FORM 10-KSB/A
Annual Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the fiscal year ended June 30, 2005
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Arizona 86-0220694
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
15575 North 83rd Way, Suite 3, Scottsdale, AZ 85260
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (480) 607-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 of 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
Yes X No
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The Registrant's revenues for the fiscal year ended June 30, 2005 were
$7,184,200.
State the aggregate market value, based upon the closing bid price of
the Common Stock as quoted on NASDAQ, of the voting stock held by non-affiliates
of the registrant: $22,202,300 as of September 19, 2005.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock: 27,410,200 shares of Class A Common Stock (net of
treasury shares) and no shares of Class B Common Stock as of September 19, 2005.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Except for historical information, the statements contained herein are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements, which
are other than statements of historical facts. From time to time, the Company
may publish or otherwise make available forward-looking statements of this
nature. All such forward-looking statements are based on the expectations of
management when made and are subject to, and are qualified by, risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied by those statements. These risks and uncertainties include,
but are not limited to, the following factors, among others, that could affect
the outcome of the Company's forward-looking statements: general economic and
market conditions; reduced demand for information technology equipment;
competitive pricing and difficulty managing product costs; development of new
technologies which make the Company's products obsolete; rapid industry changes;
failure by the Company's suppliers to meet quality or delivery requirements; the
inability to attract, hire and retain key personnel; failure of an acquired
business to further the Company's strategies; the difficulty of integrating an
acquired business; undetected problems in the Company's products; the failure of
the Company's intellectual property to be adequately protected; unforeseen
litigation; unfavorable result of current pending litigation; the ability to
maintain sufficient liquidity in order to support operations; the ability to
maintain satisfactory relationships with lenders and to remain in compliance
with financial loan covenants and other requirements under current banking
agreements; the ability to maintain satisfactory relationships with suppliers;
federal and/or state regulatory and legislative actions; customer preferences
and spending patterns; the ability to implement or adjust to new technologies
and the ability to secure and maintain key contracts and relationships.
EXPLANATORY NOTE
The purpose of this Amended Form 10-KSB is to restate the balance sheet for the
periods ending June 30, 2005 and 2004. The Preferred Stock - Series B
Convertible ("Series B") was included in the initial filing in Long-term
Liabilities. This Amendment presents the Series B in the consolidated balance
sheet between Total Liabilities and Shareholders' Equity. The restatement had
no effect on reported net loss.
PART 1
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Alanco Technologies, Inc. was incorporated in 1969 under the laws of
the State of Arizona. Unless otherwise noted, the "Company" or "Alanco" refers
to Alanco Technologies, Inc. and its wholly owned subsidiaries. Alanco (Nasdaq:
ALAN) is a provider of advanced information technology solutions with the
Company's operations at the end of both fiscal year-end 2005 and 2004
diversified into two reporting business segments including: (i) design,
production, marketing and distribution of RFID (Radio Frequency Identification)
tracking technology, and (ii) manufacturing, marketing and distribution of data
storage products.
The Company acquired its RFID (Radio Frequency Identification) tracking
technology known as the TSI PRISM system in May 2002 through the acquisition of
the operations of Technology Systems International, Inc., a Nevada corporation
("TSIN"). The Company continues to participate in the data storage market
through two wholly-owned subsidiaries: Arraid, Inc., a manufacturer of
proprietary storage products to upgrade older "legacy" computer systems; and
Excel/Meridian Data, Inc., a manufacturer of Network Attached Storage ("NAS")
systems and other storage related products for mid-range organizations.
RECENT BUSINESS DEVELOPMENTS
Contract Award - In August of 2005, Alanco announced that it had been
awarded a contract by the Colorado Department of Corrections for final design of
a TSI PRISM system to be deployed at the Centennial Correctional Facility in
Canon City, Colorado. Responding to a chronic shortage of prison space, Colorado
will construct a new 948-bed maximum security level prison to be built adjacent
to the Centennial facility, in Canon City, Colorado. Centennial will be utilized
as a transition facility for maximum security inmates under consideration for
custody level reclassification with the objective of significant operating cost
reductions through relocation of inmates to lower security level facilities. The
TSI PRISM system will be used to closely monitor inmates for compliance with
prison rules and program participation. Those inmates who demonstrate progress
toward rehabilitation can earn placement in prisons with lower security
classifications. The Centennial project installation is expected to commence in
Fall, 2005 at a project cost of approximately $750,000.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Warrant Exercise - Warrants with an expiration date of September 1,
2005, representing 700,000 shares of the Company's common stock were exercised
on August 31, 2005 at an exercise price of $.80 per share, for a total purchase
price of $560,000.
DESCRIPTION OF BUSINESS
RFID TECHNOLOGY SEGMENT
The Company acquired, in May 2002, the operations of Technology Systems
International, Inc., a Nevada Corporation ("TSIN"), developer of the proprietary
TSI PRISM(TM) wireless RFID tracking technology utilized primarily in
correctional facilities, security management and personnel monitoring. The
acquisition was effected through a wholly owned subsidiary, Technology Systems
International, Inc., an Arizona corporation, by the issuance of Alanco Class A
Common Stock to purchase Seller's assets and assumption of specific liabilities
of Seller. During the current fiscal year, the Company changed the name of
Technology System International, Inc. to Alanco/TSI PRISM, Inc. ("ATSI").
Marketing - ATSI markets its TSI PRISM(TM) RFID tracking system
primarily in the United States, through the company's direct sales
representatives and a network of lobbyists. The primary focus of the marketing
effort has been directed at the domestic state correctional facilities market.
However, during the current fiscal year, ATSI received a design contract from
the largest county jail facility in the United States, representing a new market
opportunity. In addition, ATSI received an order to provide transmitter
technology for the corrections market in Europe.
Raw Materials - The RFID Technology segment utilizes various domestic
subcontractors for materials and parts used to manufacture its products. One
domestic supplier represented approximately 34% of those purchases for fiscal
year ended June 30, 2005. The same domestic supplier accounted for 46% of the
segment's purchases of materials and parts for the year ended June 30, 2004.
Additionally, one subcontractor who accounted for approximately $130,000 and
$58,000 in installation billings during the twelve-month periods ended June 30,
2005 and 2004, respectively, completed all subcontracted installations during
the periods.
The Company anticipates continued concentration of vendor purchases;
however, additional suppliers are readily available at competitive pricing
levels. The Company does not foresee any future significant shortages or
substantial price increases that cannot be recovered from its customers.
Competitive Conditions - The TSI PRISM(TM) system is the only known
wireless RFID continuous real-time tracking technology currently available to
the correctional facilities market. There are other companies attempting to
introduce area location and monitoring technologies in the correctional
facilities market, offering an area or zone detection system. However, at this
time these technologies are not capable of providing continuous real-time
tracking.
During fiscal year 2005, Alanco entered into a technology license
agreement ("License") with a developer of RFID real-time location services
technology utilizing 2.4 GHz wireless networking standards. The License grants
to Alanco an exclusive five-year worldwide license for the corrections market,
to acquire, modify or combine the 2.4 GHz technology with Alanco's 900 MHz TSI
PRISM technology. The Company believes the 2.4 GHz technology has certain
application advantages over the 900 MHz technology in international markets and
in some segments of the U. S. corrections market. The License requires royalty
payments on product sold and stipulates minimum annual purchase requirements
starting in the second year of the License. As consideration for the License,
Alanco agreed to make certain prepayments for future product purchases and
granted a warrant to purchase 500,000 shares of Class A Common Stock at a price
of $1.00 per share.
Employees - The Company's RFID tracking segment employed eighteen and
seventeen full-time employees as of June 30, 2005 and 2004, respectively.
Seasonality of Business - Location and tracking products have minimal
seasonality. However, many of the products in this segment are marketed to state
and federal government customers that are affected by annual budget schedules
and economic conditions.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Dependence Upon Key Customers - The RFID Technology segment is in an
early stage of commercial market development. Targeted customers operate the
majority of the prison facilities in the United States and include the 50 state
governments, numerous county governments and the federal government. During the
twelve months ended June 30, 2005, substantially all new system sales recognized
were generated from two Midwestern state governments. The Company anticipates
that as market penetration of its TSI PRISM(TM) technology accelerates, the
Company will have numerous customers. However, due to the type of product sold
by the RFID Technology segment, the size of each contract may continue to be
significant.
Backlog Orders - The Company operates using order contracts that it
considers to be firm and non-cancelable. Under this method, the Company had
unfulfilled contracts as of June 30, 2005 of approximately $76,200, compared to
$138,400 at fiscal year end 2004.
Research & Development - The Company estimated that the ATSI operation
spent approximately $360,000 and $125,000 in research and development
expenditures, recorded as selling, general and administrative expense, during
fiscal years 2005 and 2004, respectively.
COMPUTER DATA STORAGE SEGMENT
The Company's Computer Data Storage segment consists of two separate
units, Arraid, Inc. ("Arraid") and Excel/Meridian Data, Inc. ("Excel"). Phoenix,
Arizona-based Arraid, manufacturer of legacy computer data storage products, was
acquired effective October 1999. Excel, a Dallas, Texas-based provider of data
storage networking products and services, was acquired effective June 2000.
Arraid designs and manufactures proprietary data storage subsystems
called "emulators" that serve as translators between older "legacy" computers
and state-of-the-art storage devices and provides unique, cost-effective storage
system solutions. Arraid's unique products are targeted at users of special
application legacy computers, such as airplane flight simulators, nuclear power
control systems, missile tracking computer systems, etc.
Excel is a manufacturer and marketer of data storage networking
products and is recognized as a leading provider of optical storage devices,
such as CD/DVD-ROM servers. Excel also markets a Network Attached Storage
("NAS") product line and other storage products incorporating state-of-the-art
software technology.
Marketing - Arraid markets legacy storage products nationally and
internationally through company sales representatives and independent sales
representatives and distributors. Excel markets optical storage and NAS
products, primarily in the United States, through national advertising,
telemarketing and company sales representatives.
Raw Materials - The computer data storage operations have numerous
domestic sources for materials and parts used to manufacture their products. For
fiscal year 2005 and 2004, no supplier provided 10% or more of the Company's
data storage material and parts purchases. The Company believes that it has an
adequate supply of materials and parts and does not foresee any significant
shortages or substantial price increases that cannot be passed on to the
customers.
Competitive Conditions - There are numerous competitors in the computer
data storage market, with no company dominating the market. Arraid principally
provides unique storage products to a limited market with minimal direct
competitors. Excel competes with many established companies in the general
storage market and many of these companies may have substantially greater
financial, marketing and technological resources, larger distribution
capabilities, earlier access to customers and more opportunities to address
customers' various information storage requirements than the Company. The
Company also competes with many smaller, less established companies in specific
storage product segments. Some of these companies may have earlier access to new
technologies or products than the Company. The announcement or introduction of
new products and/or implementation of effective marketing strategies by its
competitors may have a materially adverse affect on the Company's business.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Employees - As of June 30, 2005 the Company's computer data storage
business employed twenty-four full-time employees, compared to twenty-seven
full-time employees as of June 30, 2004.
Seasonality of Business - Computer data storage products have minimal
seasonality. However, many of the products in this segment are marketed to
business customers, which in some cases can be significantly affected by budget
restraints and economic conditions.
Dependence Upon Key Customers - During fiscal year ended June 30, 2005,
one customer accounted for 10.2% of the reported Data Storage revenues. During
fiscal year 2004, no customer accounted for 10% or more of revenues.
Backlog Orders - The Company operates using customer purchase orders
that in some cases may not be considered firm and non-cancelable. Methods of
defining a firm "Backlog Order" are being evaluated, and if the Company utilizes
that information in evaluating sales activity, the information will be reported.
Research & Development - The Company estimates it spent approximately
$150,000 in research and development expenditures, recorded as selling, general
and administrative expense, for both fiscal years 2005 and 2004.
NET ASSETS HELD FOR SALE
The Company's reporting business segments for both fiscal years 2005
and 2004 are limited to the RFID Technology segment and Computer Data Storage
segment discussed above. Assets classified on the Company's balance sheet at
June 30, 2005 and 2004 as "net assets held for sale" consist of remaining
Restaurant Equipment segment assets, which are being liquidated and are valued
at the lower of cost or net realizable value. Income (loss) of the Restaurant
Equipment liquidation activities are reported as "other income (expense)" for
both the current and prior fiscal years.
During fiscal year 2001, the Company completed the sale of its
subsidiary, Alanco Environmental Technologies (Beijing) Co., Ltd., and the
patents related to Charged Dry Sorbent Injection (CDSI) technology to a private
New Jersey corporation. See Note 3 to the Consolidated Financial Statements for
further discussion of notes receivable related to the sale of the CDSI
technology. The transaction completed the sale of the Company's remaining
Pollution Control Products assets.
ITEM 2. PROPERTIES
The Company's corporate office and the ATSI operation are located in an
approximate 9,300 square foot leased facility in Scottsdale, Arizona. The
current lease expires on July 31, 2007.
From November 2001 to August of 2003, Arraid operated under a
month-to-month lease in anticipation of negotiating a lease extension. In August
of 2003, Arraid entered into a 5,200 square foot office/manufacturing space
lease and moved to a new Phoenix, Arizona location. The new three-year lease
expires on August 31, 2006.
Excel/Meridian Data, Inc. entered into an office/manufacturing space
lease during fiscal year 2001 for 11,328 square feet in Carrollton, Texas. The
five-year lease expires March 15, 2006.
Environmental Disclosure. The Company's last mining interest consisted
of a small milling site known as the Tombstone Metallurgical Facility or mill
site located in Cochise County, near Tombstone, Arizona. At June 30, 2002, the
Company was in the process of permanently closing the site under a plan approved
by the Bureau of Land Management ("BLM"). The site was permanently closed during
the fiscal year ended June 30, 2003.
There are numerous federal and state laws and regulations relating to
environmental protection that have direct application to mining, milling and
mineralized material processing operations. The more significant of these laws
deals with mined land reclamation and wastewater discharge from such operations.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
The Tombstone Metallurgical Facility was located on federal lands that
are administered by the BLM. The mill site facility had been constructed in the
1970's when no permitting from the BLM was required. The Company believes it has
complied with all regulations, as they existed; however, there can be no
assurance that environmental problems will not be discovered in the future.
During fiscal year 2003, the Company closed the Tombstone Metallurgical Facility
under a closure plan approved and monitored by the BLM. The Company is not aware
of any material environmental claims or violations. Expenditures during fiscal
years 2005 and 2004 related to environmental regulations, including those
related to the closure of the Tombstone Metallurgical Facility, were less than
$2,000 and $10,000, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation that relates to the acquisition,
in May of 2002, of substantially all the assets of Technology Systems
International, Inc., a Nevada Corporation, to litigation arising out of Carolina
Casualty Insurance Company's failure to pay a claim (relating to the TSIN
litigation) pursuant to a Directors and Officers insurance policy, 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. The actions are more fully described below:
On January 30, 2003, Richard C. Jones, a shareholder of Technology
Systems International, Inc., a Nevada corporation ("TSIN"), filed a derivative
suit naming as defendants the Company and its wholly owned subsidiary,
Technology Systems International, Inc, an Arizona corporation (currently
operating under the corporate name of Alanco/TSI PRISM, Inc. ("ATSI") and all of
the directors of TSIN. The venue for this action is the Arizona Superior Court
in and for Maricopa County, Arizona, as 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.
This derivative suit was terminated and the action converted into a direct
action by TSIN by stipulation and court order in July 2003.
TSIN is currently in bankruptcy and, due to the bankruptcy, the court
has stayed the TSIN action. It is anticipated the Chapter 7 Bankruptcy Trustee
will evaluate the lawsuit to determine an appropriate future course of action on
behalf of TSIN. 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. In addition, the Company will pursue
reimbursement of legal expenses incurred from TSIN.
The Company is a Plaintiff in a lawsuit (U.S. District Court No.
CV-04-0789-PHX-DGC) arising out of Carolina Casualty Insurance Company's
("Carolina") failure to pay a claim, regarding the TSIN litigation, that the
Company made pursuant to its Directors and Officers Policy No.1302557("Policy")
issued by Carolina. The Company seeks payment for its legal expenses in the TSIN
litigation and reimbursement of legal fees incurred in the Carolina litigation.
On July 18, 2003, Arraid Property L.L.C., an Arizona Limited Liability
Company ("Arraid LLC"), filed a complaint in Superior Court, Arizona (case
number CV 2003-13999) against the Company and its wholly owned subsidiary,
Arraid, Inc., an Arizona corporation ("Arraid"), alleging breach of lease and
unjust enrichment and seeking monetary damages. The suit relates to an expired
lease agreement for property previously leased by Arraid. The Company has filed
a counterclaim against Arraid LLC seeking monetary damages and alleging, among
other things, excess billing. 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 and pursue the counterclaim and
reimbursement of legal fees.
No amounts have been accrued in the accompanying financial statements
of the Company as of June 30, 2005 for any potential loss arising from the
matters, or for any additional costs of defense.
The Company may also, from time to time, be involved in litigation
arising from the normal course of the business. As of June 30, 2005, there was
no such litigation pending.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Shareholders during the
fourth quarter of fiscal year ended June 30, 2005.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Alanco's common stock is traded on the NASDAQ Small Cap Market under
the symbol "ALAN."
The following table sets forth high and low sale prices for each fiscal
quarter for the last two fiscal years. Such quotations represent inter-dealer
price without retail mark-ups, markdowns, or commissions and, accordingly, may
not represent actual transactions.
Fiscal 2005 Fiscal 2004
< ------------------------- -------------------------
Quarter Ended High Low High Low
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September 30 $1.72 $0.91 $0.66 $0.25
December 31 $1.19 $0.78 $1.29 $0.40
March 31 $1.20 $0.69 $1.09 $0.70
June 30 $1.37 $0.89 $2.34 $0.79
As of June 30, 2005, Alanco had approximately 1,300 holders of record
of its Class A Common Stock. This does not include beneficial owners holding
shares in street name.
During the fiscal year ended June 30, 2005, the Company issued
3,447,400 shares of its Class A Common Stock. Of those shares, 568,800 shares
were issued in connection with exercise of employee stock options, 334,200 were
issued for services, and 2,544,400 were issued upon the exercise of warrants.
Alanco has paid no Common Stock cash dividends and has no current plans
to do so. During fiscal years ended June 30, 2005 and 2004, holders of Series A
Convertible Preferred Stock received "paid-in-kind" dividends of 304,400 shares
valued at $456,600 and 135,400 shares valued at $203,100, respectively. Holders
of Series B Convertible Preferred Stock received "paid-in-kind" dividends during
fiscal years ended June 30, 2005 and 2004 of 6,500 shares, valued at $64,500,
and 5,700 shares, valued at $57,000, respectively.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" discusses our consolidated financial statements that have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amount of assets
and liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to revenue recognition, valuation allowances for inventory and receivables,
warranty and impairment of long-lived and intangible assets. We base our
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances. The result of these
estimates and judgments form the basis for making conclusions about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
The SEC suggests that all registrants list their most "critical
accounting policies" in Management's Discussion and Analysis. A critical
accounting policy is one which is both important to the portrayal of the
Company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management has identified the critical accounting policies presented below as
those accounting policies that affect its more significant judgments and
estimates in the preparation of its consolidated financial statements. The
Company's Audit Committee has reviewed and approved the critical accounting
policies identified.
These policies include, but are not limited to, the carrying value of
goodwill and other intangible assets, estimates related to the valuation of
inventory and receivables, the actual net realizable value of net assets held
for sale and the ultimate resolution of the current litigation with TSIN and
Arraid L.L.C. that is more fully discussed in Item 3, Legal Proceedings.
Results of Operations
In accordance with accounting principles generally accepted in the
United States of America, the Company is reporting consolidated revenues for
fiscal years ended June 30, 2005 and 2004 from its Computer Data Storage
segment and its RFID Technology segment.
Data RFID
Storage Technology Corporate Total
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Fiscal year 2005
Revenue $ 6,363,300 $ 820,900 $ - $ 7,184,200
Cost of Goods Sold 4,161,200 514,300 - 4,675,500
----------- ----------- ----------- ------------
Gross Profit 2,202,100 306,600 - 2,508,700
Selling, General & Administrative 1,918,300 2,697,600 1,755,400 6,371,300
----------- ----------- ----------- ------------
Operating Income (Loss) $ 283,800 $(2,391,000) $(1,755,400) $ (3,862,600)
=========== =========== =========== ============
Accounts Receivable $ 827,600 $ 246,400 $ 17,400 $ 1,091,400
=========== =========== =========== ============
Inventory $ 1,091,900 $ 810,700 $ - $ 1,902,600
=========== =========== =========== ============
Total Assets $ 2,398,800 $ 6,987,600 $ 1,157,500 $ 10,543,900
=========== =========== =========== ============
Capital Expenditures $ 41,600 $ 108,900 $ 2,400 $ 152,900
=========== =========== =========== ============
Depreciation & Amortization $ 20,300 $ 326,400 $ 3,100 $ 349,800
=========== =========== =========== ============
Fiscal Year 2004
Revenue $ 4,672,900 $ 237,900 $ - $ 4,910,800
Cost of Goods Sold 3,038,000 151,900 - 3,189,900
----------- ----------- ----------- ------------
Gross Profit 1,634,900 86,000 - 1,720,900
Selling, General & Administrative 1,650,000 2,061,100 1,078,400 4,789,500
----------- ----------- ----------- ------------
Operating Loss $ (15,100) $(1,975,100) $(1,078,400) $ (3,068,600)
=========== =========== =========== ============
Accounts Receivable $ 491,700 $ 142,300 $ 23,200 $ 657,200
=========== =========== =========== ============
Inventory $ 1,194,700 $ 1,087,600 $ - $ 2,282,300
=========== =========== =========== ============
Total Assets $ 2,020,300 $ 7,273,200 $ 2,292,400 $ 11,585,900
=========== =========== =========== ============
Capital Expenditures $ 15,400 $ 10,200 $ 5,300 $ 30,900
=========== =========== =========== ============
Depreciation & Amortization $ 29,500 $ 308,500 $ 4,900 $ 342,900
=========== =========== =========== ============
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated revenues for fiscal year 2005 were $7,184,200, an increase
of 46.3% when compared to $4,910,800 revenues for fiscal year 2004. The revenue
increase resulted from an increase in the Data Storage segment, which reported
revenues of $6,363,300, compared to $4,672,900 reported for fiscal year ended
June 30, 2004, an increase of 36.2%. The increase in Data Storage segment
revenue resulted from increased demand for data storage products as companies
increased technology expenditures in reaction to improving economic conditions.
The RFID Technology segment (acquired effective June 1, 2002), also reported
increased revenues to $820,900 compared to $237,900 for the previous year. The
increase in RFID Technology segment revenues was the result of increased sales
of the TSI PRISM system products. The TSI PRISM revenue level is still
significantly below the Company's expectation. The Company believes the slow
sales growth of the RFID Technology segment relates to the economic conditions
that reduced both state and federal government tax revenues and the prolonged
government procurement process.
Gross Profit for fiscal year 2005 was $2,508,700, or 34.9% of sales, a
45.8% increase compared to $1,720,900, or 35% of sales, for the prior year. The
Data Storage segment reported gross profit of $2,202,100, an increase of
$567,200, or 34.7%, resulting from increased product demand. Gross Margin for
the Data Storage segment was 34.6%, compared to 35% reported in the prior year.
The decrease resulted from changes in product mix to lower margin products. The
RFID Technology segment reported an increase in gross margin to $306,600, from
$86,000 reported for the prior fiscal year. Gross Margin improved to 37.3% in
the current period from 36.1% reported for the prior fiscal year. Due to minimum
sales recognized for the RFID Technology segment in both fiscal years, the gross
margins are not reflective in the gross margin percentage that is anticipated
under higher sales levels.
Consolidated selling, general and administrative expenses for the year
ended June 30, 2005 increased by $1,581,800, or 33.0%, to $6,.371,300, compared
to $4,789,500 in fiscal 2004. Selling, general and administrative expense for
the Data Storage segment increased by $268,300, or 16.3%, when compared to the
prior year. The increase in Data Storage segment costs resulted from increases
in sales commissions and required expenditures to support the increased sales
volume. Selling, general and administrative expenses for the RFID Technology
segment increased by $636,500, or 30.9%. The increase was due primarily to
increases in Research and Development of approximately $240,000, increases in
marketing expenditures of $215,000 (required primarily to support a network of
lobbyists in key targeted states) and increases in engineering and consultant
expenses of $130,000. Corporate administrative expenses increased by $677,000,
or 62.8% compared to the prior year primarily due to an increase of
approximately $575,000 in legal expenses related to TSIN and other litigations
previously discussed. The Company does not anticipate the level of legal
expenditures incurred during fiscal 2005 to continue throughout fiscal year
2006. The Company has committed to pursue reimbursement of legal expense from
both TSIN and Arraid LLC, as well as pursue reimbursement under the applicable
Directors and Officers liability insurance policy.
The operating loss for fiscal year ended June 30, 2005 was $3,862,600,
a $794,000, or 25.9%, increase when compared to the operating loss for the prior
fiscal year of $3,068,600. The increase in the Company's operating loss resulted
from increased operating losses in the RFID Technology segment, increasing their
operating loss by approximately $415,900 in fiscal year 2005 compared to the
prior year. The Data Storage segment reported operating income of $283,800,
compared to an operating loss of $15,100 reported in the fiscal year ended June
30, 2004. The loss from operations for the fiscal year ended June 30, 2005 was
$3,790,600, a 19.4% increase when compared to a loss of $3,175,500 for the prior
fiscal year.
Fiscal year 2005 interest expense, net of interest income, was $34,700,
compared to net interest expense of $162,000 for the previous year. The decrease
in net interest expense reflects reduced average borrowing under the Company's
line of credit agreement during fiscal 2005.
Other income for the year ended June 30, 2005 increased to $106,700,
compared to $55,100 for the prior year. Other income for the current fiscal year
includes $89,600 related to the collection of notes receivable associated with
the sale of "net assets held for sale" in a prior year and $17,100 income from
the sale of "net assets held for sale" in fiscal year 2005. Fiscal year 2004
included a gain of $29,600 related to the liquidation of securities pledged to
secure a note receivable, $18,400 of income from the sale of "net assets held
for sale" and other income of $7,100.
9
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Preferred Stock dividends paid in-kind for the year ended June 30, 2005
for both Series A and Series B Convertible Preferred Stock amounted to $521,100,
compared to Preferred Stock dividends of $260,200 for the prior year, an
increase of $260,900. Series A Preferred shareholders received in-kind dividends
of 304,400 shares valued at $456,600, compared to 135,400 shares valued at
$203,100 in the prior year. Current year Series A dividends reflect two
bi-annual dividend payments compared to only one payment made in the prior year.
Series B Preferred shareholders received 6,500 shares valued at $64,500 compared
to 5,700 shares valued at $57,000 in fiscal year 2004. See Footnote 12 -
Shareholders' Equity for additional discussion of Preferred Stock transactions.
Consolidated net loss attributable to Common stockholders for fiscal
year ended June 30, 2005 was $4,311,700, or ($.17) per share, an increase in
loss attributable to common stockholders of 25.5% when compared to a net loss of
$3,435,700, or ($.19) per share, for the prior year. The increase in net loss
attributable to Common stockholders of $876,000 was due primarily to increases
in legal expenses of $575,000 and increases in preferred stock dividends of
$261,000.
Net cash used in operating activities for the current fiscal year was
$3,512,100 compared with net cash used in operating activities for the prior
fiscal year of $3,884,000. The decrease of approximately $372,000 resulted from
decreases in inventory, compared to a significant increase in inventory for
fiscal year 2004, offset by an increase in loss from operations. See "Liquidity
and Capital Resources" below for management's discussion of major items
affecting the Consolidated Statement of Cash Flow.
Any new Statements of the Financial Accounting Standards affecting the
Company are disclosed in the "Notes to Consolidated Financial Statements."
Liquidity and Capital Resources
At June 30, 2005 the Company's current assets exceeded current
liabilities by $2.8 million, resulting in a current ratio of 3.11 to 1. At June
30, 2004, the Company's current assets exceeded current liabilities by $3.7
million, reflecting a current ratio of 3.85 to 1. The decrease in net current
assets resulted primarily from funding current year losses from operations.
Accounts receivable of $1,091,400 at June 30, 2005, reflects an
increase of $434,200 from the $657,200 reported as consolidated accounts
receivable at the end of fiscal year 2004. $246,400, or 22.6% of the current
fiscal year end balance, was from the RFID Technology segment, compared to
$142,300, or 21.6%, at June 30, 2004. Data Storage segment accounts receivable
balances at June 30, 2005 amounted to $827,600, an increase of $335,900, or
68.3%, compared to the previous year. The Data Storage segment accounts
receivable balance at June 30, 2005 represented thirty-four days' sales in
receivables compared to twenty-seven days at fiscal year end 2004. The increase
was due to sales increases in May and June when compared to the previous months.
Days' sales for the RFID Technology segment are distorted due to the lack of
significant reported sales.
Consolidated inventories at June 30, 2005 amounted to $1,902,600
compared to $2,282,300 at the end of the prior fiscal year. Included in the
current fiscal year end balance is $810,700 of inventory for the RFID Technology
segment and $1,091,900 for the Data Storage segment. The RFID Technology segment
balance at June 30, 2005 of $810,700 represents a 25.5% decrease when compared
to the $1,087,600 inventory balance reported at June 30, 2004. The RFID
Technology segment decreased inventory levels through product delivered under
current system installation contracts and research and development expenditures.
Inventories for the Data Storage segment of $1,091,900 at year end represented a
decrease of less than one percent, compared to $1,194,700 of inventory recorded
at the prior fiscal year end. The June 30, 2005 Data Storage segment inventory
balance reflects an inventory turnover of 3.8 compared to 2.5 for inventory
levels at June 30, 2004.
The Company's cash position at June 30, 2005 was $737,300, compared to
$1,975,600 at the end of the prior fiscal year. The decrease in the Company's
cash position at year-end was primarily the result of funding current year
losses from operation.
Cash used in investing activities during the current year was $12,300,
compared to cash generated from investing activities of $277,800 for the
previous year. The decrease was due primarily to increased purchases of
property, plant and equipment in fiscal year 2005 of $153,000, compared to
10
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
$30,900 in the prior year and the funding of TSIN legal representation.
Approximately $50,000 of the notes receivable were paid off subsequent to June
30, 2005.
Net cash provided by financing activities during fiscal year ended June
30, 2005 amounted to $2,286,100, compared to $5,484,100 for the prior year. Cash
provided by financing activities included $1,963,500 and $4,883,600 in proceeds
from the sale of common stock, net of additional shares listing fees of $38,200
and $33,400, for fiscal years ended June 30, 2005 and 2004, respectively. Fiscal
year 2004 also included $899,200 in the collection of subscription receivables.
Advances on borrowings amounted to $329,500 compared to $2,180,300 for the
previous year. Cash repayments of borrowing and capital leases during the year
amounted to $6,900, compared to $2,581,400 during the prior fiscal year.
The Company had a $829,500 line of credit balance at June 30, 2005
under a $1,500,000 line of credit agreement with a private trust that was
amended in April 2003, November 2003, March 2005 and June 2005. The secured line
of credit is based upon accounts receivable and inventory values, and is secured
by all assets of the Company. The line of credit has an interest rate of prime
plus 2% (8.25% at June 30, 2005). Under an amendment to the line of credit
agreement, dated June 29, 2005, the Company must maintain a balance due under
the line of at least $1,000,000 through July 2007. Due to the minimum balance
requirement and the July 2007 expiration date, the $829,500 balance is presented
at June 30, 2005 and 2004 as long-term notes payable - bank. The Company had
drawn less than the minimum $1 million amount under the agreement at June 30,
2005 and had corrected that deficiency subsequent to year end. At June 30, 2005,
$671,000 was available under the line of credit agreement.
Although management cannot assure that future operations will be
profitable or that additional debt and/or equity will not be required, we
believe our cash balances of $737,300 and the $560,000 of additional capital
raised subsequent to the end of fiscal 2005 through the exercise of warrants,
and the available borrowing under the Company's line of credit at June 30, 2005
of approximately $670,000, will provide adequate capital resources to maintain
operations for the next year. However, if additional working capital is required
and not obtained through long-term debt, equity capital or operations, it could
adversely affect future operations. Management has historically been successful
in obtaining financing and has demonstrated the ability to implement a number of
cost-cutting initiatives to reduce working capital needs. The Company requires
and continues to pursue additional capital for growth and strategic plan
implementation. Accordingly, the accompanying consolidated financial statements
have been prepared assuming the Company will continue to operate and do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
Product and Environmental Contingencies
The Company is not aware of any material liabilities, either product or
environmental related. Also refer to the environmental disclosure section of the
mining properties segment under Item 2.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements.
11
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Index to Financial Statements
page
Report of Registered Public Accounting Firm. . . . . . . . . . . . . . . 13
Consolidated Balance Sheets As of June 30, 2005 and 2004 . . . . . . . . 14
Consolidated Statements of Operations For the Years Ended
June 30, 2005 and 2004. . . . . . . . . . . . . . . . . . . . . . . 15
Consolidated Statement of Changes in Shareholders' Equity and
Preferred Stock For the Years Ended June 30, 2005 and 2004 . . . . .16
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . .17
Notes to Consolidated Financial statements . . . . . . . . . . . . . . . 19
12
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Alanco Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Alanco
Technologies, Inc. and Subsidiaries as of June 30, 2005 and 2004, and the
related consolidated statements of operations, changes in shareholders' equity
and preferred stock, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits include consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alanco
Technologies, Inc. and Subsidiaries as of June 30, 2005 and 2004, and the
results of its operations, changes in shareholders' equity and preferred stock,
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/Semple & Cooper LLP
Certified Public Accountants
Phoenix, Arizona
September 1, 2005, except as to note 17 as to which the date is May 8, 2006
13
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
2005 2004
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 737,300 $ 1,975,600
Accounts receivable, net 1,091,400 657,200
Notes receivable, current 80,000 -
Inventories, net 1,902,600 2,282,300
Prepaid expenses and other current assets 378,200 110,600
------------ ------------
Total current assets 4,189,500 5,025,700
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 273,500 247,500
------------ ------------
OTHER ASSETS
Goodwill, net 5,356,300 5,356,300
Other intangible assets 560,700 691,700
Long-term notes receivable, net 8,000 68,000
Net assets held for sale 100,200 156,100
Other assets 55,700 40,600
------------ ------------
Total other assets 6,080,900 6,312,700
------------ ------------
TOTAL ASSETS $ 10,543,900 $ 11,585,900
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,279,600 $ 1,251,700
Billings in excess of cost and est. earnings on
uncompleted contracts 4,200 25,800
Deferred revenue, current 60,100 27,200
------------ ------------
Total Current Liabilities 1,343,900 1,304,700
------------ ------------
LONG TERM LIABILITIES
Notes payable, long term 1,143,600 814,100
------------ ------------
TOTAL LIABILITIES 2,487,500 2,118,800
------------ ------------
PREFERRED STOCK - SERIES B CONVERTIBLE -
500,000 shares authorized, 68,000 and
61,500 issued and outstanding, respectively 667,300 602,800
SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible
5,000,000 shares authorized, 2,781,200 and
2,476,800 shares issued and outstanding,
respectively 3,412,700 2,956,100
------------ ------------
Common Stock
Class A - 75,000,000 shares authorized,
26,680,200 and 23,232,800 shares, net of
treasury shares, outstanding, respectively 71,714,600 69,334,700
Treasury Stock, at cost
500,000 shares at June 30, 2005 and 2004 (375,100) (375,100)
Accumulated deficit (67,363,100) (63,051,400)
------------ ------------
Total shareholders' equity 7,389,100 8,864,300
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 10,543,900 $ 11,585,900
============ ============
See accompanying notes to the consolidated financial statements
14
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30,
2005 2004
------------ ------------
NET SALES $ 7,184,200 $ 4,910,800
Cost of goods sold 4,675,500 3,189,900
------------ ------------
GROSS PROFIT 2,508,700 1,720,900
Selling, general and administrative expense 6,371,300 4,789,500
------------ ------------
OPERATING LOSS (3,862,600) (3,068,600)
OTHER INCOME & EXPENSES
Interest income (expense), net (34,700) (162,000)
Other income (expense), net 106,700 55,100
------------ ------------
LOSS FROM OPERATIONS (3,790,600) (3,175,500)
Preferred stock dividend - in kind (521,100) (260,200)
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,311,700) $ (3,435,700)
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED
- Net Loss Attributable to Common Shareholders $ (0.17) $ (0.19)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 25,355,500 17,840,500
============ ============
See accompanying notes to the consolidated financial statements
15
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY & SERIES A PREFERRED STOCK
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
SERIES A
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
---------- ------------ --------- ----------- --------- ----------- ------------ -----------
Balances June 30, 2003 20,609,100 $ 65,014,000 2,248,400 $ 2,653,200 4,996,900 $(2,084,000) $(59,615,700) $ 5,967,500
Shares issued for services and
cancellation of put options 201,900 85,500 - - - - - 85,500
Shares issued for debt
restructure 1,638,900 1,058,000 - - - - - 1,058,000
Cancellation of Treasury Stock (5,018,900) (1,907,200) - - (5,018,900) 1,907,200 - -
Preferred Stock conversion 504,100 200,800 (168,000) (200,800) - - - -
Preferred Dividend, Series A,
paid in kind - - 135,400 203,100 - - - 203,100
Private Offerings 3,318,500 3,196,600 261,000 300,600 522,000 (198,300) 3,298,900
Options, Warrants exercised 2,479,200 1,720,400 - - - - - 1,720,400
NASDAQ listing of additional
shares - (33,400) - - - - - (33,400)
Net loss - - - - - - (3,435,700) (3,435,700)
---------- ------------ --------- ----------- --------- ----------- ------------ -----------
Balances, June 30, 2004 23,732,800 $ 69,334,700 2,476,800 $ 2,956,100 500,000 $ (375,100) $(63,051,400) $ 8,864,300
Shares issued for services 334,200 303,200 - - - - - 303,200
Options, Warrants exercised 3,113,200 2,001,700 - - - - - 2,001,700
Preferred Dividend, Series A,
paid in kind - - 304,400 456,600 - - - 456,600
Warrants issued for loan
amendment and licensing
agreement - 113,200 - - - - - 113,200
NASDAQ listing of additional
shares - (38,200) - - - - - (38,200)
Net Loss - - - - - - (4,311,700) (4,311,700)
---------- ------------ --------- ----------- --------- ----------- ------------ -----------
Balances, June 30, 2005 27,180,200 $ 71,714,600 2,781,200 $ 3,412,700 500,000 $ (375,100) $(67,363,100) $ 7,389,100
========== ============ ========= =========== ========= =========== ============ ===========
See accompanying notes to the consolidated financial statements
16
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR FISCAL YEARS ENDED JUNE 30,
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from operations $ (3,790,600) $ (3,175,500)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 349,800 342,900
Stock and warrants issued for services 82,400 85,500
Income from assets held for sale (106,700) (18,400)
(Gain) loss on disposal of asset - (1,000)
Changes in:
Accounts receivable, net (434,200) 151,300
Inventories, net 379,700 (1,001,900)
Prepaid expenses and other current assets (46,900) (57,500)
Accounts payable and accrued expenses 34,800 (181,800)
Deferred revenue 33,000 (74,000)
Billings and estimated earnings in excess of
costs on uncompleted contracts (21,600) 25,800
Other assets 8,200 20,600
------------ ------------
Net cash used in continuing operations (3,512,100) (3,884,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from assets held for sale 73,000 85,500
Collection of notes receivable 149,600 223,000
Cash advances - TSIN litigation (80,000) -
Purchase of property, plant and equipment (153,000) (30,900)
Proceeds from the sale of property, plant and
equipment - 5,200
Goodwill, acquisition - (5,000)
Patent renewal and other (1,900) -
------------ ------------
Net cash provided by (used in) investing
activities (12,300) 277,800
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on borrowings 329,500 2,180,300
Repayment on borrowings (6,900) (2,581,400)
Subscriptions receivable - 899,200
Proceeds from sale of Preferred Stock - 102,400
Proceeds from sale of Common Stock 1,963,500 4,883,600
------------ ------------
Net cash provided by financing activities 2,286,100 5,484,100
------------ ------------
NET INCREASE (DECREASE) IN CASH (1,238,300) 1,877,900
CASH AND CASH EQUIVALENTS, beginning of period 1,975,600 97,700
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 737,300 $ 1,975,600
============ ============
See accompanying notes to the consolidated financial statements
17
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR FISCAL YEARS ENDED JUNE 30,(continued)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
2005 2004
------------ ------------
Net cash paid during the period for interest $ 34,700 $ 170,700
============ ============
Non-Cash Activities:
Shares issued in payment of accounts payable $ - $ 208,000
============ ============
Value of stocks issued for services $ 303,200 $ 85,500
============ ============
Value of warrants issued for credit line
extension and license agreement $ 113,200 $ -
============ ============
Preferred stock dividends, in kind $ 521,100 $ 260,200
============ ============
Value of treasury stock redeemed in preferred
stock and warrant issuance - $ 198,300
============ ============
Value of treasury stock cancelled $ - $ 1,907,200
============ ============
Conversion of debt to equity $ - $ 850,000
============ ============
See accompanying notes to the consolidated financial statements
18
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Alanco Technologies, Inc. was incorporated in
Arizona in 1969.
The Company implemented a strategic plan in 2000 to position itself as a
provider of information technology. The plan was initiated by acquiring
Arraid, Inc. ("Arraid"), a computer data storage company, and acquiring a
second computer data storage company, Excel/Meridian Data, Inc.
("Excel"), effective June 1, 2000.
Concurrent with the implementation of the strategic plan, Alanco
established a formal plan to sell the previously reported business
segments. At June 30, 2003, the Company had sold or closed all mining
properties, had sold all of the pollution control product assets and was
in the process of liquidating its restaurant equipment assets. During
fiscal year 2005, the only remaining activity related to the liquidation
of the restaurant equipment assets are presented in the balance sheets at
June 30, 2005 and 2004 as "net assets held for sale."
During fiscal year 2002 the Company continued its strategic plan
implementation when its wholly-owned subsidiary, Alanco/TSI PRISM, Inc.,
an Arizona Corporation ("ATSI"), acquired certain RFID (Radio Frequency
Identification) tracking technology through the acquisition of the
operations of Technology Systems International, Inc., a Nevada
corporation ("TSIN"). The two data storage subsidiaries; Arraid, a
manufacturer of proprietary storage products to upgrade older "legacy"
computer systems; and Excel, a manufacturer of Network Attached Storage
("NAS") systems for mid-range organizations, continued the Company's
involvement in the data storage market. Therefore, fiscal years 2005 and
2004 have continuing operations in both the RFID Technology segment and
in the Computer Data Storage segment.
Principles of Consolidation - The consolidated financial statements for
the years ended June 30, 2005 and 2004 include the accounts of Alanco
Technologies, Inc. and its wholly-owned subsidiaries, ATSI, Arraid,
Excel, Fry Guy Inc., SanOne, Inc., and NetZerver, Inc., (collectively,
the "Company"). All subsidiaries are Arizona corporations, except Fry Guy
Inc., which is a Nevada corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash Equivalents - The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Accounts Receivable Trade - The Company provides for potentially
uncollectible accounts receivable by use of the allowance method. An
allowance is provided based upon a review of the individual accounts
outstanding and the Company's prior history of uncollectible accounts.
Provision for uncollectible accounts receivable amounted to approximately
$60,200 and $10,500 at June 30, 2005 and 2004, respectively. The Company
does not typically accrue interest or fees on past due amounts.
Inventories - Inventories consist of materials and parts,
work-in-process, and finished goods. Inventories are stated at the lower
of cost or market. Cost is calculated using the average-cost method for
the Data Storage segment and first-in, first-out ("FIFO") for the RFID
Technology segment.
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method, generally over a 3 to 10-year
19
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
period. Leasehold improvements are amortized on the straight-line method
over the lesser of the lease term or the useful life. Expenditures for
ordinary maintenance and repairs are charged to expense as incurred.
Betterments are capitalized as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation are eliminated from the
account and any gain or loss is reflected in the statement of operations.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The carrying amounts of accounts
receivable, notes receivable, accounts payable, accrued liabilities, and
notes payable approximate fair value.
Goodwill and Other Intangible Assets - In June 2001, the Financial
Accounting Standards Board issued SFAS No.141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001. It also provides guidance on
purchase accounting related to the recognition of intangible assets. SFAS
No. 142 requires that goodwill and identifiable acquired intangible
assets with indefinite useful lives shall no longer be amortized, but
tested for impairment annually and whenever events or circumstances occur
indicating that goodwill might be impaired. SFAS No. 142 also requires
the amortization of identifiable assets with finite useful lives.
Identifiable acquired intangible assets, which are subject to
amortization, are to be tested for impairment in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The Company elected to adopt the provisions of SFAS No. 142 as of July 1,
2001, and identified its reporting units (components) to be its ATSI
unit, which is currently the only unit under the RFID Technology segment;
and two separate units (Arraid and Excel), in its Data Storage segment.
The Company determined the carrying value of each reporting unit by
assigning assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of July 1, 2001. Upon
adoption of SFAS No. 142, amortization of goodwill recorded for business
combinations consummated prior to June 30, 2001 ceased, and intangible
assets acquired prior to June 30, 2001 that did not meet the criteria for
recognition apart from goodwill under SFAS No. 141 were reclassified to
goodwill. In connection with the adoption of SFAS No. 142, the Company
was required to perform a transitional goodwill impairment assessment.
The annual goodwill impairment assessment involves estimating the fair
value of the reporting unit and comparing it with the carrying amount. If
the carrying amount of the reporting unit exceeds its fair value,
additional steps are followed to recognize a potential impairment loss.
Calculating the fair value of the reporting units requires significant
estimates and assumptions by management. The Company estimates the fair
value of its reporting units by applying third-party market value
indicators to the reporting unit's projected earnings before interest,
taxes, depreciation and amortization. The Company completed its
impairment tests with no adjustment to the carrying value of its goodwill
as of June 30, 2005.
Intangible assets consist of goodwill, the excess of purchase price over
fair value of net assets acquired in connection with the acquisitions of
its wholly owned subsidiaries, and other intangible assets, including
cost of licenses, patents, developed software, etc. Prior to fiscal year
2002, goodwill was being amortized over 15 years. Commencing in year
2002, the Company adopted SFAS 142 and ceased amortizing goodwill
balances over a specific period pursuant to SFAS 142. However, per
Company policy, goodwill balances are reviewed at least annually to
determine appropriateness of valuation and presentation based upon
anticipated cash flows. See Impairment of Intangibles and Other
Long-lived assets below for additional discussion of valuation for
Intangible Assets.
20
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
The following is a summary of Goodwill, net:
RFID Data
Technology Storage Total
----------- ---------- -----------
Balance as of June 30, 2003 $ 5,071,700 $ 279,600 $ 5,351,300
Goodwill related to acquisition 5,000 - 5,000
----------- ---------- -----------
Balance as of June 30, 2004 5,076,700 279,600 5,356,300
Goodwill related to acquisition - - -
----------- ---------- -----------
Balance as of June 30, 2005 $ 5,076,700 $ 279,600 $ 5,356,300
=========== ========== ===========
Other intangible assets consist of the following:
Amortization Gross Net Other
Period Carrying Accumulated Intangible
(in years) Value Amortization Assets
------------ ----------- ------------ -----------
As of June 30, 2004
Patents license 3 $ 50,000 $ (34,700) $ 15,300
Manufacturing license 6 500,000 (173,600) 326,400
Software development 5 600,000 (250,000) 350,000
----------- ----------- -----------
Total Other Intangible Assets $ 1,150,000 $ (458,300) $ 691,700
=========== =========== ===========
As of June 30, 2005
Patents license 3 $ 51,900 $ (51,900) $ -
Manufacturing license 6 500,000 (256,900) 243,100
Software development 5 600,000 (370,000) 230,000
Technology license 5 90,000 (2,400) 87,600
----------- ----------- -----------
Total Other Intangible Assets $ 1,241,900 $ (681,200) $ 560,700
=========== =========== ===========
The amortization expenses for aggregate other intangible assets for the
fiscal years ended June 30, 2005 and 2004 are $222,900 and $220,000,
respectively.
The following table summarizes the estimated amortization charge related
to the other intangible assets as of June 30, 2005:
June 30th
2006 $ 221,500
2007 211,500
2008 94,500
2009 18,100
----------
$ 545,600
==========
Net Assets Held For Sale - At June 30, 2005 and 2004, the "net assets
held for sale" consist of the remaining restaurant equipment assets. The
Company is continuing to sell the equipment in small quantities and
believes the carrying value is supportable under the small unit sales.
"Net assets held for sale" at June 30, 2005 and 2004 are valued at the
lower of cost or market.
Income Taxes - The Company accounts for income taxes under the asset and
liability method, which requires recognition of deferred tax assets and
21
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement basis and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Use of Estimates - The preparation of the Company's financial statements
in conformity with accounting principles generally accepted in the United
States of America requires the Company's management to make estimates and
assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from those
estimates.
The Company makes significant assumptions concerning the realizability of
its goodwill and other intangible assets, warranty reserves, percentage
of completion method of accounting, deferred tax assets, investments and
assets held for sale. Due to the uncertainties inherent in the estimation
process and the significance of these items, it is at least reasonably
possible that the estimates in connection with these items could be
further materially revised within the next year.
Impairment of Other Long-Lived Assets - The Company performs an
assessment for impairment whenever events or changes in circumstances
indicate that the carrying amount of a long-lived asset may not be
recoverable. If the net carrying value of the asset exceeds estimated
future net cash flows, then impairment is recognized to reduce the
carrying value to the estimated fair value. No impairment to Other
Long-Lived Assets was recorded during fiscal year ended June 30, 2005 or
2004.
Revenue Recognition - The Company recognizes revenue from computer data
storage sales, net of anticipated returns, at the time products are
shipped to customers, or at the time service is provided. Revenues from
material long-term contracts (in excess of $250,000 and over a 90-day
period) in both the Computer 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 costs and income, and are recognized in the period in which
the revisions are 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.
Income (Loss) Per Share - The income (loss) per share ("EPS") is
presented in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share. Basic EPS is
calculated by dividing the income or loss available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Basic and diluted EPS were the
same for fiscal 2005 and 2004, as the Company had losses from operations
and therefore the effect of all potential common stock equivalents is
antidilutive (reduces loss per share). Stock options representing
7,806,500 shares of Class A Common Stock were outstanding at year-end
with exercise prices ranging between $0.37 and $2.75. The weighted
average exercise price for all outstanding options was $0.84. Stock
warrants representing 5,005,000 Class A Common Shares were outstanding at
year-end with exercise prices ranging between $0.60 and $2.00. The
weighted average exercise price was $1.09.
At June 30, 2005, there were 2,781,200 shares of Series A Convertible
Preferred Stock and 68,000 shares of Series B Convertible Preferred Stock
outstanding. The Series A Convertible Preferred shares are convertible
into Class A Common shares at a ratio of 3 shares of common stock for
each share of Series A Preferred. The Series B Convertible Preferred
22
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
shares are convertible into Class A Common shares at a ratio of 13 shares
of common stock for each share of Series B Preferred. If the preferred
shares had been converted into common shares at June 30, 2005, there
would have been an additional 9,227,600 Class A Common shares
outstanding.
Stock-Based Compensation - At June 30, 2005 and 2004, the Company had
stock-based compensation plans accounted for under the recognition and
measurement principles of Accounting Principles Board Opinion ("APBO")
No. 25 "Accounting for Stock Issued to Employees," and related
interpretations, as more fully described in Note 12. Pro forma
information regarding the impact of stock-based compensation on net
income and earnings per share is required by SFAS No. 123 "Accounting for
Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." Such pro forma information,
determined as if the Company had accounted for its employee stock options
under the fair value recognition provisions of SFAS No. 123, is
illustrated in the following table:
Year Ended June 30,
2005 2004
------------- ------------
Net loss attributable to Common
Shareholders $ (4,311,700) $ (3,435,700)
Deduct: Total stock-based compensation
expense determined under fair value-
based method for all awards, net of
related tax effects (255,600) (914,900)
------------ ------------
Pro Forma Net Loss $ (4,567,300) $ (4,350,600)
============ ============
Loss per Share
Basic and Diluted, as Reported $ (0.17) $ (0.19)
============ ============
Pro Forma Basic and Diluted $ (0.18) $ (0.23)
============ ============
Weighted Shares Outstanding, Basic and
Diluted 25,355,500 17,840,500
============ ============
Pro Forma Weighted Shares Outstanding,
Basic and Diluted 25,590,800 19,190,400
============ ============
The fair value for these options was estimated as of the date of grant
using a Black-Scholes option-pricing model with the following weighted
average assumptions for all options granted.
Year Ended June 30,
2005 2004
------ ------
Volatility 30% 30%
Risk free interest 3.5% 3.5%
Expected dividends none none
Expected term in years 10 10
Concentrations of Credit Risks and Significant Customers - The Company
sells products and extends credit based on an evaluation of the
customer's financial condition, generally without requiring collateral.
Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
The RFID Technology segment utilizes various domestic suppliers for
purchases of materials and parts used to manufacture its products. Due to
23
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
the advantage of volume manufacturing, one domestic supplier represented
approximately 34% of those purchases for fiscal year ended June 30, 2005.
The same domestic supplier accounted for 46% of the segment's purchases
of materials and parts for the year ended June 30, 2004. Additionally,
one subcontractor who accounted for approximately $130,000 and $58,000 in
installation billings during the twelve-month periods ended June 30, 2005
and 2004, respectively, completed substantially all subcontracted
installations during the periods.
The Company anticipates continued concentration of vendor purchases;
however, additional suppliers are readily available at competitive
pricing levels. The Company does not foresee any future significant
shortages or substantial price increases that cannot be recovered from
its customers.
During the current fiscal year one customer accounted for 10.2% of the
Company's Data Storage segment revenues. No Data Storage customer
accounted for more than 10% in the prior fiscal year. Two state
governments accounted for substantially all of the RFID Technology
segment's revenues for fiscal year 2005, while one state government
accounted for substantially all of the revenues for fiscal year 2004.
The largest accounts receivable balance in the Data Storage segment
represented 8.9% and 4.7% of consolidated accounts receivable at June 30,
2005 and 2004, respectively. The largest accounts receivable balance in
the RFID Technology segment at June 30, 2005 represented 13.3% of
consolidated accounts receivable compared to 16.6% at June 30, 2004.
Approximately 61% of the RFID Technology segment receivables were due
from one customer.
Segment Information - SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The Company has identified RFID Technology and Data Storage as the
continuing operating segments of the Company. All assets related to
previously disclosed segments have either been sold or have been
classified as "net assets held for sale" at June 30, 2005 and 2004. See
Note 14 for further information related to the Company's operating
segments.
Recent Accounting Pronouncements -- In December 2003, the FASB revised
FASB Statement No. 132, Accounting for Employers' Disclosures about
Pensions and Other Post Retirement Benefits. Statement No. 132(R) revises
employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans required by FASB Statements No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits, and No.
106, Employers' Accounting for Postretirement Benefits Other Than
Pensions. This Statement retains the disclosure requirements contained in
FASB Statement No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which it replaces. It requires additional
disclosures to those in the original Statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The
required information should be provided separately for pension plans and
for other postretirement benefit plans. The Company does not believe the
adoption of SFAS No. 132(R) will have a material impact on the Company's
financial position, results of operations or cash flows.
In December 2003, the FASB revised FASB Interpretation No. 46, Accounting
for Consolidation of Variable Interest Entities. This Interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial Statements,
which replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, addresses consolidation by business enterprises of
variable interest entities, which have one or more of the following
24
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
characteristics:1) The equity investment at risk is not sufficient to
permit the entity to finance its activities without additional
subordinated financial support provided by any parties, including the
equity holders. 2) The equity investors lack one or more of the following
essential characteristics of a controlling financial interest: a. The
direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights; b. The obligation to
absorb the expected losses of the entity; c. The right to receive the
expected residual returns of the entity. 3) The equity investors have
voting rights that are not proportionate to their economic interests, and
the activities of the entity involve or are conducted on behalf of an
investor with a disproportionately small voting interest. The Company
does not believe the adoption of FIN 46(R) will have a material impact on
the Company's financial position, results of operations or cash flows.
In November 2004, the FASB issued Statement No. 151 ("SFAS 151"),
"Inventory Cost - An Amendment of ARB No. 43, Chapter 4." SFAS 151
clarifies accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. It requires that those
items be recognized as current-period charges regardless of whether they
meet the criterion of abnormal. Currently, we do not have any inventory
items that fall into the classifications discussed, accordingly, adoption
of SFAS 151 does not have a significant impact on our financial
statements.
In December 2004, the FASB issued Statement No. 152 ("SFAS 152"),
"Accounting for Real Estate Time-Sharing Transactions -- An Amendment of
Statements 66 and 67." SFAS 152 amends SFAS 66 and 67 to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions and to state that the guidance for incidental operations and
costs incurred to sell real estate projects does not apply to real estate
time-sharing transactions. SFAS 152 is effective for financial statements
for fiscal years beginning after June 15, 2005. Currently, the Company
does not have any real estate transactions. Accordingly, adoption of SFAS
152 does not have a significant impact on our financial statements.
In December 2004, the FASB issued Statement No. 153 ("SFAS 153"),
"Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29."
SFAS 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly
as a result of the exchange. Adoption of SFAS 153 does not have a
significant impact on our financial statements.
In December 2004, the FASB issued Statement No. 123R ("SFAS 123R"),
"Share-Based Payment." This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment transactions. It requires that the fair-value-based method be
used to account for these transactions for all public entities. This
Statement is effective for small business issuers for the first reporting
period after December 15, 2005, subject to additional extensions granted
by the SEC, and will effect any stock-based compensation for options
issued after that date, or not vested as of that date. The effect of the
adoption should not be significantly different than provided in the
previously reported proforma presentation in the notes to the
consolidated financial statements.
In May 2005, the FASB issued Statement No. 154 ("SFAS 154"), "Accounting
Changes and Error Corrections". SFAS 154 replaces APB Opinion No. 20,
(APB 20") and SFAS No. 3 to require retrospective application of changes
to all prior period financial statements so that those financial
statements are presented as if the current accounting principle had
always been applied. APB 20 previously required most voluntary changes in
accounting principle to be recognized by including in net income of the
period of change the cumulative effect of changing to the new accounting
principle. In addition SFAS 154 carries forward without change the
guidance contained in APB 20 for reporting a correction of an error in
previously issued financial statements and a change in accounting
estimate. SFAS 154 is effective for changes and corrections made after
January 1, 2006, with early adoption permitted. The Company is currently
not contemplating changes that would be impacted by SFAS 154.
25
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
2. LIQUIDITY
The Company incurred significant losses and negative cash flows from
operations during fiscal year ended June 30, 2005 and in prior fiscal
years, and anticipates additional losses and negative cash flows in
fiscal year 2006. These factors, as well as the uncertain conditions that
the Company faces regarding its ability to secure significant contracts
for the TSI PRISM installations, creates an uncertainty about the
Company's ability to finance its operations and remain a going concern.
Although management cannot assure that future operations will be
profitable or that additional debt and/or equity capital will be raised,
we believe our cash balances at June 30, 2005 of approximately $737,000
and the $560,000 of additional capital raised subsequent to the end of
fiscal 2005 through the exercise of warrants, and the available
borrowings under the Company's line of credit at June 30, 2005 of
approximately $670,000, will provide adequate capital resources to
maintain our operations net cash requirements for the next year. However,
if additional working capital is required and not obtained through
long-term debt, equity capital or operations, it could adversely affect
future operations. Management has historically been successful in
obtaining financing and has demonstrated the ability to implement a
number of cost-cutting initiatives to reduce working capital needs. The
Company requires and continues to pursue additional capital for growth
and strategic plan implementation. Accordingly, the accompanying
consolidated financial statements have been prepared assuming the Company
will continue to operate and do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
3. NOTES RECEIVABLE
Notes receivable at June 30, 2005 and 2004 consisted of the following:
2005 2004
------------ ------------
Pollution Control Assets - net $ - $ 64,800
TSIN Board of Directors 80,000 -
Notes receivable - other 10,200 13,200
------------ ------------
90,200 78,000
Less - allowance for uncollectible (2,200) (10,000)
------------ ------------
Net notes receivable $ 88,000 $ 68,000
============ ============
Notes -"Pollution Control Assets, net" in the amount of $64,800 at June
30, 2004, consist of notes receivable related to the sale of the
remaining assets in the Pollution Control Products segment, net of a
deferred gain on the sale. At June 30, 2004 and 2005 the debtor was in
default on the negotiated agreements. Due to the default status, the note
balance at June 30, 2004 is presented net of the unrecognized gain and
the total amount due is classified as long term. During fiscal year 2005,
payments totaling $146,600 were received by the Company resulting in the
elimination of the June 30, 2004 note balance of $64,800, the recovery of
a related $7,800 notes receivable reserve, and the reporting of $89,600
other income. Under the current negotiated agreement, the Company has
offered to discount the remaining balances under the notes to
approximately $50,000, plus interest. Any future payments under the notes
will be reported as other income.
At June 30, 2005, Notes - "TSIN Board of Directors" in the amount of
$80,000 consisted of notes receivable related to advances made to TSIN to
assist the newly elected TSIN board of directors in obtaining legal
representation. The new board required legal representation since the
previous board was attempting to stop the new board from assuming their
responsibilities. The notes incur interest at 9% and are due on demand.
Subsequent to June 30, 2005, the Company received payments on the notes
of approximately $50,000.
Notes receivable - other at June 30, 2005 and 2004, consist of a note
from a former owner of Arraid and a note from a former owner of
Excel/Meridian Data, Inc. The notes bear interest at a rate of 8% and are
due upon demand; however, there is no assurance the Company will demand
payment during the current fiscal year; therefore, the notes are
classified as long-term.
26
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
4. INVENTORIES
Inventories consist of the following at June 30:
2005 2004
------------ ------------
Raw materials and purchased parts $ 2,011,900 $ 1,894,700
Work-in-progress 106,000 198,300
Finished goods 99,300 279,300
------------ ------------
2,217,200 2,372,300
Less reserves for obsolescence (314,600) (90,000)
------------ ------------
$ 1,902,600 $ 2,282,300
============ ============
5. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consist of the following at June 30:
2005 2004
------------ ------------
Machinery and equipment $ 202,600 $ 148,200
Furniture and office equipment 586,800 488,200
Marketing site equipment 250,000 250,000
Leasehold improvement 9,700 9,700
------------ ------------
1,049,100 896,100
Less accumulated depreciation (775,600) (648,600)
------------ ------------
Net book value $ 273,500 $ 247,500
============ ============
Related depreciation expense for the years ended June 30, 2005 and 2004,
was $126,900 and $122,800, respectively.
6. NET ASSETS HELD FOR SALE
During fiscal 2000, management of the Company formally adopted a plan to
actively pursue the sale of all business segment assets not related to
information technology. The only remaining assets presented as "net
assets held for sale" at both June 30, 2005 and 2004 related to
restaurant equipment assets. Based upon management's decision to pursue
the sale of all assets not related to information technology, only the
operations of the RFID Technology and Data Storage segments are
considered as continuing operations at June 30, 2005 and 2004.
7. LINE OF CREDIT AND NOTES PAYABLE
At June 30, 2005, the Company has a $829,500 outstanding balance,
presented as Notes payable - long term, under a $1.5 million line of
credit Agreement. The Agreement is with a private trust, initially
entered into in June 2002, for a credit line of $1.3 million. The
Agreement was amended in April 2003, November 2003, March 2005 and June
2005. Under the current amended agreement, which was signed on June 29,
2005 and expires on July 1, 2007, the Company must maintain a minimum
outstanding balance under the line of $1 million through July 1, 2007 and
pay interest on the outstanding balance at a rate of prime plus 2%(8.25%
at June 30, 2005). Due to the $1 million minimum balance requirement and
the July 2007 expiration date, the entire outstanding balance of $829,500
at June 30, 2005 is presented as Notes payable - long term
27
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
portion. The Company had drawn less than the minimum $1 million amount
under the agreement at June 30, 2005 and corrected that deficiency
subsequent to year end. At June 30, 2004, the Agreement required a
minimum balance of $500,000, which was outstanding and presented as Notes
payable - long term. During fiscal year 2004, the lender elected to
exercise a right under the Agreement to convert $500,000 of the
outstanding balance under the line of credit agreement into the Company's
Class A Common Stock at a conversion rate of $.50 per share. As
additional consideration for amending the line of credit agreement in
November 2003 and extending the agreement's termination date to July 1,
2005, the creditor also received warrants to purchase 50,000 shares of
Alanco's Common Stock at a price of $0.60 per share. The line of credit
is formula-based and secured by all assets of the company. Fund
availability under the line of credit is based upon accounts receivable
and inventory values. Balances outstanding carry an interest rate of
prime plus 2% (8.25% at June 30, 2005). For further information related
to the line of credit see also Related Party Transactions, Note 10.
Notes payable at June 30, 2005 and 2004 consist of the following:
2005 2004
------------ ------------
Notes payable - TSI Acquisition $ 314,100 $ 314,100
Note payable - EMS - 1,700
Notes payable - banks 829,500 500,000
------------ ------------
Notes payable 1,143,600 815,800
Less current portion - (1,700)
------------ ------------
Net notes payable - long term $ 1,143,600 $ 814,100
============ ============
The Notes payable - TSI Acquisition primarily represent payables assumed
as an obligation under the TSI acquisition agreement. The balance at June
30, 2005 and 2004 is payable to TSIN upon ATSI achieving a net profit of
$1 million in any twelve-month period ending on June 30th. The Notes
payable - TSI Acquisition balance of $314,100 at June 30, 2005 and 2004
has been reduced by approximately $10,500 for cost incurred and paid by
the Company that had been indemnified by TSIN in the acquisition
agreement.
The $1,700 Notes payable - EMS at June 30, 2004 relates to inventory
purchases from EMS that are payable when the inventory is utilized, but
not later than March 23, 2006. This obligation had been fulfilled at June
30, 2005.
8. CONTRACTS IN PROGRESS
The Company had one fixed price contract in progress at June 30, 2005 and
2004, within the RFID Technology segment, for the installation of a TSI
PRISM system. Billings in excess of costs and estimated earnings as of
June 30, 2005 and 2004 consist of the following:
June 30, 2005 June 30, 2004
------------ ------------
Costs incurred on uncompleted contract $ 34,100 $ 117,300
Gross profit earned to date 1,700 58,200
------------ ------------
Revenues earned to date 35,800 175,500
Less: billings to date (40,000) (201,300)
------------ ------------
Billings in excess of cost and estimated
earnings on uncompleted contracts $ (4,200) $ (25,800)
============ ============
28
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
9. INCOME TAXES
A reconciliation of anticipated statutory rates is as follows:
2005 2004
------------ ------------
Statutory rate 34.0% 34.0%
State income taxes, net of Federal income
tax benefit 5.0% 3.3%
Increase (reduction) in valuation allowance
related to net operating loss carry-forwards
and change in temporary differences (39.0%) (37.3%)
------------ ------------
0.0% 0.0%
============ ============
The components of the net deferred tax asset (liability) recognized as of
June 30, 2005 and 2004, are as follows:
2005 2004
------------ ------------
Deferred tax assets (liabilities):
Net operating loss and capital loss
carryforwards $ 12,747,000 $ 11,024,000
Goodwill 33,000 45,000
Other intangible assets 47,000 133,000
Property, plant and equipment (49,000) -
Other timing differences 62,000 149,000
Less: Valuation allowance (12,840,000) (11,351,000)
------------ ------------
Net deferred tax $ - $ -
============ ============
A valuation allowance is recognized if it is more likely than not that
some or all of the deferred income tax assets will not be realized. A
valuation allowance is used to offset the related income tax assets due
to uncertainties of realizing the benefits of certain net operating loss
and tax credits. The valuation allowance reflects a 100% reserve for all
years reported above. At June 30, 2005, the Company had net operating
loss and capital loss carryforwards for Federal tax purposes of
approximately $29,556,000. The loss carryforwards, unless utilized, will
expire from 2006 through 2024.
10. RELATED PARTY TRANSACTIONS
The line of credit described in Note 7 is with a trust controlled by
Donald Anderson, a member of the Company's Board of Directors.
During 2005 and 2004, as more fully described in Note 12, Shareholders'
Equity, the Company raised capital through a units offering and a
preferred stock offering, both to accredited investors. The Company
raised approximately $3.3 million during the current fiscal year, with
29
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
less than one percent being attributable to insiders. In fiscal year
2004, the Company raised approximately $2.4 million, with 63% of the
amount being attributable to members of the Company's Board of Directors.
11. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain facilities under non-cancelable
operating lease agreements that expire through fiscal year 2009. All
capital equipment leases had expired prior to June 30, 2005. Future
minimum payments under non-cancelable operating leases at June 30, 2005
are as follows:
Year Ended Operating
June 30, Leases
---------- --------------
2006 $ 319,300
2007 197,000
2008 15,800
2009 -
2010 -
--------------
$ 532,100
==============
Rent expense related to these operating leases totaled approximately
$342,600 and $329,100 for the years ended June 30, 2005 and 2004,
respectively.
Legal Proceedings - The Company is a party to litigation that relates
to the acquisition, in May of 2002, of substantially all the assets of
Technology Systems International, Inc., a Nevada Corporation, to
litigation arising out of Carolina Casualty Insurance Company's failure
to pay a claim (relating to the TSIN litigation) pursuant to a Directors
and Officers insurance policy, 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. The actions are more fully
described below:
On January 30, 2003, Richard C. Jones, a shareholder of Technology
Systems International, Inc., a Nevada corporation ("TSIN"), filed a
derivative suit naming as defendants the Company and its wholly owned
subsidiary, Technology Systems International, Inc, an Arizona corporation
(currently operating under the corporate name of Alanco/TSI PRISM, Inc.
("ATSI")) and all of the directors of TSIN. The venue for this action is
the Arizona Superior Court in and for Maricopa County, Arizona, as 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. This derivative
suit was terminated and the action converted into a direct action by TSIN
by stipulation and court order in July 2003.
TSIN is currently in bankruptcy and, due to the bankruptcy; the court has
stayed the TSIN action. It is anticipated the Chapter 7 Bankruptcy
Trustee will evaluate the lawsuit to determine an appropriate future
course of action on behalf of TSIN. 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. In
addition, the Company will pursue reimbursement of legal expenses
incurred from TSIN.
The Company is a Plaintiff in a lawsuit (U.S. District Court No.
CV-04-0789-PHX-DGC) arising out of Carolina Casualty Insurance Company's
("Carolina") failure to pay a claim, regarding the TSIN litigation, that
the Company made pursuant to its Directors and Officers Policy No.1302557
("Policy") issued by Carolina. The Company seeks payment for its legal
expenses in the TSIN litigation and reimbursement of legal fees incurred
in the Carolina litigation.
On July 18, 2003, Arraid Property L.L.C., an Arizona Limited Liability
Company ("Arraid LLC"), filed a complaint in Superior Court, Arizona
30
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
(case number CV 2003-13999) against the Company and its wholly owned
subsidiary, Arraid, Inc., an Arizona corporation ("Arraid"), alleging
breach of lease and unjust enrichment and seeking monetary damages. The
suit relates to an expired lease agreement for property previously leased
by Arraid. The Company has filed a counterclaim against Arraid LLC
seeking monetary damages and alleging, among other things, excess
billing. 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 and pursue the counterclaim and
reimbursement of legal fees.
The Company may also, from time to time, be involved in litigation
arising from the normal course of business. As of June 30, 2005, there
was no such litigation pending.
12. SHAREHOLDERS' EQUITY
Preferred Shares - During the fourth quarter of the fiscal year ended
2003, the Company allocated 5,000,000 of the 25,000,000 authorized shares
of the Company's Preferred Stock to be known as Series A Convertible
Preferred Stock ("Series A") and issued 2,248,400 of Series A shares in a
transaction with accredited investors. 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. The transaction recorded at June 30, 2003 was valued
at $2,833,000. In July 2003, an additional 261,000 Series A shares, plus
applicable warrants, valued at $328,900 were issued to complete the
private offering. In April 2004, one of the holders of the Series A
shares elected to convert 168,000 preferred shares into 504,000 shares of
Class A Common Stock.
Holders of Series A Preferred Stock are entitled to receive, when
declared by the Board of Directors, out of funds and assets of the
Company legally available therefore, an annual dividend of 12% per annum,
paid semi-annually. Upon approval of the holders of the Series A
Preferred shares, the dividend may be paid in kind, based upon a per
share value of $1.50 for purposes of such dividend payment. Dividends
shall accrue and be cumulative from the date of issue. The Company issued
304,400 shares and 135,400 shares representing "in kind" dividends to the
holders of Series A shares in fiscal 2005 and 2004, respectively, with
corresponding values of approximately $456,600 and $203,100. The Series A
shares are convertible by the holder at any time into three shares of the
Company's Class A Common Stock. The Company may redeem the Series A
Preferred Shares for $1.50 per share after December 31, 2004, provided
the Common stock achieves a trading value in excess of $2.00 for twenty
consecutive trading days and meets minimum daily trading volume
requirements. At June 30, 2005 and 2004, there were 2,781,200 and
2,476,800 shares of Series A Convertible Preferred Stock outstanding,
respectively.
During fiscal 2002, the Company allocated 500,000 of the authorized
shares of the Company's Preferred Stock to be known as Series B
Convertible Preferred Stock ("Series B"), and in a transaction with an
accredited investor, the Company issued 50,000 shares of Series B at
$10.00 per share and 500,000 warrants to purchase Common Stock at an
exercise price of $1.00 per share for a value received of $500,000
($487,300 net of related expenses). The preferred shares are each
convertible into thirteen (13) shares of Common Stock. Holders of shares
of the Company's Series B Preferred Stock shall be entitled to receive,
when declared by the Board of Directors, out of funds and assets of the
Company legally available therefore, an annual dividend of 10% per annum
based upon a per share value of $10 for purposes of such dividend
payment. Dividends shall accrue, be cumulative from the date of issue and
may be paid "in kind." Dividends on Series B Preferred Shares paid
"in-kind" during 2005 and 2004 amounted to 6,500 and 5,700 Preferred
Shares with values of approximately $64,500 and $57,000, respectively. At
June 30, 2005 and 2004, there were 68,000 and 61,500 shares of Series B
Convertible Preferred Stock outstanding, respectively.
Both the Series A and Series B are characterized as "restricted
securities" under federal securities laws as they were acquired from the
Company in a transaction not involving a public offering and that under
such laws and applicable regulations such shares may be resold without
registration under the Securities Act of 1933, as amended, only in
certain limited circumstances.
31
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Common Shares - The authorized capital stock of the Company consists of
75,000,000 shares of Class A Common Stock (reduced from the previously
authorized 100,000,000 shares), each entitled to one vote per share, and
25,000,000 shares of Class B Common Stock, each entitled to one-one
hundredth (1/100th) of one vote per share. No Class B Common Stock has
been issued and none was outstanding at June 30, 2005 and 2004.
During fiscal year 2005, the Company issued a total of 3,447,400 shares
of Class A Common Stock. Of those shares, 3,113,200 were issued in
connection with the exercise of employee stock options and warrants,
resulting in proceeds of $2,001,700. In addition, five-year warrants to
purchase 75,000 shares at $.90 per share (valued at $23,200) were granted
in connection with an amendment to the Company's line of credit agreement
and five-year warrants to purchase 500,000 shares at $1.00 per share
(valued at $90,000) were granted in connection with a technology
licensing agreement. Nasdaq listing fees, associated with listing the
additional shares, amounted to $38,200. Shares issued to outside vendors
by the Company as payment for services rendered totaled 334,200 shares
and were valued at $303,200.
The Company issued 3,318,500 shares of Class A Common Stock during fiscal
year 2004 in private transactions to accredited investors. 1,538,500 of
the shares were issued in November 2003 through the sale of units
consisting of one share of common stock and a warrant, with a strike
price of $.75, to acquire .5 of a share of common stock. The units were
sold at a price of $.65 per unit and resulted in proceeds of $947,900,
net of expenses of $52,100. In December 2003, 400,000 shares were issued
to an accredited investor at a price of $.65 per share, resulting in
proceeds of $246,300, net of related expenses of $13,700. The remaining
1,380,000 shares of common stock were issued in April 2004 through the
sale of units consisting of one share of common stock and two separate
warrants, each to purchase .5 shares of common stock. The two warrants
had different strike prices and termination dates. The first warrant had
a strike price of $1.60 and expired 120 days after the S-3 registration
statement applicable to the transaction had been deemed effective. (The
Company subsequently elected to modify the purchase price and term of
these warrants resulting in these warrants being exercised subsequent to
June 30, 2005 at a price of $.80 per share.) The second warrant had a
strike price of $2.00 and a term of five years. The units for the April
2004 transaction were sold at $1.50 per unit and resulted in proceeds of
$1,985,500, net of $84,000 in expenses.
During fiscal 2004, Alanco issued 2,479,200 common shares due to the
exercise of warrants and options, resulting in proceeds to the Company of
$1,720,400. Shares issued to restructure debt amounted to 1,638,900
shares, valued at $1,058,000. 201,900 shares issued to outside vendors as
payment for services rendered and cancellation of put options were valued
at $85,500. 168,000 Series A Preferred shares were converted into 504,100
Class A Common Shares with a transaction value of $200,800. Nasdaq
listing fees paid during fiscal year 2004 amounted to $33,400.
In February of 2005, the Company received notification from NASDAQ
indicating that due to the failure of the Company to maintain the minimum
$1.00 per share requirement, its securities were subject to delisting
from the NASDAQ Small Cap Market. In April of 2005, the Company received
a letter from NASDAQ stating that the closing bid price of the Company's
common stock had been at $1.00 per share or greater for at least 10
consecutive trading days and the Company had regained compliance.
However, in August 2005, the Company again received notification from
NASDAQ indicating that due to the failure of the Company to maintain the
minimum $1.00 per share requirement, its securities were subject to
delisting from the NASDAQ Small Cap Market. In accordance with
Marketplace Rule 4310(c) (8) (D), the Company has been given 180 calendar
days to comply with the Rule. If compliance with this Rule cannot be
demonstrated by January 31, 2006, NASDAQ officials will determine whether
the Company meets the NASDAQ SmallCap Market initial listing criteria as
set forth in Marketplace Rule 4310 (c), except for the bid price
requirement. If the Company meets the initial listing criteria, the
Company will be notified that it has been granted an additional 180
calendar days to meet the $1.00 minimum bid price requirement. If the
Company is not eligible for an additional compliance period, the Company
will receive written notification that the Company's securities will be
delisted. At that time, the Company may appeal Staff's determination to
delist its securities to a listing qualifications panel.
32
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
The Company's Board of Directors have shareholder authorization to
effect, if the Board believes necessary, up to a 1 for 10 reverse stock
split at a future date through December 31, 2006. As of September 27,
2005, no split was effected.
Warrants - As of June 30, 2005, the Company had 5,005,000 warrants
outstanding with a weighted average exercise price of $1.09. The life of
the outstanding warrants extends from December 2005 through March 2010.
The following is a table of activity related to all warrants.
Weighted
Number of Average
Shares Exercise Price
$
------------ ------------
WARRANTS OUTSTANDING, June 30, 2003 5,748,400 0.77
Granted 2,480,200 1.31
Exercised (2,074,200) 0.68
------------
WARRANTS OUTSTANDING, June 30, 2004 6,154,400 1.01
Granted 1,430,000 0.96
Exercised (2,544,400) 0.61
Canceled/Expired (35,000) 1.54
------------
WARRANTS OUTSTANDING, June 30, 2005 5,005,000 1.09
============
Details relative to the 5,005,000 outstanding warrants at fiscal 2005
year end are outlined below.
Outstanding Warrants
Date Number Exercise Date Purpose of
of Grant of Shares Price of Expiration Issuance
--------------- ---------- -------- ------------- ----------
5/16/2002 500,000 $1.00 5/16/2007 (1)
6/19/2002 100,000 $0.87 6/19/2007 (2)
9/4/2002 25,000 $1.00 9/4/2007 (3)
10/2002-12/2002 1,450,000 $1.00 12/31/2005 (4)
11/26/2002 50,000 $0.75 10/15/2007 (3)
10/31/2003 50,000 $0.60 10/31/2008 (2)
4/18/2004 700,000 $2.00 4/18/2009 (5)
4/18/2004 700,000 $0.80 9/1/2005 (5)
3/22/2005 75,000 $0.90 3/22/2010 (2)
3/23/2005 500,000 $1.00 3/23/2010 (3)
6/29/2005 855,000 $0.95 6/29/2010 (6)
---------
Total Warrants
Outstanding at 6/30/2005 5,005,000
=========
(1) Issued in connection with sale of Series B Preferred Stock
(2) Issued in consideration for line of credit agreement
(3) Issued for outside services rendered
(4) Issued in connection with December 2002 private offering
(5) Issued in connection with April 2004 private offering
(6) Issued in consideration for exercise of expiring warrants above
market price
33
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Warrants exercised in fiscal 2005 and 2004, were 2,544,400 and 2,074,200,
respectively. Exercise of these warrants generated approximately
$1,557,200 in fiscal 2005 and $1,426,900 in fiscal 2004.
Stock Options - As of June 30, 2005, the Company had a total of 7,806,500
stock options outstanding with a weighted average exercise price of
$0.84. Of these options, 6,907,750 are exercisable at 2005 fiscal year
end. The tables below, as well as the narrative following, provide
further information regarding the Company's stock options.
The following is a table of activity of all options:
Weighted
Number of Average
Shares Exercise Price
$
---------- ------------
OPTIONS OUTSTANDING, June 30, 2003 5,578,800 0.96
Granted 3,470,000 0.68
Exercised (405,000) 0.72
Canceled/Expired (234,800) 1.00
---------- ------------
OPTIONS OUTSTANDING, June 30, 2004 8,409,000 0.86
Granted 640,000 1.05
Exercised (568,750) 0.78
Canceled/Expired (673,750) 1.35
---------- ------------
OPTIONS OUTSTANDING, June 30, 2005 7,806,500 0.84
========== ============
For all options granted during fiscal years 2005 and 2004, the option
price was not less than the market price, as defined in the stock option
plans, of the Company's Common Stock on the grant date. At June 30, 2005,
options for 6,907,750 shares were exercisable and options for the
remaining shares become exercisable within the next two years. If not
previously exercised, options outstanding at June 30, 2005 will expire as
follows:
Calendar Year Number of Weighted Average
of Expiration Shares Exercise Price
------------- --------- ----------------
2008 1,150,000 $ 0.43
2009 792,000 1.16
2010 322,000 1.71
2011 500,000 1.03
2012 1,505,000 0.98
2013 1,207,500 0.41
2014 1,965,000 0.92
2015 365,000 0.77
--------- ----------------
7,806,500 $ 0.84
========= ================
Additional information about outstanding options to purchase the
Company's Common Stock as of June 30, 2005 is as follows:
34
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Options Outstanding Options Exercisable
-------------------------------------- --------------------
Weighted Avg. Weighted Weighted
Number Remaining Average Number Average
Exercise of Contractual Exercise of Exercise
Price Shares Life (in years) Price Shares Price
----------- --------- --------------- -------- ---------- --------
$0.37-$0.43 2,120,000 5.53 $0.40 1,835,000 $0.41
$0.50-$0.75 832,500 7.66 $0.70 705,000 $0.71
$0.85-$1.00 3,845,000 7.71 $0.95 3,447,500 $0.96
$1.08-$1.75 780,500 5.22 $1.20 691,750 $1.20
$2.00-$2.75 228,500 5.12 $2.17 228,500 $2.17
--------- ---------
Totals 7,806,500 6,907,750
========= =========
The Company Stock Option Plans are administered by the
Compensation/Administration Committee, currently comprised of two members
of the Company's Board of Directors. Company stock options are issued to
employees at an exercise price not less than the fair market value, as
determined under the option plan, on the date of grant and must be
granted within 10 years from the effective date of the Plan, with the
term of the option not exceeding 10 years. Under the Employee Incentive
Stock Option Plans, incentive and non-qualified stock options may be
granted, with the incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended. Unless
otherwise established by the Committee, the vesting schedule for the
incentive stock options is 25% after six months from the date of grant,
25% after one year, and 50% after two years. No one person shall be
granted incentive stock options with a fair market value of more than
$100,000 during any single calendar year. All of the options have been or
will be registered on Form S-8 filings. In accordance with accounting for
such options utilizing the intrinsic value method, there is no related
compensation expense recorded in the Company's financial statements for
the current fiscal year. The stock option plans outlined below allow for
reissuance of the authorized shares upon cancellation of a stock option
grant.
35
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Alanco Stock Option Summary (1)
as of 6/30/05
Balance Exercise
Plan Authorized Issued Exercised Cancelled Outstanding to Issue Price Range (5)
-----------------------------------------------------------------------------------------------------------
Misc (2) N/A 3,670,000 275,000 1,115,000 2,280,000 - $.43 - $1.00
1998 (3) 750,000 1,429,500 137,500 680,000 612,000 500 $.37 - $2.75
1998 D&O (4) 750,000 750,000 405,000 - 345,000 - $.50 - $1.75
1999 (3) 1,500,000 3,766,250 200,000 2,369,250 1,197,000 103,000 $.37 - $2.35
1999 D&O (4) 500,000 645,000 - 150,000 495,000 5,000 $.75 - $2.00
2000 (3) 1,000,000 1,722,500 234,250 765,750 722,500 43,250 $.37 - $1.50
2000 D&O (4) 500,000 490,000 100,000 - 390,000 10,000 $.37 - $1.00
2002 (3) 1,500,000 1,455,000 - 150,000 1,305,000 195,000 $.75 - $ .90
2002 D&O (4) 500,000 500,000 40,000 - 460,000 - $.75 - $1.00
2004 (3) 2,000,000 50,000 - 50,000 - 2,000,000 -
2004 D&O (4) 1,000,000 - - - - 1,000,000 -
-----------------------------------------------------------------------
Totals 10,000,000 14,478,250 1,391,750 5,280,000 7,806,500 3,356,750
=======================================================================
(1) Only includes plans with options currently outstanding or having a balance
to issue.
(2) Options issued to officers and other employees outside of any plan as an
inducement at time of employment.
(3) Employee Incentive Stock Option Plan
(4) Directors and Officers Stock Option Plan
(5) Range of exercise prices for outstanding options only.
13. RETIREMENT PLAN
The Company provides a 401(k) retirement plan for its employees.
Employees are eligible to participate in the plan on the first of the
month following 90 days of continuous employment. Employee salary
deferral rates are not restricted by the Company, however, IRS limits and
limitations imposed by discrimination tests may affect the allowed salary
deferral rate. The Company matches 25% of the amount deferred by
employees, matching up to 4% of an employee's annual compensation. The
Company's matching contributions totaled $13,300 and $12,200 for the
years ended June 30, 2005 and 2004, respectively.
36
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
14. SEGMENT REPORTING
The following table is a summary of the results of operations and other
financial information by major segment:
Data RFID
Storage Technology Corporate Total
----------- ----------- ----------- ------------
Fiscal year 2005
-----------------
Revenue $ 6,363,300 $ 820,900 $ - $ 7,184,200
Cost of Goods Sold 4,161,200 514,300 - 4,675,500
----------- ----------- ----------- ------------
Gross Profit 2,202,100 306,600 - 2,508,700
Selling, General & Administrative 1,918,300 2,697,600 1,755,400 6,371,300
----------- ----------- ----------- ------------
Operating Income (Loss) $ 283,800 $(2,391,000) $(1,755,400) $ (3,862,600)
=========== =========== =========== ============
Accounts Receivable $ 827,600 $ 246,400 $ 17,400 $ 1,091,400
=========== =========== =========== ============
Inventory $ 1,091,900 $ 810,700 $ - $ 1,902,600
=========== =========== =========== ============
Total Assets $ 2,398,800 $ 6,987,600 $ 1,157,500 $ 10,543,900
=========== =========== =========== ============
Capital Expenditures $ 41,600 $ 108,900 $ 2,400 $ 152,900
=========== =========== =========== ============
Depreciation & Amortization $ 20,300 $ 326,400 $ 3,100 $ 349,800
=========== =========== =========== ============
Fiscal Year 2004
----------------
Revenue $ 4,672,900 $ 237,900 $ - $ 4,910,800
Cost of Goods Sold 3,038,000 151,900 - 3,189,900
----------- ----------- ----------- ------------
Gross Profit 1,634,900 86,000 - 1,720,900
Selling, General & Administrative 1,650,000 2,061,100 1,078,400 4,789,500
----------- ----------- ----------- ------------
Operating Loss $ (15,100) $(1,975,100) $(1,078,400) $ (3,068,600)
=========== =========== =========== ============
Accounts Receivable $ 491,700 $ 142,300 $ 23,200 $ 657,200
=========== =========== =========== ============
Inventory $ 1,194,700 $ 1,087,600 $ - $ 2,282,300
=========== =========== =========== ============
Total Assets $ 2,020,300 $ 7,273,200 $ 2,292,400 $ 11,585,900
=========== =========== =========== ============
Capital Expenditures $ 15,400 $ 10,200 $ 5,300 $ 30,900
=========== =========== =========== ============
Depreciation & Amortization $ 29,500 $ 308,500 $ 4,900 $ 342,900
=========== =========== =========== ============
15. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth certain unaudited selected consolidated
financial information for each of the four quarters in fiscal 2005 and
2004. In management's opinion, this unaudited consolidated quarterly
selected information has been prepared on the same basis as the audited
consolidated financial statements and includes all necessary
adjustments, consisting only of normal recurring adjustments that
management considers necessary for a fair presentation when read in
conjunction with the consolidated financial statements and notes
thereto. The Company believes these comparisons of consolidated
quarterly selected financial data are not necessarily indicative of
future performance.
Quarterly earnings per share may not total to the fiscal year earnings
per share due to the weighted average number of shares outstanding at
the end of each period reported.
37
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2005
Total revenues $ 1,737,200 $ 2,085,500 $ 1,531,200 $ 1,830,300
Cost of sales 1,115,800 1,402,400 975,300 1,182,000
------------ ----------- ----------- -----------
Gross profit 621,400 683,100 555,900 648,300
Loss from operations (908,600) (871,200) (1,103,600) (979,200)
Net loss (1,145,400) (886,200) (1,355,600) (924,500)
Loss per share - basic & diluted $ (0.05) $ (0.03) $ (0.05) $ (0.04)
============ =========== =========== ============
Weighted Average Shares 24,312,600 25,416,700 25,514,500 26,091,300
============ =========== =========== ============
2004
Total revenues $ 1,037,400 $ 1,234,100 $ 1,221,100 $ 1,418,200
Cost of sales 644,700 755,900 780,000 1,009,300
------------ ----------- ---------- ------------
Gross profit 392,700 478,200 441,100 408,900
Loss from operations (806,700) (662,400) (745,100) (961,300)
Net loss (820,200) (675,900) (963,300) (976,300)
Loss per share - basic & diluted $ (0.05) $ (0.04) $ (0.05) $ (0.04)
============ =========== =========== ===========
Weighted Average Shares 15,176,200 16,402,100 17,875,500 21,922,900
============ =========== =========== ===========
16. SUBSEQUENT EVENTS
In August of 2005, Alanco announced that it has been awarded a
contract by the Colorado Department of Corrections for final design of a
TSI PRISM system to be deployed at the Centennial Correctional Facility
in Canon City, Colorado. Responding to a chronic shortage of prison
space, Colorado will construct a new 948-bed maximum security level
prison to be built adjacent to the Centennial facility, in Canon City,
Colorado. Centennial will be utilized as a transition facility for
maximum security inmates under consideration for custody level
reclassification with the objective of significant operating cost
reductions through relocation of inmates to lower security level
facilities. The TSI PRISM system will be used to closely monitor inmates
for compliance with prison rules and program participation. Those inmates
who demonstrate progress toward rehabilitation can earn placement in
prisons with lower security classifications. The Centennial project
installation is expected to commence in Fall, 2005 at a project cost of
approximately $750,000.
Warrants with an expiration date of September 1, 2005, representing
700,000 shares of the Company's common stock were exercised on
August 31, 2005 at an exercise price of $.80 per share, for a total
purchase price of $560,000.
17. RESTATEMENT.
The accompanying financial statements have been restated to reflect the
Series B Preferred Stock as mezzanine financing. It was originally
reported as a liability.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE: NONE
ITEM 8A. 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
38
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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 III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Officers and Directors
The officers and directors of the Company are:
Year
First
Name Age Position Director
------------------- --- ----------------------------------- ---------
Robert R. Kauffman 65 Director, Chairman, Chief Executive 1998
Officer
John A. Carlson 58 Director, Executive Vice President, 1999
Chief Financial Officer
Donald E. Anderson 71 Director 2002
Harold S. Carpenter 71 Director 1995
James T. Hecker 48 Director 1997
Thomas C. LaVoy 45 Director 1998
Steven P. Oman 56 Director 1998
Robert R. Kauffman: Mr. Kauffman was appointed as Chief Executive Officer and
Chairman of the Board effective July 1, 1998. Mr. Kauffman was formerly
President and Chief Executive Officer of NASDAQ-listed Photocomm, Inc., from
1988 until 1997 (since renamed Kyocera Solar, Inc.). Photocomm was the nation's
largest publicly owned manufacturer and marketer of wireless solar electric
power systems with annual revenues in excess of $35 million. Prior to Photocomm,
Mr. Kauffman was a senior executive of the Atlantic Richfield Company (ARCO)
whose varied responsibilities included Senior Vice President of ARCO Solar,
Inc., President of ARCO Plastics Company and Vice President of ARCO Chemical
Company. Mr. Kauffman earned an M.B.A. in Finance at the Wharton School of the
University of Pennsylvania, and holds a B.S. in Chemical Engineering from
Lafayette College, Easton, Pennsylvania.
John A. Carlson: Mr. Carlson, Executive Vice President and Chief Financial
Officer of Alanco Technologies, Inc., joined the Company in September 1998 as
Senior Vice President/Chief Financial Officer. Mr. Carlson started his career
with Price Waterhouse & Co. in Chicago, Illinois. He has over twenty-five years
of public and private financial and operational management experience, including
over twelve years as Chief Financial Officer of a Fortune 1000 printing and
publishing company. He earned his Bachelor of Science degree in Business
Administration at the University of South Dakota, and is a Certified Public
Accountant.
Donald E. Anderson: Donald E. Anderson is President and owner of Programmed
Land, Inc., a Minnesota and Scottsdale, Arizona, based company. Programmed Land
is a diversified holding company engaged in real estate, including ownership,
development, marketing and management of properties. He is also majority owner
of a company involved in the automotive industry. From 1988 until 1997, Mr.
Anderson was Chairman of the Board of NASDAQ-listed Photocomm, Inc., a company
39
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
involved in the solar electric business. Since 1983, Mr. Anderson has also been
President of Pine Summit Bible Camp, a non-profit organization that operates a
year-round youth camp in Prescott, Arizona. Mr. Anderson has a B.A. degree in
accounting.
Harold S. Carpenter: Mr. Carpenter is presently the President of Superiorgas
Co., Des Moines, Iowa, which is engaged in the business of trading and brokering
bulk refined petroleum products with gross sales of approximately $500 million
per year. He is also the General Partner of Superiorgas L.P., an investment
company affiliated with Superiorgas Co. Mr. Carpenter founded these companies in
1984 and 1980, respectively. Mr. Carpenter is also the President of Carpenter
Investment Company, Des Moines, Iowa, which is a real estate investment company
holding properties primarily in central Iowa. From 1970 until 1994, Mr.
Carpenter was the Chairman of the George A. Rolfes Company of Boone, Iowa, which
manufactured air pollution control equipment. Mr. Carpenter graduated from the
University of Iowa in 1958 with a Bachelor of Science and Commerce degree.
James T. Hecker: Mr. Hecker is both an Attorney and a Certified Public
Accountant. Since 1987 Mr. Hecker has been Vice President, Treasurer and General
Counsel of Rhino Capital Incorporated, Evergreen, Colorado, a private capital
management company which manages a $60 million portfolio. He also served, since
1992, as a trustee of an $11 million charitable trust. From 1984 to 1987, Mr.
Hecker was the Controller of Northern Pump Company, Minneapolis, Minnesota, a
multi-state operating oil and gas company with more than 300 properties, with
responsibility of all accounting and reporting functions. Prior to that, from
1981 to 1984, Mr. Hecker was Audit Supervisor of Total Petroleum, Inc., Denver,
responsible for all phases of internal audit and development of audit and
systems controls. Mr. Hecker received a J.D. degree from the University of
Denver in 1992, and a B.B.A. degree in Accounting and International Finance from
the University of Wisconsin in 1979. He is a member in good standing of the
Colorado and the American Bar Associations, the Colorado Society of CPAs, and
the American Institute of CPAs.
Thomas C. LaVoy: Thomas C. LaVoy has served as Chief Financial Officer of
SuperShuttle International, Inc., since July 1997 and as Secretary since March
1998. From September 1987 to February 1997, Mr. LaVoy served as Chief Financial
Officer of NASDAQ-listed Photocomm, Inc. Mr. LaVoy was a Certified Public
Accountant with the firm of KPMG Peat Marwick from 1980 to 1983. Mr. LaVoy has a
Bachelor of Science degree in Accounting from St. Cloud University, Minnesota,
and is a Certified Public Accountant.
Steven P. Oman: Mr. Oman was appointed to the Board in June 1998. Since 1991 Mr.
Oman has been in the private practice of law in Phoenix, Arizona. From 1986 to
1991, Mr. Oman served as Vice President and General Counsel of Programmed Land,
Inc., a Scottsdale-based diversified holding company engaged in real estate,
including ownership, development, marketing and management of properties, as
well as non-real estate subsidiaries involved in the electronics and automotive
industries. Prior to that, from 1978 to 1986, Mr. Oman was President and General
Counsel of Charter Development, Inc., a real estate development firm in St.
Paul, Minnesota. Mr. Oman received a J.D. degree, cum laude, in 1975 from
William Mitchell College of Law, St. Paul, and a Bachelor of Mechanical
Engineering degree from the University of Minnesota, Institute of Technology,
Minneapolis, in 1970.
Significant Employees
The following table provides information regarding a key officer for the
Company's primary subsidiary.
Appointed to
Name Age Position Position
------------- -- --------------------------------- -----------
Greg M Oester 56 President - Alanco/TSI PRISM, Inc. 2000
Greg M. Oester: Practiced international business law for 12 years and founded a
firm in Los Angeles, CA. Co-founded North American Enterprises, Inc. in 1989;
engaged in sales & marketing of European specialty products in the U.S.A.
40
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Conducted seminars on foreign investment in the U.S.A. throughout Asia. Admitted
to practice before the U.S. Customs Court, the Court of International Trade and
numerous State and Federal venues. Holds Bachelor of Arts degrees in Political
Science and Economics from the University of Arizona and also a Juris Doctor
Degree from the University of Laverne.
Audit/Corporate Governance Committee
The Audit/Corporate Governance Committee of the Board of Directors is currently
comprised of three independent directors, and operates under a written charter
adopted by the Board. The Audit/Corporate Governance Committee Charter was
included as Exhibit A in the Company's Definitive Proxy Statement filed with the
SEC on October 18, 2004. The members of the Audit/Corporate Governance Committee
are Harold S. Carpenter, a CEO with over 30 years senior management experience,
James T. Hecker, an attorney and CPA, and Thomas C. LaVoy, a CPA. All three
individuals are experienced in reading and understanding financial statements,
and, in fact, are deemed to be financial experts as defined by audit committee
requirements.
The Audit/Corporate Governance Committee is directly responsible for the
appointment, compensation, retention and oversight of the work of the
independent auditor engaged for the purpose of preparing an audit report or
performing other audit, review or attest services for the Company. The auditor
reports directly to the Audit/Corporate Governance Committee. The
Audit/Corporate Governance Committee has established "whistleblower" procedures
for the receipt, retention and treatment of complaints regarding accounting,
internal accounting controls or auditing matters, including procedures for the
confidential anonymous submission by employees of the Company of concerns
regarding questionable accounting or auditing matters.
Authority to engage independent counsel and other advisors has been given to the
Audit/Corporate Governance Committee as it determines is necessary to carry out
its duties. The Company provides appropriate funding for the Audit/Corporate
Governance Committee to compensate the outside auditors and any lawyers and
advisors it employs and to fund ordinary administrative expenses of the
Audit/Corporate Governance Committee that are necessary in carrying out its
duties.
The Audit/Corporate Governance Committee provides general oversight of the
Company's financial reporting and disclosure practices, system of internal
controls, and the Company's processes for monitoring compliance by the Company
with Company policies. The Audit/Corporate Governance Committee reviews with the
Company's independent auditors the scope of the audit for the year, the results
of the audit when completed, and the independent auditor's fee for services
performed. The Audit/Corporate Governance Committee also recommends independent
auditors to the Board of Directors and reviews with management various matters
related to its internal accounting controls. During the last fiscal year, there
were three meetings of the Audit/Corporate Governance Committee.
Management is responsible for the Company's internal controls and the financial
reporting process. The independent auditors are responsible for performing an
independent audit of the Company's consolidated financial statements in
accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States) and issuing a report thereon. The
Audit/Corporate Governance Committee is responsible for overseeing and
monitoring the quality of the Company's accounting and auditing practices.
The members of the Audit/Corporate Governance Committee are not professionally
engaged in the practice of auditing or accounting and may not be experts in the
fields of accounting or auditing, or in determining auditor independence.
Members of the Audit/Corporate Governance Committee rely, without independent
verification, on the information provided to them and on the representations
made by management and the independent accountants. Accordingly, the
Audit/Corporate Governance Committee's oversight does not provide an independent
basis to determine that management has maintained procedures designed to assure
compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit/Corporate Governance Committee's considerations and
discussions referred to above do not assure that the audit of the Company's
financial statements has been carried out in accordance with auditing standards
generally accepted in the United States, that the financial statements are
presented in accordance with accounting principles generally accepted in the
United States of America or that the Company's auditors are in fact
"independent."
41
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Compliance with Section 16(a) of Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Officers and Directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
Directors and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely upon a review of the copies of such forms furnished to the Company, or
written representations that no Form 5's were required, the Company believes
that as of the date of filing of this Form 10-KSB, all Section 16(a) filing
requirements applicable to its officers, Directors and greater than 10%
beneficial owners were satisfied, with the exception of Technology Systems
International, Inc., a Nevada corporation (TSIN) who, to the best of our
knowledge continues to own approximately 4.5 million shares of the Company's
Class A Common Stock. TSIN is currently in Chapter 7 Bankruptcy proceedings
and has not, to our knowledge, filed any current Section 16(a) forms.
Code of Ethics
The Company has adopted a Corporate Code of Business Conduct and Ethics, which
was included as Exhibit 99.2 in the Company's Form 10-QSB filed with the SEC on
November 15, 2004. We believe our code of ethics is reasonably designed to deter
wrongdoing and promote honest and ethical conduct; provide full, fair, accurate,
timely and understandable disclosure in public reports; comply with applicable
laws; ensure prompt internal reporting of code violations; and provide
accountability for adherence to the code.
The Company is currently in the process of presenting the Code of Business
Conduct and Ethics on the Company's web page. Shareholders may receive a copy of
the Company's adopted Code of Conduct, without charge, via e-mail request to
alanco@alanco.com, by calling the Company at 480 607-1010, Ext. 857, or by
writing to the Company, to the attention of the Company's Corporate Secretary at
15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid or accrued by the Company
for the services rendered during the fiscal years ended June 30, 2005, 2004 and
2003 to the Company's Chief Executive Officer, Chief Financial Officer, and
President of the Company's subsidiary, Alanco/TSI PRISM, Inc., an Arizona
corporation (ATSI), acquired effective June 1, 2002, whose salaries and bonus
exceeded $100,000 during the last fiscal year (collectively, the "Named
Executive Officers"). No stock appreciation rights ("SARs") have been granted by
the Company to any of the Named Executive Officers during the last three fiscal
years.
42
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Annual Compensation Long-Term Compensation
--------------------------------- ----------------------
Name and Other (1) Securities (# shares)
Principal Annual Annual Underlying Options
Position Salary Bonus Compensation Granted during FY
$
-------------------------------- --------- -------- ------------ ----------------------
Robert R. Kauffman, C.E.O.
FY 2005 $183,750 None 17,400 100,000
FY 2004 180,000 None 17,400 650,000
FY 2003 180,000 None 17,400 150,000
John A. Carlson, C.F.O.
FY 2005 163,333 None 10,033 75,000
FY 2004 160,000 None 9,467 350,000
FY 2003 160,000 None 8,866 75,000
Greg M. Oester, President, ATSI
FY 2005 154,500 None None 35,000
FY 2004 146,625 None None 250,000
FY 2003 148,234 None None None
(1) Represents supplemental executive benefit reimbursement for the year and
Company matching for Alanco's 401(K) Profit Sharing Plan.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 2005, to each of the Named Executive Officers and/or
Directors and to all other employees as a group. No stock appreciation rights
("SARs") have been granted by the Company.
INDIVIDUAL GRANTS
Number of
Securities
Underlying % of Total Exercise
Options Options Price Grant Expiration
Name Granted Granted ($/Sh) Date Date
---------------------- ------------ ------------- ---------------- ------------ ------------
Robert Kauffman 100,000 15.63% 0.75 2/16/05 2/16/15
John Carlson 75,000 11.72% 0.75 2/16/05 2/16/15
Donald Anderson 20,000 3.13% 0.75 2/16/05 2/16/15
Harold Carpenter 20,000 3.13% 0.75 2/16/05 2/16/15
Greg Oester 35,000 5.47% 0.75 2/16/05 2/16/15
Other Employees 390,000 60.94% $0.75 - $1.50 Various (1)
------------ -------------
Total 640,000 100.00%
============ =============
(1) These options expire ten years from date of grant.
All options are granted at a price not less than "grant-date market." During the
fiscal year 673,750 previously granted options expired or were cancelled.
43
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Aggregated Options and Warrants - Exercised in Last Fiscal Year and Values at
Fiscal Year End
The following table sets forth the number of exercised and unexercised options
and warrants held by each of the Named Executive Officers and/or Directors at
June 30, 2005, and the value of the unexercised, in-the-money options at June
30, 2005.
Unexercised Value of
Shares Options & Warrants Unexercised
Acquired On Value at Fiscal In-The-Money
Exercise During Realized Year End Options & Warrants
Name 2005 Fiscal Year $ (1) (Shares) (2) at FYE $ (3)
--------------- --------------- -------- ---------------- -----------------
Robert Kauffman 305,000 162,000 2,407,500 697,000
John Carlson 150,000 54,750 950,000 180,750
Harold Carpenter 195,000 115,900 320,000 29,800
James Hecker 21,000 14,910 220,000 33,600
Steven Oman 10,000 7,100 205,000 10,800
Thomas LaVoy 35,265 25,038 180,000 18,400
Donald Anderson 1,228,161 574,194 1,325,000 25,990
Greg Oester 45,000 7,800 985,000 50,500
(1) Calculated as the differencebetween closing price on the date
exercised and the exercise price,multiplied by the number of options
exercised.
(2) Represents the number of securities underlying unexercised options and
warrants that were exercisable at 2005 Fiscal Year End. Greg Oester also
holds 125,000 options which become exercisable in fiscal year 2006.
(3) Calculated as the difference between the closing price of the Company's
Common Stock on June 30, 2005 and the exercise price for those options
exercisable on June 30, 2005, with an exercise price less than the
closing price, multiplied by the number of applicable options.
Option Grants Subsequent to Fiscal Year End
Options Date of Date Expiration Option
Name Granted Grant Exercisable Date Price
Robert R. Kauffman 400,000 (1) 9/13/05 9/13/05 9/13/15 $0.81
John A. Carlson 200,000 (1) 9/13/05 9/13/05 9/13/15 $0.81
Harold S. Carpenter 80,000 (2) 9/13/05 9/13/05 9/13/15 $0.81
James T. Hecker 80,000 (2) 9/13/05 9/13/05 9/13/15 $0.81
Steven P. Oman 80,000 (2) 9/13/05 9/13/05 9/13/15 $0.81
Thomas C. LaVoy 80,000 (2) 9/13/05 9/13/05 9/13/15 $0.81
Donald E. Anderson 80,000 (2) 9/13/05 9/13/05 9/13/15 $0.81
Greg M. Oester 100,000 (3) 9/20/05 Varies (5) 9/20/15 $0.81
Other Employees 235,000 (4) 9/20/05 Various 9/20/15 $0.81
(1) Issued pursuant to the 2004 Stock Option Plan.
(2) Issued pursuant to the 2004 Directors & Officers Stock Option Plan.
(3) Issued pursuant to the 1999 Stock Option Plan.
(4) Issued pursuant to the 2002 Stock Option Plan.
(5) 25% vest on 9/20/2005, 25% vest on 9/20/2006, and 50% vest on 9/20/2007.
44
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Employment Agreements and Executive Compensation
The Executive Officers are at-will employees without employment agreements.
Compensation of Directors
During Fiscal Year 2005, non-employee Directors were compensated for their
services in cash ($750 per meeting per day up to a maximum of $1,500 per
meeting) and through the grant of options to acquire shares of Class A Common
Stock as provided by the 1996, 1998, 1999, 2000, 2002, and 2004 Directors and
Officers Stock Option Plans (the "D&O Plans") which are described below. All
Directors are entitled to receive reimbursement for all out-of-pocket expenses
incurred for attendance at Board of Directors meetings.
The 1996 Directors and Officers Stock Option Plan was approved by the Board of
Directors on September 9, 1996. Shareholders approved the 1998, 1999, 2000,
2002, and 2004 Directors and Officers Stock Option Plans on November 6, 1998,
November 5, 1999, November 10, 2000, November 22, 2002, and November 19, 2004,
respectively. The purpose of the 1996, 1998, 1999, 2000, 2002, and 2004 D&O
Plans is to advance the business and development of the Company and its
shareholders by affording to the Directors and Officers of the Company the
opportunity to acquire a propriety interest in the Company by the grant of
Options to acquire shares of the Company's common stock. All Directors and
Executive Officers of the Company are eligible to participate in the 1996, 1998,
1999, 2000, 2002, and 2004 Plans. Newly appointed Directors receive options to
purchase shares of common stock at fair market value. Upon each subsequent
anniversary of the election to the Board of Directors, each non-employee
Director may receive an additional option to purchase shares of common stock at
fair market value.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information with respect to each
shareholder known by Alanco to be the beneficial owner of more than 5% of the
outstanding Alanco common stock or common stock equivalent as of September 23,
2005. Information regarding the stock ownership of Robert R. Kauffman, Alanco
Chairman and Chief Executive Officer, and Donald E. Anderson, Alanco Director,
is also shown in the table in the following section, Current Directors and
Executive Officers.
Five Percent Owners
Class A Total Total
Common Common Total Stock,
Shares Stock Stock Options &
Owned Equivalent Exercisable Owned Warrants
Class A Percent Series A Total Owned Stock and Percent of
Common of Preferred Common Percent Options Options Common
Shares Class Shares Stock of and and Equivalent
Owned (5) Owned (4) Equivalent Class(5) Warrants Warrants Class (6)
--------- ------- --------- ---------- ---------- ----------- -------- -----------
Technology Systems 4,500,000 16.42% - 4,500,000 12.12% -- 4,500,000 12.12%
International, Inc. (1)
Donald E. Anderson (2) 2,101,261 7.67% 1,012,062 5,137,447 13.83% 1,405,000 6,542,447 16.98%
Robert R. Kauffman (3) 432,000 1.58% 631,387 2,326,161 6.26% 2,807,500 5,133,661 12.85%
(1) Technology Systems International, Inc., a Nevada corporation, (TSIN) is
an independent, private company, which was issued 6,000,000 shares of
45
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Alanco common stock in 2002 in connection with the acquisition of the
assets of TSIN effective in June 2002. The only Form 13D filed by TSIN
was filed on September 9, 2002 and indicated TSIN ownership of 6,000,000
Alanco common shares. TSIN is currently in bankruptcy proceeding and to
our knowledge, no filings have been made by TSIN to adjust that initial
Form 13D filing. However, based on stock transfer records and information
obtained from public bankruptcy hearings, we believe the current TSIN
ownership of Alanco common stock is approximately 4.5 million shares. To
our knowledge, no person or entity owns in excess of 25% of the
outstanding shares of TSIN. The only TSIN shareholder that we are aware
of who may beneficially control a significant percentage of the
outstanding shares of TSIN, and who could potentially own more than 5% of
the outstanding Alanco common stock equivalent, is Richard C. Jones, who,
to the best of our knowledge, owns approximately 5.3 million TSIN shares,
representing approximately 23% of the outstanding TSIN shares. TSIN has
previously indicated their intention to distribute the shares of Alanco
common stock in excess of certain corporate litigation and liquidation
expenses on a pro-rata basis to their shareholders; however, the shares
have not been distributed as of the date of this Form 10-KSB, and there
is no assurance that the shares will be distributed. The address of TSIN
is c/o Jeffrey M. Proper, 3550 N. Central Avenue, Suite 1200, Phoenix,
Arizona 85012.
(2) The number of shares, options and warrants owned includes The Anderson
Family Trust, owner of 1,548,161 shares of Alanco Class A Common Stock,
561,234 shares of Alanco Series A Convertible Preferred Stock and 725,000
exercisable warrants; Programmed Land, Inc., owner of 533,100 shares of
Alanco Class A Common Stock, 450,828 shares of Alanco Series A
Convertible Preferred Stock and 500,000 exercisable warrants, both of
which Mr. Anderson claims beneficial ownership; and 180,000 exercisable
options owned by Mr. Anderson. The 1,012,261 shares of Series A
Convertible Preferred Stock beneficially owned by Mr. Anderson represent
34.34% of the total Series A Convertible Preferred shares outstanding.
Mr. Anderson's address is 11804 North Sundown Drive, Scottsdale, Arizona
85260.
(3) In addition to the shares shown above, Robert R. Kauffman, Alanco
Chairman and Chief Executive Officer, also beneficially owns 455,000
shares of TSIN stock, representing an ownership position of less than 2%
of the outstanding TSIN shares. If TSIN distributes the shares of Alanco
common stock owned by TSIN to TSIN shareholders on a proportionate basis,
Mr. Kauffman may acquire additional shares of Alanco common stock,
thereby slightly increasing his percentage of Alanco common shares owned;
but due to matters as discussed in Footnote 1 above, we are unable to
accurately calculate the changes to Mr. Kauffman's ownership. The 631,387
shares of Series A Convertible Preferred Stock beneficially owned by Mr.
Kauffman represent 21.42% of the total Series A Convertible Preferred
shares outstanding. The address for Mr. Kauffman is: c/o Alanco
Technologies, Inc., 15575 N. 83rd Way, Suite 3, Scottsdale, Arizona
85260.
(4) Preferred Shares are Series A Convertible Preferred Stock, each share of
which is convertible into three (3) shares of Class A Common Stock. The
5% owners do not own any shares of the Series B Convertible Preferred
Stock.
(5) The percentages for Class A Common Stock shown are calculated based upon
27,410,227 shares of Class A Common Stock outstanding on September 23,
2005. The percentages for Total Common Stock Equivalent are calculated
based upon 37,135,611 shares outstanding on September 23, 2005.
(6) In calculating the percentage of ownership, option and warrant shares are
deemed to be outstanding for the purpose of computing the percentage of
shares of common stock equivalent owned by such person, but are not
deemed to be outstanding for the purpose of computing the percentage of
shares of common stock equivalent owned by any other stockholders.
Security Ownership of Management
The following table sets forth the number of exercisable stock options and the
number of shares of the Company's Common Stock and Preferred Stock beneficially
owned as of September 23, 2005, by individual directors and executive officers
and by all directors and executive officers of the Company as a group.
The number of shares beneficially owned by each director or executive officer is
determined under rules of the Securities and Exchange Commission, and the
information is not necessarily indicative of the beneficial ownership for any
other purpose. Unless otherwise indicated, each person has sole investment and
voting power (or shares such power with his or her spouse) with respect to the
shares set forth in the following table.
46
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Securities of the Registrant Beneficially Owned (1)
Total
Class A Shares Series A Shares Total Shares Total Stock,
Common Owned Preferred Owned Common Owned Exerciseable Stock Options
Stock Percent Stock Percent Stock Percent Stock Owned + & Warrants
Name of Shares of Class Shares of Class Equivalent of Class Options & Options & Percent of
Beneficial Owner (2) Owned (7) Owned (7) Owned (7) Warrants (8) Warrants Class (9)
---------------------- --------- -------- ------------- --------- ---------- -------- ------------ ---------- -----------
Robert R. Kauffman (3) 432,000 1.58% 631,387 21.42% 2,326,161 6.26% 2,807,500 5,133,661 12.85%
Director/COB/CEO
John A. Carlson 165,644 0.60% 122,675 4.16% 533,669 1.44% 1,150,000 1,683,669 4.40%
Director/EVP/CFO
Harold S. Carpenter 205,541 0.75% 219,765 (5) 7.46% 864,836 2.33% 400,000 1,264,836 3.37%
Director
James T. Hecker 32,893 0.12% 25,652 (6) 0.87% 109,849 0.30% 300,000 409,849 1.09%
Director
Steven P. Oman 10,000 0.04% 12,629 0.43% 47,887 0.13% 285,000 332,887 0.89%
Director
Thomas C. LaVoy 35,265 0.13% 44,260 1.50% 168,045 0.45% 260,000 428,045 1.14%
Director
Donald E. Anderson (4) 2,101,261 7.67% 1,012,062 34.34% 5,137,447 13.83% 1,405,000 6,542,447 16.98%
Director
Greg M. Oester 47,888 0.17% 12,440 0.42% 85,208 0.23% 1,060,000 1,145,208 3.00%
President - TSIA
--------- ---------- ---------- ------------ ----------
Officers and Directors 3,030,492 11.06% 2,080,870 70.61% 9,273,102 24.97% 7,667,500 16,940,602 37.81%
as a Group (8 individuals) ========= ========== ========== ============ ==========
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally indicates voting
or investment power with respect to securities. In accordance with SEC
rules, shares that may be acquired upon conversion or exercise of stock
options, warrants or convertible securities which are currently
exercisable or which become exercisable within 60 days are deemed
beneficially owned. Except as indicated by footnote, and subject to
community property laws where applicable, the persons or entities named
in the table above have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned.
(2) COB is Chairman of the Board; CEO is Chief Executive Officer; EVP is
Executive Vice President; CFO is Chief Financial Officer.
(3) In addition to the shares shown above, Robert R. Kauffman, Alanco
Chairman and Chief Executive Officer, also beneficially owns 455,000
shares of TSIN stock, representing an ownership position of less than 2%
of the outstanding TSIN shares. If TSIN distributes the shares of Alanco
common stock owned by TSIN to TSIN shareholders on a proportionate basis,
Mr. Kauffman may acquire additional shares of Alanco common stock,
thereby slightly increasing his percentage of Alanco common shares owned;
but due to matters as discussed in Footnote 1 of the Five Percent Owners
table above, we are unable to accurately calculate the changes to Mr.
Kauffman's ownership.
47
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
(4) The number of shares, options and warrants owned also includes The
Anderson Family Trust, owner of 1,548,161 shares of Alanco Class A Common
Stock, 561,234 shares of Alanco Series A Convertible Preferred Stock and
725,000 exercisable warrants; Programmed Land, Inc., owner of 533,100
shares of Alanco Class A Common Stock, 450,828 shares of Alanco Series A
Convertible Preferred Stock and 500,000 exercisable warrants, both of
which Mr. Anderson claims beneficial ownership; and 180,000 exercisable
options owned by Mr. Anderson. Mr. Anderson's address is 11804 North
Sundown Drive, Scottsdale, Arizona 85260.
(5) Excludes 240,000 shares of Class A Common Stock, 301,391 shares of Series
A Convertible Preferred Stock and 220,000 warrants to purchase Class A
Common Stock owned by Heartland Systems Co., a company for which Mr.
Carpenter serves as an officer. Mr. Carpenter disclaims beneficial
ownership of such shares.
(6) Excludes 285,000 shares of Class A Common Stock, 333,402 shares of Series
A Convertible Preferred Stock and 255,000 warrants to purchase Class A
Common Stock owned by Rhino Fund LLP. The fund is controlled by Rhino
Capital Incorporated, for which Mr. Hecker serves as Treasurer and
General Counsel. Mr. Hecker disclaims beneficial ownership of such
shares.
(7) The percentages for Class A Common Stock shown are calculated based upon
27,410,227 shares of Class A Common Stock outstanding on September 23,
2005. The percentages for Series A Convertible Preferred Stock are
calculated based upon 2,947,128 shares of Series A Convertible Preferred
Stock outstanding on September 23, 2005, each of which is convertible
into three (3) shares of Class A Common Stock.
(8) Represents unexercised stock options and warrants issued to named
executive officers and directors. All options and warrants issued to the
executive officers and directors were exercisable at September 23, 2005.
Greg Oester also holds the following options: 75,000 options which become
exercisable in fiscal year 2006, 25,000 options which become exercisable
in fiscal 2007, and 50,000 options which become exercisable in fiscal
year 2008.
(9) The number and percentages shown include the shares of common stock
equivalent actually owned as of September 23, 2005 and the shares of
common stock that the identified person or group had a right to acquire
within 60 days after September 23, 2005. The percentages shown are
calculated based upon 37,135,611 Common Stock Equivalent shares
outstanding as of September 23, 2005. In calculating the percentage of
ownership, option and warrant shares are deemed to be outstanding for the
purpose of computing the percentage of shares of common stock equivalent
owned by such person, but are not deemed to be outstanding for the
purpose of computing the percentage of shares of common stock equivalent
owned by any other stockholders.
48
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management
Mr. Steve Oman, a member of the Board of Directors, received compensation in the
amount of approximately $91,000 for legal services to the Company for the fiscal
year ended June 30, 2005.
Under a Line of Credit Agreement, Mr. Donald Anderson, a member of the Board of
Directors, as trustee and beneficial owner of the Anderson Family Trust, was
granted 75,000 five-year warrants in March 2005 at a strike price of $0.90
valued at $23,200. In addition, the interest paid to the Anderson Family Trust
in fiscal year 2005 under the Line of Credit Agreement was approximately
$45,000.
PART IV
ITEM 13. EXHIBITS
A. Exhibits
3(i) Articles of Incorporation of Alanco Technologies, Inc (1)
3(ii) Bylaws of Alanco Technologies, Inc (2)
4.1 Series A Preferred Convertible Stock Description (3)
4.2 Series B Preferred Convertible Stock Description (4)
10.1 1996 Directors and Officers Stock Option Plan and Kauffman and
Carlson Stock Option Agreements (5)
10.2 1998 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (6)
10.3 1999 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (7)
10.4 2000 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (8)
10.5 2002 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (9)
10.6 2004 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (10)
10.7 Nasdaq Delisting Notification (11)
10.8 Amendment 3 to Line of Credit Agreement (12)
10.9 Amendment 4 to Line of Credit Agreement (13)
14.1 Corporate Code of Business Conduct and Ethics (14)
21. Subsidiaries of the Registrant
Name State of Incorporation
---- ----------------------
Arraid, Inc. Arizona
Excel/Meridian Data, Inc. Arizona
Fry Guy Inc. Nevada
SanOne, Inc. Arizona
NetZerver, Inc. Arizona
Alanco/TSI PRISM, Inc. (formerly Technology
Systems International, Inc.) Arizona
49
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
31.1 Certification of Robert R. Kauffman, Chairman and Chief Executive
Officer of Alanco Technologies, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of John A. Carlson, Executive Vice President and
Chief Financial Officer of Alanco Technologies, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer of Alanco Technologies, Inc., pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.1 Audit/Corporate Governance Committee Charter (15)
Footnotes:
(1) Incorporated by reference to Form 10KSB filed September 27, 2001
(2) Incorporated by reference to Form 8-K filed September 27, 2002
(3) Incorporated by reference to Form S-3/A filed November 21, 2004
(4) Incorporated by reference to Form DEFM14A filed April 22, 2002
(5) Incorporated by reference to Form S-8 filed November 29, 1998
(6) Incorporated by reference to Form S-8 filed December 14, 1999
(7) Incorporated by reference to Form S-8 filed December 14, 2000
(8) Incorporated by reference to Form S-8 filed January 22, 2004
(9) Incorporated by reference to Form S-3 filed August 14, 2002
(10) Incorporated by reference to Form S-8 filed February 17, 2005
(11) Incorporated by reference to Form 8-K filed August 9, 2005
(12) Incorporated by reference to Form 8-K filed March 28, 2005
(13) Incorporated by reference to Form 8-K filed July 6, 2005
(14) Incorporated by reference to Form 10QSB filed November 15, 2004
(15) Incorporated by reference to Form DEF14A filed October 18, 2004
B. Schedules NONE
Exhibits or schedules other than those mentioned above are omitted because
the conditions requiring their filing do not exist or because the required
information is given in the financial statements, including the notes
thereto.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by Semple & Cooper, LLP, the Company's independent
auditor, for professional services rendered for the audit of the Company's
annual financial statements for the fiscal years ended June 30, 2005 and 2004
and the review of the financial statements included in the Company's Forms
10-QSB for such fiscal years were approximately $96,900 and $78,500,
respectively.
Financial Information Systems Design and Implementation
There were no fees billed for the professional services described in Paragraph
(c)(4)(ii) of Rule 2-01 of Regulation S-X rendered by Semple & Cooper, LLP for
the fiscal year ended June 30, 2005.
All Other Fees
Semple & Cooper, LLP billed the Company during fiscal year 2005 and 2004 a total
of approximately $10,000 and $10,000, respectively, for tax preparation and tax
consulting services. The Audit Committee has considered whether the provision of
these services is compatible with maintaining the principal accountant's
independence.
Audit Committee Pre-Approval Policies and Procedures
The 2005 and 2004 audit services provided by Semple & Cooper were approved by
our Audit/Corporate Governance Committee. The Audit/Corporate Governance
Committee implemented pre-approval policies and procedures related to the
provision of audit and non-audit services. Under these procedures, the
Audit/Corporate Governance Committee pre-approves both the type of services to
50
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
be provided by our independent accountants and the estimated fees related to
these services. During the approval process, the Audit/Corporate Governance
Committee considers the impact of the types of services and related fees on the
independence of the auditor. These services and fees must be deemed compatible
with the maintenance of the auditor's independence, in compliance with the SEC
rules and regulations. Throughout the year, the Audit/Corporate Governance
Committee and, if necessary, the Board of Directors, reviews revisions to the
estimates of audit and non-audit fees initially approved.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ALANCO TECHNOLOGIES, INC.
(Registrant)
/s/ John A. Carlson
John A. Carlson
Chief Financial Officer
Date: September 28, 2005
51
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
EXHIBIT 31.1
Certification of
Chairman and Chief Executive Officer
of Alanco Technologies, Inc.
I, Robert R. Kauffman, certify that:
1. I have reviewed this annual report on Form 10-KSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the period presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: September 28, 2005
/s/ Robert R. Kauffman
---------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
52
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
EXHIBIT 31.2
Certification of
Vice President and Chief Financial Officer
of Alanco Technologies, Inc.
I, John A. Carlson, certify that:
1. I have reviewed this annual report on Form 10-KSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the period presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: September 28, 2005
/s/ John A. Carlson
---------------------
John A. Carlson
Vice President and Chief Financial Officer
53
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
EXHIBIT 32.1
Certification of
Chief Executive Officer and Chief Financial Officer
of Alanco Technologies, Inc.
This certification is provided pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and accompanies this annual report of Form 10-KSB
(the "Report") for the period ended June 30, 2005 of Alanco Technologies, Inc.
(the "Issuer").
Each of the undersigned, who are the Chief Executive Officer and Chief
Financial Officer, respectively, of Alanco Technologies, Inc., hereby certify
that, to the best of each such officer's knowledge:
(i) the Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or
78o(d)); and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Issuer.
Dated: September 28, 2005
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Small business issuer caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATE: September 28, 2005 /s/ Robert R. Kauffman
----------------------
Robert R. Kauffman, CEO,
Chairman of the Board
54
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert R. Kauffman and John A. Carlson,
and each of them, his true and lawful attorney-in-fact and agents, with full
power of substitution and resubstitution for him or in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Form
10-KSB Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
--------- ----- ----
/s/Robert R. Kauffman Director & September 28, 2005
--------------------- Chief Executive Officer
Robert R. Kauffman
/s/James T. Hecker Director September 28, 2005
------------------
James T. Hecker
/s/Harold S. Carpenter Director September 28, 2005
----------------------
Harold S. Carpenter
/s/Thomas C. LaVoy Director September 28, 2005
------------------
Thomas C. LaVoy
/s/Steven P. Oman Director September 28, 2005
-----------------
Steven P. Oman
/s/Donald E. Anderson Director September 28, 2005
---------------------
Donald E. Anderson
/s/John A. Carlson Director & September 28, 2005
------------------ Chief Financial Officer
John A. Carlson
By /s/ Robert R. Kauffman
Chairman and Chief Executive Officer
Transfer Agent
Computershare Trust Company, Inc.
350 Indiana Street, Suite 800
Golden, CO 80401
303-262-0600
Fax: 303-262-0700