Form 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2000
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
(Formerly Alanco Environmental Resources Corporation)
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0220694
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15900 North 78th Street, Suite 101, Scottsdale, AZ 85260
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (480) 607-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB.
Yes X No
---- ----
The Issuer's revenues for the fiscal year ended June 30, 2000 were
$2,828,600.
State the aggregate market value, based upon the closing bid price of the
Common Stock as quoted on NASDAQ, of the voting stock held by non-affiliates of
the registrant: $11,263,600 as of September, 22, 2000.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock: 6,784,332 shares as of September 22, 2000.
Documents incorporated by reference: Part III of this Report is
incorporated by reference from the Registrant's Proxy Statement to be filed on
or before October 27, 2000.
THIS FORM 10-KSB CONTAINS STATEMENTS THAT MAY BE CONSIDERED FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN, AND THE
ACTUAL RESULTS MAY DIFFER FROM MANAGEMENT'S EXPECTATIONS.
PART 1
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Alanco Technologies, Inc. (formerly Alanco Environmental Resources
Corporation) was incorporated in 1969 under the laws of the State of Arizona.
Unless otherwise noted, "Company" refers to Alanco Technologies, Inc. and its
wholly owned subsidiaries.
The Company implemented a business strategy during fiscal year ended June
30, 2000 to reposition itself as an information technology company with
specific focus on the high-growth computer data storage market. The Company's
strategy is to divest its non-data storage business assets and reinvest the
proceeds into the computer data storage market. The reinvestment will be in
the form of strategic acquisitions and targeted expansion into high-growth data
storage markets, such as Storage Area Networking (SAN) and Network Attached
Storage (NAS). The Company believes that its divestiture program will provide
sufficient funding to reposition the Company as a significant provider of
products and services in the high-growth data storage market.
Implementation of the new Alanco strategic business plan during the fiscal
year 2000 was significant. First, the Company acquired Arraid, Inc.
("Arraid"), a Phoenix, Arizona data storage systems integrator. Second, the
Company capitalized on Arraid's data storage experience and customer base by
launching an aggressive expansion into the Storage Area Network (SAN) market.
Third, the Company acquired Excel/Meridian Data, Inc. ("Excel/Meridian"), a
provider of Network Attached Storage (NAS) solutions. In addition, the Company
sold its major pollution control products subsidiary, Alanco Environmental
Manufacturing, Inc., ("AEMI"), located in Falls City, Nebraska.
RECENT BUSINESS DEVELOPMENTS
The Company sold its wholly owned subsidiary, Alanco Environmental
Manufacturing, Inc. subsequent to year-end, with an effective date of June 30,
2000. AEMI, located in Falls City, Nebraska, represented a substantial portion
of the assets in the Company's pollution control products segment. The sale,
valued at approximately $3.7 million, resulted in a "gain on sale" of $815,100.
The Company received cash of approximately $3.1 million and a note of $600,000,
with $560,000 classified as long-term at year-end. The transaction was
recorded as of June 30, 2000 and appropriate notes receivable recorded for the
balance due.
During September of 2000, the Company reached a preliminary agreement in
principle for the sale of Alanco Beijing and the patented CDSI technology (a
patented technology described below) for cash and notes receivable valued
significantly higher than the net asset value of the assets to be sold. The
sale is contingent on the Company receiving a specific contract from a customer
located in the Republic of China. This sales transaction is anticipated to
close in the month of October 2000. The assets involved in this transaction,
including Alanco Beijing and the CDSI patented technology, are classified as
"assets held for sale" on the June 30, 2000 Consolidated Balance Sheet.
DESCRIPTION OF BUSINESS
COMPUTER DATA STORAGE SEGMENT
The acquisition of two separate entities, Arraid, Inc. and Excel/Meridian
Data, Inc., and the launching of an aggressive expansion into the Storage Area
Network (SAN) market established the Computer Data Storage Segment during
fiscal year 2000. Phoenix, Arizona based Arraid, a provider of legacy computer
data storage solutions, was acquired effective October 1, 1999.
Excel/Meridian, a Dallas, Texas based provider of Network Attached Storage
products and services was acquired effective June 1, 2000. The Company's
expansion into the Storage Area Network market accelerated in the quarter ended
March 31, 2000 and continued through year-end. In June 2000, Alanco announced
the formation of a SanOne division to focus the SAN initiative.
Arraid manufactures proprietary data storage subsystems called "emulators"
that serve as translators between older "legacy" computers and state-of-the-art
storage devices and provides unique, cost-effective storage system solutions.
Excel/Meridian is a provider of data storage networking products and services
and is recognized as a leading provider of optical storage devices, such as
CD/DVD-ROM servers.
SanOne is a provider of leading edge SAN technologies, services and
education. SanOne provides customized SAN solutions for multi-platform
environments for storage of mission critical data. Utilizing proven AIM R
methodology and partnering with leading SAN vendors, SanOne is expertly
positioned to deliver the advanced functionality of fibre technology, along
with technical support and training services.
Marketing. Excel/Meridian markets NAS products and services primarily in
the United States, through direct national advertising, telemarketing and
independent sales representatives supported by Company personnel. Arraid
markets legacy storage solutions nationally and internationally through an
organization of independent distributors, supported by Company personnel and
Company direct sales representatives. SanOne markets SAN-related products,
primarily in the Southwest United States, through Company direct sales
representatives.
Raw Materials. Both Arraid and Excel/Meridian have numerous domestic
sources for materials and parts used to manufacture its legacy and NAS
products. The Company believes that it has an adequate supply of materials
and parts and does not foresee any significant shortages or substantial price
increases that cannot be passed on to the customers. SanOne's unique systems
integration capabilities require strategic alliances with the leading SAN
technology companies in the world. The Company believes that SanOne's
significant strategic alliances with worldwide providers of SAN technology will
continue to expand and that SanOne will continue to provide its industry
leading independent SAN systems analysis and unique systems integration
capabilities.
Competitive Conditions. There are numerous competitors in the same market
as Excel/Meridian, with no company dominating the market. Arraid provides a
unique solution to a limited market with minimal direct competitors. SanOne is
targeting a new and very fast growing market. Although there are numerous
significant competitors in the general storage product market (IBM, EMC, etc.),
the identification of specific direct competitors decreases as SanOne focuses
on providing customized SAN solutions for multi-platform environments for
storage of mission critical data.
Employees. As of June 30, 2000, the Company employed approximately 50
individuals involved in the computer data storage segment.
Seasonality of Business. Computer Data storage products have minimal
seasonality. However, many of the products in this segment are marketed to
business customers, which in some cases may be affected by budget restraints.
Dependence Upon Key Customers. During fiscal year ended June 30, one
electronics manufacturing customer accounted for 10.6% of the Computer Data
Storage segment's revenue.
Backlog Orders. The Company operates using customer purchase orders that
in some cases may not be considered firm and non-cancelable. Methods of
defining a firm "Backlog Order" are being evaluated, and if the Company
utilizes that information in evaluating sales activity, the information will be
reported.
DISCONTINUED OPERATIONS
The Company's continuing operations at the end of fiscal year 2000 were
limited to the Computer Data Storage segment discussed above. Pollution
Control Products, Restaurant Equipment, and Mining, three of the operating
segments reported as "continuing operations" in fiscal year 1999, were reported
as "discontinued operations" for the current fiscal year. During the current
fiscal year, the mining assets and a significant portion of the pollution
control product assets were sold. At June 30, 2000, the remaining assets of the
Pollution Control Products and the Restaurant Equipment segments are classified
as "net assets held for sale" and are valued at the lower of cost or net
realizable value.
The Pollution Control Products Segment during fiscal years 1999 and 2000
consisted of two separate operations. The first was a wholly-owned subsidiary,
Alanco Environmental Manufacturing Inc. ("AEMI"), a pollution control products
manufacturing company, located in Falls City, Nebraska. AEMI was sold with an
effective date of June 30, 2000 and appropriately the sale has been recorded as
of year-end. The second was patented technology for the removal of noxious
gases from a gas stream called CDSI (Charged Dry Sorbent Injection), which is
primarily marketed through a wholly owned subsidiary, Alanco Environmental
Technology, LTD, in Beijing, China. Alanco Beijing and the patented
technology related to CDSI is classified as "assets held for sale" at June 30,
2000.
The CDSI system utilizes an electrostatically charged sorbent to remove
noxious gases, particularly sulfur dioxide, from a gas stream pollution source,
such as a power plant. The CDSI system offers significant economic advantage
over competing technologies for flue gas desulfurization, such as wet
scrubbers. The wet scrubber sprays a mixture of water and limestone into the
polluted gas stream to produce a sludge composed of gypsum, limestone, and
polluted water, which must be treated and disposed. Wet scrubbers are
relatively capital intensive, have high operating costs and are subject to
corrosion and frequent downtime. The CDSI system is a dry process that permits
simple, inexpensive disposal of reaction products.
The Company previously operated mining properties and had mineral
property and mining equipment assets that were presented as "net assets of
discontinued operations held for sale" on the consolidated balance sheet at
June 30, 1999. The C.O.D. mine, which consisted of 13 mining claims, and mining
equipment located at the C.O.D. mine, represented the total value of the mining
assets and were sold in September, 1999. The remaining 15 mining claims were
filed on the Tombstone mill site located in Cochise County, Arizona. (See
Mining Claim Properties below.)
ITEM 2. PROPERTIES
The Company's corporate office is currently located in an approximate 2275
square foot leased facility in Scottsdale, Arizona. This space represents a
significant downsizing. The Company moved to this facility in January of
1997and leased a total of 4527 square feet. During fiscal year 1999, the
Company subleased approximately 2,250 square feet of the space to a non-
affiliated party. Both the 1997 facility lease and 1999 sublease expired
during fiscal year 2000. A new one-year lease was signed for the current
space.
Arraid and SanOne are currently located in a 12,000 square foot leased
office/manufacturing building located in Phoenix, Arizona. Arraid had been
located in the building prior to its acquisition by Alanco and was leasing
approximately 9,000 square feet. The Company has a two-year lease that expires
October 31, 2001. The building is owned by a limited partnership consisting of
the same individuals that were the controlling shareholders of Arraid, Inc.
prior to being acquired by Alanco. At June 30, 2000, all principals in the
limited partnership were employees of the Company.
Excel/Meridian Data, Inc. has three separate leases totaling approximately
9,000 square feet of office/manufacturing space in Dallas, Texas. A lease for
6,000 square feet will expire on January 31, 2001, with the balance leased on a
month to month basis. Excel/Meridian management is currently negotiating to
consolidate all facilities into a single office/manufacturing space of
approximately 11,000 square feet in Dallas, Texas.
Mining Claim Properties
The Company previously operated mining properties and had mineral property
and mining equipment assets that were presented as "net assets of discontinued
operations held for sale" on the consolidated balance sheet at June 30, 1999.
At June 30, 1999, the Company owned 28 mining claims, with 13 related to the
C.O.D. mining and mill site located (near Kingman, Arizona) in Mohave County.
The remaining 15 claims, which have minimal value, were filed on the Tombstone
mill site located in Cochise County, Arizona.
During September of 1999, the Company sold its principal mining property,
the C.O.D. mine located near Kingman, Arizona, to Gold & Minerals, Inc. (G&M)
for $4.5 million of G&M Series A, 10% Cumulative, Convertible Preferred Stock.
The G&M Series A Preferred Stock received is convertible, after one year,
into a variable number of shares of G&M common stock determined by dividing the
face value of the Preferred Stock (plus accrued "paid_in-kind" dividends) by
the share market price at time of conversion. Although the face value of the
Preferred Stock received in this transaction is significantly higher than the
total mining property book value of approximately $2.5 million, the Company is
deferring recognition of any potential gain until such time as there exists an
active public market for G&M common stock.
Environmental Disclosure. There are numerous federal and state laws and
regulations relating to environmental protection which have direct application
to mining, milling and mineralized material processing operations. The more
significant of these laws deals with mined land reclamation and wastewater
discharge from such operations.
The Tombstone Metallurgical Facility is located on federal lands that are
administered by the BLM and requires limited environmental and/or surface
reclamation. The mill site facility was constructed in the 1970's when no
permitting was required from the BLM. Since that time, the facility has
operated intermittently, and the Company has complied with all regulations as
they existed. At present, the mill site is being dismantled and cleaned up in
exchange for the building material and equipment salvage value.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party in any litigation that is considered
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Shareholders during the fourth
quarter of the fiscal year ended June 30, 2000.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(1) Market Information: Alanco's common stock is traded on the NASDAQ
Small Cap Market under the symbol "ALAN".
(2) High and Low Sale Prices: The following table sets forth high and low
sale prices for each fiscal quarter for the last two fiscal years. Such
quotations represent inter-dealer price without retail mark-ups, mark-downs, or
commissions and, accordingly, may not represent actual transactions.
Fiscal 2000 Fiscal 1999
Quarter Ended High Low High Low
September 30 $ 1.59 $ 1.00 $ 1.41 $ .50
December 31 $ 2.91 $ 1.03 $ 1.31 $ .31
March 31 $ 5.75 $ 2.00 $ 1.31 $ .69
June 30 $ 3.13 $ 1.59 $ 2.13 $ .66
(3) Security Holders: As of September 1, 2000, Alanco had approximately
1,700 holders of record of its Common Stock. This does not include beneficial
owners holding shares in street name.
(4) Dividend Plans: Alanco has paid no common stock cash dividends and has
no current plans to do so.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS ON FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This form 10-KSB contains statements that may be considered forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are inherently uncertain,
and the actual results may differ from management's expectations.
Results of Operations
In accordance with Generally Accepted Accounting Principles, the Company
has limited its reported consolidated revenues for fiscal year ended June 30,
2000 to revenues from its Computer Data Storage segment, the only operation
classified as a continuing operation at year end. To maintain comparability,
certain balances from the Consolidated Statement of Operations and Consolidated
Statement of Cash Flows for the year ended June 30, 1999 have been restated.
Consolidated revenues for fiscal year 2000 were $2,828,600, compared to
zero for the prior fiscal year. All revenues that were reported in the
previous fiscal year were generated from business segments that had been
classified as "Discontinued Operations" at year-end and therefore omitted for
comparable reporting purposes. Consolidated net loss for fiscal year ended June
30, 2000 was $1,353,800, or $.23 per share, compared to consolidated net income
of $121,300, or $.02 per share, for the prior year.
Fiscal year 2000 interest expense, net of interest income, decreased to
$39,400 from $99,900 for the previous year. Other income decreased to a loss
of $2,200, in fiscal year 2000, compared to income of $86,000 in fiscal year
1999. The decrease in interest expense resulted primarily from the scheduled
payments of capital lease and notes payable obligations of approximately
$431,000 which reduced average borrowing. The decrease in other income was due
to one-time gains from debt restructuring and the settlement of lawsuits in
fiscal year 1999 that did not occur in fiscal year 2000.
The consolidated loss from continuing operations for fiscal year 2000 was
$1,825,600, or $.31 per share, compared to a loss of $683,400, or $.14 per
share for the prior year. The fiscal year 2000 loss from continuing operations
was attributable primarily to planned operating investments related to the
implementation of the SanOne Storage Area Network (SAN) market development
initiative. The consolidated loss from continuing operations for fiscal year
ended June 30, 1999 represented principally unallocated corporate costs
incurred, since all fiscal year 1999 operating segments were restated to
"Discontinued Operations" and appropriately segregated on the Consolidated
Statement of Operations.
The Consolidated Statement of Operations for fiscal year 2000 reflects
income from discontinued operations of $471,800, or $.08 per share, compared to
income of $804,700, or $.16 per share for the prior year.
Operating income included in discontinued operations section was $56,700,
a substantial reduction when compared to $804,700 for the prior fiscal year.
The significant decrease was due primarily to the previously reported 1998/1999
termination of a major contract in the Company's restaurant equipment segment
that resulted in a reduction of operating income from $705,900 in fiscal 1999
to a loss of $145,500 in fiscal year 2000. This decrease in operating income
was mitigated slightly by improved operating income from the pollution control
products, which increased from $175,800 in fiscal year 1999 to $231,700 in the
current fiscal year, and a reduction in the mining segment's operating loss
from $77,000 in fiscal year 1999, to a loss of $29,500 in the current fiscal
year.
Discontinued operating results also include a $815,100 gain on the sale of
pollution control products assets and an asset impairment charge of $400,000
related to the restaurant equipment segment. The $400,000 non-cash asset
impairment charge reduced the recorded value of certain assets classified as
"net assets held for sale" at year-end. The charge was necessary to properly
reflect management's estimated net realizable fair market value for certain
fryer units at year-end.
Cash flow from operating activities for current fiscal year end was a
negative $1,111,900, compared with a positive cash flow for the prior fiscal
year of $877,500. The decrease in cash flow resulted primarily from the
Company's planned investment related to implementation of the Company's Storage
Area Network (SAN) initiative and a reduction in income from discontinued
operations.
Any new Statements of the Financial Accounting Standards affecting the
Company are disclosed in the "Notes to Consolidated Financial Statements" on
page F-10.
Liquidity and Capital Resources
At June 30, 2000, the Company's current assets exceeded current
liabilities by $2,961,600, a current ratio of 2.2 to 1. At June 30, 1999, the
Company's current assets exceeded current liabilities by $2,710,600 and
reflected a current ratio of 3.8 to 1. The current ratio reduction, when
compared to the prior year, was due to operating losses incurred, and the
acquisitions completed during the year, which required cash and increased both
current assets and current liabilities. The additional current assets and
liabilities acquired were offset somewhat by the sales of AEMI, the principal
pollution control products asset, that reduced both current assets and current
liabilities.
The Company's cash position at June 30, 2000 was $176,700, compared to
$661,700 at the end of the prior fiscal year. During the year, approximately
$431,000 of cash was used to repay borrowings and capital lease obligations.
Advances from borrowings amounted to $1,248,000 during the year, of which
$1,200,000 were repaid subsequent to year end. In addition, proceeds from the
exercise of stock options in the amount of $372,500 and $1.04 million raised
when the Company issued preferred stock provided for a portion of the Company's
capital needs.
Cash used to purchase property, plant and equipment during fiscal year
2000 was $681,300, compared to $86,500 in the prior year. The substantial
increase was due to the SAN laboratory created by the SanOne division to test,
evaluate, and demonstrate leading edge Storage Area Networking technology, as
well as equipment and leasehold improvements to support the expansion of the
San Initiative.
The Company sold its principal mining asset in September of 1999 to Gold &
Minerals, Inc. in exchange for $4.5 million of G&M Series A, 10% Cumulative,
Convertible Preferred Stock. Based upon G&M projected operating results and a
review of the major G&M mining operation, management believes the sale offered
the best opportunity for the Company to maximize the return on its mining
assets; however, there can be no assurance as to when the Company will
liquidate the investment, or as to what value the Company will receive upon
liquidation of the G&M Preferred Stock. Furthermore, based on preliminary
unaudited financial information the Company has received, G&M will require
additional debt/equity financing to increase its mining production to achieve
planned production levels on its existing operating mine. There is no
assurance G&M will receive the required additional debt/equity financing. If
G&M is unable to sufficiently develop the property or if ore reserves prove to
be inadequate, the Company's preferred stock could ultimately have minimal
value.
Product and Environmental Contingencies
The Company is not aware of any material liabilities, either product or
environmental related. Also refer to the environmental disclosure section of
the mining properties segment under Item 2.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements.
7
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports........................................... F-2
Consolidated Balance Sheets - For the Year Ended June 30, 2000 and 1999. F-4
Consolidated Statements of Operations - For the Years Ended June 30,
2000 and 1999 .......................................................... F-5
Consolidated Statement of Changes in Shareholders' Equity - For the
Years Ended June 30, 2000 and 1999 ..................................... F-6
Consolidated Statements of Cash Flows - For the Years Ended June 30,
2000 and 1999 .......................................................... F-7
Notes to Consolidated Financial Statements.............................. F-9
F-1
Semple & Cooper, LLP
Certified Public Accountants and Consultants
2700 North Central Avenue, Eleventh Floor
Phoenix, Arizona 85004
Telephone (602) 241-1500 Fax (602) 234-1867
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Alanco Technologies, Inc.
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheet of Alanco
Technologies, Inc and subsidiaries as of June 30, 2000 and the related
consolidated statement of operations, changes in shareholders' equity, and cash
flow for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alanco
Technologies, Inc. and subsidiaries as of June30, 2000, and the results of its
operations, changes in stockholders' equity, and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ Semple & Cooper LLP
SEMPLE & COOPER LLP
Certified Public Accounts
Phoenix, Arizona
September 29, 2000
F-2
Hein + Associates LLP
Certified Public Accountants and Consultants
With offices in Houston, Dallas and Los Angeles.
Telephone (303) 298-9600 Fax (303) 298-8118
717 17th Street, Suite 1600
Denver, Colorado 80202-3330
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Alanco Technologies, Inc.
Phoenix, Arizona
We have audited the consolidated balance sheet of Alanco Technologies, Inc.
(formerly Alanco Environmental Resources Corporation) and subsidiaries as of
June 30, 1999 and the accompanying related consolidated statement of
operations, changes in shareholders' equity, and cash flow for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alanco
Technologies, Inc. and subsidiaries as of June 30, 1999, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
October 10, 2000
F-3
<TABLE>
<CAPTION>
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND JUNE 30, 1999
<S> <C> <C>
ASSETS June 30,
2000 1999
---------------- ---------------
CURRENT ASSETS
Cash $ 176,700 $ 661,700
Accounts receivable - trade, net of allowance for
doubtful accounts of $24,400 and $29,400, respectively 1,078,300 714,100
Notes Receivable, current 3,019,000 178,700
Inventories 1,112,700 2,069,700
Prepaid expenses and other current assets 38,300 68,800
---------------- ---------------
Total current assets 5,425,000 3,693,000
PROPERTY, PLANT AND EQUIPMENT, net 628,600 1,696,900
OTHER ASSETS:
Intangible assets, net of accumulated amortization 1,558,000 199,600
Notes Receivable, due beyond one year 560,000 --
Investment at cost 2,465,700 --
Net assets held for sale 770,900 2,443,000
Other assets 26,000 123,500
Total assets $ 11,434,200 $ 8,156,000
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Capital lease obligations, current portion $ 1,400 $ 320,500
Notes payable, current 868,100 96,000
Bank line of credit 498,500 --
Accounts payable & Accrued expenses 1,095,400 392,500
Billings in excess of cost and est earnings -- 173,400
---------------- ---------------
Total current liabilities 2,463,400 982,400
CAPITAL LEASE OBLIGATION, LONG-TERM -- 1,400
NOTES PAYABLE, LONG-TERM -- 8,000
---------------- ---------------
Total Liabilities 2,463,400 991,800
---------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 8)
SHAREHOLDERS EQUITY
Preferred Stock:
Class A cumulative convertible preferred stock:
5,000,000 shares authorized, of which 500,000 shares
have been classified as Series B. Series B issued
and outstanding of 260,000 at June 30, 2000. 1,040,000 --
Class B cumulative preferred stock:
20,000,000 shares authorized and not outstanding. -- --
Common Stock, no par value, 100,000,000 shares
authorized; 6,762,300 and 5,119,700 shares
issued, respectively 55,738,300 53,790,200
Treasury stock, at cost; 157,200 shares in 1999 -- (172,300)
Accumulated deficit (47,807,500) (46,453,700)
Total shareholders' equity 8,970,800 7,164,200
---------------- ---------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 11,434,200 $ 8,156,000
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F4
<TABLE>
<CAPTION>
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
JUNE 30,
<S> <C> <C>
2000 1999
------------- -----------
NET SALES $ 2,828,600 $ --
------------- -----------
OPERATING EXPENSES
Direct service and cost of goods sold 1,661,400 --
Selling, general and administrative 2,787,700 624,900
Depreciation and amortization 163,500 44,600
------------- -----------
Total operating expenses 4,612,600 669,500
------------- -----------
Loss from continuing operations (1,784,000) (669,500)
OTHER INCOME (EXPENSE)
Interest income 22,900 57,800
Interest expense (62,300) (157,700)
Other, net (2,200) 86,000
------------- -----------
Total other income (expense) (41,600) (13,900)
LOSS FROM CONTINUING OPERATIONS $ (1,825,600) $ (683,400)
------------- -----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Operating Inc. (Loss) - Mining (29,500) (77,000)
- Restaurant Equipment (145,500) 705,900
- Pollution Control Products 231,700 175,800
------------- -----------
Total Operating Income - Discontinued Operations 56,700 804,700
Pollution Control Products - Gain on Sale 815,100 --
Impairment of fryer unit equipment held for sale (400,000) --
------------- -----------
Total income from discontinued operations 471,800 804,700
============= ===========
NET INCOME (LOSS) $ (1,353,800) $ 121,300
INCOME (LOSS) PER SHARE - BASIC:
Loss from continuing operations $ (0.31) $ (0.14)
Income from discontinued operations $ 0.08 $ 0.16
Net income (loss) per basic common share $ (0.23) $ 0.02
INCOME (LOSS) PER SHARE - DILUTED
Loss from continuing operations N/A $ (0.12)
Income from discontinued operations N/A $ 0.14
Net income (loss) per diluted common share N/A $ 0.02
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 5,906,305 5,016,085
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED N/A 5,575,895
</TABLE>
The accompanying notes are an integral part of these financial statements.
F5
<TABLE>
<CAPTION>
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 2000
COMMON STOCK PREFERRED STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------ ------------ --------- --------- ---------- --------- ------------- ------------
Balances July 1, 1998 5,050,700 $53,742,000 -- $ -- -- $ -- ($46,575,000) $7,167,000
-- -- -- --
Stock issued for services 39,000 28,200 -- -- -- -- -- 28,200
Exercise of options 30,000 20,000 -- -- -- -- -- 20,000
Purchase of treasury stock -- -- -- -- 157,200 (172,300) -- (172,300)
Net income -- -- -- -- -- -- 121,300 121,300
------------ ------------ --------- --------- ---------- --------- ------------- ------------
Balances, June 30, 1999 5,119,700 $53,790,200 -- $ -- 157,200 (172,300) ($46,453,700) $7,164,200
Stock issued for services 88,600 125,800 -- -- -- -- -- 125,800
Exercise of options 486,200 372,500 -- -- -- -- -- 372,500
Redemption of treasury stk (157,200) (172,300) -- -- (157,200) 172,300 -- --
Preferred stock issued -- -- 260,000 1,040,000 -- -- -- 1,040,000
Acquisitions 1,225,000 1,536,300 -- -- -- -- -- 1,536,300
Services rendered & other 85,800 -- -- -- -- -- 85,800
Net income -- -- -- -- -- -- (1,353,800) (1,353,800)
------------ ------------ --------- --------- ---------- --------- ------------- ------------
Balances, June 30, 2000 6,762,300 $55,738,300 260,000 1,040,000 $0 $0 ($47,807,500) $8,970,800
============ ============ ========= ========= ========== ========= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F6
<TABLE>
<CAPTION>
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended June 30,
2000 1999
<S> <C> <C>
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ (1,825,600) $ (683,400)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 414,200 459,900
Gain on sale - discontinued operations (815,100) --
Impairment of Inventory 400,000 --
Other 2,200 400
Increase/decrease in:
Accounts receivable (378,000) 478,400
Cost & est earnings in excess of billing -- 105,000
Inventory 1,691,400 (183,300)
Net assets of disposed operations (983,400) --
Prepaid expenses and other assets 164,500 103,900
Accounts payable and accrued expenses (80,500) (208,300)
Billings in excess of costs and est earnings (173,400) 200
---------------- ---------------
Net cash provided by (used in) operations (1,583,700) 72,800
Income from discontinued operations 471,800 804,700
---------------- ---------------
Net cash provided by (used in) operating activities (1,111,900) 877,500
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
93,900 170,500
Collection of notes receivable (681,300) (86,500)
Purchase of property, plant and equipment (940,800) --
Investments (69,800) --
Net cash (forfeited)received from sale and
acquisitions (5,100) (700)
---------------- ---------------
(1,603,100) 83,300
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of thse financial statements.
F-7
<TABLE>
<CAPTION>
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from borrowings 1,248,500 --
Repayments on borrowings (96,000) (288,400)
Capital leases (335,000) (975,300)
Proceeds from sale of preferred stock 1,040,000 --
Proceeds from exercise of options 372,500 20,000
Purchase of treasury stock -- (172,300)
---------------- ---------------
Net cash provided by (used in) financing activities 2,230,000 (1,416,000)
---------------- ---------------
Net increase (decrease) in cash $ (485,000) $ (455,200)
CASH AND CASH EQUIVALENTS, beginning of year 661,700 1,116,900
---------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 176,700 $ 661,700
================ ===============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid for interest $ 62,300 $ 156,800
================ ===============
Stock issued for services $ 125,800 $ 28,200
================ ===============
Stock issued for acquisition of subsidiaries $ 1,536,300 $ --
================ ===============
Note received in sale of subsidiary $ 3,495,000 $ --
================ ===============
Fryer units transferred - inventory to net assets
held for sale and equipment to inventory in $
fiscal years 2000 and 1999, respectively 675,000 $ 1,346,000
================ ===============
Capital lease refinanced to note payable -- $ 128,000
================ ===============
</TABLE>
The accompanying notes are an integral part of thse financial statements.
F-8
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
1. Nature of Operations and Significant Accounting Policies:
Principles of Consolidation - The consolidated financial statements include
the accounts of Alanco Technologies, Inc., (formerly Alanco Environmental
Resources Corporation) and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Nature of Operations - Alanco Technologies, Inc. was incorporated in
Arizona in 1969.
For the fiscal year ended June 30, 1999, the Company provided segment
reporting for two continuing operating segments: Manufacturing of pollution
control products and restaurant equipment. Mining segment assets had been
reclassified to "net assets held for sale" at June 30, 1999.
The Company implemented a restructuring plan during the current fiscal year
by acquiring Arraid, Inc., a computer data storage company, in October
1999; instituting the November 1999 roll-out of a three-year storage area
network (SAN) expansion plan; and the acquisition of a second computer data
storage company, Excel/Meridian Data, Inc., effective June 1, 2000.
Concurrently with the implementation of the restructuring plan, the Company
established a formal plan to sell the assets of all previously reported
business segments. At year end, the Company had either sold the mining,
pollution control product and restaurant equipment assets or reclassified
them as "net assets of discontinued operations held for sale." Therefore,
at June 30, 2000, the Company has continuing operations only in the
computer data storage segment. The consolidated statement of operations
for the year ended June 30, 1999 has been restated to reflect comparable
segment revenues and operating results which were zero.
Cash Equivalents _The Company considers all highly liquid debt instruments
with original maturities of three months or less to be cash equivalents.
Inventories - Inventories consist of purchased materials and parts, work-
in-process, and finished goods. Inventories are stated at the lower of
cost or market. Cost is calculated using the average-cost method.
Property, Plant and Equipment - Property, plant and equipment are stated at
cost. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method generally over a 5- to 32-year
period. Leasehold improvements are amortized on the straight-line method
over the lesser of the lease term or the useful life. Expenditures for
ordinary maintenance and repairs are charged to expense as incurred.
Betterments or renewals are capitalized as incurred. Upon retirement or
disposal of assets, the cost and accumulated depreciation are eliminated
from the account and any gain or loss is reflected in the statement of
operations
F-9
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Fair Value of Financial Instruments - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The carrying amounts of accounts
receivable, notes receivable, accounts payable, accrued liabilities, and
notes payable approximate fair value. (See note below for fair value
discussion of investments.)
Intangible Assets - Intangibles consist of the excess of purchase price
over fair value of net assets acquired (goodwill) in connection with the
acquisition of its wholly-owned subsidiaries. Patent assets, previously
classified as intangible assets and amortized over 17 years, have been
reclassified as assets held for sale.
Investments _ In September 1999, the Company sold its principal mining
property known as the "COD mine" for convertible preferred stock in an
entity. Based on preliminary, unaudited financial information the Company
has received, the entity will require additional debt/equity financing to
increase its mining production to achieve planned production levels on its
existing operating mine. There is no assurance the entity will receive
the required additional debt equity financing. If the entity is unable to
sufficiently develop the property or if ore reserves prove to be
inadequate, the Company's preferred stock could ultimately have minimal
value.
Based upon a review of the information available and discussion with the
entity's principals, management of the Company believes that the value of
the underlying convertible preferred stock at year end equals or exceeds
the carrying value of the mining property.
Net Assets Held For Sale - During fiscal 2000, the Company implemented a
plan to divest all non data storage assets and reinvest the proceeds into
the computer data storage market. At June 30, 2000, the remaining assets of
the Pollution Control Products and the Restaurant Equipment segments are
classified as "net assets held for sale" and are valued at the lower of
cost or market.
Discontinued Operations _ During the quarter ended June 30, 2000,
management adopted a formal plan of disposal for the Company's Pollution
Control Product segment and the Restaurant Equipment segment assets. A
formal plan of disposal for the mining segment assets, which were sold
during the current fiscal year, had been adopted a year earlier and
appropriately, mining assets at June 30, 2000 were presented as "net assets
held for sale."
Based upon the formal plan of disposal adopted, management concluded that
income or loss from operations and any gain from the disposal of the
segment assets should be reported separately from the Company's results of
continuing operations. Therefore, the results of operations for the
segments identified above, as well as the gain on the sale of a substantial
portion of the pollution control product assets, are presented as
"Discontinued Operations" for the years ended June 30, 2000 and 1999,
respectively.
F-10
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Income Taxes - The Company accounts for income taxes under the asset and
liability method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Use of Estimates - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates
and assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from those
estimates.
The Company makes significant assumptions concerning the realizability of
its deferred tax, investments and "assets held for sale." Due to the
uncertainties inherent in the estimation process and the significance of
these items, it is at least reasonably possible that its estimates in
connection with these items could be further materially revised within the
next year.
Impairment of Intangible and Other Long-Lived Assets - The Company performs
an assessment for impairment whenever events or changes in circumstances
indicate that the carrying amount of a long-lived asset may not be
recoverable. If the net carrying value exceeds estimated discounted future
net cash flows, then impairment is recognized to reduce the carrying value
to the estimated fair value. During fiscal 2000, a $400,000 asset
impairment charge related to the fryer equipment units was recorded.
Revenue Recognition - The Company recognizes revenue from computer storage
area network equipment sales , net of anticipated returns, at the time
products are shipped to customers, or at the time service is provided.
Revenues from material long-term contracts are recognized on the
percentage-of-completion method for individual contracts, commencing when
progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. Revenues are recognized in the ratio
that costs incurred bear to total estimated costs. Changes in job
performance, estimated profitability and final contract settlements would
result in revisions to costs and income, and were recognized in the period
in which the revisions were determined.
Contract costs include all direct materials, subcontracts, labor costs and
those indirect costs related to contract performance. General and
administrative costs are charged to expense as incurred.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss on both short and long-term contracts is accrued.
The liability, "billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues
recognized.
F-11
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Foreign Currency Translation - The Company has one foreign entity whose
functional currency is the U.S. dollar and translates monetary assets and
liabilities at year-end exchange rates. Non-monetary items are translated
at historical rates. Income and expense amounts are translated at the
average rates in effect during the year, except for depreciation, which is
translated at historical rates. Gains or losses from changes in exchange
rates are recognized in consolidated income in the year of occurrence.
Foreign currency gains (losses) for the years ended June 30, 2000 and 1999
were immaterial.
Income (Loss) Per Share - The income (loss) per share is presented in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. Basic EPS is calculated by
dividing the income or loss available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock. In fiscal 1999, diluted common and common equivalent shares
outstanding includes 1,127,033 common equivalent shares consisting of stock
options and warrants, determined using the treasury stock method. Basic
and diluted EPS were the same for fiscal 2000 as the Company had losses
from operations and therefore, the effect of all potential common stock
equivalents was antidilutive. Stock options representing 2,721,754 shares
were outstanding at year-end with exercise prices ranging between $13.23
and $0.43. The weighted average exercise price for all outstanding options
was $1.15.
Stock-Based Compensation - As permitted under the Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based
Compensation, the Company accounts for its stock-based compensation to
employees in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. Certain
pro forma net income and EPS disclosures for employee stock option grants
are also included in the notes to the financial statements as if the fair
value method as defined in SFAS No. 123 had been applied. Transactions in
equity instruments with non-employees for goods or services are accounted
for by the fair value method.
Concentrations of Credit Risks and Significant Customers - The Company
sells products and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to
losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses.
During the current fiscal year, the Company had one customer in the
computer data storage segment that accounted for 10.6% of that segment's
sales and represented 11.2% of the consolidated accounts receivable balance
at June 30, 2000. During fiscal year 1999, the Company did business with
one customer in the food equipment sales segment whose sales comprised 18%
of consolidated sales. This customer also accounted for approximately 17%
of consolidated accounts receivable at fiscal year end 1999.
F-12
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Segment Information - In 1999, the Company adopted SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic
areas, and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance. The
Company has identified the data storage segment as the only continuing
operation unit of the Company. All assets related to previously disclosed
segments have either been sold during the year or have been classified as
"net assets of discontinued operations held for sale" at June 30, 2000.
Reclassification - Certain reclassifications have been made to conform
fiscal 1999 financials to the presentation in fiscal 2000. The
reclassifications had no effect on net income.
2. Liquidity:
During fiscal 2000, the Company incurred significant losses and has
experienced significant losses in prior years. Although management cannot
assure that future operations will be profitable or that additional debt
and/or equity capital will be raised, it believes that its capital
resources will be adequate to maintain and realize its business strategy.
Should, however, the Company incur future losses or additional working
capital is not obtained through either long-term debt or equity capital, it
could adversely affect future operations.
The company sold its principal mining asset in September of 1999 to Gold &
Minerals, Inc. in exchange for $4.5 million of G&M Series A, 10%
Cumulative, Convertible Preferred Stock. Based upon G&M projected
operating results and a review of the major G&M mining operation,
management believes the sale offered the best opportunity for the Company
to maximize the return on its mining assets; however, there can be no
assurance as to when the Company will liquidate the investment, or as to
what value the Company will receive upon liquidation of the G&M Preferred
Stock. Furthermore, based on preliminary unaudited financial information
the Company has received, G&M will require additional debt/equity financing
to increase its mining production to achieve planned production levels on
its existing operating mine. There is no assurance G&M will receive the
required additional debt/equity financing. If G&M is unable to
sufficiently develop the property or if ore reserves prove to be
inadequate, the Company's preferred stock could ultimately have minimal
value. (See Subsequent Events Foot Note 14)
3. Net Assets Held for Sale:
During fiscal 2000, management of the Company formally adopted a plan to
actively pursue the sale of all business segment assets not related to the
computer data storage segment. The assets to be sold included the
pollution control product assets and restaurant equipment assets. The
mining
F-13
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
assets had been classified as "net assets held for sale" as of June 30,
1999. The mining assets and a significant portion of the Pollution Control
Products assets were sold during the current fiscal year. At June 30, 2000
the Company had classified the remaining pollution control assets and the
restaurant equipment assets as "net assets held for sale."
Based upon management's decision to pursue the sale of all assets not
related to the computer data storage, only revenues for the computer data
storage segment were considered as continuing operations. For the year
ended June 30, 2000, the segment operating results of Pollution Control
Products, Food Distribution, and Mining were considered as discontinued
operations.
4 Notes Receivable
Notes receivable at June 30, 2000 and 1999 consisted of the following:
2000 1999
------------ ------------
Note receivable _ PMM (net of allowance) $ -- $ 100,500
Note receivable _ sale of assets 2,895,000
Note receivable _ sale of assets holdback 600,000
Note receivable _ other 84,000 78,000
------------ ------------
3,579,000 178,700
Less - current portion (3,019,000) (178,700)
------------ ------------
Notes receivable - long-term $ 560,000 $ --
As part of the Company's investment in PMM, a subsidiary that was sold in
fiscal 1996, the Company agreed to indemnify certain unrelated third
parties against losses on their continuing guarantees on leased facilities
and equipment. As a result of these guarantees, the Company loaned PMM a
total of $771,600 at prime plus 2%, with interest paid quarterly. The
notes have been in default since June of 1998. The Company had provided an
allowance for uncollectible amounts at June 30, 1999 of $671,100. The
Company does not believe the notes are collectible and has elected to
increase the allowance for uncollectible amounts at June 30, 2000 to
$771,600, the value of the entire amount due under the note.
The Company sold a principal asset in the Pollution Control Products
segment with an effective date of June 30, 2000. To properly record the
sale, two notes receivable were recorded. First, a note, without interest,
was recorded to represent the cash amount that was received at closing,
subsequent to year end, of $2,895,000. A second, seven-year, $600,000 note
receivable was recorded to represent the balance of the purchase price due
to the Company. The note has a variable interest rate from prime plus 1% to
prime plus 4% and is being amortized over a 10-year period with a balloon
payment due on or before July 5, 2007. At June 30, 2000, $560,000 of the
note was classified as note receivable, long-term.
F-14
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
5. Inventories
Inventories consisted of the following at June 30:
2000 1999
------------- -----------------
Raw materials and purchased $ 1,008,100 $ 380,800
parts
Work-in-process 87,100 243,100
Finished goods 17,500 144,100
Fryer equipment 675,000 1,301,700
------------- -----------------
Total 1,787,700 2,069,700
Less transfer of fryer
equipment to net assets 675,000 --
held for sale $ 1,112,700 $ 2,069,700
============= =================
During the fourth quarter of fiscal year ended June 30, 2000, the Company
reclassified the remaining fryer units from inventory to "assets held for
sale" and recorded a charge for asset impairment of $400,000. The amount
of fryer units held at June 30, 2000, net of the $400,000 impairment
charge, totaled $675,000.
6. Property and Equipment:
At June 30, property plant and equipment consists of the following:
2000 1999
------------- ----------------
Land $ -- $ 60,200
Buildings -- 1,373,600
Machinery and equipment 485,300 1,106,500
Furniture and office equipment 365,100 477,900
Leasehold improvements 89,300 --
------------- ----------------
939,700 3,018,200
Less accumulated depreciation (301,000) (1,321,300)
------------- ----------------
Net Book Value $ 628,600 $ 1,696,900
============= ================
Related depreciation expense for the years ended June 30, 2000 and 1999,
was $414,200 and $416,300, respectively.
F-15
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
7. Uncompleted Contracts:
The following applies to contracts in progress as of June 30, 1999:
Costs incurred on uncompleted contracts $ 780,200
Estimated earnings 610,100
---------------
1,390,300
Billings to date (1,563,700)
---------------
Billings in excess of costs and estimated
Earnings on uncompleted contracts $ (173,400)
---------------
8. Notes Payable And Bank Line of Credit:
During fiscal 1999, the Company renegotiated four capital lease obligations
into a $12,000 cash payment and a note payable of $128,000. The
transaction resulted in the Company recognizing a gain of $27,800. The
note is payable in monthly installments of $8,000 with a 0% interest rate
and matures July 2000. As of June 30, 2000 and 1999, the balance due was
$8,000 and $104,000 ($8,000 classified as long-term), respectively.
The Company had a $750,000 short-term note, 10% per annum, payable at June
30, 2000, relative to the June 2000 acquisition of Excel/Meridian Data,
Inc. The note maturity was tied to the sale of the Company's pollution
control products asset, which closed subsequent to year-end. The note was
paid in full during the quarter ended September 30, 2000.
The Company assumed a note payable to a bank as part of the Excel/Meridian
Data, Inc. acquisition. The note bears interest at the rate of 11.5% per
annum and had a balance due at June 30, 2000 of $110,100. The note is
collateralized by inventory and accounts receivable of Excel/Meridian Data,
Inc. The terms of the acquisition technically resulted in the accelerated
maturity of the note. The Company is continuing to make monthly payments of
interest and principal of $4,635 and is negotiating repayment terms with
the bank. Due to the accelerated maturity of the note, the entire balance
is classified as current.
The Bank Line of Credit balance at June 30, 2000 was $498,500. This
balance represents borrowing under a new one-year $1,000,000 Bank Line of
Credit Agreement ("Agreement") dated September 9, 1999. The formula-based
line of credit is based upon accounts receivables and inventory values and
has an interest rate of prime plus 1.5%. The Agreement expired in
September 2000 and was extended by the bank to November 7, 2000 under
existing terms. Due to the acquisitions of Excel/Meridian Data Corporation
at the end of fiscal year 2000, and the sale of Alanco Environmental
Manufacturing, Inc. ("AEMI"), subsequent to year-end but effective June 30,
2000, the Agreement is being renegotiated to reflect the change in assets.
The entire balance under the Agreement was repaid subsequent to June 30,
2000.
F-16
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
9. Commitments and Contingencies:
The Company leases certain facilities and equipment under non-cancelable
operating lease agreements that expire through fiscal year 2002. The
Company also leases certain equipment under non-cancelable capital lease
arrangements. Future minimum payments under non-cancelable operating
leases are $155,600 and $29,600 for fiscal year 2001 and 2000,
respectively.
10. Acquisitions:
The Company acquired two companies in the computer data storage industry,
Arraid, Inc., effective October 1, 1999 and Excel/Meridian Data, Inc.,
effective June 1, 2000, for a combined purchase price, consisting of cash
and stock, valued at approximately $2.73 million. Both acquisitions were
recorded using the purchase method of accounting and resulted in goodwill,
representing the value of the purchase price in excess of net assets
acquired. The value of goodwill as of June 30, 2000 was $1,606,000, with
accumulated amortization of $48,000.
11. Preferred Stock:
The Company is authorized to issue a total of 5,000,.000 shares of Class A
cumulative convertible preferred stock and 20,000,000 shares of Class B
cumulative preferred stock. These shares may be issued in such series and
preferences as determined by the Board of Directors
12. Shareholders' Equity:
Preferred Shares -During fiscal year 2000, the Company issued 260,000
shares of series B cumulative preferred stock ("Series B") to accredited
investors at $4.00 per share for a value received of $1,040,000. The
shares are characterized as "restrictive securities" under the federal
securities laws in-as-much as they were acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such shares may be resold without registration under
the Securities Act of 1933, as amended, only in certain limited
circumstances.
Holders of shares of Series B shall be entitled to receive, when declared
by the Board of Directors, out of funds and assets of the Company legally
available therefore, an annual dividend of 15% per annum based upon a per
share value of $5 for purposes of such dividend payment. Dividends shall
accrue, be cumulative from the date of issue and may be paid "in kind".
The holders of shares of series B convertible preferred stock shall be
entitled to vote upon matters submitted to shareholders, in the same manner
and with the same effect as the holders of shares of common stock, voting
together with the holders of common stock as a single class. Holders of
series B shall have that number of votes equal to the number of shares of
Common Stock into which such preferred stock is convertible as of the
record date.
F-17
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Common Shares - In November 1999, the Company's shareholders authorized
the Company's Board of Directors to effect, if the Board believes
necessary, up to a 1 for 3 reverse stock split at a future date through
October 2000. As of June 30, 2000 no split was effected.
Warrants - During fiscal 1998, the Company issued 60,715 warrants to a
director for consideration of a $300,000 line-of-credit. These warrants
expire in five years and are exercisable at $2.80 per share. During fiscal
year ended 2000, the Company issued a total of 50,000 warrants to two
consultants for services rendered. 25,000 of the warrants are exercisable
at $3.00 per share and expire in February 2003. The remaining 25,000
warrants are exercisable at $1.75 and expire in October of 2004.
Stock Options - In 1995, the Company adopted an Incentive Stock Option Plan
that authorizes the issuance of up to 142,858 shares of common stock.
Pursuant to the plan, the Company may only grant "incentive stock options"
(intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended). Incentive and non-qualified stock options may not be
granted at an exercise price of less than the fair market value of the
common stock on the date of grant. Each option must be granted within five
years from the effective date of the Plan. The term of the options may not
exceed five years. As of June 30, 2000, the Company has granted all
available options under the plan, of which all have vested, 73,000 have
been exercised, and the balance have been canceled. Options outstanding
for this plan at June 30, 2000 have exercise prices that range from $.50 to
$13.23.
In 1996, the Company adopted a Directors and Officers Stock Option Plan
(1996 D&O Plan). Only executive officers and directors of the Company shall
be eligible to be granted options under this plan. An aggregate of 107,143
shares of common stock are reserved for issuance under this plan. The
exercise price of the options will be 60% of the NASDAQ closing bid price
per share on the date of grant or such other price the Board of Directors
may determine. Each option must be granted within five years from the
effective date of the plan and the term may not exceed five years. No one
officer or director shall have more than 21,429 options granted under this
plan. As of June 30, 2000, the Company had granted options under the 1996
D&O Plan to purchase 106,074 shares of which all options are vested.
Exercise prices for the directors and officers options outstanding at June
30, 2000 range from $1.00 to $6.30.
In 1998, the Company adopted another Directors and Officers Stock Option
Plan (1998 D&O Plan) which authorizes the issuance of up to 750,000 shares
of common stock. Only executive officers and directors of the Company
shall be eligible to be granted options under the Plan. Each option must
be granted at or above fair market value within 10 years from the effective
date of the Plan, with the term of the option not exceeding 10 years. As
of June 30, 2000, the Company has granted options under the Plan to
purchase 750,000 shares, of which all have vested and 370,000 have been
exercised. Options outstanding for this Plan at June 30, 2000 have
exercise prices that range from $.50 to $1.75.
F-18
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
In 1998, the Company also adopted another Incentive Stock Option Plan (1998
Stock Option Plan) that authorizes the issuance of up to 750,000 shares of
common stock. Pursuant to the Plan, incentive and non-qualified stock
options may be granted, with the incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended.
The Plan provides for a vesting schedule for incentive stock options of 25%
after six months from the date of grant, 25% after one year, and 50% after
two years. No one person shall be granted incentive stock options with a
fair market value of more than $100,000 during any single calendar year and
the maximum number of shares granted to any one employee shall be 100,000.
The Board of Directors shall determine the exercise price, which may not be
less than the fair market value of the common stock at the date of grant.
Each option must be granted within 10 years from the effective date of the
Plan, with the term of the options not exceeding 10 years. As of June 30,
2000, the Company has granted options under the plan to purchase
830,500 shares, of which 125,500 have been canceled, 23,750 have been
exercised, and 384,750 have been vested. Options outstanding for this Plan
at June 30, 2000 have exercise prices that range from $.50 to $3.36.
During fiscal 2000, the Company adopted another Directors and Officers
Stock Option Plan (1999 D&O Plan) which authorizes the issuance of up to
500,000 shares of common stock. Only executive officers and directors of
the Company shall be eligible to be granted options under the Plan. Each
option must be granted at or above fair market value within 10 years from
the effective date of the Plan, with the term of the option not exceeding
10 years. As of June 30, 2000, the Company has not granted any options
under the Plan.
In fiscal 2000, the Company also adopted another Incentive Stock Option
Plan (1999 Stock Option Plan) that authorizes the issuance of up to
1,500,000 shares of common stock. Pursuant to the Plan, incentive and non-
qualified stock options may be granted, with the incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code of 1986,
as amended. The Plan provides for a vesting schedule for incentive stock
options of 25% after six months from the date of grant, 25% after one year,
and 50% after two years. No one person shall be granted incentive stock
options with a fair market value of more than $100,000 during any single
calendar year and the maximum number of shares granted to any one employee
shall be 100,000. The Board of Directors shall determine the exercise
price, which may not be less than the fair
market value of the common stock at the date of grant. Each option must be
granted within 10 years from the effective date of the Plan, with the term
of the options not exceeding 10 years. As of June 30, 2000, the Company has
granted options under the plan to purchase 471,000 shares, of which 25,000
have been canceled, none have been exercised, and none are vested.
Options outstanding for this Plan at June 30, 2000 have exercise prices
that range from $1.25 to $3.36.
The Company also has granted options to officers and other employees
outside of any plan as an inducement at the time of their employment. As
of June 30, 2000, the Company has granted options under the plan to
purchase 2,035,000 shares of which 1,110,000 have vested and 25,000 options
have expired. Exercise prices for these options outstanding at June 30,
2000 range from $.43 to $4.69.
F-19
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
The following is a table of activity of all options:
Weighted
Average
Number of Exercise
Shares Price
------------ -------------
Options Outstanding, June 30, 1998 131,080 $ 7.01
Granted 1,355,000 .44
Granted 715,000 .84
Exercised (30,000) .67
Canceled (147,505) 4.29
------------ -------------
Options Outstanding, June 30, 1999 2,023,575 $ .73
Granted 1,261,500 1.79
Exercised (484,250) .77
Canceled (79,071) 2.23
------------ -------------
Options Outstanding, June 30, 2000 2,721,754 $ 1.15
For all options granted during 2000 and 1999, the weighted average market
price of the Company's common stock on the grant date was approximately
equal to the weighted average exercise price. The weighted average of their
fair market price was $2.00. At June 30, 2000, options for 1,850,629
shares were exercisable and options for the remaining shares become
exercisable within the next two years. If not previously exercised,
options outstanding at June 30, 2000 will expire as follows:
Weighted
Average
Number of Exercise
Year of Expiration Shares Price
------------------ ----------- -------------
2001 1,429 $ 13.23
2002 45,858 3.46
2003 35,717 5.22
2004 31,500 .94
2005 100,000 1.25
2009 1,438,750 .51
2010 1,068,500 1.76
---------- -------------
2,721,754 $ 1.15
F-20
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for its stock options
and warrants which are granted to employees. Accordingly, no compensation
cost has been recognized for grants of options and warrants to employees
since the exercise prices were not less than the fair value of the
Company's common stock on the grant dates. Had compensation cost been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below.
Year Ended June 30,
2000 1999
-------------- ------------
Net income (loss) applicable to
common stockholders:
As reported $ (1,358,800) $ 121,300
Pro forma $ (2,350,400) $ (908,300)
Net income (loss) per common share
- basic
As reported $ (0.23) $ 0.02
Pro forma $ (0.40) $ (0.18)
Net income (loss) per common share
- diluted
As reported N/A $ 0.02
Pro forma N/A $ (0.18)
The fair value of each employee option granted in 2000 and 1999 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Year Ended June 30,
2000 1999
----------- ----------
Expected volatility 81.25% 108%
Risk-free interest rate 6.0% 4.9%
Expected dividends - -
Expected terms (in years) 10 7.8
F-21
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
13. Income Taxes:
The Company's actual effective tax rate differs from U.S. Federal corporate
income tax rate of 34% as follows for the year ended June 30:
2000 1999
---------- ------------
Statutory rate 34.0% (34.0%)
State income taxes, net of
Federal income tax benefit 3.3% (3.3%)
Increase (reduction) in
valuation allowance
related to net operating
loss carry-forwards and
change in temporary
differences (37.3%) 37.3 %
---------- ------------
0% 0%
The components of the net deferred tax asset recognized as of June 30 are
as follows:
2000 1999
------------ ------------
Long-term deferred tax assets
(liabilities):
Net operating loss
carryforwards $ 8,324,000 $ 7,968,000
Goodwill 1,364,000 1,364,000
Mining properties 1,702,000 1,702,000
Equipment and other (36,000) (57,000)
Other 10,000 21,000
Less: Valuation allowance (11,364,000) (10,998,000)
------------ --------------
Net long-term deferred $ - $ --
tax asset
============ ==============
The valuation allowance was increased by $366,000 for the year ended June
30, 2000.
At June 30, 2000, the Company had net operating loss carryforwards for
Federal tax purposes of approximately $22,231,700. The loss carryforwards,
unless utilized, will expire from 2000 through 2020.
14. Subsequent Events:
Alanco Beijing. During September of 2000, the Company reached a
preliminary agreement in principle for the sale of Alanco Beijing and the
patented CDSI technology (a patented technology described below) for cash
and notes receivable valued significantly higher than the net asset value
of the assets to be sold. The sale is contingent on the Company receiving
a specific contract from a customer located in the Republic of China.
This sales transaction is anticipated to close
F-22
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
in the second quarter. The assets involved in this transaction, including
Alanco Beijing and the CDSI patented technology, are classified as "assets
held for sale" on the June 30, 2000 Consolidated Balance Sheet.
COD Mining Assets. During September 2000, Gold and Minerals Company
("GMC"), the purchaser in September 1999 of 13 separate mining claims and
mining equipment related to the Company's COD Mine in Mohave County,
Arizona, notified the Company that the Quit Claim Deed executed to transfer
ownership of the mining claims to GMC was not considered acceptable for
proper filing by the Bureau of Land Management ("BLM"). BLM records
reflected that, although the Company had leaseholder rights relative to the
COD mining claims, the direct ownership was still registered in the names
of the three individuals from whom the Company had purchased the mining
claims in 1993.
Company records confirm the Company had acquired ownership of the mining
claims in question in 1993. The Quit Claim Deeds from the sellers of the
mining claims should have been recorded at the County Courthouse and with
BLM. The Company has been unable to locate the original Quit Claim Deeds
and, due to the County's ineffective system for retrieving filed quit claim
deeds has been unable to determine that the deeds were filed with the
County. A review of BLM records indicates that Quit Claim Deeds had not
been filed with the BLM. The Company is continuing efforts to document
deed title transfer through discussion with prior management, review of
court records and prior audit documentation. Management believes its
efforts to provide the appropriate documentation will be successful in the
near future.
Management has reviewed the 1999 agreement for the sale of COD mining
assets with legal counsel and is confident the Company has not breached the
agreement. In addition, the Company is confident the ownership of the 13
mining claims in question will be verified, or that such ownership will be
established through court proceedings. Therefore, no modification has been
made to the carrying value of the investment as presented in the financial
statements as of June 30, 2000.
15. Segment Information:
For the fiscal year ended June 30, 1999, the Company has provided segment
reporting for three continuing operating segments: Manufacturing of
pollution control products, restaurant equipment and mining. Mining
segment assets had been reclassified to "net assets held for sale" at June
30, 1999.
During fiscal year 2000, the Company established a formal plan to sell the
assets of all previously reported business segments. At year end, the
Company had sold the mining assets and a significant portion of the
pollution control products assets. The balance of the pollution control
products assets and restaurant equipment assets were reclassified to "net
assets held for sale" at June 30, 2000. Only operations of the computer
data storage segment are included in continuing operations for fiscal year
2000
F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE NONE
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 27, 2000.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 27, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 27, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 27, 2000.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Exhibits
(10) Form of "Convertible Preferred Stock Subscription and Purchase
Agreement"
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
B. Schedules NONE
C. Reports on Form 8-K NONE
Exhibits or schedules other than those mentioned above are omitted because the
conditions requiring their filing do not exist or because the required
information is given in the financial statements, including the notes thereto.
EXHIBIT (21) SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
---------------------------------------------------- ----------------------
Arraid, Inc. Arizona
Excel/Meridian Data, Inc. Arizona
Alanco Environmental Technology, (Beijing) Co. Ltd. People's Republic of
China
Fry Guy Inc. Nevada
8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Alanco Technologies, Inc.
DATE: October 10, 2000
/s/Robert R. Kauffman
-------------------------------
Robert R. Kauffman, CEO,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
/s/Robert R. Kauffman Director & October 10, 2000
------------------------- Chief Executive Officer
Robert R. Kauffman
/s/James T. Hecker Director October 10,2000
-------------------------
James T. Hecker
/s/Harold S. Carpenter Director October 10, 2000
-------------------------
JamesHarold S. Carpenter
/s/Thomas C. LaVoy Director October 10, 2000
-------------------------
Thomas C. LaVoy
/s/Steven P. Oman Director October 10, 2000
-------------------------
Steven P. Oman
/s/Kenneth M. Julien Director October 10, 2000
-------------------------
Kenneth M. Julien
/s/John A. Carlson Director & October 10, 2000
------------------------- Chief Financial Officer
John A. Carlson
Transfer Agent
Computershare Trust Company, Inc.
(Formerly American Securities Transfer & Trust, Inc.)
12039 W. Alameda Parkway, Suite Z-2
Lakewood, CO 80228
(303) 986-5400
