Form 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1997
Commission file number 0-9347
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
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(Exact name of registrant as specified in its charter)
Arizona 86-0220694
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15900 North 78th Street, Suite 101, Scottsdale, AZ 85260
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (602) 607 1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant: $21,418,343 as of September 19, 1997
Indicate the number of shares outstanding of each of the issuer's classes
of common stock: 35,346,527 as of September 19, 1997.
Documents incorporated by reference: None
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Alanco Environmental Resources Corporation is an Arizona corporation which
was organized in 1969. Unless otherwise noted, "Company" refers to Alanco
Environmental Resources Corporation and its wholly-owned subsidiaries. The
Company's operations, primarily through subsidiaries, are diversified and
include: (i) air pollution control product manufacturing, technology design and
marketing; (ii) industrial and agricultural equipment manufacturing, technology
design and marketing; (iii) restaurant equipment/food marketing and
distribution; and (iv) mineral property ownership.
RECENT BUSINESS DEVELOPMENTS
Fry Guy Update. The Company's Fry Guy subsidiary has shown significant
growth. In December 1996, the Company completed the initial nationwide roll-
out of its Integrated Finger Food Marketing ("IFFM") program, featuring the
Company's private label SGT. FRY food menu, in 1,150 Wal-Mart stores. By
fiscal year end, the Wal-Mart penetration had increased to 1,300 locations.
More than half of the new locations added after the initial roll-out represent
conversion of stores with other national branded food programs to Wal-Mart's
Radio Grill, which features the Fry Guy program and SGT. FRY foods. The
Company expects to add additional Wal-Mart locations during the current fiscal
year. Over the course of the fiscal year, the menu items have expanded to 17
items including French fries, chicken nuggets, chicken strips, onion rings,
French toast, cheese sticks and jalapeno peppers.
In December 1996, the Company also announced an agreement with Salubre
Foods International, Inc., based in Cincinnati, Ohio, to take the Fry Guy
program to the independent retail market through Salubre's network of
institutional and independent distributors. After a slow start-up, the Salubre
program began to grow in March 1997. Salubre has signed participation
agreements with approximately 26 independent distributors, each of which is
placing the program with individual retail outlets. Management believes the
Salubre program will accelerate as additional distributors are added.
Fry Guy is now serving the Mann Theatre group of Los Angeles. Mann
operates 65 movie theatres in California, Oregon and Colorado. The fryers are
currently installed in 3 theatres in the Denver area and 11 theatres in Los
Angeles and Orange Counties. The roll-out continues at this time.
The Company also reached an agreement in December 1996 with Shantou Sez
Jian Machine and Electronics Co., Ltd. ("Jian"), providing Jian with exclusive
marketing rights to Fry Guy's SGT. FRY foods in the People's Republic of China
for five years in conjunction with Jian's proprietary Chinese-patented deep
frying machines. As of fiscal year end, Jian's food orders have been limited
to sample orders and test products.
2<PAGE>
CDSI Update. Basic testing of the Charged Dry Sorbent Injection (CDSI)
system to measure the electric charge on inert sorbent materials, such as lime,
was completed in March 1997 with satisfactory results. The results showed that
lime could be charged. A design study and testing of the old CDSI units has
resulted in the development of a new prototype CDSI system. The new system
includes a new three prong charging chamber as opposed to the older single
prong unit. Laboratory tests of the new charging chamber show it to have three
to five times the charging capacity of the older units. Also, a new automated
power supply has been designed to maximize the charging chamber's potential.
In addition, the basic pneumatic hardware for the unit has been refined
into a superior product. The old units previously sold in China could only
pneumatically inject sorbent into a stack at about 610 pounds per hour, thus
requiring multiple units for even small outputs by industry standards. The new
unit will charge over three times the sorbent as did its predecessor.
Finally, the new unit has a new electronics package designed to be totally
automatic, leaving only on and off controls for the operator. The prototype
CDSI system is nearing assembly completion at Alanco's factory in Falls City,
Nebraska. An owner's manual to be furnished with each machine is also being
developed. The owner's manual discusses the theory of operation, compares CDSI
to other dry scrubbing systems, contains detailed operating and maintenance
instructions, and includes comprehensive parts lists for all components in the
system.
Presently, Alanco is seeking an actual user location of a boiler system in
which the prototype CDSI can be installed and certified according to the
Environmental Protection Agency ("EPA") for use in the United States.
The Company also reports progress in its environmental operations in
China. The Company's wholly owned Chinese incorporated subsidiary, Alanco
Environmental Technology (Beijing) Co., Ltd., reached an agreement at the end
of the fiscal year with Guangzhou Paper Ltd., in Guangzhou Province, China, to
sell the paper mill eight CDSI industrial air pollution control systems. The
installation schedule on the $1,050,000 contract calls for completion at the
end of February 1998. Subsequent to the fiscal year end, the Company received
a $120,000 deposit on the contract. Guangzhou Paper is China's largest
production paper mill and one of China's 500 largest business enterprises.
Management believes the Guangzhou agreement represents acceptance of the CDSI
system's performance at the highest level of Chinese industry, and expects
ongoing negotiations in China to result in subsequent agreements.
The Gaungzhou Paper contract represents Alanco's third CDSI installation
in China. In April the Company announced receipt of compliance approval for
its CDSI system from Hangzhou Iron and Steel Company, the largest steel
producing factory in China's Zheijiang Province. In January Alanco announced
that it had received a Certificate of Final Acceptance for the CDSI system
installed in the Dezhou Thermal Power Plant in China. That certification was
issued after the Shandong Province EPA Monitoring Center completed over a year
of tests of emissions from the CDSI system and found the system met China's
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national emissions standards. The Company has agreed to sell Hangzhou Iron and
Steel and Dezhou Thermal additional CDSI systems.
Manufacturing Update. In April the Company announced its wholly owned
subsidiary, Alanco Environmental Manufacturing Incorporated (AEMI), had been
awarded a major dust control contract for the world's largest fiberboard plant,
currently under construction in Eldorado, Arkansas.
In a contract valued in excess of $600,000, Alanco will provide the Del-
Tin Fiber, LLC, Medium Density Fiberboard Plant with 13 state of the art low
pressure cartridge filters for capturing wood dust in the processing plant.
The Alanco filters will process and clean approximately 436,000 cubic feet of
air per minute. Del-Tin is a joint venture between Deltic Timber Corporation
and Temple Inland Forest Products Corporation. The Del-Tin joint venture will
have an annual capacity of 150 million square feet of medium density
fiberboard, and will begin production in early 1998.
AEMI, located in Falls City, Nebraska, designs and manufactures industrial
air pollution control filters for nuisance or hazardous dusts and associated
peripheral equipment, as well as agricultural aeration and drying equipment and
systems, and pneumatic conveying packages and systems to handle bulk
commodities. The Company also offers custom design and fabrication of
specialized equipment. Another key AEMI development is the company`s new E-86
cartridge dust control filter, for which a patent is pending. When patented,
management expects sales of the new cartridge filter to provide significant
revenues.
Insurance Update. As of June 30, 1997, the Company discontinued the
operations of its insurance claims adjusting subsidiary, Unique Systems, Inc.,
d/b/a National Affiliated Adjustment Company. The decision to discontinue
these operations was based upon the subsidiary's losses and Management's plans
to reduce the Company's overhead and focus upon its Fry Guy and air pollution
control operations.
Mining Update. During the fiscal year just ended, the contingent sale to
Kennecott Copper of 56 mining claims, located in the Tombstone Mining District,
was terminated. In addition, the Company, in complying with new accounting
standards relating to asset impairment, has reduced the carrying value of its
mining properties by $2,593,000. Refer to Note 6 of the Consolidated Financial
Statements for further discussion.
DESCRIPTION OF BUSINESS
Air Pollution Control Segment
The Company's principal air pollution control technology is the CDSI
system. The Company acquired the rights to this technology and others in 1989
and has spent the past several years in engineering and testing. A new
production model of the CDSI is now available to the market. The new CDSI has
improved electronics and new components which will make it more effective and
reliable than previous units.
4<PAGE>
The CDSI system is a patented process that utilizes an electrostatically
charged sorbent to remove noxious gases, such as sulfur dioxide, from a hot
exhaust gas stream from a stationary air pollution source, such as a factory.
The electrostatic charge causes the sorbent particles to be more dispersed and
to more readily react with a pollutant molecule in the gas stream. The solid
product of this reaction is then later removed from the gas stream. The CDSI
system has a significantly lower cost relative to competing technologies with
similar levels of efficiency.
The CDSI system injects a chemical agent called sorbent, such as lime,
sodium carbonate, or ammonia, into the polluted gas stream generated by
industrial activity. Sorbents are selected based on the chemical nature of the
gas stream and the pollutant to be removed. As the sorbent is injected, it is
passed through a corona discharge which imparts an electrostatic charge to the
sorbent particles. As a result of this charge, the sorbent particles repel one
another, thus providing rapid dispersal of the sorbent into the polluted gas
stream. This greater dispersion results in a higher sorbent surface area being
exposed to the pollutants in the gas stream for reaction. Once the sorbent has
reacted with the pollutant, the resulting larger particles are filtered or
otherwise removed from the gas stream.
The CDSI system has significant advantages over competing technologies for
remediating polluted gas streams. The most common of these competing
technologies are wet scrubbers. Wet scrubbers spray a mixture of water and
limestone into the polluted gas stream which reacts primarily with sulfur
dioxide to produce a sludge composed of gypsum, limestone, and polluted water.
This sludge must be disposed of and the water treated before reuse or release.
Wet scrubbers are very expensive to build and have very high operating costs.
They are subject to corrosion and frequent breakdown. The CDSI system is a dry
process making collection and disposal of reaction products a much less costly
and simpler procedure. Another significant advantage of the CDSI system is its
ability to operate at temperatures above 2000 degrees Fahrenheit. Because many
chemical reactions with sorbents occur more rapidly at these high temperatures,
CDSI equipment can be used effectively where wet scrubbers cannot.
The CDSI system is easily adapted to a wide variety of industrial
applications and requires little maintenance. The Company believes the system
is particularly well suited to use in power plants, mining and smelting
facilities, incinerators, steel mills, and roaster/dryer facilities, such as
hot mix asphalt plants. There are thousands of these facilities in North
America alone. Many of these plants are experiencing problems complying with
U.S. Environmental Protection Agency standards, and the CDSI presents a cost
effective means of achieving compliance. The Company believes that the CDSI
system has substantial market potential in this application.
The proprietary portions of the CDSI system are fabricated and assembled
by the Company. The Company's wholly-owned subsidiary, Alanco Environmental
Manufacturing Inc., is capable of producing all the necessary ancillary
equipment for a CDSI installation within the United States. Non-proprietary,
5<PAGE>
ancillary equipment required for an installation outside the United States will
be contracted to local fabricators.
Marketing. The Company's marketing strategy for the CDSI system is to
continue its marketing efforts in the People's Republic of China through Alanco
Beijing and initiate a marketing program in the United States, South America
and Eastern Europe through contract marketing agreements with unrelated third
parties.
In the United States, the Company sees the highest demand for its CDSI
products in the roaster/dryer, power generating, paper mills, steam boiler, and
the metals refining and production industries.
In the United States, the Company is contacting companies identified by
the EPA as present or possibly future violators of SO2 emission standards and
proposing use of the CDSI system on a test basis. Once a test site is
obtained, the Company believes that the CDSI system should meet upcoming 1999
emission standards and that the CDSI system will be EPA approved for use in the
United States. Once EPA approval is obtained, the Company intends to market
the CDSI systems through third party marketing contracts wherein the contractor
will arrange and provide all required engineering and construction services.
Such third party marketing contractors will also be used in South America and
Eastern Europe.
The Company believes that China represents the largest single potential
market for CDSI technology. There are currently more than 450,000 industrial
coal-fired boilers in China, a country which consumes more coal than any other
country in the world. Chinese central authorities are expected to release new
regulations by year end regarding sulfur dioxide emission rates by industrial
concerns. Officials of the Chinese environmental regulations authority have
stated they believe the Company's CDSI technology is the best sulfur removing
technology for the small to medium size boilers in China, estimated to number
in excess of 300,000.
The Company's interests in China are managed by its subsidiary, Alanco
Environmental Technology (Beijing) Co., Ltd., a Chinese company ("Alanco
Beijing"). The Company also has a marketing agreement with the China National
Environment Protection Company, one of the largest environmental companies in
China. Alanco Beijing currently has engineering and marketing staff in place,
as well as people trained to represent its technology in China.
In October, 1995, test results from the Dezhou Heat & Power Plant exceeded
Chinese compliance standards for sulfur dioxide removal with a removal
efficiency for sulfur dioxide of 69.5%. These results were also achieved using
a much lower ratio of sorbent to sulfur than employed by traditional dry
sorbent injection methods, which results in a significant cost savings. This
facility is now certified as operating in compliance with Chinese standards.
After completion of a one year testing period, Alanco Beijing permanently
installed one CDSI unit at the Dezhou Heat & Power Plant. Dezhou Heat and
Power is expected to purchase more units. The Company's CDSI system was one of
five environmental technologies listed in Premier Li's "Agenda 21" plan for
6<PAGE>
cleaning up China's environment. The Agenda 21 listing is expected to result
in additional sales of CDSI systems.
Hangzhou purchased one CDSI unit with ancillary equipment for installation
in October, 1996. The total price for this installation is $155,000, and the
Company has received 80% of the purchase price of the contract to date with the
final 20% to be paid in January 1998. Now that testing and acceptance of the
initial installation is complete, Hangzhou has indicated that it will consider
purchasing four additional systems, two of which will be designed for new
boilers. Eight CDSI units have recently been sold to Guangzhou Paper Ltd.,
China's largest paper mill.
Raw Materials. The Company has numerous sources for materials and parts
used to manufacture the CDSI equipment. It does not foresee any difficulty in
the availability of needed materials nor any substantial increase in the price
of materials.
Patents. The Company owns the following United States patents:
U.S. Patent Application entitled "Apparatus For Removing Particulate
Matter And Gases From A Polluted Gas Stream" issued as U.S. Patent No.
5,308,590 on May 3, 1994. This patent is also filed in China.
U.S. Patent Application entitled "Method For Removing Particulate
Matter And Gases From A Polluted Gas Stream" issued as U.S. Patent No.
5,332,562 on July 26, 1994. This patent is also filed in China.
U.S. Patent Application entitled "Hopper System And Electrostatic Gun
For Injection Of An Electrostatically Charged Sorbent Into A Polluted Gas
Stream" issued as U.S. Patent No. 5,312,598 on May 17, 1994. In addition,
this patent application has been filed in Argentina, Australia, Brazil,
Canada, Chile, China, Europe, India, Japan, Korea, Mexico, Pakistan,
Turkey and Venezuela.
U.S. Patent Application entitled "Improved Electrostatic Gun For
Injection Of An Electrostatically Charged Sorbent Into A Polluted Gas
Stream" issued as U.S. Patent No. 5,591,412 on January 7, 1997.
U.S. Patent Application entitled "Purging Electrostatic Gun For
Injection Of A Charged Dry Sorbent Injection And Control System For The
Remediation Of Pollutants In A Gas Stream" issued as U.S. Patent No.
5,648,049 on July 15, 1997.
U.S. Patent Application entitled "Industrial Dust Collector And
Method For Its Use" filed April 24, 1997, which is currently pending.
The Company owns United States Patent No. 4,220,478 titled "Method For
Removing Particulate Matter From A Gas Stream And A Method for Producing A
Product Using The Removed Particulate Matter" and United States Patent No.
4,290,786 titled "Apparatus For Removing Particulate Matter From A Gas Stream".
These are old patents which began to expire in 1997 and deal primarily with the
7<PAGE>
Environetics Dry Scrubber System ("EDSS") or media bed filter system for the
capture of particulate matter.
The Company believes that the rights to and/or ownership of these patents
and patent applications are crucial to its future success. The Company has
filed for additional U.S. and International patents and will continue to do so
as developments warrant.
Competitive Conditions. In the area of air pollution technology, the
Company's competitors include: Wheelabrator; Pure Air; General Electric;
Westinghouse; and Mitsubishi Corporation. The Company believes its proprietary
technology to be superior to that of its competitors, because of the small
space requirements and low maintenance, capital and operating costs associated
with the CDSI unit.
Two government-funded entities have been working in concert for nearly ten
years to reduce sulfur dioxide from coal-fire plants. The technology which is
currently being developed by Air and Energy Engineering Laboratory ("AEEL") and
Energy and Environmental Research Corporation ("EERC") has been funded by the
Department of Energy and may pose a competitive threat to the Company's CDSI
system. EERC has developed a "gas re-burning sorbent injection" process for
remediation of nitrogen oxide and sulfur dioxides, which can be retrofitted to
existing coal-fire combustion equipment at low cost. However, its sulfur
dioxide removal rate is only 50% to 60%.
AEEL's sulfur dioxide removal technology is called ADVACATE. Reportedly,
the process developed by AEEL is able to remove 90% of the sulfur dioxide
produced during coal combustion. Its process involves injection of calcium
silicant sorbent into the exhaust duct downstream of a boiler, which removes
sulfur dioxide without any need for a scrubbing vessel. The technique was
successfully tested as early as 1991, and AEEL claims that its technology will
cost only half that of conventional wet scrubbers, measured both in terms of
capital outlay and operating costs. The above process does not preclude the
use of CDSI equipment to inject the advacate sorbent.
Research and Development Activities. The Company continues to take every
opportunity to enhance the performance capability of its systems through
innovative configurations and special chemical sorbents. Recent research and
development has demonstrated that the CDSI unit does charge lime (SO2 sorbent),
and the theories are in fact correct. This year the CDSI unit has been
redesigned into an industrial quality unit capable of the performance and
reliability to perform in the most severe industrial environments.
Employees. As of September 1, 1997, the Company had six individuals
whose principal responsibilities were in this business segment.
Air Pollution Control and Agricultural Aeration Equipment Manufacturing Segment
Alanco Environmental Manufacturing, Inc., ("AEMI") is the Company's
wholly-owned subsidiary which operates from its facility in Falls City,
Nebraska. AEMI manufactures aeration equipment for the agricultural industry
as well as baghouses and cyclones for industrial applications. The product
lines are: Reverse Air Filters, Pulse Jet Filters, Cyclonic Collectors,
Centrifugal Fans, Pneumatic Conveyors and Ducting. The manufacturing facility
can also perform job shop and original equipment manufacturing for other
entities. AEMI, as indicated above, also manufactures the CDSI system
equipment for the parent company. AEMI accounted for 53% of consolidated
revenues for the year ended June 30, 1997.
8<PAGE>
Marketing. AEMI uses a network of commissioned sales representatives
located across the United States as its primary marketing and sales force.
Personnel at Falls City conduct direct marketing and sales activities,
including telephone sales. AEMI also maintains a small office for
representative support in Kansas City, MO.
Raw Materials. The principal raw materials used in manufacturing are
sheet metal and plate steel, welding supplies, and various kinds of electrical
components, none of which are uncommon to this industry. The Company currently
uses several suppliers. Most of the suppliers are located in the Midwest, and
none are relied upon as the sole source. In this regard, the Company believes
that it has and should maintain an adequate supply of raw materials for the
future.
Patents. AEMI has developed a new Cartridge Filter called the "E-86". A
patent has been applied for and is pending final approval. AEMI has developed
this filter in conjunction with the passage of the new Clean Air Act of 1990.
This filter falls in line with the proposed Pm2.5 ruling that will replace
Pm10.
Seasonality of Business. The Company's manufactured products are marketed
to two separate industries. The agricultural segment is highly seasonal. The
demand for agricultural products, such as fans, ducting and fan/heater
assemblies, begins to heighten around April and May and normally tapers off
around October and November. The industrial products are produced year round.
Working Capital Practices. At year end, the manufacturing segment had a
current ratio (current assets divided by current liabilities) of approximately
3.5 to 1. A strong current position is required to offset the seasonality of
the business. In the past this segment was financed through the parent
company. However, during the past two years, outside financing was not
required. Based upon past performance, AEMI should generate needed capital
internally.
Dependence Upon Key Customers. The Company has recorded sales to over 500
different customers during the year ended June 30, 1997. Of these, no one
customer accounted for 10% of consolidated revenues generated during the
period. Continuation of customer base depends upon pricing, quality and
availability.
Backlog Orders. The Company had orders for approximately $1,101,000 as of
September 12, 1997. The Company believes that all of this will be fulfilled in
the coming fiscal year and that no material change should occur. The Company
had a backlog of $250,000 for the comparable period last year.
9<PAGE>
Competitive Conditions. AEMI categorizes its competition into two groups.
The aeration equipment group, which is seasonal, has three major manufacturers
to compete against. On a competitive note, AEMI is the leader and produces
equipment for the upper end customer. The second category is industrial air
pollution equipment. AEMI is new to this market but has procured significant
orders in the market, thereby demonstrating its sales, engineering and
production abilities.
Employees. As of September 1, 1997, the manufacturing segment employed a
total of 45 people.
Restaurant Equipment/Food Marketing and Distribution Segment
Fry Guy Inc. ("Fry Guy") has developed an Integrated Finger Food Marketing
("IFFM") program whereby it supplies a deep fry machine to customers who are
required to utilize foods of an affiliated distributor. The Company receives
income for all foods sold to the customer utilizing the Company's deep fryer.
In general, the Company has targeted qualified retail businesses offering or
desiring to offer hot foods.
Fry Guy created the IFFM program in conjunction with prominent food
suppliers as strategic partners with whom it has agreements. These suppliers
include Anchor Foods, Zartic Inc., Cargill, and the Lamb-Weston division of
Conagra. Each strategic partner provides an essential ingredient for the IFFM
program. Lamb-Weston, the world's largest supplier of food service French
fries, provides the potato products, mainly French fries. Zartic Inc. provides
the meat products including chicken nuggets and strips. Anchor Foods provides
onion rings, French toast, cheese sticks and cheese stuffed jalapeno peppers.
Cargill is the supplier of the cooking oil.
The fryer, which operates with an air filtering system, eliminates the
need for a venting system, which is necessary with conventional restaurant deep
fryers. The machine operates, with an automated lowering and raising basket
mechanism, on 110 volt electricity as compared to the 220 volts usually
required by conventional deep fryers. The machines weigh only 70 pounds and
can be operated from a countertop. A one gallon or two gallon fryer are
available.
As part of the continued growth of its IFFM program, the Company is now
servicing 1,300 Wal-Mart stores and has just been awarded 85 Super Centers,
which were not part of the original program. The IFFM program has replaced
McDonald's, Taco Bell, Wendy's, A&W Root Beer and Little Caesar's Pizza in a
number of Wal-Mart locations.
Salubre Foods International, Inc., Fry Guy's master distributor, has thus
far developed approximately 26 working distributors who are promoting the IFFM
program. Fry Guy is now serving the Mann Theatre group of Los Angeles. Mann
operates 65 movie theatres in California, Oregon and Colorado. The fryers are
currently installed in 3 theatres in the Denver area and 11 theatres in Los
Angeles and Orange Counties. The roll-out continues at this time.
Marketing. In directing its marketing effort, Fry Guy, through Salubre,
has targeted small food outlets and similar facilities in convenience stores,
discount/department stores, shopping malls, bars and other premises with small
snack bar facilities that previously were unable to offer hot food items. Fry
Guy provides these facilities with the Fry Guy fryer without charge and
receives payment from the food purchased by the distributor. As part of this
Integrated Finger Food Marketing program, Fry Guy also provides warranty
service and repairs to the fryer, training for the fryer operators, promotional
10<PAGE>
and point of sale materials and a program for the development and introduction
of new food products.
Under its agreement with Wal-Mart, Fry Guy will place a total of 1,750
fryers in Wal-Mart snack bars nationally. As of September 1, 1997, 1,300 of
these fryers have been installed. The process of delivering fryers to the
balance of the Wal-Mart snack bars is under way and will be completed by year
end.
Working Capital Practices. Fry Guy will continue its objective of placing
frying machines in profitable locations and will continue to develop its
distribution system. Fry Guy intends to use internally generated cash flow and
available lease financing to fulfill its capital requirements.
Dependence Upon Key Customers. The focus of the Company's restaurant
equipment/food distribution segment has been almost entirely devoted to its
relationship with Wal-Mart. Successful operations of Fry Guy are dependent
upon the Company's ability to meet its obligations under its agreement with
Wal-Mart. Although the Company has one year remaining on a two year commitment
with Wal-Mart, a decision by Wal-Mart to cease or reduce its commitment with
the Company's IFFM program would have a material adverse affect on its
business. Negotiations are under way for a new contract with Wal-Mart.
Backlog Orders. As of September 1, 1997, the Company has an order backlog
for the placement of fryers of approximately 150.
Competitive Conditions. Fry Guy is aware of only one direct competitor
which actively markets a ventless small capacity deep fryer, but does not
market food products. Numerous competitors offer equipment which requires
venting to the outside. Also, they are unaware of any competitor providing
both the sales and distribution of a finger food program.
Employees. As of September 1, 1997, Fry Guy has 15 employees.
Insurance Claims Adjusting Segment
As of June 30, 1997, the Company chose to discontinue its insurance claims
adjusting segment. The Company acquired National Affiliated Adjustment Company
("NAAC"), an independent claims loss adjustment company based in Scottsdale,
Arizona, in 1995. Prior to its acquisition, NAAC and a predecessor had been in
operation for more than 10 years and was one of the largest independent claims
adjustment firms in Arizona. NAAC was operated by the Company's subsidiary,
Unique Systems, Inc., doing business as National Affiliated Adjustment Company.
NAAC was a processor of property, casualty, health insurance and workmen's
compensation claims. It also provided automobile appraisals for a variety of
insurance companies. NAAC's operating revenues for the year ended June 30,
1997, were $403,000 compared to $1,194,000 for the prior year.
The decision to discontinue NAAC's operations was a result of several
factors. NAAC ceased processing workmen's compensation claims during the 1996
fiscal year. The Company's efforts to replace the lost revenues proved
unsuccessful, and NAAC has been unable to generate sufficient income to pay its
expenses. Management determined that focusing the Company's resources and
attention on the food service segment and the pollution control segment was in
the Company's best interest.
11<PAGE>
Mining Segment
The Company has classified its mineral properties as assets held for sale.
It currently holds mining properties without any exploration or development
activity. The Company has been informed by its consulting geologist that
certain of the Company's mining properties lack economic feasibility, based on
the extent of exploration to date. The geologist has, however, encouraged the
Company to continue exploration efforts until a feasible ore body is proven or
a decision is reached to abandon the property.
The Company had previously recorded a contingent sale of 56 mining claims
located in the Tombstone Mining District. This contingent sale was recorded as
an installment sale contract and any profit was recorded pro-rata based upon
the payments received. As of June 30, 1996, the Company has received payments
of $55,000 of the total sale price of $1,180,000. The installment due on or
about July 15, 1997 was not received and the contingent sale has been
terminated.
The Company is actively seeking a sale or joint venture agreement for
operation of the mining properties. As of fiscal year end, there are no
significant negotiations in process. Based upon the time to complete due
diligence by a potential purchaser and the costs involved from their eventual
disposition, the Company has determined a write-down of $2,593,000 is required
as of June 30, 1997. This write-down is consistent with the application of
SFAS (Statement of Financial Accounting Standards) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Environmental Disclosure. There are numerous federal and state laws and
regulations relating to environmental protection which have direct application
to mining, milling and mineralized material processing operations. The more
significant of these laws deal with mined land reclamation and waste water
discharge from such operations. The principal mining operations, exploration
and development of mining properties by the Company has been accomplished
underground with a minimum of surface disturbance.
Two properties which would require limited environmental and/or surface
reclamation are the C.O.D. Mine and the Tombstone Metallurgical Facility. The
Tombstone Metallurgical Facility is located on federal lands which are
administered by the Bureau of Land Management ("BLM"). The facility was
constructed in the 1970's when no permitting was required from the BLM. Since
that time, the facility has operated intermittently, and the Company has
complied with all regulations as they existed. At present, the facility
remains idle. The other property is the C.O.D. Mine, which is also on BLM land
and is also presently idle.
For a more detailed description of the mining properties, see Item 2.
Properties below.
Employees. None.
ITEM 2. PROPERTIES
The Company's corporate office is located in a 4,527 square foot leased
facility in Scottsdale, Arizona. The Company moved to this facility in January
1997 in order to reduce its lease expense and consolidate its facilities. Fry
Guy corporate operations, Air Pollution Control Services and Mining operations
are headquartered at the corporate office. A previous location of 3,883 square
feet is being subleased to an unrelated party.
12<PAGE>
Fry Guy is currently located in a 4,800 square foot leased facility in
Scottsdale, Arizona. The Restaurant Equipment Marketing Segment also leases
770 square feet of warehouse space and 2,708 square feet of office space in Las
Vegas, Nevada. Two previous locations of 3,472 and 1,609 square feet are being
subleased to unrelated parties.
NAAC, which discontinued operations as of June 30, 1997, currently leases
946 square feet of office space in Las Vegas, Nevada. Other office space of
1,348 square feet, located in Tucson, Arizona, is being subleased to an
unrelated party.
AEMI's operating facility is located at Falls City, Nebraska. This
facility is approximately 73,000 square feet under roof and is located on
approximately 6.84 acres. The Company owns this facility. AEMI also leases a
sales office in Kansas City, Missouri. This facility is approximately 297
square feet.
Mining Properties
At June 30, 1997, the Company owned mineral rights in four unpatented
mineral mining and millsite properties in Arizona. The Company's mining
properties include the Tombstone Metallurgical Facility and a mill on the site
of the C.O.D. Mine.
The following table sets forth the Company's major mineral land holdings
for the fiscal years ended June 30, 1997 and 1996.
MAJOR MINERAL LAND HOLDINGS AT JUNE 30, 1997 AND 1996
Mineral Property Location Acreage Ownership
- ---------------- ----------------- ------- ---------
C.O.D. Mine Mohave County, AZ 3,500 100%
Mineral Mountain Pinal County, AZ 4,660 100%
Cherry Creek Yavapai County, AZ 940 100%
Tombstone/STC Claims Cochise County, AZ 9,140 100%
13<PAGE>
Mining/Milling Equipment Location Acreage Ownership
- ------------------------ ----------------- ------- ---------
C.O.D. Mine Mohave County, AZ 150 100%
Tombstone Cochise County, AZ 75 100%
The following tables set forth the current appraised value and the
adjusted carrying value as of June 30, 1997 and 1996, respectively.
MAJOR MINERAL HOLDINGS AT JUNE 30, 1997
Appraised Adjusted
Mineral Property Value (1) Value (2)
- ---------------- ------------- ------------
C.O.D. Mine $ 11,514,385 $ 5,539,328
Mineral Mountain 250,510 221,520
Cherry Creek 195,621 0
Tombstone/STC Claims 783,872 670,275
Mining/Milling Equipment
- ------------------------
C.O.D. Mine Included Above 107,831
Tombstone Mill 205,687 296,702
------------ ------------
Subtotal Mineral Property & Equipment $12,950,075 $ 6,835,656
Less: Carrying Value Reserve -- (2,592,656)
------------ ------------
Total Mineral Property & Equipment $12,950,075 $ 4,243,000
============ ============
(1) The fair market value as determined by the appraisal completed for the
fiscal year ended June 30, 1997.
(2) The adjusted book value after giving consideration to any write-down in
certain mineral property values and reflects the lower of historical cost
or appraised value.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several lawsuits. The Company believes that
any financial exposure is adequately provided for in its financial statements
and that these matters will not have a material adverse effect on the financial
condition or results of operations or cash flows of the Company. However, the
Company is a defendant in the following lawsuits:
In April, 1995, the case of Sun Valley Products, Inc. v. Alanco
Environmental Services, Inc., et. al was filed in the United States District
Court, Southeastern Division, District of North Dakota. Sun Valley Products,
Inc., produces roasted sunflower seeds and purchased a bag filter system from
the George A. Rolfes Company (which later became Heartland Systems, Inc.
("Heartland") in 1992. In 1994, the Company purchased the assets of Heartland
through AEMI. Installation and service of the bag filter system occurred
before and after the time the Company purchased the business assets from
Heartland. The complaint alleged breach of contract, breach of warranties, and
negligence and seeks in excess of $50,000 in damages, though the plaintiff has
not otherwise quantified its damages. The Company negotiated a settlement of
this action in April, 1997. As stipulated by the principal terms of the
settlement agreement, Alanco paid $40,000 of the total $220,000 paid by all
defendants to Sun Valley and waived any damage claim against Sun Valley.
14<PAGE>
On June 21, 1996, the Company was served with a complaint entitled Loveit
Baumgardner and Ping Zhang v. Alanco Environmental Resources Corporation, filed
in Utah District Court, Salt Lake City, Utah. Ms. Baumgardner was a clerical
employee of the Company. Mr. Ping was an employee of the Company whose
services were rendered in the People's Republic of China. Ms. Baumgardner and
Mr. Ping seek 28,000 and 30,000 shares of the Company's common stock,
respectively, which they allege were promised to them by Kevin Jones, the
former chief financial officer of the Company. The Company has denied all
allegations contained in the Complaint. The case is currently in the discovery
stage. The Company and the Plaintiffs have exchanged documents. The Company
has requested depositions of the former officers and directors who the
Plaintiffs allege granted the stock to the Plaintiffs. The Plaintiffs have
been unable to produce these witnesses and their appearances cannot be
compelled as the witnesses reside beyond the jurisdiction of the Utah court.
Failure to produce these witnesses for depositions could result in the
Plaintiffs being unable to present testimony at trial in support of their
allegations.
In April, 1996, the registrant's subsidiary, National Affiliated
Adjustment Company, Katherine Meyer, then President of NAAC, and Norman Meyer,
then President of the Company, were named as Defendants in a civil action filed
by the U.S. Department of Labor in U.S. District Court, Nashville, Tennessee.
The action also names the International Association of Entrepreneurs of America
Benefit Trust, a self-insured employer's workers compensation trust, IAEA,
Inc., Stockton Fuller & Co., Inc., and six other individual defendants. The
action alleges NAAC received excessive compensation under the Employee
Retirement Income Security Act of 1974 (ERISA) and as employees of NAAC, the
Meyers benefited indirectly from their compensation. NAAC and its predecessor,
Realistic Adjustment Company, served as the claims processing facility for the
IAEA Trust. NAAC and the Meyers had no discretionary authority with respect to
the Trust assets or decision making and deny any breach of fiduciary duty. The
IAEA Trust has been placed into Receivership, and NAAC and the Meyers have
fully cooperated with the Receiver and the Department of Labor. NAAC and the
Meyers have filed an Answer to the Complaint denying all material allegations
and intend to vigorously defend the action. In addition, the Company filed a
Motion to Dismiss alleging that the Department of Labor had failed allege
sufficient facts on which to base a claim against NAAC and the Meyers. The
Court denied the motion to dismiss and ordered the Department of Labor to amend
its complaint. The Department of Labor has amended its complaint and answers
have been filed. Following completion of expert witness discovery, the Company
intends to file a motion for summary judgement which states that even if the
facts are as alleged by the Department of Labor, NAAC and the Meyers did not
breach any duty nor violate ERISA.
In July, 1997, the Company was served with a complaint and motion for a
temporary restraining order filed by Harbinger Capital, L.P., in the Superior
Court for the State of Arizona in and for the County of Maricopa. The
complaint sought to compel the Company to hold a special shareholders meeting
for the purpose of the election of a new Board of Directors. The Company
responded to the complaint and motion stating that a special meeting was not
necessary as the Company intended to hold its annual meeting for the purpose of
electing Directors in November, 1997, this date being as soon as possible after
the Company's annual report and audited financial statements could be completed
and distributed to the shareholders. As a result of the hearing held on July
31, 1997, the Court ordered that the Company hold its annual meeting for the
election of Directors on November 7, 1997, and provide certain shareholder
information to Harbinger. The Company has complied with the court's order and
15<PAGE>
has called its annual meeting for November 7, 1997, to be held in Scottsdale,
Arizona.
In August 1997, the Company's Fry Guy subsidiary filed an action in the
Superior Court for the State of Arizona, in and for the County of Maricopa
against Terrence D. Montford in order to collect upon Mr. Montford's promissory
notes to the Company in the principal amount of $48,186.10. Mr. Montford had
served as Vice President of the Company's Fry Guy subsidiary from January 1996
until February 1997, when he was terminated for cause. The causes of Mr.
Montford's termination included mis-use of Company credit cards, cash advances
and expense accounts for personal benefit (acknowledged by Mr. Montford's
promissory notes) and other incidents of dishonesty and breaches of loyalty to
the Company. On September 25, 1997, Mr. Montford filed an answer admitting the
promissory notes and asserting a counterclaim for breach of his employment
contract alleging that his termination was without cause. The Company
considers Mr. Montford's counterclaim to be without merit and intends to
vigorously defend against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Shareholders during the fourth
quarter of the fiscal year ended June 30, 1997.
16<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(1) Market Information: Alanco's common stock is traded on the NASDAQ
Small Cap Market under the symbol "ALAN".
(2) High and Low Sale Prices: The following table sets forth high and low
sale prices for each fiscal quarter for the last two fiscal years. Such
quotations represent inter-dealer prices without retail mark-ups, mark-downs,
or commissions and, accordingly, may not represent actual transactions.
Fiscal 1997 Fiscal 1996
Quarter Ended High Low High Low
------------- --------------- ---------------
September 30 2.50 1.12 2.62 1.75
December 31 2.28 1.00 2.62 1.81
March 31 2.12 1.06 4.93 1.90
June 30 1.31 0.75 4.00 2.00
(3) Security Holders: As of September 12, 1997, Alanco had approximately
1,938 holders of record of its Common Stock. This does not include beneficial
owners holding shares in street name.
(4) Dividend Plans: Alanco has paid no common stock cash dividends and
has no current plans to do so.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company and its subsidiaries can be found
in the following table. This information includes information for the Company
and its subsidiaries on a consolidated basis and should be read in conjunction
with the audited financial statements and accompanying notes.
17<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (Not covered by Report of Independent Certified Public Accountant)
Fiscal Year Ended
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- --------------------------------- -------------- -------------- -------------- -------------- --------------
Operating Revenue 7,057,874 3,769,110 3,438,183 1,581,515 10,987
Net Loss - Continuing Operations (4,746,386) (3,528,353) (4,753,380) (3,839,964) (4,102,173)
- Discontinued Operations (2,360,774) -- -- -- --
============== ============== ============== ============== ==============
Net Loss per share of common stock
Continuing Operations (0.14) (0.11) (0.20) (0.21) (0.32)
Discontinued Operations (0.07) (0.01) -- -- --
============== ============== ============== ============== ==============
Weighted average number of shares 34,320,608 31,782,296 23,839,969 18,253,730 12,974,995
-------------- -------------- -------------- -------------- --------------
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- --------------------------------- -------------- -------------- -------------- -------------- --------------
Current Assets 3,083,517 3,685,510 3,104,491 4,283,308 20,208
Current Liabilities 2,000,625 737,626 980,390 852,184 632,937
-------------- -------------- -------------- -------------- --------------
Working Capital (deficit) 1,082,892 2,947,884 2,124,101 3,431,124 (612,729)
============== ============== ============== ============== ==============
Total Assets 16,958,929 21,275,574 21,189,502 18,281,763 8,432,262
Long Term Debt/Capitalized Leases 1,136,242 372,020 344,129 -- --
Redeemable Preferred Stock -- 330,468 295,062 -- --
Common Stock and Other
Shareholders' Equity 13,822,062 18,970,907 18,600,816 16,327,796 7,799,325
-------------- -------------- -------------- -------------- --------------
</TABLE>
18<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of June 30, 1997, the Company's current assets exceeded current
liabilities by $1,083,000 or a ratio of 1.5 to 1. This decrease from the prior
year can be attributed largely to a reduction in inventory levels of $705,000
and an increase of $766,000 in current maturities of capitalized machine leases
associated with the Fry Guy food program. Subsequent to fiscal year end, the
Company secured a line of credit to provide additional working capital, if
needed. Aside from lease obligations, the Company is relatively debt free. It
does not see the need for further issuance of equity securities at this time.
The Company is not anticipating any significant capital additions aside
from the Fry Guy expansion, which will be funded through available leasing
sources. As revenue from the food program increases, the Company will rely
less upon outside funding to fulfill its requirements.
During June 1997, the Company signed a $1,050,000 contract for the
installation of pollution control equipment in China. This sale was finalized
through the Company's wholly owned subsidiary, Alanco Environmental Technology
Co., Ltd., which is incorporated in Beijing, China. The contract terms require
deposits and progress payments during the construction period. Subsequent to
year end, the Company received a $120,000 deposit on the above contract.
Additional contracts are anticipated during the coming year.
The Company discontinued operating its insurance adjustment business in
favor of concentrating its efforts on the Fry Guy expansion and sales in the
environmental equipment business segments. The shutdown of the insurance
segment will result in significant savings in operating expenses and will help
reduce the Company's overall cash requirements.
The manufacturing business segment has generated internally the necessary
working capital to finance its activities. It is projecting a profit and is
not budgeting any significant capital needs. During the past fiscal year, this
segment successfully developed a state of the art commercial dust filter that
currently has a patent pending. Significant sales from this product line are
anticipated during the year.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Consolidated revenues for fiscal year 1997 increased 87% or $3,289,000
over fiscal year 1996. Effective June 30, 1997, the insurance business segment
was shut down and all prior amounts have been restated for comparative
purposes. The food service segment, Fry Guy Inc., accounted for 82% of the
increase in revenue as the food program developed rapidly during 1997. Revenue
in the manufacturing segment increased by 13% during the year. Sales of
19<PAGE>
pollution control equipment during 1997 were $155,000. There were no pollution
equipment sales in the prior year.
Consolidated selling, general and administrative expenses increased by
$626,000 or 18% over the prior year. Sixty-nine percent of the increase was in
the food service segment and reflects expenses associated with sales growth.
The balance of the increase was in the manufacturing segment and reflects
additional marketing efforts.
Consolidated Loss from Operations, before other income and expenses, was a
negative $1,650,000. This was an improvement over the prior year by
$1,346,000. This gain can be directly attributed to the success of the Fry Guy
good program which was not fully implemented during 1996.
Included under other income and expenses is a $2,593,000 asset write-down
of the Company's mining properties. This represents $0.08 per share of the
loss reported from continuing operations of $0.14 per share. This is a book
entry necessitated by generally accepted accounting principles and complying
with SFAS121 relating to the impairment of assets. The write-down takes into
account the cost of any sale and the time value of future cash flows. The
Company has not given up any mining rights and is not anticipating further
reductions. The Company is still seeking a joint venture or sale of the mining
assets.
A decision was made to close the insurance business segment as of June 30,
1997. This segment reported losses in both years and efforts to improve
performance have not been successful. Management felt the closure would
conserve cash and shift resources toward the remaining core businesses. The
operating losses and write-off of the investment are reported under
discontinued operations. All anticipated expenses associated with the closure
have been accrued in the 1997 statements.
Cash flow from continuing operating activities for current fiscal year end
was a negative $1,233,000. This is an improvement of $1,573,000 over the prior
comparable period. Management expects this trend to continue in the future.
The Company reported a loss per share from continuing operations of $0.14
for 1997. Eliminating the write-down of the mining properties of $0.08,
results in a $0.06 per share loss compared to a loss of $0.10 per share for
fiscal year 1996.
Fiscal 1996 Compared to Fiscal 1995
Consolidated revenues and expenses for fiscal years 1996 and 1995 have
been restated to reflect the shutdown of the insurance segment effective June
30, 1997. After restatement, the 1996 consolidated revenues increased by 10%
over 1995. The manufacturing revenues, which increased 8% from the prior
period, accounted for 88% of consolidated revenues for fiscal year 1996. The
food distribution segment, which increased from $26,000 to $463,000, made up
the balance of the revenues.
20<PAGE>
During 1996, 61% of food service revenue was generated from the sale of
equipment. The Company is currently retaining ownership of the equipment,
ultimately leading to a significant increase in gross profit. The Company has
an agreement in place for the sale of pollution control equipment which will
not be installed or revenue recognized until after fiscal year end. See Note
15 of the Consolidated Financial Statements for additional segment information.
For the year ended June 30, 1996, the restated consolidated loss from
continuing operations was $3,205,000 compared to a loss of $4,753,000 in the
prior year. Fiscal year 1995 included a write down of assets of $1,743,000.
Loss from operations increased by $506,000 over the prior year. Included in
this increase is $262,000 due to higher depreciation and amortization of
goodwill expense.
Consolidated selling, general and administrative expenses increased by
$808,000. The food service segment, reporting for a full fiscal year,
represented $489,000 or 61% of the increase. The manufacturing segment
represented 18% of the increase. During 1996, the Company increased its
marketing efforts especially in the food service and pollution control
equipment segments, established a shareholder relations department and
developed an information retrieval system for Fry Guy Inc.
Product and Environmental Contingencies
The Company is not aware of any material product or environmental
liabilities. Also refer to the environmental disclosure section of the mining
business segment of Item 1.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements.
21<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Alanco Environmental Resources Corporation
We have audited the accompanying consolidated balance sheets of Alanco
Environmental Resources Corporation (formerly known as Alanco Resources
Corporation) and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alanco
Environmental Resources Corporation and subsidiaries as of June 30, 1997 and
1996, and the consolidated results of their operations and their consolidated
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company has incurred operating losses
and has had negative cash flows from operations for the last three years.
These factors, among others, as discussed in Note 1 to the financial
statements, raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 15, 1997
F - 1<PAGE>
BILLIE J. ALLRED
CERTIFIED PUBLIC ACCOUNTANT
Suite J-1
4625 South Ash Avenue
Tempe, Arizona 85282
Tel. (602) 820-2092
Fax (602) 820-4584
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Alanco Environmental Resources Corporation
I have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Alanco Environmental Resources
Corporation (formerly known as Alanco Resources Corporation) for the year ended
June 30, 1995. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the consolidated financial statements referred to above, present
fairly, in all material respects the consolidated results of operations and
cash flows of Alanco Environmental Resources Corporation and subsidiaries for
the year ended June 30, 1995, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company has incurred operating losses and has had
negative cash flows from operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Billie J. Allred
BILLIE J. ALLRED CPA
Tempe, Arizona
September 28, 1995
F - 2<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30,
- -------------------------------------------------------------------------------
ASSETS
1997 1996
------------ -----------
Current assets
Cash $ 526,851 $ 552,010
Accounts receivable, net of allowance for doubtful
accounts of $27,765 and $11,000, respectively 1,169,290 565,120
Notes receivable, current portion (Note 3) 586,739 1,274,647
Inventories (Note 4) 527,479 1,232,705
Prepaid expenses and other current assets 273,158 61,028
------------ -----------
Total current assets 3,083,517 3,685,510
Notes receivable, long-term portion (Note 3) 223,733 -
Property, plant, and equipment, net (Notes 5 and 7) 5,049,080 3,196,584
Costs in excess of book value on acquisition of
wholly-owned subsidiaries, net of accumulated
amortization of $681,814 and $529,066, respectively 3,967,791 4,287,969
Intangible assets, net of accumulated amortization
of $129,294 and $108,119, respectively 175,155 188,808
Assets held for sale (Note 6) 4,243,000 6,855,063
Other assets 216,653 1,272,240
Net assets of discontinued operations (Note 2) - 1,789,400
------------ -----------
Total assets $ 16,958,929 $21,275,574
============ ===========
The accompanying notes are an integral part of these financial statements.
F - 3<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
As of June 30,
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
------------ ------------
Current liabilities
Capital lease obligations, current portion (Note 7)$ 772,419 $ 124,571
Notes payable, current portion (Note 8) 117,965 -
Accounts payable and accrued expenses (Note 9) 882,920 613,055
Net liabilities of discontinued operations (Note 2) 227,321 -
------------ ------------
Total current liabilities 2,000,625 737,626
Capital lease obligations, long-term (Note 7) 1,021,843 372,020
Notes payable, long-term (Note 8) 114,399 -
Unrealized installment sales - 864,553
------------ ------------
Total liabilities 3,136,867 1,974,199
Commitments and contingencies (Notes 7 and 14)
Redeemable Preferred Stock (Note 10) - 330,468
Shareholders' equity (Note 11)
Preferred Stock, Class B, cumulative voting
20,000,000 shares authorized
none issued
Common Stock, no par value
100,000,000 shares authorized
35,346,527 and 33,209,544 shares issued
and outstanding 53,742,005 51,783,690
Accumulated deficit (39,919,943) (32,812,783)
------------ ------------
Total shareholders' equity 13,822,062 18,970,907
------------ ------------
Total liabilities and shareholders' equity $ 16,958,929 $ 21,275,574
============ ============
The accompanying notes are an integral part of these financial statements.
F - 4<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
As of June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
----------- -------------- ------------
Net sales (Note 12) $7,057,874 $ 3,769,110 $ 3,438,183
----------- -------------- ------------
Operating expenses
Direct service and cost of goods sold 3,636,314 2,507,803 2,740,812
Selling, general, and administrative 4,138,811 3,512,650 2,731,060
Depreciation and amortization 932,567 744,466 455,791
----------- -------------- ------------
Total operating expenses 8,707,692 6,764,919 5,927,663
----------- -------------- ------------
Loss from operations (1,649,818) (2,995,809) (2,489,480)
----------- -------------- ------------
Other income (expense)
Interest income 40,135 69,266 62,043
Interest expense (222,868) (101,763) (16,831)
Write-down of assets (Note 6) (2,835,472) (162,772) (1,743,043)
Loss on disposal of assets (78,363) (48,921) (616,543)
Other, net - 34,551 50,474
----------- -------------- ------------
Total other income (expense) (3,096,568) (209,639) (2,263,900)
----------- -------------- ------------
Loss before provision for income taxes (4,746,386) (3,205,448) (4,753,380)
Provision for income taxes (Note 13) - - -
----------- -------------- ------------
Loss from continuing operations (4,746,386) (3,205,448) (4,753,380)
----------- -------------- ------------
Loss from operations of discontinued
insurance adjusting subsidiary(Note 2) (2,046,256) (322,905) -
Estimated loss on disposal of insurance
adjusting subsidiary (Note 2) (314,518) - -
----------- -------------- ------------
Loss from discontinued operations (2,360,774) (322,905) -
----------- ------------- ------------
Net loss $(7,107,160) $ (3,528,353) $(4,753,380)
============ ============= ============
Net loss per share
Loss from continuing operations $ (0.14) $ (0.10) $ (0.20)
Loss from discontinued operations (0.07) (0.01) -
----------- ------------- ------------
Net loss per common share $ (0.21) $ (0.11) $ (0.20)
=========== ============= ============
Weighted average common shares
outstanding 34,320,608 31,782,296 23,839,969
=========== ============= ============
The accompanying notes are an integral part of these financial statements.
F - 5<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended June 30,
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Subscriptions Accumulated
--------------------------
Shares Amount Receivable Deficit Total
----------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 22,687,487 $40,958,847 $ (100,000) $(24,531,050) $16,327,797
Write-off of subscription
receivable (100,000) 100,000 -
Common stock issued for
(Note 11)
Cash 440,600 279,938 279,938
Satisfaction of debt 50,000 37,500 37,500
Services rendered 395,600 358,591 358,591
Acquisition of subsidiary in
Restaurant equipment
industry 4,600,000 4,600,000 4,600,000
Insurance adjusting
industry 1,750,370 1,750,370 1,750,370
Net loss (4,753,380) (4,753,380)
----------- ------------ ------------ ------------- ------------
Balance, June 30, 1995 29,924,057 47,885,246 - (29,284,430) 18,600,816
Common stock issued for
(Note 11)
Cash 2,861,333 3,129,988 3,129,988
Stock option plans 384,500 704,935 704,935
Intangible assets 18,750 41,016 41,016
Services rendered 20,904 22,505 22,505
Net loss (3,528,353) (3,528,353)
----------- ------------ ------------ ------------- ------------
Balance, June 30, 1996 33,209,544 51,783,690 - (32,812,783) 18,970,907
Common stock issued for
(Note 11)
Cash 300,000 318,000 318,000
Conversion of
convertible and
redeemable
preferred stock 1,769,768 1,569,021 1,569,021
Stock options and warrants 57,215 63,444 63,444
Legal settlement 10,000 7,850 7,850
Net loss (7,107,160) (7,107,160)
----------- ------------ ------------ ------------- ------------
Balance, June 30, 1997 35,346,527 $53,742,005 $ - $(39,919,943) $13,822,062
=========== ============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 6<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
------------ ------------- -------------
Cash flows from operating activities
Net loss from continuing operations $(4,746,386) $ (3,205,448) $ (4,753,380)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 932,567 744,466 455,791
Loss on disposition of assets 78,363 48,921 616,543
Write-down of assets 2,835,472 162,772 1,743,043
Stock issued for services rendered
and expenses 7,850 59,465 358,591
Imputed interest on redeemable
preferred stock 43,806 35,406 -
(Increase) decrease in
Accounts receivable (604,170) (174,570) (118,152)
Inventories 231,062 (526,810) 95,063
Prepaid expenses and other current assets (212,130) 123,994 2,835
Other assets (69,413) 167,067 (59,644)
Increase (decrease) in
Accounts payable and accrued expenses 269,865 (136,988) 51,700
Unrealized installment sales - (104,552) -
------------ ------------- -------------
Net cash used in continuing operating activities (1,233,114) (2,806,277) (1,607,610)
Net cash used in discontinued operating
activities (356,588) (220,680) -
------------ ------------- -------------
Net cash used in operating activities (1,589,702) (3,026,957) (1,607,610)
------------ ------------- -------------
Cash flows from investing activities
Advance for notes receivable (91,779) (770,387) (214,208)
Collection of notes receivable 579,154 416,915 -
Purchase of property, plant, and equipment (321,661) (262,126) (391,625)
Proceeds from disposition of assets 12,391 22,365 623,954
Purchase of intangible assets (48,498) (50,566) (18,925)
------------ ------------- -------------
Net cash provided by (used in) continuing
investing activities 129,607 (643,799) (804)
Net cash provided by (used in) discontinued
investing activities 12,535 (34,132) (110,982)
------------ ------------- -------------
Net cash provided by (used in) investing activities 142,142 (677,931) (111,786)
------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 7<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended June 30,
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Cash flows from financing activities
Repayments on notes payable, shareholders $ - $ (51,196) $ -
Advances from borrowings 300,000 - 38,265
Repayments on borrowings (67,636) - -
Repayments on capital lease obligations (386,154) (94,791) (24,299)
Proceeds from the sale of stock 1,576,191 3,797,963 279,938
Other - - (13,995)
------------ ------------ ------------
Net cash provided by continuing investing
activities 1,422,401 3,651,976 279,909
Net cash provided by discontinued investing
activities - 108,493 -
------------ ------------ ------------
Net cash provided by financing activities 1,422,401 3,760,469 279,909
------------ ------------ ------------
Net (decrease) increase in cash (25,159) 55,581 (1,439,487)
Cash, beginning of year 552,010 496,429 1,935,916
------------ ------------ ------------
Cash, end of year $ 526,851 $ 552,010 $ 496,429
============ ============ ============
</TABLE>
Supplemental schedule of non-cash investing and financing activities
(See Notes 3, 7, and 11)
The accompanying notes are an integral part of these financial statements.
F - 8<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Alanco Environmental Resources Corporation and subsidiaries' (the
"Company") business activities for the past several years have emphasized
diversification. The Company has expended substantial time and resources
on the development of its pollution control devices, the Environetics Dry
Scrubber System ("EDDS") and the Charged Dry Sorbent Injection System
("CDSI"), and the acquisition of operating subsidiaries in three different
business segments.
These business segments include:
i) manufacturing for the agricultural and dust control industry;
acquisition was effective on January 1, 1994;
ii) wholesale equipment supplier to the food service industry;
acquisition was effective May 1, 1995; in 1997, the Company
changed operations to food marketing and distribution; and
iii) insurance adjusting, a service-oriented business segment;
acquisition was effective May 1, 1995 and operations were
discontinued on June 30, 1997 (see Note 2).
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
Alanco Environmental Resources Corporation and its wholly-owned
subsidiaries. All significant intercompany transactions have been
eliminated.
Going Concern and Basis of Presentation
---------------------------------------
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. As shown in the
consolidated financial statements, the Company has incurred operating
losses and has had negative cash flows from operations for the last three
years. These factors raise substantial doubt about the Company's ability
to continue as a going concern.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying consolidated balance sheets is dependent upon continued
operations of the Company, which in turn is dependent upon the Company's
ability to continue to raise capital and generate positive cash flows from
operations. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue its existence.
F - 9<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Management plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence:
. The Company has secured financing which management believes will allow
the expansion of its food service segment to full capability, and the
Company intends to continue the current course which has proven to be
profitable. Cash flows from this segment improved substantially during
the last half of the year ended June 30, 1997.
. The Company plans to obtain a line of credit for use during periods of
cash fluctuations.
. The Company has discontinued operations for the insurance adjusting
segment which used operating cash during years ended June 30, 1997 and
1996.
. In June 1997, the Company executed a $1,050,000 contract for the
installation of CDSI equipment. This contract, to be completed during
the next fiscal year, will enhance the Company's cash position. Also,
the Company is in negotiations for additional contracts for the CDSI
equipment to be installed during 1998.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
-----------------------------------
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments including cash, accounts receivable, and
accounts payable and accrued expenses, the carrying amounts approximate
fair value due to their short maturities. The amounts shown for notes
payable and capital lease obligations also approximate fair value because
current interest rates and terms offered to the Company for similar notes
and lease agreements are substantially the same.
F - 10<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant, and Equipment
------------------------------
Property, plant, and equipment, including amounts for capitalized leases,
are stated at cost. Depreciation is computed using the straight-line
method over the useful lives of the assets as follows:
Buildings 32 years
Machinery and equipment 5 to 7 years
Furniture and office equipment 5 to 7 years
Betterments, renewals, and extraordinary repairs that extend the life of
the asset are capitalized; other repairs and maintenance charges are
expensed as incurred. The cost and related accumulated depreciation
applicable to assets retired are removed from the accounts, and the gain
or loss on disposition is recognized in income.
Mineral Properties and Related Assets (Assets Held For Sale)
------------------------------------------------------------
Mineral properties and related assets are carried at the lower of
historical cost or appraised value. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," the Company reviews its assets held for sale for impairment when
events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable (see Note 6).
Costs in Excess of Book Value on Acquisition of Wholly-Owned Subsidiaries
-------------------------------------------------------------------------
and Intangible Assets
---------------------
The Company continually monitors its costs in excess of book value on
acquisition of wholly-owned subsidiaries (which is amortized over 15
years) and its other intangible assets to determine whether any impairment
of these assets has occurred. In making such determination with respect
to costs in excess of book value on acquisition of wholly-owned
subsidiaries, the Company evaluates the performance, on an undiscounted
cash flow basis, of the underlying assets or group of assets which gave
rise to such amounts. With respect to other intangibles, which include
patents, the Company bases its determination on the performance, on an
undiscounted basis, of the related products.
Revenue Recognition
-------------------
Substantially all revenues are recognized when finished products are
shipped or services have been rendered with appropriate provision for
uncollectible accounts.
F - 11<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
-----------
The Company follows the policy of charging the costs of advertising to
expense as incurred.
Concentrations of Credit Risks
------------------------------
The Company sells products (primarily in the United States and China) and
extends credit based on an evaluation of the customer's financial
condition, generally without requiring collateral. Exposure to losses on
receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses.
Income Taxes
------------
The Company uses the liability method of accounting for income taxes
pursuant to SFAS No. 109, "Accounting for Income Taxes."
Net Loss Per Share
------------------
Net loss per share has been calculated based on net losses for the periods
divided by the weighted average number of shares of common stock
outstanding during the periods presented.
Supplemental Cash Flow Information
----------------------------------
The Company paid no income taxes and interest of $184,662, $66,357, and
$16,831 for the years ended June 30, 1997, 1996, and 1995, respectively.
For the non-cash investing and financing activity, see Notes 2, 3, 7, and
11.
Recently Issued Accounting Pronouncement
----------------------------------------
The Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share," which is effective for financial statements issued for periods
ending after December 31, 1997. SFAS No. 128 requires public companies to
present basic earnings per share and, if applicable, diluted earnings per
share instead of primary and fully-diluted earnings per share. The
Company does not believe that reporting earnings per share in accordance
with SFAS No. 128 will be materially different from the earnings per share
previously reported.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, _Disclosures about Segments of an Enterprise and Related
Information,_ effective for fiscal years beginning after December 15,
1997. SFAS 131 requires a company to report certain information about its
operating segments including factors used to identify the reportable
segments and types of products and services from which each reportable
segment derives its revenues. The Company does not anticipate any
material change in the manner that it reports its segment information
under this new pronouncement.
F - 12<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 2 - DISPOSAL OF OPERATIONS
As of June 30, 1997, the Company and its board of directors shut down its
insurance adjusting operations. As a result, the insurance adjusting
operations are accounted for as discontinued operations and, accordingly,
its operations are reported in this manner for all periods presented. For
1996, all assets and liabilities of discontinued operations are presented
as net assets of discontinued operations and for 1997, all assets and
liabilities of discontinued operations are presented as net liabilities of
discontinued operations in the consolidated balance sheets. Included in
loss from discontinued operations are the insurance adjusting total
revenues of approximately $403,000 and $1,194,000 and the net loss from
operations of approximately $2,046,000 and $323,000 for the years ended
June 30, 1997 and 1996, respectively. Included in the 1997 net loss from
operations is a write-off of cost in excess of book value on acquisition
of the wholly-owned subsidiary of $1,498,110. The Company estimates that
the operations will incur approximately $266,000 in expenses during the
shutdown period and will incur a loss approximately $48,000 for the
disposal of the remaining assets. Given the Company's and discontinued
operations' historical losses, there is no tax effect on the disposition
of the operations.
The following is a summary of net (liabilities) assets from discontinued
operations:
1997 1996
----------- ------------
Current assets $ 15,449 $ 155,867
Property, plant, and equipment 33,350 110,674
Other assets 10,251 1,594,996
Current liabilities (286,371) (72,137)
----------- ------------
Net (liabilities) assets from
discontinued operations $ (227,321) $ 1,789,400
=========== ============
F - 13<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 3 - NOTES RECEIVABLE
Notes receivable at June 30 consisted of the following:
1997 1996
---------- -----------
Note receivable, six monthly installments of
$75,000 with balance due December 31,
1995 (A) $ - $ 495,000
Notes receivable, quarterly interest payments
at prime plus 2%, principal was due June 26,
1997 (B) 771,581 620,238
Notes receivable - balance was due March 1997 50,458 -
Note receivable, 9.5% annum with $1,892 monthly
payments of principal and interest, secured
by first lien on the subject property (C) 225,000 -
Notes receivable - trade 30,096 103,403
Notes receivable - other 57,985 95,006
---------- -----------
1,135,120 1,313,647
Less allowance for uncollectible accounts 324,648 39,000
---------- -----------
810,472 1,274,647
Less current portion 586,739 1,274,647
---------- -----------
Long-term portion $ 223,733 $ -
========== ===========
(A) During the year ended June 30, 1995, the Company sold 86% of its 70%
interest in Phoenix Medical Management, Inc. ("PMM") to Amarante
Financial S.A., an unrelated third party, for $870,000. The note
receivable was collected during 1997.
(B) As part of the Company's acquisition of its 70% interest in PMM's
common stock, the Company agreed to indemnify certain unrelated third
parties against losses on their continuing guarantees on leased
facilities and equipment. As a result of these guarantees, the
Company has loaned PMM $771,581 plus accrued interest. PMM's
accounts receivable are collateral for this loan. Also, the
Company's former President and CEO was the former CEO of PMM, and
PMM's current President and CEO is a former officer and director of
the Company. As of June 30, 1997, this note was in default. Also,
subsequent to June 30, 1997, the Company has begun collection
procedures for payment of this note.
F - 14<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 3 - NOTES RECEIVABLE (Continued)
(C) The Company sold a warehouse, accounted for as an asset held for sale
in 1996, for $250,000 with a down payment of $25,000 and a note
receivable of $225,000. The principal and accrued interest is due
the later of the following: 1) May 1999, or 2) sixty days after the
maker receives a letter from the Iowa Department of Natural Resources
of a "no action" regarding an underground storage tank on the subject
premises.
NOTE 4 - INVENTORIES
At June 30, inventories consisted of the following:
1997 1996
---------- -----------
Purchased machine and parts $ 45,843 $ 532,746
Finished goods 192,985 229,231
Work-in-process 10,919 122,037
Raw material 277,732 348,691
---------- -----------
Total $ 527,479 $ 1,232,705
========== ===========
NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT
At June 30, property, plant, and equipment consisted of the following:
1997 1996
------------ -----------
Land $ 60,431 $ 60,231
Buildings 1,350,668 1,330,338
Machinery and equipment 4,397,243 2,044,716
Furniture and office equipment 484,523 465,689
------------ -----------
6,292,865 3,900,974
Less accumulated depreciation 1,243,785 704,390
------------ -----------
Total $ 5,049,080 $3,196,584
============ ===========
F - 15<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 6 - MINERAL PROPERTIES AND RELATED ASSETS (ASSETS HELD FOR SALE)
At June 30, mineral properties and related assets consisted of the
following:
1997 1996
----------- -----------
Mineral properties $ 3,838,467 $ 6,170,676
Mill and refinery 688,696 688,696
Other mining equipment 866,614 866,614
Building - 279,854
----------- -----------
5,393,777 8,005,840
Less accumulated depreciation 1,150,777 1,150,777
----------- -----------
Total $ 4,243,000 $ 6,855,063
=========== ===========
As of June 30, 1996, the Company was actively soliciting the sale of or a
joint venture agreement for the operations of these assets. Accordingly,
the Company has classified these mineral properties as assets held for
sale.
For the year ended June 30, 1997, the Company retained an independent
geologist ("Geologist") to appraise the mineral properties. A majority of
the mining properties are undeveloped claims which generally do not have a
readily demonstrated market value because they lack sufficient exploration
of an ore body to determine the recoverability of the amount and grade of
the potential ore body. The appraiser assigned a value to these
properties based upon the accumulated monies expended on the claims as of
June 30, 1997. Further, the appraiser indicated that these properties
lack economical feasibility based upon the exploration and development to
date. However, he stated further that there existed considerable evidence
as to the potential of these mineral properties and recommended that the
Company increase exploration and development efforts on these properties
until an economically feasible ore body is proved or a decision is reached
to abandon the property. The minority of the mining properties had past
mining activity which gave evidence of an ore grade and recoverability.
The Geologist performed a net present value analysis of the ore grade and
recoverability. The net present value analysis resulted in the current
market value exceeding the historical cost for these mining properties;
however, in accordance with SFAS No. 121, the Company has evaluated the
mineral properties for impairment. The Company's evaluation of these
assets is based on the estimated cash flows expected to result from their
eventual disposition. The Company has estimated the expected timing and
selling cost and determined a write-down of $2,592,656, which is included
in other income (expense) write-down of assets, is required as of June 30,
1997.
F - 16<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 7 - LEASE COMMITMENTS
The Company leases certain facilities and equipment under non-cancelable
operating lease agreements that expire through 2001. The Company also
leases certain machinery and office and computer equipment under non-
cancelable capital lease arrangements.
Future minimum lease payments under non-cancelable capital and operating
leases with initial or remaining terms of one year or more at June 30,
1997 are as follows:
Year ending Operating Capital
June 30, Leases Leases
----------- ------------ ------------
1998 $ 284,546 $ 1,055,140
1999 180,746 977,863
2000 95,892 214,932
2001 3,706 -
------------ ------------
$ 564,890 2,247,935
------------
Less amount representing interest 319,278
Less executory costs (taxes) 134,395
------------
1,794,262
Less current portion 772,419
------------
Long-term portion $ 1,021,843
============
At June 30, leased capital assets included in property, plant, and
equipment consisted of the following:
1997 1996
----------- -----------
Machinery and equipment $ 2,223,825 $ 540,000
Furniture and equipment 68,103 68,103
----------- -----------
2,291,928 608,103
Less accumulated amortization 309,176 119,000
----------- -----------
Total $ 1,982,752 $ 489,103
=========== ===========
The Company entered into capital lease arrangements of $1,683,825 and
$608,103 in 1997 and 1996, respectively.
F - 17<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 8 - NOTES PAYABLE
The Company has two $150,000, 12% per annum notes payable to a financial
corporation. The notes are payable in 30-month installments of $5,813
each and mature in May and June 2000. The notes are secured by 325 Fry
D'Lite Fryer systems or other similar ventless, hoodless fryers as well as
all assets of the Company and its subsidiaries. As of June 30, 1997, the
outstanding balance due was $232,364.
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At June 30, accounts payable and accrued expenses consisted of the
following:
1997 1996
--------- ---------
Accounts payable $ 402,988 $ 233,978
Payroll and related accrual 14,843 155,779
Other accrued expense 465,089 223,298
--------- ---------
Total $ 882,920 $ 613,055
========= =========
NOTE 10 - REDEEMABLE PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Class A convertible
and redeemable preferred stock ("Preferred Stock"). As of June 30, 1997,
Preferred Stock was authorized by Series as follows: Series 1, 26 shares
authorized, issued, and redeemed; Series 2, 110,000 shares authorized,
issued, and redeemed; and Series 3, 25,000 shares authorized, issued, and
redeemed. As of June 30, 1996, there were 26 shares of Series 1
authorized, issued, and outstanding.
During the year ended June 30, 1995, the Company issued 26 shares of
$20,000 par value Series 1 Preferred Stock to K.D. International, S.A. as
part of the acquisition price paid for the insurance adjusting company,
Unique Systems, Inc., dba National Affiliated Adjustment Company ("NAAC").
The stock is redeemable five years from the date of issuance at the
stated par value. Based upon future redemption, the Company has
determined the present value of the future payments by imputing a 12%
discount factor. The Company will reduce future earnings with the annual
imputed interest through the date of redemption. These shares were
converted to common shares as of June 30, 1997 (see Note 11).
F - 18<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 10 - REDEEMABLE PREFERRED STOCK (Continued)
Subsequent to the acquisition of NAAC, the Chief Executive Officer of NAAC
who is the wife of the Company's former CEO and President, acquired these
shares in an unrelated transaction.
During the year ended June 30, 1997, the Company issued 110,000 shares of
$10.00 par value Series 2 Preferred Stock. The stock is convertible 50%
at October 20, 1996 and 100% at November 19, 1996 and redeemable at
October 15, 2001. Also, the shareholders were entitled to an $0.80 per
annum dividend. These shares were converted to common shares as of June
30, 1997 (see Note 11).
During the year ended June 30, 1997, the Company issued 25,000 shares of
$10.00 par value Series 3 Preferred Stock. The stock is convertible 50%
at November 8, 1996 and 100% at December 9, 1996 and redeemable at
November 8, 2001. Also, the shareholders were entitled to an $0.80 per
annum dividend. These shares were converted to common shares as of June
30, 1997 (see Note 11).
NOTE 11 - SHAREHOLDERS' EQUITY
During the year ended June 30, 1997, the Company completed the following
common stock transactions of previously unissued common shares:
. Issued for a legal judgment 10,000 shares for an aggregate value of
$7,850.
. Issued for conversion of the Series 1 Preferred Stock 345,866 shares
which equaled a conversion rate of 75% of the closing bid price per
share on the conversion date.
. Issued for conversion of the Series 2 Preferred Stock 1,144,763 shares
which equaled, in aggregate, a conversion rate of 75% of the closing bid
price per share on the conversion date.
. Issued for conversion of the Series 3 Preferred Stock 279,139 shares
which equaled, in aggregate, a conversion rate of 75% of the closing bid
price per share on the conversion date.
During the year ended June 30, 1996, the Company completed the following
common stock transactions of previously unissued common shares:
. Issued to four directors for services performed 1,000, 1,000, 858, and
746 shares, respectively, at values ranging from $1.00 to $.82 per share
for an aggregate value of $6,000.
F - 19<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (Continued)
. Issued to an unaffiliated company for the rights to manufacture a
machine 18,750 shares at a contract price of $41,016.
. Issued for a legal judgment 12,800 shares for an aggregate value of
$8,000.
. Issued to two employees of a subsidiary, for services performed 4,000
and 500 shares, respectively, for an aggregate value of $8,505.
During the year ended June 30, 1995, the Company completed the following
common stock transactions of previously unissued common shares:
. Issued 1,750,370 shares to an unrelated third party in exchange for the
purchase of a company in the insurance adjusting industry.
. Issued 4,600,000 shares to an unrelated third party in exchange for the
purchase of a company in the wholesale food equipment supply industry.
. Issued 79,100 shares for services provided by unrelated third parties.
These services were valued at $85,341.
. Issued 316,500 shares to several individuals and companies, all of whom
are related parties, for services.
. Issued 50,000 shares to an unrelated party to obtain a judgment against
a third-party defendant who had refused to return a certificate placed
in escrow. The Company valued the shares issued at $37,500. The
transaction under which the certificate had been placed in escrow, for
the benefit of the third-party defendant, had been canceled pursuant to
mutually agreed-upon terms, and the third-party defendant failed to
return the certificate in a timely manner. The Company began legal
proceedings against the party and, based upon multiple jurisdictional
issues, management believed the issuance of the shares under this
transaction would result in more expedient results. The certificate
which was placed in escrow has been returned as a result of this
transaction.
Warrants
--------
For the year ended June 30, 1996, the Company had a private placement
offering for its common stock. In accordance with the private placement,
the Company has outstanding warrants as of June 30, 1997 and 1996 to
purchase 1,316,166 and 1,366,381 shares of common stock, respectively, at
$3 per share for an aggregate value of $3,948,498 and $4,099,143,
respectively. The warrants may be exercised through January 1999.
F - 20<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans
------------------
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations in accounting for its plans and
does not recognize compensation expense for its stock-based compensation
plans other than for restricted stock and options issued to outside third
parties. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS 123, the Company's net
loss and loss per share would be reduced to the pro forma amounts
indicated below:
Year Ended June 30,
-----------------------------
1997 1996
------------ -------------
Net loss
As reported $(7,107,160) $ (3,528,353)
Pro forma $(7,277,460) $ (4,494,873)
Loss per common share
As reported $ (0.21) $ (0.11)
Pro forma $ (0.21) $ (0.14)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before June 30, 1996. The fair value of these
options was estimated at the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions for the
years ended June 30, 1997 and 1996: dividend yields of 0%; expected
volatility of 84%; risk-free interest rates of 5.6%; and expected life of
5.0 and 2.5 years, respectively. The weighted-average fair value of
options granted during the years ended June 30, 1997 and 1996 was $0.68
and $1.04, respectively, and the weighted-average exercise price was $1.06
and $1.48, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
F - 21<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
------------------------------
The market value of the Company's common stock used to value compensation
expense for certain options that contained trading restrictions was
estimated by management. Compensation expense recognized as a result of
the issuance of stock options was $0 and $36,960 for the years ended June
30, 1997 and 1996, respectively.
1995
1995 Granted Directors and Granted
Incentive Price Officers Stock Price
Stock Plan Per Share Option Plan Per Share
----------- ------------- -------------- ----------
Outstanding, June
30, 1995 - $ - - $ -
Granted 737,500 $ 1.89 - 2.09 225,000 $ 0.10
Exercised 159,500 $ 1.89 - 2.09 225,000 $ 0.10
Canceled 18,000 $ 1.89 - $ -
----------- -------------
Outstanding, June
30, 1996 560,000 $ 1.89 - 2.09 - $ -
Granted 50,000 $ 1.25 - 2.00 200,000 $ 0.90
Exercised 7,000 $ 1.89 - $ -
Canceled 323,000 $ 1.89 - 2.00 - $ -
----------- -------------
Outstanding, June
30, 1997 280,000 $ 1.25 - 2.09 200,000 $ 0.90
=========== ============= ============== ==========
Exercisable at
June 30, 1997 280,000 $ 1.25 - 2.09 200,000 $ 0.90
=========== ============= ============== ==========
The weighted-average remaining contractual life of options outstanding
issued under the 1995 Incentive Stock Plan and the 1995 Directors and
Officers Stock Option Plan is 3.4 and 4.2 years, respectively, at June 30,
1997.
NOTE 12 - SALES
Major Customers
---------------
During the year ended June 30, 1997, the Company did business with one
customer whose sales comprised 42% of sales. During the year ended June
30, 1996, the Company did business with one customer whose sales comprised
25% of sales. During the year ended June 30, 1995, the Company did
business with two customers whose sales comprised 49% and 12% of net
sales, respectively.
F - 22<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES
At June 30, significant components of the Company's deferred tax assets
and liabilities for income taxes consist of the following:
1997 1996
------------ ----------
Deferred tax asset (liability)
Unrealized loss reserve $ 1,045,000 $ -
Estimated costs of discontinued operations 125,000 -
Bad debt reserve 12,000 5,000
Net operating losses 8,570,000 7,677,000
------------ ----------
9,752,000 7,682,000
Valuation allowance 9,752,000 7,682,000
------------ ----------
Net deferred tax asset (liability) $ - $ -
============ ==========
The valuation allowance increased by approximately $2,070,000.
For the year ended June 30, 1997, the difference between the federal
statutory rate of 34% and the Company's effective tax rate of 0% is due
primarily to the valuation allowance change of approximately $2,070,000
resulting from the net loss incurred by the Company and the permanent
difference of goodwill expense of approximately $1,901,000.
For the year ended June 30, 1996, the difference between the federal
statutory rate of 34% and the Company's effective tax rate of 0% is due
primarily to the valuation allowance change of approximately $1,400,000
resulting from the net loss incurred by the Company.
As of June 30, 1997, the Company had net federal operating loss
carryforwards totaling approximately $21,423,000. The net operating loss
carryforwards expire in various years through 2012.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Environmental Liabilities
-------------------------
The Company is not aware of any environmental liabilities that would have
a material impact on the Company's financial position, results of
operations, or cash flows.
F - 23<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Legal Proceedings
-----------------
The Company is subject to legal proceedings which arise in the ordinary
course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially
affect the financial position, results of operations, or cash flows of the
Company.
NOTE 15 - SEGMENT INFORMATION
The Company operates primarily in three industry segments: development and
marketing of pollution control devices (corporate and other),
manufacturing for agricultural and dust control industry, and food
marketing and distribution.
The following table is a summary of results by major segments:
June 30,
-----------------------------------------
1997 1996 1995
------------ ------------ ------------
Net sales
Corporate and other $ 155,195 $ - $ 342,373
Manufacturing 3,736,931 3,306,437 3,069,773
Food distribution 3,165,748 462,673 26,037
------------ ------------ ------------
Total $ 7,057,874 $ 3,769,110 $ 3,438,183
============ ============ ============
Net income (loss) from continuing
operations
Corporate and other $(5,217,661) $(2,567,427) $(3,560,612)
Manufacturing (188,710) 12,842 (1,051,222)
Food distribution 659,985 (650,863) (141,546)
------------ ------------ ------------
Total $(4,746,386) $(3,205,448) $(4,753,380)
============ ============ ============
Depreciation and amortization
Corporate and other $ 387,280 $ 409,353 $ 212,558
Manufacturing 225,484 227,246 225,149
Food distribution 319,803 107,867 18,084
------------ ------------ ------------
Total $ 932,567 $ 744,466 $ 455,791
============ ============ ============
F - 24<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
NOTE 15 - SEGMENT INFORMATION (Continued)
June 30,
-----------------------------
1997 1996
------------- ------------
Identifiable assets
Corporate and other $ 10,036,457 $14,108,630
Manufacturing 2,984,131 3,786,344
Food distribution 3,938,341 1,591,200
------------- ------------
Total $ 16,958,929 $19,486,174
============= ============
Property, plant, and equipment additions
Corporate and other $ 21,557 $ 169,460
Manufacturing 79,033 97,475
Food distribution 2,381,130 328,915
------------- ------------
Total $ 2,481,720 $ 595,850
============= ============
NOTE 16 - UNAUDITED QUARTERLY FINANCIAL DATA
1997
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ------------ ------------ ------------
Net sales $1,503,857 $ 1,592,610 $ 1,743,789 $ 2,217,618
Loss from operations $ (341,157) $ (266,499) $ (716,128) $ (326,034)
Net loss $ (350,569) $ (290,116) $ (754,520) $(3,351,181)
Net loss per share $ (0.011) $ (0.009) $ (0.022) $ (0.095)
Weighted average
common shares
outstanding 33,364,278 33,830,716 34,765,533 35,341,475
1996
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ------------ ------------ ------------
Net sales $1,386,704 $ 888,170 $ 599,257 $ 894,979
Loss from operations $ (421,084) $ (633,228) $ (998,295) $ (943,202)
Net loss $ (434,841) $ (697,921) $(1,001,372) $(1,071,314)
Net loss per share $ (0.014) $ (0.022) $ (0.029) $ (0.032)
Weighted average
common shares
outstanding 30,303,406 31,308,113 34,403,029 33,138,224
F - 25<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Alanco Environmental Resources Corporation
Our report on the consolidated financial statements of Alanco Environmental
Resources Corporation is included on page F1 of this Annual Report on Form 10-
K. In connection with our audits of such financial statements as of June 30,
1997 and 1996 and for the years then ended, we have also audited the related
financial statement schedule on page F - 28 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 15, 1997
F - 26<PAGE>
BILLIE J. ALLRED
CERTIFIED PUBLIC ACCOUNTANT
Suite J-1
4625 South Ash Avenue
Tempe, Arizona 85282
Tel. (602) 820-2092
Fax (602) 820-4584
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors and Shareholders
Alanco Environmental Resources Corporation
My report on the consolidated financial statements of Alanco Environmental
Resources Corporation and subsidiaries is included on page F2 of the Annual
Report on Form 10-K. In connection with my audit of such financial statements
for the year ended June 30, 1995, I have also audited the related financial
statement schedule listed in the index on page F28 of this Form 10-K.
In my opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ Billie J. Allred
BILLIE J. ALLRED CPA
Tempe, Arizona
September 28, 1995
F - 27<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
As of June 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
(CAPTION>
Column A Column B Column C Column D Column E
- ------------------------- --------------- --------------------------- ------------- ---------------
Additions
---------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions Period
-------------------- --------------- ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowance deducted from
asset to which it applies
Allowance for doubtful
accounts
Year Ended
June 30, 1997 $ 11,000 $ 22,201 $ - $ 5,436 $ 27,765
June 30, 1996 25,189 11,000 - 25,189 11,000
June 30, 1995 25,600 25,189 - 25,600 25,189
Allowance for notes
receivable
Year Ended
June 30, 1997 39,000 285,648 - - 324,648
June 30, 1996 - 39,000 - - 39,000
Allowance for obsolete
inventory
Year Ended
June 30, 1997 100,000 - - 35,000 65,000
June 30, 1996 - 100,000 - - 100,000
</TABLE>
F - 28<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 16, 1996, Billie J. Allred, the Company's Certifying Accountant
for the previous two fiscal years, declined to stand for re-election as
auditor. Singer Lewak Greenbaum & Goldstein LLP, Certified Public Accountants,
were engaged to serve as the Company's new auditors. The selection of Singer
Lewak Greenbaum & Goldstein LLP, was approved by the Audit Committee of the
Company's Board of Directors.
Mr. Allred's report on the financial statements for the fiscal years ended
June 30, 1995 and 1994 contained a qualification based upon the Company's
ability to continue as a going concern. Except for this qualification, Mr.
Allred's reports have not contained an adverse opinion or a disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope, or
accounting principles. Nor has there been any disagreement with Mr. Allred on
any matter of principles or practices, financial statement disclosure or
auditing scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company and their ages are as
follows:
Name Age Position with Alanco
- ------------------- --- --------------------------
Dennis Schlegel 47 C.E.O./Director
Chairman of the Board
Edward J. Maley 54 President/C.O.O./Director
John E. Haggar 55 Chief Financial Officer
Treasurer/Vice President
Cynthia L. Castellano 35 Corporate Secretary
Harold S. Carpenter 63 Director
Charles Clay Miller 56 Director
Executive Director - Environmental
Technologies Group
John Gilchrist 69 Director
The Directors serve until their successors are elected by the
shareholders. Vacancies on the Board of Directors may be filled by appointment
of the majority of the continuing directors. The executive officers serve at
the discretion of the Board of Directors.
22<PAGE>
Dennis Schlegel. Mr. Schlegel was appointed to the position of C.E.O. in
April, 1997. Mr. Schlegel was elected Chairman of the Board in September 1996.
Since 1987, Mr. Schlegel has been an independent investor in small and start-up
companies as well as a consultant to small and start-up businesses in the areas
of corporate management and financing. Prior to this, Mr. Schlegel owned and
operated Schlegel Investment Co. in Des Moines, Iowa, and Schlegel Ranch
Company, in Iowa and Washington, both of which were engaged in land
development. Mr. Schlegel attended one year at Drake University until he
withdrew to devote his full time to business pursuits.
Edward J. Maley. Edward Maley joined the Company in January 1997 as Vice
President of the Fry Guy division. He is currently President of Alanco and
President of the Fry Guy subsidiary. Mr. Maley was appointed to the Board of
Directors in September 1997. Prior to joining Alanco, Mr. Maley was President
of the U.S. operations for Rhea Vendors, a Milan, Italy, manufacturer of
Espresso/Cappuccino equipment. He was also Vice President of U.S. operations
for Aqua Di Heppi, a Rome, Italy, bottler of sparkling waters. He holds a
Bachelors degree in Political Science from Fairleigh Dickinson University and
is a Marine Corps veteran.
John E. Haggar. Mr. Haggar has been an employee of the Company since June
1995, Treasurer since July 1995, and Chief Financial Officer since February
1996. From December 1994, until June 1995, Mr. Haggar was Chief Financial
Officer of Universal Management Services. Previously, Mr. Haggar was a sole
practitioner engaged in providing accounting services to the general public in
the State of Washington. Mr. Haggar holds a Bachelor of Science in Business
from the University of Minnesota. He is a member of the American Institute of
Certified Public Accountants and is certified in Arizona and Washington State.
From January 1995 to July 1996, Mr. Haggar was a director of Ethika
Corporation, a publicly owned company whose stock is traded on the NASDAQ
System.
Cynthia L. Castellano. Ms. Castellano joined the Company in June 1995 as
Manager of Administration. Ms. Castellano was appointed Assistant Secretary in
December 1995 and then Secretary in February 1996. From January to June, 1995,
Ms. Castellano was Manager of Administration for Universal Management Services,
Inc. From 1992 through 1994, Ms. Castellano was Administrative Manager for a
general contractor in Tempe, Arizona. Ms. Castellano graduated from the
University of Phoenix with a Bachelor of Science degree in Business
Administration.
Harold S. Carpenter. Mr. Carpenter is presently the President of
Superiorgas Co., Des Moines, Iowa, which is engaged in the business of trading
and brokering bulk refined petroleum products with gross sales of approximately
$500 million per year. He is also the General Partner of Superiorgas L.P., an
investment company affiliated with Superiorgas Co. Mr. Carpenter founded these
companies in 1984 and 1980, respectively. Mr. Carpenter is also the President
of Carpenter Investment Company, Des Moines, Iowa, which is a real estate
investment company holding properties primarily in central Iowa. From 1970
until 1994, Mr. Carpenter was the Chairman of the George A. Rolfes Company of
Boone, Iowa, which manufactured air pollution control equipment. Mr. Carpenter
is currently a member of the Board of Directors of the Allied Group, Inc., a
publicly owned insurance company headquartered in Des Moines, Iowa. Mr.
Carpenter graduated from the University of Iowa in 1958 with a Bachelors of
Science and Commerce degree.
Charles Clay Miller. Charles Clay Miller, an environmental engineer, has
a professional background of more than 25 years of management, operations,
research, design, and construction in the environmental industry, in both
23<PAGE>
government and private industry, as well as first hand experience in the
development and implementation of environmental standards in regulatory
environments. Most recently, Mr. Miller was Director of the Escambia County,
Florida, Solid Waste Department, with management of a $9 million annual budget.
Mr. Miller also served as Director of the Air and Land Quality Division of the
Iowa Department of Environmental Quality. During this period Iowa became the
first state in the nation to obtain federal approval for its primary and
secondary Air Quality State Implementation Plans according to the Clean Air Act
Amendments of 1977. Mr. Miller holds B.S. Degrees in Mathematics and
Mechanical Engineering, as well as a Master of Science Degree in Environmental
Engineering and Planning. He has completed course work for a Ph. D. in Civil
Engineering at the University of Missouri, Rolla. Mr. Miller was named to the
Board on September 9, 1996.
John L. Gilchrist. John Gilchrist has been an entrepreneur and business
executive for more than forty years. He holds a Business and Accounting degree
from the American Institute of Business, and from 1968 until 1990 he was the
owner and Chief Executive Officer of Dean Studios, Inc., a photo finishing
laboratory in Des Moines, Iowa. Mr. Gilchrist developed the operations to
include photo finishing innovations, and the business was expanded from one to
three locations which had twenty six employees. Mr. Gilchrist has also been a
successful, self-directed investor for many years. Mr. Gilchrist was nominated
for election to the Company's Board of Directors in November 1996.
Compensation of Directors
Directors are entitled to receive reimbursement for all out-of-pocket
expenses incurred for attendance at Board of Directors meetings. In addition,
all Directors not otherwise employed or compensated by the Company are entitled
to receive up to January 1997, $500, or beginning in February 1997, $750, per
meeting per day up to a maximum of $1,500, or $250 per telephonic meeting, in
cash, in common stock at the market price per share, or in health insurance
benefits. Pursuant to these directors fees, no shares of common stock were
issued. In addition, on September 10, 1996, Harold Carpenter and Dennis
Schlegel were awarded options to acquire 100,000 shares each of stock pursuant
to the Company's 1996 Directors and Officers Stock Option Plan at an exercise
price of $0.90 per share. At the April 1997 Board of Directors meeting, the
Board accelerated the vesting of Norman E. Meyer's previously reported option
of 100,000 shares of stock issued pursuant to the 1995 Directors and Officers
Stock Option Plan. Also, on July 16, 1997, Wang Yee Lin, Charles Miller and
Edward Maley were awarded options to acquire 40,000 shares each of stock
pursuant to the Company's 1996 Directors and Officers Stock Option Plan at an
exercise price of $0.875 per share.
On August 27, 1997, the Board of Directors approved a two year employment
contract for Charles Miller in which he was awarded another option to purchase
an additional 40,000 shares of stock pursuant to the Company's 1996 Directors
and Officers Stock Option Plan at an exercise price of $0.672 per share
exercisable at the beginning of the second year of the employment contract.
Under a two year employment agreement approved by the Board of Directors on
August 27, 1997, Dennis Schlegel was awarded an option to purchase 50,000
shares of stock pursuant to the Company's 1996 Directors and Officers Stock
Option Plan at an exercise price of $0.672 per share exercisable at the start
of contract. The Board of Directors also separately authorized Dennis Schlegel
another option to purchase 70,000 shares of stock (exclusive of the Company's
1996 Directors and Officers Stock Option Plan) at an exercise price of $0.672
per share exercisable at the beginning of the second year of his employment
contract.
24<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows for the fiscal year ending June 30, 1997, the
compensation awarded or paid by the Company to its Chief Executive Officer and
any of the executive officers of the Company whose total salary and bonus
exceeded $100,000 during such year (The "Named Executive Officers"):
Long Term Compensation
Awards
Restricted Securities
Name and Stock Underlying All Other
Principal Fiscal Annual Compensation Awards Options Compen-
Position Year Salary Bonus ($) (#shares) sation
Norman E. Meyer 1996 $ 81,250 - $209,000 150,000 -
President, Chief 1997 $156,526 - - - -
Executive Officer (1)
Dennis Schlegel 1997 $ 10,000 - $50,625 100,000 -
Chief Executive 120,000 (3)
Officer (2)
(1) Mr. Meyer served as C.E.O. and President from April 1995 until April 1997.
(2) Mr. Schlegel was elected C.E.O. in April 1997.
(3) See Director Compensation Section.
No other executive officer earned more than $100,000 during the current
fiscal year.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 1997, to each of the Named Executive Officers. No
stock appreciation rights ("SARs") have been granted by the Company.
Individual Grants
Percent of
Number of Total Potential Realizable
Securities Options Mkt Assumed Annual Rates
Underlying Granted to Exer- Price of Stock Price
Options Employees cise Date Appreciation for
Granted(1) in Fiscal Price of Expir Option Term (2)
Name (#) Year ($/Sh) Grant Date 5% 10% 0%
Dennis Schlegel 100,000 100.0 $0.90 $1.406 9/10/01 89,500 136,500 50,600
(1) Options for common shares only, granted through the 1996 Directors and
Officers Stock Option Plan.
(2) Calculated based on given interest rate for the five year life of the
option. The column headed 0% shows the potential gain (assuming no
restrictions) upon exercise of Directors and Officers Options at
market price on the date of grant.
25<PAGE>
Option Grants Subsequent to Fiscal Year End
Number of
Securities
Underlying
Options Date of Date Expiration Option
Name Granted Grant Exercisable Date Price
- --------------- ----------- -------- ------------ ----------- ------
Wang Yee Lin 40,000 7/16/97 7/16/97 7/16/2002 .875
Edward Maley 40,000 7/16/97 7/16/97 7/16/2002 .875
Charles Miller 40,000 7/16/97 7/16/97 7/16/2002 .875
Charles Miller 40,000 8/27/97 9/01/98 8/27/2002 .672
Dennis Schlegel 50,000 8/27/97 9/01/98 8/27/2002 .672
Dennis Schlegel 70,000 8/27/97 9/01/98 8/27/2002 .672
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option/Values
The following table sets forth the number and value of the unexercised
options held by each of the Named Executive Officers at June 30, 1997. None of
the Named Executive Officers who hold unexercised options exercised options in
the fiscal year ended June 30, 1997.
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares Acquired Value FY-End (#) FY-End ($)
Name On Exercise (#) Realized ($) Exercisable Exercisable
- ------------------ --------------- ------------ ----------- ------------
Dennis Schlegel 0 0 100,000 0
Norman Meyer 0 0 50,000 (1) 0
John Haggar 0 0 50,000 0
Cynthia Castellano 0 0 7,500 0
(1) Option expired subsequent to year end
Employment Agreements and Executive Compensation
Dennis Schlegel, Chief Executive Officer, has a two year employment
agreement with the Company whereby he receives during the first year, $6,250
per month in regular compensation and options to purchase 50,000 shares of the
Company stock at $0.672 per share, and during the second year, a minimum of
$10,000 per month in regular compensation and options to purchase 70,000 shares
of the Company stock at $0.672 per share. Mr. Schlegel's employment agreement
with the Company expires August 31, 1999.
Mr. Maley, the Company's President and Chief Operating Officer, is
currently serving with no employment contract at a rate of $8,000 per month in
regular compensation and has options to purchase 40,000 shares of the Company
stock at $0.875 per share.
Mr. Haggar, the Company's Chief Financial Officer and Vice President,
receives $8,000 per month in regular compensation under the terms of an
employment agreement valid through April 24, 1998.
26<PAGE>
Incentive Stock Option Plan
On December 16, 1995, the Shareholders approved the Company's 1995
Incentive Stock Option Plan (the Plan). The purpose of the Plan is to advance
the business and development of the Company and its shareholders by affording
to the key employees of the Company the opportunity to acquire a propriety
interest in the Company by the grant of Options to acquire shares of the
Company's common stock. The Options granted are "Incentive Stock Options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, for certain key employees. The Plan is administered by an
Administrative Committee whom shall serve a one year term. The Administrative
Committee is composed of the Board's Compensation/Administration Committee.
The current members of the Compensation Committee are Charles Miller and Harold
Carpenter. The Plan was approved by the Board of Directors on September 28,
1995, subject to Shareholder approval, and shall terminate on September 28,
2005.
Subject to anti-dilution provisions, the Plan may issue Options to acquire
up to 1,000,000 shares to Key Employees. The maximum number of shares subject
to Options granted to any one Key Employee shall not exceed 100,000 shares.
The exercise price for Options shall be set by the Administrative Committee but
shall not be for less than the fair market value of the shares on the date the
Option is granted. The period in which Options can be exercised shall be set
by the Administrative Committee not to exceed five years from the date of
Grant. The Plan may be terminated, modified or amended by the Board of
directors upon the recommendation of the Administrative Committee. The
issuance of options pursuant to this Plan is not expected to be a taxable event
for recipient until such time that the recipient elects to exercise the option
whereupon the recipient is expected to recognize income to the extent the
market price of the shares exceeds the exercise price of the option on the date
of exercise. All Key Employees of the Company and its subsidiaries are
eligible to participate in the Incentive Stock Options. A Key Employee is
defined in the Plan as a Company employee who in the judgement of the
Administrative Committee has the ability to positively affect the profitability
and economic well-being of the Company. Part time employees, independent
contractors, consultants and advisors performing bona fide services to the
Company shall be considered employees for purposes of participation in the
Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The following table sets forth persons known to the Company as
beneficially owning more than five percent (5%) of the outstanding shares of
the Registrant.
% of Shares
Name and Address Shares Outstanding
- ------------------------------- ----------- ------------
Harbinger Capital L.P.
4365 Executive Drive, Suite 740
San Diego, CA 92121 7,455,720 21.1%
27<PAGE>
(b) The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of June 30, 1997, by individual directors
and executive officers and by all directors and executive officers of the
Company as a group.
% of Shares
Name and Address Shares Outstanding
- ------------------- ------- -----------
Dennis Schlegel 204,445 (1) 0.58%
Harold S. Carpenter 728,986 (2) 2.06%
John E. Haggar 50,000 0.14%
Charles Clay Miller 13,000 0.04%
John Gilchrist 80,747 (3) 0.23%
Officers and Directors as a
Group (5 individuals) 1,077,178 3.05%
(1) Includes 153,440 shares indirect ownership
(2) Includes 256,606 shares indirect ownership
(3) Includes 5,747 shares indirect ownership
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January, 1997, the Board of Directors approved the conversion of 26
shares of the Company's Series I Preferred Stock held by Kamco Holdings Inc.,
into 345,866 shares of the Company's Common Stock. These shares were
originally issued in 1995 to K. D. International, S.A., as part of the
acquisition price paid for Unique Systems, Inc. d/b/a National Affiliated
Adjustment Company, and later acquired by Katherine Meyer in an unrelated
transaction. Mrs. Meyer is the wife of the Company's former C.E.O. and
President, Norman E. Meyer, and a shareholder of Kamco Holdings Inc.
28<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Exhibits
(3)(i) Restated and Amended Articles of Incorporation
(3)(ii) By-Laws of Corporation
(21) Subsidiaries of Registrant
(27) Financial Data Schedule
B. Schedule
(II) Valuation and Qualifying Accounts
C. Reports on Form 8-K
Report to be filed, resignation of one of Registrant's Directors. On
September 22, 1997, the Company received notice from Wang Yee (Sammy) Lin
resigning as a Director of Alanco Environmental Resources Corporation, and
citing disagreement and conflict with policies and actions taken by the
Company's Board of Directors. Mr. Lin remains as Chairman, President and Chief
Executive Officer of Alanco Environmental Technology (Beijing) Co. Ltd., the
Company's wholly-owned subsidiary incorporated in China.
Exhibits or schedules other than those mentioned above are omitted because the
conditions requiring their filing do not exist or because the required
information is given in the financial statements, including the notes thereto.
29<PAGE>
EXHIBIT (21) SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
- ----------------------------------------------- --------------------------
Alanco Environmental Services, Inc. Nevada
Alanco Environmental Manufacturing, Inc. Nebraska
Alanco Financial Services Corp. Nevada
Alanco Environmental Technology People's Republic of China
(Beijing) Co. Ltd.
Fry Guy Inc. Nevada
Unique Systems, Inc.
d/b/a National Affiliated Adjustment Company Nevada
30<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Alanco Environmental
Resources Corporation
/s/ Dennis Schlegel
-----------------------
Dennis Schlegel, CEO,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ John Gilchrist Director 9/26/97
- -------------------------- ----------------
John Gilchrist
/s/ Harold S. Carpenter Director 9/26/97
- -------------------------- -----------------
Harold S. Carpenter
/s/ Charles Clay Miller Director 9/26/97
- -------------------------- -----------------
Charles Clay Miller
/s/ Edward J. Maley Director 9/26/97
- -------------------------- -----------------
Edward J. Maley
/s/ John E. Haggar Chief Financial Officer 9/26/97
- -------------------------- -----------------
John E. Haggar
31<PAGE>
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<PERIOD-END> JUN-30-1997
<CASH> 526851
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<RECEIVABLES> 2108442
<ALLOWANCES> 352413
<INVENTORY> 527479
<CURRENT-ASSETS> 3083517
<PP&E> 6292865
<DEPRECIATION> 1243785
<TOTAL-ASSETS> 16958929
<CURRENT-LIABILITIES> 2000625
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0
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<COMMON> 53742005
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<TOTAL-LIABILITY-AND-EQUITY> 16958929
<SALES> 7011702
<TOTAL-REVENUES> 7057874
<CGS> 3636314
<TOTAL-COSTS> 8707692
<OTHER-EXPENSES> 2873700
<LOSS-PROVISION> 307849
<INTEREST-EXPENSE> 222868
<INCOME-PRETAX> (4746386)
<INCOME-TAX> 0
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<DISCONTINUED> (2360774)
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</TABLE>
AMENDED AND RESTATED
---------------------
ARTICLES OF INCORPORATION
OF
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
ARTICLE I
----------
The name of the Corporation shall be ALANCO ENVIRONMENTAL RESOURCES
CORPORATION.
ARTICLE II
----------
The known place of business of the Corporation shall be 15900 North 78th
Street, 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 capital stock of the Corporation shall consist of the following:
1) One Hundred Million (100,000,000) shares of no par value Common
Stock;
2) Five Million (5,000,000) shares of Class A Cumulative Convertible
Preferred Shares;
3) Twenty Million (20,000,000) shares of Class B Cumulative Preferred
Shares.
All such stock shall be paid in from time to time upon such conditions as
may be determined by the Board of Directors. The stock may be issued in
payment for real or personal property, services, or any other right or things
of value for the use and purpose of the Corporation, and all such stock, when
so issued, shall become and be fully paid as though paid for in cash, the Board
of Directors to be the sole judges, in the absence of fraud, of the value of
any property or rights acquired in exchange for capital stock, and all such
stock when issued shall be deemed fully paid and non-assessable.
All of the above stock shall be entitled to one vote per share, provided,
however, that in the case of the election of directors of the Corporation,
every shareholder shall be entitled to cumulate their votes and give one (1)
candidate for election as a director a number of votes equal to the number of
directors to be elected, multiplied by the number of votes to which their
shares are entitled, or distribute their votes on the same principle among as
many candidates as said shareholder deems fit.
1<PAGE>
Subject to the terms and provisions of this Article, the Board of
Directors is authorized to provide from time to time for the issuance of shares
of any class of Preferred Stock in series and to fix from time to time before
issuance or if after issuance upon the mutual written consent of all the
designated series shareholders of the series for which said amended
designation, preferences and/or privileges is sought, the designation,
preferences and privileges of the shares of each series of Preferred Stock and
the restrictions or qualifications thereof, including, without limiting the
generality of the foregoing, the following:
(a) The series designation and authorized number of shares;
(b) The dividend rate, the date or dates on which such dividends will be
payable, and the extent to which such dividends may be cumulative;
(c) The amount or amounts to be received by the holders in the event of
voluntary or involuntary dissolution or liquidation of the
Corporation;
(d) The price or prices at which shares may be redeemed and any terms,
conditions and limitations upon such redemption;
(e) Any sinking fund provisions for redemption or purchase of shares of
each series; and
(f) The terms and conditions, if any, on which shares may be converted at
the election of the holders thereof into shares of other capital
stock, or of other series of Preferred Stock, or other debt
securities of the Corporation.
Each series of Preferred Stock, in preference to the Common Stock, will be
entitled to dividends, from funds or other assets legally available therefor,
at such rates, payable at such time and cumulative to such extent as may be
fixed by the Board of Directors pursuant to the authority herein conferred
upon it. In the event of dissolution or liquidation of the Corporation,
voluntary or involuntary, the holders of the Preferred Stock, in preference to
the Common Stock, will be entitled to receive such amount or amounts as may be
fixed by the Board of Directors pursuant to the authority, herein conferred
upon it.
Each series of Preferred Stock may be subject to redemption in whole or in
part at such price or prices and on such terms, conditions and limitations, as
may be fixed by the Board of Directors pursuant to the authority herein
conferred upon it, of such series. If less than all of the shares of any
series of the Preferred Stock are to be redeemed, they will be selected in such
manner as the Board of Directors shall then determine. Nothing herein
contained is to limit any right of the Corporation to purchase or otherwise
acquire any shares of any series of the Preferred Stock. Any shares of the
Preferred Stock redeemed or otherwise acquired by the Corporation and which
revert to the status of authorized and unissued shares shall be undesignated as
to series, and may thereafter, in the discretion of the Board of Directors and
to the extent permitted by law, be sold or reissued from time to time as part
of another series or (unless prohibited by the terms of such series as fixed by
the Board of Directors) of the same series, subject to the terms and conditions
therein set forth.
2<PAGE>
Notice of the intention of the Corporation to redeem shares of any series
of the Preferred Stock shall be mailed at least thirty (30) days before the
date of redemption to each holder of record of shares to be redeemed at his or
her last known post office address as shown by the records of the Corporation.
At any time after such notice has been mailed as aforesaid, the Corporation may
deposit (separately as to the series) the aggregate redemption price payable
with respect to the shares to be redeemed (or the portion thereof not already
paid in the redemption of such shares) with any bank or trust company in the
United States named in the notice of redemption. Such deposits are to be
payable in amounts as aforesaid to the respective orders of the holders of
record of the shares to be redeemed on endorsement (if required) and surrender
of their certificates, thereupon such holders will cease to be shareholders
with respect to said shares and, from and after the making of such deposit,
such holders will have no interest or claim against the Corporation with
respect to said shares, but will be entitled only to receive from such bank or
trust company, without interest, the moneys so deposited with it.
Dividends may be paid upon the Common Stock only when dividends have been
paid, or funds have been set apart for the payment of dividends, on the
Preferred Stock from the date after which dividends on the Preferred Stock
became cumulative to the beginning of the then current dividend period, but
whenever there shall have been paid, or funds shall have been set apart for the
payment of, all such dividends upon the Preferred Stock, then dividends upon
the Common Stock may be declared for payment then or thereafter out of
remaining funds or other assets legally available for such payments. After the
payment of the designated dividends, and amounts payable upon dissolution or
liquidation, if any, to which the shares of the Preferred Stock are expressly
entitled in preference to the Common Stock in accordance with the provisions
herein set forth, the Common Stock is to receive all further such dividends and
amounts.
Neither a consolidation, merger or amalgamation of this Corporation with
or into any other corporation or corporations, nor the sale, lease or
conveyance of all or part of its assets shall be deemed a liquidation,
dissolution or winding up of the affairs of the Corporation within the meaning
of any provision herein.
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
3<PAGE>
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.
4<PAGE>
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: Dean
A. Douglas, 15900 North 78th Street, 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.
/s/ Cynthia L. Castellano
--------------------------
Corporate Secretary
5<PAGE>
By-Laws
of
Alanco Environmental Resources Corporation
I. CORPORATION ARTICLES
1.01 - References Thereto.
Any reference herein made to the Corporation's Articles will be deemed to
refer to its Articles of Incorporation and all Amendments thereto as at any
given time on file with the Arizona Corporation Commission, together with any
and all certificates theretofore filed by the Corporation with the Arizona
Corporation Commission pursuant to applicable law.
1.02 - Seniority Thereof.
The Articles will in all respects be considered senior and superior to
these By-Laws, with any inconsistency to be resolved in favor of the Articles,
and with these By-Laws to be deemed automatically amended from time to time to
eliminate any such inconsistency which may then exist.
II. STOCKHOLDERS MEETINGS
2.01 - Annual Meetings.
Each annual meeting of the stockholders is to be held on the date
determined in accordance with the Corporation's Articles of Incorporation, at a
time of day and place as determined by the Board of Directors, or in the
absence of action by the Board, as set forth in the notice given, or waiver
signed, with respect to such meeting pursuant to Section 2.03 below. If any
such annual meeting is for any reason not held on the date determined as
aforesaid, a special meeting may thereafter be called and held in lieu thereof,
and the same proceedings (including the election of Directors) may be conducted
thereat as at a regular meeting. Any Director elected at any annual meeting or
special meeting in lieu of an annual meeting, will continue in office until the
election of his/her successor, subject to his/her earlier resignation pursuant
to Section 6.01 below.
2.02 - Special Meetings.
Special meetings of the stockholders may be held whenever and wherever
called for by the Chairman of the Board, the President or the Board of
Directors, or by the written demand of the holders of 10% of all issued and
outstanding shares of the stock, regardless of class. The business which may be
conducted at any such special meeting will be confined to the purposes, stated
in the notice thereof, and to such additional matters as the Chairman of such
meeting may rule to be germane to such purposes.
2.03 - Notices.
At least twenty (20) days (inclusive of the date of meeting) before the
date of any meeting of the stockholders and at the direction of the person or
persons calling the meeting, the Secretary of the Corporation will cause a
written notice setting forth the time, place and general purposes of the
meeting to be deposited in the mail, with postage prepaid, addressed to each
stockholder of record at his last address as it then, or on the applicable
record date, appears on the Corporation's records. Any stockholder may waive
call or notice of any annual, or special meeting (and any adjournment thereof)
at any time before, during which or after it is held. Attendance of a
stockholder at any such meeting in person or by proxy will automatically
- 1 -<PAGE>
By-Laws
of
Alanco Environmental Resources Corporation
evidence his/her waiver of call and notice of such meeting ( and any
adjournment thereof) unless he/she or his/her proxy is attending the meeting
for the express purpose of objecting to the transaction of business thereat
because it has not been properly called or noticed. No call or notice of a
meeting of the stockholders will be necessary if each of them waives the same
in writing or by attendance as aforesaid.
2.04 - Registered Stockholders.
For the purpose of determining stockholders entitled to notice of or to
vote at any meeting of stockholders (and at any adjournment thereof), or
stockholders entitled to express written consent to corporate action without a
meeting, or in order to make a determination of stockholders for any other
lawful action, the Board of Directors may fix in advance a record date which
shall not be more than sixty (60) days before the date of such meeting, nor
more than sixty (60) days prior to any such other action.
If no record date is fixed for determining stockholders entitled to notice
of or to vote at a meeting of stockholders, the record date shall be at four
o'clock in the afternoon on the day before the day on which notice is given,
or, if notice is waived, at the commencement of the meeting. If no record date
is fixed for determining shareholders entitled to express written consent to
corporate action without meeting, the record dated shall be the time of the day
on which the first written consent is served upon an Officer or Director of the
Corporation.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting and further provided that the adjournment or adjournments
of any such meeting do not exceed sixty (60) days in the aggregate.
2.05 - Voting Record.
The Officer or Agent having charge of the stock transfer books for shares
of the Corporation shall make a complete record of the stockholders entitled to
vote at a meeting of the stockholders (and at any adjournment thereof),
arranged in alphabetical order, with the address of and the number of shares
held by each. Such record shall be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any stockholder
during the whole time of the meeting for the purposes thereof.
2.06 - Proxies.
At all meetings of the stockholders (and at any adjournment thereof), any
stockholder entitled to vote thereat, may vote by proxy, executed in writing by
the stockholder or by his duly authorized attorney-in-fact. No proxy shall be
valid after eleven months from the date of its execution, unless otherwise
provided in the proxy. The burden of proving the validity of any proxy undated,
irrevocable, or otherwise contested at any such meeting of the stockholders
will rest with the person seeking to exercise the same. A telegram, facsimile
or cablegram appearing to have been transmitted by a stockholder or by his duly
authorized attorney-in-fact may be accepted as a sufficiently written and
executed proxy.
2.07 - Voting.
Except for the election of Directors (which will be governed by cumulative
- 2 -<PAGE>
By-Laws
of
Alanco Environmental Resources Corporation
voting pursuant to applicable law) and except as may otherwise be required by
the Corporation's Articles, Section 2.08 below, or by applicable statutes, each
issued and outstanding share of the Corporation's capital stock (specifically
excluding shares held in the treasury of the Corporation) represented at any
meeting of the stockholders, in person or by proxy, given pursuant to Section
2.06 above, will be entitled to one vote. Unless otherwise required by the
Corporation's Articles or by applicable statutes, any question submitted to the
stockholders will be resolved by a majority of the votes cast thereon provided
that such votes constitute a majority and the quorum is then present. The
voting will be by ballot on any question as to which a ballot vote is demanded,
prior to the time the voting begins, by any person entitled to vote on such
question; otherwise, a voice vote will suffice. No ballot or change of vote
will be accepted after the polls have been declared closed following the ending
of the announced time for voting.
2.08 - Voting of Shares by Certain Holders.
Shares of the Corporation held by another corporation may be voted by such
corporation's officer, agent or proxy as its by-laws may prescribe, or in
absence of such by-law provision, by any other person designated by resolution
of its Board of Directors, and such officer, agent or other person so
designated may vote such corporation's shares in this Corporation in person or
by proxy appointed by him.
Shares held by an administrator, executor, guardian or conservator may be
voted by such representative, either in person or by proxy, without a transfer
of such shares into his name. Shares standing in the name of a trustee, other
than a trustee in bankruptcy, may be voted by such representative, either in
person or by proxy, but no such trustee shall be entitled to vote shares held
by him without a transfer of such shares into his name.
Shares standing in the name of a receiver, trustee in bankruptcy, or
assignee for the benefit of creditors may be voted by such representative,
either in person or by proxy. Shares held by or under the control of such a
receiver or trustee may be voted by such receiver or trustee, either in person
or by proxy, without the transfer thereof into his name if authority so to do
be contained in an appropriate order of the court by which such receiver or
trustee was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
If shares stand in the names of two or more persons, whether fiduciaries,
members of a partnership, joint tenants, tenants in common, tenants by
community property or otherwise, or if two or more persons have the same
fiduciary relationship respecting the same shares, unless the Corporation is
given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(1) If only one votes, his act binds; (2) If more than one votes, the act of
the majority so voting binds all; and (3) If more than one votes, but the vote
is evenly split on any particular matter, each fraction may vote the shares in
question proportionally.
Shares standing in the name of a married woman but not also standing in
the name of her husband with such a designation of mutual relationship on the
certificate, may be voted and all rights incident thereto may be exercised in
- 3 -<PAGE>
By-Laws
of
Alanco Environmental Resources Corporation
the same manner as if she were unmarried.
Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the elections of
Directors of such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor counted for quorum purposes.
Nothing in this Section shall be construed as limiting the right of the
Corporation to vote its own stock held by it in a fiduciary capacity.
Shares standing in the name of a broker-dealer or similar institution for
beneficial owners to whom the broker-dealer distributed notice of the
stockholder's meeting and proxy information shall be voted as instructed by the
beneficial owners thereof. The foregoing notwithstanding, such shares may be
counted as present for purposes of determining the presence of a quorum as
stated below. In addition, the Corporation shall rely solely upon the proxy
information returned by such broker-dealers regardless of all other proxies
purported to be signed by said beneficial owner or requests to vote such shares
in person.
2.09 - Quorum.
At any meeting of the stockholders, the presence in person or by proxy of
the holders of a majority of all issued and outstanding shares of the
Corporation, (including shares registered in the name of a broker-dealer or
similar institution for beneficial owners to whom the broker-dealer distributed
notice of the stockholder's meeting and proxy information regardless of whether
such beneficial owners have returned proxies or otherwise instructed the
broker-dealer as to voting their shares), which would then be entitled to vote,
will constitute a quorum of the stockholders for all purposes. In the absence
of a quorum, any meeting may be adjourned, from time to time, but any such
adjournment shall not exceed sixty (60) days in the aggregate, by its Chairman
until a quorum is formed. At any such adjourned meeting, at which a quorum is
present, any business may be transacted which might have been transacted at the
meeting as originally noticed. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding
the withdrawal or temporary absence of enough stockholders which leaves less
than a quorum present.
2.10 - Election Inspectors.
The Board of Directors, in advance of any meeting of the stockholders, may
appoint an election inspector(s) to act at such meeting (and at any adjournment
thereof). If an election inspector(s) is/are not so appointed, the Chairman of
the meeting may, or upon request of any person entitled to vote at the meeting
will, make such appointment. If any person appointed as an inspector fails to
appear or to act, a substitute may be appointed by the Chairman of the meeting.
If appointed, the election inspector(s) (acting through a majority) will
determine the number of shares outstanding, the authenticity, validity and
effect of proxies and the number of shares represented at the meeting in person
and by proxy; they will receive and count votes, ballots and consents and
announce the results thereof; they will hear and determine all challenges and
questions pertaining to proxies and voting; and, in general, they will perform
such acts as may be proper to conduct elections and voting with complete
fairness to all stockholders. No such election inspector(s) need be a
stockholder of the Corporation.
2.11 - Organization and Conduct of Meetings.
- 4 -<PAGE>
By-Laws
of
Alanco Environmental Resources Corporation
Stockholders meetings will be called to order and thereafter chaired by
the Chairman of the Board of Directors if there is one or, if not, or if the
Chairman of the Board is absent or so requests, then by the Vice-Chairman or if
both the Chairman of the Board and the Vice-Chairman are unavailable, then by
the President or if Chairman of the Board, Vice-Chairman and President are all
unavailable, then by such other officer of the Corporation or such stockholder
as may be appointed by the Board of Directors. The Corporation's Secretary will
act as Secretary of each meeting of the Stockholders; in his absence the
Chairman of the meeting may appoint any person (whether a stockholder or not)
to act as Secretary thereat. After calling a meeting to order, the Chairman
thereof may require the registration of all stockholders intending to vote in
person, and the filing of all proxies, with the election inspector(s), if one
or more have been appointed (or, if not, with the secretary of the meeting).
After the announced time for such filing of proxies has ended, no further
proxies or changes, substitutions or revocations of proxies will be accepted.
If Directors are to be elected, a tabulation of the proxies so filed will, if
any person entitled to vote in such election so requests, be announced at the
meeting (or adjournment thereof) prior to the closing of the election polls.
Absent a showing of bad faith on his part, the Chairman of a meeting will,
among other things, have absolute authority to fix the period of time allowed
for the registration of stockholders and the filing of proxies, to determine
the order of business to be conducted at such meeting and to establish
reasonable rules for expediting the business of the meeting (including any
informal, or question and answer portions thereof).
2.12 - Stockholder Approval or Ratification.
The Board of Directors may submit any contract or act for approval or
ratification of the stockholders, either at a duly constituted meeting of the
stockholders (the notice of which either includes mention of the proposed
submittal or is waived pursuant to Section 2.03). If any contract or act so
submitted is approved or ratified by a majority of the votes cast thereon at
such meeting or by such unanimous written consent, the same will be valid and
binding upon the Corporation as the act of its stockholders pursuant to Section
2.07.
2.13 - Informalities and Irregularities.
All informalities or irregularities in any call or notice of a meeting of
the stockholders or in the areas of credentials, proxies, quorums, voting and
similar matters, will be deemed waived if no objection is made at the meeting.
III. BOARD OF DIRECTORS
3.01 - Membership.
The Board of Directors will be comprised of not less than five (5) nor
more than nine (9) members, except when the total number of stockholders of the
Corporation is less than three (3) then the number of Directors may be equal to
the number of stockholders. Directors of the Corporation need not be
stockholders.
The Board of Directors will have the power and authority to decrease or
increase its membership, provided the same falls within the aforesaid limits
and to fill any vacancies up to the maximum number of Directors allowed,
whether or not such vacancies were created by a resigned Director or a vacant
position.
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The election of the members of the Board of Directors, so slated for
election as set forth above, will take place at each regularly scheduled annual
meeting of the stockholders, but such election may be held at any other meeting
of the stockholders.
3.02 - Regular Meetings.
A regular annual meeting of the Board of Directors is to be held
immediately after each annual meeting of the stockholders at the place at which
such stockholders meeting was held. Regular meetings, other than the annual
ones, may be held at regular intervals at such places and at such times as the
Board of Directors may provide.
3.03 - Special Meetings.
Special meetings of the Board of Directors may be held whenever and
wherever (if within the continental United States) called for by the Chairman
of the Board, the President or the number of Directors which would be required
to constitute a quorum.
3.04 - Notices.
No notice need be given of regular meetings of the Board of Directors.
Written notice of the time and place (but not necessarily the purpose or all of
the purposes) of any special meeting will be given to each Director in person
or via mail, facsimile or telegram addressed to him at his latest address or
telephone number appearing on the Corporation's records. Notice to any Director
of any such special meeting will be deemed given sufficiently in advance when,
if given by mail, the same is deposited in the United States mail, with first
class or air mail, postage prepaid, at least four days before the meeting date,
or if personally delivered or given by facsimile or telegram, the same is
handed to the Director, or the facsimile or telegram is sent at least 48 hours
prior to the convening of the meeting. Any Director may waive call or notice of
any meeting (and any adjournment thereof) at any time before, during which or
after it is held. Attendance of a Director at any meeting will automatically
evidence his waiver of call and notice of such meeting (and any adjournment
thereof) unless he is attending the meeting for the express purpose of
objecting to the transaction of business thereat because it has not been
properly called or noticed. No call or notice of a meeting of Directors will be
necessary if each of them waives the same in writing or by attendance as
aforesaid. Any meeting, once properly called and noticed (or as to which call
and notice have been waived as aforesaid) and at which a quorum is formed, may
be adjourned to another time and place by a majority of those in attendance.
3.05 - Quorum.
A quorum for the transaction of business at any meeting or adjourned
meeting of the Board of Directors will consist of majority of those then in
office.
3.06 - Voting.
Any question submitted to any meeting or adjourned meeting of the Board of
Directors will be resolved by a majority of the votes cast thereon; in case of
an equality of votes, the Chairman of the meeting will have a second or
deciding vote.
3.07 - Executive Committee.
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The Board of Directors may, by resolution adopted by a majority of the
whole Board, name two or more of its members as an Executive Committee. Such
Executive Committee will have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the Corporation
while the Board is not in session, subject to such limitations as may be
included in Board's resolution; provided, however, that such Executive
Committee shall not have the authority of the Board of Directors in reference
to the following matters: (1) the submission to stockholders of any action
that requires the authorization or approval under applicable law; (2) the
filling of vacancies on the Board of Directors or in any committee of the Board
of Directors; (3) the amendment or repeal of the bylaws, or the adoption of new
bylaws; and (4) the fixing of compensation of Directors for serving on the
Board or on any Committee of the Board of Directors. A majority of those named
to the Executive Committee will constitute a quorum and the Committee may at
any time act by the written consent of a quorum thereof, although not formally
convened.
3.08 - Other Committees.
The Board of Directors shall by resolution adopted by a majority of the
whole Board, appoint a Compensation/Administration Committee, an Audit
Committee and other standing or temporary Committees from its membership and
vest such Committees with such powers as the Board may include in its
resolution; provided, however, that such Committees shall be restricted in
their authority as specifically set forth with respect to the Executive
Committee in Section 3.07 above. A majority of those named to any such
Committees will constitute a quorum and the Committee may at any time act by
the written consent of a quorum thereof, although not formally convened.
3.09 - Presumption of Assent.
A Director of the Corporation who is present at a meeting of the Board of
Directors, or of any Committee, at which action is taken on any corporate
matter will be presumed to have assented to the action taken unless his dissent
is entered in the minutes of the meeting or unless he files his written dissent
to such action with the person acting as Secretary of the meeting before the
adjournment thereof or forwards such dissent by registered or certified mail to
the Secretary of the Corporation immediately after the adjournment of the
meeting. Such right to dissent will not be available to a Director who voted
in favor of the action.
3.10 - Compensation.
By resolution of the Board of Directors, each Director may be paid his
expenses, if any, for the attendance at each meeting of the Board of Directors
or of any Committee, and may be paid a fixed sum for attendance at each such
meeting or a stated salary as a Director or Committee member. If a Director
also serves the Corporation in another capacity, on a full time basis, and is
compensated therefor, then that Director shall not be entitled to receive
compensation for attendance at meetings, but shall still be entitled to
expenses for such attendance.
3.11 - Action by Directors Without a Meeting.
Any action required or permitted to be taken at a meeting of the Board of
Directors or of a Committee of the Corporation may be taken without a meeting
if all Directors or Committee members, as the case may be, consent thereto in
writing. Such consent shall have the same effect as a unanimous vote of the
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Directors or Committee members of the Corporation.
3.12 - Meetings by Conference Telephone.
Any member of the Board of Directors or of a Committee of the Corporation
may participate in any meeting thereof by means of a conference telephone or
similar communication equipment whereby all members participating in such
meeting can hear one another. Such participation shall constitute attendance in
person, unless otherwise stated as provided in Section 3.04.
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IV. OFFICERS - GENERAL
4.01 - Election of Chief Executive Officer.
The Board of Directors will elect the Chief Executive Officer of the
Corporation who shall also be the Chairman of the Board of Directors or the
President. Such election will regularly take place at each annual meeting of
the Board of Directors, but maybe held at any other meeting of the Board of
Directors. A person elected to the office of Chief Executive Officer will
continue to hold this office until the election of his successor, subject to
action earlier taken pursuant to Sections 4.04 or 6.01.
4.02 - Appointment of Additional Officers.
The Chief Executive Officer will select and the Board of Directors shall
appoint the Officers set forth in Section 5. In addition to the Officers
contemplated in Section 5, the Chief Executive Officer may select and the Board
of Directors shall appoint other corporate Officers (as, for example, one or
more Assistant Secretaries) having such authority to perform such duties as may
be prescribed from time to time by the Chief Executive Officer, by the
President or in the case of Assistant Officers, by his/her or their superior
Officers (which, in the foregoing example, would be the Secretary). Each of
such Assistant Officers will be vested with all of the powers and charged with
all of the duties (including those herein specifically set forth) of his
superior officer in the event of such superior officer's absence or disability.
4.03 - Bonds and Other Requirements.
The Board of Directors may require any Officer to give bond to the
Corporation (with sufficient surety, and conditioned for the faithful
performance of the duties of his/her office) and to comply with such other
conditions as may from time to time be required of him/her by the Board.
4.04 - Removal or Delegations.
The Chief Executive Officer may at his sole discretion remove any Officer
of the Corporation at any time and with or without cause. In addition,
provided that two-thirds (2/3) of the whole membership thereof concurs therein,
the Board of Directors may at any time, with or without cause and whenever in
its judgment the best interests of the Corporation will be served thereby,
remove any Officer, including the Chief Executive Officer, or Agent of the
Corporation and declare his Office vacant or temporarily delegate his/her
powers and duties to any other Officer or to any Director. Such removal or
delegation shall be without prejudice to the contract rights, if any, of the
person so removed or whose powers and duties have been delegated. Election or
appointment of an Officer or Agent shall not of itself create contract rights.
4.05 - Salaries.
The Compensation of the Chief Executive Officer shall be determined and
set by the Compensation/Administration Committee. All other Officer salaries
shall from time to time be fixed by the Chief Executive Officer. No Officer
will be prevented from receiving a salary by reason of the fact that he/she is
also a Director of the Corporation.
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V. SPECIFIC OFFICERS
5.01 - Chairman of the Board.
The Board of Directors may elect a Chairman to serve as a Non-Executive
Officer of the Corporation.. The Chairman will preside at all meetings of the
Board of Directors and be vested with such other powers and duties as the Board
may from time to time delegate to him.
5.02 - Chief Officers.
The Board of Directors shall elect a Chief Executive Officer who shall
also be a Director of the Corporation. The Corporation may also have a Chief
Financial Officer who shall also be the Treasurer of the Corporation. The
Corporation may also have a Chief Operating Officer who shall also be either
the Executive Vice President or President of the Corporation. The Chief
Executive Officer shall be the presiding officer over all business affairs of
the Corporation, subject only to the direction of the Board of Directors.
5.03 - President.
The President, in the absence of the Chief Executive Officer, will
supervise the business and affairs of the Corporation and the performance by
all of its other Officers of their respective duties, subject to the control of
the Board of Directors. Except as may otherwise be specifically provided in a
resolution of the Board of Directors, the President will be a proper Officer to
sign on behalf of the Corporation any deed, bill of sale, assignment, option,
mortgage, pledge, note, bond, evidence of indebtedness, application, consent
(to service of process or otherwise), agreement, indenture or other instrument
of any significant importance to the Corporation. The President may represent
the Corporation at any meeting of the stockholders of any other Corporation in
which this Corporation then holds shares, and may vote this Corporation's
shares in such other corporation in person or by proxy appointed by him,
provided that the Board of Directors may from time to time confer the foregoing
authority upon any other person or persons. The President may designate any
Vice President to perform any acts, on behalf of the Corporation, in his place.
5.04 - Vice Presidents.
One or more Vice Presidents may be selected by the Chief Executive Officer
each of whom will be vested with all of the powers and charged with all of the
duties (including those herein before specifically set forth) of the President
in the event of his absence or disability. Each Vice President will perform
such other duties as may from time to time be delegated or assigned to him/her
by the Board of Directors, Chief Executive Officer, the President or the
Executive Vice President, in that order.
5.05 - Secretary.
The Secretary will keep the minutes of meetings of the stockholders, Board
of Directors and any Committee, and all unanimous written consents of the
stockholders, Board of Directors and any Committee of the Corporation, see that
all notices are duly given in accordance with the provisions of these By-Laws
or as required by applicable law, be custodian of the Corporate Seal and
Corporate Records, and, in general, perform all duties incident to the office.
Except as may otherwise be specifically provided in a resolution of the Board
of Directors, the Secretary and each Assistant Secretary will be a proper
officer to take charge of the Corporation's stock transfer books, and to
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compile the voting record pursuant to Section 3.06, and to impress the
Corporation's Seal on any instrument signed by a duly authorized or empowered
Officer, and to attest to the same.
5.06 - Treasurer.
The Treasurer, absent the election of a Chief Financial Officer, shall
serve as the Chief Financial Officer and will maintain the financial records of
the Corporation and supervise all Corporate reporting with any and all
government agencies. The Treasurer will keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation, and will
cause all money and other valuable effects to be deposited in the name and to
the credit of the Corporation in such depositories, subject to withdrawal in
such manner as may be designated by the Board of Directors and the Chief
Executive Officer. The Treasurer will render to the President and to the
Directors (at the regular meetings of the Board or whenever they may require),
an account of all his/her transactions, as Treasurer, and of the financial
condition of the Corporation.
VI RESIGNATIONS AND VACANCIES
6.01 - Resignations.
Any Director, Committee member or Officer may resign from his office at
any time by written notice delivered or addressed to the Corporation at its
known place of business. Any such resignation will be effective upon its
receipt by the Corporation unless some later time is therein fixed; and then
from that time, the acceptance of a resignation will not be required to make it
effective.
6.02 - Vacancies.
If the office of any Director or Committee member becomes vacant by reason
of his/her death, resignation, disqualification, removal or otherwise, the
Board of Directors may choose a successor to hold office for the unexpired
term.
VII. SEAL
7.01 - Form Thereof.
The Board of Directors may, if required by applicable Law, provide for a
Seal of the Corporation which will have inscribed thereon the name of the
Corporation, the state and year of its incorporation.
VIII. CERTIFICATES REPRESENTING SHARES
8.01 - Form Thereof.
Each certificate representing shares of the Corporation will be in such
form as may from time to time be approved by the Board of Directors, will be
consecutively numbered and will exhibit such information as may be required by
applicable law.
8.02 - Signatures and Seal Thereon.
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All certificates issued for shares of the Corporation (whether new,
reissued or transferred) will bear the signatures of the President or a Vice
President, and of the Secretary or an Assistant Secretary, and the impression
of the Corporation's Corporate Seal, if any. The signatures of such Officers
of the Corporation, and the impression of its Corporate Seal, may be in
facsimile form on any certificates which are manually countersigned by an
independent transfer agent and/or registered by a registrar duly appointed by
the Corporation and other than the Corporation itself or one of its employees.
If a supply of unissued certificates bearing the facsimile signature of a
person remains when that person ceases to hold the office, the unissued
certificates may continue to be issued and delivered by the Corporation's
transfer agent and/or registrar thereafter, the same as though such person had
continued to hold the office indicated on such certificate.
8.03 - Ownership.
The Corporation will be entitled to treat the registered owner of any
share as the absolute owner thereof and, accordingly, will not be bound to
recognize any beneficial, equitable or other claim to, or interest in, such
share on the part of any other person, whether or not it has notice thereof,
except as may expressly be provided by applicable law.
8.04 - Transfers.
Transfers of shares of the Corporation may be made on the stock transfer
books of the Corporation only at the direction of the person named in the
certificate therefor (or by his duly authorized attorney-in-fact) and upon the
surrender of such certificate.
8.05 - Lost Certificates.
In the event of the loss, theft or destruction of any certificate
representing shares of the Corporation or of any predecessor corporation, the
Corporation may issue (or, in the case of any such shares as to which a
transfer agent and/or registrar have been appointed, may direct and issue) a
new certificate, and cause the same to be delivered to the owner of the shares
represented thereby, provided that the owner shall have submitted such evidence
showing the circumstances of the alleged loss, theft or destruction, and
his/her ownership of the certificate, as the Corporation considers
satisfactory, together with any other facts which the Corporation considers
pertinent, and further provided that a bond shall have been provided in form
and amount satisfactory to the Corporation (and to its transfer agent and/or
registrar, if applicable), unless the shares represented by the certificate
lost, stolen or destroyed have at the time of the issuance of the new
certificate a market value of $500 or less (as determined by the Corporation on
the basis of such information as it may select), in which case the requirements
of a bond may be waived. The Corporation may act through its President, any
Vice President, its Secretary or its Treasurer for any purpose of this Section
8.05.
IX. DIVIDENDS
9.01 - Dividends.
Subject to such restrictions or requirements as may be imposed by
applicable law or the Corporation's Articles or as may otherwise be binding
upon the Corporation, the Board of Directors may from time to time declare and
the Corporation may pay dividends on shares of the Corporation outstanding on
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the dates of record fixed by the Board, to be paid in cash, in property, in
shares of the Corporation or in shares of other corporations owned by the
Corporation on or as of such payment or distribution dates as the Board may
prescribe.
X. INDEMNIFICATION
10.01 - Indemnification.
Subject to the provisions of Arizona Corporate Law, as amended from time
to time, the Corporation does hereby indemnify and hold harmless the Directors
and Officers of the Corporation for the performance or failure to perform, as
the case may be, any act, which act is not wilfully and/or grossly negligent
and which was performed in the best interests of the Corporation at the time
said act occurred. This indemnification shall not limit the Corporation's
ability provide additional indemnification, under Law, when and if adjudicated.
XI. AMENDMENTS
11.01 - Amendments to By-Laws.
The By-Laws may be altered, amended, supplemented, repealed or temporarily
or permanently suspended, in whole or in part, or new By-Laws may be adopted,
at any duly constituted meeting of the stockholders or the Board of Directors
(the notice of which meeting either includes mention of the proposed action
relative to the By-Laws or is waived pursuant to Section 2.03 or Section 3.04,
whichever is applicable) or, alternatively, by unanimous written consent to
corporate action without a meeting of the stockholders or the Board of
Directors pursuant to Section 3.11. if, however, any such action arises as a
matter of necessity at any such meeting and is otherwise proper, no notice
thereof will be required.
The foregoing By-Laws were adopted by the Board of Directors of the
Corporation at a meeting held on the 23rd day of May, 1995.
/s/ Cynthia L. Castellano
----------------------------
Secretary of the Corporation
(Seal)
Amended 8/15/95
Amended 9/27/95
Amended 2/17/96
Amended 3/13/96
Amended 7/13/96
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