FORM 10-KSB/A
Annual Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the fiscal year ended June 30, 2003
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Arizona 86-0220694
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
15575 North 83rd Way, Suite 3, Scottsdale, AZ 85260
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (480) 607-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB.
Yes X No
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The Registrant's revenues for the fiscal year ended June 30, 2003 were
$7,417,900.
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: $8,430,600 as of September 26, 2003.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock: 15,612,200 shares of Class A Common Stock (net of
treasury shares) and no shares of Class B Common Stock as of July 29, 2003.
Documents incorporated by reference: Part III of this Report is incorporated by
reference from the Registrant's Proxy Statement to be filed on or before October
29, 2003.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Except for historical information, the statements contained herein are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements, which
are other than statements of historical facts. From time to time, the Company
may publish or otherwise make available forward-looking statements of this
nature. All such forward-looking statements are based on the expectations of
management when made and are subject to, and are qualified by, risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied by those statements. These risks and uncertainties include,
but are not limited to, the following factors, among others, that could affect
the outcome of the Company's forward-looking statements: general economic and
market conditions; reduced demand for information technology equipment;
competitive pricing and difficulty managing product costs; development of new
technologies which make the Company's products obsolete; rapid industry changes;
failure by the Company's suppliers to meet quality or delivery requirements; the
inability to attract, hire and retain key personnel; failure of an acquired
business to further the Company's strategies; the difficulty of integrating an
acquired business; undetected problems in the Company's products; the failure of
the Company's intellectual property to be adequately protected; unforeseen
litigation; unfavorable result of current pending litigation; the ability to
maintain sufficient liquidity in order to support operations; the ability to
maintain satisfactory relationships with lenders and to remain in compliance
with financial loan covenants and other requirements under current banking
agreements; the ability to maintain satisfactory relationships with suppliers;
federal and/or state regulatory and legislative actions; customer preferences
and spending patterns; the ability to implement or adjust to new technologies
and the ability to secure and maintain key contracts and relationships.
EXPLANATORY NOTE
This Amendment No. 2 to Form 10-KSB for the period ended June 30, 2003, is
being made in order to include Item 8A, Control and Procedures, which was
inadvertently omitted from our original filing and Amendment No. 1.
Amendment No. 1 to Form 10-KSB for the period ended June 30, 2003, was
made in order to revise Item 4 of Part I, the certifications required by Section
302 of the Sarbanes-Oxley Act of 2002 (Exhibits 31.1 and 31.2) and the
certifications required by Section 906 of the Sarbanes-Oxley Act of 2002
(Exhibit 32.1) to incorporate those amendments set forth in the Securities and
Exchange Commission's Release No. 33-8283 which were inadvertently omitted from
our original filing on September 29, 2003.
Except for the items described above, none of the information contained in our
original filing on Form 10-KSB has been updated, modified or revised. The
remainder of our original report on Form 10-KSB is included herein for the
convenience of the reader.
PART 1
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Alanco Technologies, Inc. was incorporated in 1969 under the laws of
the State of Arizona. Unless otherwise noted, the "Company" or "Alanco" refers
to Alanco Technologies, Inc. and its wholly owned subsidiaries.
Alanco (Nasdaq: ALAN) is a provider of advanced information technology
solutions with the Company's operations at the end of fiscal 2003 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.
In May 2002, the Company acquired RFID (Radio Frequency Identification)
tracking technology 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 for mid-range
organizations. During fiscal year 2002, the Company also substantially
liquidated, due to continued operating losses, SanOne, Inc., a wholly owned
subsidiary that had been created to enter the Storage Area Network ("SAN")
market.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Prior to the May 2002 closing of the acquisition of the RFID tracking
technology, the Company exchanged its investment in Gold & Minerals, Inc.
("G&M"), a private Arizona-based mining company, for approximately 8.9% of the
outstanding shares of TSIN. Since the purchase consideration for the RFID
tracking technology was Alanco stock (both a fixed number of shares to be paid
at closing and a significant contingent payout based on Technology Systems
International, Inc., an Arizona Corporation ("TSIA") operating results) the
Company recorded, during the fiscal year ended June 30, 2002, an asset
impairment charge of $2.1 million to reduce the investment valuation to
approximately $375,000, the estimated value of 8.9% of the shares to be issued
to TSIN at closing, the only shares guaranteed to be issued.
RECENT BUSINESS DEVELOPMENTS
In September 2003, President Bush signed into law new legislation that
will create national standards for detection and prevention of prison rape and
provide state prison systems with $40.0 million annually in federal matching
grants to combat the problem. The Company believes the new law will accelerate
adoption of its TSI PRISM(TM) continuous tracking technology in the nation's
prisons; accordingly, the Company announced a new initiative to assist states to
deploy its unique technology by accessing the federal matching grants available
through the new law.
DESCRIPTION OF BUSINESS
RFID TECHNOLOGY SEGMENT
During fiscal year 2002, the Company acquired the operations of
Technology Systems International, Inc. ("TSIN"), developer of the proprietary
TSI PRISM(TM) wireless RFID tracking technology utilized primarily in
correctional facilities security management and personnel monitoring. The
acquisition was effected through a wholly owned subsidiary, Technology Systems
International, Inc., an Arizona corporation ("TSIA") by the issuance of Alanco
Class A Common Stock to purchase TSIN's assets and assumption of specific TSIN
liabilities. The all-stock transaction was approved at a May 14, 2002 Special
Shareholders Meeting, which authorized the stock issuance. The transaction's
effective closing date was June 1, 2002. See Footnote 14 to the Consolidated
Financial Statements for further discussion of the TSIA acquisition.
TSIN had recently completed a seven-year development program, investing
over $17 million into research and development of the TSI PRISM(TM) technology,
including test installation sites. Commencing a national sales program in fiscal
year 2001, TSIN completed the installation of its first $1 million commercial
installation at a Midwest prison facility in May 2002. By June 30, 2002, the
TSIA operations (both under TSIN and TSIA) had received approximately $5 million
in contracts, of which approximately $1 million had been completed prior to the
June 2002 acquisition.
Marketing. TSIA markets its TSI PRISM(TM) RFID tracking system
primarily in the United States, through independent sales representatives and
Company direct sales representatives. The primary focus of the marketing effort
has been on the domestic correctional facilities market.
Raw Materials. The RFID Technology segment utilizes various domestic
subcontractors for materials and parts used to manufacture its products. Due to
the advantage of volume manufacturing, one domestic supplier represented
approximately 49% and a second domestic supplier represented approximately 21%
of the segment's purchases of material and parts for the fiscal year ended June
30, 2003. Additionally, one subcontractor who accounted for approximately
$990,000 in installation billings during the twelve months ended June 30, 2003
completed all subcontracted installations.
The Company anticipates continued concentration of vendor purchases;
however, additional suppliers are readily available at competitive pricing
levels. The Company does not foresee any future significant shortages or
substantial price increases that cannot be recovered from its customers.
Competitive Conditions. The TSI PRISM(TM) 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.
Employees. As of June 30, 2003 and 2002, the Company's RFID tracking
segment employed twelve and fifteen full-time employees, 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 have been affected by annual budget
schedules and economic conditions.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Dependence Upon Key Customers. The RFID Technology segment is in an
early stage of commercial market development, commencing national sales efforts
in fiscal year 2001. Targeted customers operate the majority of the prisons in
the United States and include the 50 state governments and the federal
government. During the twelve months ended June 30, 2003, substantially all
revenues recognized were generated from two Midwestern state governments, one
accounting for 80.2% and the second accounting for 19.5% of the reported
revenues for the period. The Company anticipates that as market penetration of
its TSI PRISM(TM) technology accelerates, the Company will have numerous
customers. However, due to the type of product sold by the RFID Technology
segment, the size of each contract may continue to be significant.
Backlog Orders. The Company operates using order contracts that it
considers to be firm and non-cancelable. Under this method, the Company had
unfulfilled contracts as of June 30, 2002 of approximately $3.8 million. As of
June 30, 2003, the Company was in negotiation with a number of prospective
customers, but did not have any unfulfilled contracts.
Research & Development The Company estimated that the TSIA operation
spent approximately $150,000 and $250,000 in research and development
expenditures, recorded as selling, general and administrative expense, during
fiscal years 2003 and 2002, respectively.
COMPUTER DATA STORAGE SEGMENT
The Company's Computer Data Storage segment consists primarily of two
separate units, Arraid, Inc. ("Arraid") and Excel/Meridian Data, Inc.
("Excel"). Phoenix, Arizona-based Arraid, manufacturer of legacy computer data
storage solutions, was acquired effective October 1999. Excel, a Dallas,
Texas-based provider of data storage networking products and services, was
acquired effective June 2000.
The Company expanded into the Storage Area Network (SAN) market during
fiscal year 2000 with the formation of SanOne, Inc. ("SanOne"). Due to
significant operating losses incurred by SanOne in both fiscal year 2001 and
2002, the SanOne business was closed and the subsidiary substantially liquidated
during the fiscal year 2002.
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. Its competitive
position was recently enhanced by the development of its ESP-1 single board
computer, which will reduce product development time and costs, as well as allow
Arraid to enter significant new market niches.
Excel 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.
During fiscal years ended June 30, 2003 and 2002, the Company reviewed
goodwill and other recorded intangible assets in compliance with the Company's
policy to determine appropriateness of valuation and presentation of those
assets based upon the implementation of SFAS No. 142. As a result of that
review, the Company reduced the carrying values of goodwill and other intangible
assets related to the data storage segment by recording an asset impairment
charge of $1.39 million during fiscal year ended June 30, 2002. No adjustment
was deemed necessary for fiscal year 2003.
Marketing. Arraid markets legacy storage solutions nationally and
internationally through company sales representatives and independent
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 2003 and 2002, 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.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Competitive Conditions. There are numerous competitors in the computer
data storage market, with no company dominating the market. Arraid principally
provides a unique storage solution 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, 2003, the Company's computer data storage
business employed twenty-five full-time employees, compared to thirty-five
full-time employees as of June 30, 2002.
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 years ended June 30, 2003
and 2002, no customer accounted for 10% or more of revenues.
Backlog Orders. The Company operates using customer purchase orders
that in some cases may not be considered firm and non-cancelable. Methods of
defining a firm "Backlog Order" are being evaluated, and if the Company utilizes
that information in evaluating sales activity, the information will be reported.
Research & Development. The Company estimates it spent approximately
$150,000 in research and development expenditures, recorded as selling, general
and administrative expense, for both fiscal years 2003 and 2002.
DISCONTINUED OPERATIONS
The Company's continuing operations for both fiscal years 2003 and 2002
are limited to the RFID Technology segment and Computer Data Storage segment
discussed above. Pollution Control Products, Restaurant Equipment, and Mining
segments are reported as "discontinued operations" for both the current and
prior fiscal years.
During fiscal year 2001, the Company completed the sale of its
subsidiary, Alanco Environmental Technologies (Beijing) Co., Ltd., and the
patents related to Charged Dry Sorbent Injection (CDSI) technology to a private
New Jersey corporation. The sales proceeds consist of cash and notes receivable
through 2004. $252,000 of the projected gain was recognized during the fiscal
year ended June 30, 2001 with the balance of the gain deferred and netted
against the note receivable until payment is received. See note 3 to the
Consolidated Financial Statements for further discussion of notes receivable
related to the sale of the CDSI technology. The transaction completed the sale
of the Company's remaining Pollution Control Products assets.
At June 30, 2003 and 2002 all of the pollution control products and
mining assets had been sold. Assets classified at year-end on the Company's
balance sheet as "net assets held for sale" consist of the remaining Restaurant
Equipment segment assets, which are valued at the lower of cost or net
realizable value.
ITEM 2. PROPERTIES
The Company's corporate office and the TSIA operation are located in an
approximate 9,300 square foot leased facility in Scottsdale, Arizona. The
current lease expires on July 31, 2007.
During fiscal year 2003, Arraid operated under a month-to-month lease
in anticipation of negotiating a lease extension. In August of 2003, Arraid
entered into a 5,200 square foot office/manufacturing space lease at a new
Phoenix, Arizona location. The new three-year lease expires on August 31, 2006.
During fiscal year 2001, Excel/Meridian Data, Inc. entered into an
office/manufacturing space lease for 11,328 square feet in Carrollton, Texas.
The five-year lease expires March 15, 2006.
Mining Claim Properties. The Company's last remaining mining interest
consisted of a small milling site known as the Tombstone Metallurgical Facility
or mill site located in Cochise County, near Tombstone, Arizona. At June 30,
2002, management was in the process of permanently closing the site under a plan
approved by the Bureau of Land Management ("BLM"). The site was permanently
closed during the current fiscal year.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Environmental Disclosure. There are numerous federal and state laws and
regulations relating to environmental protection that have direct application to
mining, milling and mineralized material processing operations. The more
significant of these laws deals with mined land reclamation and wastewater
discharge from such operations.
The Tombstone Metallurgical Facility was located on federal lands that
are administered by the BLM. The mill site facility had been constructed in the
1970's when no permitting from the BLM was required. The Company believes it has
complied with all regulations, as they existed; however, there can be no
assurance that environmental problems will not be discovered in the future.
During fiscal year 2003, the Company closed the Tombstone Metallurgical Facility
under a closure plan approved and monitored by the BLM. The site closure was
accomplished by dismantling and removing the facilities and by completing
required environmental and/or surface reclamation. The Company is not aware of
any material environmental claims or violations. Expenditures during fiscal
years 2003 and 2002 related to environmental regulations, including those
related to the closure of the Tombstone Metallurgical Facility, amounted to less
than $20,000.
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, and to litigation arising from an
expired property lease between the Company's subsidiary, Arraid, Inc., and
Arraid Property L.L.C., a Limited Liability Company. The actions are more
fully described below:
On January 30, 2003, Richard C. Jones, a shareholder of Technology
Systems International, Inc., a Nevada corporation ("TSIN"), filed a derivative
suit naming as defendants the Company and its wholly owned subsidiary,
Technology Systems International, Inc., an Arizona corporation ("TSIA"), and all
of the directors of TSIN. The venue for this action is the Arizona Superior
Court in and for Maricopa County, Arizona, as case number CV2003-001937. The
complaint sets forth various allegations and seeks equitable remedies and
damages arising out of the Company's acquisition of substantially all of the
assets of TSIN. This derivative suit was terminated and the action converted
into a direct action by TSIN by stipulation and court order in July 2003. The
Company's management, in consultation with legal counsel, believes the
plaintiff's claims are without merit and the Company will aggressively defend
the action.
On July 18, 2003, Arraid Property L.L.C., an Arizona Limited Liability
Company ("Arraid LLC"), filed a complaint in Superior Court, Arizona (case
number CV 2003-13999) against the Company and its wholly owned subsidiary,
Arraid, Inc., an Arizona corporation ("Arraid"), alleging breach of lease and
unjust enrichment and seeking monetary damages. The suit relates to an expired
lease agreement for property previously leased by Arraid. The Company has filed
a counterclaim against Arraid LLC, and a third party complaint against John
Dahl, Frank Meijers and Keith Blaich (all owners of Arraid LLC and previous
employees of the Company) seeking monetary damages and alleging, among other
things, excess billing and unjust enrichment. The Company's management, in
consultation with legal counsel, believes the plaintiff's claims are without
merit and the Company will aggressively defend the action and pursue the
counterclaims and third party claims specified.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
No amounts have been accrued in the accompanying financial statements
of the company as of June 30, 2003 for any potential loss arising from these
matters, or for any additional costs of defense.
The Company may also, from time to time, be involved in litigation
arising from the normal course of the business. As of June 30, 2003, there was
no such litigation pending.
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, 2003.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Alanco's common stock is traded on the NASDAQ Small Cap Market under
the symbol "ALAN."
The following table sets forth high and low sale prices for each fiscal
quarter for the last two fiscal years. Such quotations represent inter-dealer
price without retail mark-ups, markdowns, or commissions and, accordingly, may
not represent actual transactions.
Fiscal 2003 Fiscal 2002
Quarter Ended High Low High Low
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September 30 $0.70 $0.47 $1.25 $0.64
December 31 $0.74 $0.46 $0.95 $0.63
March 31 $0.62 $0.38 $0.89 $0.45
June 30 $0.50 $0.23 $0.80 $0.40
As of June 30, 2003, Alanco had approximately 1,800 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, 2003, the Company issued
3,093,500 shares of its unregistered, restricted Class A Common Stock to
accredited investors. Of those shares, 3,000,000 were issued in connection with
a private offering in December 2002; the balance of 93,500 shares was issued for
services rendered.
During the fourth quarter of the fiscal year ended June 30, 2003, the
Company allocated 5,000,000 of the authorized 25,000,000 No Par Preferred Stock
to be known as Series A Convertible Stock ("Series A") and issued 2,248,400
shares of Series A in a transaction with accredited investors. The Company
exchanged a Series A share and warrant to purchase a share of the Company's
Class A Common Stock at $0.50 ("Warrant") for two shares of Class A Common Stock
("Common") and $0.50. The transaction recorded at June 30, 2003 was valued at
$2,833,000, including cash received of $1,124,200 and 4,496,900 Common shares
received (valued at $1,708,800). The Common shares acquired under this
transaction (valued at market price on the date of the subscription agreement)
are presented as Treasury shares at year-end. See Footnote 12 - Shareholders'
Equity for additional discussion of Preferred Stock.
During the fiscal year ended June 30, 2002, the Company issued
8,839,200 shares of its unregistered, restricted Class A Common Stock to
accredited investors. Of those shares, 7,000,000 were issued in connection with
the acquisition of TSI operations in May 2002, including 1,000,000 shares issued
to convert debt to equity. (See Footnote 14 - Acquisition for additional
discussion); 1,480,000 were issued in connection with a private offering in
December 2001 and January 2002; and 250,000 were issued in connection with a
private offering by the Company in May 2002. The balance of 109,200 shares was
issued for services rendered. The shares issued for services during the fiscal
year 2003 and 2002 were valued at fair market value based on the average closing
price for ten consecutive trading days at which the stock was listed on the
NASDAQ quotation system, ending on the day prior to the date on which the
service agreement was reached.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
In addition to the Common shares issued during fiscal 2002, the Company
allocated 500,000 of the authorized shares of the Company's No Par 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 and 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 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. The Series B
shareholders may, at any time after the third (3rd) anniversary of the date of
issuance of the shares, demand the Company redeem the Series B at a redemption
price of $10.00 per share. The shares may be redeemed by the Company paying the
aggregate redemption price in cash, or by paying the aggregate redemption price
in Common Stock value at market price. Due to the shareholder's right to demand
redemption, the Series B Convertible Preferred Stock is presented on the balance
sheet above the Shareholders' Equity section.
Alanco has paid no Common Stock cash dividends and has no current plans
to do so.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following management discussion and analysis of financial condition
contains statements that may be considered "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, and underlying assumptions and
other statements. Such forward-looking statements are inherently uncertain, and
the actual results may differ from management's expectations.
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 account
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 believes
the following critical accounting policies affect its more significant judgments
and estimates in the preparation of its consolidated financial statements.
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 Properties L.L.C. that is more fully discussed in Item 3, Legal
Proceedings presented on page 6.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Results of Operations
In accordance with Generally Accepted Accounting Principles, the
Company has limited its reported consolidated revenues for fiscal years ended
June 30, 2003 and 2002 to its Computer Data Storage segment and its RFID
Technology segment, the only segments reported as continuing operations.
Data RFID
Storage Technology Corporate Total
------------ ------------ ------------ ------------
Fiscal year 2003
Revenue $ 3,775,800 $ 3,642,100 $ -- $ 7,417,900
Cost of Goods Sold 2,331,500 2,481,400 -- 4,812,900
----------- ----------- ----------- -----------
Gross Profit 1,444,300 1,160,700 -- 2,605,000
Selling, General & Administrative 1,987,700 2,162,100 943,800 5,093,600
----------- ----------- ----------- -----------
Segment Operating Loss (543,400) (1,001,400) (943,800) (2,488,600)
Interest Income -- -- 500 500
Interest Expense -- -- (130,600) (130,600)
Other 9,700 (2,000) -- 7,700
----------- ----------- ----------- -----------
Loss from Continuing Operations $ (533,700) $ (1,003,400) $ (1,073,900) $ (2,611,000)
=========== ============ =========== ===========
Accounts/Subscriptions Receivable $ 466,700 $ 324,100 $ 916,900 $ 1,707,700
=========== ============ =========== ===========
Inventory $ 869,200 $ 409,500 $ -- $ 1,278,700
=========== ============ =========== ===========
Fiscal Year 2002
Revenue $ 5,297,900 $ 70,300 $ -- $ 5,368,200
Cost of Goods Sold 3,044,700 52,900 -- 3,097,600
----------- ----------- ----------- -----------
Gross Profit 2,253,200 17,400 -- 2,270,600
Selling, General & Administrative 5,006,300* 128,800 2,867,800 8,002,900
----------- ----------- ----------- -----------
Segment Operating Loss (2,753,100) (111,400) (2,867,800) (5,732,300)
Interest Income -- -- 95,400 95,400
Interest Expense -- -- (82,600) (82,600)
Other 1,200 -- -- 1,200
----------- ----------- ----------- -----------
Loss from Continuing Operations $ (2,751,900) $ (111,400) $ (2,855,000) $ (5,718,300)
=========== ============ =========== ===========
Accounts Receivable $ 600,100 $ 181,400 $ -- $ 781,500
=========== ============ =========== ===========
Inventory $ 999,200 $ 257,200 $ -- $ 1,256,400
=========== ============ =========== ===========
*Includes asset impairment charges
Consolidated revenues for fiscal year 2003 were $7,417,900, an increase
of 38.2% when compared to $5,368,200 for fiscal year 2002. The increase resulted
from the RFID Technology segment (acquired effective June 1, 2002), which
reported revenues of $3,642,100 compared to $70,300, representing one month's
sales for the previous year. The Data Storage segment revenue decreased to
$3,775,800, a 28.7% decrease from $5,297,900 reported for the previous year. The
decrease in Data Storage segment revenue compared to the previous year resulted
from the Company's decision to close the SanOne operations during fiscal year
2002 and the continued weak demand for data storage products as companies
reduced and delayed technology expenditures in reaction to economic conditions.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Gross Profit for fiscal year 2003 was $2.6 million, or 35.2% of sales,
a 13% increase compared to $2.3 million, or 42.3% of sales, for the prior year.
The Data Storage segment reported a decrease in gross profit dollars of
$808,900, or 35.9%, resulting from reduced product demand; and a decrease in
gross margin from 42.5% to 38.3%, due to changes in product mix to lower margin
products. The reduction of gross profit dollars in the Data Storage segment was
offset by significant increases in current fiscal year RFID Technology segment
gross profits and gross margins. Margins in the RFID Technology segment
increased to 31.9% from 24.8% reported for fiscal year ended June 30, 2002. The
RFID Technology segment should continue to show significant improvements in
gross margins as projected volume efficiencies are realized and new technology
improvements are adopted.
Selling, general and administrative expenses for the year ended June
30, 2003 increased $579,700, or 12.8%, to $5.1 million, compared to $4.5
million, excluding the asset impairment charges recorded in fiscal 2002.
The increase resulted from additional costs related to the RFID Technology
segment, reflecting a twelve-month period in the current fiscal year and only
a one-month reporting period in the prior year. Selling, general and
administrative expense for the Data Storage segment decreased by $1,629,600,
or 45%, when compared to the prior year. The decrease in Data Storage segment
costs resulted from the closure and substantial liquidation of the SanOne
operations (a subsidiary operating in the Storage Area Network (SAN) market)
during the fiscal year 2002 and continued cost containment policies adopted
by the Company.
The loss from continuing operations for the fiscal year ended June 30,
2003 was $2,611,000, or ($.14) per share, compared to a loss of $5,718,300, or
($.57) per share, for the prior fiscal year. The loss from operations for the
prior fiscal year included $1.389 million in non-cash asset impairment charges
to write down the value of goodwill and other intangible assets in the Data
Storage segment and a $2.1 million impairment of investment charge related to
the write down of an investment discussed below. The write-downs related to
management's reduced estimation of the value of goodwill and other intangible
assets and are in compliance with the Company's policy of annually reviewing
intangible asset values to determine appropriateness of valuation and
presentation. Excluding the asset impairment charges, the fiscal year 2002 loss
from continuing operations would be $2,229,300. Comparing the current year loss
from continuing operations of $2,611,000 with the fiscal year 2002 loss before
impairment charges of $2,229,300, the current loss reflects an increase of
$381,700 or 17.1%.
The fiscal year 2002 Corporate segment loss from continuing operations
includes a $2.1 million asset impairment charge, recorded in the third fiscal
quarter, related to a write-down of the Company's Gold and Minerals, Inc.
("G&M") investment that was exchanged for 8.9% of the outstanding shares of
TSIN, a transaction that is more fully discussed in the notes to the financial
statements.
Corporate expenses for the current fiscal year amounted to $943,800, an
increase of $176,000, or 22.9%, when compared to the Corporate segment expenses
for fiscal year 2002 before the impairment of assets charges. The increase in
corporate expenses resulted from additional corporate investor relations
expenditures related to the TSI acquisition and general cost increases.
Fiscal year 2003 interest expense was $130,600 compared to interest
expense of $82,600 for the previous year. Interest income of $500 for fiscal
year ended June 30, 2003 is a decrease of $94,900, or 99.5% compared to fiscal
year 2002. The increase in interest expense relates to the Company's additional
borrowings under its line of credit agreements. The decrease in interest income
is due to interest bearing note receivables that had been repaid during fiscal
year 2002.
The Consolidated Statement of Operations for fiscal year 2003 reflects
income from discontinued operations of $9,200, or nil per share, compared to
loss from discontinued operations in the prior year of $292,900, or ($.03) per
share. Loss from discontinued operations for fiscal year 2002 includes an asset
impairment charge related to restaurant equipment assets held for sale of
$300,000, management's estimate of the charge necessary to reduce the restaurant
equipment assets to net realizable value at year-end, and operating income of
$7,100.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Preferred Stock dividends for the year ended June 30, 2003 amounted to
$52,300, compared to Preferred Stock dividends of $6,300 for the prior year, an
increase of $46,000. The fiscal years 2003 and 2002 dividends relate to Series B
Preferred Stock that was approved by shareholders at a May 14, 2002 Special
Shareholders' Meeting and issued prior to fiscal 2002 year-end. 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, 2003 was $2,654,100, or ($.14) per share, a reduction in the
per share net loss of 76.7% when compared to a net loss of $6,017,500, or ($.60)
per share, for the prior year.
Net cash used in operating activities for the current fiscal year end
was $2,020,800 compared with net cash used in operating activities for the
prior fiscal year of $1,215,500. The increase in cash used in operations
resulted from the Company's increases in accounts receivable, inventories and
prepaids for the current year, while those same items decreased in fiscal year
2002, increasing cash flow for the prior year. 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, 2003 the Company's current assets exceeded current
liabilities by $562,500, resulting in a current ratio of 1.20 to 1. At June 30,
2002, the Company's current assets exceeded current liabilities by $365,500,
reflecting a current ratio of 1.18 to 1. The increase in current ratio was due
primarily to increases in receivables at June 30, 2003 related to the sale of
the Company's Series A Convertible Preferred Stock that occurred during the
fourth quarter, which were collected subsequent to fiscal year end.
Accounts receivable of $808,500 at June 30, 2003, reflects an increase
of $27,000 from the $781,500 reported as consolidated accounts receivables at
the end of fiscal year 2002. $324,100, or 40.1% of the current fiscal year end
balance, was from the RFID Technology segment, an operation acquired effective
June 1, 2002. Data Storage segment accounts receivable balances at June 30, 2003
amounted to $466,700, a decrease of $133,400, or 22.2%, compared to the previous
year. The Data Storage segment accounts receivable balance at June 30, 2003
represented thirty-two day's sales in receivables compared to forty-one days at
fiscal year end 2002. RFID Technology segment accounts receivable balance at
June 30, 2003 represented 23.1 day's sales in receivables.
Consolidated inventories at June 30, 2003 amounted to $1,278,700
compared to $1,256,400 at the end of the prior fiscal year. Included in the
current fiscal year end balance is $409,500 of inventory for the RFID Technology
segment and $869,200 for the Data Storage segment. The RFID Technology segment
balance represents a 59% increase when compared to the $257,200 inventory
balance reported at June 30, 2002. The RFID Technology segment increased
inventory to more appropriate levels to fill contracts anticipated for the
fiscal year 2004. Inventories for the Data Storage segment decreased 13.0%
compared to $999,200 of inventory recorded at the prior fiscal year end. The
June 30, 2003 Data Storage segment inventory balance reflects an inventory
turnover of 2.7 compared to 3.0 for the inventory levels at June 30, 2002. The
decrease in Data Storage segment inventory balances relative to revenues
reflects an improvement in inventory management and an improving economy. The
inventory balance for the RFID Technology segment represents an inventory
turnover of 6.1.
The Company's cash position at June 30, 2003 was $97,700, compared to
$328,400 at the end of the prior fiscal year. The decrease in the Company's cash
position at June 30, 2003 resulted from cash operating losses offset by
additional borrowing and financing activities.
Cash used in investing activities during the current year was $69,100,
compared to $441,300 for the previous year. The decrease was due to cash funding
of TSIN prior to the acquisition. Cash used to purchase property, plant and
equipment in fiscal year 2003 was $54,000, compared to $174,100 in the prior
year. The $174,100 does not include property, plant and equipment acquired via
the TSI acquisition that was effective June 1, 2002 in an all-stock transaction.
Cash used in investing activities during fiscal year 2002 includes $559,100 of
interim funding for the TSIN operation prior to the acquisition effective
closing date of June 1, 2002. See Footnote 14 - Acquisition for additional
discussion of the TSI acquisition.
Net cash provided by financing activities during fiscal year ended June
30, 2003 amounted to $1,859,200, compared to $1,904,200 for the prior year. Cash
provided by financing activities included $1,597,500 and $1,504,000 in proceeds
from the sale of common and preferred stock for fiscal years ended June 30, 2003
and 2002, respectively. Fiscal year 2002 also included $563,500 in the
collection of subscription receivables. Advances on borrowings amounted to
$3,096,200 compared to $2,620,500 for the previous year. Repayments of borrowing
and capital leases during the year amounted to $2,814,400, compared to
$2,745,500 during the prior fiscal year.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
The Company had a $1,374,000 line of credit balance at June 30, 2003
under a $1,800,000 line of credit agreement with a private trust that was
amended in April 2003. The secured line of credit was increased to $1.8 million
and is based upon accounts receivable and inventory values and secured by all
assets of the company. The line of credit has an interest rate of prime plus 4%
for borrowings up to $1.3 million and prime plus 6% for borrowing over $1.3
million. Under the line of credit agreement, the Company must maintain a balance
due under the line of at least $500,000 through December 31, 2004. Due to the
$500,000 balance requirement and the December 2004 expiration date, the $500,000
minimum balance is presented at June 30, 2003 as long-term notes payable -
other. At June 30, 2003, $426,000 was available under the line of credit
agreement.
During fiscal year ended June 30, 2002, the Company had a $1.3 million
formula-based revolving line of credit agreement with a private trust. The
secured line of credit was based upon accounts receivable and inventory values
and had interest calculated at prime plus 4%. At June 30, 2002, the Company had
$300,000 available under the line of credit, which was scheduled to expire on
December 31, 2003.
The Company believes that additional cash resources will be required
for working capital to achieve planned operating results for fiscal year 2003
and anticipates raising capital through additional borrowing or sale of stock.
The additional capital will supplement the projected cash flow from operations
and the line of credit agreement in place at June 30, 2003. If the Company were
unable to raise the required additional capital, it may materially affect the
ability of the company to achieve its financial plans.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements.
Index to Financial Statements
page
Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . . . . 12
Consolidated Balance Sheets
As of June 30, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . 13
Consolidated Statements of Operations
For the Years Ended June 30, 2003 and 2002. . . . . . . . . . . . . . 15
Consolidated Statement of Changes in Shareholders' Equity and
Preferred Stock For the Years Ended June 30,2003 and 2002 . . . . . . 16
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2003 and 2002 . . . . . . . . . . . . . .17
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . .19
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Alanco Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Alanco
Technologies, Inc. and Subsidiaries as of June 30, 2003 and 2002, 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 generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alanco
Technologies, Inc. and Subsidiaries as of June 30, 2003 and 2002, 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, 2003 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 19, 2003
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
ASSETS
2003 2002
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 97,700 $ 328,400
Accounts receivable, net 808,500 781,500
Subscriptions receivable 899,200 --
Inventories, net 1,278,700 1,256,400
Prepaid expenses and other current assets 53,100 27,200
----------- -----------
Total current assets 3,137,200 2,393,500
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 343,800 500,100
----------- -----------
OTHER ASSETS
Goodwill, net 5,351,300 5,318,400
Other intangible assets 911,700 1,131,700
Notes receivable, net 291,000 194,200
Net assets held for sale 223,200 272,600
Other assets 61,200 51,800
----------- -----------
Total other assets 6,838,400 6,968,700
----------- -----------
TOTAL ASSETS $ 10,319,400 $ 9,862,300
=========== ===========
The accompanying notes are an integral part of these financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
(Continued)
LIABILITIES AND SHAREHOLDERS EQUITY
2003 2002
------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,636,100 $ 1,356,400
Line of credit 874,000 500,000
Capital lease obligations, current portion 24,600 20,200
Notes payable, current portion -- 81,700
Deferred revenue, current portion 76,000 69,700
----------- -----------
Total current liabilities 2,610,700 2,028,000
----------- -----------
LONG TERM LIABILITIES
Capital lease obligations, long-term portion 6,000 30,500
Notes payable, long-term portion 1,164,100 1,174,600
Deferred revenue, long-term portion 25,200 85,600
----------- -----------
TOTAL LIABILITIES 3,806,000 3,318,700
----------- -----------
PREFERRED STOCK - SERIES B CONVERTIBLE 500,000 shares
authorized, 55,800 and 50,600 shares issued and
outstanding at June 30, 2003 and 2002,
respectively 545,900 493,600
----------- -----------
SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible 5,000,000
shares authorized, 2,248,400 shares issued and
outstanding at June 30 2003, 0 shares issued
and outstanding at June 30, 2002 2,653,200 --
Common Stock
75,000,000 shares authorized, 20,609,100 and
17,515,600 shares issued, 15,612,200 and
17,015,600 outstanding, respectively 65,014,000 63,386,700
Treasury Stock
4,996,900 and 500,000 shares at June 30, 2003
and 2002, respectively, at cost (2,084,000) (375,100)
Accumulated deficit (59,615,700) (56,961,600)
----------- -----------
Total shareholders' equity 5,967,500 6,050,000
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 10,319,400 $ 9,862,300
=========== ===========
The accompanying notes are an integral part of these financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
2003 2002
------------ ------------
NET SALES $ 7,417,900 $ 5,368,200
Cost of goods sold 4,812,900 3,097,600
----------- -----------
GROSS PROFIT 2,605,000 2,270,600
Selling, general and administrative expenses 5,093,600 4,513,900
Impairment of intangible assets -- 1,389,000
Impairment of investment -- 2,100,000
----------- -----------
OPERATING LOSS (2,488,600) (5,732,300)
OTHER INCOME & EXPENSES
Interest income 500 95,400
Interest expense (130,600) (82,600)
Other income, net 7,700 1,200
----------- -----------
LOSS FROM CONTINUING OPERATIONS (2,611,000) (5,718,300)
----------- -----------
DISCONTINUED OPERATIONS
Operating income from discontinued operations 9,200 7,100
Impairment of assets held for sale -- (300,000)
----------- -----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 9,200 (292,900)
----------- -----------
LOSS FROM OPERATIONS (2,601,800) (6,011,200)
Preferred stock dividends (52,300) (6,300)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (2,654,100) $ (6,017,500)
=========== ===========
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
- Continuing Operations $ (0.14) $ (0.57)
=========== ===========
- Discontinued Operations $ 0.00 $ (0.03)
=========== ===========
- Preferred Stock Dividends $ (0.00) $ (0.00)
=========== ===========
- Net Loss Attributable to Common Shareholders $ (0.14) $ (0.60)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,677,100 9,958,600
=========== ===========
The accompanying notes are an integral part of these financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY & PREFERRED STOCK
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------------------------ ---------------------- --------------------- --------------------------
Balances, June 30, 2001 8,740,300 $ 57,653,000 -- $ -- 20,000 $ (40,000) $(50,944,100) $6,668,900
Stock issued for services 92,700 55,700 -- -- -- -- -- 55,700
Purchase of Treasury Stock -- -- -- -- 523,900 (399,100) -- (399,100)
Cancellation of Treasury Stock (43,900) (64,000) (43,900) 64,000 -- --
Preferred Stock issued -- -- 50,000 487,300 -- -- -- 487,300
Preferred Stock dividends -- -- 600 6,300 -- -- -- 6,300
Common Shares issued for
acquisition 6,000,000 3,810,000 -- -- -- -- -- 3,810,000
Common Shares issued for debt 1,016,500 966,500 -- -- -- -- -- 966,500
Private offering of common
shares 1,730,000 1,050,800 -- -- -- -- -- 1,050,800
Other (20,000) (85,300) -- -- -- -- -- (85,300)
Net loss -- -- -- -- -- -- (6,017,500) (6,017,500)
---------- ----------- --------- ----------- --------- ----------- ----------- -----------
Balances, June 30, 2002 17,515,600 63,386,700 50,600 493,600 500,000 (375,100) (56,961,600) 6,543,600
Stock issued for services 93,500 42,300 -- -- -- -- -- 42,300
Purchase of Treasury Stock -- -- -- -- 4,496,900 (1,708,900) -- (1,708,900)
Preferred Stock issued -- -- 2,248,400 2,653,200 -- -- -- 2,653,200
Preferred Stock dividends -- -- 5,200 52,300 -- -- -- 52,300
Private Offering 3,000,000 1,395,000 -- -- -- -- -- 1,395,000
Options, Preferred Stock issue -- 179,900 -- -- -- -- -- 179,900
Other -- 10,100 -- -- -- -- -- 10,100
Net loss -- -- -- -- -- -- (2,654,100) (2,654,100)
Less Preferred Stock presented
above equity line -- -- (55,800) (545,900) -- -- -- (545,900)
---------- ----------- --------- ----------- --------- ----------- ----------- -----------
Balances, June 30, 2003 20,609,100 $ 65,014,000 2,248,400 $ 2,653,200 4,996,900 $(2,084,000) $(59,615,700) $5,967,500
========== =========== ========= ========== ========= ========== =========== =========
The accompanying notes are an integral part of these financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 30,
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
CASH FLOWS FROM OPERATING ACTIVITIES 2003 2002
------------- -------------
Loss from operations $ (2,601,800) $ (6,011,200)
(Income)loss from discontinued operations (9,200) 292,900
----------- -----------
Net loss attributable to continuing operations (2,611,000) (5,718,300)
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 412,100 279,800
Impairment of intangible assets -- 1,389,000
Impairment of investment -- 2,100,000
Common stock and common stock options issued for
services 74,900 55,700
Loss on disposal of property, plant and equipment 3,700 32,600
(Increase) decrease in:
Accounts receivable, net (36,000) 765,800
Inventories, net (113,400) 344,400
Prepaid expenses and other current assets (25,900) 33,300
Other assets (9,400) --
Increase (decrease) in:
Accounts payable and accrued expenses 279,700 (473,300)
Deferred revenue (54,100) (62,300)
----------- -----------
Net cash used in continuing operations (2,079,400) (1,253,300)
Net cash provided by discontinued operations 58,600 37,800
----------- -----------
Net cash used in operating activities (2,020,800) (1,215,500)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 3,300 430,700
Goodwill, acquisition (32,900) (150,000)
Proceeds from sale of property, plant and equipment 14,500 11,200
Purchase of property, plant and equipment (54,000) (174,100)
Cash funding of TSIN prior to acquisition -- (559,100)
----------- -----------
Net cash used in investing activities (69,100) (441,300)
----------- -----------
CASH FLOWS FORM FINANCING ACTIVITIES
Advances on borrowings 3,096,200 2,620,500
Repayment of borrowings (2,814,400) (2,745,500)
Repayment of capital lease obligations (20,100) (1,800)
Collection of subscriptions receivable -- 563,500
Purchase of treasury stock -- (36,500)
Proceeds from sale of preferred stock and warrants, net 225,000 487,300
Proceeds from sale of common stock, net 1,372,500 1,016,700
----------- -----------
Net cash provided by financing activities 1,859,200 1,904,200
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (230,700) 247,400
CASH AND CASH EQUIVALENTS, beginning of year $ 328,400 $ 81,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 97,700 $ 328,400
=========== ===========
The accompanying notes are an integral part of these financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
(Continued)
2003 2002
------------- -------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 130,600 $ 82,700
=========== ============
Non-Cash Activities:
Value of stock & stock options issued for services $ 74,900 $ 55,700
=========== ============
Preferred stock dividends, in kind $ 52,300 $ 6,300
=========== ============
Options issued in conjuction with credit line $ 25,000 $ 12,300
=========== ============
Note accepted in sale of operations of NetZerver $ 100,000 $ --
=========== =============
Preferred stock subscribed at year-end $ 899,200 $ --
=========== ============
Value of treasury stock redeemed in preferred stock
and warrant issuance $ 1,708,900 $ --
=========== ============
Impairment of net assets held for sale $ -- $ 300,000
=========== ============
Impairment of goodwill $ -- $ 1,389,000
=========== ============
Impairment of investment property $ -- $ 2,100,000
=========== ============
Transfers of equipment to inventory at net
book value $ -- $ 115,200
=========== ============
Exchange of G&M investment for treasury stock $ -- $ 375,200
=========== ============
Cancellation of treasury shares $ -- $ 76,500
=========== ============
Repayment of debt via termination of options $ -- $ 51,000
=========== ============
Common stock issued for acquisition of TSI $ -- $ 3,810,000
=========== ============
Conversion of debt to common stock $ -- $ 966,500
=========== ============
Purchase of goodwill that is accrued at year-end $ -- $ 104,200
=========== ============
Purchase of net assets of TSI with common stock $ -- $ (1,124,600)
=========== ============
The accompanying notes are an integral part of these financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Alanco Technologies, Inc. was incorporated in
Arizona in 1969.
During fiscal year 2000, the Company implemented a strategic plan to
position itself as a provider of information technology. The plan was
initiated by acquiring Arraid, Inc. ("Arraid"), a computer data storage
company, initiating the roll-out of a multi-year Storage Area Network
("SAN") expansion plan, and acquiring a second computer data storage
company, Excel/Meridian Data, Inc. ("Excel"), effective June 1, 2000.
Concurrent with the implementation of the strategic plan, the Company
established a formal plan to sell the assets of all previously reported
business segments. At June 30, 2002, the Company had sold the mining and
pollution control products, and had reclassified the restaurant equipment
assets as "net assets held for sale."
During the fourth quarter of fiscal 2002 the Company continued its
strategic plan to position itself as a provider of information
technology. Its wholly-owned subsidiary, Technology Systems
International, Inc., an Arizona Corporation ("TSIA"), acquired certain
RFID (Radio Frequency Identification) tracking technology through the
acquisition of the assets, liabilities and operations of Technology
Systems International, Inc., a Nevada corporation ("TSIN"). Two
additional wholly owned subsidiaries; Arraid, a manufacturer of
proprietary storage products to upgrade older "legacy" computer systems;
and Excel, a manufacturer of Network Attached Storage ("NAS") systems for
mid-range organizations, continued the Company's involvement in the data
storage market. During the year, the Company substantially liquidated,
due to continued operating losses, SanOne, Inc., a wholly owned
subsidiary that had been created to enter the SAN market. Therefore,
fiscal year 2003 has continuing operations in both the RFID Technology
segment and in the Computer Data Storage segment. Fiscal year 2003
includes twelve months of operations for both the Computer Storage
segment and the RFID Technology segment, while fiscal year 2002 includes
twelve months of Computer Data Storage segment operations and one month
of RFID Technology segment operations.
Principles of Consolidation - The consolidated financial statements
include the accounts of Alanco Technologies, Inc. and its wholly-owned
subsidiaries, TSIA, Arraid, Excel, Fry Guy, Inc., SanOne, Inc., and
NetZerver, Inc., (collectively, the "Company") for the years ended June
30, 2003 and 2002. All subsidiaries are Arizona corporations, except Fry
Guy, Inc., which is a Nevada corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash Equivalents - The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Accounts Receivable Trade - The Company provides for potentially
uncollectible accounts receivable by use of the allowance method. An
allowance is provided based upon a review of the individual accounts
outstanding and the Company's prior history of uncollectible accounts.
Provision for uncollectible accounts receivable amounted to approximately
$60,100 and $127,600 at June 30, 2003 and 2002, respectively.
Subscriptions Receivable - Subscriptions receivable at June 30, 2003
represent receivables arising from the sale of Series A Convertible
Preferred Stock and warrants during the fourth quarter of the current
fiscal year. All monies due were received prior to the issuance of the
financial statements for fiscal year 2003.
Inventories - Inventories consist of purchased materials and parts,
work-in-process, and finished goods. Inventories are stated at the lower
of cost or market. Cost is calculated using the average-cost method for
the Data Storage segment and first-in, first-out ("FIFO") for the RFID
Technology segment.
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method, generally over a 3 to 10-year
period. Leasehold improvements are amortized on the straight-line method
over the lesser of the lease term or the useful life. Expenditures for
ordinary maintenance and repairs are charged to expense as incurred.
Betterments or renewals are capitalized as incurred. Upon retirement or
disposal of assets, the cost and accumulated depreciation are eliminated
from the account and any gain or loss is reflected in the statement of
operations.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments are determined at discrete points in time based on
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The carrying amounts of accounts
receivable, notes receivable, accounts payable, accrued liabilities, and
notes payable approximate fair value. (See below for a fair value
discussion of intangible assets and investments.)
Goodwill and Other Intangible Assets - In June 2001, the Financial
Accounting Standards Board issued SFAS No.141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001. It also provides guidance on
purchase accounting related to the recognition of intangible assets. SFAS
No. 142 requires that goodwill and identifiable acquired intangible
assets with indefinite useful lives shall no longer be amortized, but
tested for impairment annually and whenever events or circumstances occur
indicating that goodwill might be impaired. SFAS No. 142 also requires
the amortization of identifiable assets with finite useful lives.
Identifiable acquired intangible assets, which are subject to
amortization, are to be tested for impairment in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The Company elected to adopt the provisions of SFAS No. 142 as of July 1,
2001, and identified its reporting units (components) to be its TSIA
unit, which is currently the only unit under the RFID Technology segment;
and two separate units (Arraid and Excel), in its Data Storage segment.
The Company determined the carrying value of each reporting unit by
assigning assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of July 1, 2001. Upon
adoption of SFAS No. 142, amortization of goodwill recorded for business
combinations consummated prior to June 30, 2001 ceased, and intangible
assets acquired prior to June 30, 2001 that did not meet the criteria for
recognition apart from goodwill under SFAS No. 141 were reclassified to
goodwill. In connection with the adoption of SFAS No. 142, the Company
was required to perform a transitional goodwill impairment assessment.
The annual goodwill impairment assessment involves estimating the fair
value of the reporting unit and comparing it with the carrying amount. If
the carrying amount of the reporting unit exceeds its fair value,
additional steps are followed to recognize a potential impairment loss.
Calculating the fair value of the reporting units requires significant
estimates and assumptions by management. The Company estimates the fair
value of its reporting units by applying third-party market value
indicators to the reporting unit's projected earnings before interest,
taxes, depreciation and amortization. The Company completed its
impairment tests with no adjustment to the carrying value of its goodwill
as of June 30, 2003 and a $1,389,000 adjustment in the Data Storage
Segment for the year-ended June 30, 2002.
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 the prior
fiscal 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. See acquisitions Footnote 14 for information related
to intangible assets.
The following is a summary of Goodwill, net:
RFID Data
Technology Storage Total
----------- ----------- -----------
Balance as of June 30, 2001 $ -- $1,420,400 $1,420,400
Goodwill related to acquisition 5,038,800 248,200 5,287,000
Impairment of goodwill -- (1,389,000) (1,389,000)
---------- ---------- -----------
Balance as of June 30, 2002 5,038,800 279,600 5,318,400
Goodwill related to acquisition 32,900 -- 32,900
---------- ---------- -----------
Balance as of June 30, 2003 $5,071,700 $ 279,600 $5,351,300
========== =========== ===========
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other intangible assets consist of the following:
Amortization Gross Net Other
Period Carrying Accumulated Intangible
(in Years) Value Amortization Assets
----------- ----------- ------------- ---------
As of June 30, 2003
Patents license 3 $ 50,000 $ 18,000 $ 32,000
Manufacturing license 6 500,000 90,300 409,700
Software development 5 600,000 130,000 470,000
----------- -------- ---------
Total Other Intangible Assets $ 1,150,000 $ 238,300 $ 911,700
=========== ======== =========
As of June 30, 2002
Patents license 3 $ 50,000 $ 1,400 $ 48,600
Manufacturing license 6 500,000 6,900 493,100
Software development 5 600,000 10,000 590,000
----------- -------- ---------
Total Other Intangible Assets $ 1,150,000 $ 18,300 $1,131,700
=========== ======== =========
The aggregate other intangible asset amortization expense for the fiscal
years ended June 30, 2003 and 2002 was $220,000 and $18,300,
respectively.
The following table summarizes the estimated amortization charge related
to the other intangible assets as of June 30, 2003:
June 30th
2004 $220,000
2005 218,800
2006 203,400
2007 193,400
2008 76,100
---------
$911,700
=========
Investments - In fiscal year 2000, the Company exchanged its principal
mining property known as the "COD mine" for convertible preferred stock
in Gold and Minerals, Inc. ("G&M"), an Arizona-based mining company with
mining assets in the Southwest. During fiscal year 2002 the investment
was written down by $2.1 million and exchanged for approximately 8.9% of
the outstanding shares of TSIN in a transaction related to the
acquisition of the operations of TSIN in May 2002. See Footnote 14 for
further discussions of the transaction.
Net Assets Held For Sale - During fiscal 2000, the Company implemented a
plan to divest all non-data storage assets and reinvest the proceeds into
the Information Technology market. At June 30, 2003 and 2002, the "net
assets held for sale" consist of the remaining restaurant equipment
assets, which value had been reduced during the fourth quarter of fiscal
year 2002 by an asset impairment charge of $300,000. Discussions have
been held with potential buyers for all remaining units; however, a firm
acceptable offer has not yet been received. 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, 2003 and 2002 are valued at the lower of cost or market.
Discontinued Operations - Discontinued operations consist of the
remaining mining, restaurant equipment and pollution control operations.
Based upon a formal plan of disposal adopted by management in fiscal year
2000, management concluded that income or loss from operations and any
gain from the disposal of the segment's assets should be reported
separately from the Company's results of continuing operations.
Therefore, the results of operations for the segments identified above
are presented as "Discontinued Operations" for the years ended June 30,
2003 and 2002, respectively. During the current fiscal year, the Company
closed its last mining property and at year-end had no known mining
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 year ended June 30, 2003.
During fiscal year ended June 30, 2002, the Company recorded a $300,000
asset impairment charge related to the restaurant equipment assets,
classified as "assets held for sale" and a $2.1 million impairment charge
related to an investment in G&M, an Arizona-based mining company. See
Investments above and Footnote 14 to the Consolidated Financial
Statements for further discussion of the transaction.
Revenue Recognition - The Company recognizes revenue from computer data
storage sales, net of anticipated returns, at the time products are
shipped to customers, or at the time service is provided. Revenues from
material long-term contracts (in excess of $250,000 and over a 90-day
period) in both the Computer Data Storage segment and the RFID Technology
segment are recognized on the percentage-of-completion method for
individual contracts, commencing when significant costs are incurred and
adequate estimates are verified for substantial portions of the contract
to where experience is sufficient to estimate final results with
reasonable accuracy. Revenues are recognized in the ratio that costs
incurred bear to total estimated costs. Changes in job performance,
estimated profitability and final contract settlements would result in
revisions to costs and income, and are recognized in the period in which
the revisions are determined.
Contract costs include all direct materials, subcontracts, labor costs
and those direct and indirect costs related to contract performance.
General and administrative costs are charged to expense as incurred. At
the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is accrued.
Foreign Currency Translation - The Company sold its only foreign entity,
which had been classified as "net assets held for sale" at June 30, 2000,
during the fiscal year 2001. The Company had no foreign currency
transactions during fiscal years 2003 and 2002.
Income (Loss) Per Share - The income (loss) per share ("EPS") is
presented in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share. Basic EPS is
calculated by dividing the income or loss available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Basic and diluted EPS were the
same for fiscal 2003 and 2002, 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
5,578,800 shares of Class A Common Stock were outstanding at year-end
with exercise prices ranging between $0.43 and $2.75. The weighted
average exercise price for all outstanding options was $0.96. Stock
warrants representing 5,748,400 Class A Common Shares were outstanding at
year-end with exercise prices ranging between $0.40 and $1.75. The
weighted average exercise price was $0.77.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock-Based Compensation - At June 30, 2003, 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 30th,
2003 2002
------------- -------------
Net loss attributable to common shareholders
as reported $ (2,654,100) $ (6,017,500)
Deduct: Total stock-based compensation expense
determined under fair value-based method
for all awards, net of related tax effects
(90,100) (683,700)
----------- -----------
Pro Forma Net Loss $ (2,744,200) $ (6,701,200)
=========== ===========
Loss per Share:
Basic and Diluted, as Reported $ (0.14) $ (0.60)
=========== ===========
Pro Forma Basic and Diluted $ (0.15) $ (0.67)
=========== ===========
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,
2003 2002
------------ ------------
Volatility 30% 30%
Risk free interest 3% 3%
Expected dividends none none
Expected term (in years) 10 10
Concentrations of Credit Risks and Significant Customers - The Company
sells products and extends credit based on an evaluation of the
customer's financial condition, generally without requiring collateral.
Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
The RFID Technology segment utilizes various domestic subcontractors for
materials and parts used to manufacture its products. Due to the
advantage of volume manufacturing, one domestic supplier represented
approximately 49% and a second domestic supplier represented
approximately 21% of the segment's purchases of material and parts for
the fiscal year ended June 30, 2003. Additionally, one subcontractor, who
accounted for approximately $990,000 in installation billings during the
twelve months ended June 30, 2003, completed all subcontracted
installations.
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.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the current and prior fiscal years, no customer accounted for more
than 10% of the Company's Data Storage segment revenues. The largest
customer represented 5.9% of revenues in fiscal year 2003 and 5.5% of
revenues in fiscal year 2002. The largest accounts receivable balance at
June 30, 2003 and 2002 represented 12.4% and 12.3% of consolidated
accounts receivable, respectively.
Two Midwestern state governments accounted for substantially all of the
RFID Technology segment's revenues for the current fiscal year. One
customer accounted for 80.2% and the second accounted for 19.5% of
reported revenues. At June 30, 2003, the RFID Technology segment's
accounts receivable represented 36% of the consolidated receivables.
88.6% of the RFID Technology segment receivables were due from one
customer.
Segment Information - SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The Company has identified RFID Technology and Data Storage as the
continuing operating segments of the Company. All assets related to
previously disclosed segments have either been sold or have been
classified as "net assets held for sale" at June 30, 2003 and 2002. See
Note 16 for further information related to the Company's operating
segments.
Recent Accounting Pronouncements - Statement of Financial Accounting
Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations,
requires recognition of the fair value of liabilities associated with the
retirement of long-lived assets when a legal obligation to incur such
costs arises as a result of the acquisition, construction, development
and/or the normal operation of a long-lived asset. Upon recognition of
the liability, a corresponding asset is recorded at present value and
accreted over the life of the asset and depreciated over the remaining
life of the long-lived asset. SFAS 143 defines a legal obligation as one
that a party is required to settle as a result of an existing or enacted
law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel.
SFAS 143 is effective for fiscal years beginning after June 15, 2002. We
have adopted this statement effective July 1, 2002 and we do not expect
it to have a material effect on the Company's financial position, results
of operation or cash flows.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that
long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no
longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15,
2001 and, generally, are to be applied prospectively. We have adopted
this statement effective July 1, 2002, and it did not materially affect
our consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of No. 4,
(Reporting Gains and Losses from Extinguishment of Debt), SFAS No. 44
(Accounting for Intangible Assets of Motor Carriers), SFAS No. 64,
(Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements),
Amendment of FASB Statement No. 13 (Accounting for Leases) and Technical
Corrections. This statement eliminates the current requirement that gains
and losses on debt extinguishment must be classified as extraordinary
items in the income statement. Instead, such gains and losses will be
classified as extraordinary items only if they are deemed to be unusual
and infrequent, in accordance with the current GAAP criteria for
extraordinary classification. In addition, SFAS 145 eliminates an
inconsistency in lease accounting by requiring that modification of
capital leases that result in reclassification as operating leases be
accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment became
effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting became effective for transactions occurring
after May 15, 2002. We have adopted this statement effective July 1,
2002, and it did not materially affect our consolidated financial
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In June 2002, the FASB issued SFAS No. 146, (SFAS 146) Accounting
for Costs Associated with Exit or Disposal Activities, which addresses
accounting for restructuring and similar costs. SFAS 146 supersedes
previous accounting guidance, principally, Emerging Issues Task Force
(EITF) Issue No. 94-3. SFAS 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost
was recognized at the date of a company's commitment to an exit plan.
SFAS 146 also establishes that the liability should initially be measured
and recorded at fair value. Accordingly, SFAS 146 may affect the timing
of recognizing future restructuring costs as well as the amount
recognized. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. We have
adopted this statement effective January 1, 2003, and it did not
materially affect our consolidated financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure , which amends SFAS
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). SFAS 148
provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirement of
SFAS 123 to require more prominent and more frequent disclosures in
financial statements of the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing
condensed financial statements for interim periods beginning after
December 15, 2002. The Company has adopted SFAS 148 and has accordingly
modified its disclosures related to stock-based compensation.
Pending Accounting Pronouncements - In April 2003, the FASB issued SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies the accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under SFAS No. 133. In
particular, SFAS No. 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative as discussed in SFAS No. 133, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of an
underlying derivative to conform it to the language used in FASB
Interpretation No. 45, Guarantor Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
and (4) amends certain other existing pronouncements. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30,
2003. The Company does not believe the adoption of SFAS No. 149 will have
a material impact on the Company's financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for classifying and
measuring as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities
and equity. SFAS No. 150 is effective at the beginning of the first
interim period beginning after June 15, 2003; including all financial
instruments created or modified after May 31, 2003. SFAS No. 150
currently has no impact on the Company.
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting for Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others ("FIN 45"). FIN 45 clarifies the requirements for
a guarantor's accounting for and disclosure of certain guarantees issued
and outstanding. It also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This Interpretation also
incorporates without reconsideration the guidance in FASB Interpretation
No. 34, which is being superseded. The Company does not believe the
adoption of this standard will have a material impact on the Company's
financial position, results of operations or cash flow.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletins ("ARB") No. 51, Consolidated Financial
Statements ("FIN 46"). FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and in the first interim period
beginning after June 15, 2003 for variable interest entities created
prior to January 31, 2003. The interpretation explains how to identify
variable interest entities and how an enterprise assesses its interests
in a variable interest entity to decide whether to consolidate that
entity. The interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved.
Variable interest entities that effectively disperse risks will not be
consolidated unless a single party holds an interest or combination of
interests that effectively recombines risks that were previously
dispersed. The Company does not believe the adoption of this standard
will have a material impact on the Company's financial position, results
of operations or cash flow.
Reclassification - Certain reclassifications have been made to conform
fiscal 2002 information to the presentation in fiscal 2003. The
reclassifications had no effect on net income.
Advertising Costs - Advertising costs are expensed as incurred and are
included in selling, general and administrative expenses. Advertising
expense totaled $141,200 and $288,500 for the years ended June 30, 2003
and 2002, respectively.
2. LIQUIDITY AND GOING CONCERN
The Company incurred significant losses during the current fiscal year
and has experienced significant losses in prior years. Although
management cannot assure that future operations will be profitable or
that additional debt and/or equity capital will be raised, it believes
that its capital resources will be adequate to maintain and realize its
business strategy. However, if additional working capital is required and
not obtained through long-term debt, equity capital or operations, it
could adversely affect future operations. Accordingly, the accompanying
consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred losses from
operations over the past several years and anticipates additional losses
during the first part of fiscal 2004. Management has historically been
successful in obtaining financing and has implemented 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.
3. NOTES RECEIVABLE
Notes receivable at June 30, 2003 and 2002 consisted of the following:
2003 2002
----------- ----------
Notes - Sale of Inventory $ 100,000 $ --
Notes - Pollution Control Assets, net 182,300 182,300
--------- ---------
282,300 182,300
Notes receivable - other 18,700 21,900
--------- ---------
301,000 204,200
Less - allowance for uncollectible (10,000) (10,000)
--------- ---------
Net notes receivable 291,000 194,200
========== =========
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective March 31, 2003, the Company sold certain Data Storage segment
assets, primarily electronic parts inventory, to a private company that
is controlled by John Dahl and Frank Meijers, former officers of Arraid
(See also Note 10, Related Party Transactions and Note 11, Commitments
and Contingencies), for cash, the assumption of a small warranty
obligation and a $100,000 promissory note, presented as Notes - Sale of
Inventory above. The non-recourse note bears interest at 3%, is secured
by negotiable securities with a current market value in excess of the
note balance at June 30, 2003 and matures on March 31, 2006. The Company
has the right to liquidate the pledged negotiable securities; however,
any amount realized over the note balance, including accrued interest,
will be shared with purchaser on a 90/10 basis with the Company receiving
the 90% of the excess amount.
At June 30, 2003 and 2002, Notes -"Pollution Control Assets, net consist
of notes receivable in the amount of $1.15 million related to the fiscal
year 2001 sale of the remaining assets in the Pollution Control Products
segment, net of a $967,700 deferred gain on the sale, resulting in a net
value for the note of $182,300. The debtor has paid interest on the notes
totaling $53,200 during fiscal year 2002, but has made no principal or
interest payments during fiscal year 2003 and is currently in default on
the notes. Due to the current default status, the note balance is
presented net of the unrecognized gain and the total amount due is
classified as long term.
The notes were issued by a privately owned New Jersey corporation and are
payable through 2004, bear interest from 5% to 7% and are secured by: (i)
the patents sold; and (ii) the personal guarantee of the principal
stockholder of the New Jersey company. Subsequent to year end, the
Company received a default judgment for the amount of the note plus
interest. The Company will continue collection efforts using the judgment
obtained. The Company believes the present value of the dollars to be
received from the collection of these notes, and/or the liquidation of
the assets securing the notes, is sufficient to recover the net carrying
value of the notes. The gain recognized in prior years was calculated
based upon the payments received relative to the total estimated receipt
less the pro rata costs of the assets sold.
Notes receivable - other at June 30, 2003 and 2002, consist of 2 notes
from the former owners of Arraid that bear interest at a rate of 8% and a
note from a former owner of Excel/Meridian Data, Inc. The notes are due
upon demand; however, there is no assurance the Company will demand
payment during the current fiscal year; therefore, the notes are
classified as long-term.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4. INVENTORIES
Inventories consist of the following at June 30:
2003 2002
------------ ------------
Purchased materials and parts $ 1,007,000 $ 1,014,700
Work-in-progress 260,400 209,000
Finished goods 199,700 206,200
---------- ----------
1,467,100 1,429,900
Less reserves for obsolescence (188,400) (173,500)
---------- ----------
$ 1,278,700 $ 1,256,400
========== ==========
During fiscal year 2002, the Company closed the SanOne demonstration
laboratory and transferred $115,200 of computer equipment, net of
accumulated depreciation of $45,600, from Property and Equipment to
inventory for sale. The inventory is currently being sold, and management
believes the valuation of the inventory is proper and will be realized.
5. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consist of the following at June 30:
2003 2002
----------- ------------
Machinery and equipment $ 201,900 $ 179,100
Furniture and office equipment 550,900 549,800
Marketing site equipment 250,000 250,000
Leasehold improvement 54,000 50,600
---------- ----------
1,056,800 1,029,500
Less accumulated depreciation (713,000) (529,400)
---------- ----------
Net book value $ 343,800 $ 500,100
========== ==========
Related depreciation expense for the years ended June 30, 2003 and 2002,
was $192,100 and $261,600, respectively.
6. NET ASSETS HELD FOR SALE
During fiscal 2000, management of the Company formally adopted a plan to
actively pursue the sale of all business segment assets not related to
information technology. The assets to be sold included the pollution
control product assets and restaurant equipment assets. The mining assets
had been classified as "net assets held for sale" as of June 30, 1999.
During fiscal year 2000, the mining assets, a portion of the restaurant
equipment assets and a significant portion of the pollution control
product's assets were sold. During fiscal year 2001, the remaining
pollution control product's assets and additional restaurant equipment
assets were sold. At June 30, 2003 and 2002, "net assets held for sale"
consist of the remaining restaurant equipment assets.
Based upon management's decision to pursue the sale of all assets not
related to information technology, only the operations of the RFID
Technology and Computer Data Storage segments are considered as
continuing operations at June 30, 2003 and 2002. For the years ended June
30, 2003 and 2002, the segment operating results of Pollution Control
Products, Restaurant Equipment Distribution, and Mining are considered
discontinued operations.
7. LINE OF CREDIT AND NOTES PAYABLE
At June 30, 2003, the Company has an outstanding line of credit totaling
$1,374,000 of which $874,000 is presented as line of credit balance due
and $500,000 is presented as notes payable - long term portion. The line
of credit balance was under a line of credit agreement with a private
trust entered into in June 2002, for a credit line of $1.3 million. The
credit agreement was amended in April 2003, increasing the credit line to
$1.8 million. Under the amended credit agreement, which expires on
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
credit into shares of Alanco's Class A Common Stock at any time prior to
the full payment of the line of credit, at a conversion rate of $0.50 per
share. As additional consideration for the increase in the credit line
and the extension, the creditor also received warrants to purchase
250,000 shares of Alanco's Common Stock at a price of $0.40 per share.
The formula-based secured line of credit is based upon accounts
receivable and inventory values and has an interest rate of prime plus 4%
(8.25% at June 30, 2003) for borrowings up to $1.3 million and prime plus
6% for borrowing in excess of $1.3 million (10.25% at June 30, 2003). The
line of credit balance at June 30, 2002 was $1,000,000 (including the
$500,000 classified as notes payable - long term portion). For further
information related to the line of credit see also Related Party
Transactions, Note 10.
Under the line of credit agreement, the Company must maintain a minimum
balance due under the line of at least $500,000 through December 31,
2004. Due to the $500,000 balance requirement and the December 2004
expiration date, the $500,000 minimum balance is presented at June 30,
2003 and 2002 as notes payable - long term portion.
Notes payable at June 30, 2003 and 2002 consist of the following:
2003 2002
----------- ----------
Notes payable - TSI Acquisition $ 314,100 $ 394,600
Note payable - EMS 350,000 350,000
Notes payable - Other 500,000 511,700
----------- ----------
Total notes payable 1,164,100 1,256,300
Less current portion -- (81,700)
----------- ----------
Notes payable - long term $ 1,164,100 $ 1,174,600
=========== ==========
The notes payable - TSI Acquisition primarily represent payables assumed
as an obligation under the TSI acquisition agreement. The balance at June
30, 2003 is payable to TSIN upon TSIA 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, 2003 has been reduced
by approximately $10,500 for cost incurred and paid by the Company that
had been indemnified by TSIN in the acquisition agreement. The note
balance has also been reduced by $70,000 related to two notes that have
been paid in full during fiscal 2003.
The notes payable - EMS are notes incurred under a TSI
acquisition-related agreement between the Company and EMS Technologies,
Inc., a Georgia corporation ("EMS"), whereby EMS converted approximately
$1.3 million of TSIN debt, assumed by the Company in the TSI acquisition,
into one million shares of Alanco stock, a $250,000 note bearing interest
at 5% (due in May 2005), and a $100,000 note bearing interest at 5% (due
in May 2007), which is convertible into Alanco Class A Common Stock at a
conversion price of $1 per share. At June 30, 2003, the Company owed
interest on the notes in the amount of $18,900, which has not been paid.
The Company is currently in negotiations with EMS relative to various
issues, including the interest payable on the above notes.
Notes payable - Other at June 30, 2003 and 2002 includes the $500,000
portion of the line of credit discussed above. Also included in the June
30, 2002 balance is a note payable to a bank with a balance of $11,700.
The note payable to a bank, bears interest at prime plus 2% and is due in
monthly installments. The $11,700 balance at June 30, 2002, plus
interest, was paid during the current fiscal year.
8. CONTRACTS IN PROGRESS
As of June 30, 2003 the Company has no fixed price contracts in progress
that qualified for percentage-of-completion method of accounting. The
Company has one fixed price contract in progress at June 30, 2002, within
the RFID Technology segment, for the installation of a TSI PRISM(TM)
system. Billings in excess of costs and estimated earnings on this
contract consist of the following:
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior to Subsequent to
Acquisition Acquisition Contract Total
by Alanco by Alanco June 30, 2002
------------ -------------- -----------
Costs incurred on uncompleted contract $ 94,700 $ 53,000 $ 147,700
Gross profit earned to date 30,900 17,300 48,200
--------- --------- ----------
Revenues earned to date 125,600 70,300 195,900
Less: billings to date (175,000) (75,000) (250,000)
--------- --------- ----------
Billings in excess of cost and estimated
earnings on uncompleted contracts $ (49,400) $ (4,700) $ (54,100)
========= ========= =========
As of June 30, 2002 billings in excess of costs and estimated earnings on
this uncompleted contract are included in deferred revenue in the
accompanying financial statements.
9. INCOME TAXES
A reconciliation of anticipated statutory rates is as follows:
2003 2002
-------- --------
Statutory rate 34.0% 34.0%
State income taxes, net of Federal income
tax benefit 3.3% 3.3%
Increase (reduction) in valuation allowance
related to net operating loss carry-forwards
and change in temporary differences (37.3%) (37.3%)
-------- --------
0.0% 0.0%
-------- --------
The components of the net deferred tax asset (liability) recognized as of
June 30 are as follows:
2003 2002
------------- -------------
Deferred tax assets (liabilities):
Net operating loss and capital loss carryforwards $ 10,264,000 $ 10,224,000
Goodwill 207,000 380,000
Other intangible assets 114,000 65,000
Property, plant and equipment (2,000) (40,000)
Profit recognized on fixed price contract in progress -- (18,000)
Other timing differences 153,000 140,000
Less: Valuation allowance (10,736,000) (10,751,000)
----------- -----------
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, 2003, the Company had net operating
loss and capital loss carryforwards for Federal tax purposes of
approximately $27,516,000. The loss carryforwards, unless utilized,
will expire from 2004 through 2024.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Related Party Transactions - The line of credit described in Note 7 is
with a trust controlled by Donald Anderson, a member of the Company's
Board of Directors.
During 2003, as more fully described in Note 12, Shareholders' Equity,
the Company raised capital through a units offering and a preferred stock
offering, both to accredited investors. The Company raised approximately
$2.4 million, with 63% of the amount raised being attributable to members
of the Company's Board of Directors.
One of the company's wholly owned subsidiaries, Arraid, leased its
operating facility for fiscal years 2003 and 2002 from Arraid Property
L.L.C., an entity majority owned by officers of Arraid. Payments made to
this entity were $98,400 and $123,300 for the years ended June 30, 2003
and 2002, respectively. In April of 2003, the Company terminated its
employment relationship with the officers of Arraid and subsequent to
year-end moved its operations to a new location. See Footnote 11,
Commitments and Contingencies, for additional discussion of a lawsuit
commenced by Arraid Property L.L.C. and associated counterclaims by the
Company and Footnote 3 for other transactions with these officers.
11. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain facilities under non-cancelable
operating lease agreements that expire through fiscal year 2008. The
Company also leases certain equipment under non-cancelable capital lease
arrangements that expire through 2005. Future minimum payments under
non-cancelable capital and operating leases at June 30, 2003 are as
follows:
Year Ended Operating Capital
June 30, Leases Leases
---------- ------------ -----------
2004 $ 329,100 $ 37,100
2005 342,600 7,700
2006 319,300 --
2007 197,000 --
2008 15,800 --
----------- ---------
$ 1,203,800 $ 44,800
===========
Less amount representing interest
and taxes (14.200)
Principal balance 30,600
Less current portion (24,600)
---------
Long term portion $ 6,000
=========
At June 30, leased capital assets included the following:
Furniture and office equipment $ 33,000
Engineering/testing equipment 21,900
---------
54,900
Less accumulated depreciation (12,800)
---------
Total $ 42,100
=========
As is discussed in Note 10, subsequent to year end, Arraid moved to a new
facility and entered into a three-year lease agreement with an unrelated
third party. The new lease is effective September 1, 2003 and calls for
monthly payments of approximately $4,000. The minimum future payments due
under this lease have been included in the above tables.
Rent expense related to these operating leases totaled approximately
$321,000 and $301,000 for the years ended June 30, 2003 and 2002,
respectively.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, and to
litigation arising from an expired property lease between the Company's
subsidiary, Arraid, Inc., and Arraid Property L.L.C., a Limited Liability
Company. The actions are more fully described below:
On January 30, 2003, Richard C. Jones, a shareholder of Technology
Systems International, Inc., a Nevada corporation ("TSIN"), filed a
derivative suit naming as defendants the Company and its wholly owned
subsidiary, Technology Systems International, Inc. an Arizona corporation
("TSIA"), and all of the directors of TSIN. The venue for this action is
the Arizona Superior Court in and for Maricopa County, Arizona, as case
number CV2003-001937. The complaint sets forth various allegations and
seeks equitable remedies and damages arising out of the Company's
acquisition of substantially all of the assets of TSIN. This derivative
suit was terminated and the action converted into a direct action by TSIN
by stipulation and court order in July 2003. The Company's management, in
consultation with legal counsel, believes the plaintiff's claims are
without merit and the Company will aggressively defend the action.
On July 18, 2003, Arraid Property L.L.C., an Arizona Limited Liability
Company ("Arraid LLC"), filed a complaint in Superior Court, Arizona
(case number CV 2003-13999) against the Company and its wholly owned
subsidiary, Arraid, Inc., an Arizona corporation ("Arraid"), alleging
breach of lease and unjust enrichment and seeking monetary damages. The
suit relates to an expired lease agreement for property previously leased
by Arraid. The Company has filed a counterclaim against Arraid LLC, and a
third party complaint against John Dahl, Frank Meijers and Keith Blaich
(all owners of Arraid LLC and previous employees of the Company) seeking
monetary damages and alleging, among other things, excess billing and
unjust enrichment. The Company's management, in consultation with legal
counsel, believes the plaintiff's claims are without merit and the
Company will aggressively defend the action and pursue the counterclaims
and third party claims specified.
No amounts have been accrued in the accompanying financial statements of
the Company as of June 30, 2003 for any potential loss arising from the
matters, or for any additional costs of defense.
The Company may also, from time to time, be involved in litigation
arising from the normal course of the business. As of June 30, 2003,
there was no such litigation pending.
12. SHAREHOLDERS' EQUITY
Preferred Shares - Pursuant to the Special Shareholders Meeting of May
14, 2002, Alanco shareholders approved an Amendment to Article IV of the
Company's Articles of Incorporation whereby the Company is authorized to
issue a total of 25,000,000 shares of No Par Preferred Stock. These
shares may be issued in such series and preferences as determined by the
Board of Directors.
During the fourth quarter for the fiscal year ended June 30, 2003, the
Company allocated 5,000,000 of the authorized shares of the Company's No
Par 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,
including cash and subscriptions receivable of $1,124,200 and 4,496,900
Common shares received (valued at $1,708,800). The Common shares
acquired under this transaction (valued at market price on the date
various subscription agreements were signed) are presented as Treasury
shares at year-end.
Holders of Series A 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 quarterly, 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
Series A shares are convertible by the holder at any time into three
shares of the Company's Class A Common Stock and 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. The Company may redeem
the Series A Preferred Shares for $1.50 per share after December 31,
2004, provided the Common stock achieves a trading value in excess of
$2.00.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the previous fiscal year, the Company had allocated 500,000 of the
authorized shares of the Company's No Par 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 and are
characterized as "restricted securities" under federal securities laws as
they were acquired from the Company in a transaction not involving a
public offering and that under such laws and applicable regulations such
shares may be resold without registration under the Securities Act of
1933, as amended, only in certain limited circumstances.
Holders of shares of 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 Preferred
Shares paid "in-kind" during 2003 and 2002 amounted to 5,230 and 632
Preferred Shares with a value of approximately $52,300 and $6,300,
respectively.
Common Shares - Pursuant to the Special Shareholders' Meeting of May 14,
2002, Alanco shareholders approved an Amendment to Article IV of the
Company's Articles of Incorporation whereby the authorized capital stock
of the Company consists of 75,000,000 shares of Class A No Par 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 No Par
Common Stock, each entitled to one-one hundredth (1/100th) of one vote
per share.
In December 2002, the Company issued 3,000,000 shares of Class A Common
Stock in a private offering to accredited investors through the sale of
units consisting of two shares of Class A Common Shares and a warrant to
purchase one Class A Common Share. The units were sold at a price of
$1.00 per unit. Expenses related to the stock issuance amounted to
$105,000, resulting in net proceeds received of $1,395,000. The Company
issued, with respect to the fund raising, three-year warrants to purchase
1,500,000 shares of the Company's Common Stock at a strike price of $1.00
per share.
In a private offering in December 2001, the Company issued 1,480,000
shares of Common Stock and 800,000 warrants to purchase Common Stock with
an exercise price of $1.00 per share, for a purchase price of $925,000.
Thirty-seven units, each unit comprised of 40,000 shares of the Company's
Common Stock and either 10,000 or 25,000 warrants, depending on the total
number of units purchased, with an exercise price of $1.00 per share,
were purchased by fourteen accredited investors in the private offering
at a price of $25,000 per unit. Expenses associated with the private
offering amounted to $38,300.
In May 2002, in a private offering, the Company issued 250,000 shares of
the Company's Common Stock to an accredited investor for a purchase price
of $164,100, net of expenses associated with the offering of $10,900. The
transaction grants the purchaser, under certain conditions and
limitations, the right and option to have the Company repurchase the
shares at a repurchase price of $0.70 per share any time during the 2003
calendar year. Subsequent to June 30, 2003, the Company agreed to issue
to the investor an additional 150,000 shares of the Company's Class A
Common Stock for the elimination of the right and option to have the
Company repurchase the shares.
The Company had received notifications from NASDAQ indicating that due to
the failure of the Company to maintain the minimum $1.00 per share
requirement, its securities were subject to delisting from the NASDAQ
Small Cap Market. The Company appealed that staff decision and was
granted an extension until September 30, 2003 to gain compliance or face
possible delisting. The Company's Board of Directors have received
shareholder authorization to effect, if the Board believes necessary, up
to a 1 for 10 reverse stock split at a future date through October 31,
2005. As of September 27, 2003, no split was affected.
Warrants - As of June 30, 2003, the Company had 5,748,400 warrants
outstanding with a weighted average exercise price of $0.77. The life of
the outstanding warrants extends from October 2004 through June 2008.
Details related to the warrants issued are presented below.
During fiscal 2000, the Company issued 25,000 warrants to a consultant
for services rendered, which are exercisable at $1.75 per share and
expire in October 2004. During fiscal 2002, the Company issued a total of
1,400,000 warrants. 800,000 warrants, which are exercisable at $1.00 per
share and expire in December 2004, were issued in connection with the
Company's private offering in December 2001 (described in the Common
Shares section above). 500,000 warrants, issued in connection with the
Company's sale of Preferred Stock (described in the Preferred Shares
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
section above), are exercisable at $1.00 per share and expire in May
2007. 100,000 warrants, which are exercisable at $0.87 per share and
expire in June 2007, were issued in consideration for a $1.3 million line
of credit agreement with an expiration date of December 31, 2003
(described in Note 7 above). During fiscal 2003, the Company issued a
total of 4,323,400 warrants. 1,500,000 warrants, which are exercisable at
$1.00 per share and expire in December 2005, were issued in connection
with the Company's private offering in December 2002 (described in the
Common Shares section above). 2,248,400 warrants, issued in connection
with the Company's June 2003 Exchange Offering of Common Stock for
Preferred Stock (described in the Preferred Shares section above), are
exercisable at $0.50 per share and expire in June 2008. 250,000 warrants,
which are exercisable at $0.40 per share and expire in April 2008, were
issued in consideration for a $1.8 million line of credit agreement due
to expire December 31, 2004 (described in Note 7). 325,000 warrants were
issued for outside services rendered. Of these warrants, 25,000 are
exercisable at $1.00 and expire in September 2007; 200,000 are
exercisable at $0.75 and expire in October 2007; and 100,000 are
exercisable at $1.00 and expire in June 2008.
Stock Options - As of June 30, 2003, the Company had a total of 5,578,800
stock options outstanding with a weighted average exercise price of
$0.96. Of these options, 4,553,800 are exercisable at 2003 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, 2001 3,359,200 $ 1.19
Granted 3,202,500 1.00
Exercised 0 0.00
Canceled/Expired (1,058,900) 1.51
----------- ---------
OPTIONS OUTSTANDING, June 30, 2002 5,502,800 $ 1.02
Granted 490,000 0.79
Exercised 0 0.00
Canceled/Expired (414,000) 1.46
----------- ---------
OPTIONS OUTSTANDING, June 30, 2003 5,578,800 $ 0.96
=========== =========
For all options granted during fiscal years 2003 and 2002, 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, 2003,
options for 4,553,800 shares were exercisable and options for the
remaining shares become exercisable within the next three years. If not
previously exercised, options outstanding at June 30, 2003 will expire as
follows:
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Calendar Weighted
Year of Number of Average
Expiration Shares Exercise Price
---------- ------------ --------------
2003 20,000 $ 1.00
2004 285,000 1.25
2005 100,000 1.95
2008 1,165,000 0.43
2009 807,000 1.14
2010 352,000 1.74
2011 531,000 1.03
2012 2,268,800 0.96
2013 50,000 0.75
---------- ---------
5,578,800 $ 0.96
========== =========
Additional information about outstanding options to purchase the
Company's common stock as of June 30, 2003 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
--------------- ------------ ----------------- ---------------- ------------ -----------------
$0.43-$0.50 1,165,000 5.18 $ 0.43 1,165,000 $ 0.43
$0.75-$1.00 3,108,800 8.57 $ 0.95 2,083,800 $ 0.94
$1.08-$1.95 1,045,500 4.65 $ 1.28 1,045,500 $ 1.28
$2.00-$2.75 259,500 7.11 $ 2.15 259,500 $ 2.15
Company stock options are issued to employees at an exercise price not
less than the fair market value, as determined under the option plan, on
the date of grant. In accordance with accounting for such options
utilizing the intrinsic value method, there is no related compensation
expense recorded in the Company's financial statements for the current
fiscal year. The stock option plans described below allow for reissuance
of the authorized shares upon cancellation of a stock option grant.
In 1995, the Company adopted an Incentive Stock Option Plan that
authorizes the issuance of up to 142,900 shares of Common Stock. Pursuant
to the Plan, the Company may grant "incentive stock options" (intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as
amended). Incentive and non-qualified stock options may not be granted at
an exercise price of less than the fair market value of the Common Stock
on the date of grant. Each option must be granted within five years from
the effective date of the Plan. The term of the options may not exceed
five years. The Company has granted 121,800 options under the plan, of
which all have vested, 112,500 have been exercised and the remaining have
been cancelled. No options are outstanding for this plan at June 30,
2003.
In 1996, the Company adopted a Directors and Officers Stock Option Plan
(1996 D&O Plan). Only executive officers and directors of the Company
shall be eligible to be granted options under this Plan. An aggregate of
107,100 shares of Common Stock are reserved for issuance under this Plan.
The exercise price of the options will be 60% of the NASDAQ closing bid
price per share on the date of grant or such other price the Board of
Directors may determine. Each option must be granted within five years
from the effective date of the Plan and the term may not exceed five
years. No one officer or director shall have more than 21,400 options
granted under this Plan. As of June 30, 2003, the Company had granted
options under the 1996 D&O Plan to purchase 106,100 shares of which all
options are vested, 47,500 have been exercised, and 38,600 have been
cancelled. The exercise price for the directors and officers options
outstanding under the 1996 D&O Plan at June 30, 2003 is $1.00.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1998, the Company adopted a Directors and Officers Stock Option Plan
(1998 D&O Plan) that authorizes the issuance of up to 750,000 shares of
Common Stock. Only executive officers and directors of the Company shall
be eligible to be granted options under the Plan. Each option must be
granted at or above fair market value within 10 years from the effective
date of the Plan, with the term of the option not exceeding 10 years. As
of June 30, 2003, the Company has granted options under the Plan to
purchase 750,000 shares, of which all have vested and 370,000 have been
exercised. Options outstanding for this Plan at June 30, 2003 have
exercise prices that range from $.50 to $1.75.
In 1998, the Company also adopted an Incentive Stock Option Plan (1998
Stock Option Plan) that authorizes the issuance of up to 750,000 shares
of Common Stock. Pursuant to the Plan, incentive and non-qualified stock
options may be granted, with the incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as
amended. The Plan provides for a vesting schedule for incentive stock
options of 25% after six months from the date of grant, 25% after one
year, and 50% after two years. No one person shall be granted incentive
stock options with a fair market value of more than $100,000 during any
single calendar year and the maximum number of shares granted to any one
employee shall be 100,000. The Board of Directors shall determine the
exercise price, which may not be less than the fair market value of the
Common Stock at the date of grant. Each option must be granted within 10
years from the effective date of the Plan, with the term of the options
not exceeding 10 years. As of June 30, 2003, the Company has granted
options under the Plan to purchase 1,294,500 shares, of which 655,200
have been canceled, 47,500 have been exercised, and 538,000 have been
vested. Options outstanding for this Plan at June 30, 2003 have exercise
prices that range from $.50 to $2.75.
During fiscal 2000, the Company adopted a Directors and Officers Stock
Option Plan (1999 D&O Plan) that authorizes the issuance of up to 500,000
shares of Common Stock. Only executive officers and directors of the
Company shall be eligible to be granted options under the Plan. Each
option must be granted at or above fair market value within 10 years from
the effective date of the Plan, with the term of the option not exceeding
10 years. As of June 30, 2003, the Company has granted options under the
Plan to purchase 645,000 shares, of which all have vested, 150,000 have
been cancelled, and none have been exercised. Options outstanding for
this Plan at June 30, 2003 have exercise prices that range from $0.75 to
$2.00.
In fiscal 2000, the Company also adopted an Incentive Stock Option Plan
(1999 Stock Option Plan) that authorizes the issuance of up to 1,500,000
shares of Common Stock. Pursuant to the Plan, incentive and non-qualified
stock options may be granted, with the incentive stock options intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended. The Plan provides for a vesting schedule for incentive stock
options of 25% after six months from the date of grant, 25% after one
year, and 50% after two years. No one person shall be granted incentive
stock options with a fair market value of more than $100,000 during any
single calendar year and the maximum number of shares granted to any one
employee shall be 100,000. The Board of Directors shall determine the
exercise price, which may not be less than the fair market value of the
Common Stock at the date of grant. Each option must be granted within 10
years from the effective date of the Plan, with the term of the options
not exceeding 10 years. As of June 30, 2003, the Company has granted
options under the Plan to purchase 2,631,200 shares, of which 1,969,200
have been canceled, none have been exercised, and 465,800 are vested.
Options outstanding for this Plan at June 30, 2003 have exercise prices
that range from $0.75 to $2.35.
During fiscal 2001, the Company adopted a Directors and Officers Stock
Option Plan (2000 D&O Plan) that authorizes the issuance of up to 500,000
shares of Common Stock. Only executive officers and directors of the
Company shall be eligible to be granted options under the Plan. Each
option must be granted at or above fair market value within 10 years from
the effective date of the Plan, with the term of the option not exceeding
10 years. As of June 30, 2003, the Company has granted options under the
Plan to purchase 330,000 shares, of which all are vested, and none have
been exercised. Options outstanding under this Plan at June 30, 2003 have
exercise prices that range from $0.75 to $1.00.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In fiscal 2001, the Company also adopted an Incentive Stock Option Plan
(2000 Stock Option Plan) that authorizes the issuance of up to 1,000,000
shares of Common Stock. Pursuant to the Plan, incentive and non-qualified
stock options may be granted, with the incentive stock options intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended. The Plan provides for a vesting schedule for incentive stock
options of 25% after six months from the date of grant, 25% after one
year, and 50% after two years. No one person shall be granted incentive
stock options with a fair market value of more than $100,000 during any
single calendar year and the maximum number of shares granted to any one
employee shall be 100,000. The Board of Directors shall determine the
exercise price, which may not be less than the fair market value of the
Common Stock at the date of grant. Each option must be granted within 10
years from the effective date of the Plan, with the term of the options
not exceeding 10 years. As of June 30, 2003, the Company has granted
options under the Plan to purchase 1,047,500 shares, of which 682,000
have been canceled, 500 have been exercised, and 315,000 are vested.
Options outstanding for this Plan at June 30, 2003 have exercise prices
that range from $0.75 to $1.00.
During fiscal 2003, the Company adopted a Directors and Officers Stock
Option Plan (2002 D&O Plan) that authorizes the issuance of up to 500,000
shares of Common Stock. Only executive officers and directors of the
Company shall be eligible to be granted options under the Plan. Each
option must be granted at or above fair market value within 10 years from
the effective date of the Plan, with the term of the option not exceeding
10 years. As of June 30, 2003, no options have been granted under the
Plan.
In fiscal 2003, the Company also adopted an Incentive Stock Option Plan
(2002 Stock Option Plan) that authorizes the issuance of up to 1,500,000
shares of Common Stock. Pursuant to the Plan, incentive and non-qualified
stock options may be granted, with the incentive stock options intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended. The Plan provides for a vesting schedule for incentive stock
options of 25% after six months from the date of grant, 25% after one
year, and 50% after two years. No one person shall be granted incentive
stock options with a fair market value of more than $100,000 during any
single calendar year and the maximum number of shares granted to any one
employee shall be 100,000. The Board of Directors shall determine the
exercise price, which may not be less than the fair market value of the
Common Stock at the date of grant. Each option must be granted within 10
years from the effective date of the Plan, with the term of the options
not exceeding 10 years. As of June 30, 2003, no options have been granted
under the Plan.
The Company also has granted options to officers and other employees
outside of any plan as an inducement at the time of their employment. As
of June 30, 2003, the Company has granted options outside of any plan to
purchase 3,670,000 shares, of which 935,000 have expired, none have been
exercised, and 2,010,000 are vested. Exercise prices for these options
outstanding at June 30, 2003 range from $.43 to $1.25. All of these
options have been or will be registered on Form S-8 filings.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
14. ACQUISITION
In December of 2001, the Company announced an agreement to acquire the
operations of TSIN, a Scottsdale, AZ based developer of the TSI PRISM(TM)
RFID (Radio Frequency Identification) tracking technology, a proprietary
wireless system primarily utilized in correctional facilities security
management and personnel monitoring. The transaction was effected by the
issuance of Alanco Class A Common Shares at closing to purchase TSIN's
assets and the Company's assumption of specified liabilities. The Company
created a wholly owned subsidiary to record the assets purchased and the
liabilities assumed. The all-stock transaction was approved at a Special
May 14, 2002 Shareholders Meeting, which authorized the issuance of the
shares required by the TSI amended acquisition agreement (the
"Agreement"). Complete proxy information was filed with the Securities
and Exchange Commission on April 22, 2002 and sent to all shareholders
pursuant to the Special Shareholders Meeting requirements.
The Agreement required the Company to issue 6 million Class A Common
Shares to the seller at closing and issue up to an additional 17 million
shares of Class B Common Shares upon TSI operations achieving certain
financial targets. Five million of the Class B Common Shares would be
earned upon the TSI operations achieving a gross profit for the twelve
months ended December 31, 2002 of at least $3 million. Gross profit
generated during the period in excess of the $3 million would earn
additional Class B Common Shares at a rate of 4 shares for each $1 of
gross profit over the $3 million threshold, up to a maximum of 12 million
Class B Common Shares. A Final Payment Extension could be earned in the
event the maximum number of additional Class B Common Shares (17 million)
have not been earned by December 31, 2002 and both the following have
occurred: (i) at least $4.5 million of Gross Profit was achieved during
calendar year 2002 from the TSI operation, and (ii) a minimum of $15
million in gross sales of the business has been contracted for during
calendar year 2002, then Gross Profit produced during the first quarter
of calendar year 2003 in excess of $1,000,000 shall earn additional
shares of Class B Common Shares at the same rate of 4 Class B Common
Shares for each $1 of such additional excess gross profit; provided,
however, that not more than the maximum of 12 million shares of Class B
Common Stock shall be payable aggregately under the payout formulas.
In accordance with the provisions of SFAS 141, Business Combinations, the
transaction was 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. To calculate the purchase
price, only the 6 million Class A Common Shares that are guaranteed to be
issued under the Agreement were valued. Since the shares were not
registered when issued, the shares were valued at 90% of the 10-day
average closing price of the Company's Class A Common Stock as traded on
the NASDAQ exchange. The time frame for the payout formula has expired
without TSI's achieving the minimum target specified or earning a Final
Payment Extension. Therefore, no additional Class B Common Shares will be
issued. See Note 11, Comitments and Contingencies for additional
discussion of a lawsuit commenced by TSIN relative to this acquisition
and appropriate comments by the Company.
The transaction closed with an effective date of June 1, 2002. The
purchase price, considering only the 6 million Class A Common Shares
issued and related costs of the acquisition, was valued at $3,914,200. In
accordance with SFAS 141, the Company has not recorded any amortization
expense against the goodwill created under this acquisition.
.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of the amounts of the assets and liabilities acquired in the
TSI acquisition are as follows:
Current Assets
Accounts receivable $ 237,300
Cost and estimated earnings in excess of billings 100,600
Inventory 267,000
Prepaid expenses 8,500
----------
Total current assets 613,400
----------
Property and Equipment 344,200
----------
Other assets
Intangible assets 1,150,000
Deposits 25,400
----------
Total other assets 1,175,400
----------
Total assets $ 2,133,000
==========
Current Liabilities
Due to bank $ 2,600
Accounts payable 277,700
Deferred revenue - short term 165,600
Leases payable - short term 21,800
Notes payable and accrued interest - short term 116,700
Other accrued expenses 399,500
----------
Total current liabilities 983,900
Deferred revenue - long term 52,000
Leases payable - long term 30,600
Notes payable - long term 675,000
Due to Alanco corporate 1,516,100
----------
Total liabilities $ 3,257,600
----------
Liabilities assumed in excess of assets acquired $ 1,124,600
==========
Total goodwill resulting from this transaction is $5,038,800 and includes
$3,810,000 of Class A Common Shares issued to the former shareholders of
TSIN, $104,200 in legal and consulting fees directly associated with the
acquisition and $1,124,600 of liabilities assumed in excess of assets
acquired.
Intangible assets acquired and corresponding amortization periods are
summarized as follows:
Patent license 3 years
Manufacturing license 6 years
Developed software 5 years
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Amounts classified as "due to Alanco corporate" at the time of the
acquisition include $559,100 for operating advances made to TSIN prior to
the acquisition and $957,000 for pre-existing TSIN notes payable that
were assumed by Alanco and satisfied through the issuance of 1,000,000
shares of Alanco Class A Common Stock simultaneous to the closing of the
acquisition.
The Company also entered into an agreement, subject to the TSI
acquisition approval at the May 14, 2002 Special Shareholders Meeting,
with EMS, an approximate 15% owner and significant vendor of TSIN, to
convert approximately $957,000 of TSIN debt into one million shares of
the Company's Class A Common Stock, to convert $350,000 of TSIN
short-term debt into long-term debt and to modify a supply agreement
between the parties to mutually acceptable terms. The transaction was
completed subsequent to the TSIN closing with Alanco issuing the one
million shares and the vendor renegotiating the debt and the supply
agreement.
In a separate agreement negotiated with an individual TSIN shareholder
during the third quarter of fiscal year 2002, the Company agreed to
exchange its investment in G&M Preferred Stock for 2,070,800 shares of
TSIN stock, or approximately 8.9% of the outstanding shares of TSIN. The
Company's investment in G&M Preferred Stock had been recorded on the
Company's balance sheet as of December 31, 2001, the most recent quarter
end prior to the negotiations, as "Investments at Cost" in the amount of
$2,475,200. Since the TSI acquisition valuation was determined
considering only the shares that were issued at closing, with no
consideration for the additional Class B Shares that may be issued, the
G&M investment was adjusted during the third quarter to reflect the
approximate value of 8.9% of the Class A Common Shares to be issued to
TSIN at closing. See "Investments" under Footnote 1 and Footnote 2 for
additional discussion of the transaction.
15. 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. The Company matches 25% of the amount
deferred by employees, up to 4% of an employee's annual compensation. The
Company's matching contributions totaled $13,400 and $9,500 for the years
ended June 30, 2003 and 2002, respectively.
16. SEGMENT REPORTING
The Company operated in fiscal year 2002 primarily in the Computer Data
Storage segment. The acquisition of Technology Systems International,
Inc., effective June 1, 2002, created a second reporting segment called
RFID Technology segment. The following table is a summary of the results
of operations and other financial information by major segment:
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Data RFID
Storage Technology Corporate Total
-------------- -------------- -------------- --------------
Fiscal year 2003
Revenue $ 3,775,800 $ 3,642,100 $ -- $ 7,417,900
Cost of Goods Sold 2,331,500 2,481,400 -- 4,812,900
----------- ----------- ----------- -----------
Gross Profit 1,444,300 1,160,700 -- 2,605,000
Selling, General & Administrative 1,987,700 2,162,100 943,800 5,093,600
----------- ----------- ----------- -----------
Segment Operating Loss (543,400) (1,001,400) (943,800) (2,488,600)
Interest Income -- -- 500 500
Interest Expense -- -- (130,600) (130,600)
Other 9,700 (2,000) -- 7,700
----------- ----------- ----------- -----------
Loss from Continuing Operations $ (533,700) $ (1,003,400) $ (1,073,900) $ (2,611,000)
=========== =========== ============ ===========
Accounts/Subscriptions Receivable $ 466,700 $ 324,100 $ 916,900 $ 1,707,700
=========== =========== ============ ===========
Inventory $ 869,200 $ 409,500 $ -- $ 1,278,700
=========== =========== ============ ===========
Total Assets $ 1,823,800 $ 7,058,400 $ 1,437,200 $ 10,319,400
=========== =========== ============ ===========
Capital Expenditures $ 12,500 $ 40,700 $ 1,000 $ 54,200
=========== =========== ============ ===========
Depreciation & Amortization $ 97,700 $ 305,100 $ 9,700 $ 412,500
=========== =========== ============ ===========
Fiscal Year 2002
Revenue $ 5,297,900 $ 70,300 $ -- $ 5,368,200
Cost of Goods Sold 3,044,700 52,900 -- 3,097,600
----------- ----------- ----------- -----------
Gross Profit 2,253,200 17,400 -- 2,270,600
Selling, General & Administrative 5,006,300* 128,800 2,867,800 8,002,900
----------- ----------- ----------- -----------
Segment Operating Loss (2,753,100) (111,400) (2,867,800) (5,732,300)
Interest Income -- -- 95,400 95,400
Interest Expense -- -- (82,600) (82,600)
Other 1,200 -- -- 1,200
----------- ----------- ----------- -----------
Loss from Continuing Operations $ (2,751,900) $ (111,400) $ (2,855,000) $ (5,718,300)
=========== =========== ============ ===========
Accounts Receivable $ 600,100 $ 181,400 $ -- $ 781,500
=========== =========== ============ ===========
Inventory $ 999,200 $ 257,200 $ -- $ 1,256,400
=========== =========== ============ ===========
Total Assets $ 1,839,100 $ 7,270,900 $ 752,300 $ 9,862,300
=========== =========== ============ ===========
Capital Expenditures $ (179,500) $ 5,300 $ 100 $ (174,100)
=========== =========== ============ ===========
Depreciation & Amortization $ 237,400 $ 24,800 $ 17,600 $ 279,800
=========== =========== ============ ===========
*Includes asset impairment charges
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE: NONE
ITEM 8A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that it is able to collect the information it is required to disclose in
the reports it files with the Securities and Exchange Commission (SEC), and to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on various evaluations of the Company's
disclosure controls and procedures, some of which occurred during the 90 days
prior to the filing date of this report, the Chief Executive and Chief Financial
Officers believe that these controls and procedures are effective to ensure that
the Company is able to collect, process and disclose the information it is
required to disclose in the reports it files with the SEC within the required
periods.
The Company also maintains a system of internal controls designed to
provide reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets. Access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Product and Environmental Contingencies
The Company is not aware of any material liabilities, either product or
environmental related. Also refer to the environmental disclosure section of the
mining properties segment under Item 2.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 29, 2003.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 29, 2003.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 29, 2003.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 29, 2003.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Exhibits
10.2 Contract for Sale of principal mining property to Gold &
Minerals, Inc. (1)
10.3 Asset Purchase Agreement related to sale of assets of Alanco
Environmental Resources, Inc. (2)
10.4 Agreement and Plan of Reorganization, dated as of June 21, 2000,
by and among the Company, Excel Computer Corporation, and the
holders of the capital stock of Excel (3)
10.5 1996 Directors and Officers Stock Option Plan and Kauffman and
Carlson Stock Option Agreements (4)
10.6 1998 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (5)
10.7 1999 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (6)
10.8 2000 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (7)
10.9 2002 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan and Oester, Mitchell and Bell Stock Option
Agreements (8)
10.10 Purchase of assets and certain liabilities of the TSIN (9)
10.11 Common stock registration (10)
10.13 Common stock registration (11)
21 Subsidiaries of the Registrant
Name State of Incorporation
---- ----------------------
Arraid, Inc. Arizona
Excel/Meridian Data, Inc. Arizona
Fry Guy Inc. Nevada
SanOne, Inc. Arizona
NetZerver, Inc. Arizona
Technology Systems International, Inc. Arizona
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.
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Footnotes:
(1) Incorporated by reference to Annual Report on Form 10-KSB for the
Fiscal Year Ended June 30, 1999
(2) Incorporated by reference to Form 8-KSB filed August 15, 2000
(3) Incorporated by reference to Form 8-KSB filed August 15, 2000
(4) Incorporated by reference to Form S-8 filed October 22,1998
(5) Incorporated by reference to Form S-8 filed November 30,1998
(6) Incorporated by reference to Form S-8 filed November 29, 1999
(7) Incorporated by reference to Form S-8 filed December 14, 2000
(8) Incorporated by reference to Form S-8 filed January 22, 2003
(9) Incorporated by reference to Form 8K filed August 14, 2002
(10) Incorporated by reference to Form S-3 filed January 8, 2003
(11) Incorporated by reference to Form S-3 filed February 25, 2003
B. Schedules NONE
C. Reports on Form 8-K NONE
Exhibits or schedules other than those mentioned above are omitted because
the conditions requiring their filing do not exist or because the required
information is given in the financial statements, including the notes
thereto.
SIGNATURES
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 29, 2003
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 registrant as
of, and for, the period presented in this report;
4. The registrant'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 registrant 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 registrant, 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 registrant'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 registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant'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 registrant'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 registrant's internal control
over financial reporting.
Date: September 30, 2003
/s/ Robert R. Kauffman
---------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
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 registrant as
of, and for, the period presented in this report;
4. The registrant'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 registrant 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 registrant, 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 registrant'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 registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant'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 registrant'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 registrant's internal control
over financial reporting.
Date: September 30, 2003
/s/ John A. Carlson
---------------------
John A. Carlson
Vice President and Chief Financial Officer
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 Amendment No. 1 to the annual
report of Form 1-KSB (the "Report") for the period ended June 30, 2003 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 30, 2003
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer
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 29, 2003
--------------------- Chief Executive Officer
Robert R. Kauffman
/s/James T. Hecker Director September 29, 2003
------------------
James T. Hecker
/s/Harold S. Carpenter Director September 29, 2003
----------------------
Harold S. Carpenter
/s/Thomas C. LaVoy Director September 29, 2003
------------------
Thomas C. LaVoy
/s/Steven P. Oman Director September 29, 2003
-----------------
Steven P. Oman
/s/Donald E. Anderson Director September 29, 2003
---------------------
Donald E. Anderson
/s/John A. Carlson Director & September 29, 2003
------------------ Chief Financial Officer
John A. Carlson
By /s/ Robert R. Kauffman
President and Chief Executive Officer