ALANCO TECHNOLOGIES, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
---TRANSACTION 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 May 14, 2003 there were 20,109,100 shares of common stock outstanding.
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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.
ALANCO TECHNOLOGIES, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 (unaudited) and June 30, 2002 ...................3
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended March 31,
2003 and 2002............................................... 4
Condensed Consolidated Statements of Operations (Unaudited)
For the nine months ended March 31,
2003 and 2002............................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended March 31,
2003 and 2002................................................6
Notes to Condensed Consolidated Financial Statements (Unaudited)..... 7
Note A - Basis of Presentation
Note B - Inventories
Note C - Disposal of Assets
Note D - Contracts in Process
Note E - Deferred Revenue
Note F - Loss per Share
Note G - Sale of Common Shares
Note H - Industry Segment Data
Note I - Asset Impairment Charge
Note J - Litigation
Note K - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............11
PART II. OTHER INFORMATION
Item 6. Exhibits .......................................................16
Signature ......................................................16
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND JUNE 30, 2002
ASSETS
March 31, 2003 June 30, 2002
-------------- -------------
CURRENT ASSETS (unaudited)
Cash $ 105,200 $ 328,400
Accounts receivable, net 861,700 781,500
Costs and estimated earnings in excess of
billings on uncompleted contracts 374,700 --
Inventories, net 1,369,100 1,256,400
Prepaid expenses and other current assets 113,100 79,000
------------- -------------
Total current assets 2,823,800 2,445,300
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 377,900 500,100
------------- -------------
OTHER ASSETS
Goodwill, net 5,351,300 5,318,400
Patents, manufacturing and software
development, net 966,700 1,131,700
Long-term notes receivable, net 291,000 194,200
Net assets held for sale 242,900 272,600
------------- -------------
Total other assets 6,851,900 6,916,900
------------- -------------
TOTAL ASSETS $ 10,053,600 $ 9,862,300
============= =============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,781,900 $ 1,356,400
Credit line 608,000 500,000
Notes payable and capital leases, current 5,600 101,900
Billings and estimated earnings in excess
of costs on uncompleted contracts -- 54,100
Deferred revenue, current 86,300 15,600
------------- -------------
Total Current Liabilities 2,481,800 2,028,000
LONG TERM LIABILITIES
Notes payable and capital leases, long term 1,205,100 1,205,100
Deferred revenue, long term 35,000 85,600
------------- -------------
TOTAL LIABILITIES 3,721,900 3,318,700
------------- -------------
Preferred Stock, 53,200 and 50,600 shares
issued and outstanding, respectively 532,000 493,600
------------- -------------
SHAREHOLDERS' EQUITY
Common Stock, 20,559,100 and 17,515,600
shares issued and 20,059,100 and 17,015,600
shares outstanding, respectively 64,808,900 63,386,700
Treasury Stock, 500,000 shares at cost (375,100) (375,100)
Accumulated deficit (58,634,100) (56,961,600)
------------- -------------
Total shareholders' equity 5,799,700 6,050,000
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 10,053,600 $ 9,862,300
============= =============
See accompanying notes to the consolidated financial statements
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
2003 2002
------------- -------------
NET REVENUES $ 1,296,900 $ 902,700
Cost of goods sold 797,400 300,600
------------- -------------
GROSS PROFIT 499,500 602,100
Selling, general and administrative expense 1,266,000 819,000
------------- -------------
OPERATING LOSS (766,500) (216,900)
OTHER INCOME & EXPENSES
Interest income (expense), net (30,600) 38,900
Impairment of Asset -- 2,100,000)
Other income, net 13,200 700
------------- -------------
LOSS FROM CONTINUING OPERATIONS (783,900) 2,277,300)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (11,000) (3,300)
------------- -------------
LOSS FROM OPERATIONS (794,900) 2,280,600)
Preferred stock dividend (13,800) --
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (808,700) $ 2,280,600)
============= =============
LOSS PER SHARE - BASIC AND DILUTED
- Continuing operations attributable
to common shareholders $ (0.04) $ (0.25)
============= =============
- Discontinued operations $ 0.00 $ 0.00
============= =============
- Net loss $ (0.04) $ (0.25)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20,059,100 9,170,300
============= =============
See accompanying notes to the consolidated financial statements
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31,
2003 2002
------------- -------------
NET REVENUES $ 6,604,100 $ 4,516,700
Cost of goods sold 4,184,800 2,486,800
------------- -------------
GROSS PROFIT 2,419,300 2,029,900
Selling, general and administrative expense 3,977,000 3,433,600
------------- -------------
OPERATING LOSS (1,557,700) (1,403,700)
OTHER INCOME & EXPENSES
Interest expense, net (84,400) 18,100
Impairment of Asset -- (2,100,000)
Other income (expense), net 11,400 11,100
------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,630,700) (3,474,500)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (3,400) 7,300
------------- -------------
LOSS FROM OPERATIONS (1,634,100) (3,467,200)
Preferred stock dividend (38,400) --
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,672,500) $ (3,467,200)
============= =============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
- Continuing operations attributable
to common shareholders $ (0.09) $ (0.38)
============= =============
- Discontinued operations $ 0.00 $ 0.00
============= =============
- Net loss $ (0.09) $ (0.38)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,210,400 9,170,300
============= =============
See accompanying notes to the consolidated financial statements
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,634,100) $ (3,467,200)
Income (loss) from discontinued operations 3,400 (7,300)
------------- -------------
Net loss from continuing operations (1,630,700) (3,474,500)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 319,400 182,800
Stock and warrants issued for services 27,200 30,700
Impairment of asset charge -- 2,100,000
Gain on disposal of asset (43,400)
Changes in:
Accounts receivable, net (89,800) 178,100
Costs and estimated earnings in excess
of billings on uncompleted contracts (374,700) --
Inventories, net (203,700) (126,000)
Prepaid expenses and other current assets (34,100) (46,200)
Accounts payable and accrued expenses 463,600 (10,000)
Billings and estimated earnings in excess
of costs on uncompleted contracts (54,100) --
Deferred revenue 20,100 --
------------- -------------
Net cash used in continuing operations (1,600,200) (1,165,100)
Net cash from discontinued operations 26,300 17,800
------------- -------------
Net cash used in operating activities (1,573,900) (1,147,300)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 3,200 63,000
Purchase of property, plant and equipment (46,300) (28,100)
Goodwill, acquisition (32,900) (162,600)
Proceeds from sale of assets 20,000 --
------------- -------------
Net cash used in investing
activities (56,000) (127,700)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on borrowings 2,286,500 1,592,500
Repayment on borrowings (2,274,800) (1,750,300)
Subscriptions receivable -- 563,500
Proceeds from sale of common stock, net 1,395,000 792,300
------------- -------------
Net cash provided by (used in) financing
activities 1,406,700 1,198,000
------------- -------------
NET INCREASE (DECREASE) IN CASH (223,200) (77,000)
CASH AND CASH EQUIVALENTS, beginning of period 328,400 81,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 105,200 $ 4,000
============= =============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Non-cash activities:
Note received in exchange for assets $ 100,000 $ --
============= =============
Preferred stock dividends $ 38,400 $ --
============= =============
See accompanying notes to the consolidated financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2003
Note A - Basis of Presentation
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or
"Company"), operates in two business segments: Data Storage
Segment and TSI PRISM Tracking Segment.
The unaudited condensed consolidated balance sheet as of March 31, 2003
and the related unaudited condensed consolidated statements of operations for
the three and nine month periods ended March 31, 2003 and 2002, and unaudited
condensed cash flows for the nine months ended March 31, 2003 and 2002 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, transactions and stock holdings.
These interim condensed consolidated financial statements should be
read in conjunction with the Company's June 30, 2002, Annual Report 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.
In December 2002, the FASB issued SFAS No 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No 123." This statement provides alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
compensation. The statement amends the disclosure requirements of FASB Statement
No. 123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company accounts for
stock-based compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of FASB Statement No.
123. The transition provisions are effective for fiscal years ending after
December 15, 2002. The disclosure provisions are effective for interim periods
beginning after December 15, 2002. The company has implemented the required
disclosure provisions in the three month period ending March 31, 2003. The
adoption of this statement is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows
as the Company does not anticipate making the voluntary change to the fair value
method of accounting for stock-based compensation.
Note B - Inventories
Inventories have been recorded at the lower of cost or market. The
composition of inventories as of March 31, 2003, and June 30, 2002, are
summarized as follows:
March 31, 2003 June 30, 2002
(unaudited)
Finished goods $ 560,400 $ 613,300
Work-in-process 302,200 111,400
Raw material 680,000 705,200
--------- ---------
Total 1,542,600 1,429,900
Less - reserve for obsolescence (173,500) (173,500)
--------- ---------
$ 1,369,100 $ 1,256,400
========= =========
Note C - Disposal of Assets
Effective March 31, 2003, the Company sold certain assets in the data
storage segment, primarily electronic parts inventory, to a private company for
cash, the assumption of a small warranty obligation and a $100,000 nonrecourse
promissory note, due March 31, 2006, bearing interest of 3% per year and secured
by marketable securities. The transaction resulted in a gain of $43,400.
Note D -Contracts In Process
Costs incurred, estimated earnings and billings in the TSI PRISM
segment, related to contracts for the installation of TSI PRISM (TM) systems in
process at March 31, 2003 and June 30, 2002 consist of the following:
March 31, 2003 June 30, 2002
(unaudited)
Costs incurred on uncompleted contracts $ 2,074,000 $ 147,700
Estimated gross profit earned to date 1,017,800 48,200
------------ -----------
Revenue earned to date 3,091,800 195,900
Less: Billings to date (2,717,100) (250,000)
------------ -----------
Costs and estimated earnings in excess of
billings (billings in excess of costs
and estimated earnings) $ 374,700 $ (54,100)
------------ -----------
Note E - Deferred Revenue
Deferred Revenues at March 31, 2003 and June 30, 2002 consist of the
following:
March 31, 2003 June 30, 2002
-------------- -------------
(unaudited)
Extended warranty revenue $ 121,300 $ 101,200
Less - current portion (86,300) (15,600)
------------ -----------
Deferred revenue - long term $ 35,000 $ 85,600
------------ -----------
Note F- Loss Per Share
Basic loss per share of common stock was computed by dividing net loss
by the weighted average number of shares outstanding of common stock.
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.
Note G - Sale of Common Shares
During the quarter ended December 31, 2002, the company raised a total
of $1,500,000 from accredited investors through the sale of units consisting of
two shares of Class A common stock and a warrant to purchase one Class A common
share. The units were sold at a price of $1.00 per unit. Expenses related to the
stock issuance amounted to $105,000 resulting in net proceeds received during
the quarter from the sale of common stock of $1,395,000. The Company issued,
with respect to the fund raising, three-year warrants to purchase 1,500,000
shares of the Company's common stock with a strike price of $1.00 per share.
Note H - Industry Segment Data
Information concerning operations by industry segment follows (unaudited):
Nine Months ended 3/31 Three Months Ended 3/31
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue
Data Storage $ 3,070,100 $ 4,516,700 $ 977,600 $ 902,700
TSI PRISM 3,534,000 -- 319,300 --
------------ ------------ ------------ ------------
Total 6,604,100 4,516,700 1,296,900 902,700
------------ ------------ ------------ ------------
Gross profit
Data Storage 1,300,700 2,029,900 406,300 602,100
TSI PRISM 1,118,600 -- 93,200 --
------------ ------------ ------------ ------------
Total 2,419,300 2,029,900 499,500 602,100
------------ ------------ ------------ ------------
Operating Loss
Data Storage (294,100) (883,400) (73,200) (39,200)
TSI PRISM (574,400) -- (462,500) --
------------ ------------ ------------ ------------
Total (868,500) (883,400) (535,700) (39,200)
Corporate Expense (689,300) (520,300) (230,800) (177,700)
Interest Expense,Net (84,300) 18,200 (30,600) 38,900
Asset Impairment Charge -- (2,100,000) -- (2,100,000)
------------ ------------ ------------ ------------
Operating Loss, Continuing Operations (1,642,100) (3,485,500) (797,100) (2,278,000)
Discontinued Operations & Other 8,000 18,300 2,200 (2,600)
------------ ------------ ------------ ------------
Total $(1,634,100) $(3,467,200) $ (794,900) $(2,280,600)
============ ============ ============ ============
Depreciation and Amortization
Data Storage 83,900 169,300 19,800 47,100
TSI PRISM 228,100 -- 77,100 --
Corporate 7,400 13,500 2,100 4,100
------------ ------------ ------------ ------------
Total $ 319,400 $ 182,800 $ 99,000 $ 51,200
============ ============ ============ ============
03/31/03 06/30/02
------------ ------------
Identifiable assets
Data Storage 2,160,500 2,108,700
TSI PRISM 7,389,800 6,991,300
Corporate 503,300 762,300
------------ ------------
Total $ 10,053,600 $ 9,862,300
============ ============
Note I - Asset Impairment Charge
During the quarter ended March 31, 2002 the Company reported an asset
impairment charge of $2.1 million, or $.23 per share, against its investment in
Gold & Minerals, Inc. ("G&M"), a private Arizona-based mining company. The
charge resulted from Alanco's negotiation of a transaction to exchange the G&M
investment for approximately 8.9% of the outstanding shares of Technology
Systems International, Inc. ("TSI"), a private company that Alanco acquired
effective June 1, 2002. The charge reduced the investment in G&M to
approximately $375,000, an estimated value of 8.9% of the Alanco common stock to
be issued to TSI at closing pursuant to the TSI acquisition agreement. The
acquisition agreement also provided the potential for a significant number of
additional Alanco shares to be issued to TSI under an earn-out formula, the
value of which was not considered in determining the adjusted valuation of the
investment. TSI did not achieve the requirements under the earn-out formula and
no additional shares have been issued.
Note J - Litigation
The only material litigation in which the Company is a party to is a
derivative suit, filed on January 30, 2003, by Richard C. Jones on behalf of
Technology Systems International, Inc., a Nevada corporation ("TSIN") versus the
Company, its wholly owned subsidiary, Technology Systems International, Inc., an
Arizona corporation ("TSIA"), and all of the directors of TSIN. The venue for
the action is the Arizona Superior Court in and for Maricopa County, Arizona, as
case number CV2003-001937. The complaint sets forth various allegations and
seeks equitable remedies and damages arising out of the Company's acquisition of
substantially all of the assets of TSIN. As stated in previous periodic reports
filed by the Company with the SEC concerning this matter, the Company's
management, in consultation with legal counsel, believes the plaintiff's claims
are without merit and the Company will aggressively defend the action.
In order to assure compliance with disclosure requirements concerning
the derivative lawsuit and for the protection of our shareholders, the Company
has suspended the S-3 Registration Statement, which was effective December 11,
2002, which includes the shares issued in connection with the transaction, for a
legal review and possible amendment.
Note K - Subsequent Events
During April 2003, the Company reached an agreement to increase the
Company's line of credit to $1.8 million from $1.3 million under an agreement
set to expire on March 31, 2003. The Agreement was extended to December 31,
2004. (See the Line of Credit Agreement attached to this filing as Exhibit I.)
The Company received notification form NASDAQ on May 14, 2003, that due
to the failure of the Company to maintain the minimum $1.00 per share
requirement, its securities are subject to delisting from the NASDAQ Small Cap
Market. The Company plans on appealing the staff determination.
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
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
G 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, estimated profit on
uncompleted TSI PRISM contracts in process, income and expense recognition,
income taxes 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 Segment, 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 both
the Data Storage Segment and the TSI PRISM Tracking Segment are recognized on
the percentage-of-completion method for individual contracts, commencing when
significant costs are incurred and adequate estimates are verified for
substantial portions of the contract to where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized in the
ratio that costs incurred bear to total estimated costs. Changes in job
performance, estimated profitability and final contract settlements would result
in revisions to 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 becomes known, the entire amount of
the estimated ultimate loss is accrued.
Long-lived assets and intangible assets - We review 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 3/31/2003 versus 03/31/2002
Consolidated revenue for the quarter ended March 31, 2003 was
$1,296,900, compared to $902,700 for the comparable quarter of the previous
year, an increase of $394,200, or 43.7%. The increase in revenue is attributed
to the acquisition of the TSI PRISM tracking technology, effective June 1, 2002,
a new business segment for the Company that reported revenues during the quarter
of $319,300. Excluding the TSI PRISM Segment, revenue for the Data Storage
Segment increased $74,900, or 8.3%, to $977,600, compared to $902,700 for the
comparable quarter of the prior year. The increase in Data Storage Segment
revenues resulted from an increase in the demand for the Company's data storage
products.
Loss from Continuing Operations for the quarter was $783,900, compared
to a loss of $2,277,300 for the same quarter of the prior year. The Loss from
Continuing Operations for the quarter ended March 31, 2002 included a $2,100,000
asset impairment charge related to the Company's investment in a private
Arizona-based mining company (see Note H). Excluding the asset impairment
charge, the Loss from Continuing Operations for the quarter increased by
$606,600 due primarily to $462,500 of losses in the new TSI PRISM Segment,
acquired in the fourth quarter of fiscal year 2002, an increase in the quarterly
loss of the Data Storage Segment of $34,000, increases in net interest expense
of $69,500 and increases in corporate expenses of $53,100.
Loss from Discontinued operations for the quarter amounted to $11,000
and related to the final costs associated with the closing the Company's last
mining property. During the quarter the Company issued a preferred stock
dividend of $13,800, resulting in the Net Loss Attributable to Common
Stockholders of $808,700, or $.04 per share, compared to a loss of $2,280,600,
or $.25 per share, in the comparable quarter. Although the Company has initiated
cost control measures that have impacted the current quarter, operating results
have continued to be affected by unfavorable economic conditions and reduced
capital spending that have adversely affected Alanco's business in recent
quarters. If the economic conditions in the United States worsen or if a wider
or global economic slowdown occurs, Alanco may experience a material adverse
impact on its operating results and business conditions.
Selling, general and administrative expenses for the current quarter
increased to $1,266,000, compared to $819,000 incurred in the comparable quarter
of fiscal year 2002. The increase was attributable to the additional selling,
general and administrative expenses of the new TSI PRISM Segment operations,
offset by reduction of sales commissions and the reduction of selling, general
and administrative costs associated with the Data Storage Segment.
(B) Nine months ended 3/31/2003 versus 3/31/2002
Consolidated revenue for the nine months ended March 31, 2003 was
$6,604,100, compared to $4,516,700 for the comparable nine-month period of the
previous year, an increase of $2,087,400, or 46.2%. The increase in revenue is
attributed to the acquisition of the TSI PRISM tracking technology, effective
June 1, 2002, a new business segment for the Company that reported revenues
during the period of $3,534,000. Excluding the TSI PRISM Tracking Segment,
revenue for the Data Storage Segment decreased to $3,070,100, compared to
$4,516,700 for the comparable nine-month period, a decrease of $1,446,600, or
32.0%. The decrease in Data Storage Segment revenues resulted from the closure
of the Company's SanOne SAN (Storage Area Network) operation and reduced demand
for data storage products in the remaining data storage operations.
The Loss from Operations for the nine-month period was $1,634,100,
compared to a loss of $3,467,200 for the same period of the prior year. The Loss
from Operations for the prior year included a $2,100,000 asset impairment charge
(See Note H). Excluding the asset impairment charge, Loss from Operations for
the period increased by $266,900 due primarily to TSI PRISM operating losses for
the period offset by reductions in losses related to the Data Storage Segment.
Operating results for the period reflected a loss from discontinued
operations of $3,400, compared to income from discontinued operations of $7,300
for the comparable period in 2002. During the nine-month period the Company
issued preferred stock dividends of $38,400, resulting in the Net Loss
Attributable to Common Stockholders of $1,672,500, or $.09 per share, compared
to $3,467,200, or $.38 per share, in the comparable period.
Selling, general and administrative expenses for the nine-month period
increased to $3,977,000, compared to $3,433,600 incurred in the comparable
period of fiscal year 2002. The increase was attributable primarily to the
additional selling, general and administrative expenses of the new TSI PRISM
Segment operations, offset by reduction of sales commissions and other selling,
general and administrative costs in the Data Storage Segment.
Liquidity and Capital Resources
The Company's current assets at March 31, 2003 exceeded current
liabilities by $342,000, or a current ratio of 1.14 to 1, compared to a current
ratio of 1.21 to 1 at fiscal year end June 30, 2002. Accounts receivable of
$861,700 at March 31, 2003, reflects an increase of $80,200, or 10.3% from the
$781,500 reported as consolidated accounts receivables at the end of fiscal year
2002. Accounts receivable balance at March 31, 2003 represented thirty-five
days' sales in receivables compared to forty-one days' sales at June 30, 2002.
During the current quarter the Company accepted a $100,000 three-year
note related to the sale of primarily inventory for cash and a note. The
non-recourse note bears interest at 3%, is secured by negotiable securities with
a current market value in excess of the note balance, and matures on March 31,
2006. The Company has the right to liquidate the pledged negotiable securities;
however, any amount realized over the note balance, including accrued interest,
will be shared with the issuer on a 90/10% basis with the Company receiving the
90% of the excess amount.
Costs and estimated earnings in excess of billings on uncompleted
contracts at March 31, 2003 increased to $374,700 from a $54,100 credit balance
classified at June 30, 2002 as billings in excess of costs and estimated
earnings. The increase resulted from billing deferrals on current contracts
attributable to contract change orders that delayed required trenching and cold
weather encountered at the installation site. The billing deferrals were also
the result of delays in delivery of required electronic components. The problems
have been resolved and the contracts have been substantially completed with
final customer acceptance scheduled to be completed in the current quarter
ending June 30, 2003.
Consolidated inventories at March 31, 2003 amounted to $1,369,100,
compared to $1,256,400 at June 30, 2002. The increase resulted primarily from
increases in inventories required for existing contracts for the TSI PRISM
Segment.
At March 31, 2003, the Company had a $1.3 million formula-based
revolving bank line of credit agreement with interest calculated at prime plus
4%. The line of credit agreement formula was based upon current asset values and
is used to finance working capital. At March 31, 2003, the Company had drawn
$1,108,000 under the line of credit, including the $500,000 balance classed as
long-term debt, and $190,000 was available. See Subsequent Event Footnote J
above for a discussion on an increase and extension of the existing line of
credit agreement executed subsequent to March 31, 2003.
Cash used in operations for the nine-month period was $1,573,900, an
increase of $426,600 when compared to cash used in operations of $1,147,300 for
the comparable period ended March 31, 2002. The increase in cash used in
operations was due primarily to increases in costs & estimated earnings in
excess of billings on uncompleted contracts at March 31, 2003, an amount that
will be reduced as billings under current contracts are completed.
During the nine-month period ended March 31, 2003, the Company
purchased approximately $46,300 of additional equipment compared to $28,100
purchased in the comparable period of the prior year. Acquisition of goodwill
(additional costs incurred related to the acquisition of TSI PRISM tracking
technology) amounted to $32,900. Repayment on borrowings during the period
amounted to $2,274,800, while advances from borrowing amounted to $2,286,500.
The Company believes that additional cash resources may be required for
working capital to achieve planned operating results for fiscal year 2004 and,
if working capital requirements exceed current availability, the Company
anticipates raising capital through additional borrowing or sale of stock. The
additional capital would supplement the projected cash flows from operations and
the line of credit agreement in place at March 31, 2003. If the Company were
unable to raise the required additional capital, it may materially affect the
ability of the Company to achieve its financial plan.
CONTROL AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that it is able to collect the information it is required to disclose in
the reports it files with the Securities and Exchange Commission (SEC), and to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on various evaluations of the Company's
disclosure controls and procedures, some of which occurred during the 90 days
prior to the filing date of this report, the Chief Executive and Chief Financial
Officers believe that these controls and procedures are effective to ensure that
the Company is able to collect, process and disclose the information it is
required to disclose in the reports it files with the SEC within the required
periods.
The Company also maintains a system of internal controls designed to
provide reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
The only material litigation in which the Company is a party to is a
derivative suit, filed on January 30, 2003, by Richard C. Jones on behalf of
Technology Systems International, Inc., a Nevada corporation ("TSIN") versus the
Company, its wholly owned subsidiary, Technology Systems International, Inc., an
Arizona corporation ("TSIA"), and all of the directors of TSIN. The venue for
the action is the Arizona Superior Court in and for Maricopa County, Arizona, as
case number CV2003-001937. The complaint sets forth various allegations and
seeks equitable remedies and damages arising out of the Company's acquisition of
substantially all of the assets of TSIN. As stated in previous periodic reports
filed by the Company with the SEC concerning this matter, the Company's
management, in consultation with legal counsel, believes the plaintiff's claims
are without merit and the Company will aggressively defend the action.
In order to assure compliance with disclosure requirements concerning
the derivative lawsuit and for the protection of our shareholders, the Company
has suspended the S-3 Registration Statement, which was effective December 11,
2002, which includes the shares issued in connection with the transaction, for a
legal review and possible amendment.
Item 2 - CHANGES IN SECURITIES
During the nine months ended March 31, 2003, the Company issued 3
million shares of Common Stock related to the Sale of Common Shares more fully
discussed in Note F and 43,500 shares of Common Stock for services rendered.
Item 6. EXHIBITS 99.1
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
Date: May 14, 2003
CERTIFICATION
I, Robert R. Kauffman, Chairman and Chief Executive Officer of Alanco
Technologies, Inc. (the "Company"), certify that:
(1) I have reviewed the Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2003 (the "Report");
(2) Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state material facts necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading; and
(3) Based on my knowledge, the financial statements, and other
financial information included in the Report, fairly present in all material
respects the financial condition and results of operations of the Company as of,
and for, the periods represented in the Report.
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared.
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of the Company's Board of Directors:
a) all significant deficiencies in the design or operations of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls;
and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were any significant changes in
internal control or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 14, 2003
By /s/ Robert R. Kauffman
------------------
Chairman and Chief Executive Officer
I, John A. Carlson, Executive Vice President and Chief Financial Officer of
Alanco Technologies, Inc. (the "Company"), certify that:
(1) I have reviewed the Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2003 (the "Report");
(2) Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state material facts necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading; and
(3) Based on my knowledge, the financial statements, and other
financial information included in the report, fairly present in all material
respects the financial condition and results of operations of the Company as of,
and for, the periods represented in the Report.
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared.
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of the Company's Board of Directors:
a) all significant deficiencies in the design or operations of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls;
and
(6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were any significant changes in
internal control or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 14, 2003
By /s/ John A. Carlson
---------------
Executive Vice President and Chief Financial Officer
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert R. Kauffman, Chairman and Chief Executive Officer of Alanco
Technologies, Inc., certify that:
1. The Quarterly Report of Alanco Technologies, Inc. on Form 10-QSB for
the quarter ended March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), which this
statement accompanies, fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
Alanco Technologies, Inc.
/s/ Robert R. Kauffman
------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
May 14, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John A. Carlson, Executive Vice President and Chief Financial Officer of
Alanco Technologies, Inc., certify that:
1. The Quarterly Report of Alanco Technologies, Inc. on Form 10-QSB
for the quarter ended March 31, 2003, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), which
this statement accompanies, fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of Alanco Technologies, Inc.
/s/ John A. Carlson
---------------
John A. Carlson
Executive Vice President & Chief Financial
Officer
May 14, 2003
EXHIBIT A
---------
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Amendment") is entered
into this 15th day of April, 2003, between Donald E. Anderson and Rebecca E.
Anderson, Trustees of the Anderson Family Trust, UTA dated December 20, 1993
("Lender") as secured party, and Alanco Technologies, Inc. ("ATI"), an Arizona
corporation ("Borrower 1"); Arraid, Inc. ("Al"), an Arizona corporation
("Borrower 2"); Excel/Meridian Data, Inc. ("EMD"), an Arizona corporation
("Borrower 3"); Sanone, Inc. ("SOI"), an Arizona Corporation ("Borrower 4"); NZ
Liquidating, Inc. (formerly known as Netzerver, Inc.) ("NZ"), an Arizona
corporation ("Borrower 5"); Technology Systems International, Inc. ("TSI"), an
Arizona corporation (formerly, TSI Acquisition Corporation, ("Borrower 6"); and
Fry Guy, Inc., a Nevada corporation ("Borrower 7"). Borrower 1, Borrower 2,
Borrower 3, Borrower 4, Borrower 5, Borrower 6, and Borrower 7, jointly and
severally, individually and collectively, the "Borrower".
RECITALS:
The parties entered into that Loan and Security Agreement, dated June
19, 2002, pursuant to which Lender agreed to provide certain funds to Borrower
upon the terms and conditions set forth therein (the "Agreement"). The parties
now wish to modify the Agreement in certain respects as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
1. Definitions. The subparagraphs of Section 1 of the Agreement corresponding to
the subparagraph numbers set forth below shall be amended by substituting the
definitions set forth below for the corresponding terms identified:
1.9 "Credit Limit" shall mean One Million Eight Hundred Thousand
Dollars ($1,800,000.00).
1.19 "Maturity Date" shall mean December 31, 2004.
2. The first paragraph of Section 2.2 of the Agreement shall be amended
to read as follows:
Except as provided below, the Credits shall bear interest, on the Daily
Balance owing, at a fluctuating rate of interest equal to the Base Rate
plus four (4%) percentage points per annum for all amounts of the
Credit outstanding up to and including $1,300,000, and at a fluctuating
rate of interest equal to the Base Rate plus six (6%) percentage points
per annum for all amounts of the Credit outstanding in excess of
$1,300,000.
3. Section 3.1 of the Agreement shall be amended to read as follows:
3.1 This Agreement shall remain in full force and effect until
December 31, 2004 (the "Maturity Date").
4. A new Section 6A shall be added to the Agreement following Section 6
thereof, which shall read as follows:
6A. COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Lender under this
Agreement, unless Lender shall otherwise consents in writing, revenues
reported from the business operations of TSI shall equal or exceed
$3,500,000 per calender quarter, commencing with the quarter ending
September 30, 2003. Revenues from contracts entered into by TSI after
the date of this Amendment and reported before July 1, 2003, shall be
counted as revenues received during the quarter ended September 30,
2003.
5. A new Section 6B shall be added to the Agreement following Section 6A, which
shall read as follows:
6B. RIGHT TO CONVERT PORTION OF CREDIT TO ATI COMMON STOCK
At any time prior to the full repayment of the Credit, Lender shall
have the right and option to convert up to $500,000 of the outstanding
Credit into shares of Class A Common Stock of the ATI at the conversion
rate of $0.50 of the Credit to be converted for each share of Class A
Common Stock, without the payment of any additional consideration,
subject to readjustment as provided herein below.
Conversion shall be deemed to have been effected on the date when
delivery of notice of such conversion is made, and such date is
referred to herein as the "Conversion Date". As promptly as practicable
thereafter ATI shall issue and deliver to Lender a certificate or
certificates for the number of full shares of Class A Common Stock to
which Lender is entitled. No fractional shares shall be issued. The
Lender shall be deemed to have become a holder of the Class A Common
Stock of record on the Conversion Date unless the transfer books of ATI
are closed on that date, in which event Lender shall be deemed to have
become a holder of the Class A Common Stock of record on the next
succeeding date on which the transfer books are open, but the
conversion rate shall be that in effect on the Conversion Date.
The number of shares of Class A Common Stock deliverable upon
conversion of a portion of the Credit shall be subject to adjustment
from time to time upon the happening of certain events as follows:
(i) Merger, Sale of Assets, Consolidation. If ATI at any time
shall consolidate with or merge into or sell or convey all or
substantially all its assets to any other entity, the conversion right
shall thereafter apply to capital stock in such number and kind of
securities and property as would have been issuable or distributable on
account of such consolidation, merger, sale or conveyance upon or with
respect to the securities subject to the conversion or purchase right
immediately prior to such consolidation, merger, sale or conveyance.
The foregoing provision shall similarly apply to successive
transactions of a similar nature by any such successor or purchaser.
Without limiting the generality of the foregoing, these anti-dilution
provisions shall apply to such securities of such successor or
purchaser after any such consolidation, merger, sale or conveyance.
(ii) Reclassification. If ATI at any time shall, by
subdivision, combination reclassification of securities or otherwise,
change any of the securities then purchasable upon the exercise of the
conversion right associated with the Credit into the same or a
different number of securities of any class or classes, the convertible
portion of the Credit shall thereafter evidence the right to purchase
such number and kind of securities as would have been issuable as the
result of such change with respect to the securities which were subject
to the conversion right immediately prior to such subdivision,
combination, reclassification or other change. If shares of Class A
Common Stock is subdivided or combined into a greater or smaller number
of shares of Class A Common Stock, the number of shares of Class A
Common Stock deliverable upon conversion of the Credit shall be
proportionately reduced or increased, as appropriate, by the ratio
which the total number of shares of Class A Common Stock to be
outstanding immediately after such event bears to the total number of
shares of Class A Common Stock outstanding immediately prior to such
event.
The Company shall at all times keep available for issue and delivery
the full number of shares of Class A Common Stock into which the entire
convertible portion of the Credit are convertible.
6. In consideration of Lender agreeing to the modifications to the Agreement set
forth herein, ATI shall grant to Lender a Warrant to purchase up to 250,000
shares of ATI's Class A Common Stock at a purchase price of $0.40 per share for
a five (5) year period following the date hereof. Such rights shall be
memorialized in a Warrant Agreement to be executed and delivered to Lender upon
the execution hereof in the form attached hereto as Exhibit "A".
7. Borrower agrees that (a) except as expressly provided herein to the contrary,
this Amendment shall not modify the Agreement, (b) all of the collateral
described in the Agreement shall remain in all respects subject to the lien or
charge of the security interest set forth in the Agreement, and (c) nothing
contained herein and nothing done pursuant hereto, shall effect or be construed
as affecting the lien or charge of said security interest, or the priority
thereof over other liens or charges, or as releasing or affecting the liability
of any party or parties who may now or hereafter be liable under or on account
of the Agreement. The provisions of this Amendment are modifications only and
except as provided herein all of the terms and conditions of the Agreement
remain in full force and effect and the parties hereto ratify and confirm the
security, priority and enforceability of the Agreement, as expressly modified by
this Amendment.
8. This Amendment shall bind and inure to the benefit of the respective
successors and assigns of each of the parties. This Amendment may be executed by
the parties hereto in several counterparts, each of which shall be deemed to be
an original and all of which shall constitute together but one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
as of the date first above written.
BORROWERS:
"Borrower l":
Alanco Technologies, Inc., an Arizona Corporation
By: /s/ Robert R. Kauffman
------------------
Robert R. Kauffman, Chief Executive Officer
"Borrower 2":
Arraid, Inc., an Arizona corporation
By: /s/ Robert R. Kauffman
------------------
Robert R. Kauffman, Chief Executive Officer
"Borrower 3":
Excel/Meridian Data, an Arizona corporation
By: /s/ Robert R. Kauffman
------------------
Robert R. Kauffman, Chief Executive Officer
"Borrower 4":
Sanone, Inc., an Arizona corporation
By: /s/ Robert R. Kauffman
------------------
Robert R. Kauffman, Chief Executive Officer
"Borrower 5":
Netzerver, Inc., an Arizona corporation
By: /s/ Robert R. Kauffman
------------------
Robert R. Kauffman, Chief Executive Officer
"Borrower 6":
Technology Systems International, Inc., an Arizona corporation (formerly, TSI
Acquisition Corporation)
By: /s/ Robert R. Kauffman
------------------
Robert R. Kauffman, Chief Executive Officer
"Borrower 7":
Fry Guy, Inc., a Nevada corporation
By: /s/ Robert R. Kauffman
------------------
Robert R. Kauffman, Chief Executive Officer
Borrower Address for Notices:
15575 North 83rd Way, Suite 3, Scottsdale, Arizona. 85260
LENDER:
/s/ Donald E. Anderson
---------------------------------------
DONALD E. ANDERSON
/s/ Rebecca E. Anderson
---------------------------------------
REBECCA E. ANDERSON
Trustees of the Anderson Family Trust, UTA
dated December 20, 1993
Lender Address for Notices:
11804 N. Sundown Drive, Scottsdale, Arizona 85260
EXHIBIT B
---------
EXHIBIT "A"
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS
(i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SUBSCRIBERS
MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED.
Warrant to Purchase
250,000 shares
WARRANT TO PURCHASE COMMON STOCK
OF
ALANCO TECHNOLOGIES, INC.
THIS CERTIFIES that DONALD E. ANDERSON AND REBECCA E. ANDERSON,
TRUSTEES OF THE ANDERSON FAMILY TRUST, UTA DATED DECEMBER 20, 1993 or any
subsequent holder hereof in accordance with Section 9 ("Holder"), has the right
to purchase from ALANCO TECHNOLOGIES, INC., an Arizona corporation (the
"Company"), up to 250,000 fully paid and nonassessable shares of the Company's
Class A common stock ("Common Stock"), subject to adjustment as provided herein,
at a price equal to the Exercise Price as defined in Section 3 below, at any
time beginning on the Date of Issuance (as defined below) and ending at 5:00
p.m., Phoenix, Arizona time, on April 30, 2008 (the "Exercise Period").
Holder agrees with the Company that this Warrant to Purchase Common
Stock of Alanco Technologies, Inc. (this "Warrant") is issued and all rights
hereunder shall be held subject to all of the conditions, limitations and
provisions set forth herein.
1. Date of Issuance.
This Warrant shall be deemed to be issued on April 15, 2003
("Date of Issuance").
2. Exercise.
(a) Manner of Exercise. During the Exercise Period, this
Warrant may be exercised as to all or any lesser number of full shares of Common
Stock covered hereby upon surrender of this Warrant, with the Exercise Form
attached hereto as Exhibit A (the "Exercise Form") duly completed and executed,
together with the full Exercise Price (as de fined below) for each share of
Common Stock as to which this Warrant is exercised, at the office of the Company
or at such other office or agency as the Company may designate in writing,
(such surrender and payment of the Exercise Price hereinafter called the
"Exercise of this Warrant").
(b) Date of Exercise. The "Date of Exercise" of the Warrant
shall be defined as the date on which this Warrant is received by the Company,
together with the full Exercise Price, in accordance with Section 2(a) above.
(c) Cancellation of Warrant. This Warrant shall be canceled
upon the Exercise of this Warrant, and, as soon as practicable after the Date of
Exercise, Holder shall be entitled to receive Common Stock for the number of
shares purchased upon such Exercise of this Warrant, and if this Warrant is not
exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.
(d) Holder of Record. Each person in whose name any Warrant
for shares of Common Stock is issued shall, for all purposes, be deemed to be
the Holder of record of such shares on the Date of Exercise of this Warrant,
irrespective of the date of delivery of the Common Stock purchased upon the
Exercise of this Warrant. Nothing in this Warrant shall be construed as
conferring upon Holder any rights as a stockholder of the Company.
3. Payment of Warrant Exercise Price.
The Exercise Price shall equal $0.40 per share of Common Stock
("Exercise Price"), subject to adjustment in accordance with Section 5 hereof.
Payment of the Exercise Price shall be made by cash, cashiers check or wire
transfer.
4. Transfer.
Subject to the provisions of Section 8 of this Warrant, this
Warrant may be transferred on the books of the Company, in whole or in part, in
person or by attorney, upon surrender of this Warrant properly completed and
endorsed. This Warrant shall be canceled upon such surrender and, as soon as
practicable thereafter, the person to whom such transfer is made shall be
entitled to receive a new Warrant or Warrants as to the portion of this Warrant
transferred, and Holder shall be entitled to receive a new Warrant as to the
portion hereof retained.
5. Adjustments to Exercise Price.
(a) Adjustment to Exercise Price Due to Stock Split, Stock
Dividend, Etc. If, prior to the exercise in full of this Warrant the number of
outstanding shares of Common Stock is increased by a stock split, stock
dividend, or other similar event, the Exercise Price shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is decreased by
a combination or reclassification of shares, or other similar event, the
Exercise Price shall be proportionately increased.
(b) Adjustment Due to Merger, Consolidation, Etc. If, prior to
the exercise in full of this Warrant, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event, as
a result of which shares of Common Stock of the Company shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities of the Company or another entity, then the Holders of
this Warrant shall thereafter have the right to receive upon exercise of this
Warrant, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock immediately theretofore issuable upon
exercise, such stock, securities or other assets which the Holder would have
been entitled to receive in such transaction had the Warrant been exercised
immediately prior to such transaction, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the Holder
to the end that the provisions hereof (including, without limitation, provisions
for the adjustment of the Exercise Price) shall thereafter be applicable, as
nearly as may be practicable in relation to any securities thereafter
deliverable upon the exercise hereof.
(c) No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the exercise rights of the Holder.
(d) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Exercise Price pursuant to this Section 5, the
Company at its expense shall promptly compute such adjustment or readjustment in
accordance with these terms and furnish to the Holder a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Company shall, upon the written
request at any time of the Holder, furnish or cause to be furnished a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Exercise Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the exercise of this Warrant.
(e) Notices of Record Date. In the event of (i) any taking by
the Company of a record date of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, or (ii) any capital reorganization of
the Company, any reclassification or recapitalization of the capital stock of
the Company, any merger or consolidation of the Company, and any transfer of all
or substantially all of the assets of the Company to any other Company, or any
other entity or person, or any voluntary or involuntary dissolution, liquidation
or winding up of the Company, the Company shall mail to the Holder at least 10
days prior to the record date specified therein, a notice specifying (A) the
date on which any such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (B) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and (C) the time, if any, that is to be fixed, as to when the holders of record
of Common Stock (or other securities) shall be entitled to exchange their shares
of Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up.
6. Fractional Interests.
No fractional shares or scrip representing fractional shares
shall be issuable upon the Exercise of this Warrant, but on Exercise of this
Warrant, Holder may purchase only a whole number of shares of Common Stock. If,
on Exercise of this Warrant, Holder would be entitled to a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares issuable upon
shall be the next higher number of shares.
7. Reservation of Shares.
The Company shall at all times reserve for issuance such
number of authorized and unissued shares of Common Stock (or other securities
substituted therefor as herein above provided) as shall be sufficient for the
Exercise of this Warrant and payment of the Exercise Price. The Company
covenants and agrees that upon the Exercise of this Warrant, all shares of
Common Stock issuable upon such exercise shall be duly and validly issued, fully
paid, nonassessable and not subject to preemptive rights, rights of first
refusal or similar rights of any person or entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant has been
issued in a transaction exempt from the registration requirements of the
Securities Act and from state registration under applicable state laws. The
Warrant and the Common Stock issuable upon the Exercise of this Warrant may not
be pledged, transferred, sold or assigned except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Securities Act and applicable state laws.
(b) Assignment. If Holder can provide the Company with
reasonably satisfactory evidence that the conditions of (a) above regarding
registration or exemption have been satisfied, Holder may sell, transfer,
assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder
shall deliver a written notice to the Company, substantially in the form of the
Assignment attached hereto as Exhibit B, indicating the person or persons to
whom the Warrant shall be assigned and the respective number of warrants to be
assigned to each assignee. The Company shall effect the assignment within ten
days and shall deliver to the assignee(s) designated by Holder, a Warrant or
Warrants of like tenor and terms for the appropriate number of shares.
9. Benefit of this Warrant.
Nothing in this Warrant shall be construed to confer upon any person
other than the Company and Holder any legal or equitable right, remedy or claim
under this Warrant, and this Warrant shall be for the sole and exclusive benefit
of the Company and Holder.
10. Applicable Law.
This Warrant is issued under and shall for all purposes be
governed by and construed in accordance with the laws of the State of Arizona,
without giving effect to the conflict of law provisions thereof.
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. Notices or Demands.
All notices or other communications required or permitted
pursuant to this Warrant shall be in writing and shall be deemed given to a
party when (a) delivered by hand or by nationally recognized overnight courier
service (costs prepaid); or (b) received or rejected by the addressee, if sent
by certified mail, return receipt requested. Such notice or other communication
shall be sent to the Company, Attention: Chief Financial Officer, 11575 North
83rd Way, Suite 3, Scottsdale, Arizona 85260 or to the Holder at the address set
forth in the Company's records (or to such other address as either party may
designate by notice to the other party).
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of
the 15th day of April, 2003.
ALANCO TECHNOLOGIES, INC.
By:/s/ Robert R. Kauffman
-----------------------
Robert R. Kauffman, CEO
EXHIBIT A
EXERCISE FORM
The undersigned hereby irrevocably exercises the right to purchase
________________ shares of common stock, no par value (the "Common Stock") of
Alanco Technologies, Inc., an Arizona corporation (the "Company"), evidenced by
the attached warrant (the "Warrant") and herewith makes payment of the exercise
price with respect to such shares in full, all in accordance with the conditions
and provisions of said Warrant.
1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.
2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:
Dated:______________
Signature
Print Name
Address
NOTICE: The signature to the foregoing Exercise Form must correspond to the name
as written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
EXHIBIT B
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase ________________ shares of the Common Stock of
Alanco Technologies, Inc., evidenced by the attached Warrant and does hereby
irrevocably constitute and appoint ________________________ as attorney-in-fact
to transfer the said Warrant on the books of the Company, with full power of
substitution in the premises.
Dated:__________________ Signature
Fill in for new registration of Warrant:
Name
Address
Please print name and address of assignee (including zip code) above.
NOTICE: The signature to the foregoing Exercise Form must correspond to the name
as written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.