ALANCO TECHNOLOGIES, INC.
15575 North 83rd Way, Suite 3
Scottsdale, Arizona 85260
(480) 607-1010
PROXY STATEMENT
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held January 30, 2007
TO THE SHAREHOLDERS OF ALANCO TECHNOLOGIES, INC.
NOTICE HEREBY IS GIVEN that the Annual Meeting of Shareholders of Alanco
Technologies, Inc., an Arizona corporation ("Alanco" or the "Company"), will be
held at 15575 North 83rd Way, Suite 3, Scottsdale, Arizona 85260, on January 30,
2007, at 10:00 a.m., Mountain Standard Time, and at any adjournment or
postponement thereof, for the purpose of considering and acting upon the
following Proposals:
Proposal No. 1 ELECTION OF DIRECTORS
Proposal No. 2 APPROVAL OF THE ALANCO 2006 STOCK OPTION PLAN
Proposal No. 3 APPROVAL OF THE ALANCO 2006 DIRECTORS AND OFFICERS STOCK
OPTION PLAN
Proposal No. 4 APPROVAL OF WARRANTS ISSUED TO AFFILIATES OF THE COMPANY
TO PURCHASE CLASS A COMMON STOCK FROM THE COMPANY
Proposal No. 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
Holders of the outstanding Common Stock and Preferred Stock of the Company of
record at the close of business on December 8, 2006, will be entitled to notice
of and to vote at the Meeting or at any adjournment or postponement thereof.
All shareholders, whether or not they expect to attend the Annual Meeting of
Shareholders in person, are urged to sign and date the enclosed Proxy and return
it promptly in the enclosed postage-paid envelope which requires no additional
postage if mailed in the United States. The giving of a proxy will not affect
your right to vote in person if you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS.
Scottsdale, Arizona ADELE L. MACKINTOSH
December 13, 2006 SECRETARY
SUMMARY TERM SHEET
This summary term sheet highlights selected information about the proposals
contained in this proxy statement and may not contain all of the information
that is important to you. To understand the proposals more fully and for a
complete description of the legal terms of the proposals, you should read
carefully this entire proxy statement, including Appendices, and the documents
we refer you to. We have included page number references parenthetically to
direct you to the place in this proxy statement where you can find a more
complete description of the topics presented in the summary.
The Meeting (Page 4)
Date, Time and Place, and Matters To Be Considered. The meeting will be held at
15575 North 83rd Way, Suite 3, Scottsdale, Arizona 85260, at 10:00 a.m.,
Mountain Standard Time, on Tuesday, January 30, 2007. Stockholders will be asked
to consider and vote upon election of directors, approval of the Alanco 2006
Stock Option Plan, approval of the Alanco 2007 Directors and Officers Stock
Option Plan, approval of warrants issued to affiliates of the Company to
purchase Class A Common Stock from the Company, 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, and to
transact such other business as may properly come before the meeting.
Record Date, Shares Entitled to Vote. You are entitled to vote at the meeting if
you owned shares of Alanco common or preferred stock as of the close of business
on the record date, which is December 8, 2006. On the record date, there were
20,153,705 common stock equivalent shares entitled to vote at the meeting. The
Common Stock Equivalent shares are composed of the outstanding shares of Class A
Common Stock and the shares of Common Stock into which the Series A and Series B
Convertible Preferred Stock are convertible.
Vote Required. The affirmative vote of a majority of the votes cast, providing a
quorum is present, is required to approve the proposals.
Solicitation of Proxies. The costs and expenses incurred in connection with
printing, filing with the SEC and mailing the proxy statements shall be borne by
the Company. In addition to solicitation by mail, our directors, officers, and
regular employees may solicit proxies from stockholders by telephone, personal
interview or otherwise. Our directors, officers, and employees will not receive
additional compensation, but may be reimbursed for out-of-pocket expenses in
connection with their solicitation of proxies. Brokers, nominees, fiduciaries,
and other custodians have been requested to forward soliciting material to the
beneficial owners of shares of Alanco Common Stock held of record by them, and
such custodians will be reimbursed by us for their reasonable expenses.
Security Ownership of Certain Beneficial Owners and of Management (Page 5)
Security Ownership of Certain Beneficial Owners. As of December 8, 2006, to the
best of our knowledge, there are four beneficial owners of 5% or more of the
outstanding shares of Alanco common stock.
Security Ownership of Management. As of December 8, 2006, the directors and
executive officers of Alanco owned, in the aggregate, 6,303,020 shares of Alanco
common stock or common stock into which preferred stock is convertible, which
equals approximately 31.3% of the Company's common stock equivalent on that
date.
Proposal No. 1: Election of Directors
Purpose of Election: The current members of the Board of Directors were elected
at the last Annual Meeting of Shareholders held on January 20, 2006, with the
exception of one new Board member who was appointed on June 30, 2006. The
Company's Articles of Incorporation call for an election to be held at the
regular annual meeting of stockholders.
Recommendations of the Alanco Board of Directors: The Company's Board of
Directors recommends the election of the seven nominees listed in this proxy
statement.
Proposal No. 2: Approval of the Alanco 2006 Stock Option Plan
Purpose of the Alanco 2006 Stock Option Plan: The purpose of the Plan is to
advance the business and development of the Company and its shareholders by
affording to Employees of the Company the opportunity to acquire an equity
interest in the Company by the grant of Options to acquire shares of the
Company's Common Stock., The Plan may issue Options to acquire up to 3,000,000
shares to Employees.
2
Recommendations of the Alanco Board of Directors: The Board of Directors
recommends approval of the Plan.
Proposal No. 3: Approval of the Alanco 2006 Directors and Officers
Stock Option Plan
Purpose of the Alanco 2006 Directors and Officers Stock Option Plan: The purpose
of the Plan is to advance the business and development of the Company and its
shareholders by affording to Directors and Executive Officers of the Company the
opportunity to acquire an equity interest in the Company by the grant of Options
to acquire shares of the Company's Common Stock, The Plan may issue Options to
acquire up to 1,000,000 shares to Employees.
Recommendations of the Alanco Board of Directors: The Board of Directors
recommends approval of the Plan.
Proposal No. 4: Approval of Warrants Issued to Affiliates of the Company
to Purchase Class A Common Stock from the Company
Purpose of Approval of Warrants Issued to Affiliates: Pursuant to NASDAQ rules,
certain issuances of securities of the Company to affiliates of the Company
require approval of the Company's shareholders. The Company sold shares of its
Class A Common Stock and Series A Convertible Preferred Stock to affiliates of
the Company in transactions occurring in April through July of 2006. These
transactions also included the issuance of Warrants to purchase additional
shares of Class A Common Stock of the Company to the Company affiliates. This
proposal is requesting shareholder approval related to the issuance of these
warrants.
Recommendations of the Alanco Board of Directors: The Board of Directors has
determined that issuance of the Warrants to the Company affiliates was in the
best interests of the Company and its shareholders and recommends approval of
the proposal.
Proposal No. 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
Purpose of Issuance of Class A Common Stock: In a transaction structured as a
merger between a newly formed subsidiary of the Company and a Delaware limited
liability company, the Company acquired StarTrak Systems, LLC ("StarTrak")
effective June 30, 2006. The transaction resulted in the Company owning all of
the membership interests in StarTrak and the previous StarTrak members
("Sellers") receiving shares of the Company's Class A Common Stock and the right
to receive additional shares of the Company's Class A Common Stock, if approved
by the Company's shareholders. Without shareholder approval, the Company is
obligated to make a cash payment valued at the market price of the Class A
Common shares that were to be issued. This proposal is not approval of the
StarTrak acquisition, which has been completed; rather it is the shareholder
approval required for the Company to issue shares of Class A Common Stock in
lieu of cash for payment of future obligations.
Terms of the Transaction: Under the terms of the transaction, 2,000,000 shares
of the Company's Class A Common Stock were issued at closing and 3,280,000
shares of Class A Common Stock will be issued upon approval by the shareholders
following the Annual Shareholders Meeting. In addition, the Sellers have a right
to receive two earn-out payments based upon the gross profits of the StarTrak
business for fiscal years ending June 30, 2007 and June 30, 2008. Also related
to the transaction is a commission payable to the investment banking firm
involved in the business deal whereby the banking firm is due a fixed cash
payment following the Annual Shareholders Meeting which, at the option of the
Company, could be paid in shares of the Company's Common Stock. See page 17 of
the Proxy Statement for further details related to the formula-based earn-out
stock payments and the commission payments. In the event the issuance of these
additional shares is not approved by the Alanco shareholders, the earn-out and
commission payments shall be paid in cash.
Information about StarTrak: StarTrak, based in Morris Plains, New Jersey, is a
leading provider of GPS tracking and wireless asset management services to the
transportation industry and the dominant provider of tracking, monitoring and
control services to the refrigerated or "Reefer" segment of the transportation
marketplace. StarTrak offers complete integrated solutions for tracking,
monitoring and controlling refrigerated trailers, trucks, railcars, and
containers.
Recommendations of the Alanco Board of Directors: The Board of Directors has
determined that it is in the best interests of Alanco and its shareholders that
payment of all additional consideration to be paid to the Sellers should be paid
in the form of the Company's Class A Common Stock rather than in cash and
recommends approval of the proposal.
3
Selected Financial Data and Pro Forma Information (Page 21)
Selected Historical Financial Data. The unaudited Alanco financial statements
for the quarter ended September 30, 2006 were filed timely with the SEC on Form
10-QSB. The audited financial statements of Alanco for the fiscal years ended
June 30, 2006 and 2005 were filed timely on Form 10-KSB. Form 10-QSB for the
period ended September 30, 2006 (provided in this proxy statement as
Appendix C), and Form 10-KSB for the year ended June 30, 2006 are incorporated
by reference in this Proxy Statement.
The audited consolidated balance sheets of StarTrak Systems LLC and Subsidiaries
as of December 31, 2005 and 2004, and the related consolidated statements of
operations, members' deficit and cash flows for the years then ended and the
interim financial statements for the period ended March 31, 2006 are
provided as Appendix A and Appendix B, respectively, in this proxy statement
to assist you in your analysis of the financial aspects of StarTrak.
Selected Pro Forma Financial Data: The unaudited condensed pro forma combining
Statement of Operations for StarTrak and Alanco for the twelve months ended June
30, 2005 and the nine months ended March 31, 2006, and the pro forma Balance
Sheet as of March 31, 2006 are presented in this proxy statement on Page 22.
4
ALANCO TECHNOLOGIES, INC.
15575 North 83rd Way, Suite 3
Scottsdale, Arizona 85260
(480) 607-1010
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 30, 2007
GENERAL INFORMATION
The enclosed Proxy is solicited by and on behalf of the Board of Directors of
Alanco Technologies, Inc., an Arizona corporation (the "Company"), for use at
the Company's Annual Meeting of Shareholders to be held at 15575 North 83rd Way,
Suite 3, Scottsdale, Arizona 85260, on the 30th day of January, 2007, at 10:00
a.m., Mountain Standard Time, and at any adjournment or postponement thereof. It
is anticipated that this Proxy Statement and the accompanying Proxy will be
mailed to the Company's shareholders on or before January 2, 2007.
The expense of soliciting proxies, including the cost of preparing, assembling
and mailing this proxy material to shareholders, will be borne by the Company.
It is anticipated that solicitations of proxies for the Meeting will be made
only by use of the mails; however, the Company may use the services of its
Directors, Officers and employees to solicit proxies personally or by telephone
without additional salary or compensation to them. Brokerage houses, custodians,
nominees and fiduciaries will be requested to forward the proxy soliciting
materials to the beneficial owners of the Company's shares held of record by
such persons, and the Company will reimburse such persons for their reasonable
out-of-pocket expenses incurred by them in that connection.
Shares not voting as a result of a proxy not marked or marked to abstain will be
counted as part of total shares voting in order to determine whether or not a
quorum has been achieved at the Meeting. Shares registered in the name of a
broker-dealer or similar institution for beneficial owners to whom the
broker-dealer distributed notice of the Annual Meeting and proxy information and
which such beneficial owners have not returned proxies or otherwise instructed
the broker-dealer as to voting of their shares, will be counted as part of the
total shares voting in order to determine whether or not a quorum has been
achieved at the Meeting.
All shares represented by valid proxies will be voted in accordance therewith at
the Meeting unless such proxies have previously been revoked. Proxies may be
revoked at any time prior to the time they are voted by: (a) delivering to the
Secretary of the Company a written instrument of revocation bearing a date later
than the date of the proxy; or (b) duly executing and delivering to the
Secretary a subsequent proxy relating to the same shares; or (c) attending the
meeting and voting your proxy in person (although attendance at the Meeting will
not in and of itself constitute revocation of a proxy.)
The Company's Annual Report to Shareholders for the fiscal year ended June 30,
2006, has been previously mailed or is being mailed simultaneously to the
Company's shareholders and includes a copy of Form 10-KSB, which constitutes
part of this proxy. All other information included in the Annual Report does not
constitute part of these proxy soliciting materials.
5
SHARES OUTSTANDING AND VOTING RIGHTS
Effective October 16, 2006, the Company effected a 2:5 reverse stock split. All
references to both number of shares and price per share of Class A Common Stock
issued and outstanding, options and warrants granted, and common stock
equivalent shares are presented herein on a post-split basis.
Voting rights are vested in the holders of the Company's Common Stock and
Preferred Stock. Only shareholders of record at the close of business on
December 8, 2006, are entitled to notice of and to vote at the Meeting or any
adjournment or postponement thereof. As of December 8, 2006, the Company had
15,494,995 shares of Class A Common Stock issued and outstanding, 3,549,061
shares of Series A Convertible Preferred Stock issued and outstanding and 76,890
shares of Series B Convertible Preferred Stock issued and outstanding. Each
Class A Common share is entitled to one vote, each share of Series A Convertible
Preferred stock is entitled to 1.2 votes (the equivalent number of common shares
into which the Series A Convertible Preferred Stock is convertible), and each
share of Series B Convertible Preferred stock is entitled to 5.2 votes (the
equivalent number of common shares into which the Series B Convertible Preferred
Stock is convertible). If the number of common shares into which the preferred
stock is convertible (the "common stock equivalent") is considered, the total
shares eligible to vote, including the common stock and the common stock
equivalent, on the record date are 20,153,705 shares, each of which is entitled
to one vote on all matters to be voted upon at the Meeting, including the
election of Directors. No fractional shares are outstanding. A majority of the
Company's outstanding voting stock represented in person or by proxy shall
constitute a quorum at the Meeting. The affirmative vote of a majority of the
votes cast, providing a quorum is present, is necessary to approve each
proposal.
Each shareholder present, either in person or by proxy, will have cumulative
voting rights with respect to the election of Directors. Under cumulative
voting, each shareholder is entitled to as many votes as is equal to the number
of shares of Common Stock (or common stock equivalent) of the Company held by
the shareholder on the Record Date multiplied by the number of directors to be
elected, and such votes may be cast for any single nominee or divided among two
or more nominees. The seven nominees receiving the highest number of votes will
be elected to the Board of Directors. There are no conditions precedent to the
exercise of cumulative voting rights. Unless otherwise instructed in any proxy,
the persons named in the form of proxy which accompanies this Proxy Statement
(the "Proxy Holders") will vote the proxies received by them for the Company's
seven nominees set forth in "Election of Directors" below. If additional persons
are nominated for election as directors, the Proxy Holders intend, unless
otherwise instructed in any proxy, to vote all proxies received by them in such
manner in accordance with cumulative voting as will assure the election of as
many of the Company's nominees as possible, and, in such event, the specific
nominees for whom votes will be cast will be determined by the Proxy Holders. If
authority to vote for any nominee of the Company is withheld in any proxy, the
Proxy Holders intend, unless otherwise instructed in such proxy, to vote the
shares represented by such proxy, in their discretion, cumulatively for one or
more of the other nominees of the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND OF MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information with respect to each
shareholder known by Alanco to be the beneficial owner of more than 5% of the
outstanding Alanco common stock or common stock equivalent as of December 8,
2006. Information regarding the stock ownership of Robert R. Kauffman, Alanco
Chairman and Chief Executive Officer, Donald E. Anderson, Alanco Director, and
Timothy P. Slifkin, Alanco Director and President and Chief Executive Officer of
the Company's subsidiary, StarTrak Systems, LLC, is also shown in the table in
the following section, Current Directors and Executive Officers.
6
Five Percent Owners
Class A Total Total
Common Common Total Stock,
Shares Share Stock Options &
Owned Equivalent Exercisable Owned Warrants
Class A Percent Series A Total Owned Stock and Percent of
Common of Preferred Common Percent Options Options Common
Shares Class Shares Share of and and Equivalent
Owned (6) Owned (5) Equivalent Class (6) Warrants Warrants Class (7)
Technology Systems 1,800,000 11.62% -- 1,800,000 8.93% -- 1,800,000 8.93%
International, Inc. (1)
Donald E. Anderson (2) 1,328,504 8.57% 1,196,349 2,764,124 13.72% 1,012,000 3,776,124 17.84%
Robert R. Kauffman (3) 232,800 1.50% 768,924 1,155,509 5.73% 1,409,000 2,564,509 11.89%
Timothy P. Slifkin (4) 1,025,882 6.62% -- 1,025,882 5.09% 160,000 1,185,882 5.84%
(1) Technology Systems International, Inc., a Nevada corporation, (TSIN) is an
independent, private company, which was issued 2,400,000 shares of Alanco
common stock in 2002 in connection with the acquisition of the assets of
TSIN effective in June 2002. The only Form 13D filed by TSIN was filed on
September 9, 2002, and indicated TSIN ownership of 2,400,000 Alanco common
shares. TSIN is currently in bankruptcy proceedings and to our knowledge,
no filings have been made by TSIN to adjust that initial Form 13D filing.
However, based on stock transfer records and information obtained from
public bankruptcy hearings, we believe the current TSIN ownership of Alanco
common stock is approximately 1.8 million shares. To our knowledge, no
person or entity owns enough TSIN shares that upon distribution of the
Alanco shares to the TSIN shareholders such person would own in excess of
5% of Alanco. TSIN has previously indicated their intention to distribute
the shares of Alanco common stock in excess of certain corporate litigation
and liquidation expenses on a pro-rata basis to their shareholders;
however, the shares have not been distributed as of the date of this Proxy
Statement, and there is no assurance that the shares will be distributed.
The address of TSIN is c/o Jill H. Ford, Trustee, P.O. Box 5845, Carefree,
AZ 85377.
(2) Donald E. Anderson is a member of the Board of Directors of Alanco
Technologies, Inc. The number of shares, options and warrants owned
includes The Anderson Family Trust, owner of 1,027,264 shares of Alanco
Class A Common Stock, 690,157 shares of Alanco Series A Convertible
Preferred Stock and 690,000 exercisable warrants (includes 400,000 warrants
which require shareholder approval prior to being exercisable - see
Proposal No. 4 below); Programmed Land, Inc., owner of 293,240 shares of
Alanco Class A Common Stock, 506,192 shares of Alanco Series A Convertible
Preferred Stock and 200,000 exercisable warrants, both of which Mr.
Anderson claims beneficial ownership; and 8,000 shares of Alanco Class A
Common Stock and 122,000 exercisable options owned by Mr. Anderson. In
addition to the exercisable stock options and warrants shown above, Donald
Anderson also holds the following options: 15,000 options exercisable in
fiscal year 2008, 25,000 options exercisable in fiscal year 2009, 25,000
options exercisable in fiscal year 2010, and 25,000 options exercisable in
fiscal year 2011. The 1,196,349 shares of Series A Convertible Preferred
Stock beneficially owned by Mr. Anderson represent 33.71% of the total
Series A Convertible Preferred shares outstanding. Mr. Anderson's address
is 11804 North Sundown Drive, Scottsdale, Arizona 85260.
(3) In addition to the shares shown above, Robert R. Kauffman, Alanco Chairman
and Chief Executive Officer, also beneficially owns 455,000 shares of TSIN
stock, representing an ownership position of less than 2% of the
outstanding TSIN shares. If TSIN distributes the shares of Alanco common
stock owned by TSIN to TSIN shareholders on a proportionate basis, Mr.
Kauffman may acquire additional shares of Alanco common stock, thereby
slightly increasing his percentage of Alanco common shares owned; but due
to matters as discussed in Footnote 1 above, we are unable to accurately
calculate the changes to Mr. Kauffman's ownership. Included in the
1,409,000 exercisable stock options and warrants shown above are 72,000
warrants which require shareholder approval prior to being exercisable -
see Proposal No. 4 below. In addition to the exercisable stock options and
warrants shown above, Robert Kauffman also holds the following options:
9,000 options exercisable in fiscal year 2008, 15,000 options exercisable
in fiscal year 2009, 15,000 options exercisable in fiscal year 2010, and
15,000 options exercisable in fiscal year 2011. The 768,924 shares of
Series A Convertible Preferred Stock beneficially owned by Mr. Kauffman
represent 21.67% of the total Series A Convertible Preferred shares
outstanding. The address for Mr. Kauffman is: c/o Alanco Technologies,
Inc., 15575 North 83rd Way, Suite 3, Scottsdale, Arizona 85260.
(4) Timothy P. Slifkin is a Director of the Company as of June 30, 2006, and
President and Chief Executive Officer of the Company's subsidiary, StarTrak
Systems, LLC ("StarTrak"). The Company acquired StarTrak, a provider of GPS
tracking and wireless asset management services to the transportation
industry, effective June 30, 2006. In addition to the exercisable stock
options and warrants shown above, Tim Slifkin also holds the following
7
options: 60,000 options exercisable in fiscal year 2007, 60,000 options
exercisable in fiscal year 2008, 60,000 options exercisable in fiscal year
2009, and 60,000 options exercisable in fiscal year 2010. The address for
Mr. Slifkin is: c/o StarTrak Systems, LLC, 106 American Road, Morris
Plains, NJ 07950.
(5) Preferred Shares are Series A Convertible Preferred Stock, each share of
which is convertible into 1.2 shares of Class A Common Stock. As of
December 8, 2006, there are 3,549,061 shares of Series A Convertible
Preferred Stock outstanding. The 5% owners do not own any shares of the
Series B Convertible Preferred Stock.
(6) The percentages for Class A Common Stock shown are calculated based upon
15,494,995 shares of Class A Common Stock outstanding on December 8, 2006.
The percentages for Total Common Stock Equivalent are calculated based upon
20,153,705 shares outstanding on December 8, 2006.
(7) In calculating the percentage of ownership, option and warrant shares are
deemed to be outstanding for the purpose of computing the percentage of
shares of common stock equivalent owned by such person, but are not deemed
to be outstanding for the purpose of computing the percentage of shares of
common stock equivalent owned by any other stockholders.
Current Directors and Executive Officers
The following table sets forth the number of exercisable stock options and
warrants and the number of shares of the Company's Common Stock and Preferred
Stock beneficially owned as of December 8, 2006, by individual directors and
executive officers and by all directors and executive officers of the Company as
a group.
The number of shares beneficially owned by each director or executive officer is
determined under rules of the Securities and Exchange Commission, and the
information is not necessarily indicative of the beneficial ownership for any
other purpose. Unless otherwise indicated, each person has sole investment and
voting power (or shares such power with his or her spouse) with respect to the
shares set forth in the following table.
Securities of the Registrant Beneficially Owned (1)
Total
Class A Shares Series A Shares Total Shares Total Stock,
Common Owned Preferred Owned Common Owned Exercisable Stock Options
Stock Percent Stock Percent Stock Percent Stock Owned + & Warrants
Name of Shares of Class Shares of Class Equivalent of Class Options & Options & Percent of
Beneficial Owner (2) Owned (10) Owned (10) Owned (10) Warrants Warrants Class (11)
----------------------- ------- -------- -------- ------- --------- -------- --------- --------- -----------
Robert R. Kauffman (3) 232,800 1.50% 768,924 21.67% 1,155,509 5.73% 1,409,000 2,564,509 11.89%
Director/COB/CEO
John A. Carlson (4) 100,257 0.65% 137,741 3.88% 265,547 1.32% 586,000 851,547 4.11%
Director/EVP/CFO
Harold S. Carpenter (5) 122,216 0.79% 306,754 8.64% 490,321 2.43% 276,000 766,321 3.75%
Director
James T. Hecker (6) 28,156 0.18% 28,804 0.81% 62,721 0.31% 160,000 222,721 1.10%
Director
Timothy P. Slifkin (7) 865,882 5.59% 0 0.00% 865,882 4.30% 160,000 1,025,882 5.05%
Director/CEO-StarTrak
Thomas C. LaVoy 22,106 0.14% 49,697 1.40% 81,743 0.41% 152,000 233,743 1.15%
Director
Donald E. Anderson (8) 1,328,504 8.57% 1,196,349 33.71% 2,764,124 13.72% 1,012,000 3,776,124 17.84%
Director
Greg M. Oester 23,155 0.15% 13,969 0.39% 39,918 0.20% 488,000 527,918 2.56%
President - ATSI
Thomas A. Robinson (9) 577,255 3.73% 0 0.00% 577,255 2.86% 160,000 737,255 3.63%
EVP - StarTrak
--------- --------- --------- --------- ----------
Officers and Directors 3,300,331 21.30% 2,502,238 70.50% 6,303,020 31.27% 4,403,000 10,706,020 43.60%
========= ========= ========= ========= ==========
as a Group (9 individuals)
8
(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, ATSI is the
Company's wholly-owned subsidiary, Alanco/TSI PRISM, Inc.
(3) In addition to the shares shown above, Robert R. Kauffman, Alanco
Chairman and Chief Executive Officer, also beneficially owns 455,000
shares of TSIN stock, representing an ownership position of less than 2%
of the outstanding TSIN shares. If TSIN distributes the shares of Alanco
common stock owned by TSIN to TSIN shareholders on a proportionate basis,
Mr. Kauffman may acquire additional shares of Alanco common stock,
thereby slightly increasing his percentage of Alanco common shares owned;
but due to matters as discussed in Footnote 1 to the Five Percent Owners
table above, we are unable to accurately calculate the changes to Mr.
Kauffman's ownership. Included in the 1,409,000 exercisable stock options
and warrants shown above are 72,000 warrants which require shareholder
approval prior to being exercisable - see Proposal No. 4 below. In
addition to the exercisable stock options and warrants shown above,
Robert Kauffman also holds the following options: 9,000 options
exercisable in fiscal year 2008, 15,000 options exercisable in fiscal
year 2009, 15,000 options exercisable in fiscal year 2010, and 15,000
options exercisable in fiscal year 2011. The 768,924 shares of Series A
Convertible Preferred Stock beneficially owned by Mr. Kauffman represent
21.67% of the total Series A Convertible Preferred shares outstanding.
(4) In addition to the exercisable stock options and warrants shown above,
John A. Carlson, Alanco Executive Vice President and Chief Financial
Officer, also holds the following options: 3,000 options exercisable in
fiscal year 2008, 5,000 options exercisable in fiscal year 2009, 5,000
options exercisable in fiscal year 2010, and 5,000 options exercisable in
fiscal year 2011.
(5) Excludes 176,000 shares of Class A Common Stock, 338,404 shares of Series
A Convertible Preferred Stock and 92,000 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. In addition to the exercisable stock options
and warrants shown above, Harold Carpenter also holds the following
options: 6,000 options exercisable in fiscal year 2008, 10,000 options
exercisable in fiscal year 2009, 10,000 options exercisable in fiscal
year 2010, and 10,000 options exercisable in fiscal year 2011.
(6) Excludes 204,000 shares of Class A Common Stock, 434,345 shares of Series
A Convertible Preferred Stock and 174,000 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) Timothy P. Slifkin is a Director of the Company as of June 30, 2006, and
President and Chief Executive Officer of the Company's subsidiary,
StarTrak Systems, LLC ("StarTrak"). The Company acquired StarTrak, a
provider of GPS tracking and wireless asset management services to the
transportation industry, effective June 30, 2006. In addition to the
exercisable stock options and warrants shown above, Tim Slifkin also
holds the following options: 60,000 options exercisable in fiscal year
2007, 60,000 options exercisable in fiscal year 2008, 60,000 options
exercisable in fiscal year 2009, and 60,000 options exercisable in fiscal
year 2010.
(8) Donald E. Anderson is a member of the Board of Directors of Alanco
Technologies, Inc. The number of shares, options and warrants owned
includes The Anderson Family Trust, owner of 1,027,264 shares of Alanco
Class A Common Stock, 690,157 shares of Alanco Series A Convertible
Preferred Stock and 690,000 exercisable warrants (includes 400,000
warrants which require shareholder approval prior to being exercisable -
see Proposal No. 4 below); Programmed Land, Inc., owner of 293,240 shares
of Alanco Class A Common Stock, 506,192 shares of Alanco Series A
Convertible Preferred Stock and 200,000 exercisable warrants, both of
which Mr. Anderson claims beneficial ownership; and 8,000 shares of
Alanco Class A Common Stock and 122,000 exercisable options owned by Mr.
Anderson. In addition to the exercisable stock options and warrants shown
above, Donald Anderson also holds the following options: 15,000 options
exercisable in fiscal year 2008, 25,000 options exercisable in fiscal
year 2009, 25,000 options exercisable in fiscal year 2010, and 25,000
options exercisable in fiscal year 2011. The 1,196,349 shares of Series A
Convertible Preferred Stock beneficially owned by Mr. Anderson represent
33.71% of the total Series A Convertible Preferred shares outstanding.
(9) Thomas A. Robinson is an Executive Vice President of the Company's
subsidiary, StarTrak Systems, LLC ("StarTrak"). The Company acquired
StarTrak, a provider of GPS tracking and wireless asset management
9
services to the transportation industry, effective June 30, 2006. In
addition to the exercisable stock options and warrants shown above, Tom
Robinson also holds the following options: 60,000 options exercisable in
fiscal year 2007, 60,000 options exercisable in fiscal year 2008, 60,000
options exercisable in fiscal year 2009, and 60,000 options exercisable
in fiscal year 2010.
(10) The percentages for Class A Common Stock shown are calculated based upon
15,494,995 shares of Class A Common Stock outstanding on December 8,
2006. The percentages for Series A Convertible Preferred Stock are
calculated based upon 3,549,061 shares of Series A Convertible Preferred
Stock outstanding on December 8, 2006, each share of which is convertible
into 1.2 shares of Class A Common Stock. The percentages for Common Stock
Equivalent shares are calculated based upon 20,153,705 Common Stock
Equivalent shares outstanding as of December 8, 2006.
(11) The number and percentages shown include the shares of common stock
equivalent actually owned as of December 8, 2006 and the shares of common
stock that the identified person or group had a right to acquire within
60 days after December 8, 2006. The percentages shown are calculated
based upon 20,153,705 Common Stock Equivalent shares outstanding as of
December 8, 2006. In calculating the percentage of ownership, option and
warrant shares are deemed to be outstanding for the purpose of computing
the percentage of shares of common stock equivalent owned by such person,
but are not deemed to be outstanding for the purpose of computing the
percentage of shares of common stock equivalent owned by any other
stockholders.
Meetings and Committees of the Board of Directors
The Board of Directors has a Compensation/Administration Committee, which was
formed in 1995 and is comprised of Messrs. Harold S. Carpenter and James T.
Hecker, who are independent directors of the Company. The
Compensation/Administration Committee recommends to the Board the compensation
of executive officers and serves as the Administrative Committee for the
Company's Stock Option Plans. The Compensation/Administration Committee met
three times during the fiscal year ended June 30, 2006.
The Board of Directors also has an Audit/Corporate Governance Committee. The
Audit Committee was originally formed in 1995. In September 2004, the Board of
Directors approved a name change for the committee to Audit/Corporate Governance
Committee to more accurately reflect the additional duties and responsibilities
of the committee as required by the Sarbanes-Oxley Act of 2002. The
Audit/Corporate Governance Committee, comprised of Messrs. Harold S. Carpenter,
James T. Hecker, and Thomas C. LaVoy, all of whom are independent non-employee
directors of the Company who have significant business experience and are deemed
to be financially knowledgeable, serves as a liaison between the Board and the
Company's auditor. 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 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. The Audit/Corporate Governance
Committee is comprised of independent members as defined under the National
Association of Securities Dealers listing standards. The Audit/Corporate
Governance Committee met three times during the fiscal year ended June 30, 2006.
All meetings held by the Board of Directors' committees were attended by each of
the directors serving on such committees with the following exceptions: Mr.
Hecker and Mr. LaVoy were each absent from one meeting for each committee on
which they serve.
The final Board committee is the Nominating/Independent Directors Committee,
which is comprised of Messrs. Harold S. Carpenter, James T. Hecker, Thomas C.
LaVoy, and Donald E. Anderson, all members of the Company's Board of Directors
who have been determined by the Board to meet the qualification as "independent"
director as set forth in Rule 10A-3 of the Exchange Act. Per Board resolution,
the Nominating/Independent Directors Committee approves all management
nominations for members of the Company's Board of Directors. In addition, the
Nominating/Independent Directors Committee meets in regularly scheduled
executive sessions at which only the independent directors are present.
The Company's Board of Directors held three meetings during the fiscal year
ended June 30, 2006, at which time all Directors were present, with the
exception of Mr. Hecker and Mr. LaVoy, each being absent from one Board of
Directors meeting. Mr. Slifkin was appointed to the Board on June 30, 2006. All
current members of the Board of Directors' committees are expected to be
nominated for reelection at a meeting of the Board of Directors following the
annual meeting.
10
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 Proxy Statement, all Section 16(a) filing
requirements applicable to its officers, Directors and greater than 10%
beneficial owners were satisfied, with the exception of Technology Systems
International, Inc., a Nevada corporation (TSIN), who, to the best of our
knowledge, continues to own approximately 1.8 million shares of the Company's
Class A Common Stock. TSIN is currently in Chapter 7 Bankruptcy proceedings and
has not, to our knowledge, filed any current Section 16 (d) forms. Also, some
reportable events were not timely reported. The names of the involved persons,
the event dates, and the filing dates are as follows:
Name of Reporting Person Reportable Event Event Date Date Reported
Donald E. Anderson Class A Common Stock Options 6/30/2006 7/11/2006
John A. Carlson Class A Common Stock Options 6/30/2006 7/11/2006
Harold S. Carpenter Class A Common Stock Options 6/30/2006 7/11/2006
James T. Hecker Class A Common Stock Options 6/30/2006 7/11/2006
Robert R. Kauffman Class A Common Stock Options 6/30/2006 7/11/2006
Thomas C. LaVoy Class A Common Stock Options 6/30/2006 7/11/2006
Timothy P. Slifkin Class A Common Stock Options 6/30/2006 7/11/2006
Class A Common Stock 6/30/2006 7/11/2006
Thomas A. Robinson Class A Common Stock Options 6/30/2006 7/11/2006
Class A Common Stock 6/30/2006 7/11/2006
Steven P. Oman Class A Common Stock Options 6/30/2006 7/11/2006
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid or accrued by the Company
for the services rendered during the fiscal years ended June 30, 2006, 2005 and
2004 to the Company's Chief Executive Officer, Chief Financial Officer, and
President of the Company's subsidiary, Alanco/TSI PRISM, Inc., an Arizona
corporation (ATSI), acquired effective June 1, 2002, whose salaries and bonus
exceeded $100,000 during the last fiscal year (collectively, the "Named
Executive Officers"). No stock appreciation rights ("SARs") have been granted by
the Company to any of the Named Executive Officers during the last three fiscal
years.
11
Annual Compensation Long Term Compensation
--------------------------------- ----------------------
Name and Other Securities (# shares)
Principal Annual Annual Underlying Options
Position Salary Bonus Compensation (1) Granted during FY
Robert R. Kauffman, C.E.O.
FY 2006 $225,000 None $17,400 376,000
FY 2005 183,750 None 17,400 40,000
FY 2004 180,000 None 17,400 260,000
John A. Carlson, C.F.O.
FY 2006 200,000 None 10,400 228,000
FY 2005 163,333 None 10,033 30,000
FY 2004 160,000 None 9,467 140,000
Greg M. Oester, President, ATSI
FY 2006 154,500 None None 48,000
FY 2005 154,500 None None 14,000
FY 2004 146,625 None None 100,000
(1) Represents supplemental executive benefit reimbursement for the year
and Company matching for Alanco's 401(K) Profit Sharing Plan.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 2006, to each of the Named Executive Officers and/or
Directors and to all other employees as a group. No stock appreciation rights
("SARs") have been granted by the Company.
INDIVIDUAL GRANTS
Number of
Securities
Underlying % of Total Exercise
Options Options Price Grant Expiration
Name Granted Granted ($/Sh) Date Date
---- --------- -------- -------- ----- ----------
Robert Kauffman 160,000 5.25% $2.02 9/13/2005 9/13/2015
Robert Kauffman 16,000 0.52% $1.15 11/16/2005 11/16/2015
Robert Kauffman 200,000 6.56% $1.82 6/30/2006 6/30/2011
John Carlson 80,000 2.62% $2.02 9/13/2005 9/13/2015
John Carlson 48,000 1.57% $1.15 11/16/2005 11/16/2015
John Carlson 100,000 3.28% $1.82 6/30/2006 6/30/2011
Harold Carpenter 32,000 1.05% $2.02 9/13/2005 9/13/2015
Harold Carpenter 40,000 1.31% $1.82 6/30/2006 6/30/2011
James Hecker 32,000 1.05% $2.02 9/13/2005 9/13/2015
James Hecker 40,000 1.31% $1.82 6/30/2006 6/30/2011
Timothy Slifkin 400,000 13.12% $1.82 6/30/2006 6/30/2011
Thomas LaVoy 32,000 1.05% $2.02 9/13/2005 9/13/2015
Thomas LaVoy 16,000 0.52% $1.15 11/16/2005 11/16/2015
Thomas LaVoy 40,000 1.31% $1.82 6/30/2006 6/30/2011
Donald Anderson 32,000 1.05% $2.02 9/13/2005 9/13/2015
Donald Anderson 40,000 1.31% $1.82 6/30/2006 6/30/2011
Greg Oester 40,000 1.31% $2.02 2/16/2005 2/16/2015
Greg Oester 8,000 0.26% $1.15 11/16/2005 11/16/2015
Thomas Robinson 400,000 13.12% $1.82 6/30/2006 6/30/2011
Other Employees 1,292,000 42.39% $1.25 - $2.50 Various (1)
-------------------
Total 3,048,000 100.00%
===================
(1) The expiration dates for these options range from 9/27/2007 to 5/25/2016.
All options are granted at a price not less than "grant-date market." During the
fiscal year 349,600 previously granted stock options expired or were cancelled.
12
Aggregated Options and Warrants - Exercised in Last Fiscal Year and Values at
Fiscal Year End
The following table sets forth the number of exercised and unexercised options
and warrants held by each of the Named Executive Officers and/or Directors at
June 30, 2006, and the value of the unexercised, in-the-money options at June
30, 2006.
Shares
Acquired On Unexercised Value of
Exercise Options & Warrants Unexercised
During Value at Fiscal In-The-Money
2006 Fiscal Realized Year End Options &Warrants
Name Year ($) (1) (Shares) (2) at FYE ($) (3)
---- ---- ------- ------------ --------------
Robert Kauffman 48,000 $ 4,600 1,331,000 $417,800
John Carlson 34,000 5,800 584,000 112,650
Harold Carpenter 40,000 4,000 200,000 37,400
James Hecker 0 0 160,000 14,400
Thomas LaVoy 8,000 1,800 152,000 10,800
Donald Anderson 160,000 16,000 930,000 164,100
Timothy Slifkin 0 0 160,000 0
Thomas Robinson 0 0 160,000 0
Greg Oester 4,000 900 488,000 37,800
(1) Calculated as the difference between closing price on the date
exercised and the exercise price, multiplied by the number of
options exercised.
(2) Represents the number of securities underlying unexercised options and
warrants that were exercisable at 2006 Fiscal Year End. The numbers shown
above for Donald Anderson include a warrant owned by The Anderson Family
Trust, of which Mr. Anderson claims beneficial ownership, for 328,000
shares which requires shareholder approval prior to being exercisable.
See Proposal No. 4 below.
(3) Calculated as the difference between the closing price of the Company's
Common Stock on June 30, 2006, and the exercise price for those options
exercisable on June 30, 2006, with an exercise price less than the
closing price, multiplied by the number of applicable options.
Option Grants Subsequent to Fiscal Year End
Number of
Underlying
Securities
Options Date of Date Expiration Option
Name Granted Grant Exercisable Date Price
Robert R. Kauffman 60,000 (1) 8/15/06 (3) 8/15/11 $1.37
John A. Carlson 20,000 (2) 8/15/06 (3) 8/15/11 $1.37
Harold S. Carpenter 40,000 (2) 8/15/06 (3) 8/15/11 $1.37
Donald E. Anderson 100,000 (1) 8/15/06 (3) 8/15/11 $1.37
(1) Issued pursuant to the 2005 Stock Option Plan
(2) Issued pursuant to the 2005 Directrors & Officers Stock Option Plan
(3) 10% vest on 8/15/06, 15% vest on 8/15/07, 25% vest on 8/15/08,
25% vest on 8/15/09 and 25% vest on 8/15/2010
Employment Agreements and Executive Compensation
The Executive Officers of the Company are at-will employees without employment
agreements with the exception of Timothy Slifkin and Thomas Robinson, executive
officers of the Company's subsidiary, StarTrak Systems, LLC, acquired by Alanco
effective June 30, 2006. Both Messrs. Slifkin and Robinson have employment
contracts with StarTrak Systems, LLC, which pre-date the Company's acquisition
of StarTrak. The contracts terminate on June 30, 2009, and specify that Mr.
Slifkin is to be employed as the Executive Director of Technology and Mr.
Robinson is to be employed as an Executive Vice President. However, Mr. Slifkin
currently is the Chief Executive Officer of StarTrak. The contracts specify a
salary of $160,000 per year with a performance bonus of up to 20% of said base
salary for both Mr. Slifkin and Mr. Robinson. The contracts require certain
severance payments in the event of termination by the Company without cause, or
if either officer resigns with good reason, as defined in the contracts.
13
Compensation of Directors
During Fiscal Year 2006, non-employee Directors were compensated for their
services in cash ($750 per meeting per day up to a maximum of $1,500 per
meeting) and through the grant of options to acquire shares of Class A Common
Stock as provided by the 2004 Directors and Officers Stock Option Plan. 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, and 2005 Directors and Officers Stock Option Plans ("D&O Plans") on
November 6, 1998, November 5, 1999, November 10, 2000, November 22, 2002,
November 19, 2004, and January 20, 2006,respectively. The purpose of the 1996,
1998, 1999, 2000, 2002, 2004, and 2005 D&O Plans is to advance the business and
development of the Company and its shareholders by affording to the Directors
and Officers of the Company the opportunity to acquire a propriety interest in
the Company by the grant of Options to acquire shares of the Company's common
stock. All Directors and Executive Officers of the Company are eligible to
participate in the 1996, 1998, 1999, 2000, 2002, 2004, and 2005 Plans. Newly
appointed Directors receive options to purchase shares of common stock at fair
market value. Upon each subsequent anniversary of the election to the Board of
Directors, each non-employee Director may receive an additional option to
purchase shares of common stock at fair market value.
Transactions with Management
Mr. Steve Oman, a former member of the Board of Directors, received compensation
in the amount of approximately $70,200 for legal services to the Company for the
fiscal year ended June 30, 2006. Mr. Oman resigned from his position on Alanco's
Board of Directors on June 30, 2006, to allow for a continuing majority of
independent directors on the Company's Board. Mr. Oman's resignation was not due
to any disagreement with the registrant but was solely for the purpose of
compliance with the Sarbanes-Oxley requirement that the Company's Board of
Directors be comprised of a majority of independent members. Mr. Oman will
continue as Alanco's Corporate Counsel.
Mr. Donald Anderson, a member of the Board of Directors and trustee and
beneficial owner of the Anderson Family Trust, was paid interest in fiscal year
2006 under the Line of Credit Agreement in the amount of approximately $89,500.
AUDIT/CORPORATE GOVERNANCE COMMITTEE REPORT (1)
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 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.
14
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."
Review of Audited Financial Statements
In this context, the Audit/Corporate Governance Committee reviewed and discussed
the Company's audited financial statements with management and with the
Company's independent auditors. Management represented to the Audit/Corporate
Governance Committee that the Company's consolidated financial statements were
prepared in accordance with auditing standards of the Public Company Accounting
Oversight Board (United States). Discussions about the Company's audited
financial statements included the auditor's judgments about the quality, not
just the acceptability, of the accounting principles, the reasonableness of
significant judgments and the clarity of disclosures in its financial
statements. The Audit/Corporate Governance Committee also discussed with the
auditors other matters required by Statement on Auditing Standards, ("SAS") No.
61 "Communication with Audit Committees," as amended by SAS No. 90, "Audit
Committee Communications."
The Company's auditors provided to the Committee written disclosures required by
the Independence Standards Board Standard No. 1 "Independence Discussion with
Audit Committee." The Audit/Corporate Governance Committee discussed with the
auditors their independence from the Company, and considered the compatibility
of non-audit services with the auditor's independence.
Audit Fees
The aggregate fees billed by Semple & Cooper, LLP, the Company's independent
auditor, for professional services rendered for the audit of the Company's
annual financial statements for the fiscal years ended June 30, 2006 and 2005,
the review of the financial statements included in the Company's Forms 10-QSB
for such fiscal years, and other services performed for the Company by Semple &
Cooper, LLP, were approximately $158,000 and $123,000, respectively.
Financial Information Systems Design and Implementation
There were no fees billed for the professional services described in Paragraph
(c)(4)(ii) of Rule 2-01 of Regulation S-X rendered by Semple & Cooper, LLP for
the fiscal year ended June 30, 2006.
15
All Other Fees
Semple & Cooper, LLP billed the Company during fiscal year 2006 and 2005 a total
of approximately $11,000 and $10,000, respectively, for tax preparation and tax
consulting services. The Audit Committee has considered whether the provision of
these services is compatible with maintaining the principal accountant's
independence.
Audit Committee Pre-Approval Policies and Procedures
The fiscal year 2006 and 2005 audit services provided by Semple & 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.
Recommendation
Based on the Audit/Corporate Governance Committee's discussion with management
and the auditors, and the Audit/Corporate Governance Committee's review of the
representations of management and the report of the auditors to the
Audit/Corporate Governance Committee, the Audit/Corporate Governance Committee
recommended to the Board of Directors that the audited financial statements be
included in the Company's Annual Report on Form 10-KSB for the year ended June
30, 2006, filed with the Securities and Exchange Commission.
AUDIT/CORPORATE GOVERNANCE COMMITTEE
James T. Hecker
Harold S. Carpenter
Thomas C. LaVoy
-------------------------------
(1) The material in this report is not "soliciting material," is not deemed
filed with the commission and is not to be incorporated by reference in any
filing of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the
date hereof and irrespective of any general incorporation language in any such
filing.
Proposal No. 1 ELECTION OF DIRECTORS
The Articles of Incorporation presently provide for a Board of Directors of not
more than nine members. The number of Directors of the Company has been fixed at
seven by the Company's Board of Directors. The Company's Board of Directors
recommends the election of the seven nominees listed below to hold office until
the next Annual Meeting of Shareholders or until their successors are elected
and qualified or until their earlier death, resignation or removal. The persons
named as "proxies" in the enclosed form of Proxy, who have been designated by
Management, intend to vote for the seven nominees for election as Directors
unless otherwise instructed in such proxy. If at the time of the Meeting, any of
the nominees named below should be unable to serve, which event is not expected
to occur, the discretionary authority provided in the Proxy will be exercised to
cumulatively vote for the remaining nominees, or for a substitute nominee or
nominees, if any, as shall be designated by the Board of Directors.
Nominees
All nominees for Director have been approved by the Company's
Nominating/Independent Directors Committee. The following table sets forth the
name and age of each nominee for Director, indicating all positions and offices
with the Company presently held by him, and the period during which he has
served as such:
16
Year
Name Age Position First Director
Harold S. Carpenter 72 Director 1995
James T. Hecker 49 Director 1997
Robert R. Kauffman 66 Director/C.O.B./C.E.O. 1998
Thomas C. LaVoy 47 Director 1998
John A. Carlson 59 Director/E.V.P./C.F.O. 1999
Donald E. Anderson 73 Director 2002
Timothy P. Slifkin 51 Director/C.E.O. - StarTrak 2006
Business Experience of Nominees
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.
Harold S. Carpenter: Mr. Carpenter is the former the President of Superiorgas
Co., Des Moines, Iowa, which is engaged in the business of trading and brokering
bulk refined petroleum products with gross sales of approximately $500 million
per year. He is also the General Partner of Superiorgas L.P., an investment
company affiliated with Superiorgas Co. Mr. Carpenter founded these companies in
1984 and 1980, respectively. Mr. Carpenter is also the President of Carpenter
Investment Company, Des Moines, Iowa, which is a real estate investment company
holding properties primarily in central Iowa. From 1970 until 1994, Mr.
Carpenter was the Chairman of the George A. Rolfes Company of Boone, Iowa, which
manufactured air pollution control equipment. Mr. Carpenter graduated from the
University of Iowa in 1958 with a Bachelor of Science and Commerce degree.
James T. Hecker: Mr. Hecker is both an Attorney and a Certified Public
Accountant. Since 1987, Mr. Hecker has been Vice President, Treasurer and
General Counsel of Rhino Capital Incorporated, Evergreen, Colorado, a private
capital management company which manages a $60 million portfolio. He also
served, since 1992, as a trustee of an $11 million charitable trust. From 1984
to 1987, Mr. Hecker was the Controller of Northern Pump Company, Minneapolis,
Minnesota, a multi-state operating oil and gas company with more than 300
properties, with responsibility of all accounting and reporting functions. Prior
to that, from 1981 to 1984, Mr. Hecker was Audit Supervisor of Total Petroleum,
Inc., Denver, Colorado, 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, St. Cloud,
Minnesota, and is a Certified Public Accountant.
John A. Carlson: Mr. Carlson, Executive Vice President and Chief Financial
Officer of Alanco Technologies, Inc., joined the Company in September 1998. Mr.
Carlson started his career with Price Waterhouse & Co. in Chicago, Illinois. He
has over twenty-five years of public and private financial and operational
management experience, including over twelve years as Chief Financial Officer of
a Fortune 1000 printing and publishing company. He earned his Bachelor of
Science degree in Business Administration at the University of South Dakota, and
is a Certified Public Accountant.
17
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 Bachelor of Arts
degree in Accounting.
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 transportation industry's acceptance of the technology for damage
prevention, refrigeration transport, and asset management applications. Mr.
Slifkin has been developing remote monitoring systems since founding Elexor
Associates in 1986, and in developing and deploying wireless systems (satellite
and terrestrial) since 1992. He has several patents issued or pending on related
technology. Prior to founding StarTrak, Mr. Slifkin was employed with Hewlett
Packard, Johannson Microwave, American Microsystems, and Jet Propulsion
Laboratories. He holds a Bachelors Degree in Engineering.
Proposal No. 2 APPROVAL OF THE ALANCO 2006 STOCK OPTION PLAN
The Company's Board of Directors approved submitting the Alanco Technologies,
Inc. 2006 Stock Option Plan to the shareholders for approval. The Board of
Directors recommends approval of the Plan. The purpose of the Plan is to advance
the business and development of the Company and its shareholders by affording to
Employees of the Company the opportunity to acquire an equity interest in the
Company by the grant of Options to acquire shares of the Company's common stock.
The Company has no current plans, proposals, or arrangements to issue options
pursuant to the 2006 Stock Option Plan. The benefits or amount of options that
will be received by or allocated to any particular employee of the Company under
the Plan is not determinable.
The Options granted to Employees can be either "Incentive Stock Options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
"Non-Statutory Options." The issuance of qualified Incentive Stock Options
pursuant to this Plan is not expected to be a taxable event for qualified
recipients until such time that the recipient elects to sell the shares received
from the exercise whereupon the recipient is expected to recognize income to the
extent the sale price of the shares exceeds the exercise price of the option on
the date of sale. The issuance of Non-Statutory Stock Options pursuant to this
Plan is not expected to result in a tax liability to the recipient since the
options are granted at fair market value on date of grant. The recipient is
expected to recognize income to the extent the market price of the shares
exceeds the exercise price of the option on the date of exercise.
The Plan is administered by the Compensation/Administration Committee of the
Board of Directors. The Plan may issue Options to acquire up to 3,000,000 shares
to Employees. The Company will not receive any consideration for the grant of
options under the Plan and the approximate market value of the shares to be
reserved for the Plan is $4,320,000 based upon the average ten trading day
closing price for the Company's common stock for the period ending December 8,
2006. The maximum number of shares subject to Incentive Stock Options granted to
any one Employee which are first exercisable during any single calendar year
shall not exceed a fair market value of $100,000. The exercise price for Options
shall be set by the Compensation/Administration Committee but shall not be for
less than the fair market value of the shares on the date the Option is granted.
Fair market value shall mean the closing price at which the Stock is listed in
the NASDAQ quotation system ending on the day an Option is granted.
18
The period in which Options can be exercised shall be set by the
Compensation/Administration Committee not to exceed ten years from the date of
Grant. Incentive Stock Options are exercisable once vested. The vesting schedule
shall be as follows: ten percent (10%) of the shares issuable under the Options
shall vest on the Date of Grant, fifteen percent (15%) of the shares issuable
under the Options shall vest one year from date of Grant provided that the
Optionee has remained an Employee of the Company for not less than one year from
date of Grant, twenty-five percent (25%) of the shares issuable under the
Options shall vest two years from date of Grant provided that the Optionee has
remained an Employee of the Company for not less than two years from the date of
Grant, twenty-five percent (25%) of the shares issuable under the Options shall
vest three years from date of Grant provided that the Optionee has remained an
Employee of the Company for not less than three years from the date of Grant,
and the remaining twenty-five percent (25%) of the shares issuable under the
Options shall vest four years from date of Grant provided that the Optionee has
remained an Employee of the Company for not less than four years from the date
of Grant, or other alternative vesting as may be determined by the
Compensation/Administration Committee. The Stock Options must be exercised
within three months following Optionee's termination of relationship with the
Company, or within one (1) year following death or permanent and total
disablement of the Optionee. Otherwise, the Incentive Stock Options shall lapse.
The vesting schedule and the exercise schedule following termination, death or
total and permanent disablement of the Optionee of Non-Statutory Stock Options
will be determined by the Committee at the time of grant. The Plan may be
terminated, modified or amended by the Board of Directors upon the
recommendation of the Compensation/Administration Committee. Provided, however,
if the Plan has been submitted to and approved by the shareholders of the
Company, no such action by the Board may be taken without approval of the
majority of the shareholders of the Company which: (a) increases the total
number of shares of Stock subject to the Plan; (b) changes the manner of
determining the Option price; or (c) withdraws the administration of the Plan
from the Committee.
All Employees of the Company and its subsidiaries are eligible to participate in
the Plan. An Employee is defined in the Plan as a person, including officers and
directors, employed by the Company who in the judgment of the
Compensation/Administration Committee has the ability to positively affect the
profitability and economic well-being of the Company. Part-time employees,
independent contractors, consultants and advisors performing bona fide services
to the Company shall be considered employees for purposes of participation in
the Plan. The aggregate number of shares within the Plan and the rights under
outstanding Options granted hereunder, both as to the number of shares and
Option price, will be adjusted accordingly in the event of a split or a reverse
split in the outstanding shares of the Common Stock of the Company.
Proposal No. 3 APPROVAL OF THE ALANCO 2006 DIRECTORS AND OFFICERS
STOCK OPTION PLAN
The Company's Board of Directors unanimously approved submitting the Alanco
Technologies, Inc. 2006 Directors and Officers Stock Option Plan to the
shareholders for approval. The Board of Directors recommends approval of the
Plan. The purpose of the Plan is to advance the business and development of the
Company and its shareholders by affording to the Directors and Executive
Officers of the Company the opportunity to acquire an equity interest in the
Company by the grant of Options to acquire shares of the Company's common stock.
The Company has four (4) non-employee directors as well as employee directors
and executive officers who are eligible to receive options under the Plan. The
Option Plan provisions indicate that on an annual basis non-employee directors
will be granted an option to purchase 20,000 shares of common stock, which
number may be adjusted at the discretion of the Board of Directors. The
following table provides information as to option grants to the non-employee
directors. Grant amounts to the other eligible officers are not determinable at
this time.
19
NEW PLAN BENEFITS
2006 Directors and Officers Stock Option Plan
Name Position Shares to be Granted Dollar Value ($) (1)
------------------------------------------------------------------------------------
Donald E. Anderson Director 20,000 $37,000
Thomas A. LaVoy Director 20,000 $37,000
James T. Hecker Director 20,000 $37,000
Harold S. Carpenter Director 20,000 $37,000
(1) Dollar value is calculated based on $1.45 per share, the closing bid
price of the Company's Class A Common Stock listed on the NASDAQ
Capital Market on December 8, 2006.
The Options granted are not "Incentive Stock Options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended. The issuance of
such non-qualified options pursuant to this Plan is not expected to be a taxable
event for recipient until such time that the recipient elects to exercise the
option whereupon the recipient is expected to recognize income to the extent the
market price of the shares exceeds the exercise price of the option on the date
of exercise.
The Plan is administered by the Compensation/Administration Committee, which
shall consist of up to three (3) individuals appointed by the Board from among
its members, at least two (2) of which are non-employee Directors. The Plan may
issue Options to acquire up to 1,000,000 shares to Directors and Executive
Officers. The Company will not receive any consideration for the grant of
options under the Plan and approximate market value of the shares to be reserved
for the plan is $1,440,000 based upon the average ten trading day closing price
for the Company's common stock for the period ending December 8, 2006. The
vesting and exercise price for Options shall be set by the
Compensation/Administration Committee but shall not be for less than the fair
market value of the shares on the date the Option is granted. Fair market value
shall mean the closing price at which the Stock is listed in the NASDAQ
quotation system ending on the day an Option is granted. The period in which
Options can be exercised shall be set by the Compensation/Administration
Committee not to exceed ten years from the date of Grant. Options are
exercisable once vested. The Plan may be terminated, modified or amended by the
Board of Directors upon the recommendation of the Compensation/Administration
Committee. Provided, however, if the Plan has been submitted to and approved by
the shareholders of the Company, no such action by the Board may be taken
without approval of the majority of the shareholders of the Company which: (a)
increases the total number of shares of Stock subject to the Plan; (b) changes
the manner of determining the Option price; or (c) withdraws the administration
of the Plan from the Committee. The aggregate number of shares within the Plan
and the rights under outstanding Options granted hereunder, both as to the
number of shares and Option price, will be adjusted accordingly in the event of
a split or a reverse split in the outstanding shares of the Common Stock of the
Company.
Proposal No. 4 APPROVAL OF WARRANTS ISSUED TO AFFILIATES OF THE COMPANY
TO PURCHASE CLASS A COMMON STOCK FROM THE COMPANY
Purpose of Proposal
The Company sold Units consisting of shares of the Company's Class A Common
Stock or Series A Convertible Preferred Stock and Warrants to purchase
additional shares of Class A Common Stock of the Company to The Anderson Family
Trust of which Donald E. Anderson, Director of the Company, is a trustee and
beneficial owner; Robert R. Kauffman, Chairman of the Board and Chief Executive
Officer of the Company; and the Harold S. Carpenter Revocable Trust of which
Harold S. Carpenter, Director of the Company, is a trustee and beneficial owner
(the "Purchasers"), among others, during the period commencing April 26, 2006
through July 14, 2006. The Purchasers are affiliates as described in Rule 144
under the Securities Act of 1933, which includes any officer, director, or 10%
or greater shareholder of the Company. Under the rules of NASDAQ, where the
Company's Class A Common Stock is traded, certain issuances of securities to
20
affiliates of the Company can only occur with the Company's shareholders'
approval. Issuance of the Warrants issued to the affiliates requires such
shareholder approval, and the Warrants are not exercisable by the Purchasers,
either by agreement of the Purchasers or in accordance with the terms of the
Warrants, until shareholder approval of issuance of the Warrants is obtained.
This Proposal is requesting shareholder approval related to the transactions
outlined below for a warrant to purchase 328,000 shares of Class A Common Stock
at a purchase price of $1.62 per share and three warrants to purchase 72,000
shares of Class A Common Stock at a purchase price of $1.50 per share.
Background of Stock and Warrant Issuance
The following table indicates data concerning these sales and the relationship
of each Purchaser to the Company resulting in their classification as an
affiliate of the Company.
# of Shares Warrant
Sale Date Unit # of Units Underlying Exercise Relationship
Purchaser Unit Description Price Purchased Warrant Price
Donald E. Anderson 4/26/2006 Common Stock and $0.61 820,000 328,000 $1.62 10% Shareholder and
Anderson Family Trust Warrant (1) Director
Robert R. Kauffman 7/14/2006 Preferred Stock $1.71 60,000 72,000 $1.50 Director and Officer
and Warrant (2)
Donald E. Anderson 7/14/2006 Preferred Stock $1.71 60,000 72,000 $1.50 10% Shareholder and
Anderson Family Trust and Warrant (2) Director
Harold S. Carpenter
Harold S. Carpenter Preferred Stock
Revocable Trust 7/14/2006 and Warrant (2) $1.71 60,000 72,000 $1.50 Director
(1) Each Unit consisted of two-fifths of one share of Class A Common Stock of
the Company and a Warrant to purchase two-fifths of one share of Class A
Common Stock of the Company for a total purchase price of $500,200. The
Warrant to purchase 328,000 (two-fifths of 820,000) shares of Class A
Common Stock is exercisable for a period of ten years following issuance at
an exercise price of $1.62 per share. A copy of the Stock and Warrant
Purchase Agreement and the Warrant issued in connection with this
transaction were filed as exhibits to the Company's Form 8-K filed with the
SEC on May 4, 2006.
(2) Each Unit consisted of one share of the Company's Series A Preferred Stock
and a Warrant to purchase 1.2 shares of Class A Common Stock of the Company
for a total purchase price of $307,800. The Series A Preferred Stock is
convertible into the Company's Class A Common Stock at a ratio of 1.2
shares of Common Stock for each share of Series A Preferred Stock. The
Warrant to purchase 72,000 (1.2 times 60,000) shares of Class A Common
Stock is exercisable for a period of five years following approval by the
Company's shareholders at an exercise price of $1.50 per share. A copy of
the Stock and Warrant Purchase Agreement and the Warrant issued in
connection with this transaction were filed as exhibits to the Company's
Form 8-K filed with the SEC on July 17, 2006.
Issuance of Warrants in addition to stock as an investment unit is a common
practice of companies similar to Alanco. It allows companies to entice investors
to acquire shares directly from the company rather than in the market, thereby
providing needed capital for the Company. The terms of the purchases of Units
purchased by the affiliates of the Company were the same as Units purchased by
non-affiliates. If the Warrants are not approved by the shareholders, they will
not be exercisable by the affiliates. The directors believe that such result
would significantly impair the Company's ability to raise future monies from
affiliates of the Company, upon whom the Company has relied heavily for needed
capital in the past.
Recommendation of the Alanco Board of Directors
The Alanco Board of Directors has determined that issuance of the Warrants to
the affiliates was in the best interests of Alanco and its shareholders and
thereby unanimously recommends that you vote in favor of the proposal to approve
the issuance of the Warrants to the affiliates.
21
Proposal No. 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
Purpose of Proposal
Effective June 30, 2006, the Company acquired StarTrak Systems, LLC, a Delaware
limited liability company ("StarTrak"), located in Morris Plains, New Jersey.
The transaction was structured as a merger between a newly formed subsidiary of
the Company and StarTrak resulting in the Company owning all of the
post-transaction membership interests in StarTrak, and the previous StarTrak
members ("Sellers") receiving shares of the Company's Class A Common Stock and
the right to receive, if approved by the Company's shareholders, additional
shares of the Company's Class A Common Stock. If shareholder approval is not
obtained, the Company is obligated to make a cash payment valued at the market
price of the Class A Common shares that were to be issued. This proposal is not
approval of the StarTrak acquisition, which has been completed; rather it is the
shareholder approval required for the Company to issue shares of Class A Common
Stock in lieu of cash for payment of future obligations.
ALTHOUGH THE STARTRAK ACQUISITION HAS OCCURRED, AND THIS VOTE WILL NOT APPROVE
OR DISAPPROVE OF THAT TRANSACTION, YOU HAVE THE RIGHT TO VOTE CONCERNING WHETHER
THE FUTURE CONSIDERATION TO BE PAID TO THE SELLERS WILL BE IN THE FORM OF CASH
OR SHARES OF ALANCO'S CLASS A COMMON STOCK IN LIEU OF CASH. BY VOTING IN FAVOR
OF PAYING FOR THE ACQUISITION IN STOCK, CERTAIN DILUTION EFFECTS WILL OCCUR AS
SET FORTH BELOW. HOWEVER, IF THE ADDITIONAL CONSIDERATION IS TO BE CASH, THE
COMPANY WILL HAVE TO RAISE SUCH CASH FROM LENDERS OR OTHER EQUITY ISSUANCES,
WHICH COULD ALSO HAVE DILUTION EFFECTS. THERE CAN BE NO ASSURANCE THAT SUCH CASH
WOULD BE AVAILABLE TO THE COMPANY.
Dilutive Effect of Transaction on Alanco Shareholders. Under the terms of the
transaction, 2,000,000 shares of Alanco Class A Common Stock were issued upon
the closing, and 3,280,000 shares of Alanco Class A Common Stock will be issued
upon approval of the Alanco shareholders immediately following the Annual
Shareholders Meeting. In addition, an undetermined number of shares of Alanco
Class A Common Stock may be issued as an "earn-out" payment based upon the gross
profit of StarTrak and the market value of said shares in the future as
described below (see Terms of the Transaction below). Issuance of these Class A
common shares may cause a dilutive effect on the value of your investment in
Alanco stock.
Terms of the Transaction
Effective June 30, 2006, Alanco acquired StarTrak, which is organized as a
Delaware limited liability company. The transaction was structured as a merger
between a newly formed subsidiary of Alanco and StarTrak resulting in Alanco
owning all of the post-transaction membership interests in StarTrak, and the
Sellers receiving shares of the Company's Class A Common Stock and the right to
receive in the future either cash or additional shares of the Company's Class A
Common Stock.
The future consideration to be paid to the Sellers for their membership
interests includes a fixed payment due following Alanco's 2006 Annual
Shareholders Meeting, but not later than January 31, 2007, and potential
"earn-out" payments based upon the gross profit of the StarTrak business for
fiscal years ending June 30, 2007 and June 30, 2008. The fixed payment due by
January 31, 2007 totals either (i) 3,280,000 shares of the Company's Class A
Common Stock, or (ii) if Alanco's shareholders do not approve the issuance of
said shares, then the value of such shares with the value of each share for such
purpose equal to the average NASDAQ closing market price for Alanco Class A
Common Stock for the five (5) trading days immediately preceding the date of
Alanco's Annual Shareholders Meeting. As of December 8, 2006, based upon the
average NASDAQ closing market price for Alanco Class A Common Stock for the last
five (5) trading days, the amount of cash to be paid to the Sellers, in lieu of
Alanco common stock, would be $4,756,000.
In addition to the fixed payment due by January 31, 2007, the Sellers have the
right to receive two earn-out payments based upon the gross profits of the
StarTrak business for fiscal years ending June 30, 2007 and June 30, 2008. In
particular, the first earn-out payment shall be equal to twice the gross profit
of StarTrak in excess of $6,000,000 for the twelve months ended June 30, 2007,
but not more than the sum of $4,000,000 (the "2007 Earn-Out Payment"). Provided
the Alanco shareholders have approved the issuance of the additional shares, the
2007 Earn-Out Payment shall be paid in the form of Alanco Common Stock valued
for such purpose at the average NASDAQ closing market price for the twenty (20)
trading days immediately following the filing with the Securities Exchange
Commission of Alanco's form 10-KSB for such 2007 fiscal year. In the event that
the Alanco shareholders have not approved the issuance of such additional
shares, the 2007 Earn-Out Payment shall be paid in cash. The 2007 Earn-Out
Payment shall be paid by Alanco in the form required on or before December 31,
2007.
22
The second earn-out payment shall be equal to twice the gross profit of StarTrak
in excess of the greater of (i) $8,000,000 or (ii) the gross profit of StarTrak
for the twelve months ended June 30, 2008, but not more than the sum of
$4,000,000 (the "2008 Earn-Out Payment"). Provided the Alanco shareholders have
approved the issuance of the additional shares, the 2008 Earn-Out Payment shall
be paid in the form of Alanco Common Stock valued for such purpose at the
average NASDAQ closing market price for the twenty (20) trading days immediately
following the filing with the Securities Exchange Commission of Alanco's form
10-KSB for such 2008 fiscal year. In the event that the Alanco shareholders have
not approved the issuance of such additional shares, the 2008 Earn-Out Payment
shall be paid in cash. The 2008 Earn-Out Payment shall be paid by Alanco in the
form required on or before December 31, 2008.
In addition to the consideration paid or to be paid to the Sellers, a commission
is payable to Cronus Partners, LLC, the investment banking firm involved in the
transaction as follows: (i) 61,406 shares of Alanco common stock issued at
closing, (ii) $150,000 paid at closing, (iii) $150,000 paid on August 31, 2006,
and (iv) $107,000 due seven days following Alanco's 2006 Annual Shareholders
Meeting, payable in cash, or at Alanco's option, in shares of Alanco common
stock with each share valued for such purpose at the average NASDAQ closing
market price for Alanco common stock for the five (5) trading days immediately
preceding the issuance date of such stock.
Background of the Acquisition
The Company was contacted in June 2005 via a mailing by Cronus Partners, LLC
("Cronus"), an investment banker located in Norwalk, Connecticut, relative to a
prospective investment in its client company, StarTrak Systems, LLC
("StarTrak"). Cronus was previously unknown to the Company and was StarTrak's
advisor relative to any potential transaction. A Confidential Disclosure
Agreement between the Company and StarTrak Systems was executed on July 5, 2005
and preliminary discussions commenced with exchange of business information by
both parties.
The Company and StarTrak principals primarily involved in the transaction
discussions and negotiations were Robert Kauffman, Director and CEO, and John
Carlson, Director and CFO, for the Company, and Tim Slifkin, CEO, and Tom
Robinson, EVP, for StarTrak.
The initial personal meeting between the parties occurred on July 26, 2005 with
Mr. Kauffman's visit to StarTrak's Morris Plains, New Jersey, headquarters and
meeting with Messrs. Slifkin and Robinson. Subsequently, StarTrak's Messrs.
Slifkin and Robinson visited Alanco corporate headquarters on August 2 and 3,
2005, and met with Robert Kauffman and John Carlson, as well as Steve Oman,
Director and Corporate Counsel, Greg Oester, President of Alanco/TSI PRISM, Inc.
("TSI"), a wholly owned subsidiary of the Company, Safa Matin, TSI Manager of
Engineering, and Donald Anderson, Alanco Director. A preliminary proposal
whereby Alanco would acquire StarTrak Systems, LLC was presented to Messrs.
Slifkin and Robinson by Mr. Kauffman, Alanco CEO. The preliminary proposal was
discussed in detail; and based upon the expressed interest at the August 3rd
meeting, both parties agreed to explore a possible acquisition transaction. The
Company's CFO, Mr. Carlson, initiated preliminary due diligence activities with
a visit to StarTrak's Morris Plains offices on August 15 and 16, 2005, when he
again met with Messrs. Slifkin and Robinson, as well as Mike Solomon, CFO, and
other operations managers of StarTrak. The Alanco Board of Directors, at its
regularly scheduled meeting on October 17, 2005, reviewed and approved in
concept Management's preliminary plan to acquire StarTrak Systems, LLC.
During the period from November, 2005, to February, 2006, minimal discussions
occurred between the parties pending final resolution of internal StarTrak
partnership issues and the completion of audited StarTrak financial statements
for fiscal years ended December 31, 2004 and 2005, which was completed in March
2006 and was a requirement for any acquisition of StarTrak by Alanco.
In February, 2006, the Company contracted for a StarTrak marketing due diligence
survey conducted by consultant Myron Anduri of Fairplay, Colorado. Mr. Anduri, a
graduate of Colorado State University with a BA degree in business, is an
independent marketing consultant with over 25 years of experience as a senior
marketing executive. Mr. Anduri was selected due to his significant marketing
credentials, his personal references, and Robert Kauffman's personal knowledge
of his capabilities due to a business relationship that existed for several
years prior to 1997. The due diligence survey consisted of Mr, Anduri traveling
to the StarTrak offices in New Jersey to complete a review of hardware
technology, wireless services, sales and marketing efforts and general
operations. The survey concluded that: 1) StarTrak currently enjoyed a
23
leadership position in the Reefer tracking and control market; 2) StarTrak
technology appears sound; 3) Sales and marketing efforts need upgrading for
StarTrak to continue growth; and 4) The key to StarTrak's success is the talent
of the StarTrak employees and proper funding. The conclusions were summarized in
a report dated April 7, 2006, which is available for inspection and copying at
the Company's offices in Scottsdale, Arizona, during regular business hours by
any interested equity security holder of the Company or representative who has
been so designated in writing.
Transaction negotiations between the parties recommenced with a visit to the
Company's Scottsdale headquarters by Messrs. Slifkin and Robinson on April 17,
2006, with meetings with Messrs. Kauffman, Carlson, Oman and Oester.
The final transaction negotiations, which resulted in mutual verbal agreement
between the parties, occurred on May 17, 2006, at a meeting in the Courtyard
Marriott Hotel, Newark, New Jersey, attended by the Company's Messrs. Kauffman
and Carlson and StarTrak's Messrs. Slifkin and Robinson.
On June 16, 2006, the Company's Board of Directors unanimously approved a
resolution to acquire 100% of StarTrak Systems, LLC in accordance with terms set
forth in the Definitive Acquisition Agreement.
The Definitive Acquisition Agreement was executed by the parties on June 26,
2006, followed by the formal closing of the transaction effective June 30, 2006.
Regulatory Approvals. Alanco was not and is not aware of any pending legal
proceeding relating to the acquisition. Alanco is not aware of any governmental
license or regulatory permit that appears to be material to its business that
might be adversely affected by Alanco's acquisition of StarTrak or of any
approval or other action by any governmental, administrative or regulatory
authority or agency, domestic or foreign, that is required for such acquisition.
Antitrust. Under the provisions of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations promulgated thereunder by
the Federal Trade Commission, certain acquisition transactions may not be
consummated unless certain information has been furnished to the Antitrust
Division of the United States Department of Justice and the FTC and certain
waiting requirements have been satisfied. Because the aggregate acquisition
price of the transaction was under $50 million, the transaction was not subject
to such requirements.
Accounting Treatment. The acquisition of assets will be accounted for using the
purchase method of accounting in accordance with the provisions of SFAS 141,
Business Combinations, which requires the allocation of the purchase price to
the fair value of the assets acquired and the liabilities assumed by balance
sheet classifications. Subsequent to the transaction the Company engaged the
services of an independent consultant to allocate value to various asset
classifications related to FASB 141.
Independent Appraisals and/or Opinions. Independent opinions and/or appraisals
have not been obtained by Alanco due to StarTrak's stage of development and the
fact that a significant portion of the acquisition consideration is contingent
on StarTrak achieving certain minimum gross profit results within fiscal years
2007 and 2008, which regulates the potential shares of Alanco common stock that
may be issued under the Acquisition Agreement.
Interests of Certain Persons in the Acquisition, Possible Conflicts of Interest.
Alanco is not aware of any possible conflicts of interest of any of its officers
or directors with respect to the acquisition transaction.
24
Information about StarTrak
General scope of business
StarTrak, based in Morris Plains, New Jersey, is a leading provider of GPS
tracking and wireless asset management services to the transportation industry
and the dominant provider of tracking, monitoring and control services to the
refrigerated or "Reefer" segment of the transportation marketplace. StarTrak
products increase efficiency and reduce costs of the refrigerated supply chain
through the wireless monitoring and control of critical Reefer data, including
GPS location, cargo temperatures and Reefer fuel levels. StarTrak offers
complete integrated solutions for tracking, monitoring and controlling
refrigerated trailers, trucks, railcars, and containers.
The company's focus is on delivering advanced monitoring and control solutions
to the mobile refrigeration market, taking advantage of its unique interactive
tracking and control hardware and software and its relationship with two U. S.
producers of mobile refrigeration units who dominate that market. The company's
integrated product and service package provides measurable return on investment
benefits to its customers through improved equipment utilization, less freight
spoilage and better reporting of shipping conditions being required by
regulatory authorities as well as customers. Today, StarTrak enjoys the largest
market share of wireless monitoring and control equipment in the North American
mobile refrigeration markets.
STARTRAK REEFER PRODUCTS/SERVICES
StarTrak's hardware is attached to the asset to which it is to track, monitor
and control. The device is designed by StarTrak for the specific application and
includes the Company's proprietary software. The hardware has an expected
service life of approximately four years. Units are typically installed by
reefer dealers and maintained at their repair facilities. The StarTrak hardware
includes a GPS locator, processors, memory, interfaces to various reefer unit
sensors (including temperature, fuel levels, battery load, etc.) power systems
and one or several communicators. The unit provides frequent readings of various
sensors, evaluates conditions, sends appropriate event notifications and
receives commands over a wireless link.
StarTrak's ReeferTrak hardware and firmware is connected directly into the
electronic control system of the reefer unit and collects sensory data from the
microprocessor and executes commands through the microprocessor interfaces,
making it the only solution that is able to both monitor and to control a reefer
remotely. With this connection, StarTrak devices are able to remotely deliver
information such as a discrete ID number, the reefer's location, current
operational status, readings from discrete sensors such as temperature set
point, actual temperature, fuel level, battery voltage, engine hours, dwell time
at location and reefer state (on, off or standby). StarTrak's solution can be
retrofitted to reefer units up to ten years of age.
At its data center, StarTrak processes the signals received with its proprietary
software and integrates it with information systems of the client, such as
shipper bill of lading, asset location, specific carrier or logistics company
information systems and transmits to the customer. The customer can view its
information in the format and protocol that fits its normal operational
requirements.
The complete StarTrak hardware, software and network solution consists of
approximately 30 design elements. StarTrak's intellectual property is protected
through its knowledge and integration of the entire business process and its
exclusive business and technical arrangements with two U.S. producers of mobile
refrigeration units. StarTrak also has some proprietary components protected by
U.S. patents.
25
THE REEFER MARKET
StarTrak interactive tracking capability can be used on multiple asset types.
However, because of its relationship with two North American reefer
manufacturers, StarTrak is focusing its technology solutions on the refrigerated
transportation industry. These reefers are managed by an on-board electronics
control system equipped with sensors and control systems that extend inside the
storage space of the trailer, container or rail car. A microprocessor in the
reefer unit controls and manages the temperature of the freight by interfacing
with numerous sensors, generates alarms and stores relevant data. Typically, a
reefer unit is managed "locally" by a driver or yard worker who is physically
present to manipulate the electronic controls manually.
We estimate that there are approximately 450,000 reefer units in service in
North America. StarTrak capabilities can be retrofitted to almost any unit in
service.
Recommendation of the Alanco Board of Directors
The Alanco Board of Directors has determined that it is in the best interests of
Alanco and its shareholders that payment of all additional consideration to be
paid to the Sellers should be paid in the form of the Company's Class A Common
Stock rather than in cash and unanimously recommends that you vote in favor of
the proposal to approve the issuance of the Class A Common Stock to the Sellers.
SELECTED FINANCIAL DATA AND PRO FORMA INFORMATION
Selected Historical Financial Data. The unaudited Alanco financial statements
for the quarter ended September 30, 2006 were filed timely with the SEC on Form
10-QSB. The audited financial statements of Alanco for the fiscal years ended
June 30, 2006 and 2005 were filed timely on Form 10-KSB. Form 10-QSB for the
period ended September 30, 2006 (provided in this proxy statement as
Appendix C), and Form 10-KSB for the year ended June 30, 2006 are incorporated
by reference in this Proxy Statement.
The audited consolidated balance sheets of StarTrak Systems, LLC and
Subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of operations, members' deficit and cash flows for the years then
ended (attached to this proxy statement as Appendix A) and the unaudited interim
financial statements for the period ended March 31, 2006 (attached to this proxy
statement as Appendix B) are provided to assist you in your analysis of the
financial aspects of StarTrak.
Selected Pro Forma Financial Data. The unaudited condensed pro forma Balance
Sheet as of March 31, 2006 and the condensed pro forma combining Statement of
Operations for StarTrak and Alanco for the twelve months ended June 30, 2005 and
the nine months ended March 31, 2006, are presented below.
26
Alanco Technologies, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
March 31, 2006
Pro Forma Consolidated Unaudited Financial Information:
The following represents a pro forma condensed consolidated balance sheet as of March 31, 2006,
assuming the Company's acquisition of StarTrak Systems, LLC was consumated as of that date.
--------------(Dollars in Thousands)----------------
Alanco StarTrak Pro Forma Pro Forma
Technologies Systems Adjustments Consolidated
Inc. LLC Amounts
ASSETS
Current Assets:
Cash $ 197 $ 49 $ $ 246
Accounts Receivable, Net 925 1,011 1,936
Notes receivable 30 0 30
Inventory 2,253 794 3,047
Other Current Assets 545 89 634
Total Current Assets 3,950 1,943 5,893
Property and Equipment, net 196 47 243
Goodwill 5,356 13,700 (1) 19,056
Intangible Assets, Net 395 1,600 (2) 1,995
Other Assets, Net 97 6 103
-----------------------------------------------------
$ 9,994 $ 1,996 $ 15,300 $ 27,290
=====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable - current portion $ 89 $ 555 $ 257 (1) $ 901
Due to Members 838 838
Accounts Payable & Accrued Expense 1,494 2,928 168 (1) 4,590
Deferred Revenue & Customer Advances 47 1,243 1,290
Billing in exess of Costs and
Est. Earnings 32 32
-----------------------------------------------------
Total Current Liabilities 1,662 5,564 425 7,651
Notes Payable, Long-term - Net 1,314 2,000 3,314
Preferred Stock - Series B 719 719
Shareholders Equity 6,299 (5,568) 9,307 (1) 15,606
5,568 (1)
-----------------------------------------------------
Total Liabilities & Shareholders' Equity $ 9,994 $ 1,996 $ 15,300 $ 27,290
=====================================================
(1) Pro forma adjustments to reflect the purchase of StarTrak Systems,LLC
("StarTrak") for the assumption of $5,568 million in liabilities over
assets and the issuance of 13.2 million of Alanco Class A Common Shares
to the owners valued at $9.2 million. Costs associated with the
acquisition amounted to approximately $532,000, resulting in a short term
note payable of $257,000, accounts payable of $168,000 and the issuance
of approximately 153,500 common shares valued at $107,000.
(2) The amount allocated to other intangible assets represents management's
estimate of the value of other intangible assets, including patents,
trademarks, software, etc. The Company has engaged an independent
consultant to appraise StarTrak's assets and propose an allocation of
the purchase price. The results of the appraisal will be used to record
the acquisition effective June 30, 2006.
27
ALANCO TECHNOLOGIES, INC AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For the Year ended June 30, 2005
The following represents an unaudited pro forma condensed consolidated statement of operations for
the year ended June 30, 2005, assuming the Company's acquisition of StarTrak Systems LLC
was consumated on July 1, 2004.
- --------------(Dollars in Thousands)--------------
Alanco StarTrak Pro Forma Pro Forma
Technologies, Systems Adjustments Consolidated
Inc. LLC Amounts
-------------------------------------------------
Sales $7,184 $6,404 $13,588
-------------------------------------------------
Cost of Sales 4,676 4,645 9,321
Selling, General and Administrative Expense 6,371 5,815 12,186
Amortization of Intangibles - Startrak 220 (2) 220
-------------------------------------------------
11,047 10,460 220 21,727
-------------------------------------------------
Operating Loss (3,863) (4,056) (8,139)
Interest Expense, net (35) (272) (53) (1) (360)
Other Income 107 200 307
-------------------------------------------------
Loss From Operations (3,791) (4,128) (53) (1) (8,192)
Preferred Stock Dividends - paid in kind (521) 0 (521)
-------------------------------------------------
Net Loss Attributable to Common Stockholders ($4,312) ($4,128) ($273) ($8,713)
=================================================
Net Loss Per Share - Basic and Diluted ($0.17) ($0.23)
========== ============
Weighted Average Common Shares
Outstanding - shares in thousands 25,356 13,353 (1) 38,709
=================================================
(1) Additional interest expense and common shares related to acquisition
(2) To record management's estimate of amortization expense-related purchase
price allocation.
28
ALANCO TECHNOLOGIES, INC AND SUBSIDIARIES
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For the Nine Months ended March 31, 2006
The following represents an unaudited pro forma condensed consolidated statement
of operations for the nine months ended March 31, 2006, assuming the Company's
acquisition of StarTrak Systems LLC was consumated on July 1, 2005.
--------------(Dollars in Thousands)--------------
Alanco StarTrak Pro Forma Pro Forma
Technologies, Systems Adjustments Consolidated
Inc. LLC Amounts
-------------------------------------------------
Sales $4,693 $5,764 $10,457
-------------------------------------------------
Cost of Sales 3,085 4,035 7,120
Selling, General and Administrative Expense 4,717 4,417 9,134
Amortization of Intangibles - StarTrak 165 (2) 165
-------------------------------------------------
7,802 8,452 165 16,419
-------------------------------------------------
Operating Loss (3,109) (2,688) (5,962)
Interest Expense, net (66) (282) (40) (1) (388)
Other Income 77 143 220
-------------------------------------------------
Loss From Operations (3,098) (2,827) (40) (6,130)
Preferred Stock Dividends - paid in kind (565) 0 (565)
-------------------------------------------------
Net Loss Attributable to Common Stockholders ($3,663) ($2,827) ($205) ($6,695)
=================================================
Net Loss Per Share - Basic and Diluted ($0.13) ($0.16)
========== =========
Weighted Average Common Shares
Outstanding - shares in thousands 28,352 13,353 (1) 41,705
=================================================
(1) Additional interest expense and common shares related to acquisition
(2) To record management's estimate of amortization expense-related purchase
price allocation.
29
INDEPENDENT AUDITOR
Semple & Cooper, LLP, Phoenix, Arizona, was appointed as the Company's
Independent Auditor for the fiscal years ended June 30, 2000, 2001, 2002, 2003,
2004, 2005, and 2006. The Company anticipates the appointment of Semple &
Cooper, LLP to audit the Company's financial statements for the fiscal year
ending June 30, 2007. A representative of Semple & Cooper, LLP is expected to
attend the Shareholders' Meeting and will have an opportunity to make a
statement if the representative desires to do so and is expected to be available
to respond to appropriate questions.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" information into this Proxy
Statement, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. This Proxy
Statement incorporates by reference documents which are not presented in this
Proxy Statement or delivered to you with it. The information incorporated by
reference is an important part of this Proxy Statement. We incorporate by
reference the documents listed below and amendments to them. These documents and
their amendments were previously filed with the SEC.
The following documents filed by us with the SEC are incorporated by reference
in this Proxy Statement:
1. Our Form 10-KSB/A filed with the SEC on December 20, 2006.
2. Our Form 10-QSB/A filed with the SEC on December 20, 2006.
REQUEST FOR COPY OF FORM 10-KSB/A
Shareholders may receive a copy of the Form 10-KSB/A 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 North 83rd Way, Suite 3, Scottsdale, Arizona 85260.
SHAREHOLDER PROPOSALS TO BE PRESENTED AT THE NEXT ANNUAL MEETING;
DISCRETIONARY AUTHORITY; OTHER BUSINESS
Any shareholder who intends to present a proposal at the annual meeting of
shareholders for the year ending June 30, 2007, and have it included in the
Company's proxy materials for that meeting generally must deliver the proposal
to us for our consideration not less than 120 calendar days in advance of the
date of the Company's proxy statement released to security holders in connection
with the previous year's annual meeting of security holders and must comply with
Rule 14a-8 under the Securities Exchange Act of 1934, as amended. In accordance
with the above rule, the applicable proposal submission deadline for the 2007
annual meeting of shareholders would be September 4, 2007.
Pursuant to Rule 14a-4 under the Securities Exchange Act of 1934, as amended,
the Company intends to retain discretionary authority to vote proxies with
respect to shareholder proposals properly presented at the Meeting, except in
circumstances where (i) the Company receives notice of the proposed matter a
reasonable time before the Company begins to mail its proxy materials (including
this proxy statement), and (ii) the proponent complies with the other
requirements set forth in Rule 14a-4.
The Board of Directors is not aware of any other business to be considered or
acted upon at the Meeting other than that for which notice is provided, but in
the event other business is properly presented at the Meeting, requiring a vote
of shareholders, the proxy will be voted in accordance with the judgment on such
matters of the person or persons acting as proxy (except as described in the
preceding paragraph). If any matter not appropriate for action at the Meeting
should be presented, the holders of the proxies shall vote against the
consideration thereof or action thereon.
ADELE L. MACKINTOSH
SECRETARY
Scottsdale, Arizona
December 14, 2006
30
Proxy Solicited by the Board of Directors of Alanco Technologies, Inc.
The undersigned hereby appoints Robert R. Kauffman and John A. Carlson, or any
one of them, with full power of substitution, as attorneys-in-fact and proxies
to represent the undersigned at the Annual Meeting of Shareholders of Alanco
Technologies, Inc. to be held at 15575 N. 83rd Way, Scottsdale, Arizona, at
10:00 a.m. Mountain Standard Time, on January 30, 2007, and at any and all
adjournments thereof, to vote in the name and place of the undersigned with all
the power which the undersigned would possess if personally present, all of the
stock of Alanco Technologies, Inc. standing in the name of the undersigned, upon
such business as may properly come before the meeting, including the following
as set forth hereon.
A SHAREHOLDER MAY USE CUMULATIVE VOTING FOR THE NOMINEES OF THAT PROPOSAL BY
VOTING THE NUMBER OF THE SHARES HELD TIMES THE NUMBER OF DIRECTORS BEING ELECTED
ON A SINGLE OR GROUP OF CANDIDATES. SHAREHOLDERS MAY ALSO WITHHOLD AUTHORITY TO
VOTE FOR A NOMINEE(S) BY DRAWING A LINE THROUGH THE NOMINEE'S NAME(S). FOR
EXAMPLE, A SHAREHOLDER WITH 1,000 SHARES MAY CAST A TOTAL OF 7,000 VOTES (# OF
SHARES X 7 DIRECTORS) FOR ALL, ONE, OR A SELECT NUMBER OF CANDIDATES.
PROPOSAL NO. 1 ELECTION TO THE BOARD OF DIRECTORS
FOR Management nominees listed below equally among all the nominees OR VOTED
AS FOLLOWS:
Harold S. Carpenter Shares James T. Hecker Shares Timothy P. Slifkin Shares
------ ------ ------
Robert R. Kauffman Shares Thomas C. LaVoy Shares
------ ------
John A. Carlson Shares Donald E. Anderson Shares
------ ------
WITHHOLD AUTHORITY to vote for all nominees listed above.
PROPOSAL NO. 2 APPROVAL OF THE ALANCO 2006 STOCK OPTION PLAN.
--------------
FOR AGAINST ABSTAIN
--- --- ---
PROPOSAL NO. 3 APPROVAL OF THE ALANCO 2006 DIRECTORS AND OFFICERS STOCK
-------------- OPTION PLAN.
FOR AGAINST ABSTAIN
--- --- ---
PROPOSAL NO. 4 APPROVAL OF WARRANTS ISSUED TO AFFILIATES OF THE COMPANY TO
-------------- PURCHASE CLASS A COMMON STOCK FROM THE COMPANY.
FOR AGAINST ABSTAIN
--- --- ---
PROPOSAL NO. 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.
FOR AGAINST ABSTAIN
--- --- ---
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AT THE MEETING IN ACCORDANCE WITH
THE SHAREHOLDER'S SPECIFICATION ABOVE. IF THE SHAREHOLDER DOES NOT INDICATE A
PREFERENCE, MANAGEMENT INTENDS TO VOTE FOR ALL PROPOSALS LISTED. THIS PROXY
CONFERS DISCRETIONARY AUTHORITY IN RESPECT TO MATTERS FOR WHICH THE SHAREHOLDER
HAS NOT INDICATED A PREFERENCE OR IN RESPECT TO MATTERS NOT KNOWN OR DETERMINED
AT THE TIME OF THE MAILING OF THE NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO
THE UNDERSIGNED.
The undersigned revokes any proxies heretofore given by the undersigned and
acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy
Statement furnished herewith.
Dated, 200
------------------ --
----------------------------------- ------------------------------------
Signature(s) should agree with the name(s) hereon. Executors, administrators,
trustees, guardians and attorneys should indicate when signing. Attorneys should
submit powers of attorney.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ALANCO. PLEASE
SIGN AND RETURN THIS PROXY TO ALANCO TECHNOLOGIES, INC., C/O COMPUTERSHARE TRUST
COMPANY, INC., 350 INDIANA STREET, SUITE 800, GOLDEN, CO 80401. THE GIVING OF A
PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING.
31
APPENDIX A
STARTRAK SYSTEMS, LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 2005 AND 2004
CONTENTS PAGE
Independent Auditors' Report 1
Consolidated Financial Statements
Consolidated balance sheets 2
Consolidated statements of operations and members' deficit 3
Consolidated statements of cash flows 4-5
Notes to consolidated financial statements 6-15
Supplementary Information
Consolidated schedules of selling, general and
administrative expenses 16
Consolidated supplementary financial data 17
INDEPENDENT AUDITORS' REPORT
To the Members of
StarTrak Systems, LLC
We have audited the accompanying consolidated balance sheets of StarTrak
Systems, LLC and Subsidiaries (the "Company") as of December 31, 2005 and 2004,
and the related consolidated statements of operations, members' deficit and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes 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 financial position of StarTrak Systems,
LLC and Subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of expressing an opinion on the basic
financial statements taken as a whole. The supplementary information listed in
the accompanying table of contents is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic financial statements and in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company has a significant accumulated deficit and working capital deficit, and
has incurred a significant net loss from operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 16, 2006
1
STARTRAK SYSTEMS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 2004
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 79,562 $ 203,557
Accounts receivable, less allowance for doubtful
accounts of approximately $30,000 and $184,000
in 2005 and 2004, respectively 935,640 659,949
Inventories 731,583 725,888
Prepaid expenses and other current assets 50,326 87,817
--------------------------
Total current assets 1,797,111 1,677,211
Computer equipment, net of accumulated depreciation
of approximately $43,000 and $14,000 in 2005 and
2004, respectively 44,505 27,147
Security deposits 6,408 6,408
--------------------------
$ 1,848,024 $ 1,710,766
==========================
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities
Notes payable, current portion $ 534,588 $ 801,088
Customer advances 1,255,270
Accounts payable 1,620,184 1,299,112
Accrued expenses 450,000 118,000
Accrued warranty 515,001 191,872
Other current liabilities 19,372 188,077
--------------------------
Total current liabilities 4,394,415 2,598,149
--------------------------
Long-term liabilities
Notes payable, net of current portion 5,000,000 4,250,000
Accrued interest payable 437,815 114,568
Due to members 569,666 113,000
--------------------------
6,007,481 4,477,568
--------------------------
Members' deficit (8,553,872) (5,364,951)
--------------------------
Total liabilities and members' deficit $ 1,848,024 $ 1,710,766
==========================
See accompanying notes to consolidated financial statement
2
STARTRAK SYSTEMS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND MEMBERS' DEFICIT
Years Ended December 31, 2005 2004
--------------------------------------------------------------------------------
Net sales $ 6,327,980 $ 4,819,420
Cost of sales 4,037,413 3,811,696
--------------------------
Gross profit 2,290,567 1,007,724
--------------------------
Expenses
Selling, general and administrative expenses 5,315,858 3,800,159
Depreciation expense 29,039 13,573
--------------------------
5,344,897 3,813,732
--------------------------
Loss from operations (3,054,330) (2,806,008)
--------------------------
Other income (expense)
Interest expense (344,576) (148,018)
Forgiveness of debt income 200,000
Interest income 9,985
--------------------------
(134,591) (148,018)
--------------------------
Net loss (3,188,921) (2,954,026)
Members' deficit, beginning of year (5,364,951) (2,322,503)
Excess of purchase price over departing member's
equity (88,422)
--------------------------
Members' deficit, end of year $(8,553,872) $(5,364,951)
==========================
See accompanying notes to consolidated financial statement
3
STARTRAK SYSTEMS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005 2004
--------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(3,188,921) $(2,954,026)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 29,039 13,573
Provision for doubtful accounts 58,998 120,313
Provision for accrued warranty 714,139 395,000
Forgiveness of debt income (255,000)
Changes in operating assets and liabilities
Accounts receivable (334,689) (489,482)
Inventories (5,695) (526,211)
Prepaid expenses and other current assets 37,491 (94,225)
Accrued interest payable 328,218 130,196
Customer advances 1,255,270
Members' salary accrual 126,666 130,000
Accounts payable 506,072 629,523
Accrued expenses 332,000 (480,370)
Accrued warranty (391,010) (248,190)
Other current liabilities (168,705) 188,077
--------------------------
Net cash used in operating activities (956,127) (3,185,822)
--------------------------
Net cash flows used in investing activities
Purchases of computer equipment (46,397) (40,720)
--------------------------
Cash flows from financing activities
Proceeds from issuance of promissory notes
(see Note 9) 750,000 3,900,000
Principal payments on notes payable (271,471) (434,962)
Advances from (repayments to) members 400,000 (185,000)
--------------------------
Net cash provided by financing activities 878,529 3,280,038
--------------------------
Net increase (decrease) in cash and cash
equivalents (123,995) 53,496
Cash and cash equivalents, beginning of year 203,557 150,061
--------------------------
Cash and cash equivalents, end of year $ 79,562 $ 203,557
==========================
See accompanying notes to consolidated financial statement
4
STARTRAK SYSTEMS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 2005 2004
--------------------------------------------------------------------------------
Supplementary disclosure of cash flow information,
cash paid during the year for interest $ 16,358 $ 33,462
==========================
Supplementary disclosure of non-cash investing and
financing activities
Promissory note issued as consideration for equity
repurchase agreement (see Note 9) $ - $ 388,422
==========================
Debt to members paid by third party in accordance
with the September 30, 2004 post closing
agreement (see Note 9) $ 130,000 $ -
=========================
See accompanying notes to consolidated financial statement
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations
StarTrak Systems, LLC (the "Company"), a Delaware Limited Liability Company, was
formed on March 26, 2001. The Company also conducts business under the name
"StarTrak LLC".
The Company provides wireless subscription information services ("Subscription
Services") and tracking and monitoring devices ("Monitoring Devices") to freight
operators of refrigerated tractor trailers and rail cars and original equipment
manufacturers ("OEM's") of refrigerated transport systems. The Monitoring
Devices collect and transmit to the Company critical information, via satellite,
cellular or radio frequency, regarding a tractor trailer's or rail car's
location, operational status, and the status of other sensors such as fuel, door
openings, and weight loads. The Company's Subscription Services process this
information, combine it with the known freight shipment and logistical data, and
delivers it to the client via several information technology applications
allowing the client to monitor and track shipments, control temperature
sensitive freight environments, remotely send commands to refrigeration systems,
and troubleshoot problems.
The Company's Subscription Services are marketed as ReeferTrak(R) Commander,
ReeferTrak(R) Sentry, ReeferTrak(R) Scout and GenTrak(TM) while the Monitoring
Devices, which enable the Subscription Services are known as ReeferTrak(R) RT
3000, ReeferTrak(R) RT 2000, ReeferTrak(R) RT 4000, GenTrak(TM) RT 4000 and
GenTrak(TM) RT 2000.
2. Going concern
At December 31, 2005, the Company had a members' deficit of approximately $8.6
million and a working capital deficit of approximately $2.6 million For the
years ended December 31, 2005 and 2004, the Company incurred net losses of
approximately $3.2 million and $3.0 million, respectively, and net cash used in
operations of $1.0 million and $3.2 million respectively. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans primarily consist of (i) obtaining additional financing
and/or capital and (ii) attaining profitable operations. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
3. Summary of significant accounting policies
Principles of Consolidation
In December 2003, the Financial Accounting Standards Board ("FASB") issued
revised FASB Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"). FIN 46 requires certain variable interest entities ("VIE") to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The Company is the primary beneficiary of StarTrak Wireless Technologies Private
Limited ("StarTrak India") under FIN 46. StarTrak India is a private company
registered on September 21, 2005 in the State of Tamil Nadu, India. StarTrak
India was formed primarily to allow the Company to outsource certain programming
functions. The Company consolidated the results of StarTrak India's operations,
consisting of approximately $45,000 in operational expenses and no revenues.
StarTrak India's assets and liabilities were not significant to the consolidated
financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued)
Principles of Consolidation (continued)
The consolidated financial statements include the accounts of the Company, a
wholly-owned inactive subsidiary and StarTrak India. All intercompany
transactions and balances have been eliminated in consolidation.
Cash Equivalents
The Company considers highly-liquid financial instruments purchased with a
maturity of three months or less as cash equivalents.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
Accounts are written off as uncollectible at the discretion of management.
Fair Value of Financial Instruments
The fair values of the Company's assets and liabilities, which qualify as
financial instruments under Statement of Financial Accounting Standards ("SFAS")
No. 107, "Disclosures About Fair Value of Financial Instruments", approximate
the carrying amounts presented in the accompanying consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost, determined by the First-In,
First-Out ("FIFO") method, or market. Finished Goods consist of Monitoring
Devices that are completed and parts available for shipment to customers. Parts
consist of items that are necessary to construct Monitoring Devices and parts
available for warranty purposes. The Company accounts for all unbilled work-in
process as parts inventory.
Computer Equipment
Computer equipment is stated at cost less accumulated depreciation. The Company
provides for depreciation using the straight-line method over the estimated
useful lives of the assets of three years.
Revenue Recognition
In November 2002, the Emerging Issues Task Force ("EITF") issued EITF 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables". This issue
addresses the determination of whether an arrangement involving more than one
deliverable contains more than one unit of accounting and how arrangement
consideration should be measured and allocated to the separate units of
accounting. EITF 00-21 does not require the deferral of revenue when all
material deliverables are considered separate units of accounting.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued)
Revenue Recognition (continued)
All of the material deliverables in the Company's sales arrangements meet the
criteria for separate units of accounting as set forth in EITF 00-21.
Accordingly, revenues for Monitoring Devices are recognized upon delivery to
customers. Subscription Service revenues are recognized for "activated"
Monitoring Devices, as delivered, on a monthly basis. Advances from customers
are recognized as liabilities until the required products are delivered and
services are performed as specified in individual customer contracts. Cost of
sales includes all direct materials and other indirect costs related to the
production of Monitoring devices and the delivery of the Subscription Service.
Selling, general and administrative costs are charged to expense as incurred.
Product and Subscription Service Warranties
The Company sells Monitoring Devices and Subscription Services to customers with
certain warranties including performance, repair, replacement and limited labor
costs. Warranty accruals are based upon the Company's historical experience.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
4. Risks and uncertainties
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of cash and cash equivalent accounts in financial
institutions, which exceed Federal depository insurance coverage $100,000
limits. The Company has not experienced losses on these accounts and management
believes the Company is not exposed to significant risks on such accounts.
Major Customers
For the year ended December 31, 2005, net sales to four customers equaled
approximately $4,420,000 or 70% of total revenues. Accounts receivable from
these customers was approximately $686,000 at December 31, 2005.
For the year ended December 31, 2004, net sales to two customers equaled
approximately $2,208,000 or 46% of total revenues. Accounts receivable from
these customers was approximately $383,000 at December 31, 2004.
Major Vendors
The Company relies upon three major suppliers to manufacture and provide
critical parts for its Monitoring Devices. In addition, the Company relies on
one major vendor to deliver its Subscription Services. The Company does not have
long-term contracts with any of these vendors.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Inventories
Inventories consist of the following at December 31:
2005 2004
Finished goods $ 249,851 $ 95,250
Parts 481,732 630,638
------------------------
$ 731,583 $ 725,888
=========================
6. Accrued warranty
The Company sells a majority of its products to customers together with repair
and replacement warranties ranging from one year to five years. The accompanying
consolidated financial statements include an accrual for estimated warranty
claims, based on the Company's experience of the amount of such claims actually
paid. The following is a reconciliation of the aggregate warranty liability as
of December 31, 2005 and 2004:
2005 2004
Beginning balance $ 191,872 $ 45,062
Claims paid during the year (391,010) (248,190)
Additional warranty reserve 714,139 395,000
-------------------------
Ending balance $ 515,001 $ 191,872
=========================
7. Customer advances
On August 24, 2005, a customer entered into a GPS Software License and Hardware
Purchase Agreement ("Purchase Agreement") under which the customer placed an
order of 4,700 of the Company's GenTrak(TM) II units and also agreed to
subscribe to web-based monitoring services for these units. Pursuant to the
Purchase Agreement, the customer paid the Company an advance of approximately
$1,162,000 related to a certain percentage of the sales price of the initial
hardware order of 4,700 GenTrak(TM) II units plus advances on certain
non-recurring engineering costs. The Company began shipping GenTrak(TM) II units
under this Purchase Agreement in February 2006.
8. Other current liabilities
As of December 31, 2004, other current liabilities primarily consisted of
approximately $169,000 in overdue payables owed to a former vendor. In
accordance with a settlement agreement signed in September 2005, the balance was
reduced to $155,000 and the Company agreed to make a payment of $100,000, with
the remainder to be paid on or before January 31, 2006. However, the vendor was
unable to make delivery of certain parts in January 2006 and agreed to release
the Company from payment of the $55,000, which was written off as of December
31, 2005.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-term debt
Long-term debt consists of the following at December 31:
2005 2004
Notes payable-Tenix Holdings $ 5,000,000 $ 4,250,000
Accrued interest payable 437,815 114,568
Due to TransCore 361,167 536,167
Note payable-former member 173,421 264,921
-------------------------
5,972,403 5,165,656
Less:current maturities (534,588) (801,088)
--------------------------
$ 5,437,815 $ 4,364,568
==========================
Aggregate future required principal and interest payments are as follows:
Amount
2006 $ 534,588
2007 5,437,815
-----------
$ 5,972,403
===========
Notes Payable-Tenix Holdings
Senior Promissory Notes
On September 30, 2004, the Company and its founders, Timothy Slifkin and Thomas
Robinson (collectively, the "Founders") entered into a Securities Purchase
Agreement (the "SPA") for senior promissory notes ("Senior Promissory Notes")
and Class A Member Units with Tenix Holdings, Inc ("THI").
Under the terms of the SPA, THI exchanged a senior promissory note for a series
of prior secured promissory notes issued between December 22, 2003 and September
30, 2004 in the amount of $3,182,288, including unpaid accrued interest of
$72,288 (the "Initial Note"). The second promissory note (the "Second Note") was
exchanged for the remaining secured promissory notes issued or to be issued. As
of March 5, 2005, the Second Note was exchanged for prior promissory notes
issued from October 14, 2004 to March 5, 2005, in the cumulative amount of
$1,890,000 plus unpaid accrued interest. THI's total promissory note exchange
commitment was $5 million which they fulfilled by March 2005.
In addition, as consideration for the obligation to exchange its senior secured
notes for the Senior Promissory Notes, THI was granted 510,000 Class A
Membership Units (the "THI Units") or 51% of the total outstanding membership
units of the Company. The amount of THI Units outstanding is subject to
reduction per terms of the Deed of Release, described below. The fair value of
the THI Units was estimated to be zero based on the book value of the Company at
September 30, 2004.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-term debt (continued)
As of December 31, 2005 and 2004, the balance of the Senior Promissory Notes is
as follows:
Initial Second Accrued Total
Note Note Interest
Balance at January 1, 2004 $ 350,000 $ - $ - $ 350,000
Secured promissory notes issued
between February 13, 2004 and
September 30, 2004 2,760,000 $2,760,000
Secured promissory notes issued
between October 14, 2004 and
December 13, 2004 1,140,000 1,140,000
Accrued interest 114,568 114,568
-----------------------------------------------
Balances at December 31, 2004 3,110,000 1,140,000 114,568 4,364,568
Secured promissory notes issued
between January 21, 2005 and
March 5, 2005 750,000 750,000
Accrued interest 323,247 323,247
-----------------------------------------------
Balances at December 31, 2005 $3,110,000 $1,890,000 $ 437,815 $5,437,815
===============================================
The Senior Promissory Notes carry interest rates of 6.75% per annum and are
collateralized by all assets of the Company. On an event of default, including
among other things, failure to pay any principal or accrued interest as due, an
additional 7.5% interest rate per annum will be charged from the date of the
default until the default is cured.
The Senior Promissory Notes plus accrued interest are automatically payable in
full on the earlier of (i) December 31, 2007, (ii) upon a liquidation event,
(iii) upon a firm commitment of an initial public offering in excess of $20
million, or (iv) at the discretion of THI upon the termination of the Founders
full time employment by the Company prior to December 31, 2007.
However, at its own option, THI can defer the automatic payment events defined
above and can instead seek partial or total repayment through market value
calculations, as defined in the SPA, to be conducted as of December 31, 2006 and
December 31, 2008. If partial repayment is made under the market value
calculations then all remaining balances are to become due and payable six
months after year end. The Company can prepay the Senior Promissory Notes at any
time without prepayment penalty.
The Company, under terms of the SPA, was to comply with certain positive and
negative covenants including, among other things, certain restrictions on the
amount of purchase and sale of assets that it may make in one year.
Also on September 30, 2004, the Company and THI entered into a Post Closing
Agreement in which THI acknowledged and agreed to pay certain debt owed by the
Company to a Founder along with certain expenses incurred by the Founder for a
total of $130,000. In addition, THI permitted the Company to adopt an Employee
Phantom Equity Plan, however such a plan was never adopted.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-term debt (continued)
Deed of Release
On March 30, 2005, THI and the Company entered into a Deed of Release (the
"Deed") in which both THI and the Company agreed to release each other from the
terms and obligations of the SPA and also agreed to modify the terms of the
Senior Promissory Notes in the event of an outside investor taking a significant
equity position in the Company.
Per the terms of the Deed, THI agreed that in the event of an outside investor
taking a significant equity position in the Company, the Senior Promissory Notes
will be reduced to a single amount of $2 million with $1.5 million due and
payable on December 31, 2007 and the remainder due on December 31, 2008, and
THI's percentage ownership of the Company will be reduced from 51% to 15%. Upon
such an occurrence, THI will retain one non-voting board of directors seat. THI
will also receive a put option to sell 75% of its ownership of the Company at
90% of market value as determined by an independent valuation and 25% of its
membership units under the same terms but with an execution date of December 31,
2008. In addition, the Company will have a call option to purchase all THI
membership units at a price of $3.5 million.
In addition, under the Deed, THI and the Founders agreed to advance $200,000
each to the Company for working capital purposes for a total of $400,000. THI
also agreed to use its best efforts to cooperate on a proposed financing
transaction.
Due to TransCore
TransCore Link Logistics Corporation ("TransCore") is a vendor to the Company.
In June 2004, the Company and Transcore entered into a Settlement Agreement
("Settlement Agreement") for past due accounts payable. The Settlement Agreement
provided for the Company to adhere to a certain payment schedule and to purchase
$1,805,000 of product from Transcore at a certain fixed price within 12 months
from the date of the settlement agreement. The Settlement Agreement also
provided for the forgiveness of $182,000 of indebtedness if payments are made
pursuant to the Settlement Agreement.
The Company made certain payments under the Settlement Agreement and ceased
making payments in July 2005. In April 2005, TransCore demanded immediate
payment of all amounts due under the Settlement Agreement, including the
$182,000.
On February 3, 2006, the Company entered into a credit agreement ("Credit
Agreement") and a security agreement ("Security Agreement") with TransCore. The
Credit Agreement provides for scheduled monthly repayment of all amounts due to
TransCore through September 30, 2006 plus interest on the outstanding balance at
a rate of 1% per month, compounded monthly. The Credit Agreement also provides
an open credit amount for future purchases of approximately $142,000. In order
to evidence its indebtedness, TransCore required the Company to sign a
promissory note agreement in the principal amount of $1 million.
Any prepayments of the amounts due to TransCore are applied first against any
accrued but unpaid interest and then against the remaining scheduled payments
due in inverse order of maturity. If the Company obtains additional capital from
an investor, the Company will be required to prepay the amounts due by $300,000.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Long-term debt (continued)
Upon full payment of the amount due, the contingent liability of $182,000 due to
TransCore will be forgiven.
The Security Agreement grants to TransCore a security interest in all the assets
of the Company and the Credit Agreement requires the Company to use its best
efforts to obtain from THI a subordination of its lien on the Company's assets
in favor of TransCore. To date, THI has not signed the subordination agreement.
At December 31, 2005 and 2004, the balances due to TransCore under the Credit
Agreement and Settlement Agreement are as follows:
Balances included in Accounts
Payable
Current maturities - unpaid $ 605,630 $ -
amount from Settlement
Agreement 179,167 354,167
Current maturities -
contingently payable 182,000 182,000
------------------------
$ 966,797 $ 536,167
========================
Note Payable-Former Member
In May 2004, the Company, pursuant to a promissory note and an equity repurchase
agreement, agreed to pay $388,422 to a departing member in exchange for his
5.66% interest in the Company. The $388,422 represented payment of the departing
member's original principal and $88,422 of other consideration, which was
guaranteed personally by the Company Founders and by THI. The promissory note
was payable in monthly installments of principal and interest of $17,391 through
May 2006. However, the Company ceased making payments in July 2005. Accordingly,
the unpaid balance due of $173,421 and $264,921 as of December 31, 2005 and
2004, respectively, has been classified as a current liability.
10. Master factoring agreement
In June 2005, the Company entered into a master factoring agreement ("Factoring
Agreement") with an accounts receivable financing company (the "Factor"). The
Factoring Agreement provides for the factoring of up to $2 million of accounts
receivable. The receivables are factored with full recourse and are advanced up
to 85% of the face value of factored receivables. The Factor charges a servicing
fee of 0.75% of the face amount of the receivable for each 30 days, or portion
thereof, from the date of the advance to the time the receivable is settled. The
Factor also charges a daily discount fee of .022% of the face amount of each
receivable factored. The daily discount fee is defined as a certain published
prime rate plus 2% per annum divided by 360.
The Factoring Agreement is secured by substantially all the assets of the
Company. THI has signed an inter-creditor agreement with the Factor in which it
took a subordinate position to the Factor in relation to its security interest
in the assets of the Company.
No accounts receivable were financed through the Factoring Agreement during
2005. The Company began factoring certain accounts receivable in February 2006.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Members' equity and LLC operating agreements
From January 1, 2004 to September 30, 2004, the Company was operating under the
amended and restated operating agreement, effective November 24, 2003 (the "2003
Operating Agreement"). Since September 30, 2004 the Company operates under the
second amended and restated Limited Liability Company Agreement (the "2004
Operating Agreement").
Pursuant to the 2003 Operating Agreement, the Company has authorized and issued
1,060 Class A member units. In addition, the Company authorized an additional
200 Class B non-voting membership units to be issued under an employee option
plan.
The exercise price of the options was to be fair market value at date of
option grant. The options were to vest in 25% increments on the first and each
subsequent anniversary of the date of grant of the options. No employee option
plan was established and no Class B membership units or options were issued.
The 2003 Operating Agreement generally provided for allocation of profits and
losses to members in proportion to their respective capital accounts.
Simultaneous with the signing of the SPA with THI, the Company members adopted
the 2004 Operating Agreement which authorized the issuance of 510,000 Class A
membership units to THI, 490,000 Class B membership units to the Founders, and
200,000 Class C membership units. The Class A members are entitled to three
board seats and the Class B members are entitled to two board seats. Only Class
C membership units are non-voting. A supermajority of the board of directors is
required to authorize, among other things, a capital transaction. A
supermajority is defined as a majority of Class A board members and all of the
Class B board members. Class C membership units are reserved for an employee
incentive bonus plan. No such plan was established and no Class C membership
units were issued.
In accordance with the 2004 Operating Agreement, profits and losses are
generally allocated in proportion to the members' respective capital accounts.
The 2004 Operating Agreement also has mandatory transfer provisions,
discretionary transfer provisions and final transfer provisions. These
provisions provide for the potential sale of all Class B membership units to
Class A members dependent upon, among other things, the market value of the
Company as of December 31, 2006, December 31, 2008, and September 30, 2012.
12. Commitments and contingencies
Founders Employment Agreements
On September 30, 2004, each Founder signed an employment agreement ("Employment
Agreement") with the Company simultaneous with the signing of the SPA with THI.
Each Employment Agreement provides for a minimum base salary of $160,000 per
year and bonuses up to 20% of the base salary. The bonuses are to be paid based
upon meeting certain financial and non financial targets. To date, no bonuses
have been paid.
The Employment Agreements end on the later of June 30, 2009 or at such time the
Founders individual equity interests have been purchased by THI pursuant to the
2004 Operating Agreement (see Note 11). The Employment Agreements can be
extended for one additional year.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Commitments and contingencies (continued)
If the Employment Agreements are terminated by the Company prior to June 30,
2007, the Founders are entitled to 48 months of base pay, less pay for the
amount of months that expired under the term of the Employment Agreement. After
June 30, 2007, termination without cause or for good reason results in a
severance payment of twelve months of base pay. However, any termination within
six months prior to or twelve months after a change in control, as defined, will
result in an additional twelve months of severance.
During the years ended December 31, 2005 and 2004, the Founders have not been
paid their full base salaries under the Employment Agreement. The accrual for
the unpaid salary is included in Due to Members.
Lease Commitments
The Company leases office space through September 30, 2007. Future minimum
rental payments under the lease are approximately as follows:
Year Ending December 31,
2006 $ 57,000
2007 43,000
------------
$ 100,000
============
Rent expense, including common occupancy charges, was approximately $77,000 and
71,000 for the years ended December 31, 2005 and 2004, respectively.
Legal Proceedings
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of any
ultimate liability with respect to these actions will not materially affect the
Company's consolidated financial statements.
13. Employee benefit plan
The Company maintains a prototype qualified profit-sharing plan under Internal
Revenue Code Section 401(k) ("401(k) Plan") for all eligible employees. The
401(k) Plan provides for a discretionary matching contribution by the Company.
For the years ended December 31, 2005 and 2004, the Company elected to not make
any matching contributions.
14. Subsequent event
In February 2006, both Founders loaned a combined $200,000 to the Company in
exchange for two Subordinated Promissory Notes (the "Notes"). The Notes are
unsecured, mature on December 31, 2008, and provide for interest payments from
time to time at an interest rate of 6.75% per annum.
15
STARTRAK SYSTEMS, LLC AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Years Ended December 31, 2005 2004
--------------------------------------------------------------------------------
Compensation
Members' compensation $ 320,000 $ 257,812
Staff salaries 1,693,529 1,534,921
Payroll taxes and employee benefits 536,953 372,127
Commission expense 110,081
Employee performance bonuses 350,000
--------------------------
Total compensation costs 2,900,482 2,274,941
--------------------------
Other significant expenses
Warranty expense 714,139 395,000
Engineering supplies 277,700 133,715
Legal fees 15,000 128,387
Shipping charges 89,387 20,289
Bad debt expense 58,998 120,313
--------------------------
Total other significant expenses 1,155,224 797,704
--------------------------
Expenses by department
Sales, marketing and customer service 344,871 191,541
Information technology 197,203 75,967
Engineering 171,591 197,517
Facilities management 138,015 92,942
Administrative and other 408,472 169,547
--------------------------
Total other significant expenses 1,260,152 727,514
--------------------------
Total selling, general and administrative expenses $ 5,315,858 $ 3,800,159
--------------------------
See accompanying notes to consolidated financial statement
16
STARTRAK SYSTEMS, LLC AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY FINANCIAL DATA
$ Increase
Years Ended December 31, 2005 2004 (decrease) %
-----------------------------------------------------------------------------
Net sales $ 6,327,980 $ 4,819,420 $ 1,508,560 31%
Cost of sales 4,037,413 3,811,696 225,717 6%
-----------------------------------------
Gross profit 2,290,567 1,007,724 1,282,843 127%
-----------------------------------------
Selling, general and
administrative expenses 5,315,858 3,800,159 1,515,699 40%
Depreciation expense 29,039 13,573 15,466 114%
-----------------------------------------
Total operating expenses 5,344,897 3,813,732 1,531,165 40%
-----------------------------------------
Loss from operations (3,054,330) 2,806,008) (248,322) 9%
Interest expense, net [1] (334,591) (148,018) (186,573) 126%
Forgiveness of debt income 200,000 200,000
-----------------------------------------
Net loss $ (3,188,921) $ (2,954,026) $ (234,895) 8%
=================================================
See accompanying notes to consolidated financial statement
[1] Pursuant to the Deed of Release dated March 30, 2005, upon the occurence of
an investor taking a significant equity position in the Company, the THI
Senior Secured Promissory Notes payable will be convered into a single $2
million Unsecured Note. At that time, all accrued interest on the Senior
Secured Promissory Notes will also be reversed. For the years ended December
31, 2005 and 2004, there was $323,247 and $114,568, respectively, of accrued
THI interest included in interest expense.
STARTRAK SYSTEMS, LLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
This analysis is for the twelve months ended December 31, 2005, compared to the
twelve months ended December 31, 2004.
Sales
Sales for the twelve months ended December 31, 2005 were $6,327,980, compared to
$4,819,420 for the prior period. The increase of 31.3%, or $1,508,560, is
attributed to increased sales of both monitoring hardware and monitoring
services. Hardware sales increased to approximately $3.5 million, an increase of
4.8% from a year earlier. Monitoring service revenue increased to approximately
$2.8 million, a 92.9% increase from the prior year. Service contracts for
monitoring generally continue for the life of the deployed hardware (7-10
years). The significant increase in monitoring service revenue was due to the
activation of units sold in prior periods as well as activation of units sold in
the current year.
Gross Profit and Operating Expenses
The Company's gross profit for the twelve months ended December 31, 2005 was
approximately $2.3 million, an increase of approximately $1.3 million, or
127.3%, when compared to the prior twelve months. Gross margin for the twelve
months ended December 31, 2005 increased to 36.2%, as compared to 20.9% for the
prior period. Gross margins increased due to the higher margined monitoring
revenues accumulating to 44% of total revenues, compared to 30% of total
revenues in fiscal year ended December 31, 2004.
General and Administrative expenses for the twelve months ended December 31,
2005 were $5.3 million, an increase of approximately $1.5 million, or 40.1%,
when compared to $3.8 million for the prior period. The increase was due to
increases in personnel and related costs of approximately $700,000, increases in
warranty expense of approximately $120,000, increases in sales and marketing
expense of approximately $275,000 and increases in research and development,
facilities and general administrative expense of approximately $400,000.
Operating Loss
Operating loss for the twelve months ended December 31, 2005 was $3,054,330, an
increase of $248,322, or 8.8%, when compared to a loss of $2,806,008 for the
twelve months ended December 31, 2004. While gross profit increased, the larger
increase in general and administrative expenses resulted in an increased net
less as compared to the prior period.
Interest expense for the twelve months ended December 31, 2005 increased
$196,558 or 132.7% over the prior period. The increase is due to the cost of the
Company's increased borrowings during the twelve-month period ended December 31,
2004.
Net Loss
The net loss for the twelve months ended December 31, 2005 was $3,188,921,
compared to a net loss of $2,954,026 for the prior period.
Liquidity and Capital Resources
As of December 31, 2005, StarTrak Systems, LLC's ("StarTrak" or "Company")
current liabilities exceeded current assets by approximately $2.6 resulting in
negative working capital and a current ratio of 2.45:1. The current ratio for
the twelve months ended December 31, 2005 was 1.55:1. As of December 31, 2005,
59%, or approximately $2.6 million, of the current liabilities are accounts
payable, accrued expenses, and accrued warranty. $1,255,270, or 29%, of the
current liabilities is customer advances representing prepayments received from
customers against future shipments. Approximately 12%, or $534,588, of the
current liabilities represents notes payable.
Accounts receivable at December 31, 2005 of $935,640 reflects an increase of
41.8% when compared to $659,949 reported as of December 31, 2004. The accounts
receivable balance at December 31, 2005 represents 38 days' sales in receivables
as compared to 36 days' sales in receivables at December 31, 2004. The slight
increase in days' sales in receivables is not considered a trend.
Inventory at December 31, 2005 increased slightly to $731,583, as compared to
$725,888 at December 31, 2004. The December 31, 2005 inventory balance reflects
an inventory turnover of 5.5 compared to 5.3 at December 31, 2004.
Cash used in operating activities for the twelve months ended December 31, 2005
was $956,127, compared to $3,185,822 for the prior year. The significant
decrease resulted primarily due to customer prepayments made to the Company and
increases to accrued expenses.
Cash used in investing activities for the twelve months ended December 31, 2005
was $46,397, compared to $40,720 for the twelve months ended December 31, 2004.
In both years this amount represents purchases of computer equipment and the
amount is not expected to significantly change in subsequent periods.
Net cash provided by financing activities was $878,529 for the twelve months
ended December 31, 2005, compared to $3,280,038 for the twelve months ended
December 31, 2004, a decrease of approximately $2.4 million. During fiscal year
2004, the Company issued $3.9 million in new promissory notes, compared to
$750,000 issued in the twelve months ended December 31, 2005. In addition,
members advanced $400,000 to the Company during fiscal year 2005 compared to the
Company making repayments to members of $185,000 in fiscal year 2004.
Management believes that additional working capital will be required to fund
current projections, the profitability of which cannot be assured. If additional
working capital is not obtained through additional long-term debt or equity
investment into the Company, it could adversely affect future operations.
Accordingly, the accompanying 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 financial statements of the Company for fiscal
years ended December 31, 2005 and 2004.
APPENDIX B
STARTRAK SYSTEMS, LLC
UNAUDITED INTERIM FINANCIAL STATEMENTS
For the Three Month Period
Ended March 31, 2006
StarTrak Systems, LLC
Condensed Balance Sheet
Assets March 31, 2006
--------------
Cash $ 48,700
Accounts Receivable 1,019,400
Inventory 793,300
Other Current Assets 81,000
--------------
Total Current Assets 1,942,400
--------------
Property Plant and Equipment 47,100
Goodwill -
Other Assets 6,400
--------------
Total Assets $ 1,995,900
==============
Liabilities and Equity
Long-tern Debt, Current Portion $ 554,900
Accounts Payable and Accrued Expenses 2,928,800
Deferred Revenue & Customer Advances 1,242,300
--------------
Current Liabilities 4,726,000
--------------
Notes Payable, Long Term 5,000,000
Accrued Interest 516,400
Due to Members 837,600
Members' Deficit (9,084,100)
--------------
Total Liabilities and S/H Equity $ 1,995,900
==============
See accompanying notes to the condensed consolidated financial statements
StarTrak Systems, LLC
Condensed Statement of Operations
3 Months 3 Months
Ended 3/31/05 Ended 3/31/06
------------- -------------
Sales $ 1,441,600 $ 2,319,300
Cost of Sales (1,026,900) (1,677,400)
Other Expenses (913,400) (1,079,900)
------------- -------------
Operating Loss (498,700) (438,000)
------------- -------------
Interest Expense, Net (72,500) (100,900)
Other Income (Loss) - (13,100)
------------- -------------
Net Loss $ (571,200) $ (552,000)
============= =============
See accompanying notes to the condensed consolidated financial statements
Condensed Statement of Cash Flows
For the Three Months Ended March 31,
(000 omitted)
2005 2006
------------- -------------
Net cash used in operating activities $ (845,600) $ (409,500)
Net cash flows used in investing activities (7,200) (10,000)
Net cash flows from financing activities 659,900 388,600
------------- -------------
Net increase (decrease) in cash $ (192,900) $ (30,900)
------------- -------------
Cash, beginning of year $ 203,600 $ 79,600
Cash, end of year $ 10,700 $ 48,700
============= =============
See accompanying notes to the condensed consolidated financial statements
STARTRAK SYSTEMS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2006
Note A - Basis of Presentation and Recent Accounting Pronouncements
StarTrak Systems, LLC (the "Company") is a Delaware Limited Liability Company
located in Morris Plains, New Jersey.
The unaudited condensed consolidated balance sheet as of March 31, 2006, the
related unaudited condensed consolidated statements of operations and cash flows
for the three months ended March 31, 2006 presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with the
instructions to Form 10-QSB. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
our opinion, the accompanying condensed consolidated financial statements
include all adjustments necessary for a fair presentation of such condensed
consolidated financial statements. Such necessary adjustments consist of normal
recurring items and the elimination of all significant intercompany balances and
transactions.
These interim condensed consolidated financial statements should be read in
conjunction with the Company's audited December 31, 2005 and 2004 Consolidated
Financial Statements included in this proxy. Interim results are not necessarily
indicative of results for a full year. Certain reclassifications have been made
to conform prior period financials to the presentation in the current reporting
period. The reclassifications had no effect on net loss.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statement and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Long-lived assets - The Company reviews carrying values at least annually or
whenever events or circumstances indicate the carrying values may not be
recoverable through projected discounted cash flows.
Note B - Subsequent Events
StarTrak System, LLC ("Sellers") members entered into an Agreement and Plan of
Reorganization (the "Transaction") in June 2006 to be 100% acquired by Alanco
Technologies, Inc., an Arizona corporation located in Scottsdale, AZ.
The Transaction, anticipated to be all stock, was effected by the issuance of 5
million Alanco Class A Common shares at closing, effective June 30, 2006, and
the obligation to issue an additional 8.2 million shares by January 31, 2007
upon approval by Alanco shareholders. In addition, the sellers could potentially
earn up to an additional $8 million (a maximum of $4 million each year) based
upon StarTrak operations achieving certain financial targets in fiscal years
2007 and 2008 ("Earn-out"). The value of the Earn-out is calculated for fiscal
year 2007 as two hundred percent of StarTrak gross profit in excess of $6
million. For fiscal year 2008, the Earn-out is calculated as two hundred percent
of gross profit in excess of $8 million. Upon shareholder approval, the Earn-out
may be paid in shares of Alanco Class A Common stock valued at market,
determined as a ten-day average closing price immediately prior to issuance.
The annual Alanco shareholders' meeting is tentatively scheduled for the end of
January 2007, at which the shareholders will be asked to approve various
proposals related to the acquisition including the issuance of the 8.2 million
common shares required by the Agreement, as well as authorization of the
issuance of common shares as payment of any potential Earn-out obligation under
the Agreement.
The value of the Transaction, considering the 5 million Class A Common Shares
issued at closing (valued at $3,485,000), 8.2 million Class A Common shares to
be issued upon shareholder approval (valued at $5,715,400 on June 30, 2006),
StarTrak net liabilities assumed of $5,425,800 and the related costs of the
acquisition of $434,500, was valued at of $15,060,700.
Rothstein Kass
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use of our report dated March 16, 2006 for Startrak Systems,
LLC which is included with this proxy filing by Alanco Technologies, Inc.
/s/ Rothstein, Kass & Company, P.C.
Rothstein, Kass & Company, P.C.
Roseland, New Jersey
December 22, 2006
APPENDIX C
ALANCO TECHNOLOGIES, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
----
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
----
For the transition period from _____________ to ____________
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
-------------------------
(Exact name of small business issuer as specified in its charter)
Arizona
-------
(State or other jurisdiction of incorporation or organization)
86-0220694
----------
(I.R.S. Employer Identification No.)
15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(480) 607-1010
--------------
(Issuer's telephone number)
----------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 10, 2006 there
were 15,475,000 shares, net of treasury shares, of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
Forward-Looking Statements: Some of the statements in this Form 10-QSB Quarterly
Report, as well as statements by the Company in periodic press releases, oral
statements made by the Company's officials to analysts and shareholders in the
course of presentations about the Company, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Words or phrases denoting the anticipated results of future events such
as "anticipate," "believe," "estimate," "will likely," "are expected to," "will
continue," "project," "trends" and similar expressions that denote uncertainty
are intended to identify such forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such factors include,
among other things, (i) general economic and business conditions; (ii) changes
in industries in which the Company does business; (iii) the loss of market share
and increased competition in certain markets; (iv) governmental regulation
including environmental laws; and (v) other factors over which the company has
little or no control.
EXPLANATORY NOTE
This amendment to Form 10-QSB for the period ended September 30, 2006 is being
filed for the purpose of modifying Part I Item 2 - Controls and Procedures,
and redating the certifications in Exhibits 31.1 and 32.1. This amendment has
no effect on reported net loss or net loss per share.
Except for the items described above, none of the information contained in our
original filing on Form 10-QSB has been updated, modified or revised. The
remainder of our original report on Form 10-QSB is included herein for the
convenience of the reader.
1
ALANCO TECHNOLOGIES, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2006 (Unaudited) and June 30, 2006...........3
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended September 30, 2006 and 2005.....4
Consolidated Statement of Changes in Shareholders'Equity
(Unaudited) for the three months ended September 30, 2006...5
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the three months ended September 30, 2006 and 2005.....6
Notes to Condensed Consolidated Financial Statements Unaudited).........8
Note A - Basis of Presentation and Recent Accounting
Pronouncements
Note B - Stock-Based Compensation
Note C - Inventories
Note D - Contracts in Process
Note E - Intangible Assets
Note F - Deferred Revenue
Note G - Loss per Share
Note H - Equity
Note I - Industry Segment Data
Note J - Sale of Arraid, Inc.
Note K - Related Party Transactions
Note L - Line of Credit and Term Loan
Note M - Litigation
Note N - Subsequent Events
Note O - Liquidity
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................16
Item 3. Controls and Procedures...... ................................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................21
Item 2. Changes in Securities.........................................21
Item 6. Exhibits......................................................22
2
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2006 AND JUNE 30, 2006
Sept 30, 2006 June 30, 2006
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and Cash Equivalents $ 3,731,900 $ 1,155,500
Accounts receivable, net 2,865,800 1,760,700
Notes receivable, current 29,600 31,600
Cost and estimated earnings in excess of
billings 97,600 -
Inventories, net 2,784,900 3,143,900
Prepaid expenses and other current assets 496,700 556,600
------------ ------------
Total current assets 10,006,500 6,648,300
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 184,300 202,300
------------ ------------
OTHER ASSETS
Goodwill 17,885,100 17,875,100
Other intangible assets, net 2,678,200 2,881,200
Net assets held for sale 13,900 28,200
Deferred Financing Costs and Other Assets 629,000 49,400
------------ ------------
Total other assets 21,206,200 20,833,900
------------ ------------
TOTAL ASSETS $ 31,397,000 $ 27,684,500
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Notes payable, current $ 1,586,600 $ 875,300
Credit Line 1,509,600 1,000,000
Accounts payable and accrued expenses 4,495,400 5,066,200
Billings in excess of cost and
estimated earnings on uncompleted contracts - 43,500
Deferred stock payment, StarTrak 5,715,400 5,715,400
Customer advances 659,300 1,001,100
Deferred revenue, current 597,700 126,000
------------ ------------
Total Current Liabilities 14,564,000 13,827,500
------------ ------------
LONG TERM LIABILITIES
Notes payable, long term 5,701,600 2,679,100
Deferred revenue - long term 34,800 -
------------ ------------
Total Long-term liabilities 5,736,400 2,679,100
------------ ------------
TOTAL LIABILITIES 20,300,400 16,506,600
------------ ------------
Preferred Stock - Series B Convertible -
500,000 shares authorized,76,900 and 75,000
issued and outstanding, respectively 756,200 737,500
------------ ------------
SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible
5,000,000 shares authorized, 3,549,000
and 3,122,900 shares issued and
outstanding, respectively 4,613,700 3,925,200
Common Stock
Class A - 75,000,000 shares authorized,
15,475,000 and 15,261,000 shares, net
of 200,000 treasury shares,
outstanding, respectively 78,916,700 78,470,200
Accumulated deficit (73,190,000) (71,955,000)
------------ ------------
Total shareholders' equity 10,340,400 10,440,400
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,397,000 $ 27,684,500
============ ============
See accompanying notes to the condensed consolidated financial statements
3
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Unaudited)
2006 2005
------------ ------------
NET SALES $ 5,134,900 $ 1,601,600
Cost of goods sold 3,336,400 1,056,700
------------ ------------
GROSS PROFIT 1,798,500 544,900
Selling, general and administrative expense 2,671,400 1,597,100
------------ ------------
OPERATING LOSS (872,900) (1,052,200)
OTHER INCOME & EXPENSES
Interest expense, net (86,100) (20,500)
Other income, net 21,900 8,400
------------ ------------
NET LOSS (937,100) (1,064,300)
Preferred stock dividends - in kind (297,900) (265,700)
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,235,000) $ (1,330,000)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.08) $ (0.12)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 15,675,000 10,766,200
============ ============
See accompanying notes to the condensed consolidated financial statements
4
ALANCO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 (unaudited)
SERIES A
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
----------------------- ----------------------- ------------------- -------------- -----------
Balances, June 30, 2006 15,461,000 $ 78,845,300 3,122,900 $ 3,925,200 200,000 $ (375,100) $ (71,955,000) $10,440,400
Shares issued for services 4,000 5,500 - - - - - 5,500
Shares issued for loan fees 210,000 267,500 - - - - - 267,500
Value of warrants issued for
loan fees - 119,400 - - - - - 119,400
Value of stock based
compensation - 54,100 - - - - - 54,100
Offering, net of expenses - - 240,000 409,300 - - - 409,300
Preferred dividends,
paid in kind - A - - 186,100 279,200 - - (279,200) -
Preferred dividends,
paid in kind - B - - - - - - (18,700) (18,700)
Net loss - - - - - - (937,100) (937,100)
---------- ----------- --------- ---------- -------- ----------- ------------- ------------
Balances, September 30, 2006 15,675,000 $ 79,291,800 3,549,000 $ 4,613,700 200,000 $ (375,100) $ (73,190,000)$ 10,340,400
========== =========== ========= =========== ======== ========== ============= ============
See accompanying notes to the condensed consolidated financial statements
5
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (937,100) $ (1,064,300)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 242,400 92,500
Stock-based compensation 54,100 -
Gain on Sale - Data Storage Assets (18,300) -
Income from assets held for sale (3,600) (8,400)
Changes in:
Accounts receivable, net (1,105,100) (39,400)
Inventories, net 359,000 (361,700)
Costs in excess of billings and estimated
earnings on uncompleted contracts (97,600) -
Prepaid expenses and other current assets 59,900 (29,300)
Accounts payable and accrued expenses (570,800) 300,700
Deferred revenue 506,500 (45,100)
Billings and estimated earnings in excess of
costs on uncompleted contracts (43,500) (1,200)
Customer Advances (341,800) -
Net assets of disposed operations (428,000)
Other assets (192,700) 2,800
------------ ------------
Net cash used in operating activities (2,516,600) (1,153,400)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from assets sold 467,400 23,600
Net cash forfeited in sale (2,400)
Collection of notes receivable, net 2,000 51,900
Purchase of property, plant and equipment (18,100) (49,800)
Patent renewal and other (8,600) -
------------ ------------
Net cash provided by investing activities 440,300 25,700
------------ ------------
See accompanying notes to the condensed consolidated financial statements
6
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Continued)
2006 2005
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) advances on line of credit $ (490,400) $ 170,500
Proceeds from notes payable 5,072,500 -
Repayment on notes payable (338,700) -
Proceeds from sale of Equity Instruments 409,300 571,100
------------ ------------
Net cash provided by financing activities 4,652,700 741,600
------------ ------------
NET INCREASE (DECREASE) IN CASH 2,576,400 (386,100)
CASH AND CASH EQUIVALENTS, beginning of period 1,155,500 737,300
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,731,900 $ 351,200
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 57,700 $ 20,500
============ ============
Non-Cash Activities:
Value of stocks and warrants issued for
services and prepayments $ 392,400 $ 51,100
============ ============
Valuation adjustment $ - $ (45,700)
============ ============
Series B preferred stock dividend,
paid in kind $ 18,700 $ 16,900
============ ============
Series A preferred stock dividend,
paid in kind $ 279,200 $ 248,800
============ ============
See accompanying notes to the condensed consolidated financial statements
7
ALANCO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2006
Note A - Basis of Presentation and Recent Accounting Pronouncements
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or
"Company"), operates in three business segments: Data Storage, Wireless
Asset Management and RFID Technology.
The unaudited condensed consolidated financial statements presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
in accordance with the instructions to Form 10-QSB. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In our opinion, the accompanying condensed consolidated
financial statements include all adjustments necessary for a fair presentation
of such condensed consolidated financial statements. Such necessary adjustments
consist of normal recurring items and the elimination of all significant
intercompany balances and transactions.
These interim condensed consolidated financial statements should be
read in conjunction with the Company's June 30, 2006, Annual Report filed on
Form 10-KSB. Interim results are not necessarily indicative of results for a
full year. Certain reclassifications have been made to conform prior period
financials to the presentation in the current reporting period. The
reclassifications had no effect on net loss.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
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 will return 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 will be
automatically reclassified and changed into two shares of common stock, and the
total number of common shares outstanding will be reduced from approximately
38.7 million shares to approximately 15.5 million shares post-split. No
fractional shares will be issued in connection with the reverse stock split and,
upon surrender of their stock certificates; shareholders will receive 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
Condensed Consolidated Financial Statements, the Notes to the Condensed
Consolidated Financial Statements and the loss per share for all periods
presented to reflect the reverse stock split.
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 first quarter of fiscal 2007 includes
compensation expense for all stock-based compensation awards granted during the
quarter, or granted in a prior quarter if 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
8
ALANCO TECHNOLOGIES, INC.
for Stock-based Compensation" ("SFAS 123"). Stock-based compensation expense for
all stock-based compensation awards granted after July, 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 is determined using a weighted average of the
contractual term and vesting period of the award;
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 equivalent to 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.
Prior to the adoption of SFAS 123R, the Company recognized stock-based
compensation expense in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APBO 25"). In March 2005, the
SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's
interpretation of SFAS 123R and the valuation of share-based payments for public
companies. The Company has applied the provisions of SAB 107 in their adoption
of SFAS 123R.
The following table illustrates the effect on net loss and net loss
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to options granted under the stock option plans in the three months
ended September 30, 2005. For purposes of pro forma disclosures, the value of
the options granted during the period is estimated using the Black-Scholes
option-pricing formula and expensed in the period of grant whether or not the
options were vested. The following pro forma information sets forth the net loss
and net loss per share assuming that the Company had used the SFAS 123 fair
value method in accounting for stock options during the three months ended
September 30, 2005:
3 months ended
September 30, 2005
------------------
Net loss, as reported $ (1,330,000)
Add: Stock-based employee compensation expense included in
reported income -
Deduct: Total stock-based employee compensation expense
determined under fair value based methods, net
of related tax effects (358,900)
--------------
Pro Forma net loss $ (1,668,900)
--------------
Net loss per common share, basic and diluted
As reported $ (0.12)
--------------
Pro forma $ (0.16)
--------------
Long-lived assets and intangible assets - The Company reviews carrying
values at least annually or whenever events or circumstances indicate the
carrying values may not be recoverable through projected discounted cash flows.
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
9
ALANCO TECHNOLOGIES, INC.
recognition and de-recognition of tax positions. The new guidance will be
effective for the Company in fiscal 2008. We are currently evaluating the
requirements of FIN 48 and the impact this interpretation may have on our
consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108
"Considering the Effects of Prior Year Misstatements in Current Year Financial
Statements", which provides interpretive guidance on how the effects of prior
year uncorrected misstatements should be 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. The Company is currently
evaluating the impact of adopting SAB 108, but we do not expect this Statement
to have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS 157, 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.
Note B - Stock-Based Compensation
The Company has several employee stock options 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 and are more fully discussed in Form 10-KSB for the year ended
June 30, 2006.
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
Assumptions for awards of options granted during the quarter ended
September 30, 2006 were:
Awards Granted
Three months
ended
September 30, 2006
------------------
Dividend yield 0%
Expected volatility 80%
Weighted-average volatility 80%
Risk-free interest rate 4 1/2%
Expected life of options (in years) 3.2 - 3.4
Weighted average grant-date fair value $0.71
10
ALANCO TECHNOLOGIES, INC.
The following table summarizes the Company's stock option activity
during the first three months of fiscal 2007:
Weighted Average
Weighted Average Remaining Aggregate Aggregate
Shares Exercise Price Contractual Fair Intrinsic
Per Share Term (1) Value Value(2)
------------ --------------- ----------- ----------- ----------
Outstanding July 1, 2006 5,721,000 $1.98 5.82 $3,597,300 -
Granted 220,000 $1.38 4.75 125,000 -
Exercised - - - - -
Forfeited or expired (25,400) $2.44 - (16,500)
------------ --------------- ----------- ----------- ----------
Outstanding September 30, 2006 5,915,600 $1.95 5.59 $3,705,800 $239,200
============ =============== =========== =========== ==========
Exercisable September 30, 2006 4,767,200 $2.00 5.79 $3,027,400 $239,200
============ =============== =========== =========== ==========
(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 comon stock as of September 30, 2006, for those awards that have
an exercise price currently below the closing price as of September 30,
2006 of $1.30.
Note C - Inventories
Inventories are recorded at the lower of cost or market. The
composition of Inventories as of September 30, 2006 and June 30, 2006 are
summarized as follows:
September 30, June 30,
2006 2006
------------ ------------
(unaudited)
Raw materials and purchased parts $ 3,095,200 $ 3,251,000
Work-in-progress - 98,100
Finished goods 12,100 198,700
------------ ------------
3,107,300 3,547,800
Less reserves for obsolescence (322,400) (403,900)
------------- ------------
$ 2,784,900 $ 3,143,900
============ ============
Note D - Contracts In Process
Costs incurred, estimated earnings and billings in the RFID Technology
segment, related to contracts for the installation of TSI PRISM system in
process at September 30, 2006 and June 30, 2006 consist of the following:
September 30, June 30,
2006 2006
------------ ------------
(unaudited)
Costs incurred on uncompleted contracts $ 240,600 $ 97,100
Estimated gross profit earned to date 17,500 19,900
------------ ------------
Revenue earned to date 258,100 117,000
Less: Billings to date (160,500) (160,500)
------------ ------------
Costs and estimated earnings/(billings) in
in excess of billings/(costs and
estimated earnings) $ 97,600 $ (43,500)
============ ============
11
ALANCO TECHNOLOGIES, INC.
Note E - Intangible Assets
The Company acquired StarTrak Systems, LLC effective June 30, 2006 in a
transaction valued at $15,060,700. The Company engaged an independent consultant
for valuation services related to FASB 141 required disclosure of the allocation
of the purchase price paid to the assets acquired and liabilities assumed by
balance sheet caption, but had not received the consultant's report prior to
filing of the Form 10-KSB for the year ended June 30, 2006. The report has been
received and the following is a summary of other intangible assets of both the
RFID Technology and Wireless Asset Management segments at June 30, 2006 and
September 30, 2006.
Amortization Gross Net Other
Periods Carrying Accumulated Intangible
(in years) Values Amortization Assets
------------ ---------- ------------ ----------
As of June 30, 2006
Patents License 3 $ 51,900 $ (51,900) $ -
Manufacturing License 6 500,000 (340,200) 159,800
Technology and Software
Development 5-6 1,842,000 (490,000) 1,352,000
Customer Base and Backlog Various 1,300,000 - 1,300,000
Technology License 5 90,000 (20,500) 69,500
----------- ----------- -----------
$ 3,783,900 $ (902,600) $ 2,881,200
=========== =========== ===========
As of September 30, 2006
Patents License 3 $ 55,900 $ (51,900) $ 4,000
Manufacturing License 6 500,000 (361,000) 139,000
Technology and Software
Development 5-6 1,842,000 (571,800) 1,270,200
Customer Base and Backlog Various 1,300,000 (100,000) 1,200,000
Technology License 5 90,000 (25,000) 65,000
----------- ----------- -----------
$ 3,787,900 $(1,109,700) $ 2,678,200
=========== =========== ===========
The amortization expense for aggregate other intangible assets for the fiscal
quarters ended September 30, 2006 and 2005 were $207,100 and $55,400,
respectively.
The following table summarizes the estimated amortization charges related to
other intangible assets as of June 30, 2006:
June 30th Amount
--------- -----------
2007 $ 818,400
2008 501,100
2009 425,100
2010 347,600
----------
$2,092,200
==========
12
ALANCO TECHNOLOGIES, INC.
Note F - Deferred Revenue
Deferred Revenues at September 30, 2006 and June 30, 2006 consist of
the following:
September 30, June 30,
2006 2006
------------ ------------
(unaudited)
Extended warranty revenue $ 632,500 $ 126,000
Less - current portion (597,700) (126,000)
------------ ------------
Deferred revenue - long term $ 34,800 $ -
============ ============
Note G - Loss Per Share
Basic and diluted loss per share of common stock was computed by
dividing net loss by the weighted average number of shares of common stock
outstanding.
Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during the
period. Dilutive securities are options and warrants that are freely exercisable
into common stock at less than the prevailing market price. Dilutive securities
are not included in the weighted average number of shares when inclusion would
increase the earnings per share or decrease the loss per share. As of September
30, 2006 there were 1,375,000 potentially dilutive securities outstanding.
Note H - Equity
During the three months ended September 30, 2006, the Company issued a
total of 214,000 shares of the Company's Class A Common Stock. Included were
4,000 shares issued for services valued at $5,500, and 210,000 shares issued as
financing costs in conjunction with a $4 million term loan transaction valued at
fair market value on date of issue at $267,500, net of a $5,000 payment made by
the lender. Warrants to purchase 283,500 shares of the Company's Class A Common
Stock at a strike price of $1.80 (valued at $119,400) were also issued in
conjunction with the term loan. The net value of stock and warrants issued in
conjunction with the term loan has been recorded and will be amortized over the
loan period as interest expense.
The value of employee stock-based compensation recognized for the
current quarter amounted to $54,100. The Company initiated the expensing of
stock-based compensation on July 1, 2006. See Note A - Basis of Presentation and
Recent Accounting Pronouncements for additional discussion of the Company's
policies related to employee stock-based compensation.
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 $409,300, net of expenses. 180,000 units
were purchase by directors and officers of the Company including 60,000 units
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 third parties.
The Company declared and paid dividends-in-kind on the Company's
preferred shares through the issuance of 186,100 shares of Series A Preferred
Stock valued at $279,200 and 1,870 shares of Series B Preferred Stock valued at
$18,700. The Preferred Stocks are more fully discussed in the Form-10KSB for the
year ended June 30, 2006.
13
ALANCO TECHNOLOGIES, INC.
Note I - Industry Segment Data
Information concerning operations by industry segment follows
(unaudited):
Industry Segment Data
Three Months ended September 30,
2006 2005
------------ ------------
Revenue
Data Storage $ 858,300 $ 1,464,600
Wireless Asset Management 4,039,900 n/a
RFID Technology 236,700 137,000
------------ ------------
Total Revenue $ 5,134,900 $ 1,601,600
============ ============
Gross Profit
Data Storage $ 213,600 $ 510,000
Wireless Asset Management 1,535,000 n/a
RFID Technology 49,900 34,900
------------ ------------
Total Gross Profit $ 1,798,500 $ 544,900
------------ ------------
Gross Margin
Data Storage 24.9% 34.8%
------------ ------------
Wireless Asset Management 38.0% n/a
------------ ------------
RFID Technology 21.1% 25.5%
------------ ------------
Overall Gross Margin 35.0% 34.0%
------------ ------------
Selling, General and Administrative Expense
Data Storage $ 455,200 $ 562,100
Wireless Asset Management 1,344,800 n/a
RFID Technology 507,700 673,300
------------ ------------
Total Segment Operating Expense $ 2,307,700 $ 1,235,400
------------ ------------
Operating Profit (Loss)
Data Storage $ (241,600) $ (52,100)
Wireless Asset Management 190,200 n/a
RFID Technology (457,800) (638,400)
Corporate Expense, net (363,700) (361,700)
------------ ------------
Operating Loss $ (872,900) $ 1,052,200)
============ ============
Depreciation and Amortization
Data Storage $ 5,900 $ 6,100
Wireless Asset Management 161,400 n/a
RFID Technology 74,400 85,500
Corporate 700 900
------------ ------------
Total Depreciation and Amortization $ 242,400 $ 92,500
============ ============
September 30, June 30,
Accounts Receivable 2006 2006
------------ ------------
Data Storage $ 275,600 $ 645,400
Wireless Asset Management 2,265,400 919,700
RFID Technology 265,700 178,300
Corporate 59,100 17,300
------------ ------------
Total $ 2,865,800 $ 1,760,700
============ ============
Inventories
Data Storage $ 969,500 $ 1,317,500
Wireless Asset Management 800,800 885,900
RFID Technology 1,014,600 940,500
------------ ------------
Total $ 2,784,900 $ 3,143,900
============ ============
14
ALANCO TECHNOLOGIES, INC.
Note J - Sale of Arraid, Inc.
The Company sold its wholly owned subsidiary, Arraid, Inc., an Arizona
corporation ("Arraid") located in Phoenix, Arizona, to a trust controlled by a
director of the Company, for cash of $456,400. Arraid was one of two
subsidiaries that comprise the Company's Data Storage business segment. The
transaction was effective September 1, 2006.
Note K - Related Party Transactions
The Company has a $2.0 million line of credit agreement ("Agreement"),
more fully discussed in the Company's Form 10-KSB for the year ended June 30,
2006, with a private trust controlled by Mr. Donald Anderson, a greater than
five percent stockholder and a member of the Company's Board of Directors. See
Note H - Equity for discussion of units sold consisting of one share of Series A
Preferred Stock and warrants to purchase 1.2 shares of the Company's Class A
Common Stock for a strike price of $1.50 per share. The units were purchased by
a group of investors that included Robert R. Kauffman, CEO and Company director,
Harold S. Carpenter, Company director, and Donald E. Anderson, Company director.
During the quarter, the Company sold its wholly owned subsidiary,
Arraid, Inc., to a trust controlled by Donald E. Anderson, a director of the
Company, for cash of approximately $456,400. The transaction was completed in
conformance with a fairness opinion letter received by the Company. (See Note J
above for additional discussion on the Sale of Arraid.)
Note L - Line of Credit and Term Loan
At September 30, 2006, the Company had an outstanding balance under the
line of credit agreement of $1,509,600. The balance is under a $2.0 million line
of credit agreement with a private trust ("Lender"), entered into in June 2002
and last modified in June 2006. Under the Agreement, the Company must maintain a
minimum balance due under the line of at least $1.5 million through the July 1,
2007 expiration date. Under the Agreement, the lender has the unilateral right
to reduce the line of credit Agreement to $1.5 million, at which time the
minimum outstanding balance under the Agreement reduces from $1.5 to $1.0
million. At September 30, 2006, the Company had $490,400 available under the
line of credit agreement.
The Company completed a $4 million term loan financing on September 28,
2006 with ComVest Capital LLC, to be used to repay short-term notes and provide
working capital to fund operations. Provisions for the four-year loan include
interest only payments for the first year with the loan balance amortized over
the remaining three-year period. The loan bears interest at prime plus two and
one-half percent per annum, matures in September 2010 and is secured by the
Company assets. Closing fees and expenses related to the transaction paid in
cash, common stock and warrants amounted to $532,800. The costs will be
amortized over the term of the loan. The loan transaction was reported via Form
8-K filed on October 3, 2006, including the applicable loan documents.
Note M - Litigation
The Company continues to be a defendant in litigation that relates to
the acquisition, in May of 2002, of substantially all the assets of Technology
Systems International, Inc., a Nevada corporation ("TSIN"). The Company is also
the plaintiff in a lawsuit arising out of Carolina Casualty Insurance Company's
("Carolina") failure to pay a claim regarding the TSIN litigation, that the
Company made pursuant to its Directors and Officers Insurance Policy issued by
Carolina, and is a defendant in litigation against the Company by Arraid
Property L.L.C. alleging breach of lease and seeking monetary damages. No
significant new activity has occurred subsequent to our report of litigation in
our Form 10-KSB filed for the year ended June 30, 2006.
15
ALANCO TECHNOLOGIES, INC.
Note N - Subsequent Events
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 will return 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 will be
automatically reclassified and changed into two shares of common stock, and the
total number of common shares outstanding will be reduced from approximately
38.7 million shares to approximately 15.5 million shares post-split. No
fractional shares will be issued in connection with the reverse stock split and,
upon surrender of their stock certificates; shareholders will receive 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
Condensed Consolidated Financial Statements, the Notes to the Condensed
Consolidated Financial Statements and the loss per share for all periods
presented to reflect the reverse stock split.
On November 2, 2006, the Company received notification from Nasdaq
stock market that it was in full compliance with all requirements for continued
listing on the Nasdaq Capital Market. The Company had previously received a
staff determination letter from Nasdaq indicating that the Company failed to
comply with the minimum $1.00 per share bid price requirement for continued
listing.
Note O - Liquidity
Through September 30, 2006, the Company had sustained recurring losses
from operations, and as of September 30, 2006, the Company has a deficit working
capital position. These conditions raise substantial doubt about the ability of
the Company to continue as a going concern. During fiscal 2007, the Company
expects to meet its working capital and other cash requirements with its current
cash reserves, cash generated from operations, its borrowing capacity under its
credit facility, and other financing as required. While the Company believes
that it will succeed in attracting additional capital and generate capital from
operations from its StarTrak acquisition, there can be no assurance that the
Company's efforts will be successful. The Company's continued existence is
dependent upon its ability to achieve and maintain profitable operations. 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, 2006. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information, the statements contained herein are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. All such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by those
statements. These risks and uncertainties include, but are not limited to, the
following factors: general economic and market conditions; reduced demand for
information technology equipment; competitive pricing and difficulty managing
16
ALANCO TECHNOLOGIES, INC.
product costs; development of new technologies which make the Company's products
obsolete; rapid industry changes; failure by the Company's suppliers to meet
quality or delivery requirements; the inability to attract, hire and retain key
personnel; failure of an acquired business to further the Company's strategies;
the difficulty of integrating an acquired business; undetected problems in the
Company's products; the failure of the Company's intellectual property to be
adequately protected; unforeseen litigation; the ability to maintain sufficient
liquidity in order to support operations; the ability to maintain satisfactory
relationships with lenders and to remain in compliance with financial loan
covenants and other requirements under current banking agreements; and the
ability to maintain satisfactory relationships with suppliers and customers.
General
Information on industry segments is incorporated by reference from Note
I - Segment Reporting to the Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results
of operations are based upon the condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires the use of estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an ongoing basis, estimates are revalued, including
those related to areas that require a significant level of judgment or are
otherwise subject to an inherent degree of uncertainty. These areas include
allowances for doubtful accounts, inventory valuations, carrying value of
goodwill and intangible assets, estimated profit on uncompleted contracts in
process, stock-based compensation, income and expense recognition, income taxes,
ongoing litigation, and commitments and contingencies. Our estimates are based
upon historical experience, observance of trends in particular areas,
information and/or valuations available from outside sources and on various
other assumptions that we believe to be reasonable under the circumstances and
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual amounts
may differ from these estimates under different assumptions and conditions.
Accounting policies are considered critical when they are significant
and involve difficult, subjective or complex judgments or estimates. We
considered the following to be critical accounting policies:
Principles of consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Revenue recognition - The Company recognizes revenue from the Data
Storage and Wireless Asset Management segments, net of anticipated returns, at
the time products are shipped to customers, or at the time services are
provided. Revenue from material long-term contracts (in excess of $250,000 and
over a 90-day completion period) in all business segments are recognized on the
percentage-of-completion method for individual contracts, commencing when
significant costs are incurred and adequate estimates are verified for
substantial portions of the contract to where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized in the
ratio that costs incurred bear to total estimated costs. Changes in job
performance, estimated profitability and final contract settlements would result
in revisions to cost and income, and are recognized in the period in which the
revisions were determined.
Contract costs include all direct materials, subcontracts, labor costs
and those direct and indirect costs related to contract performance. General and
administrative costs are charged to expense as incurred. At the time a loss on a
contract is known, the entire amount of the estimated ultimate loss is accrued.
Long-lived assets and intangible assets - The Company reviews carrying
values at least annually or whenever events or circumstances indicate the
carrying values may not be recoverable through projected discounted cash flows.
Results of Operations
(A) Three months ended 09/30/06 versus 09/30/05
Sales
Consolidated sales for the quarter ended September 30, 2006 were
$5,134,900, an increase of $3,533,300, or 220.6%, when compared to $1,601,600
for the comparable quarter of the prior year. The sales increase resulted from
the $4,039,900 of added sales reported by the Wireless Asset Management segment,
acquired effective June 30, 2006. Revenues from the RFID Technology segment for
the quarter increased by $99,700, or 72.8% due to product shipped to a current
installation.
17
ALANCO TECHNOLOGIES, INC.
Sales for the Data Storage segment decreased to $858,300, a decrease of
$606,300 or 41.4%, from $1,464,600 reported in the quarter ended September 30,
2005. Effective September 1, 2006, the Company sold Arraid, Inc., an Arizona
corporation, ("Arraid"), one of two companies that make up the Data Storage
segment. 33% of the decrease in Data Storage sales resulted from a decrease in
Arraid sales, a decrease of $117,000 prior to the effective sale date of
September 1, 2006 and $81,000 reported by Arraid in September 2005 without a
corresponding sales number for September 2006. The balance of the Data Storage
decrease, or $408,300, was due to competitive pressures experienced by
Excel/Meridian Data, Inc., the remaining entity in the Data Storage segment, for
certain storage products and postponement of data storage purchases by both
government and private customers. We do not expect the sales decreases for the
remaining Data Storage company to continue as orders for data storage products
recorded for October 2006 reflected an increase compared to orders recorded in
October of the prior year.
Gross Profit and Operating Expenses
Gross profit reported for the quarter amounted to $1,798,500, an
increase of $1,253,600, or 230%, when compared to $544,900 reported for the same
quarter of the prior year. The increase was all due to the acquisition of the
Wireless Asset Management segment that reported gross profit of $1,535,000.
Excluding the Wireless Asset Management segment, gross profit fell by $281,400,
or 51.6%. The Data Storage segment accounted for the decrease by reporting a
$296,400 decrease in gross profits. The decrease was due to the decrease in
reported sales and reduced gross margins from 34.8% in the quarter ended
September 30, 2005 to 24.9% for the current quarter. Approximately $85,000 of
the gross margin decrease resulted from lower margins with the remaining
decrease due to the decrease in reported sales. Arraid historically had the
highest margins in the Data Storage segment while accounting for only
approximately 20% of revenue. The sale of Arraid will reduce Data Storage sales
by approximately 20% and have a material effect on gross margins, reducing the
Data Storage gross margins to the range of 22% to 27%.
RFID Technology segment reported gross profit of $49,900, an increase
of 43%, compared to the $34,900 reported for the quarter ended September 30,
2005. Gross margins fell to 21.1% in the current quarter compared to 25.5%
reported in the comparable prior year quarter. The decrease in gross margin for
the RFID Technology segment resulted from material requirements in excess of
projections for current installations.
Selling, general and administrative ("SG&A") expenses, excluding
corporate expenses, for the current quarter increased to $2,307,700, an increase
of $1,072,300, or 87%, when compared to $1,235,400 reported in the comparable
quarter of fiscal year 2005. The increase was due to the newly acquired Wireless
Asset Management segment which added $1,344,800 in SG&A expenses for the current
quarter. Excluding the Wireless Asset Management segment, SG&A expense decreased
by $272,500 or 22.1%. Data Storage segment expenses decreased by $106,900 or
19%, and the RFID Technology segment decreased by $165,600 or 24.6%. The Data
Storage segment decrease resulted from the sale of Arraid, which reduced
expenses by approximately $50,000 per month, and reduced sales commission
expense for the quarter. The reduction in RFID Technology segment SG&A expense
was due to approximately $100,000 of engineering development costs related to
new technology products that was deferred pursuant to FAS No. 86 and reduced
marketing expenses.
Operating Loss
The Operating Loss for the quarter was ($ 872,900) compared to an
operating loss of ($1,052,200) for the same quarter of the prior year, a
decrease of $179,300, or 17.0%. The decreased Operating Loss resulted from a
$190,200 in operating profit contributed by the Wireless Asset Management
segment. The RFID Technology segment decreased its operating loss to ($457,800),
a decrease of $180,600, or 28.3%, when compared to the Operating Loss reported
in the same quarter of the prior year of ($638,400). The Data Storage segment
reported an operating loss of ($241,600), compared to an Operating Loss of
($52,100) reported in the comparable quarter of the prior year.
Net Loss
Net interest expense for the quarter amounted to $86,100 compared to
interest expense of $20,500 for the same quarter in the prior year. The interest
expense increase resulted primarily from increases in the prime rate and an
18
ALANCO TECHNOLOGIES, INC.
increase in the minimum borrowing limit of our credit line. Other Income
increased to $21,900 from $8,400 reported for the comparable quarter of the
prior year. The increase in other income resulted from a gain on the sale of
Arraid of approximately $18,000. The net interest expense and other income
resulted in a Net Loss of ($937,100), an 11.9% decrease from the ($1,064,300)
reported for the quarter ended September 30, 2005.
(Loss) Earnings before Dividends, Interest, Depreciation & Amortization (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
statements data prepared in accordance with US GAAP or as a measure of our
performance or liquidity. EBITDA for Alanco's 2007 fiscal year first quarter
represents a loss of ($608,600) compared to a loss of ($951,300) for the same
quarter of the prior fiscal year, a 36% decrease. A reconciliation of EBITDA to
Net Loss for the quarter ended September 30, 2006 is presented below:
3 months ended 3 months ended
September 30 September 30
EBITDA RECONCILIATION to NET LOSS 2006 2005
------------ ------------
EBITDA $ (608,600) $ (951,300)
Net interest expense (86,100) (20,500)
Depreciation and Amortization (242,400) (92,500)
------------ ------------
NET LOSS $ (937,100) $(1,064,300)
============ ============
Dividends
The Company paid quarterly in-kind Series A and Series B Preferred
Stock dividends with values of $297,900 and $265,700 in the quarters ended
September 30, 2006 and 2005, respectively.
Net Loss Attributable to Common Stockholders
The Net Loss Attributable to Common Stockholders for the quarter ended
September 30, 2006 amounted to ($1,235,000), or ($.08) per share, compared to a
loss of ($1,330,000), or ($.12) per share, in the comparable quarter of the
prior year. The Company anticipates improved future operating results in all
segments as the economy improves. However, actual results in the Wireless Asset
Management segment, Data Storage segment and the RFID Technology segment may be
affected by unfavorable economic conditions and reduced capital spending
budgets. If the economic conditions in the United States deteriorate or if a
wider or global economic slowdown occurs, Alanco may experience a material
adverse impact on its operating results and business conditions.
Liquidity and Capital Resources
The Company's current liabilities at September 30, 2006 exceeded
current assets by $4,557,500, resulting in negative working capital and a
current ratio of .69 to 1. At June 30, 2006 the Company reported negative
working capital of $7,179,200, reflecting a current ratio of .48 to 1. The
decrease in negative working capital at September 30, 2006 when compared to June
30, 2006 resulted primarily from the final funding from a $4 million term loan
closed during the quarter, the sale of Arraid effective September 1, 2006, and
the sale of equity.
Accounts receivable of $2,865,800 at September 30, 2006, reflects an
increase of $1,105,100, or 62.8%, when compared to the $1,760,700 reported as
consolidated accounts receivable at June 30, 2006. The accounts receivable
balance at September 30, 2006 for the Data Storage segment's remaining company
represents twenty-two days' sales in receivables compared to nineteen days'
sales at June 30, 2006. Due to the low revenues reported for the quarter and the
ability of minor payment changes on a few invoices to impact the days' sales
calculation, Management does not consider this to be a trend.
19
ALANCO TECHNOLOGIES, INC.
The accounts receivable balance for the Wireless Asset Management
segment at September 30, 2006 was $2,265,400 as compared to $919,700 at June 30,
2006, an increase of $1,345,700, or 146%. The increase is due to the high volume
of sales for the quarter which was largely recognized toward the end of the
quarter. The accounts receivable balance at September 30, 2006 for the Wireless
Asset Management segment represents thirty-six days' sales in receivables. There
is no comparative data for the same quarter of the prior year since the segment
was added effective June 30, 2006. The accounts receivable balance at September
30, 2006 for the RFID Technology segment represents seventy-three days' sales in
receivables, the same days' sales in receivables at June 30, 2006. The days'
sales calculation has remained high due to a $62,200 receivable at both June 30,
2006 and September 30, 2006 representing the final payment for a system
installation which was significantly past our normal terms. The customer had
received a special payment arrangement after allowing the Company to utilize the
site for a research and development project. The project has been completed and
subsequent to the quarter end the Company received payment in full for the
project.
Consolidated inventories at September 30, 2006 amounted to $2,784,900,
a decrease of $359,000 or 11.4%, when compared to $3,143,900 at June 30, 2006.
The inventory balance at September 30, 2006 for the Data Storage segment's
remaining company reflected an inventory turnover of 2.6 compared to an
inventory turnover of 3.9 at June 30, 2006. The decrease is due to the lower
volume of sales during the current quarter without a corresponding reduction in
inventory. As mentioned above, management does not consider this to be a trend
as revenues are expected to return to more typical levels. The inventory balance
at September 30, 2006 for the Wireless Asset Management segment represents an
inventory turnover of 12.5. There is no comparative data for the same quarter of
the prior year since the segment was added effective June 30, 2006. The
inventory balance for the Wireless Asset Management segment at September 30,
2006 was $800,800 as compared to $885,900 at June 30, 2006, a decrease of
$85,100, or 9.6%. The decrease is due to the high volume of shipments during the
quarter. The inventory balance for the RFID Technology segment at September 30,
2006 represents inventory turnover of .74 as compared to .51 at June 30, 2006.
The inventory turnover for both periods is due to low sales volume during the
periods. Management does not consider this a trend and the current inventory
levels reflect management's continued projected revenue increases for the
segment.
At September 30, 2006, the Company had an outstanding balance of
$1,509,600 under a $2.0 million formula-based revolving bank line of credit
agreement with interest calculated at prime plus 2%. The line of credit
agreement formula is based upon current asset values and is used to finance
working capital. At September 30, 2006, the Company had $490,400 available under
the line of credit.
In addition, the Company completed a four-year term loan agreement that
provided $4.0 million in additional working capital. The loan requires interest
only payment for the first year and bears interest at prime plus 2 1/2%. See
Line of Credit Note L for additional discussion of the existing line of credit
and Term loan agreements.
Cash used in operations for the three-month period ended September 30,
2006 was $2,516,600, an increase of $1,363,200 when compared to cash used in
operations of $1,153,400 for the comparable period ended September 30, 2005. The
increase resulted primarily from increases in inventory levels during the
current quarter, compared to an increase in inventory levels during the
comparable quarter of the prior year.
During the three months ended September 30, 2006, the Company reported
cash flows from investing activities of $440,300, compared to $25,700 reported
for the three months ended September 30, 2005. The increase resulted primarily
from increases in net cash from assets sold.
Cash provided by financing activities for the three months ended
September 30, 2006 amounted to $4,652,700, compared to $741,600 for the quarter
ended September 30, 2005. The increase was due to a $4 million term loan
transaction completed at the end of the quarter.
The Company believes that additional cash resources could be required
for working capital to achieve planned operating results for fiscal year 2007
and, if working capital requirements exceed current availability, the Company
20
ALANCO TECHNOLOGIES, INC.
anticipates raising capital through additional borrowing, the exercise of stock
options and warrants and/or the sale of stock in a private placement. The
additional capital would supplement the projected cash flows from operations and
the line of credit agreement in place at September 30, 2006. If additional
working capital was required and the Company was unable to raise the required
additional capital, it may materially affect the ability of the Company to
achieve its financial plan. The Company has raised additional capital in the
past and believes it has the ability, if needed, to raise the additional capital
to fund the planned operating results for fiscal year 2007. While the Company
believes that it will succeed in attracting additional capital and generate
capital from operations from its StarTrak acquisition, there can be no assurance
that the Company's efforts will be successful. The Company's continued existence
is dependent upon its ability to achieve and maintain profitable operations. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Item 3 - CONTROLS AND PROCEDURES
An evaluation as of the end of the period covered by this report was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that those disclosure controls and
procedures were effective in providing reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Commission's rules and
forms. In addition, there has been no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934) that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
The Company also maintains a system of internal controls 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 and includes those policies and
procedures that: (1) Pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the issuer; (2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the issuer are being made only in accordance with authorizations
of management and directors of the issuer; and (3) Provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the issuer's assets that could have a material effect on the
financial statements.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company continues to be a defendant in litigation that relates to
the acquisition, in May of 2002, of substantially all the assets of Technology
Systems International, Inc., a Nevada corporation ("TSIN"). The Company is also
the plaintiff in a lawsuit arising out of Carolina Casualty Insurance Company's
("Carolina") failure to pay a claim regarding the TSIN litigation, that the
Company made pursuant to its Directors and Officers Insurance Policy issued by
Carolina, and is a defendant in litigation against the Company by Arraid
Property L.L.C. alleging breach of lease and seeking monetary damages. No
significant new activity has occurred subsequent to our report of litigation in
our Form 10-KSB filed for the year ended June 30, 2006.
Item 2. CHANGES IN SECURITIES
During the three months ended September 30, 2006, the Company issued
240,000 shares of Series A Preferred Stock in a private offering, 186,100 shares
of Series A Preferred Stock and 1,900 Shares of Series B Preferred Stock as
dividend in-kind payments, 4,000 shares of Class A Common Stock for services,
and 210,000 shares of Common Stock for loan fees.
21
ALANCO TECHNOLOGIES, INC.
Item 6. EXHIBITS
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial
Officer
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ALANCO TECHNOLOGIES, INC.
(Registrant)
/s/ John A. Carlson
John A. Carlson
Executive Vice President and
Chief Financial Officer
22
ALANCO TECHNOLOGIES, INC.
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 quarterly report on Form 10-QSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The small business issurer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: December 19, 2006
/s/ Robert R. Kauffman
---------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
23
ALANCO TECHNOLOGIES, INC.
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 quarterly report on Form 10-QSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The 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 registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: December 19, 2006
/s/ John A. Carlson
---------------------
John A. Carlson
Executive Vice President and Chief Financial Officer
24
ALANCO TECHNOLOGIES, INC.
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 quarterly report of Form 10-QSB
(the "Report") for the period ended September 30, 2006 of Alanco Technologies,
Inc. (the "Issuer").
Each of the undersigned, who are the Chief Executive Officer and Chief
Financial Officer, respectively, of Alanco Technologies, Inc., hereby certify
that, to the best of each such officer's knowledge:
(i) the Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or
78o(d)); and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Issuer.
Dated: December 19, 2006
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer