SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-16423
CITADEL ENVIRONMENTAL GROUP, INC.
(Name of Small Business Issuer in Its Charter)
Colorado 84-0907969
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
621 17th Street, Suite 1730
Denver, Colorado 80293
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (303)297-9656
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.[ ]
The issuer's revenues for the most recent fiscal year were $ 0.
The aggregate market value of the voting stock held by non-affiliates,
based upon the average bid and asked prices of the Common Stock on April 30,
1999 was $ 1,070,791. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares outstanding of the issuer's Common Stock, as of
April 30, 1999 was 7,470,650.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE> 1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Citadel Asset Management, Ltd. was registered as an investment adviser under
the Investment Advisers Act of 1940 upon its incorporation in Colorado in
July 1983 and,until September 1992, was primarily engaged in the business of
rendering investment advisory and management services. The Company was
inactive from fiscal 1993 through fiscal 1995. The name was changed to
Citadel Environmental Group, Inc. (The "Company", or "Citadel") in August
1996.
The Company's Articles of Incorporation were amended in January 1995 to
increase the Company's authorized common stock to 25,000,000 shares with no
par value, convert each outstanding share of Series A preferred stock into
one share of common stock, and eliminate all unpaid dividends on any share of
preferred stock.
On August 12, 1996 Citadel acquired all the outstanding common stock of
Tonopah Resources International, Inc., ("TRI"). All of the outstanding common
stock of TRI was acquired for 1,050,000 shares of newly issued common stock
of Citadel, and 1,500,000 shares of Series A Preferred, 1,500,000 shares of
Series B Preferred, and 2,000,000 shares of Series C Preferred. In
conjunction with the acquisition, Citadel assumed or guaranteed $1,134,000
of TRI indebtedness.
Following the acquisition, the shareholders of TRI owned approximately 56% of
the outstanding shares of Citadel's common stock and 100% of Citadel's
preferred shares. Effective September 30, 1996 the Board of Directors of the
Company voted to discontinue the operations of TRI. In conjunction with the
discontinuance and in order to strengthen the financial position of the
Company and encourage new investors, the Company issued 2,840,000 shares of
Citadel Common Stock in exchange for all of the Series A, B and C Preferred
Stock and the cancellation of $1,100,000 in TRI debt. On September 22, 1997,
the Company sold its equity interest in TRI to the Chairman of the Board of
Citadel for $9,250 in cash. (See Item 12. "Certain Relationships and Related
Transactions").
On March 26, 1997, the Company acquired a 64% interest in Applied Medical
Recovery, Inc. ("AMR"), an Arizona corporation, engaged in reprocessing and
recycling of non-critical medical instruments and devices in exchange for
1,633,608 shares of common stock. In March 1998 Citadel tendered its
investment in AMR to Alliance Medical Corporation ("Alliance"). Alliance was
established for the sole purposes of acquiring controlling interest of both
AMR and a direct competitor, Orris, Inc.
The Company's executive offices are located at 621 17th Street, Suite 1730,
Denver, Colorado 80293 and its telephone number is (303) 297-9656.
<PAGE> 2
DESCRIPTION OF BUSINESS
The Company acquired a 64% interest in Applied Medical Recovery, Inc. ("AMR"),
an Arizona corporation, engaged in reprocessing and recycling of non-critical
medical instruments and devices on March 26, 1997. At the time of the
acquisition, it was anticipated that a subsequent business combination
involving AMR would occur in preparation for an anticipated initial public
offering.
In February 1998 Citadel tendered its investment in AMR to Alliance Medical
Corporation ("Alliance"). Alliance was established for the sole purpose of
acquiring controlling interest of both AMR and a direct competitor, Orris,
Inc. Concurrent with Citadel, the majority shareholders' of Orris agreed to
tender their shares to Alliance. Citadel received 621,025 shares of Alliance
common stock in exchange for its equity interest in AMR, representing an
ownership interest of approximately 30%. As this business combination
involving AMR was anticipated when Citadel made its initial investment, it
was expected from the onset that Citadel's control position in AMR would
only be temporary. Accordingly, the Company's investment in AMR was accounted
for under the equity method on the December 31, 1997 balance sheet of Citadel.
Alliance and its subsidiaries have developed a proprietary service which
allows for the recovery and re-use of previously used and contaminated,
(disposable) non-critical surgical instruments and related medical devices.
Prior to the creation of the independent reprocessor of surgical instruments
and/or medical devices, only hospitals reprocessed instruments. Hospitals do
not fall under the regulation of the FDA and therefore no known regulations
are currently in place.
Instruments and/or devices are segregated and collected at the point of use in
specially designated containers, reprocessed at Alliance's plants and are "sold
back" to the healthcare facility (point of origin) for reuse. Alliance
believes that its reprocessing system may save the healthcare facility up to
50% in instrument replacement costs.
The types of noncritical instruments and/or devices Alliance reprocess
include: floor grade instruments (laceration and suture trays); laparoscopic
babcocks, graspers, scissors; cutting and saw blades; knives, shears,
forceps, burs, and others.
The reprocessing system protocol includes performing the following general
functions:
1) Initial cleaning - both ultrasonic and manual;
2) Log-in inspection - tracking each instrument for individual history;
3) Sharpening and honing (if necessary);
4) Quality control microscopic inspection;
5) Final cleaning - instrument is dried and lubricated (if necessary)
and prepared for packaging;
6) Quality control inspection;
7) Packaging and sterilization;
8) Quality control inspection;
9) Sterilization of instrument is validated by independent laboratory;
and
10) Instrument shipped back to healthcare facility client for reuse.
<PAGE> 3
Under ordinary conditions, instruments can be reprocessed from three to eight
times, depending upon the nature and quality of the instrument. Once an
instrument is no longer usable by Alliance's customers, the instrument may be
sold into the foreign (overseas) medical instrument markets, in bulk to
metal recyclers, to morticians or, disposed of through regular in-house
medical waste sterilization/disposal.
Industry research indicates that approximately 40 billion medical instruments
and devices are utilized in the U.S. each year. Alliance believes that
approximately 15-20% of these instruments and devices are candidates for
Alliance's reprocessing protocol. Alliance's reprocessing service fees range
from $5.00 to $300.00 per instrument. Fees are customarily based on the type
of instrument reprocessed.
Alliance has developed an array of services which allow hospitals and surgery
centers to minimize the generation of non-recyclable medical waste. Alliance's
recovery and reprocessing services address both used and unused medical products
utilized in intervention, diagnostic and surgical procedures.
Alliance's programs intend to safely and effectively collect for recycle
and/or resale: (i) disposable operating room towels, (ii) stainless steel
instruments, (iii) plastic components and (iv) opened/unused surgical
supplies. Alliance will also purchase in bulk (from the healthcare
facility) floor grade instruments and out-sourced sterile kits for
reprocessing. The healthcare facility may purchase the reprocessed floor
grade instruments and out-sourced non-sterile kits from Alliance at prices
which are substantially below historic costs. Alliance provides in-house
training and coordinating of its various collection programs within the each
healthcare facility.
It is expected that Alliance customers will realize cost reductions as a
result of purchasing reprocessed instruments as well as a result of the
reduced volume of medical waste generated and requiring disposal.
COMPETITION
The market in which Alliance operates and will be operating can be
characterized as a new developing market which has not been fully defined.
Many of Alliance's actual and potential competitors are small companies with
comparable financial and human resources and most have shorter operating
histories. To the extent competitors and potential competitors offer
comparable or more efficient technologies and to the extent larger companies,
with greater resources, better operating efficiencies, and more extensive
capabilities to collect, recycle and distribute products, enter into Alliance's
markets, the company's ability to compete effectively could be adversely
effected.
EMPLOYEES
As of December 31, 1998, Citadel employs two persons full time, all of which
are in executive positions.
<PAGE> 4
ITEM 2. DESCRIPTION OF PROPERTY
Citadel's executive and administrative offices are located in Denver,
Colorado. The Company leases this office on a month-to-month basis, with a
monthly rental of approximately $3,000. These facilities are believed to be
adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently involved in legal arbitration involving a past
president regarding the payment of amounts due under a severance agreement.
See "Managements Discussion and Analysis - Officer's Severance Agreement."
Although currently in legal arbitration, the Company has fully accrued its
potential liability for the claim.
The Company is not a party to any other pending legal proceedings which
management believes could have a material adverse effect on its financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during the
quarter ended December 31, 1998.
<PAGE> 5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading in the over-the-counter market on the
OTC Bulletin Board under the symbol "ASEM" in April 1996. In September 1996,
the stock symbol changed and currently trades under the symbol "CTEV". There
was no active trading market for the Company's Common Stock for more than seven
years prior to April 1996. Since April 1996, trading activity with respect to
the Company's Common Stock has been limited and sporadic.
The following table reflects the high and low bid prices of the Company's
Common Stock as reported by the OTC Bulletin Board . Such prices are inter-
dealer quotations without retail mark-ups, mark- downs or commissions, and
may not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal
Year Quarter High Low
<S> <C> <C> <C>
1998 03/31/98 1 1/4 1 1/8
1998 06/30/98 1 1/8 3 1/32
1998 09/30/98 1 1/8 3/16
1998 12/31/98 3/8 3/16
1997 03/31/97 5/8 1 5/8
1997 06/30/97 1 1/16 1 9/16
1997 09/30/97 1 1/16 1 7/32
1997 12/31/97 15/16 1 3/8
</TABLE>
As of June 30, 1999, there were approximately 115 holders of record of the
Company's common stock.
The Company has no formal policy concerning the declaration of dividends and
has not issued any common stock dividends to date. The payment of dividends
is within the discretion of the Board of Directors. The payment of any
future dividends will be contingent upon future earnings, if any, its
financial condition and capital requirements, general business conditions and
other factors.
<PAGE>6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
OVERVIEW
Citadel's focus is to acquire controlling interest in operating companies in
growth industries and increase the value of the investment by providing or
locating the managerial, administrative and financial assistance necessary to
facilitate growth. The Company is dependent upon additional debt or equity
financing in order to provide these services for the benefit of its
controlled subsidiaries. There is no assurance that the Company will be able
to raise such capital.
In August 1996, the Company acquired all of the outstanding common stock of
Tonopah Resources International, Inc. ("TRI") in exchange for a combination of
Citadel Common and Preferred Stock. See Liquidity and Capital Resources. The
investment did not meet performance objectives and commenced liquidation in
September 1996. In September 1997, the Company sold the stock in the
substantially liquidated subsidiary to Citadel's Chairman of the Board. (See
"Certain Relationships and Related Transactions").
On March 26, 1997, the Company acquired a 64.45% interest in Applied Medical
Recovery, Inc. ("AMR"), an Arizona corporation, engaged in reprocessing and
recycling of non-critical medical instruments and devices in exchange for
1,633,608 shares of common stock. In March 1998 Citadel tendered its
investment in AMR to Alliance Medical Corporation ("Alliance"). Alliance was
established for the sole purpose of acquiring controlling interest of both
AMR and a direct competitor, Orris, Inc.
PLAN OF OPERATIONS
The Company intends to assist Alliance's expansion of its medical reprocessing
and recovery activities on a national and international basis and explore
possible new investments.
Citadel expects to assist in the national and international expansion of
Alliance by providing capital (generally in the form of loans) and certain
management expertise. Citadel had committed to AMR that Citadel would make
available either through Citadel and/or other third parties a $1,500,000
working capital line of credit and assist in obtaining an additional
$2,000,000 in debt financing for expansion. To date, Citadel has loaned AMR
$720,000 under the line of credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at December 31, 1998 are $0 compared
to $1,548 at December 31, 1997. The decrease in cash and cash equivalents of
$1,548 is principally due to proceeds of $ 255,216 from the issuance of equity
for cash and conversion of indebtedness, debt proceeds of $53,498 offset by
repayment and conversion of $ 31,561 and $ 95,000 in indebtedness,
respectively, less the cash requirements of operations for the period of $
183,701.
<PAGE>7
The operating loss for the period of $ 391,328 was reduced by certain
expenditures not utilizing, including $86,221 in amortized deferred consulting
expense, and an increase in accounts payable and other liabilities of $ 121,406.
SALE OF AMR SHARES TO ALLIANCE MEDICAL CORPORATION.
In February 1998 Citadel sold its investment in AMR to Alliance Medical
Corporation ("Alliance"). Alliance was established for the sole purpose of
acquiring controlling interest of both AMR and a direct competitor, Orris,
Inc. Concurrent with Citadel, the majority shareholders of Orris agreed to
tender their shares and certain other assets to Alliance. Citadel received
621,025 shares of Alliance common stock in exchange for its equity interest in
AMR.
As this business combination involving AMR was anticipated when Citadel made
its initial investment, it was expected from the onset that Citadel's control
position in AMR would only be temporary. Due to uncertainty as to whether the
subsequent business combination involving AMR would actually occur, however,
Citadel reflected AMR's financial position and results of operation in
Citadel's consolidated financial statements for the quarters ended March
31,1997, June 30, 1997 and September 30, 1997. Subsequent to September 30, 1997
the likelihood of the business combination involving AMR occurring increased to
where it was no longer considered appropriate to include AMR in Citadel's
consolidated financial statements. Accordingly, AMR is reflected on the
equity method on the December 31, 1997 balance sheet of Citadel. Citadel's
results of operations for the year ended December 31, 1997 include a loss of
$776,569 representing the portion of AMR's operations consolidated with
Citadel during the period.
PROVISION FOR UNCOLLECTIBLES FROM AFFILIATE
Due to uncertainty regarding the value of the company's investment in AMR
and its successor Alliance, as well as uncertainty regarding the ability of
Alliance to repay the assumed AMR, the Company has fully reserved the
following assets and has allocated no value to the issuance of the
1,633,608 shares of common stock issued to acquire AMR which were trading at
approximately $1.25 per share at the time of the exchange for an implied
valuation of $2,042,010:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Management fees due from AMR $ 60,000 $ 45,000
Interest receivable from AMR 145,627 43,327
Note receivable - AMR 720,575 720,000
AMR/Alliance investment 1,952,358 2,042,010
$ 2,878,560 $ 2,914,010
</TABLE>
DEBT CONVERSION
On March 31, 1998, a holder of convertible indebtedness elected pursuant to
the terms of the indebtedness to convert $30,000 in principal and $5,031 in
accrued interest into 64,059 shares of common stock.
<PAGE> 8
On June 16, 1998, a holder of convertible indebtedness elected pursuant to the
terms of the indebtedness to convert $25,000 in principal and $185 in accrued
interest into 34,772 shares of common stock.
On July 16, 1998, a holder of indebtedness elected to utilize the $40,000 in
debt and $25,823 in accrued penalties and interest to exercise a warrant to
acquire 82,500 shares of common stock.
CONSULTING AGREEMENT
On July 1, 1998 entered into a consulting agreement with Estate Management
Services ("EMS") for business development services. The agreement expires
December 31, 2001 and was paid as follows:
Citadel Environmental Group Common Stock 323,328 shares
Alliance Medical Corporation Common Stock 27,250 shares
Based on a fair market value of $0.80 and $0 for the Citadel and Alliance
shares, respectively, the Company recognized $ 258,662 in compensation
expense as a result of this agreement, $ 198,308 of which has been deferred
as of December 31, 1998 and will be amortized over the remaining period
of the contract.
RETIREMENT OF SERIES A, B, AND C PREFERRED
The Company issued 2,840,000 shares of Citadel Common Stock during fiscal 1997
in exchange for all of the Series A, B and C Preferred Stock issued in
conjunction with the TRI acquisition and the cancellation of $1,100,000 in
assumed TRI indebtedness.
PRIVATE PLACEMENT OF CONVERTIBLE PREFERRED STOCK
On April 30, 1997 the Company completed a private placement of 797,500 units
consisting of one share of no par convertible preferred stock, one A warrant
and one B warrant, for $1.00 per unit. The preferred stock is convertible
into common stock on a one-for-one basis and carries a 5% annual dividend
payable in common shares. Two A warrants allow the holder to purchase one
share of common stock at $1.25 per share. The warrants expire one year from
date of issuance (October 1997) or 90 days following the registration of the
underlying common shares, whichever is greater. Two B warrants allow the
holder to purchase one share of common stock at $1.50 per share. The warrants
expire two years from date of issuance (October 1998) or 90 days following the
registration of the underlying common shares, whichever is greater. In
conjunction with this private placement, all shareholders who acquired stock
in the Company's previous private placement (See "Private Placement - Common
Stock), converted their common shares and warrants into preferred stock and
warrants issued in accordance with the terms of this private placement.
On November 8, 1997 the Board of Directors voted to extend the expiration
dates for the Series A and B warrants to October 1998 and October 1999,
respectively.
<PAGE>9
ACQUISITION OF APPLIED MEDICAL RECOVERY, INC.
On March 26, 1997, the Company acquired a 64.45% interest in Applied Medical
Recovery, Inc. ("AMR"), an Arizona corporation, engaged in reprocessing and
recycling of non-critical medical instruments and devices in exchange for
1,633,608 shares of common stock. See "Investment in Alliance Medical
Corporation ("Alliance")."
LOAN AGREEMENT WITH APPLIED MEDICAL RECOVERY, INC.
On July 1, 1997, Citadel entered into a loan agreement with AMR. The loans
are covered by a Multiple Advance Promissory Note in an amount not to exceed
$3,500,000, bearing interest at Wells Fargo prime rate plus two percent (2%) per
annum with principal and interest due and payable on or before July 1, 1998.
The note is secured by a Security Agreement on all of the assets of AMR and its
subsidiaries. As of December 31, 1997, Citadel has advanced $720,000 to AMR
pursuant to this Multiple Advance Promissory Note.
OFFICER'S SEVERANCE AGREEMENT
On January 14, 1997, the Company entered into an agreement with Richard Landi,
accepting his retirement as President of the Company effective February 1, 1997.
Pursuant to the agreement the Company became liable for twelve months of full
compensation from February 1, 1997 through January 1, 1998 at $8,333 per month
payable bi-monthly. The Company made payments through March 31, 1997 and has
not made any further payment to date. The unpaid balance at December 31, 1997 is
$83,333. The Company is seeking arbitration to reach a mutually satisfactory
settlement.
PRIVATE PLACEMENT - COMMON STOCK
Effective September 30, 1996, the Company completed a private placement of
186,667 units consisting of one share of no par convertible preferred stock and
one warrant for $1.50 per unit. The warrant allows the purchaser to purchase one
share of common stock at $3.00 per share and expire two years from date of
issuance. In conjunction with a subsequent private placement of preferred stock
(See Private Placement of Convertible Preferred Stock), all common shares
acquired under this private placement converted their shares and warrants into
convertible preferred stock and warrants issued in accordance with the terms of
the convertible preferred private placement. The common shares issuable under
this placement were not issued as of December 31, 1996 and were accordingly
shown as stock subscriptions under current liabilities on the December 31, 1996
financial statements.
DISCONTINUED OPERATIONS
Effective September 30, 1996 the Board of Directors of the Company voted to
discontinue the operations of TRI. In conjunction with the discontinuance, and
in order to strengthen the financial position of the Company and encourage new
investors, the Company issued 2,840,000 shares of Citadel Common Stock during
fiscal 1997 in exchange for all of the Series A, B and C Preferred Stock and
the cancellation of $1,100,000 in TRI debt. On September 22, 1997, the
Company sold
<PAGE>10
its equity interest in TRI to the Chairman of the Board of Citadel for $9,250
in cash.
Discontinued operations for the years ended December 31, 1997 includes the
following:
Debt (assumed) retired $ 81,836
Gain on Sale 9,251
$ 91,087
SUBSEQUENT EVENT - SETTLEMENT OF CONVERTIBLE NOTE PAYABLE IN
DEFAULT
In January 1999 the Company settled a convertible note payable in default. The
note payable and accrued interest of $162,082 as of December 31, 1998 were
settled for the issuance of 145,000 shares of Alliance. The Company's
investment in Alliance is fully reserved and accordingly, the shares
issued in this transaction were valued at $0, for total consideration of $0
and a gain on settlement of debt of $ 162,082. The settlement is contingent
upon Alliance receiving no less than $2,000,000 pursuant to a private
placement. In the event that this private placement does not occur on or before
September 1, 1999, the convertible note will be reinstated in the amount of
$180,000 and the convertible noteholder will retain the Alliance shares
received.
SUBSEQUENT EVENT - SETTLEMENT OF NOTE PAYABLE IN DEFAULT
In March 1999 the Company settled a note payable in default. The note payable
and accrued interest of $62,291 as of December 31, 1998 were settled for a cash
payment of $35,000 and the issuance of 300,000 shares of Citadel and valued at
$ 15,000, for total consideration of $ 50,000 and a gain on settlement of debt
of $ 12,291. In conjunction with this settlement, the President and CEO of
Citadel loaned the Company the $35,000 necessary for the payment
of the settlement pursuant to a 10% promissory note with interest and principal
due March 1, 2001. The promissory note is secured by 17,500 shares of Alliance
and provides an option to purchase the shares comprising the collateral at a
price of $2.00 per share for a period of up to one year following the repayment
of the note.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued FAS
No.131, "Disclosures about Segments of an Enterprise and Related Information".
This Statement establishes standards for reporting information about a company's
operating segments and related disclosures about its products, services,
geographic areas of operations and major customers. This Statement will be
adopted by the Company in 1998 year-end financial statements and will not
impact the Company's results of operations or financial position.
In March 1998, the American Institute of Certified Public Accountant (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for fiscal
years beginning after December 15, 1998. The Statement outlines the accounting
treatment for certain costs related to the development or purchase of software
to be used internally and requires that costs incurred during the preliminary
project and post-implementation-operation stages be expensed, and that costs
incurred during the application development stage be capitalized and
amortized over the estimated useful life of the software. Costs
<PAGE>11
incurred prior to initial application of the Statement cannot be adjusted to
the amounts that would have been capitalized had the Statement been in effect
when those costs were incurred. Adoption of this Statement is not expected to
have a material impact on the Company's results of operations or financial
position.
In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-up Activities". SOP 98-5, which is effective for fiscal year beginning
after December 15, 1998, requires that all costs of start-up activities,
including organization costs, be expensed as incurred. The impact of adoption
of SOP 98-5 should be reported as the cumulative effect of a change in
accounting principle. Adoption of this Statement is not expected to have a
material impact on the Company's results of operations or financial position.
In June 1998, the FASB issued FAS No.133, "Accounting for Derivative
instruments and Hedging Activities" which requires all derivatives to be
recognized at fair value as either assets or liabilities on the balance sheet.
Any gain or loss resulting from changes in such fair value is required to be
recognized in earnings to the extent the derivatives are not effective as
hedges. This Statement is effective for fiscal years beginning after June 15,
1999, and is effective for interim periods in the initial year of adoption.
Adoption of this Statement is not expected to have a material impact on the
Company's results of operations or financial position.
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis of results of operations and
financial condition contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are based
on the current plans and expectations of Citadel Environmental Group and
involve risks and uncertainties that could cause actual future events and
results of operations to be materially different from those in the forward-
looking statements. Important factors that could cause such differences include,
among others, greater than expected expenses associated
with the Company's personnel needs or activities, the competitive pricing
environment applicable to the Company's operations, changes in customers'
business environments or changes in government regulations.
YEAR 2000
Like many other companies, the Year 2000 computer issue creates risks for the
Company. If internal systems do not correctly recognize and process date
information beyond the year 1999, the Company's operations could be adversely
impacted as a result of system failures and business process interruption.
<PAGE>12
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are attached as follows:
Index to Financial Statements F-1
Citadel Environmental Group, Inc. Financial Statements as of and
for the year ended December 31, 1998 and 1997 F-3 to F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Information with respect to the executive officers and directors of the
Company is set forth below:
<TABLE>
<CAPTION>
Company Positions
Name Age and Offices
<S> <C> <C>
Robert R. Barber 57 Chairman of the Board
Louis F. Coppage 61 President, Chief Financial Officer and
Director
Georgette W. Pagano 41 Corporate Secretary
</TABLE>
Business experience of Directors and Executive Officers of Citadel.
ROBERT R. BARBER. Mr. Barber was elected to the Board of Directors of Citadel
in August 1996 and was elected Chairman of the Board in January 1997. Mr.
Barber has for more than the past five years been Chairman of the Board and
the Chief Executive Officer of North American Recycling Systems, Inc. Prior
to forming North American Recycling Systems, he was the President
and Chief Executive Officer of North American Recycling Corporation since its
inception in 1974 which has been involved in medical waste treatment among other
businesses. He is a past Vice Chairman of the National Solid Waste Recyclers
Council and is a member of the Steering Committee for the New York Solid Waste
Industries Association. Mr. Barber is also a member of the National Solid Waste
Management Association. Mr. Barber obtained a BA degree in Liberal Arts from
Siena College in 1970.
LOUIS F. COPPAGE. Mr. Coppage was elected to the Board of Directors of
Citadel in August, 1997 and was elected President and Chief Financial Officer in
September 1997. Mr. Coppage is also acting Chairman and CEO of American
Consolidated Growth Corporation (AMGC). He has over twenty years of executive
and managerial experience with both domestic and international operations
<PAGE>13
involving finance and business development for both private and public
corporations. From 1993 to present, he has held advisory positions and has
provided investment banking consulting services for AMGC and its affiliate
companies, where he assisted in the turnaround and restructuring of the
companies. He is currently a member of the Board of Directors of AGTsports,
Inc. Mr. Coppage has served as financial consultant for numerous clients in
real estate, energy, insurance management and investment holdings related
businesses. He holds memberships in several civic, social and charitable
organizations.
GEORGETTE W. PAGANO. Ms. Pagano has been Corporate Secretary since March
1997. Ms. Pagano has extensive corporate experience with a number of public
companies beginning with Conversion Industries in 1984. Prior to joining
Conversion, Ms. Pagano was a stockbroker with the firm of Thomson McKinnon
Securities. She has served as a Director of two public companies.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following officers, directors and/or 10 percent shareholders of the
Company have filed late reports of Forms 3, 4 or 5 with respect to the number of
transactions indicated or have failed to file a required Form 3, 4 or 5 for the
period of January 1, 1998 to December 31, 1998 as indicated in the following
table:
<TABLE>
<CAPTION>
Number of Number of Failure to
Late Reports Transactions File a Report
Name
<S> <C> <C> <C>
No late reports 0 0 0
</TABLE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the total remuneration of the Chief Executive
Officer and the four most highly compensated executives whose salary and bonus
for the year ended December 31, 1998 exceeded $100,000.
None
OPTION GRANTS IN LAST FISCAL YEAR
None
INDIVIDUAL GRANTS
None
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
None
COMPENSATION OF DIRECTORS
Non-employee directors are not compensated for each Board meeting they attend,
other than for the reimbursement of expenses. Employee directors do not receive
any additional compensation for Board or committee service.
<PAGE>14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information regarding the ownership of the
Company's equity securities by (i) each person known by the Company to own 5 %
or more of each class of equity securities, (ii) each officer and director of
the Company, and by (iii) all executive officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Ownership Percent of Class
<S> <C> <C>
Robert R. Barber (1) 0 0
3617 East Thousand Oaks Blvd
Suite 223
Thousand Oaks, CA 91362
Louis F. Coppage (1) 0 0
3617 East Thousand Oaks Blvd
Suite 223
Thousand Oaks, CA 91362
Georgette W. Pagano 0 0
3617 East Thousand Oaks Blvd
Suite 223
Thousand Oaks, CA 91362
Frances Enterprises Limited 808,400 13%
c/o Ms. Pauline Gale
Royal Bank of Scotland
Trust Company "IOM Limited"
P.O. Box 151
Victory House
Douglas, Isle on Man IM99 1NJ
Koshar Limited 1,467,205 23%
c/o Jean-Paul da Costa
Piper, Smith & Basham
31 Warwick Square
London, England SWIV2AF
All Directors and Officers 0 0
as a Group (2)
________________________
(1) Director.
* under 1%
</TABLE>
<PAGE> 15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 22, 1997, the Company sold its equity interest in Tonopah
Resources International, Inc. to the Chairman of the Board of Citadel for
$9,250 in cash.
In March 1999 the Company settled a note payable in default. The note payable
and accrued interest of $62,291 as of December 31, 1998 were settled for a cash
payment of $35,000 and the issuance of 300,000 shares of Citadel and valued at
$ 15,000, for total consideration of $ 50,000 and a gain on settlement of debt
of $ 12,291. In conjunction with this settlement, the President and CEO of
Citadel loaned the Company the $35,000 necessary for the payment of the
settlement pursuant to a 10% promissory note with interest and principal due
March 1, 2001. The promissory note is secured by 17,500 shares of Alliance and
provides an option to purchase the shares comprising the collateral at a price
of $2.00 per share for a period of up to one year following the repayment of the
note.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit No. Description Page
<S> <C>
3.1 Articles of Incorporation.
3.2 By-laws.
10.1 Share Exchange Agreement between Citadel Environmental Group,
Inc. and Applied Medical Recovery, Inc. dated as of March 26,
1997.
10.2 Purchase and Sales Agreement between Citadel Environmental
Group, Inc. and Robert R. Barber dated September 22, 1997.
27 Financial Data.*
</TABLE>
* Filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
<PAGE>16
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Citadel Environmental Group, Inc.
(Registrant)
Date: July 12,1999 By: Louis F Coppage
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
President, Chief Financial
Louis F. Coppage Officer and Director 7/12/99
Robert R. Barber Chairman of the Board 7/12/99
<PAGE>17
CITADEL ENVIRONMENTAL GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
CITADEL ENVIRONMENTAL GROUP, INC. AS OF AND FOR THE YEARS
ENDED
DECEMBER 31, 1998 AND 1997:
Report of Independent Accountants F-3
Balance Sheets F-4/5
Statements of Operations F-6
Statements of Cash Flows F-7
Statements of Changes in Stockholders' Deficit F-8
Notes to Financial Statements F-9
<PAGE> F-1
FINANCIAL STATEMENTS
CITADEL ENVIRONMENTAL GROUP, INC.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE> F-2
Skeehan & Company
180 S. Lake Avenue, 7th Floor
Pasadena, CA 91101
(626) 792-3842
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
of Citadel Environmental Group, Inc.
(Formerly Citadel Asset Management, Ltd.)
Thousand Oaks, California
We have audited the accompanying balance sheets of Citadel Environmental Group,
Inc. (formerly Citadel Asset Management, Ltd.), as of December 31, 1998 and 1997
and the related statements of operations, cash flows, and changes in
stockholders' deficit for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Citadel
Environmental Group, Inc. (formerly Citadel Asset Management, Ltd.) as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principals.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, Going
Concern, to the financial statements, the Company has not had significant
operating revenues in several years and as of December 31, 1998 does not own
any assets that would generate any significant operating revenues. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are described in Note
2, Going Concern, and Note 11, Subsequent Events. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
SKEEHAN & COMPANY
Pasadena, California
June 15, 1999
<PAGE> F-3
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
<S> <C> <C>
Current Assets
Cash $ 9 $ 1,548
Prepaid expense 198,308 0
Total Current Assets 198,317 1,548
Investments 0 0
Other Assets
Note receivable-affiliated 720,575 720,000
Management fees receivable-affiliate 60,000 45,000
Accrued interest receivable-affiliate 145,627 43,327
926,202 808,327
Less: Provision for uncollectibles (926,202) (808,327)
Total Other Assets 0 0
Total Assets $ 198,317 $ 1,548
</TABLE>
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
1998 1997
<S> <C> <C>
Current Liabilities
Accounts payable $ 151,883 $ 102,018
Payroll taxes payable 1,826 4,540
Notes payable 74,938 118,000
Accrued expenses 291,378 197,136
Franchise tax payable 1,600 800
Convertible debentures 180,000 210,000
Total Current Liabilities 701,625 632,494
Total Liabilities 701,625 632,494
Stockholders' Deficit
Preferred stock- convertible, no par
value, authorized 1,199,000 shares,
issued and outstanding: 917,500 shares
in 1998 and 997,500 shares in 1997 873,250 953,250
Preferred stock-series A, .01 par value,
authorized 1,500,000 shares, issued and
outstanding: 0 sharesin 1998 and 1997 0 0
Preferred stock-series B, .01 par value,
authorized 1,500,000 shares, issued and
outstanding: 0 shares in 1998 and 1997 0 0
Preferred stock-series C, .01 par value,
authorized 2,000,000 shares, issued and
outstanding: 0 shares in 1998 and 1997 0 0
Common stock, no par value, authorized
25,000,000 shares, issued and outstanding:
7,170,650 in 1998 and 6,367,791 shares
in 1997 3,994,660 3,353,032
Accumulated deficit (5,371,218) (4,937,228)
Total Stockholders' Deficit (503,308) (630,946)
Total Liabilities and Stockholders'
Deficit $ 198,317 $ 1,548
</TABLE>
See Accompanying Independent Auditors' Report
<PAGE> F-5
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenues:
Management fees-affiliate $ 15,000 $ 45,000
Interest income-affiliate 107,875 43,259
Total Revenue 122,875 88,259
Operating Expenses:
General and administrative expenses 362,406 545,406
Total Operating Expenses 362,406 545,406
Net Loss From Operations (239,531) (457,147)
Other Income (Expenses):
Interest expense (28,034) (25,589)
Provision for uncollectibles from affiliate(117,875) (813,874)
Total Other Income Expenses (145,909) (839,463)
Net Loss Before Discontinued Operations (385,440) (1,296,610)
Income From Discontinued Operations 0 86,020
Net Loss Before Provision For Income Taxes (385,440) (1,210,590)
Provision For Income Taxes (800) (800)
Net Loss $ (386,240) (1,211,390)
Net Loss Per Weighted-Average Share of Common
Stock Outstanding:
From continuing operations $ (0.06) $ (0.25)
From discontinued operations 0.00 0.02
Total Loss Per Share $ (0.06) $ (0.23)
Weighted-Average Number of Common Shares
Outstanding Used in Basic EPS Calculation 6,785,326 5,189,492
</TABLE>
See Accompanying Independent Auditors' Report
<PAGE> F-6
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Operating Activities:
Net loss $ (386,240) $ (1,211,390)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
(Increase) Decrease in:
Receivable from affiliate 0 (88,258)
Increase (Decrease) in:
Accounts payable 49,866 26,544
Franchise taxes payable 800 800
Accrued expenses 140,610 151,398
Net Cash Used in Operating Activities (194,964) (1,120,906)
Investing Activities:
Loan advance to affiliate (575) (670,000)
Payment received in affiliate note 5,000 0
Net Cash Provided By Investing Activities 4,425 (670,000)
Financing Activities:
Proceeds from convertible debentures 25,000 240,000
Proceeds from exercises of warrants 159,000 0
Proceeds from stock sales common 0 280,000
Proceeds from stock sales preferred 0 673,250
Proceeds from loans 5,000 555,948
Net Cash Provided By Financing Activities 189,000 1,749,198
Net Increase/Decrease in Cash (1,539) (41,708)
Beginning Cash 1,548 43,256
Ending Cash $ 9 $ 1,548
</TABLE>
See Accompanying Independent Auditors' Report
<PAGE> F-7
CITADEL ENVIROMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Preferred Stock Accumulated Stockholders'
Shares Amount Shares Amount (Deficit) (Deficit)
<S> <C> <C> <C> <C> <C> <C>
Balance December31, 1996 1,784,644 $2,112,637 2,000,000 $ 50,000 $ (3,700,900) (1,538,263)
Common shares sold and
issued 186,667 280,000 280,000
Preferred shares sold and
issued 717,500 673,250 673,250
Conversion of common to
preferred (186,667) (280,000) 280,000 280,000 0
Shares issued to
acquire AMR 1,633,608 0 0
Conversion of preferred
and debt 2,840,000 1,150,000 (2,000,000)(50,000) 1,100,000
Conversion of debt
and interest 84,601 65,457 65,457
Preferred dividend-
common stock 24,938 24,938 (24,938) 0
Net loss - 1997 (1,211,390) (1,211,390)
Balance December 31,
1997 6,367,791 3,353,032 997,500 953,250 (4,937,228) (630,946)
Common stock issued
for consulting fee 323,328 258,662 258,662
Common shares issued
on warrant sales 202,222 154,185 154,185
Common stock issued-
acquisition AMR 3,000
Conversion of debt and
interest to stock 146,559 101,031 101,031
Conversion of preferred
stock to common 80,000 80,000 (80,000)(80,000)
Preferred dividend-
common stock 47,750 47,750 (47,750)
Net loss - 1998 (386,240) (386,240)
Balance December 31,
1998 7,170,650 3,994,660 917,500 873,250 (5,371,218) (503,308)
</TABLE>
See Accompanying Independent Auditors' Report
<PAGE> F-8
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1997
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Organization
Citadel Environmental Group, Inc. (formerly Citadel Asset Management, Ltd.) (the
"Company") was organized on July 1, 1983. The Company was inactive during 1993,
1994, and 1995. On August 12, 1996 the Company changed its name, recommenced
operations and changed its purpose to that of an investment company, which
acquires controlling and non-controlling interest in operating companies.
The Company will provide operating capital, management advisory services, and
assistance in market development for emerging growth companies in which it
invests.
Accounting Method
The Company maintains its books and records, presents its financial statements,
and files its income tax returns utilizing the accrual method of accounting.
The accrual method recognizes income when earned and expenses when incurred.
Property and Equipment
Property and Equipment consisting of office furniture and equipment are recorded
at cost. Depreciation is recorded using allowable methods over the useful lives
of the assets. All property and equipment assets were fully depreciated at
December 31, 1995 and therefore, no expense is recorded in these financial
statements.
Upon sale or retirement of property and equipment the related cost and
accumulated depreciation are eliminated from the accounts and the resulting
gain or loss is recognized. Repairs and maintenance expenditures that do not
extend the useful lives are included in expenses during the period they are
incurred.
Principles of Consolidation
It is the Company's policy to prepare its financial statements consolidated with
subsidiaries when the Company owns a controlling interest of 50% or more of the
outstanding voting stock in the subsidiary. The Company will prepare its
financial statements on the equity method when the controlling interest is
between 20% and 50%, or when the controlling interest exceeds 50%, but
expectation for maintaining a controlling interest is temporary. On
investments for less than 20% the Company will present the investment at cost.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
See Accompanying Independent Auditors' Report
<PAGE> F-9
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
Concentration Risk
The Company currently only receives income from its affiliate AMR, therefore
this concentration gives added risk to the potential lack of future revenues.
Year 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather that the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Currently the Company's operations do not require the company to utilize an
accounting software package to track and record the Company's transactions.
Based on recent assessments, the Company determined that it will be able to
continue processing the Company's transactions manually, at least until such
time as the Company's operations require significant modifications or changes
in its software and hardware requirements. Accordingly, the Company does not
believe that the Year 2000 issue presents a material exposure as it relates to
the Company's ability to track or record current or future transactions.
Should the Company require an accounting software and hardware system, the
Company would acquire and utilize only Year 2000 compliant products. But
currently the company does not expect to incur any costs within the next 12
months.
Operating Leases
The Company during the years 1998 and 1997 leased office facilities in Thousand
Oaks, California through June 1998 on a month to month basis. Subsequent to
that the company has operated out of the corporate secretary home office without
any rental obligations. Starting in April 1999 the corporate offices have been
moved to Denver, Colorado. The Company shares office space with the president
of the company on a month to month rental agreement of $1,600 per month.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported revenues and expenses during the reporting
period. Actual results may differ from those estimates.
Compensating Absences
The Company has not recorded a liability for employees' compensation for future
absences because the amount cannot be reasonably estimated. The Company's policy
is to recognize the costs of compensated absences when actually paid to
employees.
See Accompanying Independent Auditors' Report
<PAGE> F-10
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
Provision for Uncollectibles
Due to uncertainty regarding the Company's receivables from AMR, the Company has
classified the receivables as impaired and has fully reserved the following
assets. The amounts due from AMR and its parent Alliance are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Note Receivable $ 720,575 $ 720,000
Management Fee 60,000 45,000
Accrued Interest 145,627 43,327
$ 926,202 $ 808,327
</TABLE>
Financial Instruments
The Company has elected to value its notes and other receivables due from
AMR and its investment in common shares of Alliance at zero, based on
management's estimate of the fair market value and estimated collectability.
See Notes 4 and 5 for valuation details on the receivables and investment.
Earnings Per Share
Earnings per share were computed by dividing income available to common
stockholders by the weighted-average number of shares outstanding during the
year.
The Company has not disclosed fully diluted earnings per share information
in these financial statements due to the fact the reserved 2,562,500 shares of
common stock for convertible preferred stock and outstanding warrants and 15,000
shares of common stock for convertible bonds would be antidilutive.
NOTE 2 GOING CONCERN
The Company's continued existence is in doubt. The Company has not had any
significant operating revenues in several years and as of December 31, 1998
the Company does not own any liquid assets that would generate any operating
revenues.
Management believes that the reduction of debt initiated prior to and subsequent
to December 31, 1998, along with the disposition of their primary asset,
Alliance, will assist their financial deficiencies and provide the necessary
financing to acquire the assets needed to generate the sufficient operating
revenues and recover from continued operating losses
In the event the Company is unable to correct the current financial
situation, it may be forced to discontinue operations. Currently there is a
shortage of assets, for creditors or shareholders to recover, resulting in
losses for the Company's creditors and shareholders.
See Accompanying Independent Auditors' Report
<PAGE> F-11
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 PREPAID EXPENSE
On July 1, 1998 entered into a consulting agreement with Estate Management
Services ("EMS") for business development services. The agreement expires
December 31, 2000 and was paid as follows:
Citadel Environmental Group Common Stock 323,328 shares
Alliance Medical Corporation Common Stock 27,250 shares
Based on a fair market value of $0.80 and $0 for the Citadel and Alliance
shares, respectively, the Company recognized $258,662 in consulting expense as a
result of this agreement, $198,308 of which has been deferred as of December 31,
1998 and will be amortized over the remaining period of the contract. Fair
market value was derived from stock prices on actual trading activity for the
year.
NOTE 4 DUE FROM AFFILIATE
Note receivable and accrued interest
The note receivable due from an affiliate is a Multiple Advance Promissory Note
from AMR, a former subsidiary of the company and currently a wholey owned
subsidiary of the Alliance a 20% owned Investment of Citadel in an amount not
to exceed $3,500,000, bearing interest at Wells Fargo prime rate plus two
percent (2%) per annum and dated July 1, 1997, with principal and interest due
and payable on or before July 1, 1998. The note is in default and effective
July 1, 1998 the interest rate increased to the default rate of 18%. The
principal and accrued interest is currently due and payable.
Accrued interest receivable at December 31, 1998 and 1997 was $145,627 and
$43,327, respectively. Interest income for the years ending December 31, 1998
and 1997 was $107,875 and $43,259.
Management fees
Management fees were accrued pursuant to an agreement between the Company and
AMR, which was terminated in March 1998 concurrent with the acquisition of AMR
by Alliance. Total management fees earned in 1998 and 1997 was $15,000 and
$45,000 respectively.
Valuation reserve
Due to concerns regarding the ability of Alliance to repay the indebtedness,
accrued interest and management fees, a provision for uncollectibles was
established to provide a reserve for all receivables due from AMR. The provision
for uncollectibles from the affiliate was $117,875 and $813,874 for the years
ending December 31, 1998 and 1997, respectively.
NOTE 5 INVESTMENTS
Alliance Medical Corporation (Alliance)/Applied Medical Recovery, Inc. ("AMR")
On March 26, 1997, the Company acquired a 64.45% interest in Applied Medical
Recovery, Inc. ("AMR"), an Arizona corporation, engaged in reprocessing and
recycling of non-critical medical instruments and devices in exchange for
1,633,608 shares of common stock. In March 1998 Citadel tendered its
investment in AMR to Alliance Medical Corporation ("Alliance") in exchange for
621,025
See Accompanying Independent Auditors' Report
<PAGE> F-12
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 INVESTMENTS CONT'D
shares or 32% of Alliance. Alliance was established for the sole purposes of
acquiring controlling interest of both AMR and a direct competitor, Orris, Inc.
Due to subsequent issuance of stock by Alliance, Citadel's percentage of
ownership was reduced to 20% as of December 31, 1998.
During the period between March 26, 1997 (The Acquisition date) and the
companies year end December 31, 1997 management became aware that the real
value of the AMR was substantially lower then the $2,042,010 originally
recorded. The Company decided to sell its ownership in AMR in exchange for
Alliance stock. The company policy as stated in Note 1 under Principles of
Consolidation, elected not to consolidate AMR for financial statement
reporting but show the investment using the equity method net of the
valuation allowance. The net loss from AMR for 12/31/97 is $1,618,574 with
64.45% allocable to Citadel the company's realizable loss is $1,043,171. AMR's
consolidated value of stockholders equity without inclusion of the 12/31/97 loss
was $723,092 with 64.45% allocable to Citadel in the amount of $466,033.
Management therefore elected to carry the value of its investment in AMR at
zero.
The Alliance stock received in exchange for the AMR stock was valued at the fair
market value of the assets given up, which was determined by management to be
zero. The only financial information for Alliance available to management is the
unaudited May 31, 1998 consolidated financial statements which shows a net loss
of $978,247 with 20% allocable to Citadel in the amount of $195,649. Alliance
has a net stockholders deficit prior to the net loss for five months in the
amount of $1,227,035 allocable to Citadel would be $245,407. Therefore
management has decided to carry the investment at zero.
The Company has not recognized in these financial statements the value of
Alliance shares accepted by one of its creditors as described in Note 11
Subsequent Events. The value determined by a third party acceptance would
thereby give determinable value to the asset and create Other Comprehensive
Income of $162,082 as reportable on the Statements of Operations. Management
has elected not to recognize this transaction in the current year based on
the material contingency of the transaction as reported in Note 11.
The following is a summary of unaudited financial information for AMR and
Alliance as of December 31, 1997 and May 31, 1998 respectively.
<TABLE>
<CAPTION>
December 31, 1997 May 31, 1998
<S> <C> <C>
Total Current Assets $ 625,095 $ 1,171,014
Net Property and Equipment 642,485 1,002,614
Total other Assets 403,239 422,284
Total Assets $ 1,670,820 $ 2,595,912
Total Current Liabilities $ 2,452,934 $ 4,347,586
Total Long-Term Debts 173,368 153,588
Private Placement Debts 0 170,000
Total Liabilities 2,566,302 4,801,177
Total Stockholders (Deficit) (895,482) (2,205,262)
Total Liabilities and
Stockholders' Deficit $1,670,820 $ 2,595,912
</TABLE>
See Accompanying Independent Auditors' Report
<PAGE> F-13
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 INVESTMENTS CONT'D
Tonopah Resources International, Inc., ("TRI")
On August 12, 1996 Citadel acquired all the outstanding common stock of
Tonopah Resources International, Inc., ("TRI"). All of the outstanding common
stock of TRI was acquired for 1,050,000 shares of newly issued common stock of
Citadel, and 1,500,000 shares of Series A Preferred, 1,500,000 shares of Series
B Preferred, and 2,000,000 shares of Series C Preferred. In conjunction with
the acquisition, Citadel assumed or guaranteed $1,134,000 of TRI indebtedness.
Following the acquisition, the shareholders of TRI owned approximately 56%
of the outstanding shares of Citadel's common stock and 100% of Citadel's
preferred shares. Effective September 30, 1996 the Board of Directors of the
Company voted to discontinue the operations of TRI. In conjunction with the
discontinuance and in order to strengthen the financial position of the
Company and encourage new investors, the Company issued 2,840,000 shares of
Citadel Common Stock in exchange for all of the Series A, B and C Preferred
Stock and the cancellation of $1,100,000 in TRI debt. On September 22, 1997,
the Company sold its equity interest in TRI to the Chairman of the Board of
Citadel for $9,250 in cash. See Note 10 - Discontinued Operations.
NOTE 6 NOTES PAYABLE
Notes payable are as follows as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Unsecured promissory note payable to previous Chief
Financial Officer of Citadel dated August 1, 1997,
representing unpaid compensation, due on demand
with interest at 10%. $ 54,938 $ 52,000
Unsecured promissory note dated December1,
1996, due on demand with interest at 10%. 0 10,000
Unsecured convertible promissory note dated August
11, 1997, due on demand with interest at 10%. 0 30,000
Unsecured convertible promissory note dated September
17, 1997, due on demand with interest at 10%. 0 10,000
Unsecured promissory note dated December 20, 1997, due
on demand with interest at 10%. 0 16,000
Unsecured promissory note to an individual dated
June 22, 1998, due on demand with interest at 10%. 20,000 0
Total Notes Payable $ 74,938 $ 118,000
</TABLE>
See Accompanying Independent Auditors' Report
<PAGE> F-14
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 6 NOTES PAYABLE CONT'D
<TABLE>
<CAPTION>
Convertible debentures are as follows as of December 31, 1998 and 1997:
1998 1997
<S> <C> <C>
Unsecured convertible promissory note dated
September 30 1997, due on demand or July 1,
2002 with interest at 8.75%, convertible based on
$2.00 per common share $ 30,000 $ 30,000
Unsecured convertible promissory note in the
amount of $200,000 dated September 26, 1997,
due March 26, 1998 with interest at 10%,
convertible based on 50 % of the common stocks
average closing bid price for the previous10 days
(See Subsequent Events Note 11 first paragraph) 150,000 180,000
Total Convertible Debentures $ 180,000 $210,000
</TABLE>
Accrued interest payable at December 31, 1998 and 1997 is $ 24,662 and
$33,803, respectively.
Interest expense for the years ending December 31, 1998 and 1997 was $28,034 and
$25,589, respectively.
At December 31, 1988 the Company was in default under the terms of all notes and
convertible debentures payable and all principal and accrued interest was
currently due and payable.
NOTE 7 ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses are as follows as of December 31, 1998 and 1997:
1998 1997
<S> <C> <C>
Interest on notes payable $ 24,662 $ 33,803
Accrued severance 83,334 83,334
Accrued consulting fees 180,000 80,000
Miscellaneous 3,382 0
Total Accrued Expenses $291,378 $197,137
</TABLE>
On January 14, 1997 the Company entered into an agreement with Richard Landi,
accepting his retirement as President of the Company effective February 1, 1997.
Pursuant to the agreement the Company became liable for twelve months of full
compensation from February 1, 1997 through January 1, 1998 at $8,333 per month
payable bi-monthly. The Company made payments through March 31, 1997 and due to
lack of available funds has not made any further payment to date. The remaining
balance at October 31, 1997 is $83,333. The Company is seeking arbitration to
reach a mutually satisfactory settlement.
See Accompanying Independent Auditors' Report
<PAGE> F-15
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 PROVISION FOR INCOME TAXES
The Company files it's tax returns using the same accounting method as it does
for financial statement reporting. The Company has unused net operating losses
carried forward from inception in the amount of $5,137,448. Management has
elected not to record the potential tax benefits that may occur if profits
are realized due to the going concern problems as noted in Note 2. The only
provision that is reflected in these statements is for the minimum franchise
tax due to the State of California in the amount of $800 for each year 1998
and 1997. The potential tax benefit not recognized in these financial
statements due the potential uncertainty of the Company's continued existence
is $770,617. The benefit was calculated using the lowest federal tax rates
expected to be in effect.
NOTE 9 STOCKHOLDERS' EQUITY (DEFICIT)
Private Placement of Convertible Preferred Stock
On April 30, 1997 the Company completed a private placement of 717,500 units
consisting of one share of no par convertible preferred stock, one A warrant and
one B warrant, for $1.00 per unit. The preferred stock is convertible into
common stock on a one-for-one basis and carries a 5% annual dividend payable
in common shares. Two A warrants allow the holder to purchase one share of
common stock at $1.25 per share. The warrants expire one year from date of
issuance (October 1997) or 90 days following the registration of the underlying
common shares, whichever is greater. Two B warrants allow the holder to purchase
one share of common stock at $1.50 per share. The warrants expire two years from
date of issuance (October 1998) or 90 days following the registration of the
underlying common shares, whichever is greater. In conjunction with this
private placement, all shareholders who acquired stock in the Company's
previous private placement , converted their common shares and warrants into
preferred stock and warrants issued in accordance with the terms of this private
placement.
In 1997 and 1998 the Board of Directors authorized the issuance of 24,938 shares
and 47,750 shares of common stock, respectively, in payment of the semi-annual
dividend requirement on the preferred stock.
On November 8, 1997 the Board of Directors voted to extend the expiration dates
for the Series A and B warrants to October 1998 and October 1999, respectively.
The preferred stock is non-voting with a participating cumulative dividend and
has no preferences on involuntary conversion other than for payment at stated
value. At December 31, 1998 2,562,500 shares of common stock have been reserved
for issuance pursuant to 917,500 preferred shares, 740,000 A warrants and
905,000 B warrants.
Retirement of Series A, B, and C Preferred
The Company issued 2,840,000 shares of Citadel Common Stock during fiscal 1997
in exchange for all of the Series A, B and C Preferred Stock issued in
conjunction with the TRI acquisition and the cancellation of $1,100,000 in
assumed TRI indebtedness.
See Accompanying Independent Auditors' Report
<PAGE> F-16
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 10 DISCONTINUED OPERATIONS
Effective September 30, 1996 the Board of Directors of the Company voted to
discontinue the operations of TRI. In conjunction with the discontinuance, and
in order to strengthen the financial position of the Company and encourage new
investors, the Company issued 2,840,000 shares of Citadel Common Stock during
fiscal 1997 in exchange for all of the Series A, B and C Preferred Stock and the
cancellation of $1,100,000 in TRI debt. On September 22, 1997, the Company sold
its equity interest in TRI to the Chairman of the Board of Citadel for $9,250 in
cash and contingent consideration of $100,000.
Discontinued operations for the year ended December 31, 1997 includes the
following:
<TABLE>
<CAPTION>
1997
<S> <C>
Value of Citadel common and preferred stock issued $ 0
Debt (assumed) retired 81,836
Subsequent debt incurred (5,067)
Accrued interest on above debt 0
Write-off of loan to TRI, net of repayments 0
Gain on Sale 9,251
$ 86,020
</TABLE>
Income tax benefits are provided from the Provision for Income Taxes See
Note 8.
NOTE 11 SUBSEQUENT EVENTS
In January 1999 the Company settled a convertible note payable in default. The
note payable and accrued interest of $162,082 as of December 31, 1998 were
settled for the issuance of 145,000 shares of Alliance. The Company's
investment in Alliance is fully reserved and accordingly, the shares issued
in this transaction were valued at $0, for total consideration of $0 and if
certain contingencies are met there will be a gain realizable in the amount
of $162,082. The settlement is contingent upon Alliance receiving no less
than $2,000,000 pursuant to a private placement. In the event that this
private placement does not occur on or before September 1, 1999, the
convertible note will be reinstated in the amount of $180,000 and the
convertible note holder will retain the Alliance shares received
In March 1999 the Company settled a note payable in default. The note payable
and accrued interest of $62,291 as of December 31, 1998 were settled for a cash
payment of $35,000 and the issuance of 300,000 shares of Citadel and valued at
$ 15,000, for total consideration of $ 50,000 and a gain on settlement of debt
of $ 12,291. In conjunction with this settlement, the President and CEO of
Citadel loaned the Company the $35,000 necessary for the payment of the
settlement pursuant to a 10% promissory note with interest and principal due
March 1, 2001. The promissory note is secured by 17,500 shares of Alliance and
provides an option to purchase the shares comprising the collateral at a price
of $2.00 per share for a period of up to one-year following the repayment of the
note.
See Accompanying Independent Auditors' Report
<PAGE> F-17
CITADEL ENVIROMEMTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENT
DECEMBER 31, 1998 AND 1997
NOTE 12 LITIGATION
The Company is presently involved in legal arbitration involving
a past president regarding the payment of amounts due under a severance
agreement. See Note 7 Accrued Expenses.
The Company is not a party to any other pending legal proceedings which
management believes could have a material adverse effect on its financial
position.
NOTE 13 SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Supplemental cash flow information: 1998 1997
<S> <C> <C>
Cash paid for income taxes $ 0 $ 0
Cash paid for interest expense $28,967 $ 0
</TABLE>
Schedule of non-cash investing and financing activities:
In 1997, 280,000 shares of preferred stock valued at $280,000 was converted into
187,667 shares of common stock.
In 1997, 2,000,000 shares of preferred stock valued at $50,000 and debt valued
at $1,100,000 was converted into 2,840,000 shares of common stock.
In 1997, debt valued at $65,457 was converted into 84,601 shares of common
stock.
In 1997, the Board of Directors declared and issued a common stock dividend of
24,931 shares valued at $24,931 payable to the preferred stock holders.
In 1998, the Company issued 323,328 shares of common stock valued at $258,662 in
exchange for consulting services.
In 1998, 3000 shares of common stock was issued to a former shareholder of AMR.
In 1998, debt valued at $101,031 was converted into 146,550 shares of common
stock.
In 1998, 80,000 shares of preferred stock valued at $80,000 was converted into
80,000 shares of common stock.
In 1998, the Board of Directors declared and issued a common stock dividend of
47,750 shares valued at $47,750 to the preferred shareholders.
See Accompanying Independent Auditors' Report
<PAGE> F-18
