ALANCO TECHNOLOGIES, INC
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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For the transition period from to
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Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Arizona
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(State or other jurisdiction of incorporation or organization)
86-0220694
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(I.R.S. Employer Identification No.)
15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
(480) 607-1010
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of November 1, 2003 there were 15,261,900 shares , net of treasury shares,
of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No X
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1
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.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2003 (unaudited) and June 30, 2003 .........3
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended September 30,
2003 and 2002......................................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the three months ended September 30,
2003 and 2002..........................................5
Notes to Condensed Consolidated Financial
Statements (Unaudited)
.......................... 7 Note A - Basis
of Presentation Note B - Inventories Note C
- Contracts in Process Note D - Deferred
Revenue Note E - Loss per Share Note F -
Sale of Common Shares Note G - Industry
Segment Data Note H - Related party
Transactions Note I - Line of Credit Note J
- Litigation Note K - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...............11
PART II. OTHER INFORMATION
Item 6. Exhibits ..................................................16
Signature .................................................16
2
ALANCO TECHNOLOGIES, INC.AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003 AND JUNE 30, 2003
ASSETS
Sept. 30, 2003 June 30,
2003
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CURRENT ASSETS (unaudited)
Cash $ 177,100 $ 97,700
Accounts receivable, net 740,300 808,500
Subscription receivable -- 899,200
Inventories, net 1,344,900 1,278,700
Prepaid expenses and other current assets 88,900 53,100
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Total current assets 2,351,200 3,137,200
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PROPERTY, PLANT AND EQUIPMENT, NET 315,100 343,800
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OTHER ASSETS
Goodwill, net 5,351,300 5,351,300
Other intangible assets 856,700 911,700
Long-term notes receivable, net 254,200 291,000
Net assets held for sale 209,700 223,200
Other assets 59,000 61,200
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Total other assets 6,730,900 6,838,400
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TOTAL ASSETS $ 9,397,200 $ 10,319,400
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LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,421,700 $ 1,636,100
Credit line 799,500 874,000
Capital leases, current 18,000 24,600
Deferred revenue, current 76,000 76,000
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Total Current Liabilities 2,315,200 2,610,700
LONG TERM LIABILITIES
Notes payable and capital leases, long term 1,170,100 1,170,100
Deferred revenue, long term 25,200 25,200
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TOTAL LIABILITIES 3,510,500 3,806,000
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Preferred Stock - Series B, 500,000 shares
authorized, 55,900 and 54,500 shares issued
and outstanding, respectively 559,300 545,900
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SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible,
5,000,000 shares authorized, 2,509,400 and
2,248,400 shares issued and outstanding,
respectively 2,957,200 2,653,200
Common Stock, 20,768,300 and 20,609,100
shares issued and 15,249,500 and 15,612,200
shares outstanding, respectively 65,088,400 65,014,000
Treasury Stock, 5,518,800 and 4,996,900
shares at cost (2,282,300) (2,084,000)
Accumulated deficit (60,435,900) (59,615,700)
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Total shareholders' equity 5,327,400 5,967,500
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 9,397,200 $ 10,319,400
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See accompanying notes to the consolidated financial statements
3
ALANCO TECHNOLOGIES, INC.AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30th
2003 2002
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NET REVENUES $ 1,037,400 $ 2,391,600
Cost of goods sold 644,700 1,497,500
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GROSS PROFIT 392,700 894,100
Selling, general and administrative expense 1,119,900 1,333,700
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OPERATING LOSS (727,200) (439,600)
OTHER INCOME & EXPENSES
Interest income (expense), net (82,700) (27,100)
Other income, net 3,200 7,300
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LOSS FROM OPERATIONS (806,700) (459,400)
Preferred stock dividend (13,500) (12,600)
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (820,200) $ (472,000)
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LOSS PER SHARE - BASIC AND DILUTED
- Loss from operations $ (0.05) $ (0.03)
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- Net loss attributible to common shareholders $ (0.05) $ (0.03)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 15,176,200 17,032,800
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See accompanying notes to the consolidated financial statements
4
ALANCO TECHNOLOGIES, INC.AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Loss from operations $ (808,900) $ (468,500)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 87,000 113,400
Stock and warrants issued for services and
cancellation of stock put options charged
to interest expense 74,400 18,100
Gain on disposal of asset (1,000) --
Changes in:
Accounts receivable, net 68,200 (397,600)
Inventories, net (66,200) (256,500)
Prepaid expenses and other current assets (35,800) (5,500)
Accounts payable and accrued expenses (214,400) 593,300
Other 2,200 --
Deferred revenue -- 206,500
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Net cash used in continuing operations (894,500) (196,800)
Net cash from discontinued operations 15,700 22,100
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Net cash used in operating activities (878,800) (174,700)
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CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 36,800 3,200
Purchase of property, plant and equipment (5,900) (6,100)
Proceeds from the sale of property, plant
and equipment 3,500 --
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Net cash used in investing activities 34,400 (2,900)
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CASH FLOWS FROM FINANCING ACTIVITIES
Advances on borrowings 788,500 555,100
Repayment on borrowings (869,600) (526,900)
Subscriptions receivable 899,200 --
Proceeds from sale of Preferred Stock 105,700 --
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Net cash provided by (used in) financing
activities 923,800 28,200
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NET INCREASE (DECREASE) IN CASH 79,400 (149,400)
CASH AND CASH EQUIVALENTS, beginning of period 97,700 328,400
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CASH AND CASH EQUIVALENTS, end of period $ 177,100 $ 179,000
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See accompanying notes to the consolidated financial statements
5
ALANCO TECHNOLOGIES, INC.AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Continued)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
2003 2002
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Net cash paid during the period for interest $ 32,800 $ 27,300
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Non-Cash Activities:
Value of stock & stock options issued for services $ 3,600 $ 18,100
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Value of stock issued for cancellation of put
option $ 49,900 $ --
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Preferred stock dividends, in kind $ 13,500 $ 12,600
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Value of treasury stock redeemed in preferred
stock and warrant issuance $ 198,300 $ --
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See accompanying notes to the consolidated financial statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2003
Note A - Basis of Presentation
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or
"Company"), operates in two business segments: Computer Data Storage Segment
and RFID Technology Segment.
The unaudited condensed consolidated balance sheet as of September 30,
2003 and the related unaudited condensed consolidated statements of operations
and cash flows for the three months ended September 30, 2003 presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America 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. Accounting principles assume the continuation of the
Company as a going concern. The Company's auditors, in their opinion on the
financial statements for the year ended June 30, 2003, expressed a concern about
this uncertainty. The accompanying financial statements do not include any
adjustment that might arise from the outcome of this assumption. In our
opinion, the accompanying condensed consolidated financial statements include
all adjustments necessary for a fair presentation of such condensed consolidated
financial statements. Such necessary adjustments consist of normal recurring
items and the elimination of all significant intercompany balances and
transactions.
These interim condensed consolidated financial statements should be
read in conjunction with the Company's June 30, 2003, Annual Report on Form
10-KSB. Interim results are not necessarily indicative of results for a full
year.
Certain reclassifications have been made to conform prior period
financials to the presentation in the current reporting period. The
reclassifications had no effect on net loss.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's Common Stock on the date of grant.
In accordance with accounting for such options utilizing the intrinsic value
method under APB 25, there is not related compensation expense recorded in the
Company's financial statements for the three months ended September 30, 2003 and
2002. Had compensation cost for stock-based compensation been determined based
on the fair value of the options at the grant dates consistent with the method
of SFAS 123, the Company's net loss and loss per share would have been increased
to the pro forma amounts presented below:
7
3 months ended September 30,
2003 2002
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Net loss, as reported $ (820,200) $ (472,000)
Add: Stock-based Employee compensation expense
included in reported income, net of related tax
effects -- --
Deduct: Total stock-based Employee compensation
expense determined under fair value based
methods for all awards, net of related tax
effects (255,300) (82,500)
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Pro forma net loss $ (1,075,500) $ (554,500)
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Net loss per common share, basic and diluted
As reported $ (0.05) $ (0.03)
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Pro forma $ (0.07) $ (0.03)
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During the quarter ended September 30, 2003, the Company granted
employee stock options to purchase 1,365,000 shares of the Company's Class A
Common Stock at a purchase price of $0.37, market price on date granted The fair
value of option grants is estimated as of the date of grant, in accordance with
SFAS 123, utilizing the Black-Scholes option-pricing model, with the assumptions
utilized in the year end financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." This statement provides alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based
compensation. The statement amends the disclosure requirements of FASB Statement
No. 123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company accounts for
stock-based compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of FASB Statement No.
123. The Company implemented the required disclosure provisions. The adoption of
this statement did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows as the Company does not
anticipate making the voluntary change to the fair value method of accounting
for stock-based compensation.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" (SFAS 150). This statement
affects the classification, measurement and disclosure requirements of the
following three types of freestanding financial instruments: 1) mandatory
redeemable shares, which the issuing company is obligated to buy back with cash
or other assets; 2) instruments that do or may require the issuer to buy back
some of its shares in exchange for cash or other assets, which includes put
options and forward purchase contracts; and 3) obligations that can be settled
with shares, the monetary value of which is fixed, tied solely or predominantly
to a variable such as a market index, or varies inversely with the value of the
issuers' shares. In general, SFAS 150 is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS 150 did not
have an impact on the Company's consolidated financial position or disclosures.
8
Note B - Inventories
Inventories have been recorded at the lower of cost or market. The
composition of inventories as of September 30, 2003, and June 30, 2003, are
summarized as follows:
September 30, 2003 June 30,2003
(unaudited)
Purchased Materials and Parts $ 1,070,000 $ 1,007,000
Work-in-process 259,500 260,400
Finished Goods 193,200 199,700
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Less - reserve for obsolescence (177,800) (188,400)
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Total $1,344,900 $ 1,278,700
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Note C -Contracts In Process
As of September 30, 2003 the Company has no fixed price contracts in
progress that qualified for percentage-of-completion method of accounting.
Note D - Deferred Revenue
Deferred Revenues at September 30, 2003 and June 30, 2003 consist of the
following:
September 30, 2003 June 30, 2003
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(unaudited)
Extended warranty revenue $ 101,200 $ 101,200
Less - current portion (76,000) (76,000)
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Deferred revenue - long term $ 25,200 $ 25,200
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Note E- Loss Per Share
Basic loss per share of common stock was computed by dividing net loss
by the weighted average number of shares outstanding of common stock.
Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during the
period. Dilutive securities are options and warrants that are freely exercisable
into common stock at less than the prevailing market price. Dilutive securities
are not included in the weighted average number of shares when inclusion would
increase the earnings per share or decrease the loss per share. As of September
30, 2003, there were 12,953,200 potentially dilutive securities outstanding.
Note F - Sale of Common Shares
During the quarter ended September 30, 2003, the Company completed its
Series A Convertible Preferred Stock ("Preferred Stock") offering whereby the
Company exchanged a Series A share and a warrant to purchase a share of the
Company's Class A Common Stock at $.50 ("Warrant"), for two shares of Class A
Common Stock ("Common") and $.50. During the quarter, the Company issued 261,000
Shares of Preferred Stock and warrants to purchase 261,000 shares of Common
Stock at $.50 in exchange for 521,900 shares of Class A Common Stock (classified
as Treasury Stock at September 30, 2003) and $130,500.
9
Note G - Industry Segment Data
Information concerning operations by industry segment follows (unaudited):
Three Months Ended 9/30
2003 2002
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Revenue
Data Storage $ 1,035,400 $ 909,200
RFID Technology 2,000 1,482,400
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Total Revenue 1,037,400 2,391,600
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Gross profit
Data Storage 396,000 399,900
RFID Technology (3,300) 494,200
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Total Gross Profit 392,600 894,100
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Operating Loss
Data Storage (22,100) (169,100)
RFID Technology (499,600) (43,500)
Corporate Expense (205,500) (227,000)
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Operating Loss (727,200) (439,600)
============ ============
Depreciation and Amortization
Data Storage $ 8,000 $ 35,900
RFID Technology 76,900 74,600
Corporate 2,100 2,900
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Total Depreciation and Amortization $ 87,000 $ 113,400
============ ============
Identifiable assets
Data Storage $ 1,929,100 $ 1,823,900
RFID Technology 6,926,200 7,058,400
Corporate 541,900 1,437,100
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Total Assets $ 9,397,200 $ 10,319,400
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Note H- Related Party Transactions
The Company has a line of credit agreement, more fully discussed in the
Company's Form 10-KSB for the year ended June 30, 2003, with a private trust
controlled by Mr. Donald Anderson, a greater than five percent stockholder and a
member of the Company's Board of Directors. At September 30, 2003, the Company
was in violation of certain loan covenants relating to minimum sales for the
quarter. Subsequent to September 30, 2003 the private trust waived the loan
covenant violations and entered into an agreement to extend the existing line of
credit to July 1, 2005. See Footnote I below for additional discussion of the
amendment to the line of credit agreement.
Note I - Line of Credit
At September 30, 2003, the Company has an outstanding balance of
$1,299,500, of which $799,500 is presented as line of credit balance due and
$500,000 is presented as notes payable - long term portion due to the Company's
minimum borrowing covenant. The outstanding balance is under a $1.8 million
10
line of credit agreement with a private trust ("Lender"), entered into in June
2002 and modified in April 2003, (the "Agreement"). During October 2003, the
Company reached agreement with the private trust to amend the Agreement,
modifying certain loan covenants for the quarters ended September 30, 2003 and
December 31, 2003 and extending the Agreement's expiration date to July 1, 2005.
During the negotiations, the Lender indicated a desire to convert $250,000 of
debt into equity as provided for in the Agreement, and agreed to complete the
conversion by November 14, 2003. As compensation to the Lender for extending the
Agreement, the Company has agreed to continue maintaining a $500,000 minimum
outstanding balance subsequent to the $250,000 conversion of debt to equity and
to issue the Lender warrants to purchase 50,000 shares of the Company's Class A
Common Stock at $.60 per share, the fair market value on the date of issue. See
Exhibit A for details of Second Amendment to Loan Agreement.
Note J - Litigation
The Company continues to be a defendant in litigation that relates to
the acquisition, in May of 2002, of substantially all the assets of Technology
Systems International, Inc. a Nevada corporation, and to litigation arising from
an expired property lease between the Company's subsidiary, Arraid, Inc. and
Arraid Property L.L.C., a Limited Liability Company. No new activity has
occurred subsequent to our report of litigation in our Form 10-KSB filed for the
year ended June 30, 2003. The Company's management, in consultation with legal
counsel, believes the plaintiffs' claims are without merit and the Company will
aggressively defend the actions.
Note K - Subsequent Events
During November 2003, the Company raised a total of $1.0 million from
institutional investors through the sale of Class A Common Stock. The Company
sold the shares at a price of $.65 per share and committed to file an
appropriate S-3 registration statement pertaining to the shares within the next
30 days and a short-term warrant to purchase an additional 666,667 shares at
$.75 per share. Expenses related to the stock issuance amounted to $45,000
resulting in net proceeds received of $955,000. See Exhibit B for details for
sale of Company's Class A Common Stock.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information, the statements contained herein are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. All such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by those
statements. These risks and uncertainties include, but are not limited to, the
following factors: general economic and market conditions; reduced demand for
information technology equipment; competitive pricing and difficulty managing
product costs; development of new technologies which make the Company's products
obsolete; rapid industry changes; failure by the Company's suppliers to meet
quality or delivery requirements; the inability to attract, hire and retain key
personnel; failure of an acquired business to further the Company's strategies;
the difficulty of integrating an acquired business; undetected problems in the
Company's products; the failure of the Company's intellectual property to be
adequately protected; unforeseen litigation; the ability to maintain sufficient
liquidity in order to support operations; the ability to maintain satisfactory
relationships with lenders and to remain in compliance with financial loan
covenants and other requirements under current banking agreements; and the
ability to maintain satisfactory relationships with suppliers and customers.
General
Information on industry segments is incorporated by reference from Note
G to the Condensed Consolidated Financial Statements.
11
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results
of operations are based upon the condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires the use of estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an ongoing basis, estimates are revalued, including
those related to areas that require a significant level of judgment or are
otherwise subject to an inherent degree of uncertainty. These areas include
allowances for doubtful accounts, inventory valuations, estimated profit on
uncompleted TSI PRISM contracts in process, income and expense recognition,
income taxes and commitments and contingencies. Our estimates are based upon
historical experience, observance of trends in particular areas, information
and/or valuations available from outside sources and on various other
assumptions that we believe to be reasonable under the circumstances and which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual amounts may
differ from these estimates under different assumptions and conditions.
Accounting policies are considered critical when they are significant
and involve difficult, subjective or complex judgments or estimates. We
considered the following to be critical accounting policies:
Going concern - Accounting principles assume the continuation of the
Company as a going concern. The Company's auditors, in their opinion on the
financial statements for the year ended June 30, 2003, expressed a concern about
this uncertainty. The accompanying financial statements do not include any
adjustment that might arise from the outcome of this assumption.
Principles of consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Revenue recognition - The Company recognizes revenue from the Data
Storage Segment, net of anticipated returns, at the time products are shipped to
customers, or at the time services are provided. Revenue from material long-term
contracts (in excess of $250,000 and over a 90-day completion period) in both
the Data Storage Segment and the RFID Technology Segment are recognized on the
percentage-of-completion method for individual contracts, commencing when
significant costs are incurred and adequate estimates are verified for
substantial portions of the contract to where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized in the
ratio that costs incurred bear to total estimated costs. Changes in job
performance, estimated profitability and final contract settlements would result
in revisions to cost and income, and are recognized in the period in which the
revisions were determined. Contract costs include all direct materials,
subcontracts, labor costs and those direct and indirect costs related to
contract performance. General and administrative costs are charged to expense as
incurred. At the time a loss on a contract becomes known, the entire amount of
the estimated ultimate loss is accrued.
Long-lived assets and intangible assets - The Company reviews carrying
values at least annually or whenever events or circumstances indicate the
carrying values may not be recoverable through projected discounted cash flows.
Results of Operations
(A) Three months ended 9/30/2003 versus 09/30/2002
Consolidated revenue for the quarter ended September 30, 2003 was
$1,037,400, compared to $2,391,600 for the comparable quarter of the previous
year, a decrease of $1,354,200, or 56.6%. The decrease in revenue is attributed
to a decrease of the RFID Technology revenue, which decreased from $1,482,400
for the quarter ended September 30, 2002 to $2,000 in the current year quarter.
The Data Storage segment revenues increased to $1,035,400, a 13.9% increase
12
compared to $909,200 reported in the quarter ended September 30, 2002. The
decrease in RFID Technology revenue resulted from prison contract award and
funding postponements caused by fiscal budgetary constraints and the aftermath
of the November 2002 elections where several new administrations were elected
that added further delays to the already lengthy state contract procurement
process. The increase in Data Storage Segment revenues resulted from demand for
the Company's data storage products.
The Operating Loss for the quarter was $727,200, compared to a loss of
$439,600 for the same quarter of the prior year, an increase of 65.4%. The
increased operating loss resulted from a $499,600 operating loss generated by
the RFID Technology segment, an increase of $456,100 compared to an operating
loss of $43,500 reported for the same quarter of the prior year. The Data
Storage Segment operating loss of $22,100 was a $147,000 decrease, or 86.9%,
from the $169,100 loss reported for the quarter ended September 30, 2002.
Interest expense for the quarter amounted to $82,700, an increase of
$55,600 when compared to interest expense of $27,100 for the same quarter in the
prior year. Included in interest expense for the current quarter is $49,900,
reflecting the value of shares issued to terminate a Common Stock put option.
Loss From Operations was $806,700, or ($.05) per share, compared to a loss from
Continuing Operations of $459,400, or ($.03) per share, for the comparable
quarter of the prior year.
During the quarter the Company paid an in-kind preferred stock dividend
with a value of $13,500, resulting in the Net Loss Attributable to Common
Stockholders of $820,200, or ($.05) per share, compared to a loss of $472,000,
or ($.03) per share, in the comparable quarter. Although the Company has
initiated cost control measures that have impacted the current quarter,
operating results have continued to be affected by unfavorable economic
conditions and reduced capital spending that have adversely affected Alanco's
business in recent quarters. If the economic conditions in the United States
worsen or if a wider or global economic slowdown occurs, Alanco may experience a
material adverse impact on its operating results and business conditions.
Selling, general and administrative expenses for the current quarter
decreased to $1,119,900, a $213,800 decrease, or 16%, when compared to
$1,333,700 incurred in the comparable quarter of fiscal year 2002. The decrease
is attributable to reduced sales commissions in the RFID Technology Segment and
cost control measures initiated by the Company in the Data Storage Segment.
Liquidity and Capital Resources
The Company's current assets at September 30, 2003 exceeded current
liabilities by $36,000, resulting in a current ratio of 1.02 to 1. At June 30,
2003 the Company's current assets exceeded current liabilities by $562,500,
reflecting a current ratio of 1.20 to 1. The decrease in current ratio resulted
from losses for the quarter and reductions in accounts payable and accrued
expenses. Accounts receivable of $740,300 at September 30, 2003, reflects a
decrease of $68,200, or 8.4% from the $808,500 reported as consolidated accounts
receivables at June 30, 2003. The accounts receivable balance at September 30,
2003 represented forty-six days' sales in receivables compared to twenty-nine
days' sales at June 30, 2003. The increase in days' sales in receivables
resulted from the delay in final contract payment in the RFID Technology Segment
that had recognized the revenue during the previous quarter.
Consolidated inventories at September 30, 2003 amounted to $1,344,900,
compared to $1,278,700 at June 30, 2002. The increase resulted primarily from
increases in inventories in the Data Storage Segment required for anticipated
increases in sales.
At September 30, 2003, the Company had drawn $1,299,500 (including
$500,000 classified as long term notes payable) under a $1.8 million
formula-based revolving bank line of credit agreement with interest calculated
at prime plus 4%. The line of credit agreement formula is based upon current
13
asset values and is used to finance working capital. At September 30, 2003, the
Company had $500,500 available under the line of credit. See Line of Credit
Footnote I above for a discussion of certain modifications and extension of the
existing line of credit agreement executed subsequent to September 30, 2003.
Cash used in operations for the three-month period was $878,800, an
increase of $704,100 when compared to cash used in operations of $174,700 for
the comparable period ended September 30, 2002. The increase in cash used in
operations was due primarily to increases in the loss from operations for the
quarter and a reduction in accounts payable and accrued expenses.
During the three-month period ended September 30, 2003, the Company
collected $899,200 in subscription receivables and purchased $5,900 of
additional equipment compared to equipment purchases of $6,100 in the comparable
period of the prior year. Repayment on borrowings during the period amounted to
$869,600, while advances from borrowing amounted to $788,500.
The Company believes that additional cash resources may be required for
working capital to achieve planned operating results for fiscal year 2004 and,
if working capital requirements exceed current availability, the Company
anticipates raising capital through additional borrowing or sale of stock. The
additional capital would supplement the cash flows from operations and the line
of credit agreement in place at September 30, 2003. If the Company were unable
to raise the required additional capital, it may materially affect the ability
of the Company to achieve its financial plan. See Footnote K - Subsequent
Events, reporting the Company has raised the additional working capital and
believes it has the necessary working capital to achieve planned operating
results for the current fiscal year.
CONTROL AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that it is able to collect the information it is required to disclose in
the reports it files with the Securities and Exchange Commission (SEC), and to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on various evaluations of the Company's
disclosure controls and procedures, some of which occurred during the 90 days
prior to the filing date of this report, the Chief Executive and Chief Financial
Officers believe that these controls and procedures are effective to ensure that
the Company is able to collect, process and disclose the information it is
required to disclose in the reports it files with the SEC within the required
periods.
The Company also maintains a system of internal controls designed to
provide reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
The only material litigation in which the Company is a party to is a
derivative suit, filed on January 30, 2003, by Richard C. Jones on behalf of
Technology Systems International, Inc., a Nevada corporation ("TSIN") versus the
Company, its wholly owned subsidiary, Technology Systems International, Inc., an
Arizona corporation ("TSIA"), and all of the directors of TSIN. The venue for
the action is the Arizona Superior Court in and for Maricopa County, Arizona, as
14
case number CV2003-001937. The complaint sets forth various allegations and
seeks equitable remedies and damages arising out of the Company's acquisition of
substantially all of the assets of TSIN. As stated in previous periodic reports
filed by the Company with the SEC concerning this matter, the Company's
management, in consultation with legal counsel, believes the plaintiff's claims
are without merit and the Company will aggressively defend the action.
Item 2 - CHANGES IN SECURITIES
During the three months ended September 30, 2003, the Company issued
261,000 shares of Series A Preferred Stock related to the offering more fully
discussed in Note F and 159,200 shares of Common Stock for services rendered.
Item 6. EXHIBITS 99.1
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
Executive Vice President and
Chief Financial Officer
15
Date: November 14, 2003
CERTIFICATION
I, Robert R. Kauffman, Chairman and Chief Executive Officer of Alanco
Technologies, Inc. (the "Company"), certify that:
(1) I have reviewed the Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2003 (the "Report");
(2) Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state material facts necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading; and
(3) Based on my knowledge, the financial statements, and other
financial information included in the Report, fairly present in all material
respects the financial condition and results of operations of the Company as of,
and for, the periods represented in the Report.
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared.
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of the Company's Board of Directors:
a) all significant deficiencies in the design or operations of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls;
and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were any significant changes in
internal control or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2003
By /s/ Robert R. Kauffman
Chairman and Chief Executive Officer
16
I, John A. Carlson, Executive Vice President and Chief Financial Officer of
Alanco Technologies, Inc. (the "Company"), certify that:
(1) I have reviewed the Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2003 (the "Report");
(2) Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state material facts necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading; and
(3) Based on my knowledge, the financial statements, and other
financial information included in the report, fairly present in all material
respects the financial condition and results of operations of the Company as of,
and for, the periods represented in the Report.
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared.
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of the Company's Board of Directors:
a) all significant deficiencies in the design or operations of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls;
and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were any significant changes in
internal control or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2003
By /s/ John A. Carlson
Executive Vice President and Chief Financial Officer
17
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert R. Kauffman, Chairman and Chief Executive Officer of Alanco
Technologies, Inc., certify that:
1. The Quarterly Report of Alanco Technologies, Inc. on Form 10-QSB for
the quarter ended September 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), which this
statement accompanies, fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
Alanco Technologies, Inc.
/s/ Robert R. Kauffman
Robert R. Kauffman
Chairman and Chief Executive Officer
November 14, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John A. Carlson, Executive Vice President and Chief Financial Officer of
Alanco Technologies, Inc., certify that:
1. The Quarterly Report of Alanco Technologies, Inc. on Form 10-QSB for
the quarter ended September 30, 2003, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), which this
statement accompanies, fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
Alanco Technologies, Inc.
/s/ John A. Carlson
John A. Carlson
Executive Vice President & Chief
Financial Officer
November 14, 2003
18
EXHIBIT A
SECOND AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT ("First
Amendment") is entered into this 1st day of November, 2003, between Donald E.
Anderson and Rebecca E. Anderson, Trustees of the Anderson Family Trust, UTA
dated December 20, 1993 ("Lender") as secured party, and Alanco Technologies,
Inc. ("ATI"), an Arizona corporation ("Borrower 1"); Arraid, Inc. ("Al"), an
Arizona corporation ("Borrower 2"); Excel/Meridian Data, Inc. ("EMD"), an
Arizona corporation ("Borrower 3"); Sanone, Inc. ("SOI"), an Arizona Corporation
("Borrower 4"); NZ Liquidating, Inc. (formerly known as Netzerver, Inc.) ("NZ"),
an Arizona corporation ("Borrower 5"); Technology Systems International, Inc.
("TSI"), an Arizona corporation (formerly, TSI Acquisition Corporation,
("Borrower 6"); and Fry Guy, Inc., a Nevada corporation ("Borrower 7"). Borrower
1, Borrower 2, Borrower 3, Borrower 4, Borrower 5, Borrower 6, and Borrower 7,
jointly and severally, individually and collectively, the "Borrower".
RECITALS:
The parties entered into that Loan and Security Agreement, dated June
19, 2002, pursuant to which Lender agreed to provide certain funds to Borrower
upon the terms and conditions set forth therein (the "Agreement"). The parties
amended the Agreement pursuant to the Amendment to Loan ad Security Agreement,
dated April 15, 2003 (the "First Amendment"), and now wish to modify the
Agreement, as preciously amended in certain respects as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
1. Definitions. The subparagraphs of Section 1 of the Agreement corresponding to
the subparagraph numbers set forth below shall be amended by substituting the
definitions set forth below for the corresponding terms identified:
1.9 "Credit Limit" shall mean One Million Five Hundred Fifty
Thousand Dollars ($1,550,000.00).
1.19 "Maturity Date" shall mean July 1, 2005.
2. Section 3.1 of the Agreement shall be amended to read as follows:
3.1 This Agreement shall remain in full force and effect until
July 1, 2005 (the "Maturity Date").
3. Section 6A (added by the First Amendment) shall be amended to read as
follows:
6A. COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Lender under this
Agreement, unless Lender shall otherwise consents in writing, revenues
reported from the business operations of TSI shall equal or exceed
$3,500,000 per calender quarter, commencing with the quarter ending
March 31, 2004.
Any failure to meet the requirements of Section 6A as it previously existed are
hereby waived.
4. Lender agrees to exercise a portion of its conversion rights set forth in
Section 6B of the Agreement on November 14, 2003, so that $250,000 of the
existing outstanding balance of the Loan is converted into shares of ATI's Class
A Common Stock in accordance with the terms of said Section 6B. The minimum
amount to be drawn under the Loan shall remain $500,000 in accordance with
Section 2.1 of the Agreement.
5. In consideration of Lender agreeing to the modifications to the Agreement set
forth herein, ATI shall grant to Lender a Warrant to purchase up to 50,000
shares of ATI's Class A Common Stock at a purchase price of $0.60 per share for
a five (5) year period following the date hereof. Such rights shall be
memorialized in a Warrant Agreement to be executed and delivered to Lender upon
the execution hereof in the form attached hereto as Exhibit "A".
6. Section 6.5 of the Agreement shall be amended by substituting "21430 North
2nd Avenue, Suite 2, Phoenix, Arizona 85027" for "26 W. Lone Cactus Drive,
Phoenix, Arizona 85027."
7. Borrower agrees that (a) except as expressly provided herein to the contrary,
this Second Amendment shall not modify the Agreement as previously amended, (b)
all of the collateral described in the Agreement shall remain in all respects
subject to the lien or charge of the security interest set forth in the
Agreement, and (c) nothing contained herein and nothing done pursuant hereto,
shall effect or be construed as affecting the lien or charge of said security
interest, or the priority thereof over other liens or charges, or as releasing
or affecting the liability of any party or parties who may now or hereafter be
liable under or on account of the Agreement. The provisions of this Second
Amendment are modifications only and except as provided herein all of the terms
and conditions of the Agreement as previously amended remain in full force and
effect and the parties hereto ratify and confirm the security, priority and
enforceability of the Agreement, as expressly modified by this Second Amendment.
1
8. This Second Amendment shall bind and inure to the benefit of the respective
successors and assigns of each of the parties. This Second Amendment may be
executed by the parties hereto in several counterparts, each of which shall be
deemed to be an original and all of which shall constitute together but one and
the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be
executed as of the date first above written.
BORROWERS:
"Borrower l":
Alanco Technologies, Inc., an Arizona Corporation
By: /s/ John A. Carlson
----------------------------------------
John A. Carlson, Chief Financial Officer
"Borrower 2":
Arraid, Inc., an Arizona corporation
By: /s/ John A. Carlson
----------------------------------------
John A. Carlson, Chief Financial Officer
"Borrower 3":
Excel/Meridian Data, an Arizona corporation
By: /s/ John A. Carlson
----------------------------------------
John A. Carlson, Chief Financial Officer
"Borrower 4":
Sanone, Inc., an Arizona corporation
By: /s/ John A. Carlson
----------------------------------------
John A. Carlson, Chief Financial Officer
"Borrower 5":
Netzerver, Inc., an Arizona corporation
By: /s/ John A. Carlson
----------------------------------------
John A. Carlson, Chief Financial Officer
"Borrower 6":
Technology Systems International, Inc., an Arizona corporation (formerly,
TSI Acquisition Corporation)
By: /s/ John A. Carlson
-----------------------------------------
John A. Carlson, Chief Financial Officer
"Borrower 7":
Fry Guy, Inc., a Nevada corporation
By: /s/ John A. Carlson
-----------------------------------------
John A. Carlson, Chief Financial Officer
Borrower Address for Notices:
15575 North 83rd Way, Suite 3, Scottsdale, Arizona. 85260
LENDER:
/s/ Donald E. Anderson
---------------------------------------
DONALD E. ANDERSON
/s/ Rebecca E. Anderson
---------------------------------------
REBECCA E. ANDERSON
Trustees of the Anderson Family Trust, UTA
dated December 20, 1993
Lender Address for Notices:
11804 N. Sundown Drive, Scottsdale, Arizona 85260
2
EXHIBIT B
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is dated as of
November 7, 2003 among Alanco Technologies, Inc., an Arizona corporation (the
"Company"), and the purchasers identified on the signature pages hereto (each, a
"Purchaser" and collectively, the "Purchasers").
WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"), the Company desires to issue and sell to each Purchaser,
and each Purchaser, severally and not jointly, desires to purchase from the
Company, certain securities of the Company as more fully described in this
Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each of the
Purchasers agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement, the following terms have the meanings indicated:
-----------
"Affiliate" means any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is
under common control with a Person, as such terms are used in and
construed under Rule 144 under the Securities Act. With respect to a
Purchaser, any investment fund or managed account that is managed on a
discretionary basis by the same investment manager as such Purchaser
will be deemed to be an Affiliate of such Purchaser.
"Business Day" means any day other than Saturday, Sunday or
other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.
"Closing" means the closing of the purchase and sale of the
Shares and the Warrants pursuant to Section 2.1.
"Closing Date" means the date of the closing.
"Closing Price" means, for any date, the price determined by
the first of the following clauses that applies: (a) if the Common
Stock is then listed or quoted on an Eligible Market or any other
national securities exchange, the closing price per share of the Common
Stock for such date (or the nearest preceding date) on the primary
Eligible Market or exchange on which the Common Stock is then listed or
quoted; (b) if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the closing bid price per share of the Common Stock for
such date (or the nearest preceding date) so quoted; (c) if prices for
the Common Stock are then reported in the "Pink Sheets" published by
the National Quotation Bureau Incorporated (or a similar organization
or agency succeeding to its functions of reporting prices), the most
recent closing bid price per share of the Common Stock so reported; or
(d) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith
by Purchasers holding a majority of the Securities.
1
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Class A common stock of the Company.
"Common Stock Equivalents" means, collectively, Options and
Convertible Securities.
"Company Counsel" means Steven P. Oman, Esq., counsel to the
Company.
"Convertible Securities" means any stock or securities (other
than Options) convertible into or exercisable or exchangeable for
Common Stock.
"Effective Date" means the date that the Registration
Statement is first declared effective by the Commission.
"Eligible Market" means any of the New York Stock Exchange,
the American Stock Exchange, the NASDAQ National Market or the NASDAQ
SmallCap Market.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means 30 days following the Closing Date.
"Lien" means any lien, charge, claim, security interest,
encumbrance, right of first refusal or other restriction.
"Losses" means any and all losses, claims, damages,
liabilities, settlement costs and expenses, including, without
limitation, costs of preparation and reasonable attorneys' fees.
"Options" means any rights, warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.
"Person" means any individual or corporation, partnership,
trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an
agency or subdivision thereof) or any court or other federal, state,
local or other governmental authority or other entity of any kind.
"Per Unit Purchase Price" means $0.65.
2
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes
any information previously omitted from a prospectus filed as part of
an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by
any prospectus supplement, with respect to the terms of the offering of
any portion of the Registrable Securities covered by the Registration
Statement, and all other amendments and supplements to the Prospectus
including post effective amendments, and all material incorporated by
reference or deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" means any Common Stock (including
Underlying Shares) issued or issuable pursuant to the Transaction
Documents, together with any securities issued or issuable upon any
stock split, dividend or other distribution, recapitalization or
similar event with respect to the foregoing.
"Registration Statement" means each registration statement
required to be filed under Article VI, including (in each case) the
Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed
to be incorporated by reference in such registration statement.
"Rule 144," "Rule 415," and "Rule 424" means Rule 144, Rule
415 and Rule 424, respectively, promulgated by the Commission pursuant
to the Securities Act, as such Rules may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission
having substantially the same effect as such Rule.
"Securities" means the Shares, the Warrants and the Underlying
Shares.
"Shares" means an aggregate of 1,538,462 shares of Common
Stock, which are being issued and sold to the Purchasers at the
Closing.
"Subsidiary" means any Person in which the Company, directly
or indirectly, owns capital stock or holds an equity or similar
interest.
"Trading Day" means (a) any day on which the Common Stock is
listed or quoted and traded on its primary Trading Market, or (b) if
the Common Stock is not then listed or quoted and traded on any
Eligible Market, then a day on which trading occurs on the OTC Bulletin
Board (or any successor thereto), or (c) if trading ceases to occur on
the OTC Bulletin Board (or any successor thereto), any Business Day.
"Trading Market" means the NASDAQ SmallCap Market or any other
Eligible Market, or any national securities exchange, market or trading
or quotation facility on which the Common Stock is then listed or
quoted.
3
"Transaction Documents" means this Agreement, the Warrants,
the Transfer Agent Instructions and any other documents or agreements
executed in connection with the transactions contemplated hereunder.
"Transfer Agent Instructions" means the Irrevocable Transfer
Agent Instructions, in the form of Exhibit D, executed by the Company
and delivered to and acknowledged in writing by the Company's transfer
agent.
"Underlying Shares" means the shares of Common Stock issuable
upon exercise of the Warrants.
"Unit" means one Share and Warrant to acquire 0.5 of a share
of Common Stock.
"Warrants" means, collectively, the Warrants issued and sold
under this Agreement, in the form of Exhibit A.
ARTICLE II
PURCHASE AND SALE
2.1 Closing. Subject to the terms and conditions set forth in this Agreement, at
the Closing the Company shall issue and sell to each Purchaser, and each
Purchaser shall, severally and not jointly, purchase from the Company, such
number of Units indicated below such Purchaser's name on the signature page of
this Agreement at the Per Unit Purchase Price. The Closing shall take place at
the offices of Proskauer Rose LLP immediately following the execution hereof, or
at such other location or time as the parties may agree.
2.2 Closing Deliveries.
(a) At the Closing, the Company shall deliver or cause to be delivered to
each Purchaser the following:
(i) one or more stock certificates, free and clear of all restrictive and
other legends (except as expressly provided in Section 4.1(b) hereof),
evidencing such number of Shares equal to the number of Units indicated
below such Purchaser's name on the signature page of this Agreement,
registered in the name of such Purchaser;
(ii) a Warrant, registered in the name of such Purchaser, pursuant to which
such Purchaser shall have the right to acquire such number of
Underlying Shares indicated below such Purchaser's name on the
signature page of this Agreement, on the terms set forth therein;
(iii) a legal opinion of Company Counsel, in the form of Exhibit B, executed
by such counsel and delivered to the Purchasers; and
4
(iv) duly executed Transfer Agent Instructions acknowledged by the Company's
transfer agent.
(b) At the Closing, each Purchaser shall deliver or cause to be delivered
to the Company an amount equal to the Per Unit Purchase Price
multiplied by the number of Units indicated below such Purchaser's name
on the signature page of this Agreement, in United States dollars and
in immediately available funds, by wire transfer to an account
designated in writing to such Purchaser by the Company for such
purpose.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. The Company hereby
represents and warrants to each of the Purchasers as follows. For purposes of
these representations, the term "SEC Reports" means all reports required to
filed by the Company under the Exchange Act during the preceding 2 years.
(a) Subsidiaries. The Company has no direct or indirect Subsidiaries other
than those listed in the SEC Reports. Except as disclosed in the SEC Reports,
the Company owns, directly or indirectly, all of the capital stock or comparable
equity interests of each Subsidiary free and clear of any Lien and all the
issued and outstanding shares of capital stock or comparable equity interests of
each Subsidiary are validly issued and are fully paid, non-assessable and free
of preemptive and similar rights.
(b) Organization and Qualification. Each of the Company and the
Subsidiaries is an entity duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization (as
applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. Each of the Company and the Subsidiaries is
duly qualified to do business and is in good standing as a foreign corporation
or other entity in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
could not, individually or in the aggregate, (i) adversely affect the legality,
validity or enforceability of any Transaction Document, (ii) have or result in a
material adverse effect on the results of operations, assets, prospects,
business or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole on a consolidated basis, or (iii) adversely
impair the Company's ability to perform fully on a timely basis its obligations
under any of the Transaction Documents (any of (i), (ii) or (iii), a "Material
Adverse Effect").
(c) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further consent or action is
required by the Company, its Board of Directors or its stockholders. Each of the
5
Transaction Documents has been (or upon delivery will be) duly executed by the
Company and is, or when delivered in accordance with the terms hereof, will
constitute, the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms.
(d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby do not and will not (i) conflict
with or violate any provision of the Company's or any Subsidiary's certificate
or articles of incorporation, bylaws or other organizational or charter
documents, (ii) conflict with, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation (with or
without notice, lapse of time or both) of, any agreement, credit facility, debt
or other instrument (evidencing a Company or Subsidiary debt or otherwise) or
other understanding to which the Company or any Subsidiary is a party or by
which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal and
state securities laws and regulations and the rules and regulations of any
self-regulatory organization to which the Company or its securities are
subject), or by which any property or asset of the Company or a Subsidiary is
bound or affected.
(e) Issuance of the Securities. The Securities (including the Underlying
Shares) are duly authorized and, when issued and paid for in accordance with the
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens and shall not be subject to
preemptive rights or similar rights of stockholders. The Company has reserved
from its duly authorized capital stock the maximum number of shares of Common
Stock issuable upon exercise of the Warrants.
(f) Capitalization. The number of shares and type of all authorized, issued
and outstanding capital stock, options and other securities of the Company
(whether or not presently convertible into or exercisable or exchangeable for
shares of capital stock of the Company) is set forth in the SEC Reports. All
outstanding shares of capital stock are duly authorized, validly issued, fully
paid and nonassessable and have been issued in compliance with all applicable
securities laws. Except as disclosed in the SEC Reports, there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire, any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares of Common
Stock. Except as disclosed in the SEC Reports, there are no anti-dilution or
price adjustment provisions contained in any security issued by the Company (or
in any agreement providing rights to security holders) and the issue and sale of
the Securities (including the Underlying Shares) will not obligate the Company
to issue shares of Common Stock or other securities to any Person (other than
the Purchasers) and will not result in a right of any holder of Company
securities to adjust the exercise, conversion, exchange or reset price under
such securities. To the knowledge of the Company, except as specifically
disclosed in the SEC Reports, no Person or group of related Persons beneficially
6
owns (as determined pursuant to Rule 13d-3 under the Exchange Act), or has the
right to acquire, by agreement with or by obligation binding upon the Company,
beneficial ownership of in excess of 5% of the outstanding Common Stock,
ignoring for such purposes any limitation on the number of shares of Common
Stock that may be owned at any single time.
(g) SEC Reports; Financial Statements. The Company has filed all reports
required to be filed by it under the Exchange Act, including pursuant to Section
13(a) or 15(d) thereof, for the two years preceding the date hereof (or such
shorter period as the Company was required by law to file such material) (the
foregoing materials (together with any materials filed by the Company under the
Exchange Act, whether or not required) being collectively referred to herein as
the "SEC Reports" and, together with this Agreement and the Schedules to this
Agreement, the "Disclosure Materials") on a timely basis or has received a valid
extension of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. The Company has delivered to each Purchaser
true, correct and complete copies of all SEC Reports filed within the 10 days
preceding the date hereof. As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act and the rules and regulations of the Commission promulgated
thereunder, and none of the SEC Reports, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time of
filing. Such financial statements have been prepared in accordance with United
States generally accepted accounting principles applied on a consistent basis
during the periods involved ("GAAP"), except as may be otherwise specified in
such financial statements or the notes thereto, and fairly present in all
material respects the financial position of the Company and its consolidated
subsidiaries as of and for the dates thereof and the results of operations and
cash flows for the periods then ended, subject, in the case of unaudited
statements, to normal, immaterial, year-end audit adjustments. All material
agreements which are required to be disclosed in the SEC Reports have been
disclosed in the SEC Reports.
(h) Material Changes. Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
the SEC Reports and any news release issued by the Company, (i) there has been
no event, occurrence or development that, individually or in the aggregate, has
had or that could result in a Material Adverse Effect, (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than (A) trade payables
and accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the Company's
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting or the identity of its auditors, except as disclosed in its SEC
Reports, (iv) the Company has not declared or made any dividend or distribution
of cash or other property to its stockholders, except dividend on the Company's
outstanding Preferred Stock, or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock, and (v) the Company has not
issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock-based plans.
7
(i) Absence of Litigation. Except as disclosed in the SEC Reports, there is
no action, suit, claim, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries that could, individually or in the aggregate,
have a Material Adverse Effect.
(j) Compliance. Neither the Company nor any Subsidiary (i) is in default
under or in violation of (and no event has occurred that has not been waived
that, with notice or lapse of time or both, would result in a default by the
Company or any Subsidiary under), nor has the Company or any Subsidiary received
notice of a claim that it is in default under or that it is in violation of, any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound (whether or
not such default or violation has been waived), (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is or has been in
violation of any statute, rule or regulation of any governmental authority,
including without limitation all foreign, federal, state and local laws relating
to taxes, environmental protection, occupational health and safety, product
quality and safety and employment and labor matters, except in each case as
could not, individually or in the aggregate, have or result in a Material
Adverse Effect.
(k) Title to Assets. The Company and the Subsidiaries have good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries, except liens in favor of (i)
the Company's line of credit lender, (ii) EMS Technologies, Inc. with respect to
goods purchased for inclusion in the Company's Logan project, and (iii) nominal
office equipment lease interests. Any real property and facilities held under
lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases of which the Company and the Subsidiaries are
in compliance.
(l) Certain Fees. Except for the placement fees payable to Ashenden Finance
& Co., S.A in the amount of $35,000, no brokerage fees, finder's fees or
commissions are or will be payable by the Company to any broker, financial
advisor or consultant, finder, placement agent, investment banker, bank or other
Person with respect to the transactions contemplated by this Agreement, and the
Company has not taken any action that would cause any Purchaser to be liable for
any such fees or commissions.
(m) Securities Placements. Neither the Company nor any Person acting on the
Company's behalf has sold or offered to sell or solicited any offer to buy the
Securities by means of any form of general solicitation or advertising. Neither
the Company nor any of its Affiliates nor any Person acting on the Company's
behalf has, directly or indirectly, at any time within the past six months, made
any offer or sale of any security or solicitation of any offer to buy any
security under circumstances that would (i) eliminate the availability of the
exemption from registration under Regulation D under the Securities Act in
connection with the offer and sale of the Securities as contemplated hereby or
(ii) cause the offering of the Securities pursuant to the Transaction Documents
to be integrated with prior offerings by the Company for purposes of any
applicable law, regulation or stockholder approval provisions, including,
8
without limitation, under the rules and regulations of any Trading Market. The
Company is not, and is not an Affiliate of, an "investment company" within the
meaning of the Investment Company Act of 1940, as amended. The Company is not a
United States real property holding corporation within the meaning of the
Foreign Investment in Real Property Tax Act of 1980.
(n) Form S-3 Eligibility. The Company is eligible to register its Common
Stock for resale by the Purchasers using Form S-3 promulgated under the
Securities Act.
(o) Listing and Maintenance Requirements. Except as disclosed in the SEC
Reports, the Company has not, in the two years preceding the date hereof,
received notice (written or oral) from any Trading Market on which the Common
Stock is or has been listed or quoted to the effect that the Company is not in
compliance with the listing or maintenance requirements of such Trading Market,
and the Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing and
maintenance requirements.
(p) Disclosure. The Company confirms that neither it nor any other Person
acting on its behalf has provided any of the Purchasers or their agents or
counsel with any information that constitutes or might constitute material,
nonpublic information. The Company understands and confirms that each of the
Purchasers will rely on the foregoing representations in effecting transactions
in securities of the Company. All disclosure provided to the Purchasers
regarding the Company, its business and the transactions contemplated hereby,
including the Schedules to this Agreement, furnished by or on behalf of the
Company are true and correct and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. No event or circumstance has occurred or information
exists with respect to the Company or any of its Subsidiaries or its or their
business, properties, prospects, operations or financial conditions, which,
under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed. The Company acknowledges and agrees that no Purchaser makes or has
made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in Section 3.2.
(q) Acknowledgment Regarding Purchasers' Purchase of Securities. The
Company acknowledges and agrees that each of the Purchasers is acting solely in
the capacity of an arm's length purchaser with respect to this Agreement and the
transactions contemplated hereby. The Company further acknowledges that no
Purchaser is acting as a financial advisor or fiduciary of the Company, or, to
the Company's knowledge, any other Purchaser (or in any similar capacity) with
respect to this Agreement and the transactions contemplated hereby and any
advice given by any Purchaser or any of their respective representatives or
agents in connection with this Agreement and the transactions contemplated
hereby is merely incidental to the Purchasers' purchase of the Securities. The
Company further represents to each Purchaser that the Company's decision to
enter into this Agreement has been based solely on the independent evaluation of
the transactions contemplated hereby by the Company and its representatives.
9
(r) Patents and Trademarks. The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other similar
rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have could have a Material Adverse Effect (collectively, the "Intellectual
Property Rights"). Neither the Company nor any Subsidiary has received a written
notice that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person. To the knowledge
of the Company, all such Intellectual Property Rights are enforceable and there
is no existing infringement by another Person of any of the Intellectual
Property Rights.
(s) Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company and
the Subsidiaries are engaged. Neither the Company nor any Subsidiary has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business without a
significant increase in cost.
(t) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not, individually or in the aggregate, have or
result in a Material Adverse Effect ("Material Permits"), and neither the
Company nor any Subsidiary has received any notice of proceedings relating to
the revocation or modification of any Material Permit.
(u) Transactions With Affiliates and Employees. Except as set forth in SEC
Reports, none of the officers or directors of the Company and, to the knowledge
of the Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner.
(v) Going Concern. The Company and the Subsidiaries have no knowledge (upon
receipt of the proceeds of this transaction) that Stemple & Cooper LLP, the
Company's independent public accountants, will issue an audit letter containing
a "going concern" opinion in connection with the Company's quarterly report on
Form 10-Q or annual report on Form 10-K pursuant to Section 13 or 15(d) under
the Exchange Act for the quarterly period ended December 31, 2003 or the fiscal
year ended June 30, 2004, respectively.
(w) Internal Accounting Controls. The Company and the Subsidiaries maintain
a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
10
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
3.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, as to itself only and for no other Purchaser, represents and warrants to
the Company as follows:
(a) Organization; Authority. Such Purchaser is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations hereunder and thereunder.
The purchase by such Purchaser of the Shares and the Warrants hereunder has been
duly authorized by all necessary action on the part of such Purchaser. This
Agreement has been duly executed and delivered by such Purchaser and constitutes
the valid and binding obligation of such Purchaser, enforceable against it in
accordance with its terms.
(b) Investment Intent. Such Purchaser is acquiring the Securities as
principal for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Purchaser's right, subject to the provisions of this
Agreement, at all times to sell or otherwise dispose of all or any part of such
Securities pursuant to an effective registration statement under the Securities
Act or under an exemption from such registration and in compliance with
applicable federal and state securities laws. Nothing contained herein shall be
deemed a representation or warranty by such Purchaser to hold Securities for any
period of time.
(c) Purchaser Status. At the time such Purchaser was offered the Shares and
the Warrants, it was, and at the date hereof it is, an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
(d) Experience of such Purchaser. Such Purchaser, either alone or together
with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment. Such Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.
(e) No Short Positions or Stock Ownership. Each Purchaser has not, as of
the Closing Date, and will not during the two years following the Closing, enter
into any Short Sales. For purposes of this Section 3.2(e), a "Short Sale" by a
Purchaser means a sale of Common Stock that is marked as a short sale and that
is executed at a time when such Purchaser has no equivalent offsetting long
position in the Common Stock. For purposes of determining whether a Purchaser
has an equivalent offsetting long position in the Common Stock, all Common Stock
and all Common Stock that would be issuable upon conversion or exercise in full
of all Options then held by such Purchaser shall be deemed to be held long by
such Purchaser.
11
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
(a) Securities may only be disposed of pursuant to an effective
registration statement under the Securities Act or pursuant to an available
exemption from the registration requirements of the Securities Act, and in
compliance with any applicable state securities laws. In connection with any
transfer of Securities other than pursuant to an effective registration
statement or to the Company or pursuant to Rule 144(k), except as otherwise set
forth herein, the Company may require the transferor to provide to the Company
an opinion of counsel selected by the transferor, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration under the Securities Act.
Notwithstanding the foregoing, the Company hereby consents to and agrees to
register on the books of the Company and with its transfer agent, without any
such legal opinion, any transfer of Securities by a Purchaser to an Affiliate of
such Purchaser, provided that the transferee certifies to the Company that it is
an "accredited investor" as defined in Rule 501(a) under the Securities Act.
(b) The Purchasers agree to the imprinting, so long as is required by this
Section 4.1(b), of the following legend on any certificate evidencing
Securities:
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE EXERCISABLE] HAVE [NOT] BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS. NOTWITHSTANDING THE FOREGOING, THESE
SECURITIES [AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH
SECURITIES.
Certificates evidencing Securities shall not be required to contain such legend
or any other legend (i) while a Registration Statement covering the resale of
such Securities is effective under the Securities Act and the holder of the
12
securities and the broker or clearing house where such securities are held
undertake in writing to only sell the securities under such Registration
Statement and in compliance therewith, or (ii) following any sale of such
Securities pursuant to Rule 144, or (iii) if such Securities are eligible for
sale under Rule 144(k), or (iv) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the Staff of the Commission). Provided the Purchasers
and their brokers have given the certification to the Company's legal counsel
described under clause (i) above, the Company shall cause its counsel to issue
the legal opinion included in the Transfer Agent Instructions to the Company's
transfer agent on the Effective Date. Following the Effective Date or at such
earlier time as a legend is no longer required for certain Securities, the
Company will as soon as practicable following the delivery by a Purchaser to the
Company or the Company's transfer agent of a legended certificate representing
such Securities, deliver or cause to be delivered to such Purchaser a
certificate representing such Securities that is free from all restrictive and
other legends. If the legended certificate is delivered to the Company, the
Company will forward the same to the Company's transfer agent with appropriate
instructions to remove the legend no later than three Trading Days following its
receipt of the Certificate. The Company may not make any notation on its records
or give instructions to any transfer agent of the Company that enlarge the
restrictions on transfer set forth in this Section.
(c) The Company acknowledges and agrees that a Purchaser may from time to
time pledge or grant a security interest in some or all of the Securities in
connection with a bona fide margin agreement or other loan or financing
arrangement secured by the Securities and, if required under the terms of such
agreement, loan or arrangement, such Purchaser may transfer pledged or secured
Securities to the pledgees or secured parties. Such a pledge or transfer would
not be subject to approval of the Company and no legal opinion of the pledgee,
secured party or pledgor shall be required in connection therewith. Further, no
notice shall be required of such pledge. At the appropriate Purchaser's expense,
the Company will execute and deliver such reasonable documentation as a pledgee
or secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including the preparation and filing of
any required prospectus supplement under Rule 424(b)(3) of the Securities Act or
other applicable provision of the Securities Act to appropriately amend the list
of Selling Stockholders thereunder.
4.2 Furnishing of Information. As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act. Upon the request
of any Purchaser, the Company shall deliver to such Purchaser a written
certification of a duly authorized officer as to whether it has complied with
the preceding sentence. As long as any Purchaser owns Securities, if the Company
is not required to file reports pursuant to such laws, it will prepare and
furnish to the Purchasers and make publicly available in accordance with
paragraph (c) of Rule 144 such information as is required for the Purchasers to
sell the Securities under Rule 144. The Company further covenants that it will
take such further action as any holder of Securities may reasonably request to
satisfy the provisions of Rule 144 applicable to the issuer of securities
relating to transactions for the sale of securities pursuant to Rule 144.
13
4.3 Integration. The Company shall not, and shall use its best efforts to
ensure that no Affiliate of the Company shall, sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers or that would be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Trading Market.
4.4 Reservation and Listing of Securities. The Company shall maintain a
reserve from its duly authorized shares of Common Stock for issuance pursuant to
the Transaction Documents in such amount as may be required to fulfill its
obligations in full under the Transaction Documents. In the event that at any
time the then authorized shares of Common Stock are insufficient for the Company
to satisfy its obligations in full under the Transaction Documents, the Company
shall promptly take such actions as may be required to increase the number of
authorized shares. The Company shall in the time and manner required by its
Trading Market, prepare and file with such Trading Market an additional shares
listing application covering the number of shares of Common Stock issuable under
the Transaction Documents and shall take all steps necessary to cause such
shares of Common Stock to be approved for listing on its Trading Market as soon
as possible.
4.5 Subsequent Placements.
(a) From the date hereof until 120 calendar days following the Effective
Date, the Company will not, directly or indirectly, offer, sell, grant any
option to purchase, or otherwise dispose of (or announce any offer, sale, grant
or any option to purchase or other disposition of) any of its or the
Subsidiaries' equity or equity equivalent securities, including without
limitation any debt, preferred stock (other than dividends in kind with respect
to the Company's outstanding Preferred Stock) or other instrument or security
that is, at any time during its life and under any circumstances, convertible
into or exchangeable or exercisable for Common Stock or Common Stock Equivalents
(any such offer, sale, grant, disposition or announcement being referred to as a
"Subsequent Placement"), unless the Company shall have first complied with this
Section 4.5(a).
(i) The Company shall deliver to each Purchaser a written notice (the
"Offer")of any proposed or intended issuance or sale or exchange of the
securities being offered (the "Offered Securities") in a Subsequent Placement,
which Offer shall (w) identify and describe the Offered Securities, (x) describe
the price and other terms upon which they are to be issued, sold or exchanged,
and the number or amount of the Offered Securities to be issued, sold or
exchanged, and (y) offer to issue and sell to or exchange with each Purchaser
(A) a pro rata portion of the Offered Securities based on such Purchaser's pro
rata portion of the Shares purchased hereunder compared to number of outstanding
shares of Common Stock of the Company (the "Basic Amount"), and (B) with respect
to each Purchaser that elects to purchase its Basic Amount, any additional
portion of the Offered Securities attributable to the Basic Amounts of other
Purchasers as such Purchaser shall indicate it will purchase or acquire should
the other Purchasers subscribe for less than their Basic Amounts (the
"Undersubscription Amount").
14
(ii) To accept an Offer, in whole or in part, a Purchaser must deliver a
written notice to the Company prior to the end of the ten (10) Trading Day
period of the Offer, setting forth the portion of the Purchaser's Basic Amount
that such Purchaser elects to purchase and, if such Purchaser shall elect to
purchase all of its Basic Amount, the Undersubscription Amount, if any, that
such Purchaser elects to purchase (in either case, the "Notice of Acceptance").
If the Basic Amounts subscribed for by all Purchasers are less than the total of
all of the Basic Amounts, then each Purchaser who has set forth an
Undersubcription Amount in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the Undersubscription
Amounts subscribed for exceed the difference between the total of all the Basic
Amounts and the Basic Amounts subscribed for (the "Available Undersubscription
Amount"), each Purchaser who has subscribed for any Undersubscription Amount
shall be entitled to purchase on that portion of the Available Undersubscription
Amount as the Basic Amount of such Purchaser bears to the total Basic Amounts of
all Purchasers that have subscribed for Undersubscription Amounts, subject to
rounding by the Board of Directors to the extent its deems reasonably necessary.
(b) The restrictions contained in paragraph (a) of this Section 4.5 shall
not apply to (A) any issuance of Common Stock or grant of Options to employees,
officers, directors of or consultants or advisors to the Company, in each case,
pursuant to a stock-based plan duly approved by the Company's board of
directors; (B) any existing creditor of the Company in exchange for debt of the
Company, (C) upon exercise, conversion or exchange of any Common Stock
Equivalents described in Schedule 3.1(f) (provided that such exercise or
conversion occurs in accordance with the terms thereof, without amendment or
modification); or (D) the issuance of securities in connection with a joint
venture or development agreement or strategic partnership or similar agreement
approved by the Company's board of directors, the primary purpose of which is
not to raise equity capital.
4.6 Securities Laws Disclosure; Publicity. The Company shall, on or before
8:30 a.m., New York time on November 10, 2003, issue a press release acceptable
to the Purchasers disclosing all material terms of the transactions contemplated
hereby. Within the time required by the Exchange Act, and only if required by
the Exchange Act, the Company shall file a Current Report on Form 8-K with the
Commission (the "8-K Filing") describing the terms of the transactions
contemplated by the Transaction Documents and including as exhibits to such
Current Report on Form 8-K this Agreement and the form of Warrants, in the form
required by the Exchange Act. Thereafter, the Company shall timely file any
filings and notices required by the Commission or applicable law with respect to
the transactions contemplated hereby and provide copies thereof to the
Purchasers promptly after filing. Except with respect to the 8-K Filing and the
press release referenced above (a copy of which will be provided to the
Purchasers for their review as early as practicable prior to its filing), the
Company shall, at least two Trading Days prior to the filing or dissemination of
any disclosure required by this paragraph, provide a copy thereof to the
Purchasers for their review. The Company and the Purchasers shall consult with
each other in issuing any press releases or otherwise making public statements
or filings and other communications with the Commission or any regulatory agency
or Trading Market with respect to the transactions contemplated hereby.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of any Purchaser, or include the name of any Purchaser in any filing with the
Commission or any regulatory agency or Trading Market, without the prior written
consent of such Purchaser, except to the extent such disclosure is required by
law or Trading Market regulations, in which case the Company shall provide the
Purchasers with prior notice of such disclosure. The Company shall not, and
shall cause each of its Subsidiaries and its and each of their respective
officers, directors, employees and agents not to, provide any Purchaser with any
material nonpublic information regarding the Company or any of its Subsidiaries
from and after the filing of the 8-K. In the event of a breach of the foregoing
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covenant by the Company, any of its Subsidiaries, or any of its or their
respective officers, directors, employees and agents, in addition to any other
remedy provided herein or in the Transaction Documents, a Purchaser shall have
the right to make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material nonpublic information without the
prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Purchaser shall have any
liability to the Company, its Subsidiaries, or any of its or their respective
officers, directors, employees, shareholders or agents for any such disclosure.
Subject to the foregoing, neither the Company nor any Purchaser shall issue any
press releases or any other public statements with respect to the transactions
contemplated hereby; provided, however, that the Company shall be entitled,
without the prior approval of any Purchaser, to make any press release or other
public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations (provided that in the case of clause
(i) each Purchaser shall be consulted by the Company in connection with any such
press release or other public disclosure prior to its release). Each press
release disseminated during the 12 months preceding the date of this Agreement
did not at the time of release contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
4.7 Use of Proceeds. Except as set forth on Schedule 4.7, the Company shall
use the net proceeds from the sale of the Securities hereunder for working
capital purposes and not (i) to redeem any Company equity or equity-equivalent
securities, or (ii) to settle any outstanding litigation.
4.8 Reimbursement. If any Purchaser or any of its Affiliates or any
officer, director, partner, controlling Person, employee or agent of a Purchaser
or any of its Affiliates (a "Related Person") becomes involved in any capacity
in any Proceeding brought by or against any Person in connection with or as a
result of the transactions contemplated by the Transaction Documents, the
Company will indemnify and hold harmless such Purchaser or Related Person for
its reasonable legal and other expenses (including the costs of any
investigation, preparation and travel) and for any Losses incurred in connection
therewith, as such expenses or Losses are incurred, excluding only Losses that
result directly from such Purchaser's or Related Person's negligence or willful
misconduct, inaccuracy in any Purchaser's representations herein, or due to any
Purchaser's violation of any federal or state securities laws or reglations. In
addition, the Company shall indemnify and hold harmless each Purchaser and
Related Person from and against any and all Losses, as incurred, arising out of
or relating to any breach by the Company of any of the representations,
warranties or covenants made by the Company in this Agreement or any other
Transaction Document, or any allegation by a third party that, if true, would
constitute such a breach. The conduct of any Proceedings for which
indemnification is available under this paragraph shall be governed by Section
6.4(c) below. The indemnification obligations of the Company under this
paragraph shall be in addition to any liability that the Company may otherwise
have and shall be binding upon and inure to the benefit of any successors,
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assigns, heirs and personal representatives of the Purchasers and any such
Related Persons. The Company also agrees that neither the Purchasers nor any
Related Persons shall have any liability to the Company or any Person asserting
claims on behalf of or in right of the Company in connection with or as a result
of the transactions contemplated by the Transaction Documents, except to the
extent that any Losses incurred by the Company result from the negligence or
willful misconduct of the applicable Purchaser or Related Person in connection
with such transactions, inaccuracy in any Purchaser's representations herein, or
due to any Purchaser's violation of any federal or state securities laws or
reglations. If the Company breaches its obligations under any Transaction
Document, then, in addition to any other liabilities the Company may have under
any Transaction Document or applicable law, the Company shall pay or reimburse
the Purchasers on demand for all costs of collection and enforcement (including
reasonable attorneys fees and expenses). Without limiting the generality of the
foregoing, the Company specifically agrees to reimburse the Purchasers on demand
for all costs of enforcing the indemnification obligations in this paragraph.
ARTICLE V
CONDITIONS
5.1 Conditions Precedent to the Obligations of the Purchasers. The
obligation of each Purchaser to acquire Securities at the Closing is subject to
the satisfaction or waiver by such Purchaser, at or before the Closing, of each
of the following conditions:
(a) Representations and Warranties. The representations and warranties of
the Company contained herein shall be true and correct in all material respects
as of the date when made and as of the Closing as though made on and as of such
date; and
(b) Performance. The Company and each other Purchaser shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by it at or prior to the Closing.
5.2 Conditions Precedent to the Obligations of the Company. The obligation
of the Company to sell Securities at the Closing is subject to the satisfaction
or waiver by the Company, at or before the Closing, of each of the following
conditions:
(a) Representations and Warranties. The representations and warranties of
the Purchasers contained herein shall be true and correct in all material
respects as of the date when made and as of the Closing Date as though made on
and as of such date; and
(b) Performance. The Purchasers shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by the Purchasers at or prior to the Closing.
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ARTICLE VI
REGISTRATION RIGHTS
6.1 Shelf Registration
(a) As promptly as possible, and in any event on or prior to the Filing
Date, the Company shall prepare and file with the Commission a "Shelf"
Registration Statement covering the resale of all Registrable Securities for an
offering to be made on a continuous basis pursuant to Rule 415. The Registration
Statement shall be on Form S-3 (except if the Company is not then eligible to
register for resale the Registrable Securities on Form S-3, in which case such
registration shall be on another appropriate form in accordance herewith as the
Purchasers may consent) and shall contain (except if otherwise directed by the
Purchasers) the "Plan of Distribution" attached hereto as Exhibit C.
(b) The Company shall use its best efforts to cause the Registration
Statement to be declared effective by the Commission as promptly as possible
after the filing thereof, and shall use its best efforts to keep the
Registration Statement continuously effective under the Securities Act until the
second anniversary of the Effective Date or such earlier date when all
Registrable Securities covered by such Registration Statement have been sold
publicly (the "Effectiveness Period"). If the Company has not filed the
Registration Statement by the Filing Date, or responded to any questions or
requests for modifications issued by the SEC concerning the filed Registration
Statement within ten (10) days after the Company's receipt of such request, then
the Company shall pay to each Purchaser an amount in cash, as liquidated damages
and not as a penalty, equal to 0.5% of the aggregate purchase price paid by such
Purchaser hereunder for the first month and 1% for each month thereafter,
prorated for any partial month.
(c) The Company shall notify each Purchaser in writing promptly (and in any
event within one Trading Day) after receiving notification from the Commission
that the Registration Statement has been declared effective.
6.2 Registration Procedures. In connection with the Company's registration
obligations hereunder, the Company shall:
(a) Not less than three Trading Days prior to the filing of a Registration
Statement or any related Prospectus or any amendment or supplement thereto
(including any document that would be incorporated or deemed to be incorporated
therein by reference), the Company shall (i) furnish to each Purchaser and any
counsel designated by any Purchaser (each, a "Purchaser Counsel", and Vertical
Ventures, LLC has initially designated Proskauer Rose LLP) copies of all such
documents proposed to be filed, which documents (other than those incorporated
or deemed to be incorporated by reference) will be subject to the review of such
Purchasers and each Purchaser Counsel, and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of each
Purchaser Counsel, to conduct a reasonable investigation within the meaning of
the Securities Act. The Company shall not file a Registration Statement or any
such Prospectus or any amendments or supplements thereto to which Purchasers
holding a majority of the Registrable Securities shall reasonably object.
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(b) (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to each Registration Statement and the Prospectus
used in connection therewith as may be necessary to keep the Registration
Statement continuously effective as to the applicable Registrable Securities for
the Effectiveness Period and prepare and file with the Commission such
additional Registration Statements in order to register for resale under the
Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424; (iii)
respond as promptly as reasonably possible, and in any event within ten days, to
any comments received from the Commission with respect to the Registration
Statement or any amendment thereto and as promptly as reasonably possible
provide the Purchasers true and complete copies of all correspondence from and
to the Commission relating to the Registration Statement; and (iv) comply in all
material respects with the provisions of the Securities Act and the Exchange Act
with respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Purchasers thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented
applicable to the Company
(c) Notify the Purchasers of Registrable Securities to be sold and each
Purchaser Counsel as promptly as reasonably possible, and (if requested by any
such Person) confirm such notice in writing no later than one Trading Day
thereafter, of any of the following events: (i) the Commission notifies the
Company whether there will be a "review" of any Registration Statement; (ii) the
Commission comments in writing on any Registration Statement (in which case the
Company shall deliver to each Purchaser a copy of such comments and of all
written responses thereto); (iii) any Registration Statement or any
post-effective amendment is declared effective; (iv) the Commission or any other
Federal or state governmental authority requests any amendment or supplement to
any Registration Statement or Prospectus or requests additional information
related thereto; (v) the Commission issues any stop order suspending the
effectiveness of any Registration Statement or initiates any Proceedings for
that purpose; (vi) the Company receives notice of any suspension of the
qualification or exemption from qualification of any Registrable Securities for
sale in any jurisdiction, or the initiation or threat of any Proceeding for such
purpose; or (vii) the financial statements included in any Registration
Statement become ineligible for inclusion therein or any statement made in any
Registration Statement or Prospectus or any document incorporated or deemed to
be incorporated therein by reference is untrue in any material respect or any
revision to a Registration Statement, Prospectus or other document is required
so that it will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(d) Use its best efforts to avoid the issuance of or, if issued, obtain the
withdrawal of (i) any order suspending the effectiveness of any Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, as soon as possible.
(e) Furnish to each Purchaser and each Purchaser Counsel, without charge,
at least one conformed copy of each Registration Statement and each amendment
thereto, promptly after the filing of such documents with the Commission.
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(f) Promptly deliver to each Purchaser and each Purchaser Counsel, without
charge, two copies of the Prospectus or Prospectuses (including each form of
prospectus) and each amendment or supplement thereto. The Company hereby
consents to the use of such Prospectus and each amendment or supplement thereto
by each of the selling Purchasers in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(g) (i) In the time and manner required by each Trading Market, prepare and
file with such Trading Market an additional shares listing application covering
all of the Registrable Securities; (ii) take all steps necessary to cause such
Registrable Securities to be approved for listing on each Trading Market as soon
as possible thereafter; (iii) provide to the Purchasers evidence of such
listing; and (iv) maintain the listing of such Registrable Securities on each
such Trading Market or another Eligible Market.
(h) Cooperate with the Purchasers to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be delivered to
a transferee pursuant to a Registration Statement, which certificates shall be
free, to the extent permitted by this Agreement, of all restrictive legends, and
to enable such Registrable Securities to be in such denominations and registered
in such names as any such Purchasers may request.
(i) Upon the occurrence of any event described in Section 6.2(c)(vii), as
promptly as reasonably possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(j) Cooperate with any due diligence investigation undertaken by the
Purchasers in connection with the sale of Registrable Securities, including,
without limitation, by making available any documents and information; provided
that the Company will not deliver or make available to any Purchaser material,
nonpublic.
(k) Comply with all applicable rules and regulations of the Commission.
6.3 Registration Expenses. The Company shall pay (or reimburse the
Purchasers for) all fees and expenses incident to the performance of or
compliance with this Agreement by the Company, including without limitation (a)
all registration and filing fees and expenses, including without limitation
those related to filings with the Commission and any Trading Market, (b)
printing expenses (including without limitation expenses of printing
certificates for Registrable Securities and of printing prospectuses requested
by the Purchasers), (c) messenger, telephone and delivery expenses, (d) fees and
disbursements of counsel for the Company, (e) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement, and (f) all listing fees to be paid
by the Company to the Trading Market.
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6.4 Indemnification
(a) Indemnification by the Company. The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless each Purchaser, the
officers, directors, partners, members, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls any such Purchaser
(within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act) and the officers, directors, partners, members, agents and
employees of each such controlling Person, to the fullest extent permitted by
applicable law, from and against any and all Losses, as incurred, arising out of
or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they were
made) not misleading, except to the extent, but only to the extent, that (i)
such untrue statements, alleged untrue statements, omissions or alleged
omissions are based solely upon information regarding such Purchaser furnished
in writing to the Company by such Purchaser expressly for use therein, or to the
extent that such information relates to such Purchaser or such Purchaser's
proposed method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Purchaser expressly for use in the
Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto or (ii) in the case of an occurrence of an event
of the type specified in Section 6.2(c)(v)-(vii), the use by such Purchaser of
an outdated or defective Prospectus after the Company has notified such
Purchaser in writing that the Prospectus is outdated or defective and prior to
the receipt by such Purchaser of the Advice contemplated in Section 6.5. The
Company shall notify the Purchasers promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement. In no event shall the liability of
the Company hereunder be greater in amount than the dollar amount received by
the Company upon issuance of the Shares.
(b) Indemnification by Purchasers. Each Purchaser shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses arising
solely out of any untrue statement of a material fact contained in the
Registration Statement, any Prospectus, or any form of prospectus, or in any
amendment or supplement thereto, or arising solely out of any omission of a
material fact required to be stated therein or necessary to make the statements
therein (in the case of any Prospectus or form of prospectus or supplement
thereto, in the light of the circumstances under which they were made) not
misleading to the extent, but only to the extent, that such untrue statement or
omission is contained in any information so furnished in writing by such
Purchaser to the Company specifically for inclusion in such Registration
Statement or such Prospectus or to the extent that (i) such untrue statements or
omissions are based solely upon information regarding such Purchaser furnished
in writing to the Company by such Purchaser expressly for use therein, or to the
extent that such information relates to such Purchaser or such Purchaser's
proposed method of distribution of Registrable Securities and was reviewed and
21
expressly approved in writing by such Purchaser expressly for use in the
Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto or (ii) in the case of an occurrence of an event
of the type specified in Section 6.2(c)(v)-(vii), the use by such Purchaser of
an outdated or defective Prospectus after the Company has notified such
Purchaser in writing that the Prospectus is outdated or defective and prior to
the receipt by such Purchaser of the Advice contemplated in Section 6.5. In no
event shall the liability of any selling Purchaser hereunder be greater in
amount than the dollar amount of the net proceeds received by such Purchaser
upon the sale of the Registrable Securities giving rise to such indemnification
obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel in any
such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (i) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (ii) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (iii) the
named parties to any such Proceeding (including any impleaded parties) include
both such Indemnified Party and the Indemnifying Party, and such Indemnified
Party shall have been advised by counsel that a conflict of interest is likely
to exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable fees
and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten Trading
Days of written notice thereof to the Indemnifying Party (regardless of whether
22
it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 6.4(a) or
(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 6.4(c), any reasonable attorneys' or
other reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6.4(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 6.4(d), no Purchaser shall be
required to contribute, in the aggregate, any amount in excess of the amount by
which the proceeds actually received by such Purchaser from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Purchaser has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
6.5 Dispositions. Each Purchaser agrees that it will comply with the
prospectus delivery requirements of the Securities Act as applicable to it in
connection with sales of Registrable Securities pursuant to the Registration
Statement. Each Purchaser further agrees that, upon receipt of a notice from the
Company of the occurrence of any event of the kind described in Sections
6.2(c)(v), (vi) or (vii), such Purchaser will discontinue disposition of such
Registrable Securities under the Registration Statement until such Purchaser's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement contemplated by Section 6.2(j), or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
23
resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement. The Company may provide
appropriate stop orders to enforce the provisions of this paragraph.
6.6 Other Registrations. Other than the S-3 Registration Statement of the
Company currently under review by the SEC, the Company will not prepare and file
any registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities
before the Registration Statement becomes effective.
ARTICLE VII
MISCELLANEOUS
7.1 Termination. This Agreement may be terminated by the Company or any
Purchaser, by written notice to the other parties, if the Closing has not been
consummated by the third Trading Day following the date of this Agreement;
provided that no such termination will affect the right of any party to sue for
any breach by the other party (or parties).
7.2 Fees and Expenses. At the Closing, the Company shall pay to Vertical
Ventures, LLC up to $10,000 for their legal fees and expenses incurred in
connection with its due diligence and the preparation and negotiation of the
Transaction Documents. In lieu of the foregoing payment, Vertical Ventures, LLC
may retain the amount of actual fees of its counsel up to such amount at the
Closing and pay such amount directly to Proskauer Rose LLP. Except as expressly
set forth in the Transaction Documents to the contrary, each party shall pay the
fees and expenses of its advisers, counsel, accountants and other experts, if
any, and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company
shall pay all transfer agent fees, stamp taxes and other taxes and duties levied
in connection with the issuance of the Securities.
7.3 Entire Agreement. The Transaction Documents, together with the Exhibits
and Schedules thereto, contain the entire understanding of the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules. At or
after the Closing, and without further consideration, the Company will execute
and deliver to the Purchasers such further documents as may be reasonably
requested in order to give practical effect to the intention of the parties
under the Transaction Documents. Notwithstanding anything to the contrary
herein, Securities may be assigned to any Person in connection with a bona fide
margin account or other loan or financing arrangement secured by such Company
Securities.
7.4 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 6:30 p.m. (New York City time) on a Trading
Day, (b) the next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section on a day that is not a Trading Day or later than 6:30 p.m. (New
York City time) on any Trading Day, (c) the Trading Day following the date of
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deposit with a nationally recognized overnight courier service, or (d) upon
actual receipt by the party to whom such notice is required to be given. The
addresses and facsimile numbers for such notices and communications are those
set forth on the signature pages hereof, or such other address or facsimile
number as may be designated in writing hereafter, in the same manner, by any
such Person.
7.5 Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
the Company and each of the Purchasers or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise any right hereunder in
any manner impair the exercise of any such right. Notwithstanding the foregoing,
a waiver or consent to depart from the provisions hereof with respect to a
matter that relates exclusively to the rights of Purchasers under Article VI and
that does not directly or indirectly affect the rights of other Purchasers may
be given by Purchasers holding at least a majority of the Registrable Securities
to which such waiver or consent relates.
7.6 Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
7.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. Any
Purchaser may assign its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided such transferee agrees
in writing to be bound, with respect to the transferred Securities, by the
provisions hereof that apply to the "Purchasers" including all representations
of the Purchasers in section 3.2 hereof. Notwithstanding anything to the
contrary herein, Securities may be assigned to any Person in connection with a
bona fide margin account or other loan or financing arrangement secured by such
Securities.
7.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except that each Related Person is an intended third party
beneficiary of Section 4.8 and each Indemnified Party is an intended third party
beneficiary of Section 6.4 and (in each case) may enforce the provisions of such
Sections directly against the parties with obligations thereunder.
7.9 Governing Law; Venue; Waiver Of Jury Trial. All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by and construed and enforced in accordance with the laws of
the state of ARIZONA. The Company AND PURCHASERS Hereby Waive All Rights To A
Trial By Jury.
25
7.10 Survival. The representations, warranties, agreements and covenants
contained herein shall survive the Closing and the delivery and/or exercise of
the Securities, as applicable.
7.11 Execution. This Agreement may be executed in two or more counterparts,
all of which when taken together shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
7.12 Severability. If any provision of this Agreement is held to be invalid
or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
7.13 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights.
7.14 Replacement of Securities. If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.
7.15 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.
7.16 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser hereunder or pursuant to the Warrants or any Purchaser
enforces or exercises its rights hereunder or thereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company by a trustee, receiver or any other Person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
7.17 Adjustments in Share Numbers and Prices. In the event of any stock
split, subdivision, dividend or distribution payable in shares of Common Stock
(or other securities or rights convertible into, or entitling the holder thereof
to receive directly or indirectly shares of Common Stock), combination or other
26
similar recapitalization or event occurring after the date hereof, each
reference in any Transaction Document to a number of shares or a price per share
shall be amended to appropriately account for such event.
7.18 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. The decision of each Purchaser to
purchase Shares pursuant to this Agreement has been made by such Purchaser
independently of any other Purchaser and independently of any information,
materials, statements or opinions as to the business, affairs, operations,
assets, properties, liabilities, results of operations, condition (financial or
otherwise) or prospects of the Company or of the Subsidiary which may have been
made or given by any other Purchaser or by any agent or employee of any other
Purchaser, and no Purchaser or any of its agents or employees shall have any
liability to any other Purchaser (or any other Person) relating to or arising
from any such information, materials, statements or opinions. Nothing contained
herein or in any Transaction Document, and no action taken by any Purchaser
pursuant thereto, shall be deemed to constitute the Purchasers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Document. Each Purchaser acknowledges that no other Purchaser has
acted as agent for such Purchaser in connection with making its investment
hereunder and that no other Purchaser will be acting as agent of such Purchaser
in connection with monitoring its investment hereunder. Each Purchaser shall be
entitled to independently protect and enforce its rights, including without
limitation the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.
[Signature pages to follow]
27
IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
ALANCO TECHNOLOGIES, INC.
By: __________________________
Name: Robert R. Kauffman
Title: Chief Executive Officer
Address for Notice:
15575 North 83rd Way, Suite 3
Scottsdale, AZ 85260
Facsimile No.: (480) 607-1515
Telephone No.: (480) 607-1010
Attn: Chief Financial Officer
With a copy to:
Steven P. Oman, Rsq.
10446 N. 74th Street, Suite 130
Scottsdale, AZ 85258
Facsimile No.: (480) 348-1471
Telephone No.: (480) 348-1470
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOR PURCHASERS FOLLOW]
28
VERTICAL VENTURES, LLC
By: __________________________
Name: Joshua Silverman
Title: Partner
Number of Units: 770,000
Underlying Shares subject to
Warrants: 385,000
Address for Notice:
Vertical Ventures, LLC
641 Lexington Ave, 26th Floor
New York, NY 10022
Facsimile No.: (212) 207-3452
Telephone No.: (212) 974-3070
Attn: Joshua Silverman
With a copy to: Proskauer Rose LLP
1585 Broadway
New York, New York 10036-8299
Facsimile No.: (212) 969-2900
Telephone No.: (212) 969-3000
Attn: Adam J. Kansler, Esq.
29
CLEVELAND OVERSEAS LTD.
By: ____________________________
Name:
Title:
Number of Units: 255,642
Underlying Shares subject to
Warrants: 127,821
Address for Notice:
St. Makusgasse 19 P.O. Box 932, 9490 Vaduz,
Liechenstein Facsimile No.: +423 238 7777
Telephone No.: +423 238 7778 Attn: Ewald
Vogt
[ ]
30
OMICRON MASTER TRUST
By: __________________________
Name:
Title:
Number of Units: 512,820
Underlying Shares subject to
Warrants: 256,410
Address for Notice:
Omicron Master Trust
810 Seventh Avenue
39th Fl.
New York, NY 10019
Facsimile No.: 212-803-5264
Telephone No.: 212-805-1261
Attn: Brian Daly
31
Exhibits:
A Form of Warrant
B Opinion of Company Counsel
C Plan of Distribution
D Transfer Agent Instructions
32
EXHIBIT A
NEITHER THESE SECURITIES NOR THE SECURITIES FOR WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS. NOTWITHSTANDING THE FOREGOING, THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.
ALANCO TECHNOLOGIES, INC.
WARRANT
Warrant No. __ Dated: November __, 2003
Alanco Technologies, Inc., a Arizona corporation (the "Company"),
hereby certifies that, for value received, __________________ or its registered
assigns (the "Holder"), is entitled to purchase from the Company up to a total
of ____________ shares of Class A common stock (the "Common Stock"), of the
Company (each such share, an "Warrant Share" and all such shares, the "Warrant
Shares") at an exercise price equal to $0.75 per share (as adjusted from time to
time as provided in Section 9, the "Exercise Price"), at any time and from time
to time from and after the date hereof and through and including the 120th
calendar day following the Effective Date, but not including the Effective Date
(the "Expiration Date"), and subject to the following terms and conditions. This
Warrant (this "Warrant") is one of a series of similar Warrants issued pursuant
to that certain Securities Purchase Agreement, dated as of the date hereof, by
and among the Company and the Purchasers identified therein (the "Purchase
Agreement"). All such Warrants are referred to herein, collectively, as the
"Warrants."
ARTICLE VIII Definitions. In addition to the terms defined elsewhere in
this Warrant, capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Purchase Agreement.
ARTICLE IX Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, absent actual notice to the contrary.
33
ARTICLE X Registration of Transfers. The Company shall register the
assignment and transfer of any portion of this Warrant in the Warrant Register,
upon surrender of this Warrant, with the Form of Assignment attached hereto duly
completed and signed, to the Transfer Agent or to the Company at its address
specified herein. Upon any such registration or transfer, a new Warrant to
purchase Common Stock, in substantially the form of this Warrant (any such new
Warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred
shall be issued to the transferee and a New Warrant evidencing the remaining
portion of this Warrant not so transferred, if any, shall be issued to the
transferring Holder. The acceptance of the New Warrant by the transferee thereof
shall be deemed the acceptance by such transferee of all of the rights and
obligations of a holder of an Warrant. Notwithstanding anything herein to the
contrary, a New Warrant may only be issued to an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
ARTICLE XI Exercise and Duration of Warrant.
11.1 This Warrant shall be exercisable by the registered Holder at any time
and from time to time on or after the date hereof to and including the
Expiration Date. At 6:30 P.M., New York City time on the Expiration Date, the
portion of this Warrant not exercised prior thereto shall be and become void and
of no value.
11.2 The Holder may exercise this Warrant by delivering to the Company (i)
the original Warrant and an exercise notice, in the form attached hereto (the
"Exercise Notice"), appropriately completed and duly signed, and (ii) payment of
the Exercise Price for the number of Warrant Shares as to which this Warrant is
being exercised, and the date such items are delivered to the Company (as
determined in accordance with the notice provisions hereof) is an "Exercise
Date." Execution and delivery of the original Warrant and Exercise Notice shall
have the same effect as cancellation of the original Warrant and issuance of a
New Warrant evidencing the right to purchase the remaining number of Warrant
Shares.
ARTICLE XII Delivery of Warrant Shares.
12.1 Upon exercise of this Warrant, the Company shall promptly issue or
cause to be issued and cause to be delivered to or upon the written order of the
Holder and in such name or names as the Holder may designate, a certificate for
the Warrant Shares issuable upon such exercise, free of restrictive legends
unless a registration statement covering the resale of the Warrant Shares and
naming the Holder as a selling stockholder thereunder is not then effective and
the Warrant Shares are not freely transferable without volume restrictions
pursuant to Rule 144 under the Securities Act. The Company shall forward the
appropriate request to its transfer agent for issuance of the Shares within
three Trading Days after the Company receives the Exercise Notice. The Holder,
or any Person so designated by the Holder to receive Warrant Shares, shall be
deemed to have become holder of record of such Warrant Shares as of the Exercise
Date. The Company shall, upon request of the Holder, use its best efforts to
deliver Warrant Shares hereunder electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions.
12.2 This Warrant is exercisable, either in its entirety or, from time to
time, for a portion of the number of Warrant Shares. Upon surrender of this
Warrant following one or more partial exercises, the Company shall issue or
cause to be issued, at its expense, a New Warrant evidencing the right to
purchase the remaining number of Warrant Shares.
34
12.3 The Company's obligations to issue and deliver Warrant Shares in
accordance with the terms hereof are absolute and unconditional, irrespective of
any action or inaction by the Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other Person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with the issuance of Warrant Shares. Nothing
herein shall limit a Holder's right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company's
failure to timely deliver certificates representing shares of Common Stock upon
exercise of the Warrant as required pursuant to the terms hereof.
ARTICLE XIII Charges, Taxes and Expenses. Issuance and delivery of
certificates for shares of Common Stock upon exercise of this Warrant shall be
made without charge to the Holder for any issue or transfer tax, withholding
tax, transfer agent fee or other incidental tax or expense in respect of the
issuance of such certificates, all of which taxes and expenses shall be paid by
the Company; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the
registration of any certificates for Warrant Shares or Warrants in a name other
than that of the Holder or an Affiliate thereof. The Holder shall be responsible
for all other tax liability that may arise as a result of holding or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
ARTICLE XIV Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange
and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
customary and reasonable indemnity, if requested. Applicants for a New Warrant
under such circumstances shall also comply with such other reasonable
regulations and procedures and pay such other reasonable third-party costs as
the Company may prescribe.
ARTICLE XV Reservation of Warrant Shares. The Company covenants that it
will at all times reserve and keep available out of the aggregate of its
authorized but unissued and otherwise unreserved Common Stock, solely for the
purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as
herein provided, the number of Warrant Shares which are then issuable and
deliverable upon the exercise of this entire Warrant, free from preemptive
rights or any other contingent purchase rights of persons other than the Holder
(taking into account the adjustments and restrictions of Section 9). The Company
covenants that all Warrant Shares so issuable and deliverable shall, upon
issuance and the payment of the applicable Exercise Price in accordance with the
terms hereof, be duly and validly authorized, issued and fully paid and
nonassessable. The Company will take all such action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of any
securities exchange or automated quotation system upon which the Common Stock
may be listed.
ARTICLE XVI Certain Adjustments. The Exercise Price and number of Warrant
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 9. 16.1 Stock Dividends and Splits. If
the Company, at any time while this Warrant is outstanding, (i) pays a stock
dividend on its Common Stock or otherwise makes a distribution on any class of
35
capital stock that is payable in shares of Common Stock, (ii) subdivides
outstanding shares of Common Stock into a larger number of shares, or (iii)
combines outstanding shares of Common Stock into a smaller number of shares,
then in each such case the Exercise Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding
immediately before such event and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such event. Any
adjustment made pursuant to clause (i) of this paragraph shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution, and any adjustment pursuant to clauses
(ii) or (iii) of this paragraph shall become effective immediately after the
effective date of such subdivision or combination.
16.2 Fundamental Transactions. If, at any time while this Warrant is
outstanding, (i) the Company effects any merger or consolidation of the Company
with or into another Person, (ii) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions,
(iii) any tender offer or exchange offer (whether by the Company or another
Person) is completed pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or property, or (iv)
the Company effects any reclassification of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is effectively converted into
or exchanged for other securities, cash or property (other than as a result of a
subdivision or combination of shares of Common Stock covered by Section 9(a)
above) (in any such case, a "Fundamental Transaction"), then the Holder shall
have the right thereafter to receive, upon exercise of this Warrant, the same
amount and kind of securities, cash or property as it would have been entitled
to receive upon the occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder of the number of
Warrant Shares then issuable upon exercise in full of this Warrant (the
"Alternate Consideration"). The aggregate Exercise Price for this Warrant will
not be affected by any such Fundamental Transaction, but the Company shall
apportion such aggregate Exercise Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components of
the Alternate Consideration. If holders of Common Stock are given any choice as
to the securities, cash or property to be received in a Fundamental Transaction,
then the Holder shall be given the same choice as to the Alternate Consideration
it receives upon any exercise of this Warrant following such Fundamental
Transaction. At the Holder's request, any successor to the Company or surviving
entity in such Fundamental Transaction shall issue to the Holder a new Warrant
consistent with the foregoing provisions and evidencing the Holder's right to
purchase the Alternate Consideration for the aggregate Exercise Price upon
exercise thereof. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity to comply with the provisions of this paragraph (c) and
insuring that the Warrant (or any such replacement security) will be similarly
adjusted upon any subsequent transaction analogous to a Fundamental Transaction.
If the Company completes a "Rule 13e-3 transaction" as defined in Rule 13e-3
under the Exchange Act or other analogous "going private" transaction, the
Company (or any such successor or surviving entity) will purchase this Warrant
from the Holder for a purchase price, payable in cash within five Trading Days
36
after such request (or, if later, on the effective date of such Rule 13e-3
transaction), equal to the Black-Scholes value of the remaining unexercised
portion of this Warrant on the date of such request.
16.3 Number of Warrant Shares. Simultaneously with any adjustment to the
Exercise Price pursuant to paragraphs (a) or (b) of this Section, the number of
Warrant Shares that may be purchased upon exercise of this Warrant shall be
increased or decreased proportionately, so that after such adjustment the
aggregate Exercise Price payable hereunder for the increased or decreased number
of Warrant Shares shall be the same as the aggregate Exercise Price in effect
immediately prior to such adjustment.
16.4 Calculations. All calculations under this Section 9 shall be made to
the nearest cent or the nearest 1/100th of a share, as applicable. The number of
shares of Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Company, and the disposition of any
such shares shall be considered an issue or sale of Common Stock.
16.5 Notice of Adjustments. Upon the occurrence of each adjustment pursuant
to this Section 9, the Company at its expense will promptly compute such
adjustment in accordance with the terms of this Warrant and prepare a
certificate setting forth such adjustment, including a statement of the adjusted
Exercise Price and adjusted number or type of Warrant Shares or other securities
issuable upon exercise of this Warrant (as applicable), describing the
transactions giving rise to such adjustments and showing in detail the facts
upon which such adjustment is based. Upon written request, the Company will
promptly deliver a copy of each such certificate to the Holder and to the
Company's Transfer Agent.
16.6 Notice of Corporate Events. If the Company (i) declares a dividend or
any other distribution of cash, securities or other property in respect of its
Common Stock, including, without limitation, any granting of rights or warrants
to subscribe for or purchase any capital stock of the Company or any Subsidiary,
(ii) authorizes or approves, enters into any agreement contemplating or solicits
stockholder approval for any Fundamental Transaction or (iii) authorizes the
voluntary dissolution, liquidation or winding up of the affairs of the Company,
then the Company shall deliver to the Holder a notice describing the material
terms and conditions of such transaction, at least 20 calendar days prior to the
applicable record or effective date on which a Person would need to hold Common
Stock in order to participate in or vote with respect to such transaction, and
the Company will take all steps reasonably necessary in order to insure that the
Holder is given the practical opportunity to exercise this Warrant prior to such
time so as to participate in or vote with respect to such transaction; provided,
however, that the failure to deliver such notice or any defect therein shall not
affect the validity of the corporate action required to be described in such
notice.
ARTICLE XVII Payment of Exercise Price. The Holder shall pay the Exercise
Price in immediately available funds.
ARTICLE XVIII Limitation on Exercise. Notwithstanding anything to the
contrary contained herein, the number of shares of Common Stock that may be
acquired by the Holder upon any exercise of this Warrant (or otherwise in
respect hereof) shall be limited to the extent necessary to insure that,
following such exercise (or other issuance), the total number of shares of
Common Stock then beneficially owned by such Holder and its Affiliates and any
other Persons whose beneficial ownership of Common Stock would be aggregated
37
with the Holder's for purposes of Section 13(d) of the Exchange Act, does not
exceed 4.999% (the "Maximum Percentage") of the total number of issued and
outstanding shares of Common Stock (including for such purpose the shares of
Common Stock issuable upon such exercise). For such purposes, beneficial
ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder. Each delivery of an
Exercise Notice hereunder will constitute a representation by the Holder that it
has evaluated the limitation set forth in this paragraph and determined that
issuance of the full number of Warrant Shares requested in such Exercise Notice
is permitted under this paragraph. By written notice to the Company, the Holder
may waive the provisions of this Section or increase or decrease the Maximum
Percentage to any other percentage specified in such notice, but (i) any such
waiver or increase will not be effective until the 61st day after such notice is
delivered to the Company, and (ii) any such waiver or increase or decrease will
apply only to the Holder and not to any other holder of Warrants.
ARTICLE XIX Fractional Shares. The Company shall not be required to issue
or cause to be issued fractional Warrant Shares on the exercise of this Warrant.
If any fraction of a Warrant Share would, except for the provisions of this
Section, be issuable upon exercise of this Warrant, the number of Warrant Shares
to be issued will be rounded down to the nearest whole share. ARTICLE XX
Notices. Any and all notices or other communications or deliveries hereunder
(including without limitation any Exercise Notice) shall be in writing and shall
be deemed given and effective on the earliest of (i) the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section prior to 6:30 p.m. (New York City time) on a
Trading Day, (ii) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section on a day that is not a Trading Day or later than 6:30
p.m. (New York City time) on any Trading Day, (iii) the Trading Day following
the date of deposit with a nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required to be
given. The address and facsimile numbers for such notices or communications
shall be as set forth in the Purchase Agreement.
ARTICLE XXI Warrant Agent. The Company shall serve as Warrant agent under
this Warrant. Upon 30 days' notice to the Holder, the Company may appoint a new
Warrant agent. Any corporation into which the Company or any new Warrant agent
may be merged or any corporation resulting from any consolidation to which the
Company or any new Warrant agent shall be a party or any corporation to which
the Company or any new Warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor Warrant
agent under this Warrant without any further act. Any such successor Warrant
agent shall promptly cause notice of its succession as Warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
ARTICLE XXII Miscellaneous. 22.1 Subject to the restrictions on transfer
set forth on the first page hereof, this Warrant may be assigned by the Holder.
This Warrant may not be assigned by the Company except to a successor in the
event of a Fundamental Transaction. This Warrant shall be binding on and inure
to the benefit of the parties hereto and their respective successors and
assigns. Subject to the preceding sentence, nothing in this Warrant shall be
construed to give to any Person other than the Company and the Holder any legal
38
or equitable right, remedy or cause of action under this Warrant. This Warrant
may be amended only in writing signed by the Company and the Holder and their
successors and assigns.
22.2 The Company will not, by amendment of its governing documents or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the Holder against impairment. Without limiting the
generality of the foregoing, the Company (i) will not increase the par value of
any Warrant Shares above the amount payable therefor on such exercise, (ii) will
take all such action as may be reasonably necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable Warrant
Shares on the exercise of this Warrant, and (iii) will not close its shareholder
books or records in any manner which interferes with the timely exercise of this
Warrant.
22.3 GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL. ALL QUESTIONS CONCERNING
THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS WARRANT SHALL
BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF ARIZONA THE COMPANY AND HOLDER HEREBY WAIVES ALL RIGHTS TO A TRIAL BY
JURY.
22.4 The headings herein are for convenience only, do not constitute a part
of this Warrant and shall not be deemed to limit or affect any of the provisions
hereof.
22.5 In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
39
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
ALANCO TECHNOLOGIES, INC.
By:
Name:
Title:
40
FORM OF EXERCISE NOTICE
(To be executed by the Holder to exercise the right to purchase shares of Class
A Common Stock under the foregoing Warrant)
To: Alanco Technologies, Inc.
The undersigned is the Holder of Warrant No. _______ (the "Warrant") issued by
Alanco Technologies, Inc., an Arizona corporation (the "Company"). Capitalized
terms used herein and not otherwise defined have the respective meanings set
forth in the Warrant.
XXII.5.a.i.1 The Warrant is currently exercisable to purchase a total of
-------------- Warrant Shares.
XXII.5.a.i.2 The undersigned Holder hereby exercises its right to purchase
--------------Warrant Shares pursuant to the Warrant.
XXII.5.a.i.3 The Holder intends that payment of the Exercise Price shall be made
in immediately available funds, and shall pay the sum of $----------- to
the Company in accordance with the terms of the Warrant.
XXII.5.a.i.4 Pursuant to this exercise, the Company shall deliver to the holder
-------------- Warrant Shares in accordance with the terms of the Warrant.
XXII.5.a.i.5 Following this exercise, the Warrant shall be exercisable to
purchase a total of ---------------- Warrant Shares.
Dated: , Name of Holder:
--------------------- -------
(Print)
By:
Name:
Title:
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant)
41
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ------------------------------------ the right represented by the within
Warrant to purchase --------------- shares of Class A Common Stock of Alanco
Technologies, Inc. to which the within Warrant relates and appoints
----------------- attorney to transfer said right on the books of Alanco
Technologies, Inc. with full power of substitution in the premises.
Dated: ,
---------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant)
Address of Transferee
In the presence of:
42
EXHIBIT B
FORM OF LEGAL OPINION
[List of Purchasers]
Ladies and Gentlemen:
We have acted as counsel to Alanco Technologies, Inc., an
Arizona corporation (the "Company"), in connection with the execution and
delivery by the Company of the Securities Purchase Agreement dated as of
November __, 2003 (the "Agreement"), by and among the Company and the purchasers
identified on the signature pages thereto (the "Purchasers"). This opinion is
given to you pursuant to [Section 2.2(a)(iii] of the Agreement. (Capitalized
terms not otherwise defined herein are defined as set forth in the Agreement.)
43
We have participated in the preparation and negotiation of the
Agreement and the Exhibits and Schedules thereto, and the other documents
referred to therein. We also have examined such certificates of public
officials, corporate documents and records and other certificates, opinions,
agreements and instruments and have made such other investigations as we have
deemed necessary in connection with the opinions hereinafter set forth.
Based on the foregoing and upon such investigation as we have
deemed necessary, we give you our opinion as follows:
The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Arizona. The
Company has all requisite power and authority, and all material
governmental licenses, authorizations, consents and approvals, required
to own and operate its properties and assets and to carry on its
business as now conducted and as proposed to be conducted (all as
described in the Company's Annual Report on Form 10-K for its fiscal
ended June 30, 2003).
The Company has all requisite power and authority to execute,
deliver and perform the Agreement and each other document or instrument
executed by it, or any of its officers, in connection herewith or
therewith or pursuant hereto or thereto (collectively, the "Transaction
Documents"), to issue, sell and deliver the Shares pursuant to the
Transaction Documents, and to carry out and perform its obligations
under, and to consummate the transactions contemplated by, the
Transaction Documents.
All corporate action on the part of the Company, its directors
and its stockholders necessary for the authorization, execution and
delivery by the Company of the Transaction Documents, the
authorization, issuance, sale and delivery of the Shares pursuant to
the Agreement, and the consummation by the Company of the transactions
contemplated by the Transaction Documents has been duly taken. The
Transaction Documents have been duly and validly executed and delivered
by the Company and constitute the legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with
their terms, except (a) that such enforceability may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement
of creditors' rights in general and (b) that the remedies of specific
performance and injunctive and other forms of injunctive relief may be
subject to equitable defenses.
The Company meets the eligibility requirements for the use of
Form S-3 for the registration of the Shares.
44
To our knowledge, the Company has filed all reports (the "SEC
Documents") required to be filed by it under Sections 13(a) and 15(d)
of the Exchange Act of 1934, as amended (the "Exchange Act"). .
Based in part upon the representations of the Purchasers
contained in the Securities Purchase Agreement, the Shares may be
issued to the Purchasers without registration under the Securities Act
of 1933, as amended.
The execution, delivery and performance by the Company of, and
the compliance by the Company with the terms of, the Transaction
Documents, the issuance, sale and delivery of the Shares pursuant to
the Agreement, and the issuance and delivery of Conversion Stock do not
(a) conflict with or result in a violation of any provision of law,
rule or regulation having applicability to the Company or its
Subsidiaries or of the certificate of incorporation or by-laws or other
similar organizational documents of the Company or its Subsidiaries,
(b) to our knowledge, conflict with, result in a breach of or
constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or result in or permit the
termination or modification of, any agreement, instrument, order, writ,
judgment or decree known to us to which the Company of its Subsidiaries
is a party or is subject or (c) result in the creation or imposition of
any lien, claim or encumbrance on any of the Company's or its
Subsidiaries' assets or properties.
To our knowledge, there is no material claim, action, suit,
proceeding, arbitration, investigation or inquiry, pending or
threatened, before any court or governmental or administrative body or
agency, or any private arbitration tribunal, against the Company or its
Subsidiaries, or any of its officers, directors or employees (in
connection with the discharge of their duties as officers, directors
and employees), or affecting any of its properties or assets except as
listed in the publicly filed reports of the Company.
No consent, license, permit, waiver, approval or authorization
of, or designation, declaration, registration or filing with, any
court, governmental or regulatory authority, or self-regulatory
organization, is required in connection with the valid execution,
delivery and performance by the Company of the Documents, or the offer,
sale, issuance or delivery of the Shares or the consummation of the
transactions contemplated thereby.
The Company is not an Investment Company within the meaning of
the Investment Company Act of 1940, as amended.
We express no opinion as to any matters governed by any laws other than
the law of the State of Arizona and the Federal laws of the United States of
America.
Very truly yours,
45
Exhibit C
Plan of Distribution
The selling stockholders may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and o any other method permitted
pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in short sales against the
box, puts and calls and other transactions in our securities or derivatives of
our securities and may sell or deliver shares in connection with these trades.
46
Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved. Any
profits on the resale of shares of common stock by a broker-dealer acting as
principal might be deemed to be underwriting discounts or commissions under the
Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, attributable to the sale of shares will be borne by a selling
stockholder. The selling stockholders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of the shares
if liabilities are imposed on that person under the Securities Act.
The selling stockholders may from time to time pledge or grant a
security interest in some or all of the shares of common stock owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time under this prospectus after we have filed an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.
The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus and may sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares of common stock may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by such broker-dealers or agents
and any profit on the resale of the shares of common stock purchased by them may
be deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares of common stock. We have agreed to indemnify the
selling stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
The selling stockholders have advised us that they have not entered
into any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of common stock by any selling stockholder. If we are notified by any
selling stockholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares of common stock, if required, we will file
a supplement to this prospectus. If the selling stockholders use this prospectus
for any sale of the shares of common stock, they will be subject to the
prospectus delivery requirements of the Securities Act.
The anti-manipulation rules of Regulation M under the Securities
Exchange Act of 1934 may apply to sales of our common stock and activities of
the selling stockholders.
47
Ladies and Gentlemen:
Reference is made to the Securities Purchase Agreements (the "Purchase
Agreement"), dated as of November7, 2003, among Alanco Technologies, Inc., an
Arizona (the "Company") and the purchasers named therein (the "Holders")
pursuant to which the Company is issuing the Company's Class A common stock (the
"Common Stock").
The Company has agreed with the Holders that it will instruct you to: (A) issue
the Common Stock free of all restrictive and other legends if, at the time of
such issue, (i) a registration statement covering the resale of such Common
Stock has been declared and is effective by the Commission under the Securities
Act, (ii) such Common Stock are eligible for sale under Rule 144(k) or (iii)
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the Staff of
the Commission); or (B) reissue the Common Stock (if such shares were originally
issued with a restrictive legend) free of all restrictive and other legends (i)
upon the effectiveness of a registration statement covering the resale of the
Common Stock or (ii) following any sale of such Common Stock pursuant to Rule
144 or (iii) such Common Stock are eligible for sale under Rule 144(k) or (iv)
if such legend is not required under applicable requirements of the Securities
Act (including judicial interpretations and pronouncements issued by the Staff
of the Commission).
In furtherance of this instruction, upon the effectiveness of the Registration
Statement (as defined in the Purchase Agreement) we have instructed our counsel
to deliver to you their opinion letter in the form attached hereto as Exhibit I
to the effect that the Registration Statement has been declared effective by the
Commission and that Common Stock are freely transferable by the Holders and
accordingly may be issued (or reissued, as applicable) and delivered to the
Holders free of all restrictive and other legends.
You need not require further letters from us or our counsel to effect any future
issuance or reissuance of shares of Common Stock to the Holders as contemplated
by the Purchase Agreement and this letter. This letter shall serve as our
standing irrevocable instructions with regard to this matter
Please be advised that the Holders have relied upon this instruction letter as
an inducement to enter into the Purchase Agreement. Please execute this letter
in the space indicated to acknowledge your agreement to act in accordance with
these instructions.
Very truly yours,
[ ]
48
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
ACKNOWLEDGED AND AGREED:
[Transfer Agent]
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
49
Exhibit I
[Counsel's Letterhead]
[Transfer Agent]
Re: [ ]
-------------------
To Whom It May Concern:
We are writing on behalf of our client, Alanco Technologies, Inc., an
Arizona corporation (the "Company"), in connection with the Company's recent
filing of a Registration Statement on Form S-3 (File No. ______) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to ____ shares of the Company's Class A common stock (the
"Registrable Securities"), issued or to be issued to the selling stockholders
(the "Selling Stockholders") listed in the selling stockholders table at pages
__ of the final prospectus, a copy of which is attached hereto as Exhibit A.
In connection with the foregoing, we advise you that the SEC has entered an
order declaring the Registration Statement effective under the Securities Act of
1933, as amended (the "1933 Act"), on ___ __, 2003. We have no knowledge that
any stop order suspending its effectiveness has been issued or that any
proceedings for that purpose are pending before, or threatened by, the SEC.
This letter shall serve as our standing opinion to you that the Common
Stock are freely transferable by the Holders pursuant to the Registration
Statement. You need not require further letters from us to effect any future
legend-free issuance or reissuance of shares of Common Stock to the Holders as
contemplated by the Company's Irrevocable Transfer Agent Instructions dated
November __, 2003. This letter shall serve as our standing opinion with regard
to this matter.
If you have any questions relating to the foregoing, please feel free to
call me at
-------------------.
Very truly yours,
50