ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-KSB/A
Amendment No. 1
Annual Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the fiscal year ended June 30, 2008
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0220694
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
15575 North 83rd Way, Suite 3, Scottsdale, AZ 85260
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (480) 607-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ___
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Yes X No ___
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The Registrant's revenues for the fiscal year ended June 30, 2008 were
$17,211,000.
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: $24,022,000 as of September 26, 2008.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock: 31,669,700 shares of Class A Common Stock (net of
treasury shares) and no shares of Class B Common Stock as of September 26, 2008.
EXPLANATORY NOTE ON AMENDMENT
This amendment No. 1 to Form 10-KSB for the fiscal year ended June 30, 2008 and
2007 is being filed for the purpose of adding the Consent of Independent
Registered Public Accounting Firm in Exhibit 23.2 which was inadvertently
omitted from the original filing. This amendment has no effect on previously
reported net loss or net loss per share.
Except for the item 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.
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. The words "believe," "may,"
"estimate," "continue," "anticipate," "intend," "should," "plan," "could,"
"target," "potential," "is likely," "will," "expect" and similar expressions, as
they relate to the Company are intended to identify forward-looking statements
within the meaning of the "safe harbor" provisions of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. 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. New
risk factors emerge from time to time and it is not possible to accurately
predict all such risk factors, nor can we assess the impact of all such risk
factors on our business or the extent to which any risk factor, or combination
of risk factors, may cause results to differ materially from those contained in
any forward-looking statements. Except as otherwise required by applicable law,
we undertake no obligation to publicly update or revise any forward-looking
statements or the risk factors described in this Annual Report or in the
documents we incorporate by reference, whether as a result of new information,
future events, changed circumstances or any other reason after the date of this
Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Alanco Technologies, Inc. was incorporated in 1969 under the laws of
the State of Arizona. Unless otherwise noted, the "Company" or "Alanco" refers
to Alanco Technologies, Inc. and its wholly owned subsidiaries. Alanco (Nasdaq:
ALAN) is a provider of advanced information technology solutions with the
Company's operations for fiscal year ended June 30, 2008 diversified into three
reporting business segments including: (i) RFID Technology - incorporating
design, production, marketing and distribution of RFID (Radio Frequency
Identification) tracking technology, (ii) Data Storage - incorporating the
manufacturing, marketing and distribution of data storage products and (iii)
Wireless Asset Management - incorporating the design, production, marketing,
distribution and monitoring of wireless asset management products, primarily for
the transportation industry.
The Company acquired its RFID (Radio Frequency Identification) tracking
technology known as the TSI PRISM system in May 2002 through the acquisition of
the operations of Technology Systems International, Inc., a Nevada corporation
("TSIN"). The Company continues to participate in the data storage market
through Excel/Meridian Data, Inc., a manufacturer of Network Attached Storage
("NAS") systems and other storage related products for mid-range organizations.
Arraid, Inc., a manufacturer of proprietary storage products to upgrade older
"legacy" computer systems, previously included in the data storage segment, was
sold during the first quarter of fiscal year 2007 and appropriately the results
of operations for fiscal year 2007 are reported as discontinued operations.
The June 30, 2006 acquisition of StarTrak Systems, LLC ("StarTrak"), a
Delaware LLC located in Morris Plains, New Jersey, added Wireless Asset
Management, a third reporting business segment described as a provider of
wireless GPS tracking and monitoring services, which are offered on a monthly
subscription basis to various industry segments. The company's primary focus is
currently the refrigerated or "Reefer" segment of the transport industry,
providing the dominant share of all wireless tracking, monitoring and control
services to this market segment.
RECENT BUSINESS DEVELOPMENTS
The Company was notified by Nasdaq on July 29, 2008 that the Company
was out of compliance with Marketplace Rule 4351 and IM-4351 (the "Rules")
concerning the issuance of 100,000 shares of Series D Preferred Stock. The terms
of the Series D Preferred Stock included a provision entitling the investors to
notification of any stockholders' meetings and the right to vote with the
holders of its Class A Common Stock on any matters before them. The Series D
Preferred Stock allowed the investors to vote "the number of votes equal to
$10.00 divided by the Nasdaq closing market price for the Company's Class A
Common Stock on the record date for the stockholders meeting." Since the number
of votes was not limited, Nasdaq staff believed the Series D could be considered
a "super voting" security and therefore resulted in a violation of the rules. To
correct the issue raised by the Nasdaq staff, the Company amended the
designation of the Series D Preferred Stock stating that its holders have seven
votes per share for each share of Series D Preferred Stock held. Accordingly,
Nasdaq staff has determined that the Company has regained compliance with the
Rules and, the matter is now closed.
On August 26, 2008 the Company announced that it had completed a $2.5
million financing with the primary investors being directors and officers of the
Company. The financing was comprised of $1.8 million from the sale of 180,000
shares of non-convertible Series D Preferred Stock at a price of $10.00 per
share, 130,000 of which were sold to directors and officers of the Company. An
additional $500,000 of the financing came from an increase in the Company's
current credit line with a trust controlled by a director of the Company. The
remainder of the financing was comprised of the exercise of outstanding stock
options by officers of the Company. Approximately $1.4 million of the proceeds
was used to pay down the Company's current term loan. To complete the financing,
amendments were required to both the Company's line of credit agreement and the
ComVest term loan agreement. The Powers, Preferences, Rights and Limitations of
the Series D Preferred Stock as well as amendments to both the line of credit
agreement and the ComVest term loan agreement were included as attachments to an
8-K filed on August 27, 2008.
The Company's subsidiary, StarTrak Systems, LLC, announced on September
11, 2008 that it had received an order from Exel Transportation Services, Inc.,
valued in excess of $750,000 for ReeferTrak system hardware and five years of
data subscription services. The two-way command and control monitoring systems
are to be deployed on Exel's existing 500 unit fleet of refrigerated intermodal
trailers.
DESCRIPTION OF BUSINESS
RFID TECHNOLOGY SEGMENT
The Company acquired the operations of Technology Systems
International, Inc., a Nevada Corporation ("TSIN") in fiscal year ended June 30,
2002. The technology consisted of the proprietary TSI PRISM(TM) wireless 915 MHz
RFID tracking capabilities utilized primarily in correctional facilities,
security management and personnel monitoring. The acquisition was effected
through a wholly owned subsidiary, Technology Systems International, Inc., an
Arizona corporation, by the issuance of Alanco Class A Common Stock to purchase
TSIN's assets and assumption of specific liabilities of TSIN. During the fiscal
year 2005, the Company changed the name of Technology Systems International,
Inc. to Alanco/TSI PRISM, Inc. ("ATSI").
In March 2005, Alanco entered into a technology license agreement
("License") with a developer of RFID real-time location services technology
utilizing 2.4 GHz wireless networking standards. The License currently grants to
Alanco a five-year worldwide license for the corrections market, to acquire,
modify or combine the 2.4 GHz technology with Alanco's 915 MHz TSI PRISM
technology. The Company believes the 2.4 GHz technology has certain application
advantages over the 915 MHz technology in international markets and in some
segments of the U.S. corrections market.
Marketing - ATSI markets both its TSI PRISM(TM) 915 MHz and 2.4 GHz
RFID tracking systems in the United States, through the Company's direct sales
representatives and limited lobbyists. The 2.4 GHz RFID tracking systems is also
marketed internationally through international distributors and business
partnerships. The primary focus of the marketing effort has been directed at the
domestic state and federal correctional facilities and county jail markets.
Internationally, ATSI is providing transmitter technology for a project in the
corrections market in Europe and Australia.
Raw Materials - The RFID Technology segment utilizes various domestic
subcontractors for materials and parts used to manufacture its products. Due to
the limited number of system installations, approximately 78% of those purchases
for fiscal year ended June 30, 2008 were made from the licensor of the 2.4 GHz
technology. During fiscal year ended June 30, 2007, one subcontractor accounted
for approximately 50% of the business segment's purchases.
The Company anticipates continued concentration of vendor purchases;
however, additional suppliers are readily available at competitive pricing
levels. The Company does not foresee any future significant shortages or
substantial price increases that cannot be recovered from its customers.
Competitive Conditions - We believe the TSI PRISM(TM) system is the
only known wireless RFID continuous real-time tracking technology currently
available to the correctional facilities market. There are other companies
attempting to introduce area location and monitoring technologies in the
correctional facilities market, offering an area or zone detection system.
However, at this time those technologies are not capable of providing continuous
real-time tracking.
Employees - The Company's RFID tracking segment employed sixteen
full-time employees at both June 30, 2008 and 2007.
Seasonality of Business - Location and tracking products have minimal
seasonality. However, many of the products in this segment are marketed to state
and federal government customers that are affected by annual budget schedules
and economic conditions.
Dependence Upon Key Customers - The RFID Technology segment continues
in an early stage of commercial market development in the United States.
Targeted customers operate the majority of the prison facilities in the United
States and include the 50 state governments, numerous county governments and the
federal government. During the twelve months ended June 30, 2008, five customers
accounted for more than 10% of the segment's revenue with the largest customer
accounting for approximately 24% of total segment revenue. During fiscal year
2007, substantially all revenue was generated from three state governments and a
general contractor. The Company anticipates that as market penetration of its
TSI PRISM(TM) technology accelerates, the Company will have numerous customers.
However, due to the type of product sold by the RFID Technology segment, the
size of each contract may continue to be significant.
Backlog Orders - The Company operates using system order contracts that
it considers to be firm and non-cancelable and extended maintenance contracts
not longer than twelve months. Under this method, the Company had an order
backlog as of June 30, 2008 of approximately $5.5 million, compared to $532,000
at June 30, 2007.
Research & Development - The Company estimated that the ATSI operations
spent approximately $400,000 and $300,000 in research and development
expenditures, recorded as selling, general and administrative expense, during
fiscal years 2008 and 2007, respectively.
WIRELESS ASSET MANAGEMENT
The Company's Wireless Asset Management business segment was
established by the acquisition, effective June 30, 2006, of StarTrak Systems,
LLC ("StarTrak"), a privately held Delaware LLC located in Morris Plains, New
Jersey. StarTrak is a leading provider of wireless GPS tracking and monitoring
services which are offered on a monthly subscription basis to various industry
segments. The Company's primary focus is currently the refrigerated or "Reefer"
segment of the transport industry. StarTrak provides the dominant share of all
wireless tracking, monitoring and control services to this market segment.
Marketing - StarTrak markets its wireless tracking and wireless
subscription data services in the United States, both through dealers and the
Company's direct sales representatives. The primary focus of the marketing
effort has been directed at the domestic refrigerated transport market and the
reefer equipment providers. The Company also has limited international sales
opportunities (Australia, Europe) and expects that segment to grow as well.
Raw Materials - The Wireless Asset Management segment utilizes various
domestic suppliers for materials, parts and assembly used to manufacture its
hardware products and a number of suppliers for its air time purchases, both
cellular and satellite, required to provide its data services. For fiscal year
ended June 30, 2008, one provider of parts and assembly accounted for 24% of
total segment purchases and one vendor who provides satellite air time accounted
for 27% of total purchases. During fiscal 2007, one supplier accounted for 42%
of purchases.
The Company anticipates the Wireless Asset Management segment will
utilize various domestic subcontractors in the future for materials and parts
used to manufacture its products; however, certain vendors may represent more
than 10% of total purchases. Additional suppliers are generally available at
competitive pricing levels and we anticipate concentration of purchases will
decrease as new products are introduced and volumes increase. The Company does
not foresee any future significant shortages or substantial price increases that
cannot be recovered from its customers.
Competitive Conditions - StarTrak is the only known provider of
wireless tracking and monitoring services that offers a subscription program
targeted to the refrigerated or "Reefer" segment of the transport industry.
There are other companies marketing tracking services to the general transport
industry; however, to our knowledge, none have the capability of providing
integration with the major manufacturers' "Reefer" electronic systems that
allows for the monitoring of various sensor data on a real-time basis.
Employees - The Company's Wireless Asset Management segment employed
thirty-six and thirty-nine full-time and part-time employees as of June 30, 2008
and 2007, respectively, including three interns at June 30, 2007.
Seasonality of Business - Location and tracking products have minimal
seasonality. However, many of the products in this segment are marketed to
commercial customers that are affected by annual budget schedules and economic
conditions. Further, high asset utilization during the summer months can cause
some seasonal effects on deployment of units.
Dependence Upon Key Customers - The company has numerous end customers,
many of which chose to purchase StarTrak products from two primary OEM
refrigerator equipment suppliers. StarTrak is the only vendor currently
providing the two OEMs with tracking and monitoring products for the
refrigerated or Reefer segment of the transport industry. Additionally, the
company delivered product and provided subscription services under a contract
with a major customer that amounted to 13.1% and 41% of segment revenue for
fiscal years ended 2008 and 2007, respectively.
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, 2008 and 2007 of approximately $8 and $9
million, respectively.
Research & Development - The Company estimates it spent approximately
$250,000 and $300,000 in research and development expenditures, recorded as
selling, general and administrative expense, in fiscal years 2008 and 2007,
respectively.
COMPUTER DATA STORAGE SEGMENT
The Company's Computer Data Storage segment reporting for fiscal 2008
and 2007 represents the operations of Excel/Meridian Data, Inc. ("Excel").
During fiscal 2007, the Company sold Arraid, a Phoenix, Arizona-based
manufacturer of legacy computer data storage products, leaving Excel, a Dallas,
Texas-based provider of data storage networking products and services, as the
only unit comprising the Computer Data Storage Segment. Arraid's results of
operations for fiscal year 2007 are reported in the current financial Form
10-KSB as discontinued operations.
Excel is a manufacturer and marketer of data storage networking
products and is recognized as a leading provider of optical storage devices,
such as CD/DVD-ROM servers. Excel also markets a Network Attached Storage
("NAS") product line and other storage products incorporating state-of-the-art
software technology.
Marketing - Excel markets optical storage and NAS products, primarily
in the United States, through national advertising, telemarketing and Company
sales representatives.
Raw Materials - During both fiscal years 2008 and 2007, two suppliers
accounted for more than 10% of material and parts purchases. One supplier
accounted for 34% and 37.6%, respectively, and a second supplier accounted for
32.4% and 17.2% of those purchases, respectively. The Company anticipates
continued concentration of vendor purchases; however, additional suppliers are
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 - There are numerous competitors in the Computer
Data Storage market, with no company dominating the market. 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 effect on the Company's business.
Employees - As of June 30, 2008, the Company's computer data storage
business employed sixteen full-time employees, compared to twenty full-time
employees as of June 30, 2007.
Seasonality of Business - Computer data storage products have minimal
seasonality. However, many of the products in this segment are marketed to
business customers, which in some cases can be significantly affected by budget
restraints and economic conditions.
Dependence Upon Key Customers - During fiscal year 2008 one customer
accounted for 10.5% of revenues and during fiscal year 2007 one customer
accounted for 17.4% 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 2008 and 2007.
ITEM 1A. RISK FACTORS
An investment in Alanco involves a high degree of risk. In addition to the other
information included in this Form 10-KSB, you should carefully consider the
following risk factors in determining whether or not to purchase shares of
Alanco Class A Common Stock. These matters should be considered in conjunction
with the other information included or incorporated by reference in this filing.
This Form 10-KSB contains statements which constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places and include statements regarding
the intent, belief or current expectations of our management, directors or
officers primarily with respect to our future operating performance. Prospective
purchasers of our securities are cautioned that these forward-looking statements
are not guarantees of future performance and involve risks and uncertainties.
Actual results may differ materially from those in the forward-looking
statements as a result of various factors. The information set out below,
identifies important factors that could cause such differences. See "Safe Harbor
Statements Under the Private Securities Litigation Reform Act of 1995."
We may not be able to reach the sales goals anticipated from the StarTrak
Systems acquisition. We acquired the operations of StarTrak Systems, LLC
("StarTrak") effective June 30, 2006. StarTrak is a leading provider of wireless
tracking and subscription data services to the transportation industry, with a
focus upon the refrigerated or "Reefer" segment of the transport industry.
StarTrak provides wireless (including GPS, cellular and radio) tracking,
monitoring and control services to this market. We are anticipating significant
revenue growth from sales of StarTrak products in the transportation market. We
do not have experience in the transportation market, and there is no certainty
that we will be able to capture the required market share for StarTrak to
achieve its anticipated financial success. The StarTrak system is currently
being marketed to the transportation market as a tool to increase efficiency and
reduce costs of the refrigerated supply chain by wireless monitoring and control
of critical Reefer data, including GPS location, cargo temperatures and Reefer
fuel levels. Although StarTrak is the dominant provider for tracking, management
and control services of the refrigeration transport market and is currently the
only tracking system, to the best of our knowledge, which is able to provide
direct interaction with the customer allowing for remote adjustments of
variables controlled by the unit, there are other tracking/monitoring systems
being marketed to the refrigerated transport industry. There is no certainty
that the transportation industry will adopt this technology broadly enough for
us to reach our marketing projections.
The loss of key StarTrak personnel would have a negative impact on our StarTrak
business and technology development. Our StarTrak technology is reliant on key
personnel who developed and understand the technology. We have short-term
contracts with some key personnel, but have no assurance that such personnel
will remain with the Company on a long-term basis. The loss of the services of
those key technology personnel could have an adverse effect on the business,
operating results and financial condition of our company.
We may continue to experience lower than anticipated sales in our TSI PRISM
division. We acquired the business and assets of Technology Systems
International, Inc. ("TSI") effective June 2002, creating the Company's RFID
Technology segment. During fiscal 2005, we changed the name of Technology
Systems International, Inc. to Alanco/TSI PRISM, Inc. ("ATSI"). We had
anticipated significant revenue growth from sales of the TSI PRISM tracking
system in the corrections market in prior years which was not realized. We
continue to anticipate future significant revenue growth from sales of the TSI
PRISM tracking system; however, there is no certainty that we will be able to
capture the required market share for ATSI to achieve its anticipated financial
success. The TSI PRISM system is currently being marketed to the corrections
market as a prison and jail management tool and officer safety system. Although
there are other inmate and officer monitoring systems being marketed to the
corrections industry, the TSI PRISM system is currently the only system, to the
best of our knowledge, which is able to continuously (every two seconds) monitor
the location of both officers and prisoners, both inside and outside of
buildings. There is no certainty that the corrections industry will adopt this
technology broadly enough for us to reach our marketing projections.
The loss of key ATSI personnel would have a negative impact on our ATSI business
and technology development. Our TSI PRISM technology is reliant on key personnel
who developed and understand the technology. We have no employment contracts
with any of our ATSI personnel. The loss of the services of those key technology
personnel could have an adverse effect on the business, operating results and
financial condition of our company, and our ability to continue to develop
products economically and competitively.
We could incur financial losses as a result of the continuing litigation with
respect to our acquisition of ATSI. We have been sued concerning our acquisition
of ATSI. We recently entered into a Settlement Agreement pursuant to which the
value of the TSI assets acquired and the value of the consideration we gave for
such assets will be determined by an independent third-party appraiser. If we
paid less than 85% of the value of the assets, we will have to pay the
difference to the TSI bankruptcy estate. See Legal Proceedings for a discussion
of a legal suit filed in connection with our acquisition of the operations of
TSI.
We are subject to the budget constraints of the governmental agencies purchasing
TSI PRISM systems, which could result in a significant decrease in our
anticipated revenues. We cannot assure you that the governmental agencies we
anticipate purchasing our TSI PRISM systems will have the necessary revenue to
purchase the systems even though they may want to do so. The funds available to
governmental agencies are subject to various economic and political influences.
Even though the TSI PRISM system may be recommended for purchase by corrections
facility managers, the governmental agency responsible for the facility may not
have sufficient budget resources to purchase the system.
Worsening general economic conditions may negatively affect our potential
customers' ability and willingness to purchase the products sold by our Company.
Both our RFID Technology and our Data Storage segment rely on a strong economy
to support technology spending by our customers. Our Data Storage segment sells
network attached storage systems to mid-sized network users. Previous
deterioration in general economic conditions resulted in reduced spending by our
customers for technology in general, including the products sold by us. We have
the ability to reduce overhead to assist in offsetting our reduced sales volume;
however, if the economic conditions were to deteriorate, we could experience a
material adverse impact on our business, operating results, and financial
conditions. See previous section discussing the budget constraints of our
government customers. As some governmental funding is supplied by sales tax and
income tax revenues, a reduction in economic activity reduces governmental
revenues and the monies that can be budgeted for TSI PRISM systems.
Acts of domestic terrorism and war have impacted general economic conditions and
may impact the industry and our ability to operate profitably. On September 11,
2001, acts of terrorism occurred in New York City and Washington, D.C. On
October 7, 2001, the United States launched military actions on Afghanistan, and
in 2003 launched military attacks on Iraq with ongoing operations in both areas.
As a result of those terrorist acts and military actions, there has been a
disruption in general economic activity and a diversion of governmental funding
to those endeavors that would otherwise have been available for the purchase of
products and systems such as those sold by the Company. There may be other
consequences resulting from those acts of terrorism, and any others which may
occur in the future, including civil disturbance, war, riot, epidemics, public
demonstration, explosion, freight embargoes, governmental action, governmental
delay, restraint or inaction, quarantine restrictions, unavailability of
capital, equipment, personnel, which we may not be able to anticipate. These
terrorist acts and acts of war may continue to impact the economy, and in turn,
reduce the demand for our products and services, which would harm our ability to
make a profit. Also, as federal dollars are redirected to military efforts, they
may not be available for the purchase of new federal prison monitoring systems
from our ATSI subsidiary.
The Company may not have sufficient capital to meet its liquidity needs if we
are not able to carry out our fiscal year 2009 operating plan; Uncertainty of
proceeds and additional financing. The Company incurred significant losses
during fiscal year 2007 and fiscal year 2008 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,
we believe that, based on our fiscal 2009 operating plan, cash flow will be
adequate to meet our anticipated future requirements for working capital
expenditures, scheduled lease payments and scheduled payments of interest on our
indebtedness. We will need to materially reduce expenses, or raise additional
funds through public or private debt or equity financing, or both, if the
revenue and cash flow elements of our 2009 operating plan are not met. If we
need to seek additional financing to meet working capital requirements, there
can be no assurance that additional financing will be available on terms
acceptable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our business, operating results, financial
condition and ability to continue operations will be materially adversely
affected.
If we raise additional funds through the sale of stock, our existing Alanco
shareholders will experience dilution and may be subject to newly issued senior
securities. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then current shareholders of the
Company will be reduced, and such equity securities may have rights, preferences
or privileges senior to those of the holders of Class A Common Stock.
Our StarTrak and ATSI intellectual property protection may not be sufficient to
maintain the value of such property rights. Our primary business strategy is to
develop the StarTrak and ATSI business opportunities. The long-term success of
this strategy depends in part upon the StarTrak and ATSI intellectual property
acquired. Although we are not currently aware of any conflicting technology
rights, third parties may hold United States or foreign patents which may be
asserted in the future against the StarTrak and ATSI technology, and there is no
assurance that any license that might be required under such patents could be
obtained on commercially reasonable terms, or otherwise. Our competitors may
also independently develop technologies that are substantially equivalent or
superior to our technology. In addition, the laws of some foreign countries do
not protect our proprietary rights to the same extent as the laws of the United
States.
Our efforts to prohibit others from infringing upon our StarTrak and ATSI
intellectual property may not be adequate. Despite our efforts to safeguard and
maintain our proprietary rights both in the United States and abroad, there can
be no assurance that we will be successful in doing so or that the steps taken
by us in this regard will be adequate to deter infringement, misuse,
misappropriation or independent third-party development of our technology or
intellectual property rights or to prevent an unauthorized third party from
copying or otherwise obtaining and using our products or technology. Litigation
may also become necessary to defend or enforce our proprietary rights. Any of
such events could have a negative impact on our competitive position in the
markets we serve.
The loss of key corporate or subsidiary executives would have a negative effect
on our Company. Our performance is substantially dependent on the services and
performance of our executive officers and key employees. The loss of the
services of any of our executive officers or key employees could have a material
adverse effect on our business, operating results and financial condition due to
their extensive industry specific knowledge and comprehensive operating plans
for the Company. Our future success will depend on our ability to attract,
integrate, motivate and retain qualified technical, sales, operations and
managerial personnel. With the exception of the two most senior StarTrak
executives, none of our executive officers are bound by an employment agreement,
and none are covered by key-man insurance.
Additional competitors to StarTrak may arise that could affect the future
projected StarTrak business. Although StarTrak currently is the dominant
provider of tracking, management and control services of refrigeration transport
Reefer units, it can be expected that if, and to the extent that, the demand for
the StarTrak technology increases, the number of competitors will likely
increase. Increasing competition could adversely affect the amount of new
business we are able to attract, the rates we are able to charge for our
services and/or products, or both.
Additional competitors to the TSI PRISM business may arise that could affect the
future projected TSI PRISM business. Although early in the market development
cycle, the TSI PRISM business/technology has no current, identified direct
competitors capable of the same performance levels as the TSI PRISM system.
There are other companies attempting to introduce area location and monitoring
technologies in the correctional facilities market who offer area or zone
detection systems that are not capable of providing continuous real-time
tracking at this time. However, it can be expected that if, and to the extent
that, the demand for the ATSI technology increases, the number of competitors
will likely increase, as will their capabilities. Increasing competition could
adversely affect the amount of new business we are able to attract, the rates we
are able to charge for our services and/or products, or both.
We may lack the capital for our Excel Meridian Data subsidiary to compete
effectively in the data storage market. Because we are significantly smaller
than many of our competitors in the data storage business, we may lack the
capital required to increase our market share. We operate in a very competitive
environment, competing against numerous other companies, many of whom have
greater financial resources and market position than we do.
We may not be able to maintain our NASDAQ Listing if we are unable to keep our
stock price above the minimum $1.00 bid price per share. Our Class A Common
Stock currently trades on the NASDAQ Capital Market under the symbol "ALAN."
However, there can be no assurance that an active trading market in our Class A
Common Stock will be available at any particular future time.
In August, 2005, we received notification from NASDAQ indicating that due to the
failure of the Company to maintain the minimum $1.00 bid price per share
requirement, the Company's securities were subject to delisting from NASDAQ. In
accordance with Marketplace Rule 4310(c) (8) (D), the Company had 180 days, or
until January 31, 2006, to comply with the Rule. The minimum bid price
requirement was not met by the date specified, and again in accordance with
Marketplace Rule 4310(c), NASDAQ officials determined the Company met the NASDAQ
Capital Market initial listing criteria except for the bid price requirement and
notified the Company that it had been granted an additional 180 calendar days
(until July 31, 2006) to meet the $1.00 minimum bid price requirement. In
August, 2006, we received notification from NASDAQ indicating that we had not
regained compliance with the minimum $1.00 bid price per share requirement and
that the Company's securities would be delisted. We elected to appeal the NASDAQ
Staff delisting determination and an oral hearing before the NASDAQ Listing
Qualifications Panel ("Panel") was held on September 14, 2006, with
representatives from the Company present. Effective October 16, 2006, the
Company's Board of Directors elected to effect a 2:5 reverse stock split
pursuant to approval of a proposal authorizing a reverse split obtained from the
shareholders at the Company's Annual Meeting of Shareholders held on January 20,
2006. The Company's stock began trading on a post-split adjusted basis under the
interim trading symbol "ALAND" on October 16, 2006 for a period of 20 trading
days, after which the Company's trading symbol returned to "ALAN." The Company's
stock has traded above the $1.00 minimum bid price since the reverse stock split
was effected. On November 2, 2006, the Company received a letter from NASDAQ
indicating that the Company had remedied its minimum bid price deficiency and
had regained compliance with the continued listing requirements of The NASDAQ
Capital Market. There can be no assurance that the Company's stock will continue
to trade above the minimum NASDAQ $1.00 per share bid requirement, and the
Company may again in the future be notified that delisting may occur.
The Company does not anticipate payment of dividends. We do not anticipate that
we will pay cash dividends on our Class A Common Stock in the foreseeable
future. The payment of dividends by us will depend on our earnings, financial
condition, and such other factors, as our Board of Directors may consider
relevant. We currently plan to retain earnings to provide for the development of
our business.
Our articles of incorporation and Arizona law may have the effect of making it
more expensive or more difficult for a third party to acquire, or to acquire
control of, us. Our articles of incorporation make it possible for our Board of
Directors to issue preferred stock with voting or other rights that could impede
the success of any attempt to change control of us. Arizona law prohibits a
publicly held Arizona corporation from engaging in certain business combinations
with certain persons, who acquire our securities with the intent of engaging in
a business combination, unless the proposed transaction is approved in a
prescribed manner. This provision has the effect of discouraging transactions
not approved by our Board of Directors as required by the statute which may
discourage third parties from attempting to acquire us or to acquire control of
us even if the attempt would result in a premium over market price for the
shares of common stock held by our stockholders.
Certain provisions in our Alanco shareholder rights plan may discourage a
takeover attempt. We have implemented a shareholder rights plan which could make
an unsolicited takeover of our company more difficult. As a result, shareholders
holding a controlling block of shares may be deprived of the opportunity to sell
their shares to potential acquirers at a premium over prevailing market prices.
This potential inability to obtain a premium could reduce the market price of
our common stock.
The market price of Alanco Class A Common Stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control. These
factors include:
o progress of our products through development and marketing;
o announcements of technological innovations or new products by us or our
competitors;
o government regulatory action affecting our products or competitors'
products in both the United States and foreign countries;
o developments or disputes concerning patent or proprietary rights;
o actual or anticipated fluctuations in our operating results;
o the loss of key management or technical personnel;
o the loss of major customers or suppliers;
o the outcome of any future litigation;
o changes in our financial estimates by securities analysts;
o general market conditions for emerging growth and technology
companies;
o broad market fluctuations;
o recovery from natural disasters; and
o economic conditions in the United States or abroad.
Future sales of Alanco Class A Common Stock in the public market could adversely
affect our stock price and our ability to raise funds in new equity offerings.
We cannot predict the effect, if any, that future sales of shares of our common
stock or the availability for future sale of shares of our common stock or
securities convertible into or exercisable for our common stock will have on the
market price of our common stock prevailing from time to time. For example, the
availability of the shares covered by S-3 registration statements for sale, or
of common stock by our existing stockholders under Rule 144, or the perception
that such sales could occur, could adversely affect prevailing market prices for
our common stock and could materially impair our future ability to raise capital
through an offering of equity securities.
ITEM 2. PROPERTIES
The Company's corporate office and the ATSI operation are located in an
approximate 9,300 square foot leased facility in Scottsdale, Arizona. The
current lease expires July 31, 2010.
Excel/Meridian Data, Inc. entered into an office/manufacturing space
lease during fiscal year 2001 for 11,328 square feet in Carrollton, Texas. The
five-year lease, scheduled to expire on March 15, 2006 was extended through
April 2009.
StarTrak Systems, LLC, is currently occupying an approximately 5,000
square foot office/manufacturing facility in Morris Plains, New Jersey, under a
lease that expired on September 30, 2007. The lease was extended on a month to
month basis to allow StarTrak to finalize the terms on a new lease for
approximately 12,000 square feet of office/manufacturing space located near its
current facility in Morris Plains, New Jersey. StarTrak is scheduled to move to
the new location in October 2008.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings - The Company is a plaintiff in litigation initiated by its
subsidiary, StarTrak Systems, LLC, against former employees and others for
violation of certain non-disclosure covenants and for misappropriation of trade
secrets. The actions are more fully described below. The Company continues as a
party to certain post-litigation procedures relating to the acquisition, in May
of 2002, of substantially all the assets of Technology Systems International,
Inc., a Nevada Corporation ("TSIN"), and to litigation arising from an expired
property lease between the Company's former subsidiary, Arraid, Inc., and Arraid
Property L.L.C., an Arizona limited liability company.
StarTrak Systems Litigation
On July 12, 2007, the Company's subsidiary, StarTrak Systems, LLC,
commenced a lawsuit against Brian Hester, Satamatics, Ltd., Satamatics, Inc.,
and Farruhk Shahzad in the United States District Court, District of New Jersey,
as case number 07-3203(DRD), for misappropriation of trade secrets, violation of
confidentiality agreements and contempt for violation of a previously issued
court order concerning such trade secrets issued to Brian Hester. Brian Hester
and Farruhk Shahzad are previous employees of StarTrak, and the Company believes
that they have employed and/or are attempting to employ trade secrets of
StarTrak in connection with their association with Satamatics in direct
competition with StarTrak. The Company is seeking injunctive relief and damages
from the defendants.
TSIN Litigation
The Company was party to litigation arising out of the Company's
acquisition of substantially all of the assets of TSIN. This initial derivative
suit was terminated and the action converted into a direct action by TSIN in
July 2003.
TSIN is currently in Chapter 7 bankruptcy. The parties to the lawsuit
have entered into a Settlement Agreement, which was attached as an exhibit to
Form 8-K filed on September 21, 2007. In place of the litigation, which has been
dismissed with prejudice, the Settlement Agreement provides for a valuation
procedure, conducted by an independent third party valuation expert, to value
(i) the assets transferred by TSIN to Alanco in connection with the Acquisition
Agreement ("Business Value"), and (ii) the consideration paid by Alanco to TSIN
("Consideration Value"). If the appraiser determines that the Consideration
Value is within 15% of the Business Value, neither party shall be entitled to
any damages or claims. If the Consideration Value is less than 85% of the
Business Value, Alanco shall pay to the TSIN's bankruptcy estate the full
difference in the values, plus interest thereon, plus the sum of $300,000 for
attorneys' fees incurred by TSIN in prosecuting the various related litigation
matters. Alanco's payment may be made, at Alanco's option, in cash or by an
equivalent market value of additional Alanco Class A Common Stock (subject to
certain conditions set forth in the Settlement Agreement). If the Consideration
Value is greater than 115% of the Business Value, TSIN shall immediately pay
Alanco the sum of $300,000 for Alanco's attorneys' fees and costs incurred in
connection with the various litigation matters. The Settlement Agreement was
approved by the bankruptcy court following a hearing for the same on September
19, 2007, and the parties have undertaken the appraisal process. The Company
anticipates that the final appraisal report will be issued and the matter
entirely resolved in the near future.
Arraid Litigation
On July 18, 2003, Arraid Property L.L.C., an Arizona Limited Liability
Company ("Arraid LLC"), filed a complaint in the Arizona Superior Court in and
for Maricopa County, Arizona (case number CV 2003-13999) against the Company and
its wholly owned subsidiary, Arraid, Inc., alleging breach of lease and seeking
substantial monetary damages in excess of $3 million. The suit relates to an
expired lease agreement for property previously leased by Arraid. Following a
trial, the Court found in favor of Arraid LLC against the Company with respect
to certain factual findings resulting in damages owed by the Company in an
amount of approximately $35,000, less than one percent of the amount sought by
the plaintiff. The court determined that the plaintiff was the prevailing party,
and awarded the plaintiff approximately $95,000 in attorney's fees and costs.
The Company's management, in consultation with legal counsel, has appealed the
decision of the court.
The Company may also, from time to time, be involved in litigation
arising from the normal course of business. As of June 30, 2008 there was no
such litigation pending deemed material by the Company.
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, 2008.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Alanco's common stock is traded on the Nasdaq Capital Market under the
symbol "ALAN."
The following table sets forth high and low sale prices for each fiscal
quarter for the last two fiscal years. Such quotations represent inter-dealer
prices without retail mark-ups, markdowns, or commissions and, accordingly, may
not represent actual transactions.
Fiscal 2008 Fiscal 2007
------------------------- -------------------------
Quarter Ended High Low High Low
----------------------- ------------------------- -------------------------
September 30 $2.60 $1.47 $1.90 $1.15
December 31 $2.26 $1.28 $1.79 $1.12
March 31 $1.61 $0.85 $2.57 $1.28
June 30 $1.70 $0.86 $4.14 $2.02
As of June 30, 2008 and 2007 Alanco had approximately 1,000 holders of
record of its Class A Common Stock. This does not include beneficial owners
holding shares in street name.
The Company issued a total of 11,204,600 shares of its Class A Common
Stock during fiscal year ended June 30, 2008. Of those shares, 7,889,200 shares
were issued for the conversion of 6,574,300 Series A Preferred Shares to Common
Shares, 2,453,900 were issued in connection with August 2007 private offerings
of units consisting of one share of Class A Common Stock and 800,000 shares were
issued to convert $1,000,000 of debt to equity. Of the remaining shares, 10,000
were issued in connection with the exercise of employee stock options, 41,500
shares were issued to outside vendors as payment for services rendered, 10,000
shares were issued for loan fees.
During the fiscal year ended June 30, 2007, the Company issued
4,961,600 shares of its Class A Common Stock, including 669,900 shares issued in
connection with exercise of employee stock options and warrants, 275,700 issued
for services, 736,000 issued pursuant to a private offering and 3,280,000 were
additional shares issued related to the StarTrak acquisition.
Alanco has paid no Common Stock cash dividends and has no current plans
to do so. During fiscal years ended June 30, 2008 and 2007, holders of Series A
Convertible Preferred Stock received "paid-in-kind" dividends of 1,389,000,
including a special dividend offered as incentive for holders to convert the
Series A Preferred Shares to Common Shares and 396,900 shares, respectively.
Holders of Series B Convertible Preferred Stock received "paid-in-kind"
dividends during fiscal years ended June 30, 2008 and 2007 of 8,500 shares and
7,800 shares, respectively.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" discusses our consolidated financial statements that have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amount of assets
and liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to revenue recognition, valuation allowances for inventory and receivables,
estimated fair value of stock based compensation, warranty reserves and
impairment of long-lived and intangible assets. We base our estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances. The result of these estimates
and judgments form the basis for making conclusions about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The SEC suggests that all registrants list their most "critical
accounting policies" in Management's Discussion and Analysis. A critical
accounting policy is one which is both important to the portrayal of the
Company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management has identified the critical accounting policies presented below as
those accounting policies that affect its more significant judgments and
estimates in the preparation of its consolidated financial statements. The
Company's Audit Committee has reviewed and approved the critical accounting
policies identified.
These policies include, but are not limited to, revenue recognition,
the carrying value of goodwill and other intangible assets, estimates related to
the valuation of inventory and receivables, and the ultimate resolution of the
current litigation with TSIN and Arraid L.L.C. that is more fully discussed in
Item 3, Legal Proceedings.
Results of Operations
In accordance with accounting principles generally accepted in the
United States of America, the Company is reporting consolidated revenues for
fiscal years ended June 30, 2008 and 2007 from its Computer Data Storage
segment, RFID Technology segment and Wireless Asset Management segment.
The following table is a summary of the results of operations and other
financial information by major segment:
Wireless
Asset RFID Data
Management Technology Storage Corporate Total
-------------- ------------ ----------- ----------- -----------
Fiscal year 2008
Sales $ 11,838,900 $ 1,639,400 $ 3,732,700 $ - $ 17,211,000
Cost of Goods Sold 8,319,800 1,408,100 2,734,500 - 12,462,400
------------ ------------ ------------ ------------ ------------
Gross Profit 3,519,100 231,300 998,200 - 4,748,600
Selling, General & Administrative 6,301,600 2,183,200 1,455,200 1,422,900 11,362,900
------------ ------------ ------------ ------------ ------------
Operating Loss $ (2,782,500) $ (1,951,900) $ (457,000) $ (1,422,900) $ (6,614,300)
============ ============ ============ =========== ===========
Gross Margin 29.7% 14.1% 26.7% 27.6%
============ ============ ============ ===========
Accounts Receivable, net $ 1,783,700 $ 910,600 $ 78,700 $ 17,600 $ 2,790,600
============ ============ ============ ============ ============
Inventory, net $ 2,024,100 $ 1,963,500 $ 803,300 $ - $ 4,790,900
============ ============ ============ ============ ============
Total Assets $ 18,701,600 $ 8,117,100 $ 1,403,600 $ 874,600 $ 29,096,900
============ ============ ============ ============ ============
Capital Expenditures $ 145,600 $ 15,500 $ 7,800 $ 1,000 $ 169,900
============ ============ ============ ============ ============
Research & Development $ 250,000 $ 400,000 $ 150,000 $ - $ 800,000
============ ============ ============ ============ ============
Depreciation & Amortization $ 455,600 $ 170,900 $ 26,700 $ 1,000 $ 654,200
============ ============ ============ ============ ============
Fiscal year 2007
Sales $ 12,976,600 $ 1,065,500 $ 4,432,000 $ - $ 18,474,100
Cost of Goods Sold 8,505,900 735,700 3,360,000 - 12,601,600
------------ ------------ ------------ ------------ ------------
Gross Profit 4,470,700 329,800 1,072,000 - 5,872,500
Selling, General & Administrative 5,192,200 2,314,600 1,504,600 1,310,800 10,322,200
------------ ------------ ------------ ------------ ------------
Operating Loss $ (721,500) $ (1,984,800) $ (432,600) $ (1,310,800) $ (4,449,700)
============ ============ ============ ============ ============
Gross Margin 34.5% 31.0% 24.2% 31.8%
============ ============ ============ ============
Accounts Receivable, net $ 1,561,300 $ 342,400 $ 327,300 $ 17,600 $ 2,248,600
============ ============ ============ ============ ============
Inventory, net $ 1,669,400 $ 1,279,100 $ 859,600 $ - $ 3,808,100
============ ============ ============ ============ ============
Total Assets $ 17,870,900 $ 7,247,400 $ 1,560,300 $ 1,253,300 $ 27,931,900
============ ============ ============ ============ ============
Capital Expenditures $ 64,000 $ 103,100 $ 38,800 $ - $ 205,900
============ ============ ============ ============ ============
Research & Development $ 300,000 $ 300,000 $ 150,000 $ - $ 750,000
============ ============ ============ ============ ============
Depreciation & Amortization $ 644,100 $ 303,400 $ 23,600 $ 2,700 $ 973,800
============ ============ ============ ============ ============
Sales
Consolidated net sales for fiscal year 2008 were $17,211,000, a 6.8%
decrease when compared to $18,474,100 reported for fiscal year 2007. The
decrease in sales resulted from decreases in sales for both the Data Storage and
Wireless Asset Management segments offset by an increase in sales for the RFID
Technology segment. Sales for the fourth quarter of fiscal year 2008 amounted to
$4,720,300, a 42% increase when compared to $3,325,300 reported for the
comparable quarter of the prior fiscal year.
The Company's Wireless Asset Management segment incurred a sales
decrease of $1,137,700, or 8.8%, when compared to the prior year due to a major
contract with one customer that accounted for sales of approximately $5.3
million in fiscal year 2007 and only $1.5 million of sales in the current fiscal
year. Excluding the major customer sales for both fiscal years 2008 and 2007,
sales for the Wireless Asset Management segment increased by approximately 35%.
In addition, delays in new product introductions targeted at the refrigerated
truck/trailer market contributed to the Wireless Asset Management segment sales
decrease. Although revenues on a quarter to quarter comparison may fluctuate,
management believes that increases in hardware sales and monitoring revenues
will be achieved in fiscal year ended June 30, 2009 through new product
introductions and increased market penetration.
Sales for the RFID Technology segment increased by $573,900, or 53.9%,
when compared to the prior fiscal year. The improvement in the RFID Technology
segment sales reflects momentum in customer acceptance of the TSI PRSIM tracking
and monitoring technology and reflects the completion of the long sales cycles
required for customers to understand the advantages of the TSI PRISM technology
and then secure budget approval for an acquisition This sales improvement has
been achieved while maintaining the pricing structure it has utilized over the
past few years. As further evidence of improved market penetration by the TSI
PRISM technology, the RFID Technology segment had a backlog at June 30, 2008 in
excess of $5 million, or more than three times the total sales recorded in
fiscal year 2008. While fiscal year 2008 revenue has increased over 2007, it
remains at an unacceptable level that must be significantly increased for the
segment to become a viable business. The Company believes that additional
revenues for this segment will be recognized as the tracking and monitoring
technology becomes the accepted method for modern prison management
effectiveness. The Company believes the lack of significant sales progress for
the RFID Technology segment to date is due to an extraordinarily complex and
lengthy bureaucratic procurement process that, in some cases, takes several
years to complete. The sales process for the TSI PRISM products is protracted
because it generally involves four separate phases: 1) product presentation to a
state director of corrections, 2) obtaining the state director of correction's
agreement to position the product among the top priorities of his budget, 3)
competing with other state projects for funding and 4) publishing the RFP
(request for proposal) and awarding the contract. RFID segment customers are
currently at various phases in the procurement process, and we believe that TSI
PRISM sales will increase significantly in fiscal year 2009 as the funding phase
is completed and contracts are awarded.
Customers are also studying various methods to finance the adoption of
RFID technology for their corrections facilities. Based upon meetings the
Company has had with various State governments to discuss federal grants
available to assist in funding the acquisition of the TSI PRISM system and
actions taken to apply for those grants, we believe that numerous State
governments have applied or are considering, in addition to their normal
legislative funding, applying for federal grants under programs such as PREA
(Prison Rape Elimination Act of 2003), grants awarded from VOIT/TIS funds
available under a 1999 program to reduce prison violence administered by the
U.S. Department of Justice and grants awarded by the National Institute of
Justice. In addition, potential customers are reviewing available lease
financing options.
The Company's Data Storage segment reported a decrease in sales of
$699,300, or 15.8%. The Data Storage segment sales for both periods reflect only
those revenues for Excel/Meridian Data, the Company's remaining business in this
segment. As a result of adoption of SAB 108 during the quarter ended March 31,
2007, the Company recorded an adjustment to increase deferred revenue relative
to extended warranty sales. The Company had previously recognized a portion of
its extended warranty revenue in the period of sale, as opposed to over the term
of the warranty coverage. The one-time adjustment, representing the cumulative
effect, decreased net sales in fiscal year 2007 by approximately $150,000.
Without the adjustment, the Data Storage segment fiscal 2007 sales would have
been approximately $4,582,000, which, when comparing the current year fiscal
year revenues, would reflect a decrease of approximately $850,000, or 18.6%. The
decrease in Data Storage segment revenue resulted from a trend towards lower
priced storage products, government redirecting military defense expenditures
from computer system support to the war effort, reduced demand for storage
products as a result of a weak economy and a general reduction in selling prices
of data storage. In fiscal year 2007, the Data Storage segment recorded an
unusually large sale ($945,000) that was not duplicated in the current period.
Gross Profit
The Company's gross profit for fiscal year 2008 was $4,748,600 (27.6%
of sales), a decrease of $1,123,900 or 19.1%, when compared to $5,872,500 (31.8%
of sales) for the prior year. The reduction in gross margin resulted primarily
from reductions in sales and reduced gross margin in both the Wireless Asset
Management and RFID Technology segments. Changes in fiscal year 2008 gross
profit and gross margins compared to fiscal year 2007 for each of the Company's
business segments are more fully discussed below.
Gross profits for the Wireless Asset Management segment decreased to
$3,519,100 (29.7% of sales), a decrease of $951,600 or 21.3% compared to
$4,470,700 (34.5% of sales) in gross profit reported for fiscal year ended June
30, 2007. The reduction in gross profit resulted from lower unit sales compared
to the prior year, lower margins on the new hardware sales, additional costs
required to convert customers from control channel to GSM products, and one time
inventory obsolescence reserve adjustments of approximately $342,000 incurred
due to the changeover to the new RT6000 product line.
The RFID Technology segment reported a $98,500, or 29.9%, decrease in
gross profit to $231,300 from the $329,800 reported for the prior fiscal year.
The decrease resulted primarily from the Company's strategic decision to install
a system at a low margin that provided a significant opportunity test certain
design concepts with an objective of developing a lower cost RFID system
designed for a new market and not due to other changes in pricing strategy. We
believe that reported gross margin for fiscal years 2008 and 2007 are not
reflective of the gross margin percentage anticipated under higher sales levels.
The Data Storage segment reported fiscal year 2008 gross profits of
$998,200, a decrease of $73,800, or 6.9%, compared to $1,072,000 reported for
the prior year. Gross margin for fiscal year 2008 for the Data Storage segment
was 26.7%, compared to 24.2% reported in the prior year. The reduction in gross
profit resulted from reported sales decreases offset somewhat by an increase in
margin. The gross margin increase resulted from changes in product mix and is
not deemed to be a trend. The Data Storage segment is continually reselling new
technology products and integrating those products to meet customer
expectations. This constant product evolution results in continuous changes in
product offerings and consequently gross margins.
Selling, General & Administrative Expense
Fiscal year 2008 Selling, general and administrative expense for the
Company's business segments, excluding Corporate expenses, increased $928,600,
or 10.3%, to $9,940,000, compared to $9,011,400 reported for fiscal year ended
June 30, 2007. The Wireless Asset Management segment accounted for the entire
increase, increasing Selling, general and administrative expenses to $6,301,600,
an increase of $1,109,400, or 21.4%, compared to $5,192,200 reported in the
prior year. The increase in the Wireless Asset Management segment was due to
increased legal expense (see StarTrak Systems Litigation in Note 11 of Notes to
Consolidated Financial Statements), increased warranty cost due to a defective
product which has been rectified, additional sales expenses, additional IT
expenditures required to upgrade the data services network and additional costs
to complete product development necessary to commercialize its new product line
targeted at the truck/trailer market. The Wireless Asset Management segment
increase was offset by decreases of $49,400, or 3.3%, in the Data Storage
segment and decreases of $131,400, or 5.7%, in the RFID Technology segment as a
result of cost controls implemented during the year. Corporate administrative
expenses increased by $112,100, or 8.6%, compared to the prior year primarily
due to an insurance settlement of approximately $300,000 that reduced legal fees
in fiscal year 2007. Excluding the insurance settlement, Corporate expense
decreased by approximately $188,000, primarily due to legal expenses.
Operating Loss
The operating loss for fiscal year ended June 30, 2008 was
($6,614,300), a ($2,164,600), or 48.6%, increase when compared to the operating
loss for the prior fiscal year of ($4,449,700). The increase in operating loss
resulted primarily from increased operating losses in the Company's Wireless
Asset Management segment who increased operating losses by ($2,061,000),
reporting an operating loss of ($2,782,500) in fiscal year 2008 compared to
($721,500) in the prior fiscal year. The Data Storage segment also reported an
increase in operating loss to ($457,000), an increase of ($24,400) from the
($432,600) reported in the prior fiscal year. The RFID Technology segment
reported a slight reduction in operating loss to ($1,951,900), a 1.7% reduction
compared to ($1,984,800) reported in the fiscal year ended June 30, 2007.
Loss From Continuing Operations
The loss from continuing operations for the fiscal year ended June 30,
2008 was ($7,309,100), a $2,193,500 or 42.9%, increase when compared to a loss
of ($5,115,600) for the prior fiscal year. The increase in loss from continuing
operations included $2,164,600 in increased operating loss explained above and
an increase of $33,100 in net interest expense, offset slightly by a ($4,200)
increase in other income. Fiscal year 2008 interest expense, net of interest
income, was $792,900, compared to net interest expense of $759,800 for the
previous year. The increase in net interest expense reflects increased average
borrowing offset by reductions in interest rates under the Company's line of
credit and loan agreements. Other income for the current fiscal year was $98,100
compared to $93,900 for fiscal year ended June 30, 2007. The current and prior
years other income resulted primarily from gains on sale of "assets held for
sale."
EBITDA
The Company believes that (loss) earnings before net interest income,
income taxes, depreciation and amortization of intangible assets (EBITDA), is an
important measure used by management to measure performance. EBITDA may also be
used by certain investors to compare and analyze our operating results between
accounting periods. However, EBITDA should not be considered in isolation or as
a substitute for net income, cash flows or other financial statement data
prepared in accordance with GAAP, or as a measure of our performance or
liquidity. EBITDA for Alanco's fiscal year 2008 represents a loss of
($5,862,000) compared to a loss of ($3,382,000) for the same period of the prior
year. EBITDA before stock-based compensation was ($5,439,000) compared to
($3,208,200) reported in the prior period. Reconciliation between EBITDA and
Loss From Continuing Operations is presented below:
EBITA RECONCILIATION TO LOSS FROM CONTINUING OPERATIONS
Fiscal Years Ended
June 30, 2008 June 30, 2007
------------- -------------
EBITDA before Stock-based compensation $ (5,439,000) $ (3,208,200)
Stock-based compensation (423,000) (173,800)
------------- -------------
EBITDA $ (5,862,000) $ (3,382,000)
Net interest expense (792,900) (759,800)
Depreciation and amortization (654,200) (973,800)
------------- -------------
LOSS FROM CONTINUING OPERATIONS $ (7,309,100) $ (5,115,600)
============= =============
Dividends
Preferred Stock dividends paid in-kind for the year ended June 30, 2008
for both Series A and Series B Convertible Preferred Stock amounted to
$2,432,900, a significant increase compared to Preferred Stock dividends of
$672,900 for the prior year. In addition to normal dividend increases, the
increase resulted primarily from the current fiscal year expense reflecting
three regular semi-annual dividends compared to two dividends recorded in the
prior fiscal year, the special imputed Series A Preferred Stock dividend
recorded during the quarter ended March 31, 2008 of $264,000 related to the
beneficial conversion feature calculated based upon the implied value of
warrants issued in the Series A Preferred Stock Offering and the recording of a
special 10% "in-kind" Series A Preferred Stock dividend valued at $896,400,
associated with the conversion of all Series A into Class A Common Stock at June
30, 2008. See Note 12 - Shareholders' Equity for additional discussion of
Preferred Stock transactions.
Net Loss Attributable to Common Stockholders
Consolidated net loss attributable to Common stockholders for fiscal
year ended June 30, 2008 was ($9,748,600), or ($.42) per share, an increase of
66% when compared to a net loss attributable to Common stockholders of
($5,871,700), or ($.34) per share, for the prior year.
Net cash used in operating activities for the fiscal year ended June
30, 2008 was ($6,619,200) compared with net cash used in operating activities
for the prior fiscal year of ($7,080,700). The decrease of $461,500, or 6.5%,
resulted primarily from a decrease in customer advances, an increase in accounts
payable, an increase in billings in excess of costs and estimated earnings on
uncompleted contracts, offset by an increase in loss from operations. See
"Liquidity and Capital Resources" below for management's discussion of major
items affecting the Consolidated Statement of Cash Flow.
Any new Statements of the Financial Accounting Standards affecting the
Company are disclosed in the "Notes to Consolidated Financial Statements."
Liquidity and Capital Resources
The Company's current assets exceeded current liabilities by $759,300
at June 30, 2008, representing a current ratio of 1.1 to 1. That was a
significant improvement when compared to June 30, 2007 when the Company's
current liabilities exceeded current assets by $248,300, resulting in negative
working capital and a current ratio of .97 to 1.
Consolidated accounts receivable at June 30, 2008 of $2,790,600,
fifty-nine days' sales in receivables, reflects an increase of $542,000, or
24.1%, compared to the $2,248,600, forty-four days' sales in receivables,
reported at the end of fiscal year 2007. The increase in days' sales was
reported in both the Wireless Asset Management and the RFID segments.
The Wireless Asset Management segment reported an Accounts Receivable
balance at June 30, 2008 of $1,783,700, or 63.9% of the current fiscal year end
consolidated balance, compared to 69.4% of the consolidated balance at the prior
fiscal year end. The $1,783,700 June 30, 2008 balance for the Wireless Asset
Management segment represented fifty-five days' sales compared to an accounts
receivable balance at June 30, 2007 of $1,561,300, representing forty-four days'
sales. The increase in days' sales resulted from an increase in sales in the
last month of the fourth quarter compared to the prior year.
Receivables for the Data Storage segment decreased by $248,600, or 76%,
and RFID Technology segment increased by $568,200, or 166%. The Data Storage
segment accounts receivable balance at June 30, 2008 of $78,700 represented
eight days' sales in receivables compared to $327,300, or twenty-seven days, at
fiscal year end 2007. Days' sales in receivables for the Data Storage segment
may be significantly affected by the percentage of credit card sales in a
particular period versus a comparable period and therefore a change in days'
sales in receivables is not considered a trend towards faster or slower
receivable collection. Days' sales for the RFID Technology segment, two hundred
and three days at June 30, 2008 and one hundred and seventeen days at June 30,
2007, are distorted due to a number of significant projects in process at June
30, 2008 compared to the end of the prior fiscal year and the lack of
significant reported system sales for both fiscal years ended 2008 and 2007.
Consolidated inventories at June 30, 2008 amounted to $4,790,900
compared to $3,808,100 at the end of the prior fiscal year, an increase of
$982,800, or 25.8%. $684,300, or 69.6% of the current year increase was reported
by the RFID Technology segment, reporting inventories of $1,963,500 at June 30,
2008, an increase of $684,400, or 53.5%, from $1,279,100 at fiscal year end
2007. The increase in inventories was due to additional inventory required for
new projects in the installation phase. A significant portion of the RFID
Technology segment inventory was sold in the first quarter of fiscal year 2009.
Due to low sales levels reported for both fiscal 2008 and 2007, turnover ratios
are not considered significant. The Data Storage segment accounted for $803,300,
or 16.8% of the consolidated inventory values, representing an inventory turn of
3.4 compared to 3.9 at June 30, 2007. The Wireless Asset Management segment
inventory accounted for $2,024,100, or 42.2% of the consolidated balances,
representing an inventory turn of 4.1 compared to 5.1 for the prior year. The
Wireless Asset Management segment inventory levels increased due to new product
introductions targeted at the refrigerated truck/trailer market. The Data
Storage segment inventories decreased slightly and the Wireless Asset Management
segment inventories increased in line with anticipated sales growth.
Net cash used in investing activities during the current year was
($90,500), compared to net cash provided from investing activities of $576,000,
a decrease of $666,500, from the previous year. The current year decrease was
due primarily to cash from sale of assets held for sale at June 30, 2007 of
$747,400.
Net cash provided by financing activities during fiscal year ended June
30, 2008 amounted to $6,820,800, compared to $5,965,000 for the prior year.
Significant items for the current year include $5,090,900 in net proceeds from
the sale of Common Stock, $2,733,600 in net proceeds from the sale of Preferred
Stock, reduced by net repayment on borrowing of $997,100. Significant items for
fiscal year 2007 include $3,112,400 in net proceeds from the sale of Common
Stock and $2,852,600 in net new borrowing (primarily the $4 million term loan
offset by debt repayment).
The Company had a $2,000,000 line of credit balance under a $2 million
line of credit agreement with a private trust that was last amended, prior to
June 30, 2008, effective February 26, 2008. The secured line of credit is based
upon accounts receivable and inventory values, and is secured by substantially
all assets of the Company. The line of credit has an interest rate of prime plus
3% (8.0% at June 30, 2008). Under the amended line of credit agreement, the
Company must maintain a balance due under the line of at least $1.5 million
through June 2009. Due to the minimum borrowing requirement and the July 2010
expiration, the balance due is presented at June 30, 2008 and 2007 as notes
payable, long term. See Note 7 - Line of Credit and Notes Payable to the
consolidated financial statements for additional discussion on the line of
credit agreement.
Considering the Company's working capital position at year end and the
projected cash requirements to fund operations, management estimates that the
year end cash balance of $726,900 would have been adequate to meet cash
requirements for approximately a three-month period. Subsequent to year end,
the Company completed additional financings of approximately $2.5 million as
explained in Note 16 - Subsequent Events to the consolidated financial
statements.
Although management cannot assure that future operations will achieve
projections, or that additional debt and/or equity will not be required, we
believe our cash balances at year end, operating projections and the additional
capital raised subsequent to June 30, 2008 may provide adequate capital
resources to maintain operations for the next year. If additional working
capital is required during fiscal 2009 and not obtained through additional
long-term debt, equity capital or operations, it could adversely affect future
operations. Management has historically been successful in obtaining financing
and has demonstrated the ability to implement a number of cost-cutting
initiatives to reduce working capital needs. Accordingly, the accompanying
consolidated financial statements have been prepared assuming the Company will
continue to operate and do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. As a result, the
Company's independent certified public accountants have issued a going concern
opinion on the consolidated financial statements of the Company for the fiscal
year ended June 30, 2008.
Product and Environmental Contingencies
The Company is not aware of any material liabilities, either product or
environmental related.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements.
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm . . . . . . . . .19
Consolidated Balance Sheets As of June 30, 2008 and 2007. . . . . . . . .20
Consolidated Statements of Operations For the Years Ended
June 30, 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . .21
Consolidated Statement of Changes in Shareholders'
Equity and Preferred Stock
For the Years Ended June 30, 2008 and 2007 . . . . . . . . . . . . .22
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2008 and 2007 . . . . . . . . . . . . .23
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . .24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Alanco Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Alanco
Technologies, Inc. and Subsidiaries as of June 30, 2008 and 2007, 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated 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, 2008 and 2007 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 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, anticipates additional losses in the next year, and has
insufficient working capital as of June 30, 2008 to fund the anticipated losses.
These conditions raise substantial doubt about the Company's ability 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, Marchal & Cooper, LLP
Certified Public Accountants
Phoenix, Arizona
September 28, 2008
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
ASSETS 2008 2007
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 726,900 $ 615,800
Accounts receivable, net 2,790,600 2,248,600
Notes receivable 29,600 29,600
Inventories, net 4,790,900 3,808,100
Costs and estimated earnings in excess
of billings on uncompleted contracts - 122,000
Prepaid expenses and other current assets 333,600 382,800
------------- -------------
Total current assets 8,671,600 7,206,900
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 269,600 250,700
------------- -------------
OTHER ASSETS
Goodwill, net 17,931,700 17,931,700
Other intangible assets, net 1,564,100 2,066,200
Other assets 659,900 476,400
------------- -------------
Total other assets 20,155,700 20,474,300
------------- -------------
TOTAL ASSETS $ 29,096,900 $ 27,931,900
============= =============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,638,000 $ 4,085,400
Billings in excess of costs and estimated
earnings on uncompleted contracts 667,900 -
Notes payable, current 1,794,500 2,485,900
Customer advances 53,300 -
Deferred revenue, current 758,600 883,900
------------- -------------
Total current liabilities 7,912,300 7,455,200
LONG TERM LIABILITIES
Notes payable, long term 3,508,400 4,814,100
Deferred revenue, long term 140,900 149,100
------------- -------------
TOTAL LIABILITIES 11,561,600 12,418,400
------------- -------------
Preferred Stock - Series B Convertible -
500,000 shares authorized, 91,300 and 82,800
issued and outstanding, respectively 900,500 815,000
------------- -------------
SHAREHOLDERS' EQUITY
Preferred Stock
Preferred Stock - Series A - 5,000,000
shares authorized, 3,759,800 outstanding
at 6-30-07 - 4,930,100
Preferred Stock - Series D - 500,000
shares authorized, 100,000 outstanding
at 6-30-08 997,100 -
Common Stock
Class A - 75,000,000 shares authorized,
31,427,700 and 20,223,100 shares, net
of 200,000 treasury shares outstanding
at a cost of $375,100, respectively 103,213,000 87,595,100
Class B - 25,000,000 shares authorized
and 0 shares outstanding - -
Accumulated deficit (87,575,300) (77,826,700)
------------- -------------
Total shareholders' equity 16,634,800 14,698,500
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 29,096,900 $ 27,931,900
============= =============
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
2008 2007
------------- -------------
NET SALES $ 17,211,000 $ 18,474,100
Cost of goods sold 12,462,400 12,601,600
------------- -------------
GROSS PROFIT 4,748,600 5,872,500
Selling, general and administrative expenses 10,314,900 9,188,900
Amortization of stock-based compensation 423,000 173,800
Depreciation and amortization 625,000 959,500
------------- -------------
OPERATING LOSS (6,614,300) (4,449,700)
OTHER INCOME & EXPENSES
Interest expense, net (792,900) (759,800)
Other income, net 98,100 93,900
------------- -------------
LOSS FROM CONTINUING OPERATIONS (7,309,100) (5,115,600)
LOSS FROM DISCONTINUED OPERATIONS - (83,200)
Preferred stock dividend - in kind (2,432,900) (672,900)
Series D preferred stock dividend - cash (6,600) -
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (9,748,600) $ (5,871,700)
============= =============
NET LOSS PER SHARE - BASIC AND DILUTED
Continuing operations $ (0.32) $ (0.30)
============= =============
Discontinued operations (0.00) (0.00)
============= =============
Preferred stock dividends (0.11) (0.04)
============= =============
Net loss attributable to common stockholders (0.42) (0.34)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,995,800 17,286,500
============= =============
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY & PREFERRED STOCK
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
NET OF TREASURY SHARES (1) SERIES A SERIES D ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
-------------------------- ------------------------ ------------------- ------------- -----------
Balances, June 30, 2006 15,261,500 $ 78,470,200 3,122,900 $ 3,925,200 - $ - $(71,955,000) $10,440,400
Options, warrants exercised 669,900 1,216,600 - - - - - 1,216,600
Shares issued for services 8,900 17,500 - - - - - 17,500
Shares & warrants issued for
loan fees 210,000 408,300 - - - - - 408,300
Private Offerings, Net 736,000 1,519,900 240,000 409,500 - - - 1,929,400
Additional shares issued
StarTrak Acq. 3,280,000 5,715,400 - - - - - 5,715,400
Conversion of note payable to
equity 56,800 107,000 - - - - - 107,000
Value of stock based compensation - 173,800 - - - - - 173,800
Preferred Dividend, Series A,
paid in kind - - 396,900 595,400 - - (595,400) -
Preferred Dividend, Series B,
paid in kind - - - - - - (77,500) (77,500)
NASDAQ listing of additional
shares - (33,600) - - - - - (33,600)
Net loss - - - - - - (5,198,800) (5,198,800)
------------ ------------- ----------- ------------ ------- ---------- ------------- ------------
Balances, June 30, 2007 20,223,100 $ 87,595,100 3,759,800 $ 4,930,100 - $ - $(77,826,700) $14,698,500
Options exercised 10,000 9,200 - - - - - 9,200
Shares issued for services 41,500 69,200 - - - - - 69,200
Shares & warrants issued for
loan fees 10,000 20,800 - - - - - 20,800
Private Offerings, Net 2,453,900 5,123,700 1,425,500 1,736,500 100,000 997,100 - 7,857,300
Special Dividend related to
conversion - - 597,600 896,400 - (896,400) -
Conversion of note payable to
equity 800,000 1,000,000 - - - - - 1,000,000
Value of stock based compensation - 423,000 - - - - - 423,000
Value of imputed Series A
Preferred Stock Div. - 264,000 - - - - (264,000) -
Conversion of Series A Preferred
Stock 7,889,200 8,750,000 (6,574,300) (8,750,000) - - - -
Preferred Dividend, Series A,
paid in kind - - 791,400 1,187,000 - - (1,187,000) -
Preferred Dividend, Series B,
paid in kind - - - - - - (85,500) (85,500)
Preferred Dividends, Series D,
cash - - - - - - (6,600) (6,600)
NASDAQ listing of additional
shares - (42,000) - - - - - (42,000)
Net loss - - - - - - (7,309,100) (7,309,100)
------------ ------------- ----------- ------------ ------- ---------- ------------- ------------
Balances, June 30, 2008 31,427,700 $103,213,000 - $ - 100,000 $ 997,100 $(87,575,300) $16,634,800
============ ============= =========== ============ ======= ========== ============= ============
(1) Net of 200,000 shares of treasury stock valued at $375,100 for all periods.
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $(7,309,100) $(5,115,600)
Adjustments to reconcile net income to net
Cash used in operating activities:
Depreciation and amortization 654,200 973,800
Gain on sale - data storage assets - (17,500)
Stock and warrants issued for services 69,200 17,500
Stock-based compensation 423,000 173,800
Income from assets held for sale (80,500) (67,600)
(Loss) income from discontinued operations - (83,200)
Loss on disposal of asset - 1,600
Changes in operating assets and liabilities:
Accounts receivable, net (542,000) (777,200)
Inventories, net (982,800) (710,700)
Prepaid expenses and other current assets 49,200 3,600
Accounts payable and accrued expenses 552,600 (887,700)
Deferred revenue (133,500) 787,900
Costs and estimated earnings in excess
of billings on uncompleted contracts 122,000 -
Billings in excess of costs and estimated
earnings on uncompleted contracts 667,900 (165,500)
Customer advances 53,300 (1,001,100)
Other assets (162,700) (212,800)
------------- ------------
Net cash used in continuing operations (6,619,200) (7,080,700)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from assets held for sale -Fry Guy 80,500 95,800
Net cash from assets held for sale - Arraid - 747,400
Net cash forfeited in sale - (2,600)
Collection of note receivable - 2,000
Purchase of property, plant and equipment (169,900) (205,900)
Goodwill, acquisition - (56,600)
Patent renewal and other (1,100) (4,100)
------------ ------------
Net cash provided by (used in) investing
activities (90,500) 576,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) advances on line of credit 500,000 (500,000)
Advances on borrowings - 4,090,000
Repayment on borrowings (1,497,100) (737,400)
Net proceeds from sale of preferred stock 2,733,600 -
Series D preferred stock - cash dividends (6,600) -
Net proceeds from sale of common stock 5,090,900 3,112,400
------------ ------------
Net cash provided by financing activities 6,820,800 5,965,000
------------ ------------
NET INCREASE (DECREASE) IN CASH 111,100 (539,700)
CASH AND CASH EQUIVALENTS, beginning of period 615,800 1,155,500
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 726,900 $ 615,800
============ ============
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
2008 2007
------------ ------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 568,500 $ 480,200
============ ============
Non-cash activities:
Value of stock & warrants issued for
services and prepayments $ 69,200 $ 17,500
============ ============
Value of shares issued - StarTrak Deferred
Stock Payment $ - $ 5,715,400
============ ============
Value of stock and warrants issued for
loan fees $ 20,800 $ 408,300
============ ============
Conversion of notes payable to equity $ 1,000,000 $ 107,000
============ ============
Series A preferred stock dividend,
paid in kind $ 2,083,400 $ 595,400
============ ============
Series B preferred stock dividend,
paid in kind $ 85,500 $ 77,500
============ ============
See accompanying notes in the consolidated financial statements
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.
Alanco Technologies, Inc. and subsidiaries' (the "Company") business
operations for the past several years have emphasized a plan to
strategically position the Company as a provider of information
technology specializing in tracking and monitoring. The Company initiated
its strategic direction in fiscal year 2002 when it acquired wireless
tracking RFID (Radio Frequency Identification) technology designed to be
used in the corrections market, through its acquisition of the operations
of Technology Systems International, Inc., a Nevada corporation ("TSIN").
The Company expanded its footprint in wireless tracking and data services
into wireless asset management for the refrigerated or "Reefer" market
through the acquisition, effective June 30, 2006, of StarTrak Systems,
LLC, a Delaware corporation, ("StarTrak"), a provider of GPS tracking and
wireless data services for the Reefer segment of the transport industry.
In fiscal years 2008 and 2007, the Company had continued operations in
the RFID Technology, Computer Data Storage and Wireless Asset Management
business segments. The StarTrak acquisition, effective June 30, 2006,
created the Wireless Asset Management segment.
Principles of Consolidation - The consolidated financial statements for
the year ended June 30, 2008 include the accounts of Alanco Technologies,
Inc. and its wholly-owned subsidiaries, Alanco/TSI PRISM, Inc., Excel,
Fry Guy Inc. and StarTrak Systems, LLC (collectively, the "Company"). The
consolidated financial statements for the prior fiscal year also included
Arraid, Inc. reported as discontinued operations. All subsidiaries are
Arizona corporations, except Fry Guy Inc., which is a Nevada corporation
and StarTrak Systems, LLC, which is a Delaware LLC. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications - Certain balances have been reclassified in the
accompanying consolidated financial statements to conform to the current
year presentation.
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 for doubtful accounts 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 $109,700 and $102,200 at June 30, 2008 and
2007, respectively. The Company does not typically accrue interest or
fees on past due amounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Inventories - Inventories consist of materials and parts,
work-in-process, and finished goods. Inventories are stated at the lower
of cost or market. Cost is calculated using the average-cost method for
the Data Storage segment and first-in, first-out ("FIFO") for the RFID
Technology and the Wireless Asset Management segments.
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method, generally over a 3 to 10-year
period. Leasehold improvements are amortized on the straight-line method
over the lesser of the lease term or the useful life. Expenditures for
ordinary maintenance and repairs are charged to expense as incurred.
Betterments are capitalized as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation are eliminated from the
account and any gain or loss is reflected in the statement of operations.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The carrying amounts of accounts
receivable, notes receivable, accounts payable, accrued liabilities, and
notes payable approximate fair value given their short term nature or
with regards to long term notes payable based on borrowing rates
currently available to the Company for loans with similar terms and
maturities.
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 at that time identified its reporting units (components) to be
two separate units (Arraid and Excel), which made up the Company's Data
Storage segment until September 2006 when Arraid was sold. Currently
Excel represents the Company's Data Storage segment. In May of 2002 the
Company added its ATSI unit (the RFID Technology segment) and, effective
June 30, 2006, it added its StarTrak unit (the Wireless Asset Management
segment). 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. The Company determines the carrying value of each
reporting unit by assigning assets and liabilities, including the
existing goodwill and intangible assets, to the reporting units. 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, 2008.
Intangible assets consist of goodwill, the excess of purchase price over
fair value of net assets acquired in connection with the acquisitions of
its wholly owned subsidiaries, and other intangible assets, including
cost of licenses, patents, developed software, etc. Prior to fiscal year
2002, goodwill was being amortized over 15 years. Commencing in year
2002, the Company adopted SFAS 142 and ceased amortizing goodwill
balances over a specific period pursuant to SFAS 142. However, per
Company policy, goodwill balances are reviewed at least annually to
determine appropriateness of valuation and presentation based upon
anticipated cash flows. See Impairment of Intangibles and Other
Long-lived assets below for additional discussion of valuation for
Intangible Assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of Goodwill, net:
RFID Data
Technology Storage StarTrak Total
----------- --------- ------------ ------------
Balance as of June 30, 2006 $ 5,076,700 $ 279,600 $ 12,518,800 $ 17,875,100
Goodwill additions related to
acquisitions for fiscal year 2007 - - 56,600 56,600
----------- --------- ------------ ------------
Balance as of June 30, 2007 & 2008 $ 5,076,700 $ 279,600 $ 12,575,400 $ 17,931,700
=========== ========= ============ ============
The Company completed the acquisition of StarTrak effective June 30,
2006. The purchase price, considering the 5 million Class A Common Shares
issued at closing (valued at $3,485,000), 8.2 million Class A shares
issued upon shareholder approval (valued at $5,715,400 on June 30, 2006),
StarTrak net liabilities assumed of $5,425,800 and the related costs of
the acquisition of $434,500, was valued at $15,060,700. The Company
engaged an independent consultant for valuation services related to SFAS
141 required disclosures of the allocation of the purchase price paid to
the assets acquired and liabilities assumed by balance sheet caption and
recorded the acquisition, effective June 30, 2006, in compliance with the
independent consultant's recommendations.
Other intangible assets consist of the following:
Amortization Gross Net Other
Period Carrying Accumulated Intangible
(in years) Value Amortization Assets
------------ ------------ ------------- ------------
Other Intangible Assets
Patents license 3 $ 55,900 $ (52,600) $ 3,300
Manufacturing license 6 500,000 (423,600) 76,400
Technology and software
development 5-6 1,842,000 (807,000) 1,035,000
Customer base and backlog Various 1,300,000 (400,000) 900,000
Technology license 5 90,000 (38,500) 51,500
------------ ------------- ------------
As of June 30, 2007 $ 3,787,900 $ (1,721,700) $ 2,066,200
============ ============= ============
Patents license 3 $ 57,000 $ (54,200) $ 2,800
Manufacturing license 6 500,000 (500,000) -
Technology and software
development 5-6 1,842,000 (1,014,000) 828,000
Customer base and backlog Various 1,300,000 (600,000) 700,000
Technology license 5 90,000 (56,700) 33,300
------------ ------------- ------------
As of June 30, 2008 $ 3,789,000 $ (2,224,900) $ 1,564,100
============ ============= ============
The amortization expenses for aggregate other intangible assets for the
fiscal years ended June 30, 2008 and 2007 were $503,200 and $819,000,
respectively.
The following table summarizes the estimated amortization charges related
to the other intangible assets as of June 30, 2008:
June 30, Amount
--------- -----------
2009 $ 426,800
2010 351,200
2011 347,100
2012 332,000
2013 107,000
-----------
$ 1,564,100
===========
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, allowances for inventory and
receivables, realization of deferred tax assets, and investments. 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 charge was
recorded during fiscal years ended June 30, 2008 or 2007.
Revenue Recognition - The Company sells various products and services
including a tracking and monitoring system for monitoring inmates and
staff in prisons and county jails, monitoring/data transmission products
and data services focused at the refrigerated or "Reefer" segment of the
transport industry and data storage networking products. In addition, the
Company provides extended warranty/maintenance contracts that in some
cases include on site support. The Company sells products and services
through its direct sales force as well as independent resellers.
The Company recognizes revenue, net of anticipated returns, at the time
products are shipped to customers, or at the time service is provided.
Deferred revenue relates primarily to extended warranty/maintenance
contracts and is recognized when the service is provided. Revenues for
products and services are generally recognized when all of the following
have been met:
o Persuasive evidence of an arrangement exists;
o Delivery, which is typically FOB shipping point or when the service
has been performed;
o The customer's fee is deemed to be fixed or determinable and free of
contingencies or significant uncertainties; and
o Collectability is probable.
Revenues from maintenance and data services are recognized ratably over
the term of the maintenance or data services contract period. Data
services and maintenance agreements are typically stated separately in an
agreement. We have classified the value of revenues pertaining to the
contractual maintenance obligations that exist for the 12-month period
subsequent to the balance sheet date as a current liability, and the
contractual obligations with a term beyond 12 months as a non-current
liability.
Our arrangements with customers and resellers do not include any rights
of return or price protection nor do arrangements with resellers include
any acceptance provisions. The Company provides customers with a standard
one year warranty included in the price of the product. Payment terms are
typically due within 30 days of invoice date for product or service.
Revenues from material long-term contracts that extend over a reporting
period 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 by applying the ratio of
costs incurred to date to the estimated total contract 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loss Per Share - The loss per share ("EPS") is presented in accordance
with the provisions of Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS 128). 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 2008 and 2007, as
the Company had losses from operations during both years and therefore
the effect of all potential common stock equivalents is antidilutive
(reduces loss per share). Stock options representing 6,673,000 shares of
Class A Common Stock were outstanding at year-end with exercise prices
ranging between $.92 and $5.00. The weighted average exercise price for
all outstanding options was $2.00. Stock warrants representing 5,331,900
Class A Common Shares were outstanding at year-end with exercise prices
ranging between $1.25 and $5.00. The weighted average exercise price was
$2.15. In addition, $500,000 of the outstanding balance under the line
of credit agreement is convertible into Class A Common Shares of the
Company at a price of $1.50 per share.
At June 30, 2008, there were no shares of Series A Convertible Preferred
Stock and 91,300 shares of Series B Convertible Preferred Stock
outstanding. The Series B Convertible Preferred shares are convertible
into Class A Common shares at a ratio of 5.2 shares of common stock for
each share of Series B Preferred. If the preferred shares had been
converted into common shares at June 30, 2008 there would have been an
additional 474,800 Class A Common shares outstanding.
Stock Options Plans - The Company has stock-based compensation plans and
effective July 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123R"), using the modified
prospective transition method and therefore have not restated results for
prior periods. Under this transition method, stock-based compensation
expense for the fiscal years ended June 30, 2008 and 2007 include
compensation expense for all stock-based compensation awards granted
during the year, or granted prior to, but not fully vested as of July 1,
2006, based on the grant date fair value estimated in accordance with the
original provision of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" ("SFAS 123"). Stock-based
compensation expense for all stock-based compensation awards granted
after June 30, 2006 is based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R. The value of the
compensation cost is amortized on a straight-line basis over the
requisite service periods of the award (the option vesting term).
The Company estimates fair value using the Black-Scholes valuation model.
Assumptions used to estimate compensation expense are determined as
follows:
o Expected term was determined under the simplified method using an
average of the contractual term and vesting period of the award as
appropriate statistical data required to properly estimate the
expected term was not available.
o Expected volatility of award grants made under the Company's plans
is measured using the historical daily changes in the market price
of the Company's common stock over the expected term of the award;
o Risk-free interest rate is to approximate the implied yield on
zero-coupon U.S. Treasury bonds with a remaining maturity equal to
the expected term of the awards; and,
o Forfeitures are based on the history of cancellations of awards
granted by the Company and management's analysis of potential
forfeitures.
Stock Split -The Company announced on October 16, 2006 that the Board of
Directors had elected to effect a 2 for 5 reverse stock split effective
October 16, 2006, when the Company's common stock began trading on a post
split-adjusted basis under the interim trading symbol "ALAND" for a
period of 20 days, after which the Company's trading symbol returned to
"ALAN." The Company had previously received authority from its
shareholders to effect a reverse split at a ratio within a specified
range, if and as determined by the Board of Directors, in order to
maintain its Nasdaq listing.
As a result of the reverse split, each five shares of the Company's
Class A Common Stock outstanding at the time of the reverse split was
automatically changed into two shares of common stock, and the total
number of common shares outstanding was reduced from approximately 38.7
million shares to approximately 15.5 million shares post-split. No
fractional shares were issued in connection with the reverse stock split.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Upon surrender of their stock certificates, shareholders received cash in
lieu of the fractional shares to which they would otherwise be entitled.
All per share amounts and outstanding shares, including all common stock
equivalents (stock options, warrants and convertible securities) have
been restated in the Consolidated Financial Statements, the Notes to the
Consolidated Financial Statements and the loss per share for all periods
presented to reflect the reverse stock split.
Concentrations of Credit Risks and Significant Vendors and 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.
All three business segments of the Company utilize various domestic
suppliers for purchases of materials and parts used to manufacture its
products. During fiscal year ended June 30, 2008, due to the advantage of
volume manufacturing, one supplier for the RFID Technology segment
accounted for approximately 78% compared to 50% in the year ended June
30, 2007. Two domestic suppliers for the Wireless Asset Management
segment accounted for approximately 27% and 24% of those purchases in
fiscal year 2008 and one supplier accounted for 42% in the prior fiscal
year. Two suppliers in the Data Storage segment accounted for more than
10% of material and parts purchases in both fiscal 2008 and 2007. The two
suppliers accounted for 32% and 34% of purchases in fiscal year 2008
compared to 38% and 17% in the prior fiscal year.
The Company anticipates that due to the advantages of volume
manufacturing, a concentration of vendor purchases may occur in all
business segments; however, additional suppliers are readily available at
competitive pricing levels.
One Data Storage customer accounted for 10.5% and 17.4% of that segment's
sales in fiscal years 2008 and 2007, respectively. In the RFID Technology
segment, five customers accounted for more than 10% of the segment's
fiscal year 2008 revenues with the largest accounting for 23.8% of
revenues. Four state governments accounted for substantially all of the
RFID Technology segment's revenues for fiscal year 2007. Three customers
accounted for more than 10% of the Wireless Asset Management's fiscal
2008 segment sales with the largest accounting for approximately 24%. One
customer accounted for 41% of segment sales in the Wireless Asset
Management segment in fiscal 2007. Sales concentrations in all three
business segments are the result of large contracts received during the
year. Sales concentrations may continue; however, large contract
customers generally change from year to year.
At June 30, 2008, the largest accounts receivable balance was in the RFID
Technology segment and accounted for 18.4% of consolidated receivables
(56.3% of the RFID Technology segment receivables). The only other
receivable balance exceeding 10% of the consolidated receivables was in
the Wireless Asset Management segment and accounted for 10.9% (23.9% of
the Wireless Asset Management segment's accounts receivable balance). At
June 30, 2007, three customers each accounted for more than 10% of the
consolidated receivables with the largest accounting for 23.3% of
consolidated accounts receivables.
The Company invests its excess cash in short term bank investments that
in some cases exceeds the maximum FDIC insurance amount. The Company in
the future may elect to increase the number of accounts and the number of
banks to keep the balances within the insurable amount.
Segment Information - SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The Company had identified RFID Technology, Wireless Asset Management and
Data Storage as the three operating segments of the Company for fiscal
years 2008 and 2007. See Note 14 for further information related to the
Company's operating segments.
Recent Accounting Pronouncements - In June 2006, the Financial Accounting
Standards Board (FASB) issued a standard that addresses accounting for
income taxes: FIN 48, Accounting for Uncertainty in Income Taxes. Among
other things, FIN 48 requires applying an audit sustainability standard
of "more likely than not" related to the recognition and de-recognition
of tax positions. The new guidance was effective for the Company in
fiscal year 2008 without a material effect on our consolidated financial
statements.
The SEC issued Staff Accounting Bulletin (SAB) 108 " Considering the
Effects of Prior Year Misstatements in Current Year Financial
Statements," in September 2006, which provides interpretive guidance on
how the effects of prior year uncorrected misstatements should be
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
considered when quantifying misstatements in current year financial
statements. There is currently diversity in practice, with the two
commonly used methods to quantify misstatements being the "rollover"
method (which primarily focuses on the income statement impact of
misstatements) and the "iron curtain" method (which focuses on the
balance sheet impact). SAB 108 requires registrants to use a dual
approach whereby both of these methods are considered in evaluating the
materiality of financial statement errors. Prior materiality assessments
will need to be reconsidered using both the rollover and iron curtain
methods.
In September 2006, the FASB issued SFAS 157 "Fair Value Measurements",
which establishes how companies should measure fair value when they are
required to use a fair value measure for recognition or disclosure
purposes under GAAP. This Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods within those years. The provisions of SFAS 157 are effective for
the Company in July 2008. The Company is currently evaluating the impact
of this Statement on our consolidated financial statements, but we do not
expect SFAS 157 to have a material effect.
In February 2007, the FASB issued SFAS 159 "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value.
The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes
for similar types of assets and liabilities. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. The Company has not yet
determined whether it will elect the fair value option for any of its
financial instruments.
In March 2008, the FASB issued SFAS 161 "Disclosure about Derivative
Instruments in Hedging Activities". SFAS 161 is intended to improve
financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. The provisions of the SFAS 161 are effective
for financial statements issued for fiscal years beginning after November
15, 2008. The Company is currently evaluating the impact of this
Statement on our consolidated financial statements, but we do not expect
SFAS 161 to have a material effect.
In May 2008, the FASB issued SFAS 162 "The Hierarchy of Generally
Accepted Accounting Principles". SFAS 162 addresses the principles used
in the preparation of financial statements that are presented in
conformity with GAAP. FAS 162 concludes that the GAAP hierarchy should
reside in the accounting literature established by FASB thereby directing
accounting principles directly to the entity and not to the auditors as
has been done in the past with GAAP literature. The provisions of SFAS
162 became effective 60 days following SEC's approval. The company
believes that SFAS 162 will have no effect on its consolidated financial
statements.
2. STOCK-BASED COMPENSATION
The Company has several employee stock option and officer and director
stock option plans that have been approved by the shareholders of the
Company. The plans require that options be granted at a price not less
than market on date of grant.
The Company uses the Black-Scholes option pricing model to estimate fair
value of stock-based awards with the following assumptions for prior
awards of options:
Awards Prior to
July 1, 2006
---------------
Dividend yield 0%
Expected volatility 27%-80%
Weighted-average volatility 43.1%
Risk-free interest rate 3%-4 1/2%
Expected life of options (in years) 5-10
Weighted average grant-date fair value $0.61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assumptions for awards of options granted during the years ended June 30,
2008 and 2007 were:
Awards Granted Years Ended
June 30, 2007 June 30, 2008
------------- -------------
Dividend yield 0% 0%
Expected volatility 80% 62%
Weighted-average volatility 80% 62%
Risk-free interest rate 4 1/2% 4%
Expected life of options (in years) 3.2 - 3.4 5
Weighted average grant-date Black
Scholes calculated fair value $0.67 $0.66
The following table summarizes the Company's stock option activity during
fiscal year 2008:
Weighted Average
Weighted Average Remaining Aggregate Aggregate
Number of Exercise Price Contractual Fair Intrinsic
Shares Per Share Term (1) Value Value(2)
----------- ---------------- ---------------- ------------ -----------
Outstanding July 1, 2007 5,543,800 $1.97 4.95 $ 3,496,100 $ -
Granted 1,293,000 $2.16 4.26 854,900 -
Exercised (10,000) $0.92 - (6,300) -
Forfeited or expired (153,800) $2.36 - (96,900)
----------- ----------------- ---------------- ------------ -----------
Outstanding June 30, 2008 6,673,000 $2.00 4.10 $ 4,247,800 $ 229,000
=========== ================= ================ ============ ===========
Exercisable June 30, 2008 4,896,600 $2.00 4.08 $ 2,987,500 $ 224,100
(1) Remaining contractual term presented in years.
(2) The aggregate intrinsic value is calculated as the difference between the
exercise price of the underlying awards and the closing price of the
Company's common stock as of June 30, 2008, for those awards that have an
exercise price currently below the closing price as of June 30, 2008 of
$1.40.
As of June 30, 2008, total compensation costs related to non-vested
awards not yet recognized amount to approximately $1.1 million and are
expected to be recognized as follows: fiscal year 2009 - $425,000;
fiscal year 2010 - $425,000; fiscal year 2011 - $250,000.
3. LIQUIDITY AND GOING CONCERN
The Company incurred significant losses and negative cash flows from
operations during fiscal year ended June 30, 2008 and in prior fiscal
years, and anticipates additional losses and negative cash flows in early
fiscal year 2009. These factors, as well as the uncertain conditions that
the Company faces regarding its ability to secure significant contracts
for the TSI PRISM installations and StarTrak products, creates an
uncertainty about the Company's ability to finance its operations and
remain a going concern. Although management cannot assure that future
operations will be profitable or that additional debt and/or equity
capital will be raised, management believes cash balances at June 30,
2008 of approximately $726,900 and the raising of approximately $2.5
million of additional equity capital and $500,000 increase in the
Company's line of credit subsequent to the end of fiscal 2008 will
provide adequate capital resources to maintain the Company's net cash
requirements for the next year. However, if additional working capital is
required and not obtained through long-term debt, equity capital or
operations, it could adversely affect future operations. Management has
historically been successful in obtaining financing and has demonstrated
the ability to implement a number of cost-cutting initiatives to reduce
working capital needs. The Company requires and continues to pursue
additional capital for growth and strategic plan implementation.
Accordingly, the accompanying consolidated financial statements have been
prepared assuming the Company will continue to operate and do not include
any adjustments that might be necessary if the Company is unable to
continue as a going concern.
4. NOTES RECEIVABLE
At June 30, 2008 and 2007, Notes Receivables consisted of a note
receivable related to advances made to TSIN in fiscal year 2005 to assist
the newly elected TSIN board of directors in obtaining legal
representation. The new board required legal representation since the
previous board was attempting to stop the new board from assuming their
responsibilities. The notes incur interest at 9% and are due on demand.
During fiscal 2006, the Company received payments on the notes of
approximately $50,000. At June 30, 2007, the TSIN Board of Directors had
filed for reimbursement from TSIN under the Directors indemnification
provisions of the Articles of Incorporation, Bylaws of TSIN and corporate
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
laws of the State of Nevada. The new board is awaiting payment so the
funds received can be used to repay the notes. Although significant
delays have occurred, the Company is monitoring the obligation and
expects the balance to be collected during fiscal 2009.
5. INVENTORIES
Inventories consist of the following at June 30:
2008 2007
------------ ------------
Raw materials and purchased parts $ 5,163,400 $ 4,160,400
Work-in-progress - 6,400
Finished goods 359,800 70,900
------------ ------------
5,523,200 4,237,700
Less reserves for obsolescence (732,300) (429,600)
------------ ------------
$ 4,790,900 $ 3,808,100
============ ============
6. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consist of the following at June 30:
2008 2007
----------- -----------
Machinery and equipment $ 330,600 $ 263,500
Furniture and office equipment 665,400 608,000
Marketing site equipment 50,000 50,000
Leasehold improvement 33,900 9,700
----------- ----------
1,079,900 931,200
Less accumulated depreciation (810,300) (680,500)
----------- ----------
Net book value $ 269,600 $ 250,700
=========== ==========
Related depreciation expense for the years ended June 30, 2008 and 2007,
was $151,000 and $154,700, respectively.
7. LINE OF CREDIT AND NOTES PAYABLE
At June 30, 2008, the Company has a $2,000,000 outstanding balance,
presented as Notes payable - long-term, under a $2.0 million Line of
Credit Agreement ("Agreement"), present in the table below as "Notes
Payable - Trust". The Agreement is with a private trust, initially
entered into in June 2002, for an initial credit line of $1.3 million
secured by substantially all of the assets of the Company. The Agreement
has been amended various times since June 2002 with the last amendment
prior to June 30, 2008, effective February 26, 2008. Under the amended
agreement, which expires on July 1, 2010, the Company must maintain a
minimum outstanding balance under the line of $1.5 million and pay
interest on the outstanding balance at a rate of prime plus 3% (8% at
June 30, 2008). Under the Agreement, the lender has the unilateral right
to reduce the line of credit under Agreement to $2.0 million, at which
time the minimum outstanding balance under the Agreement reduces from
$1.5 million to $1.0 million. In addition, $500,000 of the outstanding
balance is convertible into Class A Common Shares of the Company.
Interest payments made under the Agreement amount to $170,500 and
$186,500 in fiscal years ended June 30, 2008 and 2007, respectively. See
Note 16 - Subsequent Events for a discussion of an increase in credit
line that occurred subsequent to June 30, 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Notes payable at June 30, 2008 and 2007 consist of the following:
2008 2007
------------- -------------
Contingent notes payable - TSI $ 314,100 $ 314,100
Notes payable - Trust 2,000,000 1,500,000
Notes payable - StarTrak Acquisition 461,200 1,485,900
Notes payable - Comvest Capital 2,527,600 4,000,000
------------- -------------
Notes payable 5,302,900 7,300,000
Less current portion (1,794,500) (2,485,900)
------------- -------------
Notes payable - long term $ 3,508,400 $ 4,814,100
============= =============
Contingent notes payable - TSI represent payables assumed as an
obligation under the TSI acquisition agreement. The balance at June 30,
2008 and 2007 is payable to TSIN upon ATSI achieving a net profit of $1
million in any twelve-month period ending on June 30th. The Contingent
notes payable - TSI balance of $314,100 at June 30, 2008 and 2007
reflects a reduction of approximately $10,500 for costs incurred and
paid by the Company that had been indemnified by TSIN in the acquisition
agreement.
Notes payable - StarTrak Acquisition represent the balance of notes
assumed in the acquisition. At June 30, 2007 the balance includes a $1.5
million non-interest bearing note payable to Tenix Holding, Inc. (a prior
investor in StarTrak) due December 31, 2007 that had been discounted (at
an effective interest rate of 6%) to $1,455,000 due to the non-interest
bearing nature of the note, and $30,900 of notes due on demand that bear
interest at 7%. In February 2008, $1.0 million of the Tenix Holding, Inc.
note was converted to equity via the issuance of 800,000 shares of the
Company's Class A Common Stock and the payment of $50,000, which is
considered as additional interest expense. The $500,000 balance of the
Tenix note was transferred to a new note requiring monthly payments of
$20,000, commencing May 1, 2008 and continuing through November 2008 with
the $360,000 remaining balance payable on December 1, 2008. At June 30,
2008, $460,000 of the Notes Payable - StarTrak acquisition was under the
Tenix note.
The Company completed a $4 million term loan financing on September 28,
2006 with ComVest Capital LLC. Provisions under the four-year loan
included interest only payments for the first year with the loan balance
amortized over the remaining three-year period. The agreement has been
amended various times since September 2006 with the last material
amendment prior to June 30, 2008 effective in December 2007. That
amendment reduced the prepayment requirements and delayed the monthly
installment payments in the event the Company raised additional capital.
The monthly installment payments were delayed until June 1, 2008 when a
principal payment of $23,447 was due followed in July 2008 with principal
payments of $111,111 due monthly until the balance is paid in full. The
amended loan bears interest at prime plus two and one-half percent per
annum (7.5% at June 30, 2008), matures in May 2010 and is secured by all
of the Company assets. During fiscal year 2008 the Company paid $338,700
in interest to Comvest under the agreement. See Note 16 - Subsequent
Events for a discussion of an amendment to the term loan financing line
that occurred subsequent to June 30, 2008.
Future minimum non-contingent payments as of June 30, 2008 are as
follows:
June 30, Payment
----------- ------------
2009 $ 1,794,500
2010 3,194,300
------------
$ 4,988,800
============
8. CONTRACTS IN PROGRESS
The Company had three uncompleted contracts in progress at June 30, 2008
and one uncompleted contract in progress at June 30, 2007, within the
RFID Technology segment, for the installation of TSI PRISM systems.
Billings in excess of costs and estimated earnings at June 30, 2008 and
estimated earnings in excess of billings on uncompleted contracts as of
June 30, 2007 consist of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2008 June 30, 2007
------------- -------------
Costs incurred on uncompleted contracts $ 510,400 $ 242,100
Gross profit earned to date 138,800 161,900
------------- -------------
Revenues earned to date 649,200 404,000
Less: billings to date (1,317,100) (282,000)
------------- -------------
(Billings in excess of costs and estimated
earnings) and costs and estimated
earnings in excess of billings $ (667,900) 122,000
============= =============
9. INCOME TAXES
A reconciliation of anticipated statutory rates is as follows:
2008 2007
---------- ----------
Statutory rate 34.0% 34.0%
State income taxes, net of federal income
tax benefit 5.0% 5.0%
Increase (reduction) in valuation allowance
related to net operating loss carry-forwards
and change in temporary differences -39.0% 39.0%
---------- ----------
0.0% 0.0%
========== ==========
The components of the net deferred tax asset (liability) recognized as of
June 30, 2008 and 2007 are as follows:
2008 2007
------------- -------------
Deferred tax assets (liabilities):
Net operating loss and capital loss
carryforwards $ 18,000,000 $ 16,526,000
Property, plant and equipment (1,000,000) 24,000
Other permanent timing differences 400,000 26,000
Less: Valuation allowance 17,400,000) (16,576,000)
------------- -------------
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, 2008, the Company had net operating
loss and capital loss carry-forwards for federal tax purposes of
approximately $49,000,000. The loss carry-forwards, unless utilized, will
expire from 2009 through 2028.
10. RELATED PARTY TRANSACTIONS
At June 30, 2008 and 2007, the Company had a line of credit agreement
with a trust controlled by Donald E. Anderson, a member of the Company's
Board of Directors. See Note 7 for additional discussion of the line of
credit agreement.
During the first quarter of fiscal 2007, the Company sold its wholly
owned subsidiary, Arraid, Inc., to a trust controlled by Mr. Anderson for
cash of approximately $465,400. The transaction was completed in
conformance with a fairness opinion letter received by the Company.
During fiscal year 2008, as more fully described in Note 12,
Shareholders' Equity, the Company raised approximately $7.9 million in
private offerings to accredited investors, with $1.3 million being
attributable to insiders of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain facilities under non-cancelable
operating lease agreements that expire through fiscal year 2018. Future
minimum payments under non-cancelable operating leases at June 30, 2008
for fiscal years ended 2009 through 2013 are as follows:
Years Ended Operating
June 30, Leases
------------- -----------
2009 $ 410,300
2010 364,300
2011 201,300
2012 189,600
2013 191,800
-----------
$1,357,300
===========
Future minimum payments for fiscal years 2014 through 2018 amount to $1.1
million. Rent expense related to these operating leases totaled
approximately $324,700 and $362,700 for the years ended June 30, 2008 and
2007, respectively.
Legal Proceedings - The Company is a plaintiff in litigation initiated by
its subsidiary, StarTrak Systems, LLC, against former employees and
others for violation of certain non-disclosure covenants and for
misappropriation of trade secrets. The Company continues as a party to
certain post-litigation procedures relating to the acquisition, in May of
2002, of substantially all the assets of Technology Systems
International, Inc., a Nevada Corporation ("TSIN"), and to litigation
arising from an expired property lease between the Company's former
subsidiary, Arraid, Inc., and Arraid Property L.L.C., an Arizona limited
liability company. The legal proceedings are more fully described below.
StarTrak Systems Litigation - On July 12, 2007, the Company's subsidiary,
StarTrak Systems, LLC, commenced a lawsuit against Brian Hester,
Satamatics, Ltd., Satamatics, Inc., and Farruhk Shahzad in the United
States District Court, District of New Jersey, as case number
07-3203(DRD), for misappropriation of trade secrets, violation of
confidentiality agreements and contempt for violation of a previously
issued court order concerning such trade secrets issued to Brian Hester.
Brian Hester and Farruhk Shahzad are previous employees of StarTrak, and
the Company believes that they have employed and/or are attempting to
employ trade secrets of StarTrak in connection with their association
with Satamatics in direct competition with StarTrak. The Company is
seeking injunctive relief and damages from the defendants.
TSIN Litigation - The Company was party to litigation arising out of the
Company's acquisition of substantially all of the assets of TSIN. This
initial derivative suit was terminated and the action converted into a
direct action by TSIN in July 2003.
TSIN is currently in Chapter 7 bankruptcy. The parties to the lawsuit
have entered into a Settlement Agreement, which was attached as an
exhibit to Form 8-K filed on September 21, 2007. In place of the
litigation, which has been dismissed with prejudice, the Settlement
Agreement provides for a valuation procedure, conducted by an independent
third party valuation expert, to value (i) the assets transferred by TSIN
to Alanco in connection with the Acquisition Agreement ("Business
Value"), and (ii) the consideration paid by Alanco to TSIN
("Consideration Value"). If the appraiser determines that the
Consideration Value is within 15% of the Business Value, neither party
shall be entitled to any damages or claims. If the Consideration Value is
less than 85% of the Business Value, Alanco shall pay to the TSIN's
bankruptcy estate the full difference in the values, plus interest
thereon, plus the sum of $300,000 for attorneys' fees incurred by TSIN in
prosecuting the various related litigation matters. Alanco's payment may
be made, at Alanco's option, in cash or by an equivalent market value of
additional Alanco Class A Common Stock (subject to certain conditions set
forth in the Settlement Agreement). If the Consideration Value is greater
than 115% of the Business Value, TSIN shall immediately pay Alanco the
sum of $300,000 for Alanco's attorneys' fees and costs incurred in
connection with the various litigation matters. The Settlement Agreement
was approved by the bankruptcy court following a hearing for the same on
September 19, 2007, and the parties have undertaken the appraisal
process. The Company anticipates that the final appraisal report will be
issued and the matter entirely resolved in the near future.
Arraid Litigation - On July 18, 2003, Arraid Property L.L.C., an Arizona
Limited Liability Company ("Arraid LLC"), filed a complaint in the
Arizona Superior Court in and for Maricopa County, Arizona (case number
CV 2003-13999) against the Company and its wholly owned subsidiary,
Arraid, Inc., alleging breach of lease and seeking substantial monetary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
damages in excess of $3 million. The suit relates to an expired lease
agreement for property previously leased by Arraid. Following a trial,
the Court found in favor of Arraid LLC against the Company with respect
to certain factual findings resulting in damages owed by the Company in
an amount of approximately $35,000, less than one percent of the amount
sought by the plaintiff. The court determined that the plaintiff was the
prevailing party, and awarded the plaintiff approximately $95,000 in
attorney's fees and costs. The Company's management, in consultation with
legal counsel, has appealed the decision of the court.
The Company may also, from time to time, be involved in litigation
arising from the normal course of business. As of June 30, 2008 there was
no such litigation pending deemed material by the Company.
12. SHAREHOLDERS' EQUITY
Preferred Shares - In fiscal 2003, the Company allocated 5,000,000 of the
25,000,000 authorized shares of the Company's Preferred Stock to be known
as Series A Convertible Preferred Stock ("Series A"). Holders of Series A
Preferred Stock are entitled to receive, when declared by the Board of
Directors, out of funds and assets of the Company legally available
therefore, an annual dividend of 12% per annum, paid in kind
semi-annually, based upon a per share value of $1.50 for purposes of such
dividend payment. Dividends shall accrue and be cumulative from the date
of issue. The Company has subsequently completed a number of private
transactions with accredited investors resulting in the issuance of
Series A Preferred Stock. In that regard, the Company completed, during
the quarter ended March 31, 2008, an offering to accredited investors of
1,425,500 Units at a unit price of $1.50, each unit consisting of one
share of its Series A Convertible Preferred Stock ("Series A") together
with a 5-year warrant to purchase one share of the Company's Class A
Common Stock at a price of $1.75 per share. The warrants included a
redemption feature that effectively forces the warrant to be exercised in
the event the market price of the Company's Common Stock reached $3.50
per share. The Series A Convertible Preferred Stock is convertible into
1.2 shares of the Company's Class A Common Stock. The Company may redeem
the Series A Preferred Shares for $1.50 per share, provided the Common
Stock achieves a trading value in excess of $5.00 for twenty consecutive
trading days and meets minimum daily trading volume requirements. The
Company received $2,107,500, net of expense, from the offering with
$1,736,500 attributable to the Series A Preferred Stock and $371,000
attributable to the warrants to purchase common shares and as such
recorded in Common Stock.
The Series A Preferred Stock offering has been recorded giving
consideration to the value of the underlying common shares into which the
Preferred A is convertible and to a Black Scholes value for the related
warrants. The Company allocated the proceeds of the offering based upon
related fair values. The Black Scholes method does not consider the
effect of the warrant's force conversion feature and no adjustment was
made. Based upon the implied value of warrants, utilizing a volatility of
62% based on weekly weighted average changes in the market price and an
assumed time to expiration of 912 days, a beneficial conversion feature
of $264,000 was determined and is recorded as a special Series A
Preferred Stock Dividend. The implied value for the warrants has been
credited to Common Stock in fiscal year 2008. The recording of the Series
A Preferred Stock beneficial conversion feature under this methodology
increases the Net Loss Attributable to Common Shareholders by the amount
of the special dividend but has no effect on cash or equity.
The Company's board of directors elected, during the fourth quarter of
fiscal 2008, to provide an incentive to the holders of Series A Preferred
Stock to convert their Preferred Shares into Class A Common Shares at the
ratio of 1.2 shares of Common Stock for each share of Series A Preferred
Stock. As part of that incentive, the board declared a regular Series A
Preferred "in-kind" semi-annual dividend (normally scheduled to be
declared in July 2008) one month early and declared an additional special
10% "in-kind" dividend to holders of Series A Preferred Stock who
converted their holdings into Class A Common Stock of the Company by the
end of fiscal year 2008. As a result of that incentive, all Series A
Preferred Shares were converted into common shares by June 30, 2008. The
additional special 10% dividend issued to Series A Preferred Stock
holders as incentive to convert to common stock amounted to 597,600
shares valued at $896,400.
The Company issued 791,400 shares (excluding the special conversion
dividend) and 396,900 shares representing "in kind" dividends to the
holders of Series A shares in fiscal 2008 and 2007 respectively, with
corresponding values of approximately $1,187,000 and $595,400. 329,400
shares representing fiscal 2008 "in kind" dividends were related to the
dividend normally declared in the following fiscal year. At June 30, 2007
there were 3,759,800 shares of Series A Convertible Preferred Stock
outstanding. All Series A Preferred Stock had been converted into common
shares at June 30, 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the quarter ended June 30, 2008, the Company allocated 500,000 of
the authorized shares of the Company's Preferred Stock to be known as
Series D Preferred Stock ("Series D"). The Series D Preferred Stock has a
priority ranking superior to the Common Stock of the Company and all
other series of preferred stock, except the Series A Convertible
Preferred Stock and the Series B Convertible Preferred Stock, which has a
ranking superior to the Series D Preferred Stock, with respect to payment
of dividends and upon dissolution, liquidation and winding-up of the
Company. Holders of Series D are entitled to receive, when declared by
the Board of Directors, out of funds and assets of the Company legally
available therefore, an annual cash dividend of 15% per annum, paid
quarterly, based upon a per share value of $10.00 for purposes of such
dividend payment. The rate increases to 20% in the event the Series D is
not redeemed by December 31, 2009. Dividends shall accrue and be
cumulative from the date of issue. During the fourth quarter, the Company
completed a private offering to accredited investors of the Series D
shares at a price of $10.00 per share. The Company issued 100,000 shares
under the offering and received $1,000,000 ($997,100 net of expenses).
The Series D shares have a stated accumulated dividend rate of 15% of the
$10.00 par value and are not convertible into common shares. Each share
of Series D Preferred Stock has voting rights equal to 6.67 shares of the
Company's Common Stock. 50% (50,000 shares) of the Series D shares issued
were purchased by a trust controlled by an insider of the Company.
In July 2006, The Company completed an offering of 240,000 units
consisting of one share of Series A Preferred Stock and a warrant to
purchase 1.2 shares of the Company's Class A Common Stock at a strike
price of $1.50 per share. The units were sold for $1.71 each and
generated $409,500, net of expenses. 180,000 units were purchased by
directors and officers of the Company including 60,000 units each
purchased by Robert R. Kauffman, director and CEO, Harold S. Carpenter,
director, and Donald E. Anderson, director. The remaining 60,000 units
were sold to non-related accredited third parties.
During fiscal 2002, the Company allocated 500,000 of the authorized
shares of the Company's Preferred Stock to be known as Series B
Convertible Preferred Stock ("Series B"), and in a transaction with an
accredited investor, the Company issued 50,000 shares of Series B at
$10.00 per share and 200,000 warrants to purchase Common Stock at an
exercise price of $2.50 per share for a value received of $500,000
($487,300 net of related expenses). The Series B Convertible Preferred
Stock has priority ranking superior to the Common Stock of the Company
and all other series of preferred stock with respect to payment of
dividends and upon dissolution, liquidation and winding-up of the
Company. The preferred shares are each convertible into 5.2 shares of
Common Stock and each Series B Preferred Share has voting rights equal to
the number of shares of Common Stock into which the Series B is
convertible. Holders of shares of the Company's Series B Preferred Stock
shall be entitled to receive, when declared by the Board of Directors,
out of funds and assets of the Company legally available therefore, an
annual dividend of 10% per annum based upon a per share value of $10 for
purposes of such dividend payment. Dividends shall accrue, be cumulative
from the date of issue and may be paid "in kind." Dividends on Series B
Preferred Shares paid "in-kind" during fiscal 2008 and fiscal 2007
amounted to 8,600 and 7,800 Series B Preferred Shares with values of
approximately $85,500 and $77,500, respectively. At June 30, 2008 and
2007, there were 91,300 and 82,800 shares of Series B Convertible
Preferred Stock outstanding, respectively.
The Series A, Series B and Series D Preferred Shares 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.
Common Shares - The authorized capital stock of the Company consists of
75,000,000 shares of Class A Common Stock (reduced from the previously
authorized 100,000,000 shares), each entitled to one vote per share, and
25,000,000 shares of Class B Common Stock, each entitled to one-one
hundredth (1/100th) of one vote per share. No Class B Common Stock has
been issued and none was outstanding at June 30, 2008 and 2007.
The Company issued during fiscal year 2008 a total of 11,204,600 shares
of Class A Common Stock. 7,889,200 shares, valued at $8,750,000, were
issued for the conversion of 6,574,300 Series A Preferred Shares to
Common Shares. 2,453,900 shares were issued in connection with August
2007 private offerings of units consisting of one share of Class A Common
Stock together with a 3-year warrant to purchase .4 shares of the
Company's Class A Common Stock at a price of $3.00 per share. The units
were priced at $2.00 per unit, resulting in proceeds, net of costs of
$172,300, of $4,752,700. In addition, 800,000 shares were issued to
convert $1,000,000 of the Tenix notes payable to equity. Of the remaining
shares, 10,000 were issued in connection with the exercise of employee
stock options resulting in proceeds of $9,200, 41,500 shares, valued at
$69,200, were issued to outside vendors as payment for services rendered,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and 10,000 shares were issued for loan fees valued at $20,800. Additional
increases to common stock resulted from an imputed common stock dividend
of $264,000 and warrants to purchase 1,425,500 shares at $1.75 per share,
valued at $371,000, related to a private offering of units that consisted
of Series A Preferred Stock and warrants and $423,000 related to the
value of stock based compensation expensed during the year. Nasdaq
listing fees, associated with listing the additional shares in fiscal
year 2008, amounted to $42,000.
The Company's fiscal 2006 annual meeting of shareholders was held on
January 30, 2007. Proposals voted upon and approved included Proposal #5
- "Approval of Issuance of Class A Common Stock as Payment in Lieu of
Cash Related to Obligations Incurred in Connection with the Company's
Acquisition of StarTrak Systems, LLC," resulting in the Company issuing,
in January 2007, 3,280,000 shares of Class A Common Stock in payment of
$5,715,400 in "Deferred stock payment, StarTrak" and 56,800 shares issued
for payment of $107,000 notes payable acquired in the acquisition. The
acquisition of StarTrak Systems, LLC became effective June 30, 2006.
In addition to the 3,280,000 common shares issued in payment of the
"Deferred stock payment" and the 56,800 common shares issued in payment
of a note payable (discussed above), the Company issued during fiscal
year 2007 a total of 1,624,800 shares of Class A Common Stock. Of those
shares, 736,000 were issued in connection with private offerings
resulting in proceeds, net of costs, of $1,519,900, 669,900 were issue in
connection with the exercise of employee stock options and warrants
resulting in proceeds of $1,216,600, 8,900 shares, valued at $17,500,
were issued to outside vendors as payment for services rendered and
210,000 shares, valued at $267,200, were issued as financing costs in
conjunction with a $4 million term loan. In addition, five-year warrants
to purchase 283,500 shares at $1.80 per share (valued at $119,300) were
granted in connection with the $4 million term loan and a three-year
warrant to purchase 20,000 shares at $2.25 per share (valued at $21,800)
was granted in consideration for an amendment to the Company's line of
credit agreement. Nasdaq listing fees, associated with listing the
additional shares in fiscal year 2007, amounted to $33,600.
The value of employee stock-based compensation recognized for the year
ended June 30, 2008 and 2007 amounted to $423,000 and $173,800,
respectively. The Company initiated the expensing of stock-based
compensation on July 1, 2006. See Note 1 - Nature of Operations and
Significant Accounting Policies and Note 2 - Stock-Based Compensation for
additional discussion of the Company's policies related to employee
stock-based compensation.
Warrants - As of June 30, 2008, the Company had 5,331,900 warrants
outstanding with a weighted average exercise price of $2.15. The life of
the outstanding warrants extends from October 2008 through April 2016.
The following is a table of activity related to all warrants.
Weighted
Number of Average
Shares Exercise Price
----------- ----------------
WARRANTS OUTSTANDING, June 30, 2006 2,876,700 $ 2.73
Granted 591,500 1.67
Exercised (369,900) 2.44
Canceled/Expired - -
-----------
WARRANTS OUTSTANDING, June 30, 2007 3,098,300 $ 2.19
Granted 2,531,600 2.26
Exercised - -
Canceled/Expired (298,000) 2.33
-----------
WARRANTS OUTSTANDING, June 30, 2008 5,331,900 $ 2.15
===========
Details relative to the 5,331,900 outstanding warrants at fiscal 2008
year end are outlined below.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Outstanding Warrants
Date Number Exercise Date Purpose of
of Grant of Shares Price $ of Expiration Issuance
---------- ---------- -------- ------------- ----------
10/31/2003 20,000 $1.50 10/31/2008 (1)
4/18/2004 280,000 $5.00 8/2/2009 (2)
3/22/2005 30,000 $2.25 3/22/2010 (1)
3/23/2005 200,000 $2.50 3/23/2010 (3)
6/29/2005 342,000 $2.37 6/29/2010 (4)
11/16/2005 460,000 $1.25 11/16/2008 (4)
1/16/2006 308,400 $2.12 1/16/2009 (6)
4/26/2006 328,000 $1.62 4/25/2016 (7)
6/2/2006 167,000 $2.12 6/2/2009 (8)
6/15/2006 173,400 $2.12 6/15/2009 (8)
7/14/2006 72,000 $1.50 7/14/2011 (9)
7/14/2006 216,000 $1.50 1/30/2012 (9)
9/28/2006 283,500 $1.80 9/30/2011 (10)
6/25/2007 20,000 $2.25 6/25/2010 (1)
8/6/2007 331,600 $3.00 8/6/2010 (11)
8/6/2007 300,000 $2.00 8/6/2010 (11)
8/13/2007 374,500 $3.00 8/13/2010 (11)
1/18/2008 1,425,500 $1.75 1/18/2013 (9)
----------
Total Warrants Outstanding
at 6/30/2008 5,331,900
==========
(1) Issued in consideration for line of credit agreement
(2) Issued in connection with April 2004 private offering
(3) Issued for outside services rendered
(4) Issued in consideration for exercise of expiring warrants above market
price
(5) Issued in connection with August 2005 private offering
(6) Issued in connection with January 2006 private offering
(7) Issued in connection with April 2006 private offering
(8) Issued in connection with June 2006 private offering
(9) Issued in connection with sale of Series A Preferred Stock
(10) Issued in connection with September 2006 term loan financing
(11) Issued in connection ith August 2007 private offering
There were no warrants exercised in fiscal 2008. During fiscal 2007,
369,900 were exercised, generating $902,500 for the Company.
Stock Options - As of June 30, 2008, the Company had a total of 6,673,000
stock options outstanding with a weighted average exercise price of
$2.00. Of these options, 4,896,600 are exercisable at 2008 fiscal year
end. The tables below, as well as the narrative following, provide
further information regarding the Company's stock options.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a table of activity of all options:
Weighted
Number of Average
Shares Exercise Price
----------- --------------
OPTIONS OUTSTANDING, June 30, 2006 5,721,000 $ 1.98
Granted 278,000 1.47
Exercised (300,000) 1.08
Canceled/Expired (155,200) 3.05
-----------
OPTIONS OUTSTANDING, June 30, 2007 5,543,800 $ 1.97
Granted 1,293,000 2.16
Exercised (10,000) 0.92
Canceled/Expired (153,800) 2.36
-----------
OPTIONS OUTSTANDING, June 30, 2008 6,673,000 $ 2.00
===========
For all options granted during fiscal years 2008 and 2007, 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, 2008,
options for 4,896,600 shares were exercisable and options for the
remaining shares become exercisable within the next four years. If not
previously exercised, options outstanding at June 30, 2008 will expire as
follows:
Calendar Year Number of Weighted Average
of Expiration Shares Exercise Price
------------- ---------- ----------------
2008 248,000 $ 1.08
2009 250,000 2.57
2010 112,000 4.36
2011 2,462,000 1.83
2012 1,856,000 2.23
2013 293,000 1.02
2014 694,000 2.27
2015 738,000 1.88
2016 20,000 1.60
----------
6,673,000 $ 2.00
==========
Additional information about outstanding options to purchase the
Company's Common Stock as of June 30, 2008 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
-------------- ----------- ---------------- ---------- ------------ ------------
$0.92-$1.15 554,000 3.42 $1.02 554,000 $1.02
$1.25-$1.37 293,000 3.39 $1.34 128,000 $1.30
$1.75-$1.87 2,365,000 3.27 $1.82 1,883,100 $1.82
$2.00-$2.25 2,067,000 4.84 $2.09 1,270,500 $2.14
$2.50-$2.87 1,274,000 3.44 $2.53 941,000 $2.54
$3.75-$5.00 120,000 2.54 $4.44 120,000 $4.44
----------- ------------
Totals 6,673,000 $2.00 4,896,600 $2.00
=========== ============
The Company's Stock Option Plans are administered by the
Compensation/Administration Committee, currently comprised of two
independent members of the Company's Board of Directors. Company stock
options are issued to employees at an exercise price not less than the
fair market value, as determined under the option plan, on the date of
grant and must be granted within 10 years from the effective date of the
Plan, with the term of the option not exceeding 10 years. Options granted
to employees under the Stock Option Plans, which are terminated prior to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
exercise, are considered to be available for grant to subsequent
employees. Total issued stock options for any plan may exceed those
authorized due to termination of prior non-exercised grants. Under the
Employee Incentive Stock Option Plans, incentive and non-qualified stock
options may be granted, with the incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as
amended. Unless otherwise established by the Committee, the standard
vesting schedule for the incentive stock options issued currently is 10%
vested immediately upon grant, 15% vested after twelve months from date
of grant, 25% after two years from the date of grant, 25% after three
years, and 25% after four years. All of the options have been or will be
registered on Form S-8 filings. See Footnotes 1 and 2 for a discussion of
the applicable accounting treatment of stock-based compensation for
fiscal years 2008 and 2007.
Alanco Stock Option Summary (1)
as of June 30, 2008
Balance Exercise
Plan Authorized Issued Exercised Cancelled Outstanding to Issue Price Range (5)
--------------------------------------------------------------------------------------------------------------------------
Misc (2) N/A 1,468,000 322,000 446,000 700,000 0 $1.07 - $2.50
1998 (3) 300,000 646,800 77,000 363,800 206,000 17,000 $1.25 - $2.87
1998 D&O (4) 300,000 300,000 162,000 0 138,000 0 $1.25 - $4.37
1999 (3) 600,000 1,600,500 210,000 1,034,500 356,000 34,000 $0.92 - $5.00
1999 D&O (4) 200,000 258,000 0 60,000 198,000 2,000 $1.87 - $5.00
2000 (3) 400,000 802,000 131,700 410,300 260,000 8,300 $0.92 - $3.75
2000 D&O (4) 200,000 196,000 48,000 0 148,000 4,000 $0.92 - $2.50
2002 (3) 600,000 712,000 0 126,000 586,000 14,000 $1.82 - $2.50
2002 D&O (4) 200,000 200,000 16,000 0 184,000 0 $1.87- $2.50
2004 (3) 800,000 1,028,000 0 228,000 800,000 0 $1.15- $2.50
2004 D&O (4) 400,000 396,000 0 0 396,000 4,000 $1.15- $2.02
2005 (3) 1,200,000 1,219,000 0 64,000 1,155,000 45,000 $1.37- $2.50
2005 D&O (4) 400,000 400,000 0 0 400,000 0 $1.37- $1.82
2006 (3) 3,000,000 984,000 0 38,000 946,000 2,054,000 $2.00-$2.50
2006 D&O (4) 1,000,000 200,000 0 0 200,000 800,000 $2.00
-----------------------------------------------------------------------------------------
Totals 9,600,000 10,410,300 966,700 2,770,600 6,673,000 2,982,300
=========================================================================================
(1) Only includes plans with options currently outstanding or having a balance available to issue.
(2) Options issued to officers and other employees outside of any plan as an inducement
at time of employment.
(3) Employee Incentive Stock Option Plan
(4) Directors and Officers Stock Option Plan
(5) Range of exercise prices for outstanding options only.
13. RETIREMENT PLAN
The Company provides a 401(k) retirement plan for its employees.
Employees are eligible to participate in the plan on the first of the
month following 90 days of continuous employment. Employee salary
deferral rates are not restricted by the Company, however, IRS limits and
limitations imposed by discrimination tests may affect the allowed salary
deferral rate. The Company matches 25% of the amount deferred by
employees, matching up to 4% of an employee's annual compensation. The
Company's matching contributions totaled $29,100 and $19,400 for the
years ended June 30, 2008 and 2007, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. SEGMENT REPORTING
The following table is a summary of the results of operations and other
financial information by major segment:
Wireless
Asset RFID Data
Management Technology Storage Corporate Total
-------------- ------------ ----------- ----------- -----------
Fiscal year 2008
Sales $ 11,838,900 $ 1,639,400 $ 3,732,700 $ - $ 17,211,000
Cost of Goods Sold 8,319,800 1,408,100 2,734,500 - 12,462,400
------------ ------------ ------------ ------------ ------------
Gross Profit 3,519,100 231,300 998,200 - 4,748,600
Selling, General & Administrative 6,301,600 2,183,200 1,455,200 1,422,900 11,362,900
------------ ------------ ------------ ------------ ------------
Operating Loss $ (2,782,500) $ (1,951,900) $ (457,000) $ (1,422,900) $ (6,614,300)
============ ============ ============ =========== ===========
Gross Margin 29.7% 14.1% 26.7% 27.6%
============ ============ ============ ===========
Accounts Receivable, net $ 1,783,700 $ 910,600 $ 78,700 $ 17,600 $ 2,790,600
============ ============ ============ ============ ============
Inventory, net $ 2,024,100 $ 1,963,500 $ 803,300 $ - $ 4,790,900
============ ============ ============ ============ ============
Total Assets $ 18,701,600 $ 8,117,100 $ 1,403,600 $ 874,600 $ 29,096,900
============ ============ ============ ============ ============
Capital Expenditures $ 145,600 $ 15,500 $ 7,800 $ 1,000 $ 169,900
============ ============ ============ ============ ============
Research & Development $ 250,000 $ 400,000 $ 150,000 $ - $ 800,000
============ ============ ============ ============ ============
Depreciation & Amortization $ 455,600 $ 170,900 $ 26,700 $ 1,000 $ 654,200
============ ============ ============ ============ ============
Fiscal year 2007
Sales $ 12,976,600 $ 1,065,500 $ 4,432,000 $ - $ 18,474,100
Cost of Goods Sold 8,505,900 735,700 3,360,000 - 12,601,600
------------ ------------ ------------ ------------ ------------
Gross Profit 4,470,700 329,800 1,072,000 - 5,872,500
Selling, General & Administrative 5,192,200 2,314,600 1,504,600 1,310,800 10,322,200
------------ ------------ ------------ ------------ ------------
Operating Loss $ (721,500) $ (1,984,800) $ (432,600) $ (1,310,800) $ (4,449,700)
============ ============ ============ ============ ============
Gross Margin 34.5% 31.0% 24.2% 31.8%
============ ============ ============ ============
Accounts Receivable, net $ 1,561,300 $ 342,400 $ 327,300 $ 17,600 $ 2,248,600
============ ============ ============ ============ ============
Inventory, net $ 1,669,400 $ 1,279,100 $ 859,600 $ - $ 3,808,100
============ ============ ============ ============ ============
Total Assets $ 17,870,900 $ 7,247,400 $ 1,560,300 $ 1,253,300 $ 27,931,900
============ ============ ============ ============ ============
Capital Expenditures $ 64,000 $ 103,100 $ 38,800 $ - $ 205,900
============ ============ ============ ============ ============
Research & Development $ 300,000 $ 300,000 $ 150,000 $ - $ 750,000
============ ============ ============ ============ ============
Depreciation & Amortization $ 644,100 $ 303,400 $ 23,600 $ 2,700 $ 973,800
============ ============ ============ ============ ============
15. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (unaudited)
The following table sets forth certain unaudited selected consolidated
financial information for each of the four quarters in fiscal 2008 and
2007. In management's opinion, this unaudited consolidated quarterly
selected information has been prepared on the same basis as the audited
consolidated financial statements and includes all necessary adjustments,
consisting only of normal recurring adjustments that management considers
necessary for a fair presentation when read in conjunction with the
consolidated financial statements and notes thereto. The Company believes
these comparisons of consolidated quarterly selected financial data are not
necessarily indicative of future performance.
Quarterly earnings per share may not total to the fiscal year earnings per
share due to the weighted average number of shares outstanding at the end
of each period reported.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ------------------ ------------------ -----------------
2008
Net Sales $ 4,552,600 $ 3,770,200 $ 4,167,900 $ 4,720,300
Cost of sales 2,964,900 2,604,000 2,863,200 4,030,300
--------------- ---------------- ---------------- ---------------
Gross profit 1,587,700 1,166,200 1,304,700 690,000
--------------- ---------------- ---------------- ---------------
Loss from Continuing Operations (1,483,200) (2,005,800) (1,557,900) (2,262,200)
--------------- ---------------- ---------------- ---------------
Net loss* (1,840,200) (2,026,900) (2,200,000) (3,681,500)
=============== ================ ================ ===============
Loss per share - basic & diluted $ (0.08) $ (0.09) $ (0.09) $ (0.16)
--------------- ---------------- ---------------- ---------------
Weighted Average Shares 21,872,200 21,890,100 23,453,000 22,995,800
=============== ================ ================ ===============
2007
Net Sales $ 5,134,900 $ 5,591,100 $ 4,422,800 $ 3,325,300
Cost of sales 3,336,400 3,734,100 3,106,200 2,424,900
--------------- ---------------- ---------------- ---------------
Gross profit 1,798,500 1,857,000 1,316,600 900,400
--------------- ---------------- ---------------- ---------------
Loss from Continuing Operations (872,900) (404,900) (1,252,200) (1,919,700)
--------------- ---------------- ---------------- ---------------
Net loss* (1,234,900) (659,600) (1,782,500) (2,194,700)
=============== ================ ================ ===============
Loss per share - basic & diluted $ (0.08) $ (0.04) $ (0.10) $ (0.13)
--------------- ---------------- ---------------- ---------------
Weighted Average Shares 15,675,000 15,680,700 17,968,600 17,286,500
=============== ================ ================ ===============
*Attributable to Common Shareholders
16. SUBSEQUENT EVENTS
The Company was notified by Nasdaq on July 29, 2008 that the Company was
out of compliance with Marketplace Rule 4351 and IM-4351 (the "Rules")
concerning the issuance of 100,000 shares of Series D Preferred Stock. The
terms of the Series D Preferred Stock included a provision entitling the
investors to notification of any stockholders' meetings and the right to
vote with the holders of its Class A Common Stock on any matters before
them. The Series D Preferred Stock allowed the investors to vote "the
number of votes equal to $10.00 divided by the Nasdaq closing market price
for the Company's Class A Common Stock on the record date for the
stockholders meeting." Since the number of votes was not limited, Nasdaq
staff believed the Series D could be considered a "super voting" security
and therefore resulted in a violation of the rules. To correct the issue
raised by the Nasdaq staff, the Company amended the designation of the
Series D Preferred Stock stating that its holders have seven votes per
share for each share of Series D Preferred Stock held. Accordingly, Nasdaq
staff has determined that the Company has regained compliance with the
Rules and, the matter is now closed.
On August 26, 2008 the Company announced that it had completed a $2.5
million financing with the primary investors being directors and officers
of the Company. The financing was comprised of $1.8 million from the sale
of 180,000 shares of non-convertible Series D Preferred Stock at a price of
$10.00 per share, 130,000 of which were sold to directors and officers of
the Company. An additional $500,000 of the financing came from an increase
in the Company's current credit line with a trust controlled by a director
of the Company. The remainder of the financing was comprised of the
exercise of outstanding stock options by officers of the Company.
Approximately $1.4 million of the proceeds was used to pay down the
Company's current term loan. To complete the financing, amendments were
required to both the Company's line of credit agreement and the ComVest
term loan agreement. The Powers, Preferences, Rights and Limitations of the
Series D Preferred Stock as well as amendments to both the line of credit
agreement and the ComVest term loan agreement were included as attachments
to Form 8-K filed on August 27, 2008.
The Company's subsidiary, StarTrak Systems, LLC, announced on September 11,
2008 that it had received an order from Exel Transportation Services, Inc.,
valued in excess of $750,000 for ReeferTrak system hardware and five years
of data subscription services. The two-way command and control monitoring
systems are to be deployed on Exel's existing 500 unit fleet of
refrigerated intermodal trailers.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE: NONE
ITEM 8A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out, under the supervision and with the participation
of the Company's management, including the Company's Chief Executive
Officer and the Company's Chief Financial Officer, an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities and Exchange Act of 1934, as amended). Based on their
evaluation, the Company's Chief Executive Officer and its Chief Financial
Officer concluded that, as of June 30, 2008, the Company's disclosure
controls and procedures were not effective because of the material weakness
identified as of such date discussed below. Notwithstanding, the existence
of the material weakness described below, management has concluded that the
consolidated financial statements in this Form 10-KSB fairly present, in
all material respects, the Company's financial position, results of
operations and cash flows for the periods and dates presented.
(b) REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
With the participation of the Company's Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the effectiveness
of our internal control over financial reporting as of June 30, 2008, based
on the framework and criteria established in Internal Control - Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO").
A material weakness is a significant deficiency, or combination of
significant deficiencies, that result in more than a remote likelihood that
a material misstatement of the annual or interim financial statements will
occur and not be detected by management before the financial statements are
published. In its assessment of the effectiveness in internal control over
financial reporting as of June 30, 2008, the Company determined that there
were control deficiencies that constituted a material weakness, as
described below.
o We have not assessed our control environment or entity-level controls.
Due to time and staff constraints, we did not perform an assessment of our
control environment or entity-level controls in accordance with COSO
standards.
o We have not tested the operating effectiveness of our controls over
financial reporting. During our review process we created and implemented
new controls and procedures. However due to time and staff constraints, we
did not test our controls over financial reporting in accordance with COSO
standards. Since we have not completely tested our controls, we have
determined that our controls over financial reporting were ineffective.
o The Company did not maintain a sufficient complement of personnel with
the appropriate level of knowledge, experience, and training to analyze,
review, and monitor the accounting of inventory adjustments that are
significant or non-routine with regard to the flow of inventory material
through the warehouse. As a result, the Company did not prepare adequate
contemporaneous documentation that would provide a sufficient basis for an
effective evaluation and review of the accounting for inventory adjustments
that are significant or non-routine. This material weakness resulted in
errors in the preliminary June 30, 2008 consolidated financial statements
and more than a remote likelihood that a material misstatement of the
Company's annual or interim financial statements would not be prevented or
detected.
Due to these material weaknesses, management concluded that our internal
control over financial reporting was not effective as of June 30, 2008.
This annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control
over financial reporting. Managements report was not subject to attestation
by the Company's independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this annual report.
(c) REMEDIATION PLAN FOR MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
The Company is in the process of developing and implementing a remediation
plan to address the material weaknesses as described above.
The Company has taken the following actions to improve internal control
over financial reporting:
o During the remaining period through the year ending June 30, 2009, we
intend to devote resources, to properly assess, and remedy if needed, our
control environment and entity-level controls.
o During the remaining period through the year ending June 30, 2009, we
will enhance our risk assessment, internal control design and documentation and
develop a plan for testing in accordance with COSO standards.
o In July 2008, the senior accounting position at one of the Company's
subsidiaries was upgraded with the addition of experienced accounting personnel.
The Company plans to continue to enhance the staffing and competency level
within the department with training and periodic reviews.
In addition, the following are specific remedial actions to be taken
for matters related to inventory transactions including significant and
non-routine adjustments.
o The Company requires that all significant or non-routine inventory
adjustments be thoroughly researched, analyzed, and documented by qualified
warehouse personnel, and to provide for complete review of the resulting
transaction by the Warehouse Supervisor prior to recording the transactions. In
addition, all major transactions will require the additional review and approval
of the Materials Manager.
o Develop and implement focused monitoring controls and other procedures in
the Internal Audit function.
In light of the aforementioned material weakness, management conducted a
thorough review of all significant or non-routine adjustments for the year ended
June 30, 2008. As a result of this review, management believes that there are no
material inaccuracies or omissions of material fact and, to the best of its
knowledge, believes that the consolidated financial statements for the year
ended June 30, 2008 fairly present in all material respects the financial
condition and results of operations for the Company in conformity with U.S.
generally accepted accounting principles.
ITEM 8B. OTHER INFORMATION
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Officers and Directors
The officers and directors of the Company are:
Year
Name Age Position First Director
Harold S. Carpenter 74 Director 1995
James T. Hecker 51 Director 1997
Robert R. Kauffman 68 Director/C.O.B./C.E.O. 1998
Thomas C. LaVoy 48 Director 1998
John A. Carlson 61 Director/E.V.P./C.F.O. 1999
Donald E. Anderson 74 Director 2002
Timothy P. Slifkin 53 Director/C.E.O. - StarTrak 2006
Robert R. Kauffman: Mr. Kauffman was appointed as Chief Executive Officer and
Chairman of the Board effective July 1, 1998. Mr. Kauffman was formerly
President and Chief Executive Officer of NASDAQ-listed Photocomm, Inc., from
1988 until 1997 (since renamed Kyocera Solar, Inc.). Photocomm was the nation's
largest publicly owned manufacturer and marketer of wireless solar electric
power systems with annual revenues in excess of $35 million. Prior to Photocomm,
Mr. Kauffman was a senior executive of the Atlantic Richfield Company (ARCO)
whose varied responsibilities included Senior Vice President of ARCO Solar,
Inc., President of ARCO Plastics Company and Vice President of ARCO Chemical
Company. Mr. Kauffman earned an M.B.A. in Finance at the Wharton School of the
University of Pennsylvania, and holds a B.S. in Chemical Engineering from
Lafayette College, Easton, Pennsylvania.
John A. Carlson: Mr. Carlson, Executive Vice President and Chief Financial
Officer of Alanco Technologies, Inc., joined the Company in September 1998 as
Senior Vice President/Chief Financial Officer. Mr. Carlson started his career
with Price Waterhouse & Co. in Chicago, Illinois. He has over twenty-five years
of public and private financial and operational management experience, including
over twelve years as Chief Financial Officer of a Fortune 1000 printing and
publishing company. Mr. Carlson earned his Bachelor of Science degree in
Business Administration at the University of South Dakota, and is a Certified
Public Accountant.
Donald E. Anderson: Donald E. Anderson is President and owner of Programmed
Land, Inc., a Minnesota and Scottsdale, Arizona, based company. Programmed Land
is a diversified holding company engaged in real estate, including ownership,
development, marketing and management of properties. He is also majority owner
of a company involved in the automotive industry. From 1988 until 1997, Mr.
Anderson was Chairman of the Board of NASDAQ-listed Photocomm, Inc., a company
involved in the solar electric business. Since 1983, Mr. Anderson has also been
President of Pine Summit Bible Camp, a non-profit organization that operates a
year-round youth camp in Prescott, Arizona. Mr. Anderson has a B.A. degree in
accounting.
Harold S. Carpenter: Mr. Carpenter is the former President of Superiorgas Co.,
Des Moines, Iowa, which is engaged in the business of trading and brokering bulk
refined petroleum products with gross sales of approximately $500 million per
year. He is also the General Partner of Superiorgas L.P., an investment company
affiliated with Superiorgas Co. Mr. Carpenter founded these companies in 1984
and 1980, respectively. Mr. Carpenter is also the President of Carpenter
Investment Company, Des Moines, Iowa, which is a real estate investment company
holding properties primarily in central Iowa. From 1970 until 1994, Mr.
Carpenter was the Chairman of the George A. Rolfes Company of Boone, Iowa, which
manufactured air pollution control equipment. Mr. Carpenter graduated from the
University of Iowa in 1958 with a Bachelor of Science and Commerce degree.
James T. Hecker: Mr. Hecker is both an Attorney and a Certified Public
Accountant. Since 1987 Mr. Hecker has been Vice President, Treasurer and General
Counsel of Rhino Capital Incorporated, Evergreen, Colorado, a private capital
management company which manages a $60 million portfolio. He also served, since
1992, as a trustee of an $11 million charitable trust. From 1984 to 1987, Mr.
Hecker was the Controller of Northern Pump Company, Minneapolis, Minnesota, a
multi-state operating oil and gas company with more than 300 properties, with
responsibility of all accounting and reporting functions. Prior to that, from
1981 to 1984, Mr. Hecker was Audit Supervisor of Total Petroleum, Inc., Denver,
responsible for all phases of internal audit and development of audit and
systems controls. Mr. Hecker received a J.D. degree from the University of
Denver in 1992, and a B.B.A. degree in Accounting and International Finance from
the University of Wisconsin in 1979. He is a member in good standing of the
Colorado and the American Bar Associations, the Colorado Society of CPAs, and
the American Institute of CPAs.
Thomas C. LaVoy: Thomas C. LaVoy has served as Chief Financial Officer of
SuperShuttle International, Inc., since July 1997 and as Secretary since March
1998. From September 1987 to February 1997, Mr. LaVoy served as Chief Financial
Officer of NASDAQ-listed Photocomm, Inc. Mr. LaVoy was a Certified Public
Accountant with the firm of KPMG Peat Marwick from 1980 to 1983. Mr. LaVoy has a
Bachelor of Science degree in Accounting from St. Cloud University, Minnesota,
and is a Certified Public Accountant.
Timothy P. Slifkin: Timothy P. Slifkin, President and Chief Executive Officer of
the Company's subsidiary, StarTrak Systems, LLC, is directly responsible for
development of StarTrak's wireless product line and for leading the North
American rail industry's acceptance of the technology for damage prevention,
refrigeration transport, and asset management applications. Mr. Slifkin has been
developing remote monitoring systems since founding Elexor Associates in 1986,
and in developing and deploying wireless systems (satellite and terrestrial)
since 1992. Mr. Slifkin has several patents issued or pending on related
technology. Prior to founding StarTrak, Mr. Slifkin was employed with Hewlett
Packard, Johannson Microwave, American Microsystems, and Jet Propulsion
Laboratories. Mr. Slifkin holds a Bachelors Degree in Engineering.
Non-Director Significant Employees
The following table provides information regarding key officers for the
Company's primary subsidiaries.
Name Age Position Year Appointed
to Position
----------------------------------------------------------------------------
Greg M. Oester 59 President - Alanco/TSI PRISM, Inc. 2002
Thomas A. Robinson 47 Executive Vice President -
StarTrak Systems, LLC 2006
Greg M. Oester: Mr. Oester started his employment as President of Alanco/TSI
PRISM, Inc. (formerly Technology Systems International, Inc.) in 2000. He
practiced international business law for 12 years and founded a firm in Los
Angeles, CA. He co-founded North American Enterprises, Inc. in 1989 and engaged
in sales & marketing of European specialty products in the U.S.A. Mr. Oester
conducted seminars on foreign investment in the U.S.A. throughout Asia. He was
admitted to practice before the U.S. Customs Court, the Court of International
Trade and numerous State and Federal venues. Mr. Oester holds Bachelor of Arts
degrees in Political Science and Economics from the University of Arizona and
also a Juris Doctor Degree from the University of Laverne.
Thomas A. Robinson: Mr. Robinson, Executive Vice President of StarTrak Systems,
LLC, has been responsible for major program deliveries at StarTrak since 1999.
He is intimately involved in the systems development, network completion,
customer commitments, and deployments for all major products of StarTrak. Prior
to joining StarTrak, Mr. Robinson was employed by Varlen Corporation (acquired
by Amsted Industries in 1999) where he was responsible for mergers and
acquisitions. Prior to Varlen, he was a Program Manager at Hughes Aircraft. Mr.
Robinson holds Bachelors and Masters Degrees in Engineering from Case Western
Reserve University and an MBA from Wharton.
Audit/Corporate Governance Committee
The Audit/Corporate Governance Committee of the Board of Directors is currently
comprised of three independent directors, and operates under a written charter
adopted by the Board. The Audit/Corporate Governance Committee Charter was
included as Exhibit A in the Company's Definitive Proxy Statement filed with the
SEC on October 18, 2004. The members of the Audit/Corporate Governance Committee
are Harold S. Carpenter, a CEO with over 30 years senior management experience,
James T. Hecker, an attorney and CPA, and Thomas C. LaVoy, a CPA. All three
individuals are experienced in reading and understanding financial statements,
and, in fact, are deemed to be financial experts as defined by audit committee
requirements.
The Audit/Corporate Governance Committee is directly responsible for the
appointment, compensation, retention and oversight of the work of the
independent auditor engaged for the purpose of preparing an audit report or
performing other audit, review or attest services for the Company. The auditor
reports directly to the Audit/Corporate Governance Committee. The
Audit/Corporate Governance Committee has established "whistleblower" procedures
for the receipt, retention and treatment of complaints regarding accounting,
internal accounting controls or auditing matters, including procedures for the
confidential anonymous submission by employees of the Company of concerns
regarding questionable accounting or auditing matters.
Authority to engage independent counsel and other advisors has been given to the
Audit/Corporate Governance Committee as it determines is necessary to carry out
its duties. The Company provides appropriate funding for the Audit/Corporate
Governance Committee to compensate the outside auditors and any lawyers and
advisors it employs and to fund ordinary administrative expenses of the
Audit/Corporate Governance Committee that are necessary in carrying out its
duties.
The Audit/Corporate Governance Committee provides general oversight of the
Company's financial reporting and disclosure practices, system of internal
controls, and the Company's processes for monitoring compliance by the Company
with Company policies. The Audit/Corporate Governance Committee reviews with the
Company's independent auditors the scope of the audit for the year, the results
of the audit when completed, and the independent auditor's fee for services
performed. The Audit/Corporate Governance Committee also recommends independent
auditors to the Board of Directors and reviews with management various matters
related to its internal accounting controls. During the last fiscal year, there
were three meetings of the Audit/Corporate Governance Committee.
Management is responsible for the Company's internal controls and the financial
reporting process. The independent auditors are responsible for performing an
independent audit of the Company's consolidated financial statements in
accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States) and issuing a report thereon. The
Audit/Corporate Governance Committee is responsible for overseeing and
monitoring the quality of the Company's accounting and auditing practices.
The members of the Audit/Corporate Governance Committee are not professionally
engaged in the practice of auditing or accounting and may not be experts in the
fields of accounting or auditing, or in determining auditor independence.
Members of the Audit/Corporate Governance Committee rely, without independent
verification, on the information provided to them and on the representations
made by management and the independent accountants. Accordingly, the
Audit/Corporate Governance Committee's oversight does not provide an independent
basis to determine that management has maintained procedures designed to assure
compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit/Corporate Governance Committee's considerations and
discussions referred to above do not assure that the audit of the Company's
financial statements has been carried out in accordance with auditing standards
generally accepted in the United States, that the financial statements are
presented in accordance with accounting principles generally accepted in the
United States of America or that the Company's auditors are in fact
"independent."
Compliance with Section 16(a) of Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Officers and Directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
Directors and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely upon a review of the copies of such forms furnished to the Company, or
written representations that no Form 5's were required, the Company believes
that as of the date of filing of this Form 10-KSB, all Section 16(a) filing
requirements applicable to its officers, Directors and greater than 10%
beneficial owners were satisfied.
Code of Ethics
The Company has adopted a Corporate Code of Business Conduct and Ethics, which
was included as Exhibit 99.2 in the Company's Form 10-QSB filed with the SEC on
November 15, 2004. We believe our code of ethics is reasonably designed to deter
wrongdoing and promote honest and ethical conduct; provide full, fair, accurate,
timely and understandable disclosure in public reports; comply with applicable
laws; ensure prompt internal reporting of code violations; and provide
accountability for adherence to the code.
The Code of Business Conduct and Ethics is presented on the Company's web page
under the subheading "Corporate Governance." Shareholders may receive a copy of
the Company's adopted Code of Conduct, without charge, via e-mail request to
alanco@alanco.com, by calling the Company at 480-607-1010, Ext. 857, or by
writing to the Company to the attention of the Company's Corporate Secretary at
15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid or accrued by the Company
for the services rendered during the fiscal years ended June 30, 2008, 2007 and
2006 to the Company's Chief Executive Officer, Chief Financial Officer,
President of the Company's subsidiary, Alanco/TSI PRISM, Inc. (ATSI), President
of the Company's subsidiary, StarTrak Systems, LLC (STS), and Executive Vice
President of the Company's subsidiary, StarTrak Systems, LLC, whose salaries and
bonus exceeded $100,000 during the last fiscal year (collectively, the "Named
Executive Officers"). No stock appreciation rights ("SARs") have been granted by
the Company to any of the Named Executive Officers during the last three fiscal
years.
Annual Compensation Long-Term Compensation
----------------------------------- ----------------------
Name and Other (1) Securities (# shares)
Principal Annual Annual Underlying Options
Position Salary Bonus Compensation Granted during FY
---------------------------------- --------- ------- --------------- ----------------------
Robert R. Kauffman, C.E.O.
FY 2008 $247,500 None $17,400 200,000
FY 2007 250,000 None 17,400 60,000
FY 2006 225,000 None 17,400 376,000
John A. Carlson, C.F.O.
FY 2008 220,500 None 10,405 100,000
FY 2007 222,500 None 10,400 20,000
FY 2006 200,000 None 10,400 228,000
Greg M. Oester, President, ATSI
FY 2008 139,050 None None 50,000
FY 2007 154,500 None None 0
FY 2006 154,500 None None 48,000
Timothy P. Slifkin, President, STS
FY 2008 (2) 333,332 None 3,081 100,000
FY 2007 160,000 None 667 0
FY 2006 N/A N/A N/A 400,000
Thomas A. Robinson, Exec V.P., STS
FY 2008 (3) 343,333 None 3,104 100,000
FY 2007 160,000 None 667 0
FY 2006 N/A N/A N/A 400,000
(1) Represents supplemental executive benefit reimbursement for the year and Company matching for
Alanco's 401(K) Profit Sharing Plan.
(2) Includes $156,665 compensation accrued in prior years but paid during fiscal 2008.
(3) Includes $166,666 compensation accrued in prior years but paid during fiscal 2008.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 2008 to each of the Named Executive Officers and/or
Directors and to all other employees as a group. No stock appreciation rights
("SARs") have been granted by the Company.
INDIVIDUAL GRANTS
Number of
Securities
Underlying % of Total Exercise
Options Options Price Grant Expiration
Name Granted Granted ($/Sh) Date Date
---------------- ----------- ---------- ------------- --------------------- ---------------------
Robert Kauffman 200,000 15.48% $2.00 10/5/2007 10/5/2012
John Carlson 100,000 7.73% $2.00 10/5/2007 10/5/2012
Harold Carpenter 50,000 3.87% $2.00 10/5/2007 10/5/2012
Donald Anderson 50,000 3.87% $2.00 10/5/2007 10/5/2012
Thomas LaVoy 50,000 3.87% $2.00 10/5/2007 10/5/2012
James Hecker 50,000 3.87% $2.00 10/5/2007 10/5/2012
Timothy Slifkin 100,000 7.73% $2.00 10/5/2007 10/5/2012
Greg Oester 50,000 3.87% $2.00 10/5/2007 10/5/2012
Tom Robinson 100,000 7.73% $2.00 10/5/2007 10/5/2012
Other Employees 543,000 42.00% $2.00 - $2.50 7/20/2007 - 10/5/2007 7/10/2012 - 10/5/2012
----------- ----------
Total 1,293,000 100.00%
=========== ==========
All options are granted at a price not less than "grant-date market." During the
fiscal year 153,800 previously granted stock options expired or were cancelled.
Aggregated Options and Warrants - Exercised in Last Fiscal Year and Values at
Fiscal Year End
The following table sets forth the number of exercised and unexercised options
and warrants held by each of the Named Executive Officers and/or Directors at
June 30, 2008, and the value of the unexercised, in-the-money options at June
30, 2008.
Shares Unexercised Value of Unexercised
Acquired On Value Options & Warrants In-The-Money
Exercise During Realized at Fiscal Year End Options & Warrants
Name 2008 Fiscal Year ($) (1) (Shares) (2) at FYE ($) (3)
---------------- ---------------- --------- ------------------ --------------------
Robert Kauffman 0 $- 1,338,000 $121,810
John Carlson 0 - 619,000 47,730
Harold Carpenter 0 - 354,000 13,980
James Hecker 0 - 175,000 7,680
Thomas LaVoy 0 - 157,000 4,000
Donald Anderson 0 - 1,345,500 24,750
Timothy Slifkin 0 - 290,000 0
Greg Oester 0 - 493,000 19,280
Thomas Robinson 0 - 320,000 0
(1) Calculated as the difference between closing price on the date exercised
and the exercise price, multiplied by the number of options exercised.
(2) Represents the number of securities underlying unexercised options and
warrants that were exercisable at 2008 Fiscal Year End.
(3) Calculated as the difference between the closing price of the Company's
Common Stock on June 30, 2008, and the exercise price for those options
exercisable on June 30, 2008, with an exercise price less than the
closing price, multiplied by the number of applicable options.
Option Grants Subsequent to Fiscal Year End
The following table sets forth information regarding employee stock options
granted after June 30, 2008.
Number of
Underlying
Securities
Options Date of Date Expiration Option
Name Granted Grant Exercisable Date Price
------------------- ---------- ------- ----------- ---------- ------
Robert R. Kauffman 250,000 (1) 8/19/08 (2) 8/19/13 $1.20
John A. Carlson 120,000 (1) 8/19/08 (2) 8/19/13 $1.20
Donald E. Anderson 75,000 (1) 8/19/08 (2) 8/19/13 $1.20
Harold S. Carpenter 75,000 (1) 8/19/08 (2) 8/19/13 $1.20
James T. Hecker 75,000 (1) 8/19/08 (2) 8/19/13 $1.20
Thomas C. LaVoy 75,000 (1) 8/19/08 (2) 8/19/13 $1.20
Timothy P. Slifkin 25,000 (1) 8/19/08 (2) 8/19/13 $1.20
Greg M. Oester 50,000 (1) 8/19/08 (2) 8/19/13 $1.20
Thomas A. Robinson 25,000 (1) 8/19/08 (2) 8/19/13 $1.20
Other Employees 65,000 (1) 7/7/08 (3) 7/7/13 $1.40
Other Employees 120,000 (1) 8/19/08 (2) 8/19/13 $1.20
(1) Issued pursuant to the 1998, 1999, 2005 & 2006 Stock Option Plans.
(2) 10% vest on 8/19/2008, 15% vest on 8/19/2009, 25% vest on 8/19/2010, 25%
vest on 8/19/2011 and 25% vest on 8/19/2012.
(3) 10% vest on 7/7/2008, 15% vest on 7/7/2009, 25% vest on 7/7/2010, 25% vest
on 7/7/2011 and 25% vest on 7/7/2012.
Employment Agreements and Executive Compensation
The Executive Officers are at-will employees without employment agreements.
Compensation of Directors
During fiscal year 2008, non-employee Directors were compensated for their
services in cash ($750 per meeting per day up to a maximum of $1,500 per
meeting) and through the grant of options to acquire shares of Class A Common
Stock as provided by the 1996, 1998, 1999, 2000, 2002, 2004, 2005, and 2006
Directors and Officers Stock Option Plans (the "D&O Plans") which are described
below. All Directors are entitled to receive reimbursement for all out-of-pocket
expenses incurred for attendance at Board of Directors meetings.
The 1996 Directors and Officers Stock Option Plan was approved by the Board of
Directors on September 9, 1996. Shareholders approved the 1998, 1999, 2000,
2002, 2004, 2005, and 2006 Directors and Officers Stock Option Plans on November
6, 1998, November 5, 1999, November 10, 2000, November 22, 2002, November 19,
2004, January 20, 2006, and January 30, 2007, respectively. The purpose of the
1996, 1998, 1999, 2000, 2002, 2004, 2005, and 2006 D&O Plans is to advance the
business and development of the Company and its shareholders by affording to the
Directors and Officers of the Company the opportunity to acquire a propriety
interest in the Company by the grant of Options to acquire shares of the
Company's common stock. All Directors and Executive Officers of the Company are
eligible to participate in the 1996, 1998, 1999, 2000, 2002, 2004, 2005, and
2006 Plans. Newly appointed Directors receive options to purchase shares of
common stock at fair market value. Upon each subsequent anniversary of the
election to the Board of Directors, each non-employee Director may receive an
additional option to purchase shares of common stock at fair market value.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information with respect to each
shareholder known by Alanco to be the beneficial owner of more than 5% of the
outstanding Alanco common stock or voting rights as of September 26, 2008.
Information regarding the stock ownership of Robert R. Kauffman, Alanco Chairman
and Chief Executive Officer, Donald E. Anderson, Alanco Director, Timothy P.
Slifkin, StarTrak Chief Executive Officer, and Thomas A. Robinson, StarTrak
Executive Vice President, is also shown in the table in the following section,
Current Directors and Executive Officers.
Five Percent Owners
Class A
Common Total Total Total
Shares Voting Voting Stock,
Owned Series D Rights Exercisable Rights Options &
Class A Percent Preferred Owned Stock and Warrants
Common of Shares Total Percent Options Options Percent of
Shares Class Owned Voting of Class and & Voting
Owned (8) (9) Rights (8) Warrants Warrants Rights (10)
--------- ------- --------- --------- -------- ----------- --------- -----------
Donald E. Anderson (1) 3,668,960 11.59% 150,000 4,718,960 13.84% 1,378,000 6,096,960 17.18%
WSV Management, LLC (2) 2,543,869 8.03% 0 2,543,869 7.46% 881,579 3,425,448 9.79%
Robert R. Kauffman (3) 1,843,312 5.82% 0 1,843,312 5.40% 1,186,000 3,029,312 8.58%
Timothy P. Slifkin (4) 2,253,480 7.12% 12,000 2,337,480 6.85% 292,500 2,629,980 7.65%
The Rhino Fund, LLLP (5) 1,599,847 5.05% 50,000 1,949,847 5.72% 340,667 2,290,514 6.65%
Tom Robinson (6) 1,484,076 4.69% 8,000 1,540,076 4.52% 322,500 1,862,576 5.41%
Technology Systems 1,807,670 5.71% 0 1,807,670 5.30% 0 1,807,670 5.30%
International, Inc. (7)
(1) The number of shares, options and warrants owned includes: The Anderson
Family Trust, owner of 2,061,113 shares of Alanco Class A Common Stock,
50,000 shares of Alanco Series D Non-Convertible Preferred Stock and
670,000 exercisable warrants; Programmed Land, Inc., owner of 1,599,847
shares of Alanco Class A Common Stock, 50,000 shares of Alanco Series D
Non-Convertible Preferred Stock and 533,500 exercisable warrants; Pine
Summit Bible Camp and Conference Center, owner of 50,000 shares of Alanco
Series D Non-Convertible Preferred Stock, all of which Mr. Anderson claims
beneficial ownership; and 8,000 shares of Alanco Class A Common Stock and
174,500 exercisable options owned by Mr. Anderson. Mr. Anderson also has an
additional 162,500 stock options with a vesting schedule ranging from
October 5, 2008 to August 19, 2012. The 150,000 shares of Series D
Non-Convertible Preferred Stock beneficially owned by Mr. Anderson
represent 53.57% of the total Series D Non-Convertible Preferred shares
outstanding. Mr. Anderson's address is 11804 North Sundown Drive,
Scottsdale, Arizona 85260.
(2) The number of shares and warrants owned by WSV Management, L.L.C. includes:
WS Opportunity Fund, L.P., owner of 797,513 shares of Alanco Class A Common
Stock and 259,513 exercisable warrants, WS Opportunity Fund Q.P., L.P.,
owner of 756,459 shares of Alanco Class A Common Stock and 242,219
exercisable warrants, and WS Opportunity International Fund, Ltd., owner of
989,897 shares of Alanco Class A Common Stock and 379,847 exercisable
warrants. The address for WSV Management, L.L.C. is 300 Crescent Court,
Suite 1111, Dallas, TX 75201.
(3) In addition to the shares shown above, Robert R. Kauffman, Alanco Chairman
and Chief Executive Officer, also beneficially owns 455,000 shares of TSIN
stock, representing an ownership position of less than 2% of the
outstanding TSIN shares. If TSIN distributes the shares of Alanco common
stock owned by TSIN to TSIN shareholders on a proportionate basis, Mr.
Kauffman may acquire additional shares of Alanco common stock, thereby
slightly increasing his percentage of Alanco common shares owned; but due
to matters as discussed in Footnote 7 below, we are unable to accurately
calculate the changes to Mr. Kauffman's ownership. Mr. Kauffman also has an
additional 435,000 stock options with a vesting schedule ranging from
October 5, 2008 to August 19, 2012. The address for Mr. Kauffman is: c/o
Alanco Technologies, Inc., 15575 North 83rd Way, Suite 3, Scottsdale,
Arizona 85260.
(4) In addition to the stock options shown above, Timothy P. Slifkin, President
of StarTrak Systems, LLC, has 232,500 options with a vesting schedule
ranging from October 5, 2008 to August 19, 2012. The 12,000 shares of
Series D Non-Convertible Preferred Stock beneficially owned by Mr. Slifkin
represent 4.29% of the total Series D Non-Convertible Preferred shares
outstanding. The address for Mr. Slifkin is: c/o StarTrak Systems, LLC, 106
The American Road, Morris Plains, NJ 07950.
(5) The 50,000 shares of Series D Non-Convertible Preferred Stock owned by The
Rhino Fund, LLLP, managed by Rhino Capital, Inc., a private capital
management company, represent 17.86% of the total Series D Non-Convertible
Preferred shares outstanding. The address for Rhino Capital, Inc. is 32065
Castle Court, Suite 100, Evergreen, CO 80439.
(6) In addition to the stock options shown above, Thomas A. Robinson, Executive
Vice President of StarTrak Systems, LLC, has 232,500 options with a vesting
schedule ranging from October 5, 2008 to August 19, 2012. The 8,000 shares
of Series D Non-Convertible Preferred Stock beneficially owned by Mr.
Robinson represent 2.86% of the total Series D Non-Convertible Preferred
shares outstanding. The address for Mr. Robinson is: c/o StarTrak Systems,
LLC, 106 The American Road, Morris Plains, NJ 07950.
(7) Technology Systems International, Inc., a Nevada corporation, (TSIN) is an
independent, private company, which was issued 6,000,000 shares (equivalent
to 2,400,000 as adjusted for the October 16, 2006 2 for 5 reverse stock
split) of Alanco common stock in 2002 in connection with the acquisition of
the assets of TSIN effective in June 2002. TSIN filed a Schedule 13G on
December 31, 2006, indicating TSIN ownership of 1,807,670 Alanco common
shares. TSIN has previously indicated their intention to distribute the
shares of Alanco common stock in excess of certain corporate litigation and
liquidation expenses on a pro-rata basis to their shareholders; however,
the shares have not been distributed as of the date of filing, and there is
no assurance that the shares will be distributed. The address of TSIN is
c/o Jill H. Ford, Trustee, P.O. Box 5845, Carefree, AZ 85377.
(8) The percentages for Class A Common Stock shown are calculated based upon
31,669,667 shares of Class A Common Stock outstanding on September 26,
2008. The percentages for Total Voting Rights are calculated based upon
34,104,531 voting rights on September 26, 2008.
(9) Preferred Shares are Series D Non-Convertible Preferred Stock, each share
of which has seven votes in matters submitted to shareholders for a vote.
As of September 26, 2008, there are 280,000 shares of Series D
Non-Convertible Preferred Stock outstanding. The 5% owners do not own any
shares of the Series B Convertible Preferred Stock.
(10) In calculating the percentage of ownership, option and warrant shares are
deemed to be outstanding for the purpose of computing the percentage of
voting rights shares owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of voting rights
shares owned by any other stockholders.
Security Ownership of Management
The following table sets forth the number of exercisable stock options and the
number of shares of the Company's Common Stock and Preferred Stock beneficially
owned as of September 26, 2008, by individual directors and executive officers
and by all directors and executive officers of the Company as a group.
The number of shares beneficially owned by each director or executive officer is
determined under rules of the Securities and Exchange Commission, and the
information is not necessarily indicative of the beneficial ownership for any
other purpose. Unless otherwise indicated, each person has sole investment and
voting power (or shares such power with his or her spouse) with respect to the
shares set forth in the following table.
Securities of the Registrant Beneficially Owned (1)
Stock Total
Class A Shares Series D Shares Shares Options & Total Stock,
Common Owned Preferred Owned Total Owned Warrants Voting Options
Stock Percent Stock Percent Voting Percent Exercisable Rights & & Warrants
Name of Shares of Class Shares of Class Rights of Class @ 9/26/08 Options & Percent of
Beneficial Owner (2) Owned (7) Owned (7) Owned (7) + 60 days (8) Warrants Class (9)
-------------------------- ---------- -------- --------- -------- ---------- -------- ------------- ---------- ------------
Robert R. Kauffman (3) 1,843,312 5.82% 0 0.00% 1,843,312 5.40% 1,216,000 3,059,312 8.66%
Director/COB/CEO
John A. Carlson 393,338 1.24% 0 0.00% 393,338 1.15% 615,000 1,008,338 2.90%
Director/EVP/CFO
Harold S. Carpenter 725,626 2.29% 0 (5) 0.00% 725,626 2.13% 379,000 1,104,626 3.20%
Director
James T. Hecker 90,019 0.28% 0 (6) 0.00% 90,019 0.26% 190,000 280,019 0.82%
Director
Timothy P. Slifkin 2,253,480 7.12% 12,000 4.29% 2,337,480 6.85% 307,500 2,644,980 7.69%
Director/CEO - StarTrak
Thomas C. LaVoy 92,573 0.29% 10,000 3.57% 162,573 0.48% 172,000 334,573 0.98%
Director
Donald E. Anderson (4) 3,668,960 11.59% 150,000 53.57% 4,718,960 13.84% 1,385,500 6,104,460 17.20%
Director
Greg M. Oester 46,407 0.15% 0 0.00% 46,407 0.14% 505,500 551,907 1.59%
President - TSIA
Thomas A. Robinson 1,484,076 4.69% 8,000 2.86% 1,540,076 4.52% 337,500 1,877,576 5.45%
EVP - StarTrak
---------- --------- ---------- ------------- ----------
Officers and Directors 10,597,791 33.46% 180,000 64.29% 11,857,791 34.77% 5,108,000 16,965,791 43.27%
as a Group (9 individuals) ========== ========= ========== ============= ==========
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally indicates voting
or investment power with respect to securities. In accordance with SEC
rules, shares that may be acquired upon conversion or exercise of stock
options, warrants or convertible securities which are currently
exercisable or which become exercisable within 60 days are deemed
beneficially owned. Except as indicated by footnote, and subject to
community property laws where applicable, the persons or entities named
in the table above have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned.
(2) COB is Chairman of the Board; CEO is Chief Executive Officer; EVP is
Executive Vice President; CFO is Chief Financial Officer.
(3) In addition to the shares shown above, Robert R. Kauffman, Alanco
Chairman and Chief Executive Officer, also beneficially owns 455,000
shares of TSIN stock, representing an ownership position of less than 2%
of the outstanding TSIN shares. If TSIN distributes the shares of Alanco
common stock owned by TSIN to TSIN shareholders on a proportionate basis,
Mr. Kauffman may acquire additional shares of Alanco common stock,
thereby slightly increasing his percentage of Alanco common shares owned;
but due to matters as discussed in Footnote 7 of the Five Percent Owners
table above, we are unable to accurately calculate the changes to Mr.
Kauffman's ownership.
(4) The number of shares, options and warrants owned includes: The Anderson
Family Trust, owner of 2,061,113 shares of Alanco Class A Common Stock,
50,000 shares of Alanco Series D Non-Convertible Preferred Stock and
670,000 exercisable warrants; Programmed Land, Inc., owner of 1,599,847
shares of Alanco Class A Common Stock, 50,000 shares of Alanco Series D
Non-Convertible Preferred Stock and 533,500 exercisable warrants; Pine
Summit Bible Camp and Conference Center, owner of 50,000 shares of Alanco
Series D Non-Convertible Preferred Stock, all of which Mr. Anderson
claims beneficial ownership; and 8,000 shares of Alanco Class A Common
Stock and 174,500 exercisable options owned by Mr. Anderson.
(5) Excludes 928,448 shares of Class A Common Stock, 50,000 shares of Series
D Non-Convertible Preferred Stock and 159,000 warrants to purchase Class
A Common Stock owned by Heartland Systems Co., a company for which Mr.
Carpenter serves as an officer. Mr. Carpenter disclaims beneficial
ownership of such shares.
(6) Excludes 1,174,471 shares of Class A Common Stock, 50,000 shares of
Series D Non-Convertible Preferred Stock and 340,667 warrants to purchase
Class A Common Stock owned by Rhino Fund LLLP. The fund is controlled by
Rhino Capital Incorporated, for which Mr. Hecker serves as Treasurer and
General Counsel. Mr. Hecker disclaims beneficial ownership of such
shares.
(7) The percentages for Class A Common Stock shown are calculated based upon
31,669,667 shares of Class A Common Stock outstanding on September 26,
2008. The percentages for Series D Non-Convertible Preferred Stock are
calculated based upon 280,000 shares of Series D Non-Convertible
Preferred Stock outstanding on September 26, 2008, each share of which
has seven votes in matters submitted to shareholders for a vote. The
percentages for Total Voting Rights are calculated based upon 34,104,531
voting rights as of September 26, 2008.
(8) Represents unexercised stock options and warrants issued to named executive
officers and directors. All options and warrants listed that were issued to
the executive officers and directors were exercisable at September 26,
2008, or will be exercisable within 60 days following September 26, 2008.
Robert Kauffman also holds the following options: 102,500 options
exercisable in fiscal year 2010, 127,500 options exercisable in fiscal year
2011, 112,500 options exercisable in fiscal year 1012, and 62,500 options
exercisable in fiscal year 2013. John Carlson also holds the following
options: 48,000 options exercisable in fiscal year 2010, 60,000 options
exercisable in fiscal year 2011, 55,000 options exercisable in fiscal year
1012, and 30,000 options exercisable in fiscal year 2013. Harold Carpenter
also holds the following options: 33,750 options exercisable in fiscal year
2010, 41,250 options exercisable in fiscal year 2011, 31,250 options
exercisable in fiscal year 1012, and 18,750 options exercisable in fiscal
year 2013. James Hecker also holds the following options: 23,750 options
exercisable in fiscal year 2010, 31,250 options exercisable in fiscal year
2011, 31,250 options exercisable in fiscal year 1012, and 18,750 options
exercisable in fiscal year 2013. Timothy Slifkin also holds the following
options: 60,000 options exercisable in fiscal year 2009, 88,750 options
exercisable in fiscal year 2010, 31,250 options exercisable in fiscal year
2011, 31,250 options exercisable in fiscal year 1012, and 6,250 options
exercisable in fiscal year 2013. Thomas LaVoy also holds the following
options: 23,750 options exercisable in fiscal year 2010, 31,250 options
exercisable in fiscal year 2011, 31,250 options exercisable in fiscal year
1012, and 18,750 options exercisable in fiscal year 2013. Donald Anderson
also holds the following options: 48,750 options exercisable in fiscal year
2010, 56,250 options exercisable in fiscal year 2011, 31,250 options
exercisable in fiscal year 1012, and 18,750 options exercisable in fiscal
year 2013. Greg Oester also holds the following options: 20,000 options
exercisable in fiscal year 2010, 25,000 options exercisable in fiscal year
2011, 25,000 options exercisable in fiscal year 1012, and 12,500 options
exercisable in fiscal year 2013. Thomas Robinson also holds the following
options: 60,000 options exercisable in fiscal year 2009, 88,750 options
exercisable in fiscal year 2010, 31,250 options exercisable in fiscal year
2011, 31,250 options exercisable in fiscal year 1012, and 6,250 options
exercisable in fiscal year 2013.
(9) The number and percentages shown include the voting rights shares
actually owned as of September 26, 2008 and the shares of common stock
that the identified person or group had a right to acquire within 60 days
after September 26, 2008. The percentages shown are calculated based upon
34,104,531 voting rights as of September 26, 2008. In calculating the
percentage of ownership, option and warrant shares are deemed to be
outstanding for the purpose of computing the percentage of shares owned
by such person, but are not deemed to be outstanding for the purpose of
computing the percentage of shares owned by any other stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management
Mr. Steve Oman, a former member of the Board of Directors, received compensation
in the amount of approximately $108,100 and $116,100 for legal services to the
Company for the fiscal years ended June 30, 2008 and 2007, respectively.
Mr. Donald Anderson, a member of the Board of Directors and trustee and
beneficial owner of the Anderson Family Trust, was paid interest in fiscal years
2008 and 2007 under the Line of Credit Agreement in the amount of approximately
$170,500 and $186,500, respectively.
See Note 7 and 10 to the consolidated financials for additional related party
transactions and discussion.
PART IV
ITEM 13. EXHIBITS
A. Exhibits
3(i) Articles of Incorporation of Alanco Technologies, Inc (1)
3(ii) Bylaws of Alanco Technologies, Inc (2)
4.1 Series A Preferred Convertible Stock Description (3)
4.2 Series B Preferred Convertible Stock Description (4)
4.3 Series D Preferred Stock Description (5)
4.4 Series D Preferred Stock Description Amendment (6)
10.1 1996 Directors and Officers Stock Option Plan and Kauffman and
Carlson Stock Option Agreements (7)
10.2 1998 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (8)
10.3 1999 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (9)
10.4 2000 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (10)
10.5 2002 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (11)
10.6 2004 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (12)
10.7 2005 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (13)
10.8 2006 Incentive Stock Option Plan and Directors and Officers Stock
Option Plan (14)
10.9 Nasdaq Delisting Notification (15)
10.10 Amendment 3 to Line of Credit Agreement (16)
10.11 Amendment 4 to Line of Credit Agreement (17)
10.12 Amendment 5 to Line of Credit Agreement (18)
10.13 Amendment 6 to Line of Credit Agreement (19)
10.14 Amended and Restated Loan and Security Agreement (20)
10.15 First Amendment to Restated Loan and Security Agreement (21)
10.16 Second Amendment to Restated Loan and Security Agreement (6)
10.17 TSIN Settlement Agreement and Mutual Release (22)
10.18 ComVest Loan Agreement (23)
10.19 Amendment No. 2 to ComVest Loan Agreement (24)
10.20 Amendment No. 3 to ComVest Loan Agreement (25)
10.21 Amendment No. 5 to ComVest Loan Agreement (6)
14.1 Corporate Code of Business Conduct and Ethics (26)
21. Active Subsidiaries of the Registrant
Name State of Incorporation
Excel/Meridian Data, Inc. Arizona
Fry Guy Inc. Nevada
Alanco/TSI PRISM, Inc.
(formerly Technology Systems
International, Inc.) Arizona
StarTrak Systems, LLC Delaware
23.2 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Robert R. Kauffman, Chairman and Chief Executive
Officer of Alanco Technologies, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of John A. Carlson, Executive Vice President and
Chief Financial Officer of Alanco Technologies, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer of Alanco Technologies, Inc., pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.1 Audit/Corporate Governance Committee Charter (27)
Footnotes:
(1) Incorporated by reference to Form 10KSB filed September 27, 2001
(2) Incorporated by reference to Form 8-K filed September 27, 2002
(3) Incorporated by reference to Form S-3/A filed November 21, 2004
(4) Incorporated by reference to Form DEFM14A filed April 22, 2002
(5) Incorporated by reference to Form 8-K filed June 16, 1008
(6) Incorporated by reference to Form 8-K filed August 28, 2008
(7) Incorporated by reference to Form S-8 filed October 22, 1998
(8) Incorporated by reference to Form S-8 filed November 30, 1998
(9) Incorporated by reference to Form S-8 filed November 29, 1999
(10) Incorporated by reference to Form S-8 filed December 14, 2000
(11) Incorporated by reference to Form S-8 filed January 22, 2003
(12) Incorporated by reference to Form S-8 filed February 17, 2005
(13) Incorporated by reference to Form S-8 filed February 2, 2006
(14) Incorporated by reference to Form S-8 filed March 21, 2007
(15) Incorporated by reference to Form 8-K filed August 4, 2006
(16) Incorporated by reference to Form 8-K filed March 28, 2005
(17) Incorporated by reference to Form 8-K filed July 6, 2005
(18) Incorporated by reference to Form 8-K filed July 14, 2006
(19) Incorporated by reference to Form 8-K filed June 28, 2007
(20) Incorporated by reference to Form 8-K filed December 27, 2007
(21) Incorporated by reference to Form 8-K filed February 29, 2008
(22) Incorporated by reference to Form 8-K filed September 21, 2007
(23) Incorporated by reference to Form 8-K filed October 3, 2006
(24) Incorporated by reference to Form 8-K filed July 27, 2007
(25) Incorporated by reference to Form 8-K filed January 2, 2008
(26) Incorporated by reference to Form 10QSB filed November 15, 2004
(27) Incorporated by reference to Form 14A filed October 18, 2004
B. Schedules NONE
Exhibits or schedules other than those mentioned above are omitted because
the conditions requiring their filing do not exist or because the required
information is given in the financial statements, including the notes
thereto.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by Semple, Marchal & Cooper, LLP, the Company's
independent auditor, for professional services rendered for the audit of the
Company's annual financial statements for the fiscal years ended June 30, 2008
and 2007 and the review of the financial statements included in the Company's
Forms 10-QSB for such fiscal years were approximately $125,000 and $107,100,
respectively.
Financial Information Systems Design and Implementation
There were no fees billed for the professional services described in Paragraph
(c)(4)(ii) of Rule 2-01 of Regulation S-X rendered by Semple, Marchal & Cooper,
LLP for the fiscal years ended June 30, 2008 and 2007.
All Other Fees
Semple, Marchal & Cooper, LLP billed the Company during fiscal year 2008 and
2007 a total of approximately $12,000 and $12,000, respectively, for tax
preparation and tax consulting services. The Audit Committee has considered
whether the provision of these services is compatible with maintaining the
principal accountant's independence.
Audit Committee Pre-Approval Policies and Procedures
The 2008 and 2007 audit services provided by Semple, Marchal & Cooper, LLP were
approved by our Audit/Corporate Governance Committee. The Audit/Corporate
Governance Committee implemented pre-approval policies and procedures related to
the provision of audit and non-audit services. Under these procedures, the
Audit/Corporate Governance Committee pre-approves both the type of services to
be provided by our independent accountants and the estimated fees related to
these services. During the approval process, the Audit/Corporate Governance
Committee considers the impact of the types of services and related fees on the
independence of the auditor. These services and fees must be deemed compatible
with the maintenance of the auditor's independence, in compliance with the SEC
rules and regulations. Throughout the year, the Audit/Corporate Governance
Committee and, if necessary, the Board of Directors, reviews revisions to the
estimates of audit and non-audit fees initially approved.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ALANCO TECHNOLOGIES, INC.
(Registrant)
/s/ John A. Carlson
-------------------
John A. Carlson
Chief Financial Officer
Date: September 26, 2008
EXHIBIT 23.2
SEMPLE, MARCHAL & COOPER, LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
2700 NORTH CENTRAL AVENUE, NINTH FLOOR, PHOENIX, ARIZONA 85004
TEL 602-234-1500 * FAX 602-234-1867
Consent of Independent Registered Public Accounting Firm
Alanco Technologies, Inc.
Scottsdale, Arizona
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-149485) of Alanco Technologies, Inc. of our
report dated September 28, 2008, relating to the consolidated financial
statements, which appear in this Form 10-KSB.
/s/ Semple, Marchal & Cooper, LLP
---------------------------------
Semple, Marchal & Cooper, LLP
Phoenix, AZ
September 28, 2008
EXHIBIT 31.1
Certification of
Chairman and Chief Executive Officer
of Alanco Technologies, Inc.
I, Robert R. Kauffman, certify that:
1. I have reviewed this annual report on Form 10-KSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the period presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: September 26, 2008
/s/ Robert R. Kauffman
---------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
EXHIBIT 31.2
Certification of
Vice President and Chief Financial Officer
of Alanco Technologies, Inc.
I, John A. Carlson, certify that:
1. I have reviewed this annual report on Form 10-KSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the period presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: September 26, 2008
/s/ John A. Carlson
---------------------
John A. Carlson
Vice President and Chief Financial Officer
EXHIBIT 32.1
Certification of
Chief Executive Officer and Chief Financial Officer
of Alanco Technologies, Inc.
This certification is provided pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and accompanies this annual report of Form 10-KSB
(the "Report") for the period ended June 30, 2008 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 26, 2008
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Small business issuer caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATE: September 26, 2008 /s/ Robert R. Kauffman
----------------------
Robert R. Kauffman, CEO,
Chairman of the Board
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 26, 2008
--------------------- Chief Executive Officer
Robert R. Kauffman
/s/James T. Hecker Director September 26, 2008
------------------
James T. Hecker
/s/Harold S. Carpenter Director September 26, 2008
----------------------
Harold S. Carpenter
/s/Thomas C. LaVoy Director September 26, 2008
------------------
Thomas C. LaVoy
/s/Donald E. Anderson Director September 26, 2008
---------------------
Donald E. Anderson
/s/John A. Carlson Director & September 26, 2008
------------------ Chief Financial Officer
John A. Carlson
/s/Timothy P.Slifkin Director September 26, 2008
--------------------
Timothy P. Slifkin
By /s/ Robert R. Kauffman
Chairman and Chief Executive Officer
Transfer Agent
Computershare Trust Company, Inc.
350 Indiana Street, Suite 800
Golden, CO 80401
303-262-0600
Fax: 303-262-0700