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 September 30, 2004
____TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ____________
Commission file number 0-9347
ALANCO TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Arizona
(State or other jurisdiction of incorporation or organization)
86-0220694
(I.R.S. Employer Identification No.)
15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
(480) 607-1010
(Issuer's telephone number)
----------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of November 5, 2004 there were 25,437,200 shares, net of
treasury shares, of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X___
Forward-Looking Statements: Some of the statements in this Form 10-QSB Quarterly
Report, as well as statements by the Company in periodic press releases, oral
statements made by the Company's officials to analysts and shareholders in the
course of presentations about the Company, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Words or phrases denoting the anticipated results of future events such
as "anticipate," "believe," "estimate," "will likely," "are expected to," "will
continue," "project," "trends" and similar expressions that denote uncertainty
are intended to identify such forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such factors include,
among other things, (i) general economic and business conditions; (ii) changes
in industries in which the Company does business; (iii) the loss of market share
and increased competition in certain markets; (iv) governmental regulation
including environmental laws; and (v) other factors over which the company has
little or no control.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2004 and June 30, 2004.......................3
Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended September 30, 2004 and 2003.....4
Changes in Certain Equity and Preferred Stock Accounts
(Unaudited)
For the three months ended September 30, 2004 and 2003.....5
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended September 30, 2004 and 2003.....6
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................8
Note A - Basis of Presentation
Note B - Inventories
Note C - Contracts in Process
Note D - Deferred Revenue
Note E - Loss per Share
Note F - Equity
Note G - Industry Segment Data
Note H - Related Party Transactions
Note I - Line of Credit
Note J - Litigation
Note K - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................12
Item 3. Controls and Procedures........................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................16
Item 2. Changes in Securities..........................................16
Item 6. Exhibits ......................................................17
2
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 AND JUNE 30, 2004 (Unaudited)
Sep 30, 2004 June 30, 2004
------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 2,166,400 $ 1,975,600
Accounts receivable, net 839,400 657,200
Inventories, net 2,337,300 2,282,300
Cost and est earnings in excess of
billings on uncompleted contracts 21,600 --
Prepaid expenses and other current assets 162,200 110,600
------------- -------------
Total current assets 5,526,900 5,025,700
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 253,700 247,500
------------- -------------
OTHER ASSETS
Goodwill and other intangible assets, net 5,994,900 6,048,000
Long-term notes receivable, net 38,000 68,000
Net assets held for sale 142,000 156,100
Other assets 35,400 40,600
------------- -------------
Total other assets 6,210,300 6,312,700
------------- -------------
TOTAL ASSETS $ 11,990,900 $ 11,585,900
============= =============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,456,200 $ 1,246,500
Credit line and capital leases, current 502,200 5,200
Billings in excess of cost and
est earnings on uncompleted projects -- 27,200
Deferred revenue, current -- 25,800
------------- -------------
Total Current Liabilities 1,958,400 1,304,700
LONG TERM LIABILITIES
Notes payable and capital leases, long term 314,100 814,100
------------- --------------
TOTAL LIABILITIES 2,272,500 2,118,800
------------- -------------
Preferred Stock - Series B, 63,000
and 58,600 shares issued and
outstanding, respectively 617,800 602,800
------------- -------------
SHAREHOLDERS' EQUITY
Preferred Stock - Series A Convertible,
2,624,600 and 2,476,800 shares issued
and outstanding, respectively 3,177,900 2,956,100
Common Stock - 25,389,700 and 23,232,800
shares outstanding, net of Treasury Stock 70,119,500 68,959,600
Accumulated deficit (64,196,800) (63,051,400)
------------- -------------
Total shareholders' equity 9,100,600 8,864,300
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 11,990,900 $ 11,585,900
============= =============
See accompanying notes to the consolidated financial statements
3
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Unaudited)
2004 2003
------------- -------------
NET REVENUES $ 1,737,200 $ 1,037,400
Cost of goods sold 1,115,800 644,700
------------- -------------
GROSS PROFIT 621,400 392,700
Selling, general and administrative expense 1,518,700 1,119,900
------------- -------------
OPERATING LOSS (897,300) (727,200)
OTHER INCOME & EXPENSES
Interest income (expense), net (16,300) (82,700)
Other income (expense), net 5,000 3,200
------------- -------------
LOSS FROM OPERATIONS (908,600) (806,700)
Preferred stock dividends - in kind (236,800) (13,500)
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,145,400) $ (820,200)
============= =============
NET LOSS PER SHARE - BASIC AND DILUTED -
Net loss attributable to common shareholders $ (0.05) $ (0.05)
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 24,312,600 15,176,200
============= =============
See accompanying notes to the consolidated financial statements
4
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN CERTAIN SHAREHOLDERS' EQUITY AND PREFERRED
STOCK ACCOUNTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 (Unaudited)
Common Stock Preferred Stock - Ser A Preferred Stock - Ser B Treasury Stock
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
------------------------ ----------------------- ----------------------- ---------------------
Balances at 6/30/04 23,732,800 $ 69,334,700 2,476,800 $ 2,956,100 61,500 $ 602,800 500,000 $ (375,100)
Preferred dividends in kind -- -- 147,800 221,800 1,500 15,000 -- --
Shares issued for services 57,500 59,900 -- -- -- -- -- --
Options and Warrants exercised 2,099,400 1,100,100 -- -- -- -- -- --
------------------------ ----------------------- ----------------------- ---------------------
Balances at 09/30/04 25,889,700 $ 70,494,700 2,624,600 $ 3,177,900 63,000 $ 617,800 500,000 $ (375,100)
======================== ======================= ======================= =====================
See accompanying notes to the consolidated financial statements
5
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from operations $ (908,700) $ (806,700)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 82,800 87,000
Stock and warrants issued for services 59,900 74,400
(Income) loss from assets held for sale (5,000) (2,200)
Gain on disposal of asset -- (1,000)
Changes in:
Accounts receivable, net (182,200) 68,200
Inventories, net (55,000) (66,200)
Costs in excess of billings and
estimated earnings on uncompleted
contracts (21,600) --
Prepaid expenses and other current assets (51,600) (35,800)
Accounts payable and accrued expenses 209,700 (214,400)
Deferred revenue (27,200)
Billings and estimated earnings in excess
of costs on uncompleted contracts (25,800) --
Other assets 5,200 2,200
------------- -------------
Net cash used in operating activities (919,500) (894,500)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash from assets held for sale 19,100 15,700
Collection of notes receivable 30,000 36,800
Purchase of property, plant and equipment (34,000) (5,900)
Proceeds from the sale of property, plant
and equipment -- 3,500
Patent renewal (1,900) --
------------- -------------
Net cash provided by investing activities 13,200 50,100
------------- -------------
See accompanying notes to the consolidated financial statements
6
ALANCO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, (Continued)
2004 2003
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on borrowings -- 788,500
Repayment on borrowings (3,000) (869,600)
Subscriptions receivable -- 899,200
Proceeds from sale of Preferred Stock -- 105,700
Proceeds from sale of Common Stock 1,100,100
------------- -------------
Net cash provided by financing activities 1,097,100 923,800
------------- -------------
NET INCREASE IN CASH 190,800 79,400
CASH AND CASH EQUIVALENTS, beginning of period 1,975,600 97,700
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 2,166,400 $ 177,100
============= =============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Net cash paid during the period for interest $ 16,700 $ 32,800
============= =============
Non-Cash Activities:
Value of stock issued for cancellation
of put option $ -- $ 49,900
============= =============
Value of stocks and warrants issued
for services $ 59,900 $ 3,600
============= =============
Series B preferred stock dividend in kind $ 15,000 $ 13,500
============= =============
Series A preferred stock dividend in kind $ 221,800 $ --
============= =============
Value of treasury stock redeemed in
preferred stock and warrant issuance $ -- $ 198,300
============= =============
See accompanying notes to the consolidated financial statements
7
ALANCO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2004
Note A - Basis of Presentation
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or
"Company"), operates in two business segments: Computer Data Storage Segment and
RFID Technology Segment.
The unaudited condensed consolidated balance sheet as of September 30,
2004 and the related unaudited condensed consolidated statements of operations
and cash flows for the three months ended September 30, 2004 presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and in
accordance with the instructions to Form 10-QSB. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In our opinion, the accompanying condensed consolidated
financial statements include all adjustments necessary for a fair presentation
of such condensed consolidated financial statements. Such necessary adjustments
consist of normal recurring items and the elimination of all significant
intercompany balances and transactions.
These interim condensed consolidated financial statements should be
read in conjunction with the Company's June 30, 2004, 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.
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's Common Stock on the date of grant.
In accordance with accounting for such options utilizing the intrinsic value
method under APB 25, there is no related compensation expense recorded in the
Company's financial statements for the three months ended September 30, 2004 and
2003. Had compensation cost for stock-based compensation been determined based
on the fair value of the options at the grant dates consistent with the method
of SFAS 123, the Company's net loss and loss per share would have been increased
to the pro forma amounts presented below.
8
ALANCO TECHNOLOGIES, INC.
3 months ended September 30,
2004 2003
------------- -------------
Net loss, as reported $ (1,145,400) $ (820,200)
Add: Stock-based Employee compensation
expense included in reported income,
net of related tax effects -- --
Deduct: Total stock-based Employee
compensation expense determined under
fair value based methods for all
awards, net of related tax effects $ (43,500) $ (245,700)
------------- -------------
Pro forma net loss $ (1,188,900) $ (1,065,900)
============= =============
Net loss per common share, basic and diluted
As reported $ (0.05) $ (0.05)
============= =============
Pro forma $ (0.05) $ (0.07)
============= =============
Weighted average common shares 24,312,600 15,176,200
============= =============
During the quarter ended September 30, 2004, the Company granted
employee stock options to purchase 75,000 shares of the Company's Class A Common
Stock at an average purchase price of $1.20, market price on date granted. The
fair value of option grants is estimated as of the date of grant, in accordance
with SFAS 123, utilizing the Black-Scholes option-pricing model, with the
assumptions substantively utilized in the year-end financial statements.
Note B - Inventories
Inventories have been recorded at the lower of cost or market. The
composition of inventories as of September 30 and June 30, 2004 are summarized
as follows:
September 30, June 30,
2004 2004
------------- -------------
(unaudited)
Raw materials and purchased parts $ 2,095,100 $ 1,894,700
Work-in-progress 239,900 198,300
Finished goods 245,300 279,300
------------- -------------
2,580,300 2,372,300
Less reserves for obsolescence (243,000) (90,000)
------------- -------------
$ 2,337,300 $ 2,282,300
============= =============
9
Note C - Contracts In Process
Costs incurred, estimated earnings and billings in the RFID Technology
segment, related to contracts for the installation of TSI PRISM system in
process at September 30, 2004 and June 30, 2004 consist of the following.
September 30, June 30,
2004 2004
------------- -------------
Costs incurred on uncompleted contracts $ 334,000 $ 117,300
Estimated gross profit earned to date 193,900 58,200
------------- -------------
Revenue earned to date 527,900 175,500
Less Billing to date (506,300) (201,300
------------- -------------
Costs and estimated earnings in excess of
Billing (billing in excess of costs and
earnings) $ 21,600 $ (25,800)
============= =============
Note D - Deferred Revenue
Deferred Revenues at September 30, 2004 and June 30, 2004 consist of
the following:
September 30, June 30,
2004 2004
------------- -------------
Extended warranty revenue $ -- 27,200
Less - current portion -- (27,200)
------------- -------------
Deferred revenue - long term $ -- $ --
============= =============
Note E - Loss Per Share
Basic loss per share of common stock was computed by dividing net loss
by the weighted average number of shares of common stock outstanding.
Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during the
period. Dilutive securities are options and warrants that are freely exercisable
into common stock at less than the prevailing market price. Dilutive securities
are not included in the weighted average number of shares when inclusion would
increase the earnings per share or decrease the loss per share. As of September
30, 2004 there were 8,360,000 potentially dilutive securities outstanding.
Note F - Equity
During the three months ended September 30, 2004, the Company issued a
total 2,156,900 shares of the Company's Class A Common Stock. Included were
2,099,400 shares issued upon exercise of outstanding warrants and options
generating approximately $1.1 million in proceeds to the Company. The balance of
57,500 shares, valued at $59,900 fair market value, were issued in exchange for
services rendered to the Company.
The Company also declared dividends on the Company's preferred shares
during the quarter and paid the dividends-in-kind through the issuance of
147,800 shares of Series A Preferred Stock valued at $221,700 and 1,500 shares
of Series B Preferred Stock valued at $15,000. The Preferred Stock is more fully
discussed in the Form-10KSB for the year ended June 30, 2004.
10
Note G -Industry Segment Data
Information concerning operations by industry segment follows (unaudited):
Three Months Ended 09/30
2004 2003
------------- -------------
Revenue
Data Storage $ 1,365,700 $ 1,035,400
RFID Technology 371,500 2,000
------------- -------------
Total Revenue 1,737,200 1,037,400
============= =============
Gross Profit
Data Storage 479,900 395,900
RFID Technology 141,500 (3,300)
------------- -------------
Total Gross Profit 621,400 392,600
------------- -------------
Gross Margin
Data Storage 35.1% 38.2%
------------- -------------
RFID Technology 38.1% n/a
------------- -------------
Overall Gross Margin 35.8% 37.8%
------------- -------------
Selling, General and Administrative Expense
Data Storage 445,200 418,000
RFID Technology 690,000 496,300
------------- -------------
Total Segment Operating Expense 1,135,200 914,300
------------- -------------
Operating Profit (Loss)
Data Storage 34,700 (22,100)
RFID Technology (548,500) (499,600)
Corporate Expense (383,500) (205,500)
------------- -------------
Operating Loss (897,300) (727,200)
============= =============
Depreciation and Amortization
Data Storage 5,500 8,000
RFID Technology 78,500 76,900
Corporate 700 2,100
------------- -------------
Total Depreciation and Amortization $ 84,700 $ 87,000
============= =============
Note H - Related Party Transactions
The Company has a line of credit agreement ("Agreement"), more fully
discussed in the Company's Form 10-KSB for the year ended June 30, 2004, with a
private trust controlled by Mr. Donald Anderson, a greater than five percent
stockholder and a member of the Company's Board of Directors.
Note I - Line of Credit
At September 30, 2004, the Company has an outstanding balance of
$500,000, which is presented as line of credit balance due. The balance is under
a $1.3 million line of credit agreement with a private trust ("Lender"), entered
11
into in June 2002 and modified in April and October of 2003. Under the line of
credit agreement, the Company must maintain a minimum balance due under the line
of at least $500,000 through the July 1, 2005 expiration date. At September 30,
2004, the Company had $800,000 available under the line of credit agreement.
Note J - Litigation
The Company continues to be a defendant in litigation that relates to
the acquisition, in May of 2002, of substantially all the assets of Technology
Systems International, Inc., a Nevada corporation. No significant new activity
has occurred subsequent to our report of litigation in our Form 10-KSB filed for
the year ended June 30, 2004. The Company's management, in consultation with
legal counsel, believes the plaintiff's claims are without merit and the Company
will aggressively defend against the action. Litigation previously reported as
arising from an expired property lease between the Company's subsidiary, Arraid,
Inc., and Arraid Property L.L.C., a Limited Liability Company, has been deemed
immaterial.
Note K - Subsequent Events
On October 12, 2004 the Company announced notification from Spectrum
Human Services Inc., a Michigan-based private prison operator, that its
affiliate, Spectrum Juvenile Justice Services, had selected the Alanco
proprietary tracking technology for installation at its new Calumet II juvenile
detention facility to be constructed at Highland Park, Michigan. The present
construction plan anticipates completion of the TSI PRISM system in early spring
2005, with an estimated contract value of approximately $500,000. The Calumet II
project will be Alanco's second juvenile facility TSI PRISM installation in the
state of Michigan, following completion of the W. J. Maxey Boys Training School
in 2003.
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 - Segment Reporting to the Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results
of operations are based upon the condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires the use of estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
12
contingent liabilities. On an ongoing basis, estimates are revalued, including
those related to areas that require a significant level of judgment or are
otherwise subject to an inherent degree of uncertainty. These areas include
allowances for doubtful accounts, inventory valuations, carrying value of
goodwill and intangible assets, estimated profit on uncompleted contracts in
process, income and expense recognition, income taxes, ongoing litigation, and
commitments and contingencies. Our estimates are based upon historical
experience, observance of trends in particular areas, information and/or
valuations available from outside sources and on various other assumptions that
we believe to be reasonable under the circumstances and which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual amounts may differ from these
estimates under different assumptions and conditions.
Accounting policies are considered critical when they are significant
and involve difficult, subjective or complex judgments or estimates. We
considered the following to be critical accounting policies:
Principles of consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Revenue recognition - The Company recognizes revenue from the Data
Storage 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 RFID Technology Segment are recognized on the
percentage-of-completion method for individual contracts, commencing when
significant costs are incurred and adequate estimates are verified for
substantial portions of the contract to where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized in the
ratio that costs incurred bear to total estimated costs. Changes in job
performance, estimated profitability and final contract settlements would result
in revisions to 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 - The Company reviews carrying
values at least annually or whenever events or circumstances indicate the
carrying values may not be recoverable through projected discounted cash flows.
Results of Operations
(A) Three months ended 9/30/2004 versus 9/30/2003
Revenues
Consolidated revenue for the quarter ended September 30, 2004 was
$1,737,200, compared to $1,037,400 for the comparable quarter of the previous
year, an increase of $699,800, or 67.5%. The increase is attributed to revenue
increases in both the RFID Technology segment, which increased to $371,500 in
the current quarter from $2,000 reported for the three months ended September
30, 2003, and the Data Storage segment, which reported a 31.9% revenue increase
to $1,365,700 in the quarter ended September 30, 2004 compared to $1,035,400 for
the comparable quarter in the prior fiscal year. The increase in RFID Technology
revenue resulted from system expansions at current TSI PRISM systems locations
and the initial revenue from the current contract in progress. The same quarter
in the prior fiscal year had been negatively affected by prison contract and
funding postponements caused by fiscal budgetary constraints. The increase in
Data Storage Segment revenues compared to the previous year resulted from
increased demand for the Company's data storage products as companies increased
technology expenditures in reaction to improving economic conditions.
Gross profit and Operating Expenses
Gross profit generated during the quarter amounted to $621,400, an
increase of $228,800, or 58.3% when compared to the same quarter of the prior
13
year. Gross margins decreased from 37.8% for the quarter ended September 30,
2003 to 35.8% for the current quarter. The decrease in gross margin resulted
primarily from a change in product mix to lower gross margin products in the
data storage segment.
Selling, general and administrative expenses for the current quarter
increased to $1,518,700, a $398,800 increase, or 35.6%, when compared to
$1,119,900 incurred in the comparable quarter of fiscal year 2003. The major
components of the increase in selling, general and administrative expense were:
an increase of approximately $120,000 in selling and marketing expenses,
primarily in our RFID Technology segment; an increase in inventory reserve of
$75,000 related to new technology in the RFID Technology segment that
potentially reduced the value of existing inventory; and an increase of
approximately $130,000 in legal expense related to the litigation in which the
Company is currently involved. The Company will continue to pursue legal expense
reimbursement from both the Company's insurance carrier as well as the
Plaintiffs in the litigation matters.
Operating Loss
The Operating Loss for the quarter was $897,300 compared to a loss of
$727,200 for the same quarter of the prior year, an increase of 23.4%. The
increased loss resulted from increased corporate expenses and increases in the
RFID Technology segment loss offset by the Data Storage segment reporting an
operating profit for the current quarter compared to a loss in the comparable
quarter of the prior fiscal year.
Interest and Dividends Expense
Interest expense for the quarter amounted to $16,300 compared to
interest expense of $82,700 for the same quarter in the prior year. The $66,400
interest expense reduction resulted from a decrease in average borrowing during
the quarter accomplished by the Company's effort in raising additional working
capital.
The Company paid quarterly in-kind Series B Preferred Stock dividends
with values of $15,000 and $13,500 in fiscal year 2004 and 2003, respectively.
In addition, the Company declared a Series A Preferred Stock dividend during the
quarter and paid the dividend in-kind through the issuance of additional Series
A Preferred Stock valued at $221,800. The dividend complied with the Series A
Preferred Stock provision for a stock dividend to be declared and paid on a
six-month interval.
Net Loss Attributable to Common Stockholders
Net Loss Attributable to Common Stockholders for the quarter ended
September 30, 2004 amounted to $1,145,400, or ($.05) per share, compared to a
loss of $820,200, or ($.05) per share, in the comparable quarter of the prior
year. Although the Company has shown improved operating results in its Data
Storage segment and anticipates improved future operating results in its RFID
Technology segment as the economy improves, actual results in both the Data
Storage segment and the RFID Technology segment may be affected by unfavorable
economic conditions and reduced capital spending budgets. If the economic
conditions in the United States worsen or if a wider or global economic slowdown
occurs, Alanco may experience a material adverse impact on its operating results
and business conditions.
Liquidity and Capital Resources
The Company's current assets at September 30, 2004 exceeded current
liabilities by $3,568,500, resulting in a current ratio of 2.85 to 1. At June
30, 2004 the Company's current assets exceeded current liabilities by
$3,721,000, reflecting a current ratio of 3.85 to 1. The decrease in the current
ratio at September 30, 2004 when compared to June 30, 2004 resulted primarily
from the reclassification of $500,000 credit line payable to current liabilities
at September 30, 2004 from long-term notes payable at June 30, 2004. The
reclassification was required to reflect the July 1, 2005 termination date of
the existing line of credit agreement. Accounts receivable of $839,400 at
September 30, 2004, reflects an increase of $182,200, or 28%, when compared to
the $657,200 reported as consolidated accounts receivable at June 30, 2004. The
accounts receivable balance at September 30, 2004 represented forty-four days'
sales in receivables compared to fifty-eight days' sales at June 30, 2004. The
decrease in days' sales in receivables resulted primarily from improvements in
the RFID Technology segment.
14
Consolidated inventories at September 30, 2004 amounted to $2,337,300
an increase of $55,000, or 2%, when compared to $2,282,300 at June 30, 2004. The
September 30, 2004 reflects an inventory turnover of 1.91 compared to 2.5 at
June 30, 2004. Although the September 30, 2004 balance reflects only a slight
increase from the June 30, 2004 balance, it is a much larger increase when
compared to inventory levels of prior reporting periods and reflects
management's anticipated revenue increases for both the Data Storage segment and
the RFID Technology segment.
At September 30, 2004, the Company had a balance of $500,000 under 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 is based upon
current asset values and is used to finance working capital. At September 30,
2004, the Company had $800,000 available under the line of credit. See Line of
Credit Footnote I for additional discussion of the existing line of credit
agreement.
Cash used in continuing operations for the three-month period was
$919,500; an increase of $25,000 when compared to cash used in operations of
$894,500 for the comparable period ended September 30, 2003. The increase was
due primarily to increases in the loss from operations for the period.
During the three-months ended September 30, 2004, the Company reported
cash flows from investing activities of $13,200, including collecting $30,000 in
notes receivable, purchasing $34,000 of additional equipment and raising $19,100
from the sale of assets held for sale. For the quarter ended September 30, 2003,
the Company reported $50,100, including collecting notes receivable of $36,800,
purchasing additional equipment in the amount of $5,900 and raising $19,200 from
the sale of property, plant & equipment and assets held for sale.
Cash provided by financing activities for the quarter ended September
30, 2004 consisted primarily of $1.1 million in proceeds received from the
exercise of warrant and options. Cash provided by financing activities during
the same quarter in the prior fiscal year included the collections of
subscription receivables in the amount of $899,200 and the proceeds from the
sale of preferred stock of $105,700.
The Company believes that additional cash resources may be required for
working capital to achieve planned operating results for fiscal year 2005 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 September 30, 2004. If additional
working capital was required and the Company was unable to raise the required
additional capital, it may materially affect the ability of the Company to
achieve its financial plan. See Footnote F - Equity for additional information
related to working capital raised by the Company during the three months ended
September 30, 2004, necessary to achieve planned operating results for the
current fiscal year.
Item 3 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that it is able to collect the information it is required to disclose in
the reports it files with the Securities and Exchange Commission (SEC), and to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on various evaluations of the Company's
disclosure controls and procedures, some of which occurred during the 90 days
prior to the filing date of this report, the Chief Executive and Chief Financial
Officers believe that these controls and procedures are effective to ensure that
the Company is able to collect, process and disclose the information it is
required to disclose in the reports it files with the SEC within the required
periods.
The Company also maintains a system of internal controls designed to
provide reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
15
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 Company continues to be a defendant in litigation that relates to
the acquisition, in May of 2002, of substantially all the assets of Technology
Systems International, Inc., a Nevada corporation. No significant new activity
has occurred subsequent to our report of litigation in our Form 10-KSB filed for
the year ended June 30, 2004. The Company's management, in consultation with
legal counsel, believes the plaintiff's claims are without merit and the Company
will aggressively defend the actions. Litigation previously reported as arising
from an expired property lease between the Company's subsidiary, Arraid, Inc.
and Arraid Property L.L.C., a Limited Liability Company, has been deemed
immaterial.
Item 2. CHANGES IN SECURITIES
During the three months ended September 30, 2004, the Company issued
147,800 shares of Series A Preferred Stock and 1,500 Shares of Series B
Preferred Stock as dividend in-kind payments, 2,099,400 shares of Class A Common
Stock for the exercise of existing warrants and options and 57,500 shares of
Common Stock for services rendered.
Item 6. EXHIBITS
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial
Officer
99.1 Nominating Committee Charter
99.2 Code of Conduct
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
16
EXHIBIT 31.1
Certification of
Chairman and Chief Executive Officer
of Alanco Technologies, Inc.
I, Robert R. Kauffman, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 12, 2004
/s/ Robert R. Kauffman
---------------------
Robert R. Kauffman
Chairman and Chief Executive Officer
17
EXHIBIT 31.2
Certification of
Vice President and Chief Financial Officer
of Alanco Technologies, Inc.
I, John A. Carlson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Alanco
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 12, 2004
/s/ John A. Carlson
---------------------
John A. Carlson
Executive Vice President and Chief Financial Officer
18
EXHIBIT 32.1
Certification of
Chief Executive Officer and Chief Financial Officer
of Alanco Technologies, Inc.
This certification is provided pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and accompanies this quarterly report of Form 10-QSB
(the "Report") for the period ended September 30, 2004 of Alanco Technologies,
Inc. (the "Issuer").
Each of the undersigned, who are the Chief Executive Officer and Chief
Financial Officer, respectively, of Alanco Technologies, Inc., hereby certify
that, to the best of each such officer's knowledge:
(i) the Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or
78o(d)); and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Issuer.
Dated: November 12, 2004
/s/ Robert R. Kauffman
----------------------
Robert R. Kauffman
Chief Executive Officer
/s/ John A. Carlson
----------------------
John A. Carlson
Chief Financial Officer
19
EXHIBIT 99.1
ALANCO TECHNOLOGIES, INC.
NOMINATING COMMITTEE
CHARTER
I. Purpose
The purpose of the Nominating Committee is to select qualified nominees to be
elected to the board of directors (the "Board of Directors") of Alanco
Technologies, Inc. (the "Corporation") by the Corporation's stockholders at the
annual stockholder meeting, to select qualified persons to fill any vacancies on
the Board of Directors, and to undertake such other duties and responsibilities
as may from time to time be delegated by the Board of Directors to the
Nominating Committee.
II. Membership Requirements
The Nominating Committee shall be comprised of that number of directors as the
Board of Directors shall determine from time to time, such number not to be less
than two. The membership of the Nominating Committee shall meet all applicable
requirements of the NASDAQ and the Securities and Exchange Commission (the
"SEC") and any other applicable laws, rules and regulations with respect to
independence, as determined by the Board. The members of the Nominating
Committee shall be appointed annually by the Board of Directors and may be
removed at any time, with or without cause, by the Board of Directors. Unless a
Chairman of the Nominating Committee is elected by the full Board of Directors,
the members of the Nominating Committee may designate a Chairman by majority
vote of the full Nominating Committee membership.
III. Authority
In discharging its responsibilities, the Nominating Committee shall have
authority to retain outside counsel or other consultants in the Nominating
Committee's sole discretion. The Nominating Committee shall also have sole
authority to approve the fees and other retention terms of such consultants and
to terminate such consultants. The Nominating Committee shall have the authority
to create subcommittees with such powers as the Nominating Committee shall from
time to time confer.
IV. Responsibilities
The following are the general responsibilities of the Nominating Committee and
are set forth only for its guidance. The Nominating Committee may assume such
other responsibilities as it deems necessary or appropriate in carrying out its
purpose.
The Nominating Committee shall:
1. Select a replacement Director when a vacancy on the Board of Directors occurs
or is anticipated;
2. Establish the criteria for evaluating and evaluate the qualifications of
individuals for election as members of the Board of Directors, which criteria
shall include, at a minimum, the following:
a. compliance with the independence and other applicable
requirements of NASDAQ and the SEC, all other applicable laws,
rules, regulations and listing standards, and the criteria,
policies and principles set forth in the Corporation's
Articles of Incorporation, Bylaws, Code of Conduct, and this
Charter; and
b. the ability to contribute to the effective management of the
Corporation, taking into account the needs of the Corporation
and such factors as the individual's experience, perspective,
skills, time availability, knowledge of the industries in
which the Corporation operates, and such other criteria as the
Committee shall determine to be relevant at the time.
3. Consider stockholder recommendations for possible nominees for election as
members of the Board of Directors;
4. Annually evaluate the qualifications of current members of the Board of
Directors who are available for reelection, in light of the characteristics of
independence, skills, experience, availability of service to the Corporation and
tenure of its members, and of the Board's anticipated needs;
5. Upon a significant change in a Director's personal circumstances or in the
event a significant ongoing time commitment arises that may be inconsistent with
a Director's service to the Board, review, as appropriate and in light of the
then current Board policies as reflected in the Code of Conduct or other
corporate governance principles, the continued Board membership of such member;
6. Report to the Board of Directors its conclusions with respect to the matters
that the Nominating Committee has considered;
7. Review and reassess the adequacy of this Charter of the Nominating Committee
annually and submit any proposed modifications to the Board of Directors for
approval; and
8. Review and evaluate the Nominating Committee's performance annually with the
committee or individual designated by the Board of Directors to undertake such
review.
V. Reliance
The Committee, and each member of the Committee in his or her capacities as
such, shall be entitled to rely, in good faith, on information, opinions,
reports or statements, or other information prepared or presented to them by (i)
officers and other employees of the Corporation, which such member believes to
be reliable and competent in the matters presented, (ii) counsel, public
accountants or other persons as to matters which the member believes to be
within the professional competence of such person.
VI. Meetings
Subject to the Bylaws and resolutions of the Board of Directors, the Nominating
Committee shall meet not less than once a year at such time as the Chairman of
the Nominating Committee shall designate. The Nominating Committee shall fix its
own rules of procedure, and a majority of the number of members then serving on
the Nominating Committee shall constitute a quorum. The Nominating Committee
shall keep minutes of its meetings, and all action taken by it shall be reported
to the Board of Directors. The Committee may take action by meeting in person,
telephonically, or by unanimous written action.
EXHIBIT 99.2
Alanco Technologies, Inc.
Code of Business Conduct and Ethics
Introduction
Alanco Technologies (the Company) is committed to conducting its business with
honesty and integrity. The policies outlined in this Code are designed to ensure
that the Company's employees and officers (employees) and members of its board
of directors (directors) act in accordance with not only the letter but also the
spirit of the laws and regulations that apply to our business. Employees and
directors who violate this Code will be subject to disciplinary action.
Employees and directors are expected to read the policies set forth in this Code
and ensure that they understand and comply with them. Any questions about the
Code or the appropriate course of conduct in a particular situation should be
directed to the Company's General Counsel. Any violations of laws, rules,
regulations or this Code should be reported immediately. The Company will not
allow retaliation against an employee or director for such a report made in good
faith.
Any waiver of the provisions of this Code for executive officers or directors of
the Company may be made only by the board of directors or a committee of the
board and must be promptly disclosed to shareholders.
Responsibilities
1. Compliance with laws, rules and regulations
All employees and directors must respect and obey all laws that apply to our
business, including state and local laws in the areas in which the Company
operates. Any questions as to the applicability of any law should be directed to
the Company's General Counsel.
If a law conflicts with a policy in this Code, employees and directors must
comply with the law. If a local custom or policy conflicts with a policy in the
Code, employees and directors must comply with the Code.
2. Insider trading
The Company has a securities trading policy and all employees and directors must
abide by its terms. This policy, among other things, provides that employees and
directors may not buy or sell shares of the Company when they are in possession
of material, non-public information. They also are prohibited from passing on
such information to others who might make an investment decision based on it.
Employees and directors also may not trade in stocks of other companies about
which they learn material, non-public information through the course of their
employment or service. Any questions as to whether information is material or
has been adequately disclosed should be directed to the Company's General
Counsel.
3. Conflicts of interest
A conflict of interest occurs when the private interest of an employee or
director interferes or appears to interfere in any way with the interests of the
Company. Conflicts of interest can occur when an employee or director takes
action or has interests that could reasonably be expected to make it difficult
to make objective decisions on behalf of the Company or to perform his or her
duties effectively. Conflicts of interest also arise when an employee or
director, or a member of his or her family, receives improper personal benefits
as a result of his or her position with the Company. An employee or director
will not be deemed to have a conflict of interest solely on the basis of his
service on the board of directors of a company, or other involvement with a
company that is under common ownership, or has a business relationship, with the
Company, provided such relationship or involvement is fully disclosed to the
Company.
Conflicts of interest are prohibited as a matter of corporate policy, unless
such conflicts are fully disclosed to the Company's Board of Directors, and if a
director has the potential conflict, such director does not vote on any matter
related to the potential conflict. Any employee or director who becomes aware of
a conflict or potential conflict, or who has a question about whether a conflict
exists, should bring it to the attention of the Company's General Counsel or the
Company's Chief Executive Officer.
4. Corporate opportunities
Employees and directors are prohibited from taking for themselves personally any
opportunities that arise through the use of corporate property, information or
position and from using corporate property, information or position for personal
gain. Employees and directors are further prohibited from competing with the
Company directly or indirectly. Employees and directors owe a duty to the
Company to advance its legitimate interests when the opportunity to do so
arises.
5. Confidentiality
Employees and directors may learn information about the Company that is not
known to the general public or to competitors. Confidential information includes
all non-public information that might be of use to competitors, or harmful to
the Company or its customers if disclosed, or information that associates of the
Company have entrusted to it.
Employees and directors must maintain the confidentiality of information
entrusted to them by the Company or its associates, except when disclosure is
authorized or legally mandated. This obligation to protect confidential
information does not end when an employee or director leaves the Company. Any
questions about whether information is confidential should be directed to the
Company's General Counsel.
6. Fair dealing
Each employee and director shall endeavor to deal fairly with the Company's
shareholders, competitors, suppliers and employees. No employee or director
shall take unfair advantage of anyone through manipulation, concealment, abuse
of privileged information, misrepresentation of material facts, or any other
unfair practice.
7. Protection and proper use of Company assets
Theft, carelessness and waste have a direct impact on the Company's
profitability. Employees and directors have a duty to safeguard Company assets
and ensure their efficient use. Company assets should be used only for
legitimate business purposes, and employees and directors should take measures
to ensure against their theft, damage, or misuse.
Company assets include intellectual property such as trademarks, business and
marketing plans, salary information and any unpublished financial data and
reports. Unauthorized use or distribution of this information is a violation of
Company policy.
8. Recordkeeping
All of the Company's books, records, accounts and financial statements must be
maintained in reasonable detail, must appropriately reflect the matters to which
they relate and must conform both to applicable legal requirements and to the
Company's system of internal controls. All assets of the Company must be
carefully and properly accounted for. The making of false or misleading records
or documentation is strictly prohibited.
The Company complies with all laws and regulations regarding the preservation of
records. Records should be retained or destroyed only in accordance with the
Company's document retention policies. Any questions about these policies should
be directed to the Company's General Counsel.
9. Interaction with public officials
When dealing with public officials, employees and directors must avoid any
activity that is or appears illegal or unethical. The giving of gifts, including
meals, entertainment, transportation, and lodging, to government officials in
the various branches of U.S. government, as well as state and local governments,
is restricted by law. Employees and directors must obtain pre-approval from the
Company's General Counsel before providing anything of value to a government
official or employee. The foregoing does not apply to personal lawful political
contributions.
In addition, the U.S. Foreign Corrupt Practices Act prohibits giving anything of
value, directly or indirectly, to officials of foreign governments or foreign
political candidates in order to obtain or retain business. Illegal payments to
government officials of any country are strictly prohibited.
Compliance standards and procedures
No code of business conduct and ethics can replace the thoughtful behavior of an
ethical employee or director or provide definitive answers to all questions.
Since we cannot anticipate every potential situation, certain policies and
procedures have been put in place to help employees and directors approach
questions or problems as they arise.
1. Designated Ethics Officer
The Company's General Counsel has been designated as the Company's Ethics
Officer with responsibility for overseeing and monitoring compliance with the
Code. The Ethics Officer reports directly to the Chief Executive Officer and
also will make periodic reports to the Company's Audit/Corporate Governance
Committee regarding the implementation and effectiveness of this Code as well as
the policies and procedures put in place to ensure compliance with the Code.
2. Seeking Guidance
Employees and directors are encouraged to seek guidance from supervisors,
managers or other appropriate personnel when in doubt about the best course of
action to take in a particular situation. In most instances, questions regarding
the Code should be brought to the attention of the Company's General Counsel.
3. Reporting Violations
If an employee or director knows of or suspects a violation of the Code, or of
applicable laws and regulations, he or she must report it immediately to the
Company's General Counsel or the Chief Executive Officer. If the situation
requires it, the reporting persons identity will be kept anonymous. The Company
does not permit retaliation of any kind for good faith reports of violations or
possible violations.
4. Investigations
Reported violations will be promptly investigated. It is imperative that the
person reporting the violation not conduct an investigation on his or her own.
However, employees and directors are expected to cooperate fully with any
investigation made by the Company into reported violations.
5. Discipline/Penalties
Employees and directors who violate this Code may be subject to disciplinary
action, up to and including discharge. Employees and directors who have
knowledge of a violation and fail to move promptly to report or correct it and
employees and directors who direct or approve violations may also be subject to
disciplinary action, up to and including discharge. Furthermore, violation of
some provisions of this Code are illegal and may subject the employee or
director to civil and criminal liability.