SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarter ended . . . . . . . . . . . . . . . September 30, 2002
Commission file number . . . . . . . . . . . . . . . . . . . . .0-9347
ALANCO TECHNOLOGIES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0220694
--------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15575 N. 83rd Way, Suite 3, Scottsdale, Arizona 85260
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(480) 607-1010
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES XX NO
--- ---
As of November 5, 2002 there were 17,048,100 shares of common stock,
net of treasury shares, issued and outstanding.
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
Consolidated Balance Sheets
September 30, 2002 and June 30, 2002 ...................3
Consolidated Statements of Operations
For the three months ended September 30,
2002 and 2001....................................... 4
Consolidated Statements of Cash Flows
For the three months ended September 30,
2002 and 2001........................................5
Notes to Consolidated Financial Statements .................. 6
Note A - Basis of Presentation
Note B - Inventories
Note C - Deferred Revenues
Note D - Segment Data
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................7
PART II. OTHER INFORMATION
Item 2 Changes in Securities.........................................9
Item 6. Exhibits ....................................................10
Signature .............................................................10
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF
ASSETS
Sept 30,2002 June 30,2002
(unaudited)
------------ ------------
CURRENT ASSETS
Cash $ 179,000 $ 328,400
Accounts receivable, net 1,179,100 781,500
Inventories, net 1,512,900 1,256,400
Prepaid expenses and other current assets 95,500 79,000
------------ ------------
Total current assets 2,966,500 2,445,300
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 447,900 500,100
------------ ------------
OTHER ASSETS
Goodwill, net 5,318,400 5,318,400
Patents, licenses and software development,
net 1,076,600 1,131,700
Long-term notes receivable, net 179,900 194,200
Net assets held for sale 259,700 272,600
------------ ------------
Total other assets 6,834,600 6,916,900
------------ ------------
TOTAL ASSETS $ 10,249,000 $ 9,862,300
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable & accruals $ 1,949,700 $ 1,356,400
Credit line 547,000 500,000
Notes payable and capital leases, current 83,100 101,900
Deferred revenue, current 276,200 69,700
------------ ------------
Total Current Liabilities 2,856,000 2,028,000
------------ ------------
LONG TERM LIABILITIES
Notes payable and capital leases, long term 1,205,100 1,205,100
Deferred revenue, long term 85,600 85,600
------------ ------------
Total Long Term Liabilities 1,290,700 1,290,700
------------ ------------
TOTAL LIABILITIES 4,146,700 3,318,700
------------ ------------
Preferred stock, 51,900 and 50,600 shares
issued and outstanding, respectively 506,200 493,600
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, 17,548,100 and 17,515,600
issued, and 17,048,100 and
17,015,600 outstanding, respectively 63,404,800 63,386,700
Treasury stock, 500,000 shares at cost (375,100) (375,100)
Accumulated deficit (57,433,600) (56,961,600)
------------ ------------
Total shareholders' equity 5,596,100 6,050,000
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 10,249,000 $ 9,862,300
============ ============
The accompanying notes are an integral part of these financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE 3 MONTHS ENDED SEPTEMBER 30,
2002 2001
------------ ------------
NET SALES $ 2,391,600 $ 2,138,600
Cost of goods sold 1,497,500 1,247,400
------------ ------------
GROSS MARGIN 894,100 891,200
Selling, general and administrative expenses 1,333,700 1,273,600
------------ ------------
OPERATING LOSS (439,600) (382,400)
OTHER INCOME & EXPENSES
Interest expense, net (27,100) (7,800)
Other expense, net (1,800) 10,400
------------ ------------
LOSS FROM CONTINUING OPERATIONS (468,500) (379,800)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 9,100 (1,400)
------------ ------------
LOSS FROM OPERATIONS (459,400) (381,200)
Preferred stock dividend (12,600) --
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (472,000) $ (381,200)
============ ============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
- Continuing operations attributable
to common shareholders $ (0.03) $ (0.04)
============ ============
- Discontinued operations $ 0.00 $ (0.00)
============ ============
- Net Loss $ (0.03) $ (0.04)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,032,800 8,707,400
============ ============
The accompanying notes are an integral part of these financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (459,400) $ (381,200)
(Income) loss from discontinued operations (9,100) 1,400
----------- -----------
Net loss from continuing operations (468,500) (379,800)
Adjustments to reconcile net income to net
Cash used in operating activities:
Depreciation and amortization 113,400 64,000
Stock issued for services 18,100 23,000
Changes in:
Accounts receivable, net (397,600) 238,300
Inventories (256,500) 105,600
Prepaid expenses and other assets (5,500) (600)
Accounts payable and accrued expenses 593,300 253,400
Deferred revenue 206,500 --
----------- -----------
Net cash used in continuing operations (196,800) 303,900
----------- -----------
Net cash from discontinued operations 22,100 5,000
----------- -----------
Net cash used in operating activities (174,700) 308,900
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 3,200 6,700
Purchase of property, plant and equipment (6,100) (99,400)
Intangible assets, acquisition -- (160,000)
Purchase of treasury stock -- (24,000)
----------- -----------
Net cash provided by (used in) investing
activities (2,900) (276,700)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on borrowings 555,100 535,000
Repayment on borrowings (526,900) (558,300)
----------- -----------
Net cash provided by (used in) financing
activities 28,200 (23,300)
----------- -----------
NET INCREASE (DECREASE) IN CASH $ (149,400) $ 8,900
CASH AND CASH EQUIVALENTS, beginning of period $ 328,400 $ 81,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 179,000 $ 89,900
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 27,300 $ 29,300
=========== ===========
Non-cash activities
Value of stock issued for services $ 18,100 $ 23,000
=========== ===========
Preferred stock dividend in kind $ 12,600 $ --
=========== ===========
The accompanying notes are an integral part of these financial statements
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
Note A - Basis of Presentation
Alanco Technologies, Inc., an Arizona corporation ("Alanco" or
"Company")operates in two business segments: Data Storage Segment and RFID
Tracking Segment.
The unaudited condensed consolidated balance sheet as of September 30,
2002 and the related unaudited condensed consolidated statements of operations,
and cash flows for the quarters ended September 30, 2002 and 2001 presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States 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 adjustments
necessary consisted 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.
Note B - Inventories
Inventories have been recorded at the lower of cost or market. The
composition of inventories as of September 30, 2002, and June 30, 2002, are
summarized as follows:
September 30, 2002 June 30, 2002
(unaudited)
------------------ -------------
Finished goods $ 670,000 $ 613,300
Work-in-process 89,700 111,400
Raw material 926,700 705,200
----------- -----------
Total $1,686,400 $1,429,900
Less - reserve for obsolescence (173,500) (173,500)
----------- -----------
$1,512,900 $1,256,400
=========== ===========
Note C - Deferred Revenue
Deferred Revenue at September 30, 2002 and June 30, 2002 consist of the
following:
Sept. 30, 2002 June 30, 2002
(unaudited)
-------------- -------------
Billings in excess of cost and estimated
earnings on uncompleted contracts $ 260,600 $ 54,100
Extended warranty revenue 101,200 101,200
----------- ----------
Total 361,800 155,300
Less current portion (276,200) (69,700)
----------- ----------
Deferred revenue - long term $ 85,600 $ 85,600
=========== ==========
Note D - Industry Segment Data
Information concerning operations for the three months ended September 30, by
industry segment follows (unaudited):
2002 2001
------------ -----------
Revenue
Data Storage $ 909,200 $ 2,138,600
RFID Technology 1,482,400 --
----------- -----------
Total 2,391,600 2,138,600
----------- -----------
Gross Profit
Data Storage 399,900 891,200
RFID Technology 494,200 --
----------- -----------
Total 894,100 891,200
----------- -----------
Operating Income
Data Storage (169,100) (188,700)
RFID Technology (45,300) --
----------- -----------
Total (214,400) (188,700)
Less Corporate (227,000) (183,200)
Interest Expense, Net (27,100) (7,900)
Other 9,100 (1,400)
----------- -----------
Loss From Operations $ (459,400) $ (381,200)
=========== ===========
Depreciation and Amortization
Data Storage 35,900 59,400
RFID Technology 74,600 --
Corporate 2,900 4,600
----------- -----------
Total $ 113,400 $ 64,000
=========== ===========
Identifiable Assets
Data Storage 1,988,800 2,108,700
RFID Technology 7,707,400 6,991,300
Corporate 552,800 762,300
----------- -----------
Total $10,249,000 $ 9,862,300
=========== ===========
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.
General
Information on industry segments is incorporated by reference from Note
D 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. 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 or uncompleted RFID
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 90-day period) in both the Data
Storage Segment and the RFID 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
whenever events or circumstances indicate the carrying values may not be
recoverable through projected discounted cash flows.
Results of Operations - Three months ended 9/30/2002 versus 9/30/2001
Consolidated revenue for the quarter ended September 30, 2002 was
$2,391,600, compared to $2,138,600 for the comparable quarter of the previous
year, an increase of $253,000 or 11.8%. The increase in revenue is attributed to
the acquisition of the RFID tracking technology, effective June 1, 2002, a new
business segment for the Company that reported revenues during the quarter of
$1,482,400. Excluding the RFID Tracking Segment, revenue for the Data Storage
Segment decreased to $909,200, compared to $2,138,600 for the comparable
quarter, a decrease of $1,229,400, or 57.4%. 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 quarter was $459,400, compared to a
loss of $381,200 for the same quarter of the prior year. The increase in Loss
from Operations was due to RFID Tracking Segment losses, increases in interest
expense and increases in corporate expenses, offset by a reduction in the Data
Storage Segment operating loss. During the quarter the Company issued a
preferred stock dividend of $12,600, resulting in the Net Loss Attributable to
Common Stockholders of $472,000, or $.03 per share, compared to $381,200, or
$.04 per share, in the comparable quarter. The 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.
Operating results for the quarter reflected income from discontinued
operations of $9,100, compared to a loss from discontinued operations of $1,400
for the comparable quarter in 2001.
Selling, general and administrative expenses for the current quarter
increased to $1,333,700, compared to $1,273,600 incurred in the comparable
quarter of 2001. The increase was attributable primarily to the additional
selling, general and administrative expenses of the new RFID Tracking Segment
operations, offset by reduction of sales commissions and the elimination of
selling, general and administrative costs associated with the SanOne SAN
subsidiary that has ceased operation.
Liquidity and Capital Resources
The Company's current assets at September 30, 2002 exceeded current
liabilities by $110,500, or a current ratio of 1.04 to 1, compared to a current
ratio of 1.20 to 1 at fiscal year end June 30, 2002. The decrease in current
ratio resulted primarily from the current loss for the quarter and increases in
current assets.
Accounts receivable of $1,179,100 at September 30, 2002, reflects an
increase of $397,600, or 50.9%, from the $781,500 reported as consolidated
accounts receivables at the end of fiscal year 2002. The increase resulted from
normal contract receivables for the RFID Tracking Segment of $661,600 at
September 30, 2002, compared to $181,400 reported at June 30, 2002. The Data
Storage Segment accounts receivables decreased to $517,500, a decrease of
$82,600, or 13.8%, compared to the $600,100 reported at June 30, 2002. The Data
Storage Segment accounts receivable balance at September 30, 2002 represented
fifty-one days sales in receivables compared to forty-one days sales at June 30,
2002. The increase in day's sales in receivables resulted from a larger
percentage of sales occurring in the final month of the quarter compared to the
prior fiscal year end results.
Consolidated inventories at September 30, 2002 amounted to $1,512,900,
compared to $1,256,400 at June 30, 2002. The increase resulted from increases in
inventories required for existing contracts for the RFID Tracking Segment that
reported $529,500 in inventory at September 30, 2002, compared to $257,200 at
fiscal year end. The decrease in Data Storage Segment inventory was not
proportionate with the decrease in Data Storage Segment sales and reflects the
segment's inability to proportionately reduce inventory balance during the year
as revenues decreased from prior levels.
The Company has 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, 2002, the Company had drawn $1,047,000 under
the line of credit, which expires December 31, 2003. Under the line of credit
agreement, the Company must maintain a minimum balance due of at least $500,000
through December 31, 2003. Due to the $500,000 balance requirement and the
December 2003 expiration date, the $500,000 minimum balance is presented at June
30, 2002 and September 30, 2002 as long-term notes payable - bank. At September
30, 2002, $253,000 was available under the line of credit agreement.
Cash used in operations for the quarter was $174,700, an increase of
$494,100 when compared to cash generated from operations of $308,900 for the
comparable quarter ended September 30, 2001. The increase in cash used in
operations was due primarily to increases in accounts receivable and inventories
during the quarter compared to a reduction in accounts receivable and
inventories during the prior year comparable quarter.
During the quarter the Company purchased approximately $6,100 of
additional equipment compared to $99,400 purchased in the quarter ended
September 30, 2001. Repayment on borrowing during the quarter amounted to
$526,900, while advances from borrowing amounted to $555,100.
Item 3 - 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 past 90
days of 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 Company is not currently a party in any litigation. However, the
Company's Board of Directors has received written communications from the Board
of Directors of Technology Systems International, Inc., a Nevada corporation
("TSIN") from which the Company acquired its RFID tracking operations, effective
June 1, 2002. The communication indicated dissatisfaction with the earn-out
formula set forth in the acquisition agreement and requests special
consideration and/or modifications. The Company's Board of Directors has
reviewed the communications from TSIN in detail and has responded that based
upon the information presented by TSIN, no modification to the contract would be
appropriate. If TSIN were to pursue any legal action against the Company in this
matter, the Company is confident it will prevail. The letter received and the
Company's response is attached as Exhibits A and B, respectively, to this
filing.
Item 2 - CHANGES IN SECURITIES
During the quarter ended September 30, 2002, the company issued
18,100 shares of common stock for services rendered.
Item 6. EXHIBITS 10.9
Exhibit A - Letter from Technology Systems International, Inc. Board
of Directors
Exhibit B - Letter from Alanco Technologies, Inc. Board of Directors
Exhibit C - Restated Articles of Incorporation
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 there under duly authorized.
ALANCO TECHNOLOGIES, INC.
(Registrant)
/s/John A. Carlson
---------------------
John A. Carlson
Chief Financial Officer
DATE: November 14, 2002
CERTIFICATION
I, Robert R. Kauffman, President 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 September30, 2002 (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: November 14, 2002
By /s/ Robert R. Kauffman
President and Chief Executive Officer
I, John A. Carlson, 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 September 30, 2002 (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: November 14, 2002
By /s/ John A. Carlson
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 September 30, 2002 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
November 14, 2002
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 September 30, 2002 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
November 14, 2002
EXHIBIT A
Technology Systems International, Inc.
Board of Directors
INTRODUCTION
In an attempt to address concerns and planned actions at Alanco
Technologies, Inc. ("Alanco") by several large Technology Systems International,
Inc. ("TSI") shareholders, a number of TSI Directors would like for the Alanco
Board of Directors to review this letter and determine if some amicable solution
or resolution of these concerns can be provided to accommodate the TSI
Shareholders and enable Alanco to go forward without any disruption to their
business plan.
October 17, 2002
To: The Board of Directors of Alanco Technologies, Inc.
This letter is sent to the Alanco Board of Directors ("BOD") by four
(4) of the six (6) Directors of TSI. The two (2) directors not included are Mr.
Robert Kauffman, Alanco CEO and Chairman and Mr. Greg Oester, CEO of TSI, the
two individuals who signed the Amended Acquisition Agreement for their
respective companies. It is obvious that the two signers are in a conflict of
interest position and were not involved in any of these discussions which
resulted in this letter being drafted and provided to each Alanco BOD member.
The process of the merging of TSI with Alanco was based on the
financial needs of both companies as neither was having success in raising
capital by the end of Calendar year 2001. TSI's over riding issue was to raise
sufficient capital to carry out its business plan. It was communicated to TSI,
by Alanco, that with the merger of the two entities that Alanco would be able to
accommodate TSI's financial needs and adequate funds would be in place for the
successful implementation of TSI's business plan. The assurance that Alanco
would be able to fulfill this financial role with its existing resources, line
of credit, proposed sale of two (2) data storage companies (projected at US 3.0
Million Dollars), and the ability to raise capital with its planned acquisition
of TSI ultimately sealed the Board's decision to merge with Alanco. The adequate
funding has not occurred as Alanco/TSI continues to struggle to make payroll.
During the discussion phase of putting an acquisition agreement
together, a number of off-site meetings occurred between Alanco's Senior
Management, Greg Oester (CEO of TSI) and select TSI Shareholders. These meetings
occurred on an ad hoc basis and no notes were recorded and the content and
assurances remain a point of contention. It is understood that there was
discussion concerning problems with an adverse take over by TSI which would
affect the NASDAQ listing of Alanco, therefore the creation of an earn out
schedule was formulated as part of the plan for acquisition. There remains
contention over whether there were assurances given to TSI Shareholders
Letter to Alanco BOD Draft Page 1 of 3
Technology Systems International, Inc.
Board of Directors
concerning the earn-out formula or not at these meetings prior to the Board's
discussion on February 19, 2002 to approve the Amended Acquisition Agreement.
Let me restate, that the undersigned Directors desire an amicable
solution to these noted concerns and foremost feel that the rights of all TSI
Shareholders be honored.
When a TSI Director at the February 19, 2002 Board of Directors meeting
requested consideration for Board seats on behalf of TSI Shareholders, this
request was flatly denied by Alanco's CEO and TSI Director Mr. Robert Kauffman.
This position by Alanco of not allowing any TSI Director's on its BOD coupled
with the diminution of TSI's Shareholders voting rights from a Class A share
with 1 for 1 voting rights to a Class B share with a 1 for 100 voting right
exacerbates the above noted position of Alanco (no representation on its Board
for TSI Shareholders).
As a result of the above, the undersigned Directors have reviewed
Nevada Revised Statutes ("NRS") 78.139 re: "DIRECTORS AND OFFICERS: DUTIES,
PRESUMPTIONS AND POWERS WHEN CONFRONTED WITH CHANGE OR POTENTIAL CHANGE IN
CONTROL OF CORPORATION". For the record, the undersigned Directors at the TSI
Board of Directors meeting on February 19, 2002 felt they were taking
appropriate action based on the information made available to them at that time.
However, in view of our obligations pursuant to NRS 78.139 and shareholders
dissatisfaction with the lack of representation on the Alanco BOD this has
become a serious point of contention and as Directors we feel Alanco should
share our concerns and revisit their position on this matter.
Another issue concerning the Amended Acquisition Agreement is that
shareholders affected by the Excluded Liabilities never were given any list or
document that spelled that out prior to the vote on acceptance of the terms of
payout from the Acquisition Agreement. In addition none of the undersigned
Directors of TSI received this list of Excluded Liabilities prior to or at the
February 19, 2002 TSO BOD Meeting. It is the position of these Directors that a
number of TSI Shareholders in good faith provided working capital, in the form
of loans, for the continuation of operations of TSI prior to the merger with
Alanco and are all deserving to be paid and these liabilities should be the
responsibility of Alanco.
The last issue included for your review is the earn-out schedule for
distribution of shares to TSI Shareholders and the degree that the lack of
adequate funding has impacted this schedule. The inability of TSI to not make
its earn out in accordance with the schedule and Alanco's inability to sell its
2 data storage companies for US 3.0 Million Dollars may not be anyone's fault,
but both impact greatly these two entities and the TSI Shareholders should not
take the brunt of both of these circumstances.
Letter to Alanco BOD Draft Page 2 of 3
Technology Systems International, Inc.
Board of Directors
Hopefully, you as Alanco Board members will review these and other
matters of serious concerns not listed in this letter carefully and determine
what accommodation can be made for the TSI Shareholders concerning these issues.
All of the undersigned would be more than happy to meet with the BOD of Alanco
at your earliest possible convenience to discuss our concerns. Thank you for
your consideration concerning these matters and we respectfully request that you
reply within in 14 days.
Respectfully yours,
/s/ James G. Ricketts
James G. Ricketts, Ph.D.
Chairman, TSI
/s/ Frederick M. Carrington
Frederick M. Carrington, Ph.D.
Director, TSI
/s/ Evert Eggink
Evert Eggink, Captain
Director, TSI
/s/ Kevin L. Jones
Kevin L. Jones
Director, TSI
Letter to Alanco BOD Draft Page 3 of 3
EXHIBIT B
November 4, 2002
To the Board of Directors
Technology Systems International, Inc. (Nevada)
Following a diligent review of the background and historical facts concerning
the acquisition by a subsidiary of Alanco Technologies, Inc, ("Alanco") of the
business and assets of Technology Systems International, Inc ("TSI"), meetings
with two of our directors on a one-to-one basis with representatives of TSI, and
a review of various correspondence received by the Alanco board, including your
letter of October 17, 2002, the Alanco board sets forth its response to the
issues raised by or on behalf of TSI as follows.
The history of the negotiations culminating in the acquisition are set forth in
Alanco's Proxy Statement filed with the Securities and Exchange Commission on
April 22, 2002 with respect to the Alanco Shareholders Meeting held May 14,
2002, at which issuance of the Alanco shares necessary for the acquisition of
TSI was approved. Those negotiations initially resulted in a written letter of
intent which was executed by both Alanco and TSI. The letter of intent had the
following language concerning the consideration to be received by TSI for its
assets:
Acquisition Consideration. The parties intend that the business
combination of TSI and Alanco shall be consummated with the issuance of
Alanco stock on an approximate basis of one to one with the outstanding
shares of TSI which is assumed to approximate 24 million shares at
closing. The shares and other consideration to be paid to TSI for TSI
Assets shall be paid as follows:
a. Alanco will immediately advance TSI the sum of $25,000 pursuant
to terms and conditions as specified in the attached form of Note.
b. Alanco to exchange 6,000,000 shares of Alanco common stock for
TSI Assets at closing.
c. In addition, Alanco shall transfer to TSI up to 18 million
additional shares (total of 24 million shares) depending on
financial performance of TSI over the six-month period ending June
30, 2002 and the twelve-month period ending December 31, 2002.
Timing and amount of shares distributed to be determined by an
approved formula.
d. Sub paragraphs b. and c. above may be amended to include the
payment of preferred stock under terms acceptable to both parties.
The letter of intent was approved by the TSI board of directors in writing on
December 18, 2001. Clearly, the concept of an "earn-out" with respect to TSI's
financial performance for 2002 was part of our agreement from the very start of
negotiations. Further, we understand that a copy of the letter of intent,
together with a draft of the earn-out formula from the first Acquisition
Agreement, was sent to all of the TSI shareholders in late December, 2001 or
early January, 2002, in connection with solicitation of TSI shareholder approval
for the proposed transaction. The wording of the resolution, which was approved
by over 70% of the TSI shareholders (including each of the TSI directors owning
shares of TSI - other than Mr. Ricketts whose shares were purchased by Alanco),
included the following language:
WHEREAS, the terms of the Sale would require all Shareholders of
Technology Systems International, Inc. to receive (pro rata) shares of
Alanco Common Stock (6,000,000 shares at the close of the transaction
and up to an additional 18,000,000 shares pursuant to an earn-out
formula) thereby resulting in Technology Systems International, Inc.
becoming a wholly owned subsidiary of Alanco,
RESOLVED, that the Shareholders hereby approve the Sale of the assets
of the Corporation and instruct the Officers, Directors and Agents of
the Corporation to take any actions necessary to effectuate said sale.
Again, the earn-out concept was known to and approved by the TSI shareholders
from the beginning.
Further, the minutes of the TSI board of directors meeting of February 19, 2002
reflect discussions among the TSI board members with respect to the earn-out
formula including a discussion of some of the parameters comprising the earn-out
formula. At that time, the earn-out shares were set forth in the Amended
Acquisition Agreement to be Class B common shares of Alanco, a fact specifically
mentioned in the minutes of the meeting. After the discussion, the TSI board
unanimously (except for Bob Kauffman's abstaining) approved the Amended
Acquisition Agreement.
At the closing of the transaction on May 14, 2002, Alanco requested and received
a written certification by Everett Bell, TSI's corporate secretary, of the
adoption by the TSI board of directors and shareholders of actions approving the
transaction. That certification was relied upon by Alanco in closing the
transaction.
As you know, Alanco is publicly traded with approximately 4,000 shareholders.
Alanco prepared and sent to all of its shareholders its SEC reviewed Proxy
Statement describing the transaction and soliciting votes approving the same.
The Proxy Statement included a copy of the Amended Acquisition Agreement and a
description of all of its important provisions. The Proxy Statement also
included a statement that the agreement would not be significantly modified from
the one presented without further shareholder approval. Therefore, no
significant change to the agreement is possible at this time without further
Alanco shareholder approval.
With the above background, we will respond to each of the issues which we
believe have been presented by your October 17th letter.
1. Issues concerning the earn-out. Although it is somewhat difficult to
precisely ascertain the specific claims and requested agreement modifications
sought, it is apparent that some TSI people believe that the earn-out is unfair
to the TSI shareholders and should be changed, perhaps by extending the earn-out
period. We understand the argument advanced by TSI to be as follows:
a. The earn-out was added to address requirements with respect to
Alanco's NASDAQ listing requirements. Actually, the earn-out was
integral to the proposed transaction from the beginning and the
exact earn-out formula was also devised to address the NASDAQ
situation. TSI was only beginning to make sales and had large
expectations concerning future sales not yet made. Obviously, the
value of TSI turns upon the success of its Prism System and the
actual system sales. If few actual sales occur, then TSI has little
value. On the other hand, if the majority of TSI's projected sales
actually occurred, then TSI's value would be greatly enhanced.
Alanco's approach to valuing TSI was based upon this reality. The
earn-out formula approach was utilized to assure Alanco that it
would not be paying too much for TSI if the sales failed to
materialize, while simultaneously rewarding the TSI shareholders if
the projected sales actually occurred. Furthermore, the TSI sales
projection which formed the basis of the earn-out formula, was the
exact same projection developed by TSI management several months
prior to the December 2001 preliminary acquisition agreement with
Alanco. This approach was advanced by Alanco from the very
beginning and was the approach approved by the TSI shareholders and
directors months before the acquisition closing.
The determination by Alanco of the number of shares to be
paid at closing was, however, related to Alanco's NASDAQ listing
status. Alanco was aware that its listing would be jeopardized if
NASDAQ felt that the transaction would result in a "reverse
merger." This limited the initial share distribution at closing to
less than approximately 8,000,000 (100% of Alanco's then
outstanding shares) and less than 7,000,000 due to the proposed
issuance of an additional 1,000,000 shares to TSI creditor, EMS. In
its final consideration, based upon these and other business
considerations, Alanco management determined that the number of
initial shares to be issued to TSI should be 6,000,000 shares at
closing.
Alanco subsequently learned that the earn-out shares would
also be counted by NASDAQ in their analysis of whether a reverse
merger would take place. After much discussion with NASDAQ, it was
determined that NASDAQ would not deem the transaction to be a
reverse merger if the Alanco shares to be issued to TSI, including
the potential earn-out shares, would not give TSI shareholders the
right to elect a majority of Alanco's directors, and therefore the
TSI shareholders would not control Alanco. Therefore, it was
determined that the earn-out shares should be a new class of Alanco
Class B common shares with limited voting rights. The Acquisition
Agreement was amended accordingly, and it was the Amended
Acquisition Agreement that was specifically approved by the TSI
board of directors at its meeting in February, 2002.
Allegations have been made that certain Alanco officers
verbally stated that 1) the earn-out portion of the shares would be
issued irrespective of TSI's performance, and/or 2) that those
shares would be regular Class A common shares, again irrespective
of the Acquisition Agreement. Besides the fact that no Alanco
officer made such statements, such verbal commitments would be
patently illegal and unenforceable without approval by Alanco's
board of directors and as indicated above, its shareholders.
Irrespective of the origin of the earn-out formula, or its
details, the formula was in the Amended Acquisition Agreement from
early February, 2002, and the formula was approved by the TSI board
with discussion that the final derivation of the formula also met
the approval granted by the TSI shareholders. It is inappropriate
to raise issues concerning the earn-out formula for the first time
in July of 2002, six months following TSI board and shareholder
approval and two months after the closing.
b. An extension of time for the earn-out formula to be met should be
granted. It seems that this argument has been primarily advanced
based upon an allegation that Alanco has not adequately funded the
TSI operation thereby impacting the TSI operation's ability to meet
the earn-out formula in the allotted time frame. In this regard, it
has been alleged that Alanco's credit line expired and that Alanco
has not sold its other operating subsidiaries, thereby depriving
TSI of adequate funding.
Alanco has fully funded the TSI operation. In the time period from
the December 2001 Preliminary Acquisition Agreement to the May 2002
closing, Alanco raised approximately $1.5 million in new equity
financing with Alanco advancing TSI approximately $500,000 cash for
its operations through the May 2002 closing, and has continued to
supply all of TSI's cash needs. Although the old Alanco bank credit
line was due to expire at the end of June, 2002, Alanco arranged a
much more flexible credit facility to replace the bank line in
mid-June, 2002. Alanco was never without an adequate credit line,
and in fact, has never drawn the full amount available under its
current credit facility. The allegations that Alanco has not had
the necessary cash to fund the TSI operations is simply wrong. In
fact, the TSI operations have expanded since the acquisition by two
new engineers and an additional sales person. Both the president
and executive vice president of TSI have stated that TSI's sales
and business performance have not been hindered by any funding
shortage.
The concern regarding Alanco's disposition of its other
operating subsidiaries is irrelevant relative to TSI meeting the
earn-out formula. As indicated above, TSI sales have not been
hindered by any lack of funding.
If TSI fails to meet the earn-out formula, it will not be
due to any lack of effort or cash expended by Alanco. It will
simply be because of factors beyond our control and that is exactly
why the earn-out formula was part of the transaction in the first
place.
2. Issues concerning Alanco board membership. You have advanced the position
that TSI should have the right to appoint directors to Alanco's board of
directors. This argument is particularly confusing in light of the minutes of
the TSI Board Meeting of February 19, 2002 and your letter of October 17th,
which both indicate that board membership was specifically discussed during
negotiations with the result that Alanco CEO, Bob Kauffman, firmly stated that
no changes in Alanco's Board would occur as a result of the acquisition, and the
Amended Acquisition Agreement has no provision allowing TSI to appoint any board
members. In other words, this matter was negotiated and agreement reached to the
effect that no Alanco Board seats would be provided to TSI representatives.
3. Issues concerning Excluded Liabilities. Your letter of October 17th indicates
that no one saw a list of Excluded Liabilities prior to the TSI board meeting of
February 19, 2002. Apparently, there is some confusion. There is no separate
list or schedule to the Acquisition Agreement of Excluded Liabilities. Section
2.2 of the Amended Acquisition Agreement, which the TSI board had and approved
at their February meeting, sets forth the liabilities which were not to be
assumed by Alanco, that is, the Excluded Liabilities. A number of categories of
excluded liabilities are set forth with the final provision in subparagraph (h)
of: "[a]ny liability known or unknown, not assumed by Alanco under the
provisions of Section 2.1 above." In other words, there is no Excluded Liability
list as all liabilities were excluded other than those specifically assumed
pursuant to section 2.1 of the Agreement. Furthermore, Section 2.1 states that
the only liabilities to be assumed were those specifically set forth on Schedule
2.1 to the agreement. If the TSI board failed to review Schedule 2.1, then they
could only assume that no liabilities were to be assumed.
Your reference to the list of Excluded Liabilities is likely a reference to
Schedule 2.1-2 where certain obligations of TSI to some of its shareholders with
respect to advances made by such shareholders is set forth. Rather than being
Excluded Liabilities, these liabilities are specifically assumed contingent upon
reaching a net profit of $1,000,000 from the TSI operations. Similar to the
stock earn-out provisions, this additional consideration to be paid in the form
of Alanco assuming the obligation to pay these TSI liabilities is contingent
upon future TSI operations, namely, the TSI operation achieving $1,000,000 in
profit.
Your letter of October 17th also requests review of "other matters of serious
concerns not listed in this letter." We have addressed all matters that we
understand have been raised and hope that all important issues have been
addressed. We can only assume any issues not addressed are not very significant
if you did not find them important enough to mention in your letter of October
17th.
We hope that our explanation of the actual events pertinent to the transaction,
and our explanation of the same, is of some aid to you. We do not believe it is
appropriate to modify the agreement, and could not do so without a ratification
vote of our shareholders, which we are unwilling to recommend as it would not be
in the best interest of our shareholders to do so.
By Unanimous Resolution of the Board of Directors
of Alanco Technologies, Inc.
/s/ Adele Mackintosh
Adele Mackintosh, Secretary
EXHIBIT C
SECOND RESTATED
ARTICLES OF INCORPORATION
OF
ALANCO TECHNOLOGIES, INC.
ARTICLE I
The name of the Corporation shall be ALANCO TECHNOLOGIES, INC..
ARTICLE II
The known place of business of the Corporation shall be 15575 North
83rd Way, Suite 3, Scottsdale, Arizona 85260.
ARTICLE III
The Corporation initially intends to engage in the business of
researching, designing, manufacturing and selling environmental technology and
related equipment, to engage in the business of mining, and to perform any and
all things related to said business.
ARTICLE IV
The authorized capital stock of the Corporation shall consist
of Seventy-Five Million (75,000,000) shares of Class A Common Stock, Twenty-Five
Million (25,000,000) shares of Class B Common Stock, and Twenty-Five Million
(25,000,000) shares of Preferred Stock.
Upon filing of Articles of Amendment to the Corporation's
Articles of Incorporation with the Arizona Corporation Commission adopting this
Article IV in replacement of the former Article IV of the Corporation's Articles
of Incorporation, each issued and outstanding share of the Corporation's former
Common Stock shall automatically be converted into one share of Class A Common
Stock
The holders of the Class A Common Stock shall be entitled to
one vote for each share held by them of record on the books of this Corporation,
and subject to any preferential rights of the Preferred Stock, shall participate
equally with all other holders of shares of Class A Common Stock and Class B
Common Stock with respect to dividends and receiving the net assets of the
Corporation upon dissolution.
The holders of the Class B Common Stock shall be entitled to
one-one hundredth (1/100th) of one vote for each share held by them of record on
the books of this corporation, and subject to any preferential rights of the
Preferred Stock, shall participate equally with all other holders of shares of
Class A Common Stock and Class B Common Stock with respect to dividends and
receiving the net assets of the Corporation upon dissolution.
The Preferred Stock shall be issued in such series with such
designation, preferences, voting rights, privileges and such other restrictions
and qualifications as the Board of Directors may by resolution establish in
accordance with Arizona Revised Statutes Section 10-602, or its successor. Any
previous certificates filed pursuant to said section shall remain in effect.
ARTICLE V
The business and affairs of this Corporation shall be conducted by a
Board of Directors of not less than three (3) and no more than nine (9) members.
The directors need not be shareholders. The Board of Directors shall have the
power to increase or decrease the Board within the limits above provided. The
Board of Directors may also fill any vacancies which may occur in the Board of
Directors resulting from an increase in the Board of Directors or otherwise,
pending the next annual meeting of the stockholders.
The Board of Directors shall be elected at the regular annual meetings
of the stockholders.
The Directors shall each year upon their election organize into a Board
of Directors and elect a President and/or Chief Executive Officer, one or more
Vice Presidents, a Secretary and a Treasurer, any two (2) of which offices,
except the offices of the President and/or Chief Executive Officer and Vice
President, or President and/or Chief Executive Officer and Secretary, may be
held by the same persons. All officers shall serve for one (1) year or until
their successors are elected and qualified.
The Board of Directors of this Corporation shall have power without any
action on the part of the stockholders to make, alter, amend or repeal By-Laws
of the Corporation.
ARTICLE VI
Pursuant to the vote of the holders of a majority in interest of the
capital stock issued and outstanding, the Board of Directors shall have the
power and authority to lease, sell, assign, transfer, convey or otherwise
dispose of the entire property of the Corporation, irrespective of the effect
thereof upon the continuance of the business of the Corporation and the exercise
of its franchise; but the Corporation shall not be dissolved, except as provided
by the laws of the State of Arizona.
ARTICLE VII
No director of the Corporation shall be liable to the Corporation or
its shareholders for money damages for the breach of fiduciary duty as a
director, except for liability for any of the following: (i) the amount of a
financial benefit received by a director to which such director is not entitled;
(ii) an intentional infliction of harm on the Corporation or its shareholders;
(iii) a violation of A.R.S. 10-833; or (iv) an intentional violation of criminal
law. The directors of the Corporation shall be indemnified for liability, as
defined in A.R.S. 10-850, to any person for any action taken, or any failure to
take any action as a director, except liability for any of the exceptions
described in the prior sentence and except in connection with any matter for
which indemnification is prohibited under A.R.S. 10-851(D), to the fullest
extent permitted by the Arizona Business Corporation Act, A.R.S. 10-101 et seq.
The officers of the Corporation shall be indemnified to the same extent as
directors of the Corporation; and any officer who is not also a director or who
is a party to a proceeding on the basis of an act or omission solely as an
officer shall further be indemnified against liability for any of the exceptions
described in the first sentence of this Article VII, except that an officer who
is not also a director shall not be indemnified for (a) liability in connection
with a proceeding by or in the right of the Corporation other than for
reasonable expenses incurred in connection with the proceeding; or (b) liability
arising out of conduct that constitutes: (i) receipt by the officer of a
financial benefit to which the officer is not entitled; (ii) an intentional
infliction of harm on the Corporation or the shareholders; or (iii) an
intentional violation of criminal law. If the Arizona Business Corporation Act
is amended to authorize corporate actions further eliminating or limiting the
personal liability of officers or directors, or to expand the matters for which
indemnification is permissible, then the liability of an officer or director of
the Corporation shall be automatically eliminated or limited and the
indemnification of the officers and directors shall be automatically expanded,
to the fullest extent permitted by the Arizona Business Corporation Act, as so
amended, without any further corporate or shareholder action being required. Any
repeal or modification of this Article VII by the shareholders of the
Corporation shall not adversely affect any right or protection of an officer or
director of the Corporation existing at the time of such repeal or modification.
ARTICLE VIII
The private property of the officers, directors and stockholders of the
Corporation shall be exempt from all corporate debts of any kind whatsoever.
ARTICLE IX
The name and address of the statutory agent of the Corporation is: John
A. Carlson, 15575 North 83rd Way, Suite 3, Scottsdale, Arizona 85260. The
statutory agent may be changed by the Corporation at any time by the filing of
an appointment of a successor statutory agent.