Conservation and Recovery Act, as amended, or its
state or local equivalent), or disposed, spilled or deposited any Hazardous
Substances, oil, petroleum, or Hazardous Waste (collectively, "Materials"),
the nature, amount, or concentration of which would enable the United States
Environmental Protection Agency or any state regulatory agency to undertake
or require the removal or remediation of such Materials.
5.14 Other Environmental Matters. As to all operations relating to the
business: (a) Alanco and its Subsidiaries have complied with all applicable
federal, state and local laws, regulations, rulings and guidelines
(collectively referred to as "Environmental Laws") in all material respects
relating to any Materials used, generated, managed, handled, treated, stored
or disposed of at, or moved or transported from, the sites where the Business
is conducted; (b) neither Alanco nor any Subsidiary has received any notices
that it has been designated as a "Potentially Responsible Party," a
"Responsible Party," (as those terms are defined, used or construed pursuant
to CERCLA or its state or local counterparts) or a defendant in any action,
suit or proceeding pursuant to any Environmental Law; (c) no Materials have
been delivered to any site listed by the United States Environmental
Protection Agency (i.e., CERCLA or NPL) or by any state as a site that
actually or potentially requires investigation or remedial action; (d)
neither Alanco nor any Subsidiary is a party to, have received notice of, or
is aware of any actual or threatened litigation or administrative proceedings
concerning environmental claims or liabilities; and (e) there are no
environmental studies or reports in the possession or control of Alanco or
any Subsidiary.
5.15 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.
5.16 Filings. Alanco has previously delivered to Arraid an accurate
and complete copy of each final report and definitive proxy statement,
together with all amendments or supplements required to be made with respect
thereto, filed since June 30, 1998 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,
17
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.
5.17 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.
5.18 Full Disclosure; No Misrepresentation. Alanco has fully provided
Arraid with all the information which Arraid has requested for deciding
whether to enter into this Agreement and all information which Alanco
believes is reasonably necessary to enable Arraid 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. Private Placement Status; Representations and Warranties of Arraid
and the Arraid Shareholders.
6.1 Arraid and the Arraid Shareholders represent and warrant as follows
and acknowledge and confirm 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) Arraid and the Arraid Shareholders have such knowledge and
experience in financial and business matters, or have relied upon advisors
who are so qualified, that they are capable of evaluating the merits and
risks of the investment by them in Alanco as contemplated by this Agreement
and are able to bear the economic risk of such investment for an indefinite
period of time. Arraid and the Arraid 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) Arraid is acquiring the Common Stock of Alanco for investment for
its own account and not with a view to, or for resale in connection with, any
distribution, other than transfer of the Common Stock to the Arraid
Shareholders in connection with the complete liquidation of Arraid. Arraid
and the Arraid Shareholders understand that the Common Stock of Alanco to be
issued to Arraid 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 Arraid's and the Arraid
Shareholders' representations expressed herein.
(c) Arraid and the Arraid Shareholders acknowledge that the Common
18
Stock of Alanco must be held indefinitely and 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) Arraid and the Arraid Shareholders have received from Alanco and
have reviewed the following public disclosure documents and reports of
Alanco: Alanco's 1999 and 1998 Annual Reports including Forms 10KSB and 10-K,
respectively, Alanco's Proxy Statement delivered to its shareholders for the
Annual Meetings of Shareholders held November 6, 1998 and to be held November
5, 1999, and Alanco's Form 10-Q for the Quarter ended March 31, 1999. Arraid
and the Arraid Shareholders have 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. Arraid and the Arraid Shareholders understand that such
discussions, as well as the written information provided by Alanco, were
intended to describe the aspects of Alanco's business and prospects which it
believes to be material but were not necessarily a thorough or exhaustive
description.
(e) Arraid and the Arraid Shareholders are sophisticated investors with
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) Arraid and the Arraid Shareholders, both by themselves and through
their agents, have been solely responsible for their "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, they have acted solely in their interest, and that neither they
nor any of their 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.
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
Arraid and the Arraid Shareholders contained herein, and the assumption of
the Assumed Liabilities by Alanco, Alanco waives compliance with the Arizona
bulk sales law.
8.0 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
19
Purchase Price) of the transactions contemplated by this Agreement and the
Additional Agreements 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 or any Additional Agreement.
9.0 Additional Agreements. The following additional agreements (the
"Additional Agreements") shall be executed and delivered by the parties
thereto as applicable upon the date hereof:
9.1 Registration Rights Agreement. Arraid, the Arraid Shareholders and
Alanco shall enter into a Registration Rights Agreement substantially in the
form of Exhibit B attached hereto with respect to the shares of the Common
Stock to be acquired by Arraid from Alanco.
9.2 Lease Agreement. Arraid Properties, L.L.C., as landlord, and AI,
as tenant, shall enter into a Lease Agreement ("Lease") with respect to the
business premises presently used by Arraid as its primary business premises
in the form of Exhibit C attached hereto.
9.3. Covenants Not to Compete. The Arraid Shareholders, individually,
excluding Byron Stoeser, and Alanco shall enter into the Non-Competition and
Non-Disclosure Agreements attached hereto as Exhibits D-1 through D-4,
respectively.
10.0 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.
11.0 Closing. The closing ("Closing") shall occur at the offices of
Alanco,15900 North 78th Street, Suite 101, Scottsdale, Arizona 85260. The
Closing shall constitute the acts which take place on the date hereof (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 October 1, 1999.
12.0 Closing Documents. On the Closing Date, the parties shall
exchange documents as follows:
12.1. Delivery by Arraid. Arraid shall deliver to Alanco:
(a) A copy of the resolutions duly adopted by the Board of Directors
and shareholders of Arraid authorizing and approving the execution, delivery
and performance of this Agreement and the applicable Additional Agreements,
and the execution and delivery of any and all other documents and agreements
contemplated hereunder and thereunder, certified by the Secretary of Arraid.
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(b) The opinion of counsel to Arraid dated as of the Closing Date to
Alanco to the following effect:
(1) Arraid 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
Arraid and this Agreement has been duly executed and delivered by
Arraid and constitutes a valid and binding obligation of Arraid
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 therefore 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 Arraid
or its obligations hereunder.
(3) To the best of said counsel's knowledge Arraid 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, Arraid or Arraid's
properties or business or the transactions contemplated under
this Agreement.
(c) 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
Arraid in and to the Assets to be conveyed hereunder. Any sales and transfer
taxes imposed upon Arraid in connection with the sale and transfer of assets
hereunder shall be paid by Arraid.
(d) A copy of the Articles of Incorporation and the By-Laws of Arraid,
as amended, certified by the Secretary of Arraid.
(e) The Additional Agreements.
(f) 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 Arraid:
(a) A copy of the resolutions duly adopted by the Board of Directors of
Alanco and AI authorizing and approving the execution, delivery and
performance of this Agreement and the applicable Additional Agreements, 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.
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(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 Arraid of a stock certificate representing 800,000 shares of
Alanco Common Stock issued in the name of Arraid. 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) The opinion of counsel to Alanco dated as of the Closing Date to
Arraid to the following effect:
(1)Alanco and AI are corporations duly organized, validly
existing and in good standing under the laws of the State of
Arizona, and are entitled to own their properties and to carry on
their 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 AI and this Agreement has been duly executed and
delivered by Alanco and AI and constitutes valid and binding
obligations of Alanco and AI 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 AI or their 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 AI or their properties or business or the transactions
contemplated under this Agreement.
(4) The shares of Alanco Common Stock to be issued to Arraid,
when issued, shall be fully paid, non assessable, and validly
issued.
(d) The Additional Agreements.
(e) Copies of the Articles of Incorporation and the By-Laws of Alanco
and AI, as amended, certified by the Secretary of each.
(f) Such further instruments or other documents as Arraid 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.
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13.0 Post-Closing Covenants.
13.1 Arraid Employee Stock Options. Promptly following the Closing,
Alanco shall grant a total of 150,000 options to acquire Alanco Common Stock
to employees of AI other than the Arraid Shareholders. Such options shall be
exercisable at the closing price for Alanco Common Stock as of the Closing
Date and shall vest and otherwise be subject to the Alanco Employee Stock
Option Plan.
13.2 Recruiting Stock Options. During the twelve (12) month period
following the Closing Date, Alanco shall provide additional options to
acquire up to 500,000 shares of Alanco Common Stock for the recruitment of
executive-level employees required to accomplish the Business Plan objectives
of Arraid.
13.3 Financing. Alanco shall use its best reasonable efforts to
provide the financing required for implementation of the Business Plan in
accordance with the projected initial year required capital of up to
$2,000,000. Such Alanco financing will be utilized to compensate for cash
flow operating losses and for working capital requirements reflected in the
Business Plan. In the event that Arraid's business is substantially under
performing with respect to the Business Plan during said initial year, Alanco
shall not be obligated to continue to provide financing pursuant to the
Business Plan until the parties mutually determine appropriate modifications
to, and financing requirements under the Business Plan. In addition to
direct cash infusion to AI in the form of either capital contributions or
loans, Alanco "financing" may include indirect financial assistance such as
vendor discount negotiation, vendor guarantees, bank or other lender
guarantees, collateral agreements, cash management procedures, and the like.
13.4 Alanco Board Membership. The Arraid Shareholders shall have the
right to nominate one non-employee director to serve on the Alanco Board of
Directors effective upon the Board of Directors meeting which is scheduled to
occur coincident with the annual shareholders meeting for Alanco scheduled
for November 5, 1999. Such nominee shall be subject to approval by a
majority of the present Alanco Board. The current Alanco Board intends to
nominate such approved nominee for election to the Board for at least two
consecutive one-year terms.
13.5 AI Board Membership. Promptly following the Closing Date, the AI
Board of Directors shall be comprised of Robert R. Kauffman (Chairman), John
A. Carlson, Steven P. Oman, Frank B. Meijers, and John C. Dahl. Alanco shall
vote its stock in AI to continue Frank B. Meijers and John C. Dahl as
directors of AI through at least January 31, 2001.
13.6 Change of Arraid Corporate Name. Promptly following the Closing,
Arraid shall take all necessary actions to formally change its corporate name
to a name which does not use the name "Arraid" or any name similar thereto,
and the Arraid Shareholders shall cause Arraid Properties, L.L.C. to consent
to the use of "Arraid" as part of the name of AI following the Closing.
13.7 Increase or Reduction in Deferred Common Shares. If, and to the
extent that the number of shares of Alanco common stock shall be increased or
reduced by whatever action, including, but not limited to, change of par
value, split-up, reclassification, distribution or a dividend payable in
stock, or the like, the number of Deferred Common Shares to be delivered to
Arraid or the Arraid Shareholders pursuant to this Agreement shall be
proportionately adjusted. In the event Alanco is reorganized, consolidated
or merged with another corporation, Arraid or the Arraid Shareholders shall
23
be entitled to receive shares of such reorganized, consolidated or merged
company in the same proportion, at an equivalent price, and subject to the
same conditions as those received by the other Alanco shareholders with
respect to the number of Deferred Common Shares to be issued to Arraid or the
Arraid Shareholders pursuant to this Agreement.
14.0 Indemnification.
14.1 Arraid and the Arraid Shareholders. Arraid and the Arraid
Shareholders agree to and do hereby indemnify, and hold harmless Alanco and
AI, their 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 Arraid or the Arraid Shareholders to perform any of
their warranties, representations, guarantees, commitments, covenants, or
conditions under this Agreement. Arraid and the Arraid Shareholders shall
remain liable for all claims, liabilities, debts, defaults and obligations,
whether or not known, which are not expressly assumed hereunder by Alanco and
Arraid and the Arraid Shareholders shall defend at their entire expense,
including reasonable attorney's fees and other costs of litigation, and
indemnify and hold harmless Alanco and AI against any and all such claims,
debts, defaults, obligations, liabilities or suits. In no event shall the
indemnities by Arraid or the Arraid Shareholders exceed the value of the
Alanco Common Shares received by them hereunder, and such indemnity
obligations may be satisfied by Arraid or the Arraid Shareholders tendering
such Alanco Common Shares to Alanco.
14.2 Alanco and AI. Alanco and AI agree to and hereby indemnify and
hold harmless the Arraid Shareholders and Arraid, 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 Arraid or the Arraid Shareholders may incur or suffer by reason of a
breach of or failure by Alanco or AI to perform any of its warranties,
representations, guarantees, commitments or covenants in this Agreement, or
by reason of any act or omission of Alanco or AI subsequent to the Closing
Date which constitutes a breach or default hereunder.
15. 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 Arraid) or
corporation or other entity, other than the Arraid Shareholders, Arraid,
Alanco and AI, and this Agreement shall be for the sole and exclusive benefit
of the Arraid Shareholders, Arraid, Alanco and AI.
16. 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. 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:
24
(a) if to Arraid or the Arraid Shareholders:
26 West Lone Cactus Drive
Phoenix, Arizona 85027
with a copy to:
Charles R. Berry, Esq.
Titus, Brueckner & Berry
7373 N. Scottsdale, RD., Suite B252
Scottsdale, Arizona 85253-3527
(b) if to Alanco or AI:
15900 North 78th Street, Suite 101
Scottsdale, Arizona 85260
Attn: Robert R. Kauffman, Chairman
with a copy to:
Steven P. Oman, Esq.
14001 N. 50th Street
Scottsdale, Arizona 85254
18. 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. Entire Agreement. This Agreement and the Additional Agreements
contain all of the terms agreed upon by the parties with respect to the
subject matter hereof and thereof and there are no representations or
understandings between the parties except as provided herein and therein.
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. 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. 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. 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. 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
25
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. 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.
ARRAID, INC.
an Arizona corporation
By:
/s/ Frank B. Meijers, President
----------------------------
Frank B. Meijers, President
/s/ Frank B. Meijers
--------------------------------
FRANK B. MEIJERS
/S/ John C. Dahl
--------------------------------
JOHN C. DAHL
/s/ Keith F. Blaich
--------------------------------
KEITH F. BLAICH
/s/ Byron Stoeser
---------------------------------
BYRON STOESER
/s/ Michael Flannery
---------------------------------
MICHAEL FLANNERY
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
an Arizona corporation
By: /s/ Robert R. Kauffman
-------------------------------------------
Robert R. Kauffman, Chief Executive Officer
AI ACQUISITION COMPANY
an Arizona corporation
By: /s/ Robert R. Kauffman
-------------------------------------------
Robert R. Kauffman, Chairman
26
ARTICLES OF AMENDMENT TO
ARTICLES OF INCORPORATION OF
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
Pursuant to A.R.S. #10-1006, Alanco Environmental Resources Corporation,
An Arizona corporation, hereby adopts the following Articles of Amendment to
its Articles of Incorporation.
1. The name of the Corporation before the adoption of the amendment: ALANCO
ENVIRONMENTAL RESOURCES CORPORATION
2. The Amendment to the Articles of Incorporation as adopted:
RESOLVED, that Article I of the Articles of Incorporation of this
Corporation be, and is hereby is, amended to read as follows:
ARTICLE I: The name of the Corporation shall be ALANCO
TECHNOLOGIES, INC.
3. The Amendment to Articles of Incorporation was adopted by the
Shareholders on November 5, 1999.
4. At the time of adoption of the Articles of Amendment, 5,342,486 shares
of the common stock of the Corporation were issued and outstanding and entitled
to vote on said amendment. 4,139,978 were represented at the meeting, and
4,113,275 shares voted in favor of the amendment. The number of shares cast in
favor of the amendment was sufficient for approval of the amendment.
IN WITNESS WHEREOF, the President of the Corporation, acting for and
on behalf of the Corporation, has executed these Articles of Amendment this 4th
day of November, 1999.
/s/Robert R. Kauffman
- ---------------------------------
ROBERT R. KAUFFMAN, President
