ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the fiscal year ended June 30, 2006
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
(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, 2006 were
$6,659,600.
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: $18,006,500 as of September 22, 2006.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock: 38,163,700 shares of Class A Common Stock (net of
treasury shares) and no shares of Class B Common Stock as of September 22, 2006.
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.
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 for fiscal years ended June 30, 2006 and 2005 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.
The acquisition, effective June 30, 2006, of StarTrak Systems, LLC
("StarTrak"), located in Morris Plains, New Jersey, added Wireless Asset
Management, a third reporting business segment described as a provider of
wireless GPS tracking and monitoring services, which are offered on a monthly
subscription basis to various industry segments. The company's primary focus is
currently the refrigerated or "Reefer" segment of the transport industry,
providing the dominant share of all wireless tracking, monitoring and control
services to this market segment.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
RECENT BUSINESS DEVELOPMENTS
New Product Announcement - On September 7, 2006, the Company announced
that StarTrak Systems, LLC, its wholly owned subsidiary, had commenced the
initial commercial deployment of the new ReeferTrak(R) Scout RFID product line
designed specifically for localized food distribution fleets, including fast
food, dairy and grocery operations. Two Los Angeles-area food distributors have
recently purchased and deployed the new ReeferTrak Scout units and base stations
at their distribution centers.
ReeferTrak Scout is an RFID wireless communications system that gives
users full two-way command and control capability of their refrigerated truck
and trailer fleets when the units are within a several mile range of a base
station-equipped distribution center. When the "reefers" are operating out of
range of the distribution center, the Scout unit logs GPS, trip and
refrigeration unit performance data and automatically downloads the information
to StarTrak's central data center via the local base station upon return to the
center. Customers use the data to immediately confirm temperature compliance of
the shipment from origin to destination. The base stations' several mile RFID
range provides excellent coverage of distribution facilities, allowing customers
to achieve significant savings in yard operations, fuel usage and product
quality.
Material Definitive Agreement - On August 28, 2006, the Company
completed agreements whereby the Company raised $1.3 million in debt financing
from certain officers and members of the Company's Board of Directors. The funds
were used for working capital requirements related primarily to the acquisition
of StarTrak Systems, LLC, an acquisition that was effective on June 30, 2006.
Contract for Wireless Tracking and Monitoring of Refrigerated
Containers - The Company announced on August 24, 2006 that its subsidiary,
StarTrak Systems, LLC ("StarTrak"), had begun delivery on a single contract
valued at greater than $10 million for its GenTrak wireless tracking system and
related monitoring services. The StarTrak contract represents one of the largest
single industrial deployments of wireless tracking and monitoring systems on
refrigerated assets anywhere.
GenTrak is a GPS-based, wireless monitoring and control system,
initially deployed on marine gensets to monitor the location, operating
condition, fuel levels, etc. of both the gensets and any connected refrigerated
container. A marine genset is a portable generator temporarily connected to a
refrigerated container to provide power during the land-based portion of the
transport cycle. The GenTrak system provides significant operational savings and
quality improvements to global shipping companies in their refrigerated
container operations.
Nasdaq Listing Notification - In August of 2006, Alanco announced that
it had received a staff determination letter from Nasdaq indicating that the
Company failed to comply with the minimum bid price requirements for continued
listing as set forth in Nasdaq Marketplace Rule 4310(c)(4), and that its
securities may be subject to delisting from the Nasdaq Capital Market. The
Company has appealed the Staff determination and requested a hearing before the
Nasdaq Listing Qualifications Panel ("Panel"). Under Nasdaq Marketplace rules, a
request for a hearing stays the delisting action pending the issuance of a
written determination by the Panel. The hearing was held on September 14, 2006
in Washington, D.C. with representatives of the Company present. There can be no
assurance that the Panel will grant the Company's request for continued listing.
Pending a decision by the Panel, the Company's common stock will remain listed
on the Nasdaq Capital Market.
Sale of Unregistered Securities - On July 14, 2006, the Company
completed the sale, in a private offering to several private and institutional
investors, of 240,000 Units consisting of one share of its Series A Convertible
Preferred Stock together with a 5-year warrant to purchase three shares of the
Company's Class A Common Stock at a price of $.60 per share ("Unit") for a Unit
price of $1.71. The Company received $410,400 from the offering. Twenty five
percent of the Units, or 60,000 Units, were purchased by an institutional
investor with the balance purchased by members of the Company's Board of
Directors. Due to the structure of the offering and the Nasdaq stock market
requirements, warrants issued in this offering to members of the Board of
Directors are restricted from being exercised without shareholders' approval,
which shall be requested at the next annual meeting of the Company's
Shareholders.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
DESCRIPTION OF BUSINESS
RFID TECHNOLOGY SEGMENT
The Company acquired, in May 2002, the operations of Technology Systems
International, Inc., a Nevada Corporation ("TSIN"). The technology consisted of
the proprietary TSI PRISM(TM) wireless RFID tracking capabilities 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 TSIN's assets and assumption of
specific liabilities of TSIN. During the fiscal year 2005, the Company changed
the name of Technology Systems 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 and federal correctional
facilities and county jail markets. In addition, ATSI is providing transmitter
technology for a project in 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. During fiscal year ended June 30, 2006, no
subcontractor accounted for 10% or more of the business segment's purchases.
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. See
Competitive Conditions below for a discussion related to a new licensing
agreement to provide new technology that may increase concentration of purchases
in future years.
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
full-time employees as of June 30, 2006 and 2005, 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.
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, 2006, substantially all revenue was generated from
four state governments. In fiscal year 2005, a substantial portion of revenues
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 system order contracts that
it considers to be firm and non-cancelable and extended maintenance contracts
not longer than twelve months. Under this method, the Company had an order
backlog as of June 30, 2006 of approximately $560,100, compared to $76,200 at
fiscal year end 2005.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Research & Development - The Company estimated that the ATSI operation
spent approximately $200,000 and $360,000 in research and development
expenditures, recorded as selling, general and administrative expense, during
fiscal years 2006 and 2005, respectively.
WIRELESS ASSET MANAGEMENT
The Company's Wireless Asset Management business segment was created by
the acquisition, effective June 30, 2006, of StarTrak Systems, LLC ("StarTrak"),
a privately held company located in Morris Plains, New Jersey. StarTrak is a
leading provider of wireless GPS tracking and monitoring services which are
offered on a monthly subscription basis to various industry segments. The
company's primary focus is currently the refrigerated or "Reefer" segment of the
transport industry. StarTrak provides the dominant share of all wireless
tracking, monitoring and control services to this market segment.
Marketing - StarTrak markets its wireless tracking and wireless
subscription data services in the United States, both through dealers and the
company's direct sales representatives. The primary focus of the marketing
effort has been directed at the domestic refrigerated transport market and the
reefer equipment providers. The company also has limited international sales
(Australia, Europe) and expects that segment to grow as well.
Raw Materials - The Company anticipates the Wireless Asset Management
segment will utilize various domestic subcontractors for materials and parts
used to manufacture its products; however certain vendors may represent more
than 10% of total purchases for fiscal year 2007. Additional suppliers are
available at competitive pricing levels and we anticipate concentration of
purchases will decrease as new products are introduced and volumes increase. The
Company does not foresee any future significant shortages or substantial price
increases that cannot be recovered from its customers.
Competitive Conditions - StarTrak is the only known provider of
wireless GPS tracking and monitoring services that offers a subscription program
to the refrigerated or "Reefer" segment of the transport industry. There are
other companies marketing GPS tracking services to the general transport
industry; however, to our knowledge, none have the capability of providing
integration with the major manufacturers' "Reefer" electronic systems that
allows for the monitoring of various sensor data on a real time basis.
Employees - The Company's Wireless Asset Management segment employed
thirty-three full-time employees and two part-time employees as of June 30,
2006.
Seasonality of Business - Location and tracking products have minimal
seasonality. However, many of the products in this segment are marketed to
commercial customers that are affected by annual budget schedules and economic
conditions. Further, high asset utilization during the summer months can cause
some seasonal effects on deployment of units.
Dependence Upon Key Customers - The company has numerous end customers,
many of which chose to purchase StarTrak products from two primary OEM
refrigerator equipment suppliers. StarTrak is the only vendor currently
providing the two OEMs with tracking and monitoring products for the
refrigerated or Reefer segment of the transport industry. Additionally, the
company is currently delivering product and providing subscription services
under a contract with a major customer that is expected to exceed 10% of fiscal
year 2007 segment revenue.
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, 2006 of approximately $11 million.
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"). Arraid
is a Phoenix, Arizona-based manufacturer of legacy computer data storage
products, and Excel is a Dallas, Texas-based provider of data storage networking
products and services.
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.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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 2006 and 2005, 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.
Employees - As of June 30, 2006 the Company's computer data storage
business employed twenty-seven full-time employees, compared to twenty-four
full-time employees as of June 30, 2005.
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, 2006,
no customer accounted for more than 10% of the reported Data Storage revenues.
During fiscal year 2005, one customer accounted for 10.2% 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 2006 and 2005.
NET ASSETS HELD FOR SALE
The Company's reporting business segments for both fiscal years 2006
and 2005 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, 2006 and 2005 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 of the Restaurant Equipment
liquidation activities are reported as "other income" for both the current and
prior fiscal years.
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.
In August 2003, Arraid entered into a three-year 5,200 square foot
office/manufacturing space lease and moved to a new Phoenix, Arizona location.
The three-year lease, scheduled to expire on August 31, 2006, was extended
through August 2008.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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, scheduled to expire on March 15, 2006 was extended through
April 2009.
StarTrak Systems, LLC, is currently occupying an approximately 5,000
square foot office/manufacturing facility in Morris Plains, New Jersey
under a lease scheduled to expire on September 30, 2007. Management is currently
working with its landlord to obtain significant additional office/manufacturing
space required due to business expansion.
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 ("TSIN"), 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., an Arizona limited
liability company. The actions are more fully described below:
On January 30, 2003, a shareholder of TSIN filed a derivative suit
naming as defendants the Company and its wholly owned subsidiary, ATSI. 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 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 Chapter 7 bankruptcy. The Chapter 7 Trustee failed
to prosecute the action timely and the state court dismissed the action for lack
of prosecution, but allowed the Trustee to restart the action, which the Trustee
has done as case number CV2006-007398. The Company is seeking its attorney's
fees with respect to the dismissed action, and will appeal the court's order
allowing the Trustee to restart the action. The Company's management, in
consultation with legal counsel, believes the plaintiff's claims are without
merit and the Company will continue to aggressively defend the action. In
addition, the Company will pursue reimbursement of legal expenses incurred from
TSIN.
The Company is the 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 Insurance Policy ("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.
The District Court granted summary judgment in favor of Carolina and the Company
has filed an appeal with the Ninth Circuit Court of Appeals.
On July 18, 2003, Arraid Property L.L.C., an Arizona Limited Liability
Company ("Arraid LLC"), filed a complaint in the Arizona Superior Court in and
for Maricopa County, Arizona (case number CV 2003-13999) against the Company and
its wholly owned subsidiary Arraid, Inc., alleging breach of lease and seeking
substantial monetary damages. The suit relates to an expired lease agreement for
property previously leased by Arraid. Following a trial, the Court found in
favor of Arraid LLC against the Company with respect to certain factual findings
resulting in damages owed by the Company in an amount currently undecided, but
anticipated to be less than $35,000. The prevailing party, which has not yet
been determined by the court, will likely be awarded some attorney's fees. Based
upon a determination of the amount of any final award against the Company, the
Company's management, in consultation with legal counsel, will determine whether
to appeal the decision of the court.
The Company may also, from time to time, be involved in litigation
arising from the normal course of business. As of June 30, 2006, there was no
such litigation pending deemed material by the Company.
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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, 2006.
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
prices without retail mark-ups, markdowns, or commissions and, accordingly, may
not represent actual transactions.
Quarter Ended High Low High Low
------------- --------------- ---------------
September 30 $0.99 $0.70 $1.72 $0.91
December 31 $0.70 $0.46 $1.19 $0.78
March 31 $0.78 $0.48 $1.20 $0.69
June 30 $0.83 $0.60 $1.37 $0.89
As of June 30, 2006, 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, 2006, the Company issued
11,473,500 shares of its Class A Common Stock. Of those shares, 2,100,000 shares
were issued in connection with exercise of employee stock options and warrants,
383,500 were issued for services and prepayments, 3,990,000 were issued pursuant
to a private offering and 5,000,000 were issued in the StarTrak acquisition.
Alanco has paid no Common Stock cash dividends and has no current plans
to do so. During fiscal years ended June 30, 2006 and 2005, holders of Series A
Convertible Preferred Stock received "paid-in-kind" dividends of 341,700 shares
valued at $512,500 and 304,400 shares valued at $456,600, respectively. Holders
of Series B Convertible Preferred Stock received "paid-in-kind" dividends during
fiscal years ended June 30, 2006 and 2005 of 7,000 shares, valued at $70,200,
and 6,500 shares, valued at $64,500, 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.
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.
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ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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, 2006 and 2005 from its Computer Data Storage segment
and its RFID Technology segment.
Wireless
Data RFID Asset
Storage Technology Management Corporate Total
------------ ------------ ------------ ------------- -------------
Fiscal year 2006
Revenue $ 6,028,100 $ 631,500 $ - $ - $ 6,659,600
Cost of Goods Sold 3,877,800 479,900 - - 4,357,700
------------ ------------ ------------ ------------ ------------
Gross Profit 2,150,300 151,600 - - 2,301,900
Selling, General &
Administrative 2,081,600 2,669,600 - 1,553,100 6,304,300
------------ ------------ ------------ ------------ ------------
Operating Income (Loss) $ 68,700 $ (2,518,000) $ - $ (1,553,100) $ (4,002,400)
============ ============ ============ ============ ============
Accounts Receivable $ 645,400 $ 178,300 $ 919,700 $ 17,300 $ 1,760,700
============ ============ ============ ============ ============
Inventory $ 1,317,500 $ 940,500 $ 885,900 $ - $ 3,143,900
============ ============ ============ ============ ============
Total Assets $ 2,344,200 $ 7,239,800 $ 17,572,200 $ 528,300 $ 27,684,500
============ ============ ============ ============ ============
Capital Expenditures $ 15,800 $ 54,400 $ - $ 600 $ 70,800
============ ============ ============ ============ ============
Depreciation & Amortization $ 24,200 $ 355,600 $ - $ 3,200 $ 383,000
============ ============ ============ ============ ============
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
============ ============ ============ ============ ============
9
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated revenues for fiscal year 2006 were $6,659,600, a decrease
of 7.3% when compared to $7,184,200 revenues for fiscal year 2005. The revenue
decrease resulted from decreases in both the Data Storage and the RFID
Technology segments. The decrease in Data Storage segment revenue of $335,200,
or 5.3%, resulted from a change in product mix, redirecting military defense
expenditures from computer system support to the war effort and general
reduction in selling prices of data storage products. The RFID Technology
segment also reported decreased revenues to $631,500 compared to $820,900 for
the previous year. The decrease in RFID Technology segment revenues was due to a
lack of sales of the TSI PRISM system products. The TSI PRISM revenue level is
significantly below the Company's expectation. The Company believed the slow
sales growth of the RFID Technology segment in fiscal year 2005 was related to
the economic conditions that reduced both state and federal government tax
revenues and the prolonged government procurement process. We believe that
assessment was accurate and that prolonged government procurement process was
again the main influence on the low sales level for fiscal 2006. Customer
activity is currently significant and various state governments are considering
methods to finance the adoption of RFID technology for their state corrections
facilities.
The Company's gross profit for fiscal year 2006 was $2,301,900 (34.6%
of sales), a decrease of $206,800 or 8.2%, when compared to $2,508,700 (34.9% of
sales) for the prior year. The Data Storage segment reported gross profit of
$2,150,300, a decrease of $51,800, or 2.4%, compared to $2,202,100 gross profit
reported for the prior year. Gross margin for fiscal year 2006 reported for the
Data Storage segment was 35.7%, compared to 34.6% reported in the prior year.
The decrease in Data Storage gross profit resulted from decreased sales while
the increase in gross margin resulted from changes in product mix. The RFID
Technology segment reported a decrease in gross margin to $151,600, from
$306,600 reported for the prior fiscal year. Reported gross margin of the RFID
Technology was 24% compared to 37.4% 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 of the gross margin percentage that is
anticipated under higher sales levels.
Consolidated selling, general and administrative expenses for the year
ended June 30, 2006 decreased by $67,000, or 1.0%, to $6,304,300, compared to
$6,371,300 in fiscal 2005. Selling, general and administrative expense for the
Data Storage segment increased by $163,300, or 8.5%, when compared to the prior
year. The increase in Data Storage segment selling, general and administrative
costs resulted from increases in sales and administrative costs related to
adding sales personnel and enhancing sales support. Selling, general and
administrative expenses for the RFID Technology segment decreased by $28,000, or
1.0%. Corporate administrative expenses decreased by $202,300, or 11.5%,
compared to the prior year primarily due to a decrease in legal expenses related
to TSIN and other litigations previously discussed. The Company has committed to
pursue reimbursement of legal expense incurred.
The operating loss for fiscal year ended June 30, 2006 was $4,002,400,
a $139,800, or 3.6%, increase when compared to the operating loss for the prior
fiscal year of $3,862,600. The increase in the Company's operating loss resulted
from increased operating losses in the RFID Technology segment, increasing their
operating loss by approximately $127,000 in fiscal year 2006 compared to the
prior year. The Data Storage segment reported operating income of $68,700,
compared to operating income of $283,800 reported in the fiscal year ended June
30, 2005. The loss from operations for the fiscal year ended June 30, 2006 was
$4,009,200, a 5.7% increase when compared to a loss of $3,790,600 for the prior
fiscal year.
Fiscal year 2006 interest expense, net of interest income, was $90,300,
compared to net interest expense of $34,700 for the previous year. The increase
in net interest expense reflects increased average borrowing and interest rates
under the Company's line of credit agreement during fiscal 2006.
Other income for the year ended June 30, 2006 was $83,500, compared to
$106,700 for the prior year. Other income for the current fiscal year includes
$54,200 related to the collection of notes receivable associated with the sale
of "net assets held for sale" in a prior year and $30,000 income from the sale
of "net assets held for sale" in fiscal year 2006. Fiscal year 2005 included a
gain of $89,600 related to the collection of notes receivable associated with
the sale of "net assets held for sale" in the prior year and $17,100 of income
from the sale of "net assets held for sale."
10
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Preferred Stock dividends paid in-kind for the year ended June 30, 2006
for both Series A and Series B Convertible Preferred Stock amounted to $582,700,
compared to Preferred Stock dividends of $521,100 for the prior year, an
increase of $61,600, or 11.8%. Series A Preferred shareholders received in-kind
dividends of 341,700 shares valued at $512,500, compared to 304,400 shares
valued at $456,600 in the prior year. Series B Preferred shareholders received
7,000 shares valued at $70,200 compared to 6,500 shares valued at $64,500 in
fiscal year 2005. 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, 2006 was $4,591,900, or ($.16) per share, an increase of
6.5% when compared to a net loss attributable to Common stockholders of
$4,311,700, or ($.17) per share, for the prior year. The increase in net loss
attributable to Common stockholders of $280,200 was due to increases in
operating losses of the RFID Technology segment and increases in preferred stock
dividends, partially offset by a reduction in legal expenses.
Net cash used in operating activities for the fiscal year ended June
30, 2006 was $3,713,500 compared with net cash used in operating activities for
the prior fiscal year of $3,514,000. The increase of $199,500, or 5.7%, resulted
primarily from an increase in loss from operations of $218,600. 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, 2006 the Company's current liabilities exceeded current
assets by approximately $7.2 million, resulting in a current ratio of .5 to 1.
At June 30, 2005, the Company's current assets exceeded current liabilities by
$2.8 million, reflecting a current ratio of 3.1 to 1. The substantial decrease
in current ratio resulted from an increase of approximately $9.4 million in net
current liabilities related to the acquisition of StarTrak Systems, LLC. $5.7
million of the increase is represented by the current liability presented as
Deferred stock payment, StarTrak, a liability that relates to the Company's
commitment as part of the merger agreement to issue, after shareholder approval
expected at the next annual meeting of the Company's shareholders, up to 8.2
million shares of the Company's Class A Common Stock. The Deferred stock payment
liability is valued at market value on June 30, 2006 and may be adjusted from
time to time until paid, based upon market price fluctuation of the Company's
stock. Approximately $4.1 million of the increase in net current liabilities is
related to current liabilities of StarTrak assumed in excess of current assets.
The balance of the increase in net liabilities relates to incurred expenses
related to the transaction.
Accounts receivable at June 30, 2006 of $1,760,700 reflects an increase
of $669,300 from the $1,091,400 reported as consolidated accounts receivable at
the end of fiscal year 2005. $919,700, or 52.2% of the current fiscal year end
balance, was acquired in the acquisition of StarTrak Systems, LLC, effective
June 30, 2006. Receivables for the Data Storage and RFID Technology segments
decreased by $250,300, or 23.3%. Data Storage segment accounts receivable
balances at June 30, 2006 amounted to $645,400, a decrease of $182,200, or
22.0%, compared to the previous year. The Data Storage segment accounts
receivable balance at June 30, 2006 represented twenty-eight days' sales in
receivables compared to thirty-four days at fiscal year end 2005. Accounts
receivable for the RFID Technology segment amount to $178,300 compared to
$246,400 at year end June 30, 2005. Days' sales for the RFID Technology segment
are distorted due to the lack of significant reported sales. In addition, a
receivable in the amount of $62,200, representing the final payment for a system
installation, was significantly past our normal terms due to a special
arrangement whereby the Company was allowed to utilize the site for a research
and development project. The project has been completed and the customer is
processing the invoice for payment.
11
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated inventories at June 30, 2006 amounted to $3,143,900
compared to $1,902,600 at the end of the prior fiscal year, an increase of
$1,241,300, or 65.2%. $885,900 or 71% of the increase is due to inventory
acquired in the merger with StarTrak. The Data Storage segment accounted for
$225,600, or 18.2% of the inventory increase; and increases in the RFID
Technology segment inventory accounted for $129,800 or 10.5% of the increase.
The RFID Technology segment inventory levels increased due to a system
installation in process at June 30, 2006 that required certain site specific
equipment. The Data Storage segment inventory increase resulted from inventory
acquired to complete a warranty project, inventory acquired for new products
evaluation and general inventory increases. The June 30, 2006 Data Storage
segment inventory balance reflects an inventory turnover of 2.9 compared to 3.8
for inventory levels at June 30, 2005.
Cash used in investing activities during the current year was $753,900,
compared to cash used in investing activities of $10,400 for the previous year.
The increase was due primarily to cash funding of StarTrak prior to the June
2006 acquisition in the amount of $774,300.
Net cash provided by financing activities during fiscal year ended June
30, 2006 amounted to $4,885,600, compared to $2,286,100 for the prior year. Cash
provided by financing activities included $3,465,100 and $1,963,500 in proceeds
from the sale of common stock, net of additional shares listing fees of $44,000
and $38,300, for fiscal years ended June 30, 2006 and 2005, respectively.
Advances on borrowings amounted to $1,993,500 compared to $329,500 for the
previous year. Cash repayments of borrowing and capital leases during the year
amounted to $573,000, compared to $6,900 during the prior fiscal year.
The Company had a $2,000,000 line of credit balance at June 30, 2006
under a $2,000,000 line of credit agreement with a private trust that was last
amended effective June 30, 2006. 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% (10.25% at
June 30, 2006). Under an amendment to the line of credit agreement, the Company
must maintain a balance due under the line of at least $1,500,000 through July
2007 (reduced to $1,000,000 under certain conditions controlled by the
lender). Due to the minimum borrowing requirement and the July 2007 expiration
date, $1.0 million of the balance due is presented at June 30, 2006 as notes
payable, long term, more fully discussed in Note 7 to the consolidated financial
statements.
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 $1,155,500, additional capital raised subsequent to
the end of fiscal 2006 and a term loan currently being negotiated, will provide
adequate capital resources to maintain operations for the next year. However, if
additional working capital is required and not obtained through additional
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. As previously discussed, 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. As a result, the Company's
indipendent certified public accountants have issued a going concern opinion
on the consolidated financial statements of the company for the fiscal year
ended June 30, 2006.
Product and Environmental Contingencies
The Company is not aware of any material liabilities, either product or
environmental related.
12
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements.
Index to Financial Statements
Page
Report of Registered Public Accounting Firm. . . . . . . . . . . . . . . . .16
Consolidated Balance Sheets As of June 30, 2006
and 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Operations For the Years
Ended June 30, 2006 and 2005. . . . . . . . . . . . . . . . . . . . . 18
Consolidated Statement of Changes in Shareholders'
Equity and Preferred Stock For the Years Ended
June 30, 2006 and 2005. . . . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Cash Flows For the Years
Ended June 30, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . .20
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . .22
13
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, 2006 and 2005, 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, 2006 and 2005, 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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred significant losses
from operations, anticipates additional losses in the next year, and has
insufficient working capital as of June 30, 2006 to fund the anticipated losses.
These conditions raise substantial doubt as to the ability of the Company to
continue as a going concern. These consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Semple & Cooper LLP
Certified Public Accountants
Phoenix, Arizona
September 15, 2006
14
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
2006 2005
------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 1,155,500 $ 737,300
Accounts receivable, net 1,760,700 1,091,400
Notes receivable, current 31,600 80,000
Inventories, net 3,143,900 1,902,600
Prepaid expenses and other current assets 556,600 378,200
------------- -------------
Total current assets 6,648,300 4,189,500
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 202,300 273,500
------------- -------------
OTHER ASSETS
Goodwill, net 20,417,100 5,356,300
Other intangible assets 339,200 560,700
Long-term notes receivable, net - 8,000
Net assets held for sale 28,200 100,200
Other assets 49,400 55,700
------------- -------------
Total other assets 20,833,900 6,080,900
------------- -------------
TOTAL ASSETS $ 27,684,500 $ 10,543,900
============= =============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,066,200 $ 1,279,600
Credit Line 1,000,000 -
Billings in excess of cost and est.
earnings on uncompleted contracts 43,500 4,200
Notes payable, current 875,300 -
Deferred stock payment, StarTrak 5,715,400 -
Customer advances 1,001,100 -
Deferred revenue, current 126,000 60,100
------------- -------------
Total Current Liabilities 13,827,500 1,343,900
------------- -------------
LONG TERM LIABILITIES
Notes payable, long term 2,679,100 1,143,600
------------- -------------
TOTAL LIABILITIES 16,506,600 2,487,500
------------- -------------
Preferred Stock - Series B Convertible
500,000 shares authorized, 75,000 and
68,000 issued and outstanding,
respectively
737,500 667,300
------------- -------------
SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible
5,000,000 shares authorized, 3,122,900
and 2,781,200 shares issued and
outstanding, respectively 3,925,200 3,412,700
Common Stock
Class A - 75,000,000 shares authorized,
38,653,700 and 26,680,200 shares, net of
treasury shares, outstanding, respectively 78,845,300 71,714,600
Class B - 25,000,000 shares authorized
and none were issued - -
Treasury Stock, at cost
500,000 shares at June 30, 2006 and 2005 (375,100) (375,100)
Accumulated deficit (71,955,000) (67,363,100)
------------- -------------
Total shareholders' equity 10,440,400 7,389,100
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 27,684,500 $ 10,543,900
============= =============
See accompanying notes to the consolidated financial statements
15
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30,
2006 2005
------------- -------------
NET SALES $ 6,659,600 $ 7,184,200
Cost of goods sold 4,357,700 4,675,500
------------- -------------
GROSS PROFIT 2,301,900 2,508,700
Selling, general and administrative expense 6,304,300 6,371,300
------------- -------------
OPERATING LOSS (4,002,400) (3,862,600)
OTHER INCOME & EXPENSES
Interest expense, net (90,300) (34,700)
Other income, net 83,500 106,700
------------- -------------
LOSS FROM OPERATIONS (4,009,200) (3,790,600)
Preferred stock dividend - in kind (582,700) (521,100)
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,591,900) $ (4,311,700)
============= =============
NET LOSS PER SHARE - BASIC AND DILUTED
- Net Loss Attributable to Common Shareholders $ (0.16) $ (0.17)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 29,106,100 25,355,500
============= =============
See accompanying notes to the consolidated financial statements
16
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY & PREFERRED STOCK
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
SERIES A
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
----------------------- --------------------- ------------------ -------------- -------------
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
Options, warrants exercised 3,113,200 2,025,100 - - - - - 2,025,100
Shares & warrants issued for
services 334,200 319,700 - - - - - 319,700
Preferred Dividend, Series A,
paid in kind - - 304,400 456,600 - - - 456,600
Warrants issued for loan
amendment and licensing
agreement - 73,400 - - - - - 73,400
NASDAQ listing of additional
shares - (38,300) - - - - - (38,300)
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
Options, warrants exercised 2,100,000 1,235,000 - - - - - 1,235,000
Shares & warrants issued for
services 158,500 110,400 - - - - - 110,400
Shares issued for prepaid
services 225,000 135,000 - - - - - 135,000
Private Offerings, Net 3,990,000 2,274,100 - - - - - 2,274,100
Acquisition of StarTrak 5,000,000 3,485,000 - - - - - 3,485,000
Preferred Dividend, Series
A, paid in kind - - 341,700 512,500 512,500
Stock adjustment - (64,700) - - - - - (64,700)
NASDAQ listing of additional
shares - (44,100) - - (44,100)
Net loss - - - - - - -
(4,591,900) (4,591,900)
---------- ------------ --------- ----------- ------- ---------- ------------- ------------
Balances, June 30, 2006 38,653,700 $ 78,845,300 3,122,900 $ 3,925,200 500,000 $ (375,100) $ (71,955,000) $ 10,440,400
========== ============ ========= =========== ======= ========== ============= ============
See accompanying notes to the consolidated financial statements
17
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR FISCAL YEARS ENDED JUNE 30,
2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from operations $ (4,009,200) $ (3,790,600)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 383,100 349,800
Stock and warrants issued for services 51,100 82,400
Income from assets held for sale (30,000) (106,700)
Loss on disposal of asset 22,600 -
Changes in:
Accounts receivable, net 250,300 (434,200)
Inventories, net (355,500) 379,700
Prepaid expenses and other current assets (125,600) (46,900)
Accounts payable and accrued expenses 103,300 34,800
Deferred revenue (53,900) 33,000
Billings and estimated earnings in excess
of costs on uncompleted contracts 39,300 (21,600)
Other assets 11,000 6,300
------------- -------------
Net cash used in continuing operations (3,713,500) (3,514,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from assets held for sale 101,900 73,000
Collection of notes receivable 56,400 149,600
Cash advances - TSIN litigation - (80,000)
Purchase of property, plant and equipment (70,800) (153,000)
Goodwill, acquisition (67,100) -
Cash funding of StarTrak prior to acquisition (774,300) -
------------- -------------
Net cash provided by (used in) investing
activities (753,900) (10,400)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on borrowings 1,993,500 329,500
Repayment on borrowings (573,000) (6,900)
Net Proceeds from sale of Common Stock 3,465,100 1,963,500
------------- -------------
Net cash provided by financing activities 4,885,600 2,286,100
------------- -------------
NET INCREASE (DECREASE) IN CASH 418,200 (1,238,300)
CASH AND CASH EQUIVALENTS, beginning of period 737,300 1,975,600
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 1,155,500 $ 737,300
============= =============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 90,300 $ 34,700
============= =============
Non-cash activities:
Value of stock issued for services and
prepayments $ 245,400 $ 303,200
============= =============
Value of warrants issued for credit line
extension and licensing agreement $ - $ 113,200
============= =============
Value of shares issued in payment of notes
receivable $ 107,000 $ -
============= =============
Stock issued for StarTrak acquisition $ 3,485,000 $ -
============= =============
Purchase of goodwill that is accrued at
year-end $ 67,100 $ -
============= =============
StarTrak liabilities assumed in excess of
assets acquired $ 5,425,800 $ -
============= =============
Net value of equipment written off during the
period $ 22,700 $ -
============= =============
Preferred Stock issued, in kind $ 552,800 $ 521,100
============= =============
See accompanying notes in 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.
Alanco Technologies, Inc. and subsidiaries (the "Company") business
operations for the past several years have emphasized a plan to
strategically position the Company as a provider of information
technology. The plan was initiated in fiscal year 2000 by acquiring
Arraid, Inc. ("Arraid"), a manufacturer of proprietary storage products
to upgrade older "legacy" computer systems, and Excel/Meridian Data, Inc.
("Excel"), a manufacturer of Network Attached Storage ("NAS") systems for
mid-range organizations. These acquisitions formed the Company's Computer
Data Storage business segment.
Concurrent with the implementation of the strategic plan, Alanco
established a formal plan to sell the previously reported business
segments. During fiscal years ended June 30, 2006 and 2005, the only
activity related to the previously reported business segments was the
continued liquidation of restaurant equipment assets, the net value of
which is presented in the balance sheets at June 30, 2006 and 2005 as
"net assets held for sale."
The Company continued its new strategic direction in fiscal year 2002
when Alanco/TSI PRISM, Inc. ("ATSI") acquired wireless tracking RFID
(Radio Frequency Identification) technology designed to be used in the
corrections market, through its acquisition of the operations of
Technology Systems International, Inc., a Nevada corporation ("TSIN");
and again in fiscal year 2006 when the Company expanded its footprint in
wireless tracking and data services into wireless asset management for
the refrigerated or "Reefer" market through the acquisition, effective
June 30, 2006, of StarTrak Systems, LLC, a provider of GPS tracking and
wireless data services for the Reefer segment of the transport industry.
In fiscal years 2006 and 2005, the Company had continuing operations in
the RFID Technology segment and in the Computer Data Storage segment. The
StarTrak acquisition, effective June 30, 2006, created the Company's new
Wireless Asset Management segment, the accounts of which are included in
the consolidated balance sheet at June 30, 2006. Operating results for
the Wireless Asset Management will be reported starting in the quarter
ending September 30, 2006.
Principles of Consolidation - The consolidated financial statements for
the years ended June 30, 2006 and 2005 include the accounts of Alanco
Technologies, Inc. and its wholly-owned subsidiaries, ATSI, Arraid,
Excel, Fry Guy Inc. and StarTrak Systems, LLC (collectively, the
"Company"). StarTrak Systems, LLC operations were acquired effective June
30, 2006 and therefore are not included in the Company's consolidated
Statement of Operations. All subsidiaries are Arizona corporations,
except Fry Guy Inc., which is a Nevada corporation and StarTrak Systems,
LLC, which is a Delaware LLC. 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
$71,600 and $60,200 at June 30, 2006 and 2005, 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 and the Wireless Asset Management segments.
19
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method, generally over a 3 to 10-year
period. Leasehold improvements are amortized on the straight-line method
over the lesser of the lease term or the useful life. Expenditures for
ordinary maintenance and repairs are charged to expense as incurred.
Betterments 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 two separate
units (Arraid and Excel), which continue to make up the Company's Data
Storage segment. In May of 2002 the Company added its ATSI unit and,
effective June 30, 2006, it added its StarTrak unit. The Company
determines the carrying value of each reporting unit by assigning assets
and liabilities, including the existing goodwill and intangible assets,
to the reporting units. 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, 2006.
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 StarTrak Total
----------- ---------- ----------- -----------
Balance as of June 30, 2005 & 2004 5,076,700 279,600 - 5,356,300
Goodwill related to acquisition - - 15,060,800 15,060,800
------------ ---------- ----------- -----------
Balance as of June 30, 2006 $ 5,076,700 $ 279,600 $15,060,800 $20,417,100
=========== ========== =========== ===========
The Company completed the acquisition of StarTrak effective June 30,
2006. The purchase price, considering the 5 million Class A Common Shares
issued at closing (valued at $3,485,000), 8.2 million Class A shares to
be issued upon shareholder approval (valued at $5,715,400 on June 30,
2006), StarTrak net liabilities assumed of $5,425,800 and the related
costs of the acquisition of $434,500, was valued at of $15,060,800. The
Company has engaged an independent consultant for valuation services
related to FASB 141 required disclosures of the allocation of the
purchase price paid to the assets acquired and liabilities assumed by
balance sheet caption. We believe the allocation will focus primarily on
intangible assets other than goodwill. The consultant's report has not
been received by the date of this audit report and therefore the entire
transaction value is presented as goodwill. The consultant's report is
expected in the next few weeks when the appropriate allocation of the
purchase price will be completed.
Other intangible assets, excluding any allocations required due to the
StarTrak acquisition, consist of the following:
Amortization Gross Net Other
Period Carrying Accumulated Intangible
(in years) Value Amortization Assets
----------- ---------- ----------- -----------
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
========== =========== ===========
As of June 30, 2006
Patents license 3 $ 51,900 $ (51,900) $ -
Manufacturing license 6 500,000 (340,200) 159,800
Software development 5 600,000 (490,000) 110,000
Technology license 5 90,000 (20,500) 69,500
---------- ----------- -----------
Total Other Intangible Assets $1,241,900 $ (902,600) $ 339,300
========== =========== ===========
The amortization expenses for aggregate other intangible assets for the
fiscal years ended June 30, 2006 and 2005 were $221,500 and $222,900,
respectively.
The following table summarizes the estimated amortization charges related
to the other intangible assets as of June 30, 2006, excluding any
allocations required due to the StarTrak acquisition, which will be
determined after an independent consultant has completed valuation
pursuant to FASB 141:
21
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
June 30th Amount
2007 $ 211,400
2008 94,100
2009 18,100
2010 15,600
---- -------------
$ 339,200
=============
Net Assets Held For Sale - At June 30, 2006 and 2005, 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, 2006 and 2005 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
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 years ended June 30, 2006 or
2005.
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 that extend over a reporting 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.
Loss Per Share - The 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.
22
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Basic and diluted EPS were the same for fiscal 2006 and 2005, 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 14,302,500 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 $0.79. Stock warrants representing 7,191,700 Class A Common
Shares were outstanding at year-end with exercise prices ranging between
$0.50 and $2.00. The weighted average exercise price was $0.93.
At June 30, 2006, there were 3,122,900 shares of Series A Convertible
Preferred Stock and 75,000 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
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, 2006, there
would have been an additional 10,344,700 Class A Common shares
outstanding.
Stock-Based Compensation - At June 30, 2006 and 2005, 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,
2006 2005
------------- ------------
Net loss attributable to Common Shareholders $ (4,591,900) $(4,311,700)
Deduct: Total stock-based compensation
expense determined under fair value-
based method for all awards, net of
related tax effects (1,881,900) (255,600)
------------- -------------
Pro Forma Net Loss $ (6,473,800) $ (4,567,300)
============= =============
Loss per Share
Basic and Diluted, as Reported $ (0.16) $ (0.17)
============= =============
Pro Forma Basic and Diluted $ (0.21) $ (0.18)
============ =============
Weighted Shares Outstanding, Basic and Diluted 29,106,100 25,355,500
============= =============
Pro Forma Weighted Shares Outstanding, Basic
and Diluted 30,657,771 25,590,800
============= =============
23
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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,
2006 2005
-------- --------
Volatility 27% 30%
Risk free interest 4.5% 3.5%
Expected dividends none none
Expected term in years 5-10 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
the advantage of volume manufacturing, one domestic supplier represented
approximately 34% of those purchases for fiscal year ended June 30, 2005.
No supplier accounted for 10% or more of those purchases for fiscal year
ended June 30, 2006.
The Company anticipates that due to the advantages of volume
manufacturing, a concentration of vendor purchases may occur in the RFID
Technology segment; 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.
No Data Storage customer accounted for more than 10% of the segment sales
in fiscal year 2006 and one Data Storage customer account for 10.2% of
the segment sales in fiscal year 2005. Four state governments accounted
for substantially all of the RFID Technology segment's revenues for
fiscal year 2006, while two state governments accounted for substantially
all of the revenues for fiscal year 2005.
The largest accounts receivable balance in the Data Storage segment
represented 15.6% and 8.9% of consolidated accounts receivable (41.6% and
11.7% of Data Storage receivables) at June 30, 2006 and 2005,
respectively. The largest accounts receivable balance in the RFID
Technology segment at June 30, 2006 represented 6.9% of consolidated
accounts receivable (56.7% of RFID receivables) compared to 13.3% (61% of
RFID receivables) at June 30, 2005. The largest accounts receivable in
the Wireless Asset Management segment amounted to 17.1% of consolidated
receivables and 32.6% of the Wireless Asset Management segment
receivables.
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 had identified RFID Technology and Data Storage as the
continuing operating segments of the Company for fiscal year 2006 and
2005. The acquisition of StarTrak Systems, LLC, effective June 30, 2006
added an additional reporting segment for future reporting periods that
is referred to as Wireless Asset Management. All assets related to
previously disclosed segments have either been sold or have been
classified as "net assets held for sale" at June 30, 2006 and 2005. See
Note 14 for further information related to the Company's operating
segments.
24
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Recent Accounting Pronouncements - 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. 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 affect 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 principles 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.
2. LIQUIDITY AND GOING CONCERN
The Company incurred significant losses and negative cash flows from
operations during fiscal year ended June 30, 2006 and in prior fiscal
years, and anticipates additional losses and negative cash flows in early
fiscal year 2007. 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,
management believes cash balances at June 30, 2006 of approximately
$1,155,500 and the $410,400 of additional equity capital raised
subsequent to the end of fiscal 2006 through the sale of stock, and the
additional long-term debt financing anticipated to close shortly, will
provide adequate capital resources to maintain the Company's 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.
25
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
3. NOTES RECEIVABLE
Notes receivable at June 30, 2006 and 2005 consisted of the following:
2006 2005
------------- -------------
TSIN Board of Directors $ 29,600 $ 80,000
Notes receivable - other 2,000 10,200
------------- -------------
31,600 90,200
Less - allowance for uncollectible - (2,200)
------------- -------------
Net notes receivable $ 31,600 $ 88,000
============= =============
At June 30, 2006 and 2005, Notes - "TSIN Board of Directors" consisted of
notes receivable related to advances made to TSIN in fiscal year ended
June 30, 2005 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. During fiscal 2006, the Company received
payments on the notes of approximately $50,000. At June 30, 2006, the
TSIN Board of Directors had filed for reimbursement from TSIN under the
Directors indemnification provisions of the Articles of Incorporation,
Bylaws of TSIN and corporate laws of the State of Nevada. The new board
is awaiting payment so the funds received can be used to repay the notes.
4. INVENTORIES
Inventories consist of the following at June 30:
2006 2005
------------- -------------
Raw materials and purchased parts $ 3,251,000 $ 2,011,900
Work-in-progress 98,100 106,000
Finished goods 198,700 99,300
------------- -------------
3,547,800 2,217,200
Less reserves for obsolescence (403,900) (314,600)
------------- -------------
$ 3,143,900 $ 1,902,600
============= =============
5. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consist of the following at June 30:
2006 2005
------------- -------------
Machinery and equipment $ 351,500 $ 202,600
Furniture and office equipment 608,000 586,800
Marketing site equipment 50,000 250,000
Leasehold improvement 9,700 9,700
------------- -------------
1,019,200 1,049,100
Less accumulated depreciation (816,900) (775,600)
------------- -------------
Net book value $ 202,300 $ 273,500
============= =============
Related depreciation expense for the years ended June 30, 2006 and 2005,
was $161,600 and $126,900, respectively.
26
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
6. NET ASSETS HELD FOR SALE
Several years ago, the Company formally adopted a plan to sell all
business segment assets not related to information technology. The only
remaining assets presented as "net assets held for sale" at both June 30,
2006 and 2005 related to restaurant equipment assets.
7. LINE OF CREDIT AND NOTES PAYABLE
At June 30, 2006, the Company has a $2,000,000 outstanding balance,
$1,000,000 presented in current liabilities as Credit Line and $1,000,000
presented as Notes payable - long term, under a $2.0 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 has been amended various times since June 2002 with the last
amendment in June 2006. Under the current amended agreement, which
expires on July 1, 2007, the Company must maintain a minimum outstanding
balance under the line of $1.5 million through July 1, 2007 and pay
interest on the outstanding balance at a rate of prime plus 2% (10.25% at
June 30, 2006). Under the Agreement, the lender has the unilateral right
to reduce the line of credit Agreement to $1.5 million, at which time the
minimum outstanding balance under the Agreement reduces from $1.5 million
to $1.0 million. At June 30, 2006 the Company was fully drawn under the
line of credit Agreement. At June 30, 2005, the Company had an
outstanding balance of $829,500 under the Agreement. Interest payments
made under the Agreement amount to $89,500 and $34,700 in fiscal years
ended June 30, 2006 and 2005, respectively.
Notes payable at June 30, 2006 and 2005 consist of the following:
2006 2005
------------- -------------
Notes payable - TSI Acquisition $ 314,100 $ 314,100
Notes payable - Bank 1,000,000 829,500
Notes payable - StarTrak Acquisition 1,733,300 -
Notes payable - Other 507,000 -
------------- -------------
Notes payable 3,554,400 1,143,600
Less current portion (875,300) -
------------- -------------
Notes payable - long term $ 2,679,100 $ 1,143,600
============= =============
The Notes payable - TSI Acquisition primarily represent payables assumed
as an obligation under the TSI acquisition agreement. The balance at June
30, 2006 and 2005 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, 2006 and 2005
has been reduced by approximately $10,500 for costs incurred and paid by
the Company that had been indemnified by TSIN in the acquisition
agreement.
Notes payable - StarTrak Acquisition represent notes assumed in the
acquisition and include a $1.5 million non interest bearing note payable
to Tenix Holding, Inc. (a prior investor in StarTrak) due December 31,
2007 that has been discounted to $1.365 million due to the non interest
bearing nature of the note, and $368,300 of notes due on demand (expected
to be repaid in the quarter ended December 31, 2006) that bear interest
at 7%.
Notes payable - Other includes a $257,000 non interest bearing note due
to an investment banker involved in the StarTrak acquisition ($150,000 of
which was paid August 31, 2006 and $107,000 is due by January 31, 2007
and may, if approved by shareholders, be paid in stock) and a $250,000
demand note bearing interest at 12% and due to the Company's Chief
Executive Officer.
27
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
8. CONTRACTS IN PROGRESS
The Company had one fixed price contract in progress at June 30, 2006 and
2005, 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, 2006 and 2005 consist of the following:
June 30, 2006 June 30, 2005
------------- -------------
Costs incurred on uncompleted contract $ 97,100 $ 34,100
Gross profit earned to date 19,900 1,700
------------- ------------
Revenues earned to date 117,000 35,800
Less: billings to date (160,500) (40,000)
------------- ------------
Billings in excess of cost and estimated
earnings on uncompleted contracts $ (43,500) $ (4,200)
============= ============
9. INCOME TAXES
A reconciliation of anticipated statutory rates is as follows:
2006 2005
------------- ------------
Statutory Rate 34% 34%
State income taxes, net of Federal income
tax benefit 5% 5%
Increase (reduction) in valuation allowance
related to net operating loss carry-
forwards and change in temporary
differences -39% -39%
------------- ------------
0% 0%
============= ============
The components of the net deferred tax asset (liability)recognized as of
June 30, 2006 and 2005, are as follows:
2006 2005
------------- ------------
Deferred tax assets (liabilities):
Net operating loss, capital loss
carryforwards, amortization of
intangibles $ 14,498,000 $ 12,827,000
Property, plant and equipment 22,000 (49,000)
Other timing differences 23,000 62,000
Less: valuation allowance (14,543,000) (12,840,000)
------------- ------------
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, 2006, the
Company had net operating loss and capital loss carryforwards for
Federal tax purposes of approximately $37,527,000. The loss
carryforwards, unless utilized, will expire from 2007 through 2025.
28
10. RELATED PARTY TRANSACTIONS
At June 30, 2006, the Company had a line of credit agreement with a trust
controlled by Donald Anderson, a member of the Company's Board of
Directors. In addition, the Company also had a demand note payable to Mr.
Robert Kauffman, CEO of the Company, in the amount of $250,000. See Note
7 for additional discussion of both the line of credit agreement and the
note due to Mr. Kauffman.
During 2006, as more fully described in Note 12, Shareholders' Equity,
the Company raised approximately $2.3 million in private offerings to
accredited investors, with twenty-two percent being attributable to
insiders.
11. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain facilities under non-cancelable
operating lease agreements that expire through fiscal year 2009. Future
minimum payments under non-cancelable operating leases at June 30, 2006
are as follows:
Year Ended Operating
June 30, Leases
---------- -------------
2007 $ 412,700
2008 197,200
2009 105,200
2010 -
2011 -
-------------
$ 715,100
=============
Rent expense related to these operating leases totaled approximately
$340,400 and $342,600 for the years ended June 30, 2006 and 2005,
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., an Arizona limited liability company. The actions are
more fully described below:
On January 30, 2003, a shareholder of TSIN filed a derivative suit naming
as defendants the Company and its wholly owned subsidiary, Alanco/TSI
PRISM, Inc. 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 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 Chapter 7 bankruptcy. The Chapter 7 Trustee failed
to prosecute the action timely and the state court dismissed the action
for lack of prosecution, but allowed the Trustee to restart the action,
which the Trustee has done as case number CV2006-007398. The Company is
seeking its attorney's fees with respect to the dismissed action, and
will appeal the court's order allowing the Trustee to restart the action.
The Company's management, in consultation with legal counsel, believes
the plaintiff's claims are without merit and the Company will continue to
aggressively defend the action. In addition, the Company will pursue
reimbursement of legal expenses incurred from TSIN.
The Company is the 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 Insurance Policy
("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. The District Court granted summary judgment
in favor of Carolina and the Company has filed an appeal with the Ninth
Circuit Court of Appeals.
29
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
On July 18, 2003, Arraid Property L.L.C., an Arizona limited liability
company ("Arraid LLC"), filed a complaint in the Arizona Superior Court
in and for Maricopa County, Arizona (case number CV 2003-13999) against
the Company and its wholly owned subsidiary, Arraid, Inc., alleging
breach of lease and seeking substantial monetary damages. The suit
relates to an expired lease agreement for property previously leased by
Arraid. Following a trial, the Court found in favor of Arraid LLC against
the Company with respect to certain factual findings resulting in damages
owed by the Company in an amount currently undecided, but anticipated to
be less than $35,000. The prevailing party, which has not yet been
determined by the court, will likely be awarded some attorney' fees.
Based upon a determination of the amount of any final award against the
Company, the Company's management, in consultation with legal counsel,
will determine whether to appeal the decision of the court.
The Company may also, from time to time, be involved in litigation
arising from the normal course of business. As of June 30, 2006, there
was no such litigation pending deemed material by the Company.
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 in kind semi-annually, 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 341,700 shares and
304,400 shares representing "in kind" dividends to the holders of Series
A shares in fiscal 2006 and 2005, respectively, with corresponding values
of approximately $512,500 and $456,600. 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, 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, 2006 and 2005,
there were 3,122,900 and 2,781,200 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 2006 and 2005 amounted to 7,000 and 6,500 Preferred
Shares with values of approximately $70,200 and $64,500, respectively. At
June 30, 2006 and 2005, there were 75,000 and 68,000 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.
30
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, 2006 and 2005.
The Company issued a total of 11,473,500 shares of Class A Common Stock
in fiscal year 2006. The issued shares were comprised of 2,100,000
shares issued in connection with the exercise of employee stock options
and warrants, resulting in proceeds of $1,235,000; 383,500 shares issued
to outside vendors as payment for services rendered valued at $245,400:
3,990,000 shares issued in connection with private offerings; and
5,000,000 shares in June 2006 in connection with the Company's
acquisition of StarTrak Systems, LLC.
The 2006 private offerings included the January 2006 sale to an
institutional investor of 1,500,000 units consisting of one share of
Class A Common Stock together with a 3-year warrant to purchase one-half
share of the Company's Common Stock at a price of $.85 per share ("Unit")
for a unit sale price of $.60. The Company received $830,000, net of
commission, from the offering. The Company granted additional warrants to
purchase 52,500 shares of its Common Stock on terms identical to those
granted in the private offering as commissions related to the offering.
In addition, in April 2006 the Company completed the sale, in a private
offering to a trust beneficially owned by a Director of the Company, of
820,000 units for $500,200. The units consisted of one share of Class A
Common Stock, together with a warrant to purchase one share at a price of
$.65 per share. In June 2006, the Company completed two additional
private offerings, the first to three institutional investors for a total
of 835,000 units consisting of one share of Class A Common Stock together
with a 3-year warrant to purchase one-half share of the Company's Common
Stock at a price of $.85 per share ("Unit"), for a unit sale price of
$.60. The Company received $479,000, net of commission, from the
offering. The second June 2006 offering consisted of 835,000 units to an
institutional investor, each unit composed of one share of Class A Common
Stock together with a 3-year warrant to purchase one-half share of the
Company's Common Stock at a price of $.85 per share ("Unit"), for a unit
sale price of $.60. The Company received $464,900, net of commission,
from the offering. The Company also granted warrants to purchase 29,225
shares of Common Stock on terms identical to those granted in the private
offering as commissions related to the offering. Nasdaq listing fees paid
during fiscal year 2006 amounted to $44,100.
Effective June 30, 2006, the Company acquired StarTrak Systems, LLC, a
Delaware limited liability company ("StarTrak"). The transaction was
structured as a merger between a newly formed subsidiary of the Company
and StarTrak, resulting in the Company owning all of the post-transaction
membership interests in StarTrak and the previous StarTrak members
receiving 5,000,000 shares of the Company's Class A common stock and the
right to receive in the future either cash or additional shares of the
Company's Class A common stock. The 5,000,000 initial shares issued to
the StarTrak members were valued at $3,485,000. Potential additional
shares to be issued to the StarTrak members will be presented for
approval as a proposal to the Alanco's shareholders at the 2006 Annual
Shareholders Meeting.
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. Shares issued to outside vendors by the Company as
payment for services rendered totaled 334,200 shares and were valued at
$303,200. Nasdaq listing fees, associated with listing the additional
shares in fiscal year 2005, amounted to $38,200.
31
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
In August, 2005, the Company received notification from NASDAQ indicating
that due to the failure of the Company to maintain the minimum $1.00 bid
price per share requirement, the Company's securities were subject to
delisting from NASDAQ. In accordance with Marketplace Rule 4310(c) (8)
(D), the Company had 180 days, or until January 31, 2006, to comply with
the Rule. The minimum bid price requirement was not met by the date
specified, and in accordance with Marketplace Rule 4310(c), NASDAQ
officials determined the Company met the NASDAQ Capital Market initial
listing criteria except for the bid price requirement and notified the
Company that it had been granted an additional 180 calendar days (until
July 31, 2006) to meet the $1.00 minimum bid price requirement. In
August, 2006, the Company received notification from NASDAQ indicating
that it had not regained compliance with the minimum $1.00 bid price per
share requirement and that the Company's securities would be delisted.
The Company elected to appeal the NASDAQ Staff delisting determination
and an oral hearing before the NASDAQ Listing Qualifications Panel
("Panel") was scheduled for September 14, 2006. There can be no assurance
that the Panel will grant the Company's request for continued listing.
Pending a decision by the Panel, the Company's Common Stock will remain
listed on the NASDAQ Capital Market.
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, 2008. As of September 27,
2006, no split was effected.
Warrants - As of June 30, 2006, the Company had 7,191,726 warrants
outstanding with a weighted average exercise price of $1.09. The life of
the outstanding warrants extends from May 2007 through April 2016. The
following is a table of activity related to all warrants.
Weighted
Number of Average
Shares Exercise Price $
------------- -------------
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
Granted 4,336,726 0.74
Exercised (1,850,000) 0.61
Canceled/Expired (300,000) 0.70
------------- -------------
WARRANTS OUTSTANDING, June 30, 2006 7,191,726 1.09
============= =============
32
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Details relative to the 7,191,726 outstanding warrants at fiscal 2006
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)
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 8/2/2009 (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)
8/31/2005 700,000 $1.00 6/9/2007 (7)
11/16/2005 1,150,000 $0.50 11/16/2008 (6)
1/16/2006 802,500 $0.85 1/16/2009 (8)
4/26/2006 820,000 $0.65 4/25/2016 (9)
6/2/2006 417,501 $0.85 6/2/2009 (10)
6/15/2006 446,725 $0.85 6/15/2009 (10)
-------------
Total Warrants
Outstanding
@ 6/30/2006 7,191,726
=============
Warrants exercised in fiscal 2006 and 2005, were 1,850,000 and 2,544,400,
respectively. Exercise of these warrants generated approximately
$1,135,000 in fiscal 2006 and $1,557,200 in fiscal 2005.
Stock Options - As of June 30, 2006, the Company had a total of
14,302,500 stock options outstanding with a weighted average exercise
price of $0.79. Of these options, 11,926,500 are exercisable at 2006
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, 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
Granted 7,620,000 0.75
Exercised (250,000) 0.40
Canceled/Expired (874,000) 0.89
------------- -------------
OPTIONS OUTSTANDING, June 30, 2006 14,302,500 $ 0.79
============= =============
For all options granted during fiscal years 2006 and 2005, 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, 2006,
33
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
options for 11,926,500 shares were exercisable and options for the
remaining shares become exercisable within the next four years. If not
previously exercised, options outstanding at June 30, 2006 will expire as
follows:
Calendar Year Number of Weighted Average
of Expiration Shares Exercise Price $
----------------- ------------- -----------------
2008 1,120,000 $ 0.43
2009 772,500 1.15
2010 320,000 1.71
2011 5,860,000 0.76
2012 1,405,000 0.97
2013 952,500 0.40
2014 1,907,500 0.92
2015 1,910,000 0.76
2016 55,000 0.64
------------- ----------------
14,302,500 $ 0.79
============= ================
Additional information about outstanding options to purchase the
Company's Common Stock as of June 30, 2006 is as follows:
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-$0.46 2,105,000 4.82 $0.41 2,105,000 $0.41
$0.50-$0.75 6,277,500 5.31 $0.72 3,901,500 $0.72
$0.80-$1.00 4,932,500 7.35 $0.92 4,932,500 $0.92
$1.08-$1.75 764,000 4.52 $1.20 764,000 $1.20
$2.00-$2.75 223,500 4.13 $2.16 223,500 $2.16
---------- ----------
Totals 14,302,500 11,926,500
========== ==========
The Company Stock Option Plans are administered by the
Compensation/Administration Committee, currently comprised of two
independent 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 standard
vesting schedule for the incentive stock options issued currently is 10%
vested immediately upon grant, 15% vested after twelve months from date
of grant, 25% after two years from the date of grant, 25% after three
years, and 25% after four years. 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.
34
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Alanco Stock Option Summary (1)
as of 6/30/06
Balance Exercise
Plan Authorized Issued Exercised Cancelled Outstanding to Issue Price Range (5)
--------------------------------------------------------------------------------------------------------------------
Misc (2) N/A 3,670,000 305,000 1,115,000 2,250,000 0 $0.43 - $1.00
1998 (3) 750,000 1,459,500 162,500 709,500 587,500 0 $0.37 - $2.75
1998 D&O (4) 750,000 750,000 405,000 0 345,000 0 $0.50 - $1.75
1999 (3) 1,500,000 3,956,250 375,000 2,456,250 1,125,000 0 $0.37 - $2.35
1999 D&O (4) 500,000 645,000 0 150,000 495,000 5,000 $0.75 - $2.00
2000 (3) 1,000,000 1,912,500 234,250 923,250 755,000 10,750 $0.37 - $1.50
2000 D&O (4) 500,000 490,000 120,000 0 370,000 10,000 $0.37 - $1.00
2002 (3) 1,500,000 1,745,000 0 250,000 1,495,000 5,000 $0.73 - $0.90
2002 D&O (4) 500,000 500,000 40,000 0 460,000 0 $0.75- $1.00
2004 (3) 2,000,000 2,550,000 0 550,000 2,000,000 0 $0.46- $0.81
2004 D&O (4) 1,000,000 990,000 0 0 990,000 10,000 $0.46- $0.81
2005 (3) 3,000,000 2,580,000 0 0 2,580,000 420,000 $0.73
2005 D&O (4) 1,000,000 850,000 0 0 850,000 150,000 $0.73
----------------------------------------------------------------------------------
Totals 14,000,000 22,098,250 1,641,750 6,154,000 14,302,500 610,750
==================================================================================
(1) Only includes plans with options currently outstanding or having a balance available 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 $17,000 and $13,300 for the
years ended June 30, 2006 and 2005, respectively.
14. STARTRAK ACQUISITION
Alanco shareholders entered into an Agreement and Plan of Reorganization
(the "Transaction") in June 2006 to acquire 100% of StarTrak Systems, LLC
("StarTrak"), a Delaware LLC, located in Morris Plains, New Jersey.
StarTrak, a leading provider of GPS tracking and wireless subscription
data services to the transportation industry, specifically focuses upon
the refrigerated or "Reefer" segment of the transport industry providing
the dominant share of all wireless tracking, monitoring and control
services to this market segment. The transaction closed effective June
30, 2006.
The Transaction, anticipated to be all stock, was effected by the
issuance of 5 million Alanco Class A Common shares at closing, effective
June 30, 2006, and the obligation to issue an additional 8.2 million
shares by January 31, 2007 upon approval by Alanco shareholders. In
addition, the sellers could potentially earn up to an additional $8
million (a maximum of $4 million each year) based upon StarTrak
operations achieving certain financial targets in fiscal years 2007 and
2008 ("Earn-out"). The value of the Earn-out is calculated for fiscal
year 2007 as two hundred percent of StarTrak gross profit in excess of $6
million. For fiscal year 2008, the Earn-out is calculated as two hundred
percent of gross profit in excess of $8 million. Upon shareholder
approval, the Earn-out may be paid in shares of Alanco Class A Common
stock valued at market, determined as a ten-day average closing price
immediately prior to issuance.
The annual Alanco shareholders' meeting is tentatively scheduled for
December 28, 2006, at which the shareholders will be asked to approve
various proposals related to the acquisition including the issuance of
the 8.2 million common shares required by the Agreement, as well as
authorization of the issuance of common shares as payment of any
potential Earn-out obligation under the Agreement. A preliminary proxy
statement for the annual meeting is scheduled to be filed shortly
following the filing of the Company's Form 10-KSB for the year ended June
30, 2006.
35
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
The value of the Transaction, considering the 5 million Class A Common
Shares issued at closing (valued at $3,485,000), 8.2 million Class A
Common shares to be issued upon shareholder approval (valued at
$5,715,400 on June 30, 2006), StarTrak net liabilities assumed of
$5,425,800 and the related costs of the acquisition of $434,500, was
valued at of $15,060,700. In accordance with the provisions of SFAS 141,
Business Combinations, the transaction must be recorded using the
purchase method of accounting, which requires the allocation of the
purchase price to the fair value of the assets acquired and the
liabilities assumed by balance sheet classifications. The Company has
engaged the services of an independent consultant for valuation services
related to FASB 141. The consultant's report has not been received by the
date of this audit report and therefore the entire transaction value is
presented as goodwill. The consultant's report is expected in the next
few weeks when the appropriate allocation of the purchase price will be
completed. We believe the allocation will focus primarily on intangible
assets other than goodwill. If additional payments are made pursuant to
the Earn-out provisions of the merger agreement, or if the value of the
8.2 million shares to be issued upon shareholder approval is valued
differently than valued at closing, the purchase price and related
goodwill value may be adjusted.
A summary of the amounts of the assets and liabilities acquired in the
StarTrak acquisition are as follows:
Current Assets
Accounts receivable $ 919,700
Inventory 885,900
Prepaid expense 33,500
----------
Total current assets $ 1,839,100
Property and Equipment 42,300
Other Assets - deposits 4,500
----------
Total Assets $ 1,885,900
==========
Current Liabilities
Accounts payable $ 3,683,300
Notes payable 368,300
Customer advances 1,001,100
Deferred revenues 119,700
Due to Alanco 774,300
----------
Total current liabilities 5,946,700
Long-Term debt 1,365,000
----------
Total Liabilities 7,311,700
----------
Liabilities assumed in excess of assets acquired $ 5,425,800
==========
Amounts classified as "due to Alanco" at the time of the acquisition
consisted of operating advances made to StarTrak prior to the
acquisition.
36
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
15. SEGMENT REPORTING
The following table is a summary of the results of operations and other
financial information by major segment:
Wireless
Data RFID Asset
Storage Technology Management Corporate Total
------------ ------------ ------------ ------------- -------------
Fiscal year 2006
Revenue $ 6,028,100 $ 631,500 $ - $ - $ 6,659,600
Cost of Goods Sold 3,877,800 479,900 - - 4,357,700
------------ ------------ ------------ ------------ ------------
Gross Profit 2,150,300 151,600 - - 2,301,900
Selling, General &
Administrative 2,081,600 2,669,600 - 1,553,100 6,304,300
------------ ------------ ------------ ------------ ------------
Operating Income (Loss) $ 68,700 $ (2,518,000) $ - $ (1,553,100) $ (4,002,400)
============ ============ ============ ============ ============
Accounts Receivable $ 645,400 $ 178,300 $ 919,700 $ 17,300 $ 1,760,700
============ ============ ============ ============ ============
Inventory $ 1,317,500 $ 940,500 $ 885,900 $ - $ 3,143,900
============ ============ ============ ============ ============
Total Assets $ 2,344,200 $ 7,239,800 $ 17,572,200 $ 528,300 $ 27,684,500
============ ============ ============ ============ ============
Capital Expenditures $ 15,800 $ 54,400 $ - $ 600 $ 70,800
============ ============ ============ ============ ============
Depreciation & Amortization $ 24,200 $ 355,600 $ - $ 3,200 $ 383,000
============ ============ ============ ============ ============
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
============ ============ ============ ============ ============
16. 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 2006 and
2005. 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.
37
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2006
Total revenues $ 1,601,600 $ 1,624,900 $ 1,466,200 $ 1,966,900
Cost of sales 1,056,700 1,113,800 914,700 1,272,500
------------ ------------- ------------- -------------
Gross profit 544,900 511,100 551,500 694,400
------------ ------------- ------------- -------------
Operating Loss (1,064,300) (1,041,800) (1,028,600) (867,700)
------------ ------------- ------------- -------------
Net loss* (1,330,000) (1,059,100) (1,273,600) (929,200)
============ ============= ============= =============
Loss per share - basic & diluted $ (0.05) (0.04) $ (0.04) $ (0.03)
------------ ------------- ------------- -------------
Weighted Average Shares 26,915,400 28,269,300 30,111,900 31,138,700
============ ============= ============= =============
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
------------ ------------- ------------- -------------
Operating Loss (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
============ ============= ============= =============
*Attributable to Common Shareholders
17. SUBSEQUENT EVENTS
The Company announced on August 28, 2006, that it had completed
agreements whereby the Company raised $1.3 million in debt financing from
certain officers and members of the Company's Board of Directors. The
funds were used for working capital requirements related primarily to the
acquisition of StarTrak Systems, LLC an acquisition that was effective on
June 30, 2006.
In August of 2006, Alanco announced that it had received a staff
determination letter from Nasdaq indicating that the Company failed to
comply with the minimum bid price requirements for continued listing as
set forth in Nasdaq Marketplace Rule 4310(c)(4), and that its securities
may be subject to delisting from the Nasdaq Capital Market. The Company
has appealed the Staff determination and requested a hearing before the
Nasdaq Listing Qualifications Panel ("Panel"). Under Nasdaq Marketplace
rules, a request for a hearing stays the delisting action pending the
issuance of a written determination by the Panel. The hearing was held on
September 14, 2006 in Washington, D.C. with representatives of the
Company present. There can be no assurance that the Panel will grant the
Company's request for continued listing. Pending a decision by the Panel,
the Company's common stock will remain listed on the Nasdaq Capital
Market.
The Company announced on July 14, 2006, that the Company completed the
sale, in a private offering to several private and institutional
investors, of 240,000 Units consisting of one share of its Series A
Convertible Preferred Stock together with a 5-year warrant to purchase
three shares of the Company's Class A Common Stock at a price of $.60 per
share ("Unit") for a Unit price of $1.71. The Company received $410,400
from the offering. Twenty five percent of the Units, or 60,000 Units,
were purchased by an institutional investor with the balance purchased by
members of the Company's Board of Directors. Due to the structure of the
offering and the Nasdaq stock market requirements, warrants issued in
this offering to members of the Board of Directors are restricted from
being exercised without shareholders' approval, which shall be requested
at the next annual meeting of the Company's Shareholders.
On July 6, 2006, the Company announced the completion of the acquisition
of StarTrak Systems, LLC, effective June 30, 2006. In conjunction with
the acquisition, effective July 1, 2006, Mr. Tim Slifkin, President and
Chief Executive Officer of StarTrak, was appointed to the Company's Board
38
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
of Directors to replace Mr. Steven Oman, who resigned. Mr. Oman's
resignation was not due to any disagreement with the registrant, but was
solely for the purpose of compliance with the Sarbanes-Oxley requirement
that the Company's Board of Directors be comprised of a majority of
independent members. Mr. Oman will continue as Alanco's Corporate
Counsel.
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, through the date of this filing, the Chief
Executive and Chief Financial Officers believe that these controls and
procedures are effective to ensure that the Company is able to collect, process
and disclose the information it is required to disclose in the reports it files
with the SEC within the required periods.
The Company also maintains a system of internal controls designed to
provide reasonable assurance that transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets. Access to assets is permitted only in accordance with management's
general or specific authorization, and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART 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
Name Age Position First Director
Harold S. Carpenter 72 Director 1995
James T. Hecker 49 Director 1997
Robert R. Kauffman 66 Director/C.O.B./C.E.O. 1998
Thomas C. LaVoy 46 Director 1998
John A. Carlson 59 Director/E.V.P./C.F.O. 1999
Donald E. Anderson 72 Director 2002
Timothy P. Slifkin 51 Director/C.E.O. - StarTrak 2006
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.
39
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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
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 the former 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.
Timothy P. Slifkin: Timothy P. Slifkin, President and Chief Executive Officer of
the Company's subsidiary, StarTrak Systems, LLC, is directly responsible for
development of StarTrak's wireless product line and for leading the North
American rail industry's acceptance of the technology for damage prevention,
refrigeration transport, and asset management applications. Mr. Slifkin has been
developing remote monitoring systems since founding Elexor Associates in 1986,
and in developing and deploying wireless systems (satellite and terrestrial)
since 1992. He has several patents issued or pending on related technology.
Prior to founding StarTrak, Mr. Slifkin was employed with Hewlett Packard,
Johannson Microwave, American Microsystems, and Jet Propulsion Laboratories. He
holds a Bachelors Degree in Engineering.
40
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Non-Director Significant Employees
The following table provides information regarding key officers for the
Company's primary subsidiaries.
Name Age Position Year Appointed
to Position
---------------------------------------------------------------------------------------------
Greg M. Oester 57 President - Alanco/TSI PRISM, Inc. 2002
Thomas A. Robinson 45 Executive Vice President - StarTrak Systems, LLC 2006
Greg M. Oester: Mr. Oester started his employment as President of Alanco/TSI
PRISM, Inc. (formerly Technology Systems International, Inc.) in 2000. He
practiced international business law for 12 years and founded a firm in Los
Angeles, CA. He co-founded North American Enterprises, Inc. in 1989 and engaged
in sales & marketing of European specialty products in the U.S.A. Mr. Oester
conducted seminars on foreign investment in the U.S.A. throughout Asia. He was
admitted to practice before the U.S. Customs Court, the Court of International
Trade and numerous State and Federal venues. Mr. Oester 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.
Thomas A. Robinson: Mr. Robinson, Executive Vice President of StarTrak Systems,
LLC, has been responsible for major program deliveries at StarTrak since 1999.
He is intimately involved in the systems development, network completion,
customer commitments, and deployments for all major products of StarTrak. Prior
to joining StarTrak, Mr. Robinson was employed by Varlen Corporation (acquired
by Amsted Industries in 1999) where he was responsible for mergers and
acquisitions. Prior to Varlen, he was a Program Manager at Hughes Aircraft. Mr.
Robinson holds Bachelors and Masters Degrees in Engineering from Case Western
Reserve University and an MBA from Wharton.
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
41
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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."
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 (d) 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 Code of Business Conduct and Ethics is presented on the Company's web page
under the subheading "Corporate Governance." 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.
42
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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, 2006, 2005 and
2004 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.
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 2006 $225,000 None $17,400 940,000
FY 2005 183,750 None 17,400 100,000
FY 2004 180,000 None 17,400 650,000
John A. Carlson, C.F.O.
FY 2006 200,000 None 10,400 570,000
FY 2005 163,333 None 10,033 75,000
FY 2004 160,000 None 9,467 350,000
Greg M. Oester, President, ATSI
FY 2006 154,500 None None 120,000
FY 2005 154,500 None None 35,000
FY 2004 146,625 None None 250,000
(1) Represents supplemental executive benefit reimbursement for the year and
Company matching for Alanco's 401(K) Profit Sharing Plan.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 2006, to each of the Named Executive Officers and/or
Directors and to all other employees as a group. No stock appreciation rights
("SARs") have been granted by the Company.
INDIVIDUAL GRANTS
Number of
Securities
Underlying % of Total Exercise
Option Options Price Grant Expiration
Name Grante Granted ($/Sh) Date Date
Robert Kauffman 400,000 5.25% $0.81 9/13/2005 9/13/2015
Robert Kauffman 40,000 0.52% $0.46 11/16/2005 11/16/2015
Robert Kauffman 500,000 6.56% $0.73 6/30/2006 6/30/2011
John Carlson 200,000 2.62% $0.81 9/13/2005 9/13/2015
John Carlson 100,000 1.31% $0.46 11/16/2005 11/16/2015
John Carlson 20,000 0.26% $0.46 11/16/2005 11/16/2015
John Carlson 250,000 3.28% $0.73 6/30/2006 6/30/2011
Harold Carpenter 80,000 1.05% $0.81 9/13/2005 9/13/2015
Harold Carpenter 100,000 1.31% $0.73 6/30/2006 6/30/2011
James Hecker 80,000 1.05% $0.81 9/13/2005 9/13/2015
James Hecker 100,000 1.31% $0.73 6/30/2006 6/30/2011
Thomas LaVoy 80,000 1.05% $0.81 9/13/2005 9/13/2015
Thomas LaVoy 40,000 0.52% $0.46 11/16/2005 11/16/2015
Thomas LaVoy 100,000 1.31% $0.73 6/30/2006 6/30/2011
Donald Anderson 80,000 1.05% $0.81 9/13/2005 9/13/2015
Donald Anderson 100,000 1.31% $0.73 6/30/2006 6/30/2011
Greg Oester 100,000 1.31% $0.81 2/16/2005 2/16/2015
Greg Oester 20,000 0.26% $0.46 11/16/2005 11/16/2015
Timothy Slifkin 1,000,000 13.12% $0.73 6/30/2006 6/30/2011
Thomas Robinson 1,000,000 13.12% $9.73 6/30/2006 6/30/2011
Other Employees 3,230,000 42.39% $0.50 - $1.00 Various (1)
------------------
Total 7,620,000 100.00%
==================
43
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
(1) The expiration dates for these options range from 9/27/2007 to 5/25/2016.
All options are granted at a price not less than "grant-date market." During the
fiscal year 874,000 previously granted stock options expired or were cancelled.
Aggregated Options and Warrants - Exercised in Last Fiscal Year and Values at
Fiscal Year End
The following table sets forth the number of exercised and unexercised options
and warrants held by each of the Named Executive Officers and/or Directors at
June 30, 2006, and the value of the unexercised, in-the-money options at June
30, 2006.
Unexercised Value of
Shares Options & Warrants Unexercised
Acquired On Value at Fiscal In-The-Money
Exercise During Realized Year End Options &Warrants
Name 2006 Fiscal Year ($) (1) (Shares) (2) at FYE ($) (3)
---- ---------------- ------- ------------ --------------
Robert Kauffman 120,000 $4,600 3,507,500 $441,200
John Carlson 85,000 5,800 1,460,000 112,650
Harold Carpenter 100,000 4,000 680,000 60,800
James Hecker 0 0 400,000 14,400
Thomas LaVoy 20,000 1,800 380,000 10,800
Donald Anderson 400,000 16,000 2,505,000 187,500
Greg Oester 10,000 900 1,220,000 37,800
Timothy Slifkin 0 0 400,000 0
Thomas Robinson 0 0 400,000 0
(1) Calculated as the difference between 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 2006 Fiscal Year End.
(3) Calculated as the difference between the closing price of the Company's
Common Stock on June 30, 2006, and the exercise price for those options
exercisable on June 30, 2006, with an exercise price less than the
closing price, multiplied by the number of applicable options.
Option Grants Subsequent to Fiscal Year End
Number of
Underlying
Securities
Options Date of Date Expiration Option
Name Granted Grant Exercisable Date Price
------------------ --------- ------- ---------- ---------- ------
Robert R. Kauffman 150,000 (1) 8/15/06 (3) 8/15/11 $0.55
John A. Carlson 50,000 (2) 8/15/06 (3) 8/15/11 $0.55
Harold S. Carpenter 100,000 (2) 8/15/06 (3) 8/15/11 $0.55
Donald E. Anderson 250,000 (1) 8/15/06 (3) 8/15/11 $0.55
(1) Issued pursuant to the 2005 Stock Option Plan.
(2) Issued pursuant to the 2005 Directors & Officers Stock Option Plan.
(3) 10% vest on 8/15/2006, 15% vest on 8/15/2007, 25% vest on 8/15/2008,
25% vest on 8/15/2009 and 25% vest on 8/15/2010.
Employment Agreements and Executive Compensation
The Executive Officers are at-will employees without employment agreements.
Compensation of Directors
During Fiscal Year 2006, 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, 2004, and 2005 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.
44
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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, 2004, and 2005 Directors and Officers Stock Option Plans on November 6,
1998, November 5, 1999, November 10, 2000, November 22, 2002, November 19, 2004,
and January 20, 2006, respectively. The purpose of the 1996, 1998, 1999, 2000,
2002, 2004, and 2005 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, 2004, and 2005 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 22,
2006. Information regarding the stock ownership of Robert R. Kauffman, Alanco
Chairman and Chief Executive Officer, Donald E. Anderson, Alanco Director, and
Timothy P. Slifkin, StarTrak Chief Executive Officer, 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 11.79% -- 4,500,000 9.14% -- 4,500,000 9.14%
International, Inc. (1)
Donald E. Anderson (2) 3,321,261 8.70% 1,132,434 6,718,563 13.65% 2,350,000 9,068,563 17.58%
Robert R. Kauffman (3) 507,000 1.33% 729,051 2,694,153 5.47% 3,342,500 6,036,653 11.48%
Timothy P. Slifkin (4) 2,164,706 5.67% 0 2,164,706 4.40% 400,000 2,564,706 5.17%
(1) Technology Systems International, Inc., a Nevada corporation, (TSIN) is an
independent, private company, which was issued 6,000,000 shares of 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 Proxy Statement, and there is no assurance that the shares will be
distributed. The address of TSIN is c/o Jill H. Ford, Trustee, P.O. Box
5845, Carefree, AZ 85377.
45
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
(2) The number of shares, options and warrants owned includes The Anderson
Family Trust, owner of 2,568,161 shares of Alanco Class A Common Stock,
654,713 shares of Alanco Series A Convertible Preferred Stock and 1,545,000
exercisable warrants; Programmed Land, Inc., owner of 733,100 shares of
Alanco Class A Common Stock, 477,721 shares of Alanco Series A Convertible
Preferred Stock and 500,000 exercisable warrants, both of which Mr.
Anderson claims beneficial ownership; and 20,000 shares of Alanco Class A
Common Stock and 305,000 exercisable options owned by Mr. Anderson. Mr.
Anderson also has an additional 225,000 stock options with a vesting
schedule ranging from August 15, 2007 to August 15, 2010, and a warrant to
purchase 180,000 shares of Class A Common Stock which requires shareholder
approval before it can be exercised, a proposal for which will be presented
at the Company's Annual Shareholders Meeting tentatively scheduled for
December 28, 2006. The 1,132,434 shares of Series A Convertible Preferred
Stock beneficially owned by Mr. Anderson represent 33.67% 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. Mr. Kauffman also has an
additional 135,000 stock options with a vesting schedule ranging from
August 15, 2007 to August 15, 2010, and a warrant to purchase 180,000
shares of Class A Common Stock which requires shareholder approval before
it can be exercised, a proposal for which will be presented at the
Company's Annual Shareholders Meeting tentatively scheduled for December
28, 2006. The 729,051 shares of Series A Convertible Preferred Stock
beneficially owned by Mr. Kauffman represent 21.68% of the total Series A
Convertible Preferred shares outstanding. The address for Mr. Kauffman is:
c/o Alanco Technologies, Inc., 15575 North 83rd Way, Suite 3, Scottsdale,
Arizona 85260.
(4) In addition to the stock options shown above, Timothy P. Slifkin, Chief
Executive Officer of StarTrak Systems, LLC, has 600,000 options with a
vesting schedule ranging from June 30, 2007 to June 30, 2010
(5) Preferred Shares are Series A Convertible Preferred Stock, each share of
which is convertible into three (3) shares of Class A Common Stock. As of
September 22, 2006, there are 3,362,937 shares of Series A Convertible
Preferred Stock outstanding. The 5% owners do not own any shares of the
Series B Convertible Preferred Stock.
(6) The percentages for Class A Common Stock shown are calculated based upon
38,163,706 shares of Class A Common Stock outstanding on September 22,
2006. The percentages for Total Common Stock Equivalent are calculated
based upon 49,227,816 shares outstanding on September 22, 2006.
(7) 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 22, 2006, 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) 507,000 1.33% 729,051 21.68% 2,694,153 5.47% 3,342,500 6,036,653 11.48%
Director/COB/CEO
John A. Carlson 250,644 0.66% 129,993 3.87% 640,623 1.30% 1,465,000 2,105,623 4.15%
Director/EVP/CFO
Harold S. Carpenter 305,541 0.80% 292,875 (5) 8.71% 1,184,166 2.41% 690,000 1,874,166 3.75%
Director
James T. Hecker 32,893 0.09% 27,183 (6) 0.81% 114,442 0.23% 400,000 514,442 1.04%
Director
Thomas C. LaVoy 55,265 0.14% 46,901 1.39% 195,968 0.40% 380,000 575,968 1.16%
Director
Donald E. Anderson (4) 3,321,261 8.70% 1,132,434 33.67% 6,718,563 13.65% 2,350,000 9,068,563 17.58%
Director
Timothy P. Slifkin 2,164,706 5.67% 0 0.00% 2,164,706 4.40% 400,000 2,564,706 5.17%
Director/CEO - StarTrak
Greg M. Oester 57,888 0.15% 13,183 0.39% 97,437 0.20% 1,220,000 1,317,437 2.61%
President - TSIA
Thomas A. Robinson 1,443,138 3.78% 0 0.00% 1,443,138 2.93% 400,000 1,843,138 3.71%
------------ ----------- ------------ -------------------------
Officers and Directors 8,136,336 21.32% 2,371,620 70.52% 15,253,196 30.98% 10,647,500 25,900,696 43.26%
============ =========== ============ =========================
as a Group (9 individuals)
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
(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. Mr. Kauffman also has a warrant to purchase 180,000
shares of Class A Common Stock which requires shareholder approval before
it can be exercised, a proposal which will be presented at the Company's
Annual Shareholders Meeting tentatively scheduled for December 28, 2006.
(4) The number of shares, options and warrants owned also includes The
Anderson Family Trust, owner of 2,568,161 shares of Alanco Class A Common
Stock, 654,713 shares of Alanco Series A Convertible Preferred Stock and
1,545,000 exercisable warrants; Programmed Land, Inc., owner of 733,100
shares of Alanco Class A Common Stock, 477,721 shares of Alanco Series A
Convertible Preferred Stock and 500,000 exercisable warrants, both of
which Mr. Anderson claims beneficial ownership; and 20,000 shares of
Alanco Class A Common Stock and 305,000 exercisable options owned by Mr.
Anderson. Mr. Anderson's address is 11804 North Sundown Drive,
Scottsdale, Arizona 85260. Mr. Anderson also has a warrant to purchase
180,000 shares of Class A Common Stock which requires shareholder
approval before it can be exercised, a proposal which will be presented
at the Company's Annual Shareholders Meeting tentatively scheduled for
December 28, 2006.
47
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
(5) Excludes 440,000 shares of Class A Common Stock, 319,370 shares of Series
A Convertible Preferred Stock and 230,000 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 510,000 shares of Class A Common Stock, 413,290 shares of Series
A Convertible Preferred Stock and 435,000 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
38,163,706 shares of Class A Common Stock outstanding on September 22,
2006. The percentages for Series A Convertible Preferred Stock are
calculated based upon 3,362,937 shares of Series A Convertible Preferred
Stock outstanding on September 22, 2006, each of which is convertible
into three (3) shares of Class A Common Stock. The percentages for Common
Stock Equivalent shares are calculated based upon 49,227,816 Common Stock
Equivalent shares outstanding as of September 22, 2006.
(8) Represents unexercised stock options and warrants issued to named
executive officers and directors. All options and warrants listed that
were issued to the executive officers and directors were exercisable at
September 22, 2006. Robert Kauffman also holds the following options:
22,500 options exercisable in fiscal year 2008, 37,500 options
exercisable in fiscal year 2009, 37,500 options exercisable in fiscal
year 2010, and 37,500 options exercisable in fiscal year 2011. John
Carlson also holds the following options: 7,500 options exercisable in
fiscal year 2008, 12,500 options exercisable in fiscal year 2009, 12,500
options exercisable in fiscal year 2010, and 12,500 options exercisable
in fiscal year 2011. Donald Anderson also holds the following options:
37,500 options exercisable in fiscal year 2008, 62,500 options
exercisable in fiscal year 2009, 62,500 options exercisable in fiscal
year 2010, and 62,500 options exercisable in fiscal year 2011. Harold
Carpenter also holds the following options: 15,000 options exercisable in
fiscal year 2008, 25,000 options exercisable in fiscal year 2009, 25,000
options exercisable in fiscal year 2010, and 25,000 options exercisable
in fiscal year 2011. Timothy Slifkin also holds the followng options:
150,000 options exercisable in fiscal year 2007, 150,000 options
exercisable in fiscal year 2008, 150,000 options exercisable in fiscal
year 2009, and 150,000 options exercisable in fiscal year 2010. Thomas
Robinson also holds the following options: 150,000 options exercisable
in fiscal year 2007, 150,000 options exercisable in fiscal year 2008,
150,000 options exercisable in fiscal year 2009, and 150,000 options
exercisable in fiscal year 2010.
(9) The number and percentages shown include the shares of common stock
equivalent actually owned as of September 22, 2006 and the shares of
common stock that the identified person or group had a right to acquire
within 60 days after September 22, 2006. The percentages shown are
calculated based upon 49,227,816 Common Stock Equivalent shares
outstanding as of September 22, 2006. 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management
Mr. Steve Oman, a former member of the Board of Directors, received compensation
in the amount of approximately $70,200 for legal services to the Company for the
fiscal year ended June 30, 2006.
Mr. Donald Anderson, a member of the Board of Directors and trustee and
beneficial owner of the Anderson Family Trust, was paid interest in fiscal year
2006 under the Line of Credit Agreement in the amount of approximately $89,500.
See Note 7 and 10 to the consolidated financials for additional related party
transactions and discussion.
48
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
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 2005 Incentive Stock Option Plan and Directors and Officers Stock Option Plan (11)
10.8 Nasdaq Delisting Notification (12)
10.98 Amendment 3 to Line of Credit Agreement (13)
10.10 Amendment 4 to Line of Credit Agreement (14)
10.11 Amendment 5 to Line of Credit Agreement (15)
14.1 Corporate Code of Business Conduct and Ethics (16)
21. Active Subsidiaries of the Registrant
Name State of Incorporation
Arraid, Inc. Arizona
Excel/Meridian Data, Inc. Arizona
Fry Guy Inc. Nevada
Alanco/TSI PRISM, Inc. (formerly Technology
Systems International, Inc.) Arizona
StarTrak Systems, LLC Delaware
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 (17)
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
49
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
(4) Incorporated by reference to Form DEFM14A filed April 22, 2002
(5) Incorporated by reference to Form S-8 filed October 22, 1998
(6) Incorporated by reference to Form S-8 filed November 30, 1998
(7) Incorporated by reference to Form S-8 filed November 29, 1999
(8) Incorporated by reference to Form S-8 filed December 14, 2000
(9) Incorporated by reference to Form S-8 filed January 22, 2003
(10) Incorporated by reference to Form S-8 filed February 17, 2005
(11) Incorporated by reference to Form S-8 filed February 2, 2006
(12) Incorporated by reference to Form 8-K filed August 4, 2006
(13) Incorporated by reference to Form 8-K filed March 28, 2005
(14) Incorporated by reference to Form 8-K filed July 6, 2005
(15) Incorporated by reference to Form 8-K filted July 14, 2006
(16) Incorporated by reference to Form 10QSB filed November 15, 2004
(17) Incorporated by reference to Form 14A 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, 2006 and 2005
and the review of the financial statements included in the Company's Forms
10-QSB for such fiscal years were approximately $107,100 and $96,900,
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, 2006.
All Other Fees
Semple & Cooper, LLP billed the Company during fiscal year 2006 and 2005 a total
of approximately $11,000 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 2006 and 2005 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
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 27, 2006
50
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 27, 2006
/s/ Robert R. Kauffman
---------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
51
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 27, 2006
/s/ John A. Carlson
---------------------
John A. Carlson
Vice President and Chief Financial Officer
52
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, 2006 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 27, 2006
/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 27, 2006 /s/ Robert R. Kauffman
----------------------
Robert R. Kauffman, CEO,
Chairman of the Board
53
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 27, 2006
--------------------- Chief Executive Officer
Robert R. Kauffman
/s/James T. Hecker Director September 27, 2006
------------------
James T. Hecker
/s/Harold S. Carpenter Director September 27, 2006
----------------------
Harold S. Carpenter
/s/Thomas C. LaVoy Director September 27, 2006
------------------
Thomas C. LaVoy
/s/Donald E. Anderson Director September 27, 2006
---------------------
Donald E. Anderson
/s/John A. Carlson Director & September 27, 2006
------------------ Chief Financial Officer
John A. Carlson
/s/Timothy P.Slifkin Director September 27, 2006
--------------------
Timothy P. Slifkin
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