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, 1998
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
--------------------------
(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
----- -----
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: $2,828,382 as of September 24, 1998.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock: 5,050,683 as of September 24, 1998. (All common shares and
per share data has been adjusted to reflect a one for seven stock reversal
that took place in May of 1998.)
Documents incorporated by reference: Part III of this Report is incorporated by
reference from the Registrant's Proxy Statement to be filed on or before
October 30, 1998. Certain Exhibits are incorporated by reference from the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1997.<PAGE>
PART 1
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Alanco Environmental Resources Corporation was incorporated in 1969 under
the laws of the State of Arizona. Unless otherwise noted, "Company" refers to
Alanco Environmental Resources Corporation and its wholly-owned subsidiaries.
The Company's continuing operations are diversified and include: (i) design,
production, marketing and distribution of pollution control products, and (ii)
restaurant equipment/food marketing and distribution. The Company previously
operated mining properties and continues to have mineral property assets that
are presented as "net assets of discontinued operations held for sale" on the
consolidated balance sheet at June 30, 1998 and 1997.
RECENT BUSINESS DEVELOPMENTS
Pollution Control Products. The Company has a patented air pollution
control technology based on a charged dry sorbent injection system called CDSI.
The Company had, by fiscal year end, substantially completed the contracts for
eleven CDSI units, which had been sold during the year to customers in China.
Eight units were sold to Guangzhou Paper Ltd., Guangzhou, China, and three were
sold to Lanzhou Chemical Industry of Lanzhou, China. The Company has been paid
in full for all systems sold. The Company is continuing its efforts to export
CDSI units to China and other countries; however, the current economic turmoil
in the Asian markets is negatively affecting sales.
The Company has other patented and non-patented pollution control products
that it sells nationally and internationally. During September 1998, Alanco
Environmental Manufacturing Incorporated ("AEMI"), a wholly owned subsidiary,
was assigned a U.S. patent for the E-86 Cartridge Dust Control Filter. The E-
86 series filter incorporates a proprietary design which minimizes costs by
reducing the complexity of the cartridge seal system.
Restaurant Equipment/Food Service Products. In December 1996, the
Company, through its Fry Guy Inc. subsidiary, completed the nationwide roll-out
of its Integrated Finger Food Marketing ("IFFM") program, featuring the
Company's private label "Sgt. Fry" food menu in Wal-Mart stores. Fry Guy's
agreement with Wal-Mart was for a two year period and accounted for 90% of this
segment's revenue during fiscal year ended June 30, 1998. In May of 1998 Wal-
Mart notified the Company of their intention to terminate the contract. The
contract was terminated on August 9, 1998. Wal-Mart elected to purchase new
fryer equipment for all stores and to self-manage the very successful finger
food program. Wal-Mart is expected to return all Fry Guy fryer units to the
Company by the end of October 1998.
The Company plans on refurbishing the returned machines at its facility in
Scottsdale, Arizona. Sales and marketing efforts are continuing in an effort
to place the returned and refurbished units at new locations under the IFFM
program. The Company anticipates entering into a number of contracts in its
attempt to replace the Wal-Mart business and is considering a sale and/or
leasing program.
DESCRIPTION OF BUSINESS
Pollution Control Products Segment
CDSI Technology. The Company acquired the rights to the CDSI (Charged Dry
Sorbent Injection) technology in 1989. The CDSI system is a patented process
2<PAGE>
that utilizes an electrostatically charged sorbent to remove noxious gases,
particularly sulfur dioxide, from a hot exhaust gas stream from an air
pollution source such as a power plant. The electrostatic charge increases the
dispersal of sorbent particles which react more readily 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 most competing technologies with similar levels of efficiency.
The CDSI system appears to offer other advantages over most competing
technologies for remediating polluted gas streams, particularly flue gas
desulfurization. The most common of these competing technologies are wet
scrubbers which 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 Company believes that the CDSI system is particularly well suited to
use in small power plants, mining and smelting facilities, incinerators and
mini steel mills. The proprietary elements of the CDSI system are fabricated
and assembled by the Company. The Company, through its wholly-owned
subsidiary, Alanco Environmental Manufacturing Inc. (AEMI) in Falls City,
Nebraska, manufactures all of the necessary ancillary equipment for a CDSI
installation, such as blowers and bins.
Other Pollution Control Products. AEMI also manufactures baghouse filters
and cyclone particulate removal systems for industrial applications as well as
air handling equipment for the agricultural industry. 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.
During fiscal year ended June 30, 1998, AEMI was assigned U.S. Patent
#5,803,939 for the E-86 Cartridge Dust Control Filter. The patent was issued
on September 8, 1998. The E-86 series filter incorporates a proprietary design
which minimizes costs by reducing the complexity of the cartridge seal system.
Pollution control products accounted for 50.9% and 54.1% of the
consolidated revenues for years ended June 30, 1998 and 1997, respectively.
Marketing. The Company's primary marketing effort for the sale of
pollution control products in the United States is through a national network
of independent sales representatives, supported and supplemented with sales and
marketing efforts (including telephone sales) performed by Company personnel.
The marketing efforts for CDSI technology and other pollution control
products is concentrated on third world applications, primarily in the People's
Republic of China and South America. The Chinese effort is primarily through
its subsidiary, Alanco Environmental Technology (Beijing) Co., Ltd. ("Alanco
Beijing"), a Chinese company. Alanco Beijing manages the Company's interests
in China and marketing efforts aimed at other select third world countries. In
3<PAGE>
addition, the Company 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 technical support staff in
place, as well as people trained to represent its technology in China. In
South America the Company operates its marketing program through a network of
distributors.
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 issued a comprehensive new
sulfur dioxide emission regulation in 1997 to control the country's serious
acid rain problem. All industrial coal users must significantly reduce the
sulfur dioxide emission from their operations.
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%. This facility is now certified as
operating in compliance with Chinese standards.
Raw Materials. The Company has numerous sources for materials and parts
used to manufacture the CDSI units and other pollution control products. The
principal raw materials used in manufacturing are sheet metal and plate steel,
welding supplies, and various kinds of electrical components, all of which are
common to this industry. 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 and does
not foresee any substantial increase in prices.
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, Singapore, 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 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. In addition, this patent application has been filed in
Argentina, Brazil, Canada, Chile, China, Czech Republic, Europe, Hungary,
Korea, Mexico and Poland.
U.S. Patent Application entitled "Industrial Dust Collector And
4<PAGE>
Method For Its Use" issued as U.S. Patent No. 5,803,939 on September 8,
1998. AEMI has developed this filter in conjunction with the passage of
the new Clean Air Act. The new filter, called the "E-86", falls in line
with the proposed Pm2.5 ruling that will replace Pm10.
Competitive Conditions. The Company has various competitors, depending on
the type of pollution control product. In the area of flue gas desulfurization
technology, the Company's competitors include: Babcock Wilcox, Wheelabrator,
Pure Air, General Electric, Austria Energy, and Mitsubishi Corporation. The
Company believes its CDSI technology is appropriately targeted at relatively
low capacity generation plants.
Significant competitors exist for the industrial air pollution products
other than in the area of flue gas desulfurization technology, and the Company
is relatively new to this market. However, the Company has procured
significant orders, thereby demonstrating its sales, engineering and production
capabilities.
The aeration equipment products market has three major manufacturers to
compete against. The Company is considered the market leader in the aeration
equipment market and produces equipment for the upper end customer.
Research and Development Activities. The Company continues to enhance the
performance capability of its products through innovative configurations and
improved electronics. This year the CDSI unit has been further redesigned to
improve performance and reliability in the most severe environments. The
Company also developed and patented a new air filter in conjunction with the
passage of the new Clean Air Act. The new filter, called the "E-86", falls in
line with the proposed Pm2.5 ruling that will replace Pm10.
Employees. As of September 1, 1998, the Company had 51 individuals
primarily involved in the pollution control products segment.
Seasonality of Business. Some of the Company's manufactured products are
marketed to the agricultural market and are 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. Other industrial pollution control products, including CDSI units,
have minimal seasonality.
Dependence Upon Key Customers. The Company has recorded sales to over 500
different customers during the year ended June 30, 1998. Guangzhou Paper Ltd.
accounted for sales of $880,000 or 15.8% of the segment revenue and 8.0% of
the consolidated revenue. Continuation of customer base depends upon pricing,
quality, competition and product availability.
Backlog Orders. The Company operates using customary purchase orders for
orders received. To be considered backlog, the orders must be firm and non-
cancelable. Since customary purchase orders may not always be considered firm
and non-cancelable, the Company does not have a reportable backlog.
Restaurant Equipment/Food Marketing and Distribution Segment
The Company, through its Fry Guy Inc. subsidiary ("Fry Guy"), 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
5<PAGE>
qualified retail businesses offering or desiring to offer hot foods.
The fryer, which operates with an air filtering system, eliminates the
need for venting, 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 approximately 70 pounds and can
be operated from a countertop. A one gallon or two gallon fryer is available.
Marketing. Fry Guy, both directly and through a distributor network, 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 may provide 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
and point of sale materials and a program for the development and introduction
of new food products.
Fry Guy's contract with Wal-Mart, which accounted for approximately 45% of
the consolidated revenue for the current fiscal year, was terminated in August,
1998. Since that time, Fry Guy has continued to provide its services to Wal-
Mart on substantially the same terms as the prior agreement. However, Wal-Mart
has notified the Company that it is returning the Fry Guy fryers. As a result,
the Company anticipates that substantially all of its Fry Guy revenue from Wal-
Mart will cease by calendar year end.
The Company plans on refurbishing the returned machines at its facility in
Scottsdale, Arizona. Sales and marketing efforts are continuing in an effort
to place the returned and refurbished units at new locations under the IFFM
program. The Company anticipates entering into a number of contracts in its
attempt to replace the Wal-Mart business and is considering a sale and/or
leasing program.
Dependence Upon Key Customers. The focus of the Company's restaurant
equipment/food distribution segment had been almost entirely devoted to its
relationship with Wal-Mart. During fiscal year 1998, Wal-Mart accounted for
approximately 90 percent of this segment's revenue and 45 percent of the
consolidated revenue. The decision by Wal-Mart to cease its commitment with
the Company's IFFM program will have a material adverse effect on its business.
Competitive Conditions. Fry Guy is aware of three direct competitors who
actively market a ventless small capacity deep fryer, but do not market food
products. Numerous competitors offer equipment which requires venting to the
outside. However, the Company is unaware of any competitor providing both the
sales and distribution of a finger food program.
Employees. As of September 1, 1998, Fry Guy has 12 employees.
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 is currently located in a 4,800 square foot leased office
warehouse facility in Scottsdale, Arizona.
6<PAGE>
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 Claim Properties
The Company has classified its mineral claim property as assets held for
sale and currently has no intention of developing these properties. At June
30, 1998, the Company owned mineral rights in four unpatented mineral mining
and millsite properties in Arizona. The Company's mining claim 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 claim holdings
at fiscal years ended June 30, 1998 and 1997.
MAJOR MINERAL CLAIM HOLDINGS AT June 30, 1998 AND 1997
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%
Mining/Milling Equipment Location Acreage Ownership
C.O.D. Mine Mohave County, AZ 150 100%
Tombstone Cochise County, AZ 75 100%
The following table sets forth the adjusted carrying value as of June 30,
1998 and 1997, respectively.
MAJOR MINERAL CLAIM HOLDINGS AT June 30, 1998 AND 1997
Adjusted
Mineral Property Value (1)
C.O.D. Mine $5,539,328
Mineral Mountain 221,520
Cherry Creek 0
Tombstone/STC Claims 670,275
Mining/milling Equipment
C.O.D. Mine 107,831
Tombstone Mill 296,702
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Subtotal Mineral Property & Equipment $6,835,656
Less: Carrying Value Reserve for Fiscal Year 1997 (2,592,656)
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Adjusted Carrying Value as of June 30, 1997 $4,243,000
Less: Carrying Value Reserve for Fiscal Year 1998 (1,800,000)
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Adjusted Carrying Value as of June 30, 1998 $2,443,000
===========
7<PAGE>
(1) The adjusted book value after giving consideration to any write-down in
certain mineral property values reflects the lower of historical cost
or net value after certain asset impairment charges.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party 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.
On August 10, 1998, a complaint was filed by the Company's Fry Guy Inc.
subsidiary against Stenberg Welding & Fabricating, Inc., ("Stenberg") and other
parties whose identities are unknown at this time in the Superior Court in and
for the County of Maricopa, Arizona. The action seeks damages for fraud,
breach of agreement, negligent misrepresentation, negligence, unjust enrichment
and intentional interference with contractual relationship. Fry Guy's causes
of action arise from an agreement for the sale of fry units to Fry Guy from
Stenberg and tortuous interference with Fry Guy's contractual relationship with
Wal-Mart. The action alleges misrepresentations by Stenberg as to the failure
and repair rate of their frying units, their policy on parts and accessories
and the availability of replacement filters available only through Stenberg.
In early 1998, Stenberg sold a controlling interest to a group whose intent was
to take over Fry Guy's Wal-Mart account. Thereafter, Stenberg refused to fill
orders for filters necessary for Fry Guy to service the Wal-Mart account, while
at the same time engaging in negotiations with Wal-Mart in an attempt to induce
Wal-Mart to terminate its contract with Fry Guy and purchase or lease fry units
from Stenberg. This Complaint claims damages in the amount of $1,250,000 and
was served on the Defendant on August 18, 1998.
In June 1998, a case was filed against the Company's Fry Guy Inc.
subsidiary by Mr. Kenneth Ross, who alleged that monies were owed to him for
wages and other benefits while he was an employee of Fry Guy. Fry Guy Inc.
filed a Motion to Dismiss in August 1998 for failure to state a claim upon
8<PAGE>
which relief can be granted based on the fact that Mr. Ross was an employee at
will and was not entitled to receive wages or benefits after his termination of
employment by Fry Guy. This motion is currently pending, and it is expected
that Fry Guy will prevail on this Motion; and if not, it is unlikely that Mr.
Ross will ultimately be successful in this litigation.
In March 1998, Sanwa Leasing, Inc. filed an action against Gary Hall in
California District Court in and for Orange County, California, for
$152,278.17, representing delinquent and future lease payments for the residual
value of the equipment under a lease of medical related equipment used by
Phoenix Medical Management, Inc. ("PMM"). The Company has undertaken Dr.
Hall's representation although it denied that it had any liability pursuant to
its 1994 agreement to indemnify Dr. Hall from any liability pursuant to
personal guaranty of the equipment lease arising from the Company's 1994
purchase of Dr. Hall's common stock of PMM. It is believed that the Company
may have liability on this action, which is set for trial on November 23, 1998.
However, the Company believes a settlement in principle has been reached
whereby others will pay any amounts due pursuant to the Sanwa Lawsuit and the
matter will be dismissed with prejudice.
In February 1998 the case of Argonaut Financial Services Corporation v.
Alanco Environmental Resources Corporation was filed in the U.S. District Court
for the District of Colorado. The Plaintiff had acquired 1,700,000 shares of
the Company's common stock for $2,040,000 in September 1995 pursuant to
Subscription Agreement and Private Placement Memorandum provided by the
Company. The Plaintiff alleged that the Memorandum contained false and
misleading information in violation of Section 10(b) of the Securities Act of
1934, Rule 10b-5 promulgated thereunder and Section 12(a)(2) of the Securities
Act of 1934. In March 1998 the Company filed a Motion to dismiss or in the
Alternative, For Summary Judgement. The motion to dismiss was based upon the
Plaintiff having failed to plead its claims with sufficient particularity or
how the Plaintiff had been damaged. The motion sought summary judgement in
favor of the Company based upon the Plaintiff's having sold all of its shares
in December 1996 at a time when the market price for the Company's common stock
was in excess of $2.00 per share as well as the Plaintiff's claims being barred
by the one year Statute of Limitations. The Plaintiff did not respond to the
Company's Motion and on April 7, 1998, the Parties entered into a Stipulation
of Dismissal, and on April 14, 1998, the action was dismissed.
On January 7, 1998, the Company instituted a lawsuit in County Court of
Maricopa County, Arizona, against Phoenix Medical Management, Inc. ("PMM") for
non-payment of two promissory notes due the Company in the amount of
$685,602.31 and $100,000.00 plus interest on both promissory notes. The
Company determined that PMM had apparently transferred all of its assets to a
creditor. Based on the foregoing, the Company amended its complaint to include
six individual defendants and additional corporate defendants. The Amended
Complaint alleged numerous causes of action against all Defendants for
fraudulent transfer of PMM's assets and indemnification of amounts due pursuant
to the Sanwa Lawsuit. The Company is negotiating a settlement with the
Defendants.
On October 14, 1997, the case of Norman E. Meyer v. Alanco Environmental
Resources Corporation was filed in Maricopa Superior Court. Norman E. Meyer, a
past President of the Company, filed for payment of unpaid wages, vacation pay
and consultant services allegedly due him. Mr. Meyer alleged damages in the
amount of $150,000. The Company filed an answer denying any liability to Mr.
Meyer based on Mr. Meyer's taking all vacation time to which he was entitled
prior to termination and based on a termination agreement between Alanco and
Mr. Meyer. The Company is presently engaged in settlement negotiations with
9<PAGE>
Mr. Meyer.
In April, 1996, the Company's subsidiary, Unique Systems, Inc. ("Unique"),
d/b/a National Affiliated Adjustment Company ("NAAC"), 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. In 1997, NAAC filed for protection under
Chapter 7 of the federal bankruptcy laws in Phoenix, Arizona. As a result
thereof, the Department of Labor action as to NAAC has been stayed. The
Bankruptcy Trustee filed a motion in the NAAC bankruptcy whereby the Trustee
moved to set aside the Company's security interest in the receivables of NAAC
based on the fact that the Company received its security agreement for an
antecedent debt and within 90 days of the filing of NAAC's bankruptcy. It is
expected that the Company's general claim of $382,265 will be allowed, but
little, if any, funds will be available in the NAAC bankruptcy to pay any
claims other than administrative.
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, 1998.
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. The stock
price table has been restated to reflect the one for seven stock reversal that
took place in May of 1998. Such quotations represent inter-dealer prices
without retail mark-ups, mark-downs, or commissions and, accordingly, may not
represent actual transactions.
Fiscal 1998 Fiscal 1997
Quarter Ended High Low High Low
September 30 7.217 3.717 17.50 7.875
December 31 7.875 4.375 15.969 7.00
March 31 5.467 2.842 14.875 7.441
June 30 4.158 1.125 9.191 5.033
(3) Security Holders: As of September 1, 1998, Alanco had approximately
1,900 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.
10<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, 1998 June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994
-------------- -------------- -------------- -------------- ---------------
Operating Revenue 10,975,854 6,903,920 3,769,110 3,438,183 1,581,515
Net Loss - Continuing Operations (1) (4,855,042) (2,153,528) (3,205,448) (4,753,380) (3,839,964)
- Discontinued Operations (1,800,000) (4,953,632) (322,905) -- --
-------------- -------------- -------------- -------------- ---------------
Net Loss (6,655,042) (7,107,160) (3,528,353) (4,753,380) (3,839,964)
============== ============== ============== ============== ===============
Net Loss per share of common stock
Continuing Operations (0.96) (0.44) (0.71) (1.40) (1.47)
Discontinued Operations (0.36) (1.01) (0.07) -- --
-------------- -------------- -------------- -------------- ---------------
Net Loss per share of common stock (1.32) (1.45) (0.78) (1.40) (1.47)
============== ============== ============== ============== ===============
Weighted average number of shares 5,050,683 4,902,944 4,540,328 3,405,710 2,607,676
</TABLE>
<TABLE>
<CAPTION>
(1) For fiscal year ending June 30, 1998, continuing operations includes impairment of assets of ($5,258,000) or a
loss per share of ($1.04).
Fiscal Year Ended
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994
-------------- -------------- -------------- -------------- ---------------
Current Assets 3,368,601 3,083,517 3,685,510 3,104,491 4,283,308
Current Liabilities 2,080,718 2,000,625 737,626 980,390 852,184
-------------- -------------- -------------- -------------- ---------------
Working Capital 1,287,883 1,082,892 2,947,884 2,124,101 3,431,124
============== ============== ============== ============== ===============
Total Assets 9,658,409 16,958,929 21,275,574 21,189,502 18,281,763
Long Term Debt/Capitalized Leases 410,671 1,136,242 372,020 344,129 --
Redeemable Preferred Stock -- -- 330,468 295,062 --
-------------- -------------- -------------- -------------- ---------------
Common Stock and Other
Shareholders' Equity 7,167,020 13,822,062 18,970,907 18,600,816 16,327,796
-------------- -------------- -------------- -------------- ---------------
</TABLE>
11<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS ON FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Consolidated revenues for fiscal year 1998 increased 59% to $10,976,000,
or an increase of $4,072,000 over fiscal year 1997. The Restaurant
Equipment/Food Service Products segment, Fry Guy Inc., accounted for 55% or
$2,224,000 of the increase. The Company had revenue increases of over
$1,848,000 in its pollution control segment, of which CDSI system sales
represented an increase of approximately $900,000.
Direct service and cost of goods sold for fiscal year 1998 increased
$1,617,000 or 46% over fiscal year 1997 due primarily to costs associated with
increased sales in all the Company's business segments. Selling, general and
administrative expenses remained flat because increases in sales expense were
offset by reductions in administrative overhead.
For the fiscal year 1998 the Company incurred non-cash charges for
impairment of certain assets. The charges are recorded in the operating
expense section of the statement of operations. These charges were necessary
to properly reflect a deterioration of the Company's food business due to
termination of Wal-Mart's food service contract with Fry Guy, which accounted
for approximately 45% of the consolidated fiscal 1998 revenue. The contract
termination resulted in a write-down of related goodwill of $3,658,000, an
additional write-down of $1,500,000 against Fry Guy deep fryer units that Wal-
Mart is returning to the Company and a $100,000 restructuring charge.
Consolidated loss from operations, before other income and expenses, was
$4,581,000 compared to a loss of $1,555,000 for the prior year. The current
loss from operations includes non-cash charges for impaired assets in the
amount of $5,258,000 related to the loss of the Wal-Mart contract.
The net loss for fiscal year ended June 30, 1998 was $6,655,000 or $1.32
per share, compared to $7,107,000 or $1.45 per share reported in the prior
year.
Relative to the Company's mining properties, which continued to be
categorized as "assets held for sale", continuing deflation in precious metals
markets has further impacted the marketability and valuation of these assets.
Therefore, an additional write-down of $1,800,000 was taken on the mining
properties to reflect management's estimated value for these assets of
$2,443,000 at June 30, 1998.
Cash flow from continuing operating activities for current fiscal year end
was a positive $1,801,000. This is an improvement of $3,034,000 over the prior
comparable period.
Any new Statements of the Financial Accounting Standards affecting the
Company are disclosed in the "Notes to Consolidated Financial Statements" on
page F-10.
Fiscal 1997 Compared to Fiscal 1996
Consolidated revenues for fiscal year 1997 increased 83% or $3,135,000
over fiscal year 1996. Effective June 30, 1997, the insurance business segment
was shut down and all prior years have been restated for comparative purposes.
The food service segment, Fry Guy Inc., accounted for 86% of the increase in
12<PAGE>
revenue as the Wal-Mart food program developed rapidly during 1997. Revenue in
the pollution control segment increased 13% during the year.
Consolidated selling, general and administrative expenses increased by
$531,000 or 15% over the prior year. Seventy-four 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 pollution control segment and reflects
additional sales and marketing efforts.
Consolidated loss from operations, before other income and expenses, was
$1,555,000. This was an improvement of $1,441,000 over the prior year's loss.
This gain can be directly attributed to the success of the Fry Guy food
program, which was not fully implemented during 1996.
Included under other discontinued operations is a $2,593,000 asset write-
down of the Company's mining properties. 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.
Liquidity and Capital Resources
At June 30, 1998, the Company's current assets exceeded current
liabilities by approximately $1,288,000, a current ratio of 1.6 to 1. At June
30, 1997, the Company's current assets exceeded current liabilities by
approximately $1,083,000 and reflected a current ratio of 1.5 to 1. The
current ratio improved, compared to the prior year end, due to a $285,000
increase in current assets, while current liabilities remained relatively
constant. Current assets increased due to increased cash balances from
increased sales, without a related increase in accounts receivable, and reduced
prepaid expenses.
Net cash provided (used) in operating activities in fiscal 1998, 1997 and
1996 was $1,573,300, ($1,589,700) and ($3,027,000), respectively. The major
provider of cash for the current fiscal year was the improved operating
results, before the non-charges for impairment of assets, resulting from
increased operating revenues while reducing administrative overhead expenses.
In fiscal years 1997 and 1996, cash was used in operating activities due
primarily to operating losses from continuing operations.
The Company's cash position has improved to $1,116,900 at the end of the
current fiscal year from $526,900 in fiscal year 1997 and $552,000 in fiscal
year 1996.
13<PAGE>
Cash used for additions to property, plant and equipment and investment in
intangible assets has continued to decrease over the three year period ended
June 30, 1998, to $185,300 for the current year from $370,200 in fiscal year
1997 and $312,700 in fiscal year 1996. The balance of activity relating to
cash flow from investing activity during the three year period related to the
collection and advance of notes receivable.
Cash provided by (used in) financing activity changed dramatically over
the three year period. In fiscal year 1998, the Company used cash in financing
activity of $882,900 primarily to meet current capital lease obligations. In
fiscal years 1997 and 1996, the Company issued additional stock to finance cash
operating losses.
During fiscal year 1998, Wal-Mart, which accounted for approximately 45%
of the Company's revenue, terminated its contract with the Fry Guy food service
operations and is returning over 1,500 fryers to the Company. Although there
will be continued Fry Guy sales to Wal-Mart through the first 1999 fiscal
quarter, the Company anticipates the Wal-Mart revenue to cease in the second
quarter. Wal-Mart elected to purchase new fryer equipment for its stores and
self-manage the finger food program.
To respond to the contract loss, the Company is quickly revitalizing its
sales program to replace declining revenues and is attempting to reduce
operating expenses. The loss of the Wal-Mart account is projected to result in
a shortfall in working capital and impair the ability of the Company to meet
its short-term capital lease obligations. The Company believes this working
capital shortfall will be resolved by additional borrowing, placement of the
fryers in new locations, and sale or lease of the fryers.
The Year 2000 Issue
The Company has consulted with an outside Management Information Systems
analyst and determined that all computer systems currently in use by the
Company are either in compliance with the Year 2000 issue or can be made to
comply with minor modifications.
The Company does not anticipate significant problems with any of its
suppliers of data necessary for the Company's operations. The potential risk
to the Company concerning the Year 2000 issue appears to be problems that
customers may incur and the effect on their ability to pay the Company for
services and products. The Company does not have a formal contingency plan to
resolve this issue. However, due to the Company's diverse customer base,
management anticipates the problems should be limited in scope.
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
properties segment under Item 2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements.
14<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Alanco Environmental Resources Corporation
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Alanco
Environmental Resources Corporation and subsidiaries as of June 30, 1998 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the year 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alanco
Environmental Resources Corporation and subsidiaries as of June 30, 1998, and
the results of its operations and its cash flows for the year 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 2 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 matter are also
described in Note 2. The consolidated financial statements do not include any
adjustments that mighty result from the outcome of this uncertainty.
/s/Hein + Associates LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
August 20, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Alanco Environmental Resources Corporation
We have audited the accompanying consolidated balance sheet of Alanco
Environmental Resources Corporation (formerly known as Alanco Resources
Corporation) and subsidiaries as of June 30, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended June 30, 1997. 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
the consolidated results of their operations and their consolidated cash flows
for each of the two years in the period ended June 30, 1997, 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 two years. These
factors, among others, as discussed in Note 2 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 2. 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-2<PAGE>
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
<S> <C> <C>
1998 1997
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,116,857 $ 526,851
Accounts receivable - trade, net of allowance
for doubtful 1,192,547 1,169,290
accounts of $18,535 and $27,765,
respectively
Notes receivable, current portion 349,212 586,739
Inventories 540,371 527,479
Prepaid expenses and other current assets 64,544 273,158
Cost and estimated earnings in excess of
billings on uncompleted 105,070 -
contracts ------------- ------------
Total current assets 3,368,601 3,083,517
PROPERTY, PLANT AND EQUIPMENT, net 3,380,124 5,049,080
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $1,134,842 223,381 4,142,946
and $811,108, respectively
Notes receivable, long-term portion - 223,733
Other assets 243,303 216,653
Net assets of discontinued operations held 2,443,000 4,243,000
for sale ------------- ------------
TOTAL ASSETS $9,658,409 $16,958,929
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Capital lease obligations, current portion $ 1,042,273 $ 772,419
Notes payable, current portion 264,399 117,965
Accounts payable 236,174 402,988
Accrued expenses 364,624 479,932
Billings in excess of costs and estimated
earnings on uncompleted 173,248 -
contracts
Net liabilities of discontinued operations - 227,321
------------- ------------
Total current liabilities 2,080,718 2,000,625
CAPITAL LEASE OBLIGATIONS, LONG-TERM 410,671 1,021,843
NOTES PAYABLE, LONG-TERM - 114,399
COMMITMENTS AND CONTINGENCIES, (Notes 2 and 8)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
20,000,000 shares authorized; none issued
Common stock, no par value; 100,000,000
shares authorized, 53,742,005 53,742,005
5,050,683 shares issued and outstanding
Accumulated deficit (46,574,985) (39,919,943)
------------- ------------
Total shareholders' equity 7,167,020 13,822,062
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,658,409 $16,958,929
============= ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3<PAGE>
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
JUNE 30,
<S> <C> <C> <C>
1998 1997 1996
------------- ------------ ------------
NET SALES $10,975,854 $6,903,920 $3,769,110
------------- ------------ ------------
OPERATING EXPENSES:
Direct service and cost of goods 5,099,370 3,482,460 2,507,803
sold
Selling, general and administrative 4,052,350 4,043,959 3,512,650
Depreciation and amortization 1,147,113 932,567 744,466
------------- ------------ ------------
Operating expenses before 10,298,833 8,458,986 6,764,919
impairment
Other expenses:
Impairment of intangibles 3,657,817 - -
Impairment of equipment and 1,600,000 - -
other ------------- ------------ ------------
Total impairment expenses 5,257,817 - -
============= ============ ============
Total operating expenses 15,556,650 8,458,986 6,764,919
------------- ------------ ------------
LOSS FROM OPERATIONS (4,580,796) (1,555,066) (2,995,809)
------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 35,562 40,135 69,266
Interest expense (294,331) (222,868) (101,763)
Write-down of assets - (242,614) (162,772)
Other, net (15,477) (173,115) (14,370)
------------- ------------ ------------
Total other income (expense) (274,246) (598,462) (209,639)
------------- ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS (4,855,042) (2,153,528) (3,205,448)
------------- ------------ ------------
DISCONTINUED OPERATIONS:
Loss on planned disposal of mining (1,800,000) (2,592,858) -
properties
Loss from operations of insurance - (2,046,256) (322,905)
adjusting subsidiary
Estimated loss on disposal of
insurance adjusting - (314,518) -
subsidiary
------------- ------------ ------------
Total discontinued operations (1,800,000) (4,953,632) (322,905)
------------- ------------ ------------
NET LOSS $(6,655,042) $(7,107,160) $(3,528,353)
============= ============ ============
NET LOSS PER SHARE (Basic and
Diluted):
Loss from continuing operations $(.96) $(0.44) $(0.71)
Loss from discontinued operations (.36) (1.01) (0.07)
------------- ------------ ------------
Net loss per basic and diluted $(1.32) $(1.45) $(0.78)
common share ------------- ------------ ------------
WEIGHTED AVERAGE COMMON SHARES 5,050,683 4,902,944 4,540,328
OUTSTANDING ============= ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4<PAGE>
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998
<S> <C> <C> <C> <C>
COMMON STOCK ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------------ ------------ ------------- ------------
BALANCES, July 1, 1995 4,276,041 $47,885,246 $(29,284,430) $18,600,816
Common stock issued for:
Cash 408,762 3,129,988 - 3,129,988
Stock option plans 54,929 704,935 - 704,935
Intangible assets 2,679 41,016 - 41,016
Services rendered and 2,987 22,505 - 22,505
other
Net loss - - (3,528,353) (3,528,353)
------------ ------------ ------------- ------------
BALANCES, June 30, 1996 4,745,398 51,783,690 (32,812,783) 18,970,907
Common stock issued for:
Cash 42,858 318,000 - 318,000
Conversion of
convertible and 252,824 1,569,021 - 1,569,021
redeemable
preferred stock
Stock options and 8,174 63,444 - 63,444
warrants
Legal settlement 1,429 7,850 - 7,850
Net loss - - (7,107,160) (7,107,160)
------------ ------------ ------------- ------------
BALANCES, June 30, 1997 5,050,683 53,742,005 (39,919,943) 13,822,062
Net loss - - (6,655,042) (6,655,042)
------------ ------------ ------------- ------------
BALANCES, June 30, 1998 5,050,683 $53,742,005 $(46,574,985) $7,167,020
============ ============ ============= ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5<PAGE>
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(4,855,042) $(2,153,528) $(3,205,448)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,147,113 932,567 744,466
Loss on disposition of assets 42,521 78,363 48,921
Write-down of assets - 242,614 162,772
Impairment of intangibles 3,657,817 - -
Impairment of equipment and other 1,600,000 - -
Stock issued for services - 7,850 59,465
rendered and expenses
Bad debt 376,317 - -
Imputed interest on redeemable - 43,806 35,406
preferred stock
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable (23,257) (604,170) (174,570)
Inventories (12,892) 231,062 (526,810)
Prepaid expenses 208,614 (212,130) 123,994
Costs in excess of billings (105,070) - -
Other assets (26,650) (69,413) 167,067
Increase (decrease) in:
Accounts payable and accrued (382,122) 269,865 (136,988)
expenses
Billings in excess of costs 173,248 - -
Unrealized installment sales - - (104,552)
------------ ------------ ------------
Net cash provided by (used in)
continuing operating 1,800,597 (1,233,114) (2,806,277)
activities
Loss from discontinued operations (1,800,000) (2,592,858) -
Write-off of mining properties 1,800,000 2,592,858 -
Increase (decrease) in other net (227,321) (356,588) (220,680)
assets ------------ ------------ ------------
Net cash used in discontinued (227,321) (356,588) (220,680)
operations ------------ ------------ ------------
Net cash provided by (used in) 1,573,276 (1,589,702) (3,026,957)
operating activities ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advance for notes receivable - (91,779) (770,387)
Collection of notes receivable 84,943 579,154 416,915
Purchase of property, plant and (124,479) (321,661) (262,126)
equipment
Proceeds from disposition of assets - 12,391 22,365
Purchase of intangible assets (60,826) (48,498) (50,566)
------------ ------------ ------------
Net cash provided by (used in) (100,362) 129,607 (643,799)
continuing operating activities
Net cash provided by (used in) - 12,535 (34,132)
discontinued operating activities ------------ ------------ ------------
Net cash provided by (used in) (100,362) 142,142 (677,931)
investing activities ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on notes payable, - - (51,196)
shareholders
Advances from borrowings 150,000 300,000 -
Repayments on borrowings (117,965) (67,636) -
Repayments on capital lease (914,943) (386,154) (94,791)
obligations
Proceeds from the sale of stock - 1,576,191 3,797,963
------------ ------------ ------------
Net cash provided by (used in) (882,908) 1,422,401 3,651,976
continuing investing activities
Net cash provided by discontinued - - 108,493
investing activities
------------ ------------ ------------
Net cash provided by (used in) (882,908) 1,422,401 3,760,469
financing activities ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND 590,006 (25,159) 55,581
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning 526,851 552,010 496,429
of year ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $1,116,857 $526,851 $552,010
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION:
Cash paid for interest $294,321 $184,662 $66,357
============ ============ ============
Equipment acquired with capital $573,625 $1,683,825 $608,103
leases ============ ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations - 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 has four other business segments.
These business segments include:
(i) Manufacturing of pollution control products, including the EDDS and
CDSI.
(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.
(iii) Mining operations. During fiscal 1998, the Company discontinued
its pursuit of its mining operations. Therefore, its mining
properties have been classified as net assets of discontinued
operations held for sale on the balance sheet.
(iv) Insurance adjusting, a service-oriented business segment;
acquisition was effective May 1, 1995 and operations were
discontinued on June 30, 1997 (see Note 3).
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents - For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
Inventories - Inventories consist of purchased materials and parts, work-
in-process, and finished goods. Inventories are stated at the lower of
cost or market, as calculated using the average-cost method. Inventories
consisted of the following at June 30:
1998 1997
---------- ---------
Raw materials and purchased parts $289,420 $323,575
Work-in-process 24,835 10,919
Finished goods 226,116 192,985
---------- ---------
$540,371 $527,479
========== =========
F-7<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment - Property, plant and equipment are stated at
cost. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method generally over a 5- to 32-year
period. Leasehold improvements are amortized on the straight-line method
over the lesser of the lease term or the useful life. Expenditures for
ordinary maintenance and repairs are charged to expense as incurred. Upon
retirement or disposal of assets, the cost and accumulated depreciation are
eliminated from the account and any gain or loss is reflected in the
statement of operations.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The carrying amounts of accounts
receivable, notes receivable, accounts payable, accrued liabilities, and
notes payable approximate fair value.
Intangible Assets - Intangibles consist of patents and the excess of
purchase price over fair value of net assets acquired (goodwill) in
connection with the acquisition of its wholly-owned subsidiaries. During
fiscal 1998, the remaining excess of purchase price over fair value of net
assets acquired associated with the Companies prior purchase of a wholesale
equipment supplier was written-off as a result of the Company's impairment
analysis. All remaining intangibles are being amortized over 17 years.
Income Taxes - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between
the financial statements and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
Use of Estimates - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company makes significant assumptions concerning the realizability of
its deferred tax assets, investment in mining properties, and in property
and equipment associated with its food marketing and distribution
operation. Due to the uncertainties inherent in the estimation process and
the significance of these costs, it is at least reasonably possible that
its estimates in connection with these items could be further materially
revised within the next year.
F-8<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of Intangible and Other Long-Lived Assets - The Company performs
an assessment for impairment whenever events or changes in circumstances
indicate that the carrying amount of a long-lived asset may not be
recoverable. If the net carrying value exceeds estimated undiscounted
future net cash flows, then impairment is recognized to reduce the carrying
value to the estimated fair value. During fiscal 1998 and 1997,
approximately $7,057,817 and $2,835,472 of intangible and other long-lived
assets were written-off due to impairment in continuing and discontinued
operations.
Revenue Recognition - The Company recognizes revenue, net of anticipated
returns, at the time products are shipped to customers for product sales
and at the time service is provided. Revenues from long-term contracts are
recognized on the percentage-of-completion method for individual contracts,
commencing when progress reaches a point where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized
in the ratio that costs incurred bear to total estimated costs. Changes in
job performance, estimated profitability and final contract settlements may
result in revisions to costs and income, and are recognized in the period
in which the revisions are determined. There are two long-term contracts
in progress at June 30, 1998.
Contract costs include all direct materials, subcontracts, labor costs and
those indirect costs related to contract performance. General and
administrative costs are charged to expense as incurred.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss on both short and long-term contracts is accrued.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "billings in excess of costs and estimated earnings
on uncompleted contracts," represents billings in excess of revenues
recognized.
Foreign Currency Translation - The Company has one foreign entity whose
functional currency is the U.S. dollar and translates monetary assets and
liabilities at year-end exchange rates and non-monetary items are
translated at historical rates. Income and expense amounts are translated
at the average rates in effect during the year, except for depreciation and
cost of product sales which are translated at historical rates. Gains or
losses from changes in exchange rates are recognized in consolidated income
in the year of occurrence. Foreign currency gains (losses) for the years
ended June 30, 1998, 1997, and 1996 were immaterial.
Income (Loss) Per Share - The income (loss) per share is presented in
accordance with the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (FAS 128). FAS 128 replaced the
presentation of primary and fully diluted earnings (loss) per share (EPS)
with a presentation of basic EPS and diluted EPS. Basic EPS is calculated
by dividing the income or loss available to common shareholders by the
weighted average number of common shares outstanding for the period.
F-9<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock. Basic and diluted EPS were the same for fiscal 1998, 1997
and 1996 as the Company had losses from operations and therefore, the
effect of all potential common stocks was antidilutive.
Stock-Based Compensation - In fiscal 1997, the Company adopted Financial
Accounting Standards Board "Accounting for Stock-Based Compensation"
(FAS 123). FAS 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and
other equity instruments to employees based on fair value. Companies that
do not adopt the fair value accounting rules must disclose the impact of
adopting the new method in the notes to the financial statements.
Transactions in equity instruments with non-employees for goods or services
must be accounted for on the fair value method. The Company has elected
not to adopt the fair value accounting prescribed by FAS 123 for employees,
and is subject only to the disclosure requirements prescribed by FAS 123.
Concentrations of Credit Risks and Significant Customers - 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.
During the year ended June 30, 1998, 1997 and 1996, the Company did
business with one customer in the food marketing and distribution segment
whose sales comprised 45%, 42% and 25% of consolidated sales. This
customer also accounted for approximately 37%, 46% and 0% of consolidated
accounts receivable for fiscal 1998, 1997 and 1996 respectively. The
Company believes that retention of this customer is highly unlikely to
continue in the future.
New Pronouncement - SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," was issued in June 1998. This statement
establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for the Company's financial statements for the year ended June
30, 2001 and the adoption of this standard is not expected to have a
material effect on the Company's financial statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued in February 1998. This statement
revises the disclosure requirement for pensions and other postretirement
benefits. This statement is effective for the Company's financial
statements for the year ended June 30, 1999 and the adoption of this
standard is not expected to have a material effect on the Company's
financial statements.
F-10<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This statement establishes
standards for the way public business enterprises report information about
operating segments. It also establishes standards for related disclosure
about products and services, geographical areas and major customers. This
statement is effective for the Company's financial statements for the year
ended June 30, 1999 and the adoption of this standard is not expected to
have a material effect on the Company's financial statements.
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
This statement establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, Statement 130 requires that all components of
comprehensive income shall be classified based on their nature and shall be
reported in the financial statements in the period in which they are
recognized. A total amount for comprehensive income shall be displayed in
the financial statements where the components of other comprehensive income
are reported. This statement is effective for the Company's financial
statements for the year ended June 30, 1999 and the adoption of this
standard is not expected to have a material effect on the Company's
financial statements.
Reclassification - Certain reclassifications have been made to conform
fiscal 1997 financials to the presentation in fiscal 1998. The
reclassifications had not effect on net income.
2. CONTINUED OPERATIONS:
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which contemplate
continuation of the Company and a going concern. As shown in the
consolidated financial statements, the Company has incurred operating
losses from operations for the last three years. Additionally, the
retention of a significant customer in the Company's food marketing and
distribution business, which accounted for 45% of revenues in fiscal 1998,
is considered unlikely by management of the Company as of June 30, 1998.
Management of the Company believes that loss of this customer will
negatively impact future operating results of the Company. As a result,
the Company has reduced by $1,600,000 and $3,657,817 the carrying value of
the equipment expected to be returned and goodwill associated with its food
marketing and distribution business, respectively. This equipment has been
valued at its expected sales value less refurbishing costs. 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
F-11<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 or recorded asset amounts or
amounts and classifications of liabilities that might be necessary should
the Company be unable to continue its existence.
Management plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence:
Management of the Company will attempt to replace the expected lost
revenues from a significant customer with new customers. Additionally,
the Company is currently attempting to expand its operations of its
pollution control manufacturing company.
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.
3. DISCONTINUED 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 in 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 and discontinued operations'
historical losses, there is no tax effect on the disposition of the
operations.
F-12<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of net (liabilities) assets of the Company's
discontinued insurance adjusting operations:
1998 1997
--------- ------------
Current assets $ - $15,449
Property, plant and equipment - 33,350
Other assets - 10,251
Current liabilities - (286,371)
--------- ------------
Net (liabilities) assets from $- $(227,321)
discontinued operations ========= ============
During fiscal 1998, management of the Company determined that they would
actively pursue the sale of their mining properties and discontinue all
related operations. As such, these properties have been classified as
assets held for sale and related impairment associated with such
properties is included in discontinued operations.
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 an 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. During fiscal
1998 and 1997, based on the Company's analysis of the properties,
approximately $1,800,000 and $2,593,000 of the properties carrying value
F-13<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
were reduced to estimated market value. Management will continue to
evaluate the carrying value of the properties and additional adjustments
may be required in the future.
4. NOTES RECEIVABLE:
Notes receivable at June 30 consisted of the following:
1998 1997
---------- ----------
Note receivable, quarterly interest payments $771,581 $771,581
at prime plus 2%, principal was due June 26,
1997(1)
Notes receivable, 9.5% annum with $1,892 223,613 225,000
monthly payments of principal and interest,
secured by first lien on the subject
property(2)
Notes receivable - other. 29,634 138,539
---------- ----------
1,024,828 1,135,120
Less allowance for uncollectible accounts (675,615) (324,648)
---------- ----------
349,213 810,472
Less current portion (349,213) (586,739)
---------- ----------
Long-term portion $ - $223,733
========== ==========
_______________________
(1)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
F-14<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, this note was in default.
During fiscal 1998, the Company determined PMM transferred all its assets
to a creditor and PMM was subsequently sold. The Company filed a lawsuit
naming PMM for fraudulently transferring assets. Subsequent to June 30,
1998, the Company has reached a tentative agreement with the Company who
purchased PMM's assets for repayment for $200,000 of the original $771,581
loan. Additionally, the Company that purchased PMM has agreed to pay any
and all amounts due on the leased facilities and equipment that is
guaranteed by the Company.
(2)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 May 1999 and the note
is collateralized by the warehouse.
5. PROPERTY AND EQUIPMENT:
At June 30, property plant and equipment consists of the following:
1998 1997
----------- -----------
Land $60,231 $60,431
Buildings 1,366,682 1,350,668
Machinery and equipment 3,522,838 4,397,243
Furniture and office equipment 478,655 484,523
----------- -----------
5,428,406 6,292,865
Less accumulated depreciation (2,048,282) (1,243,785)
----------- -----------
$3,380,124 $5,049,080
=========== ===========
Related depreciation expense for the years ended June 30, 1998, 1997, and
1996 was $824,539, $552,361, and $244,733, respectively.
F-15<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. UNCOMPLETED CONTRACTS:
The following applies to contracts in progress as of June 30, 1998:
Costs incurred on uncompleted $609,369
contracts
Estimated earnings 443,665
-----------
1,053,034
Billings to date 1,121,212
-----------
$68,178
===========
Included in the accompanying
balance sheet under
the following captions:
Costs and estimated earnings
in excess of billings on $105,070
uncompleted contracts
Billings in excess of costs
and estimated earnings on 173,248
uncompleted contracts -----------
$ (68,178)
===========
F-16<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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, 1998, the
outstanding balance due was $114,399. The Company also has a $300,000
line-of-credit at a 10.25% interest rate with the same financial
corporation collateralized by inventory and equipment. As of June 30,
1998, $150,000 was drawn on the line-of-credit and has subsequently been
paid.
In April 1998, the Company obtained a 90-day $300,000 line-of-credit with a
director and shareholder of the Company. The Company was advanced $100,000
and repaid the balance before year-end. No balance was outstanding at
June 30,1998. As consideration for the line-of-credit, the director is
receiving interest at a rate of 3% of the highest principal balance for
every month the principal is outstanding and the shareholder received
warrants to purchase 435,000 shares of common stock. These warrants expire
in five years and are exercisable at $2.80 per share. As a result of the
relationship between the quoted market price and exercise price of the
warrants on the date of grant, the financing fee related to the warrants
was immaterial.
8. COMMITMENTS AND CONTINGENCIES:
The Company is a defendant in several lawsuits. Management of 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 Company's financial condition, cash flows or
operations.
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.
F-17<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments under non-cancelable capital and operating
leases with initial or remaining terms of one year or more at June 30, 1998
are as follow:
Year Ending Operating Capital
June 30, Leases Leases
------------ ----------- -----------
1999 $152,489 $1,272,912
2000 91,387 459,095
2001 3,706 7,789
--------- -----------
$247,582 1,739,796
=========
Less amount representing interest (175,658)
Less executory costs (taxes) (111,193)
-----------
1,452,945
Less current portion 1,042,275
-----------
Long-term portion $410,670
===========
At June 30, leased capital assets included in property, plant and equipment
consisted of the following:
1998 1997
----------- -----------
Machinery and equipment $1,333,450 $2,223,825
Furniture and equipment 18,260 68,103
----------- -----------
1,351,710 2,291,928
Less accumulated amortization (661,071) 309,176
----------- -----------
Total $690,639 $1,982,752
=========== ===========
F-18<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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).
These shares were converted to common shares as of June 30, 1997 (see
Note 10). 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 par value Series 2 Preferred Stock. The stock was 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 anum
dividend. These shares were converted to common shares as of June 30, 1997
(see Note 10).
During the year ended June 30, 1997, the Company issued 25,000 shares of
$10 par value Series 3 Preferred Stock. The stock was 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 anum dividend.
These shares were converted to common shares as of June 30, 1997 (see
Note 10).
10. SHAREHOLDERS' EQUITY:
Common Shares - In May 1998, the Company's shareholders approved a 1 for 7
reverse stock split. Accordingly, all common stock reflected in the
accompanying financial statements and notes reflect this reverse split for
all periods presented.
F-19<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1997, among other transactions, the Company
completed the following common stock transactions of previously unissued
common shares:
Issued for a legal judgment 1,429 shares for an aggregate value of
$7,850.
Issued for conversion of the Series 1 Preferred Stock 49,409 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 163,538 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 39,877 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 143, 143, 123, and 106
shares, respectively, at values ranging from $7.00 to $5.74 per share
for an aggregate value of $6,000.
Issued to an unaffiliated company for the rights to manufacture a
machine 2,679 shares at a contract price of $41,016.
Issued for a legal judgment 1,829 shares for an aggregate value of
$8,000.
Issued to two employees of a subsidiary, for services performed 571 and
72 shares, respectively, for an aggregate value of $8,505.
Warrants - During fiscal 1998, the Company reissued 60,715 warrants to a
stockholder for consideration of a $300,000 line-of-credit (see Note 7).
These warrants expire in five years and are exercisable at $2.80 per share.
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, 1998, 1997, and 1996 to
purchase 168,456, 188,024, and 195,197 shares of common stock,
respectively, at $21 per share for an aggregate value of $3,537,576,
$3,948,498, and $4,099,143, respectively. The warrants may be exercised
through December 1998.
Stock Options - In 1995, the Company adopted an Incentive Stock Option Plan
(1995 ISOP) that authorizes the issuance of up to 142,858 shares of common
stock. Pursuant to the plan, the Company may only grant "incentive stock
options" (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended).
F-20<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incentive and non-qualified stock options may not be granted at an exercise
price of less than the fair market value of the common stock on the date of
grant (except for holders of more than 10% of common stock, whereby the
exercise price must be at least 110% of the fair market value at the date
of grant for incentive stock options). Each option must be granted within
five years from the effective date of the Plan. The term of the options
may not exceed five years. As of June 30, 1998, the Company had granted
options under the plan to purchase 122,501 shares, of which all have
vested, 23,785 have been exercised, and 79,069 have been canceled.
Options outstanding for this plan at June 30, 1998 have exercise prices
that range from $14.63 to $4.27.
In 1995, the Company adopted the Directors and Officers Stock Option Plan
(1995 D&O Plan), which provides for the grant of stock options to only
executive officers and directors of the Company. An aggregate of 142,858
shares of common stock are reserved for issuance under this plan. The
exercise price of the options will be $.70 per share or such other price
the board of directors may determine. Each option must be granted within
five years from the effective date of the plan. The term of the options
may not exceed six months. Only the options granted and exercised in
fiscal 1996 were under the 1995 D&O Plan.
In 1996, the Company adopted another Director and Officer Stock Option Plan
(1996 D&O Plan). Only executive officers and directors of the Company
shall be eligible to be granted options under this plan. An aggregate of
107,143 shares of common stock are reserved for issuance under this plan.
The exercise price of the options will be 60% of the NASDAQ closing bid
price per share on the date of grant or such other price the Board of
Directors may determine. Each option must be granted within five years
from the effective date of the plan and the term may not exceed five years.
No one officer or director shall have more than 21,429 options granted
under this plan. As of June 30, 1998, the Company had granted options
under the 1996 D&O Plan to purchase 58,575 shares of which 45,717 options
are vested and the balance will vest in one year. Exercise prices for the
directors and officers options outstanding at June 30, 1998 range from
$4.69 to $6.30.
Subsequent to year-end, the Company granted a total of 1,100,000 10-year
options to two new officers of the Company. The exercise price has not yet
been determined.
The following is a table of activity under these plans:
F-21<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incentive Weighted Directors Weighted
Stock Average Officer Average
Option Exercise Stock Exercise
Plan Price Option Plans Price
----------- ---------- ------------- ----------
OPTIONS OUTSTANDING, June - $- - $ -
30, 1995
Granted 105,357 12.86 32,143 0.70
Exercised (22,785) 12.92 (32,143) 0.70
Canceled (2,572) 13.23 - -
----------- ---------- ------------- ----------
OPTIONS OUTSTANDING, June 80,000 12.83 - -
30, 1996
Granted 7,143 13.23 28,572 6.30
Exercised (1,000) 13.23 - -
Canceled (46,143) 12.51 - -
----------- ---------- ------------- ----------
OPTIONS OUTSTANDING, June 40,000 13.27 28,572 6.30
30, 1997
Granted 10,001 4.78 30,003 5.53
Canceled (30,354) 11.62 - -
----------- ---------- ------------- ----------
OPTIONS OUTSTANDING, June 19,647 $11.49 58,575 $ 5.91
30, 1998 =========== ========== ============= ==========
F-22<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For all options granted during 1998, 1997, and 1996, the weighted average
market price of the Company's common stock on the grant date was
approximately equal to the weighted average exercise price. The weighted
average remaining contractual life for all options and warrants as of June
30, 1998 was approximately 4 years. At June 30, 1998, options for
65,364 shares were exercisable and options for the remaining shares become
exercisable within the next year. If not previously exercised, options
outstanding at June 30, 1998 will expire as follows:
Weighted
Average
Number of Exercise
Year Shares Price
------ ---------- ----------
2001 15,360 $13.32
2002 28,572 $6.30
2003 34,290 $5.45
----------
78,222
==========
F-23<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for its stock options
and warrants which are granted to employees. Accordingly, no compensation
cost has been recognized for grants of options and warrants to employees
since the exercise prices were not less than the fair value of the
Company's common stock on the grant dates. Had compensation cost been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of FAS 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
Year Ended June 30,
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ -------------
Net loss applicable to common
stockholders:
As reported $(6,655,042) $(7,107,160) $(3,528,353)
Pro forma $(6,820,859) $(7,277,460) $(4,494,873)
Net loss per common share -
basic and diluted:
As reported $ (1.32) $(1.45) $ (.78)
Pro forma $ (1.35) $(1.48) $ (.99)
F-24<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each employee option granted in 1998, 1997, and 1996 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Year Ended June 30,
1998 1997 1996
-------- -------- ---------
Expected volatility 104% 84% 84%
Risk-free interest rate 6.1% 5.6% 5.6%
Expected dividends - - -
Expected terms (in years) 5.0 5.0 2.5
11. INCOME TAXES:
The Company's actual effective tax rate differs from U.S. Federal corporate
income tax rate of 34% as follows for the year ended June 30:
1998 1997 1996
-------- ------- --------
Statutory rate (34.0%) (34.0%) (34.0%)
State income taxes, net of Federal (3.3%) (3.3%) (3.3%)
income tax benefit
Increase (reduction) in valuation
allowance related to
of net operating loss 37.3% 37.3% 37.3%
carryforwards and change in -------- -------- ------
temporary differences
-0-% -0-% -0-%
======== ======== ======
F-25<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset recognized as of June 30 are
as follows:
1998 1997
------------ ------------
Long-term deferred tax assets
(liabilities):
Net operating loss $7,676,000 $8,570,000
carryforwards
Impairment of goodwill 1,364,000 -
Impairment of mining properties 2,613,000 1,045,000
Impairment of equipment and 581,000 -
other
Estimated cost of discontinued - 125,000
operations
Other 374,000 12,000
Valuation allowance (12,608,000) (9,752,000)
------------ ------------
Net long-term deferred tax $- $-
asset ============ ============
The valuation allowance was increased by $2,856,000 for the year ended
June 30, 1998.
At June 30, 1998, the Company had net operating loss carryforwards for
Federal tax purposes of approximately $20,580,000. The loss
carryforwards, unless utilized, will expire from 1999 through 2012.
12. SEGMENT INFORMATION:
The Company operates primarily in four industry segments: development and
marketing of pollution control devices, manufacturing for agricultural and
dust control industry, and food marketing and distribution.
F-26<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table is a summary of results by major segments:
For the Years Ended June 30,
1998 1997 1996
------------- ------------- -------------
Net sales:
Pollution control $5,585,885 $3,738,172 $3,306,437
products
Food distribution 5,389,969 3,165,748 462,673
Mining - - -
------------- ------------- -------------
Total $10,975,854 $6,903,920 $3,769,110
============= ============= =============
Loss from continuing
operations:
Pollution control $438,555 $(259,284) $12,842
products
Food distribution (3,534,106) 659,985 (650,863)
Mining - - -
Other (1,759,491) (2,554,229) (2,567,427)
------------- ------------- -------------
Total $(4,855,042) $(2,153,528) $(3,205,448)
============= ============= =============
Depreciation and
amortization:
Pollution control $234,714 $232,559 $227,246
products
Food distribution 554,396 319,803 107,867
Mining - - -
Other 358,003 380,205 409,353
------------- ------------- -------------
Total $1,147,113 $932,567 $744,466
============= ============= =============
F-27<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30,
1998 1997
------------ -------------
Identifiable assets:
Pollution control $3,662,129 $2,984,131
products
Food distribution 3,834,078 3,938,341
Mining 2,443,000 4,243,000
Other (280,798) 5,793,457
------------ -------------
Total $9,658,409 $16,958,929
============ =============
Property, plant and
equipment additions:
Pollution control $77,241 $79,033
products
Food distribution 612,007 2,381,130
Mining - -
Other 8,856 21,557
------------ -------------
Total $698,104 $2,481,720
============ =============
F-28<PAGE>
INDEPENDENT AUDITOR'S REPORT
ON SUPPLEMENTARY INFORMATION
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules to the
consolidated financial statements referred to in the index are presented for
the purposes of additional analysis and are not a required part of the basic
consolidated financial statements. Such information for the year ended June
30, 1998 has been subjected to the auditing procedures applied in the audit of
the basic consolidated financial statements. In our opinion, such information
is fairly stated in all material respects in relation to the basic consolidated
financial statements taken as a whole.
/s/Hein + Associates LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
August 20, 1998
F-29<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Alanco Environmental Resources Corporation
Our report on the consolidated balance sheet of Alanco Environmental Resources
Corporation (formerly known as Alanco Resources Corporation) and subsidiaries
as of June 30, 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended June 30, 1997 is included on page F-2 of this Annual Report on Form 10-K.
In connection with our audits of such financial statements, we have also
audited the related financial statement schedule on page F-31 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
<PAGE>
F-30<PAGE>
</TABLE>
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED JUNE 30, 1998, 1997, AND 1996
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ------------- ------------ ------------ ---------------
Year Ended June 30, 1998:
Impairment of mineral
properties (assets held $2,592,656 $1,800,000 $- $- $4,392,656
for sale)
Impairment of goodwill - 3,657,817 - - 3,657,817
Impairment of equipment - 1,500,000 - - 1,500,000
(assets held for sale)
Allowance for notes 324,648 376,317 - - 700,965
receivable
Other 92,765 - - (9,230) 83,535
Year Ended June 30, 1997:
Impairment of mineral $- $2,592,656 $- $- $2,592,656
properties
Allowance for notes 39,000 285,648 - - 324,648
receivable
Other 111,000 22,201 - (40,436) 92,765
Year Ended June 30, 1996:
Allowance for notes $- $39,000 $- $- $39,000
receivable
Other 25,189 85,811 - - 111,000
</TABLE>
F-31<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 22, 1998, Singer Lewak Greenbaum & Goldstein LLP, Certified Public
Accountants, the Company's Certifying Accountant for the previous two fiscal
years, was dismissed. Hein and Associates LLP, Certified Public Accountants,
were engaged to serve as the Company's new auditors. The selection of Hein and
Associates LLP was approved by the Audit Committee of the Company's Board of
Directors.
Singer Lewak Greenbaum & Goldstein LLP's report on the financial
statements for the fiscal years ended June 30, 1997 and 1996 contained a
qualification based upon the company's ability to continue as a going concern.
Except for this qualification, Singer Lewak Greenbaum & Goldstein LLP's reports
have not contained an adverse opinion or a disclaimer of opinion, or were
qualified or modified as to uncertainty, audit scope, or accounting principles.
Nor has there been any disagreement with Singer Lewak Greenbaum & Goldstein
LLP 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 information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 30, 1998.
(The Company expects to file on approximately September 28, 1998.)
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Registrant's Proxy Statement to be filed on or before October 30, 1998.
15<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*
(27) Financial Data Schedule
*Incorporated by reference from the Annual Report on Form 10-K for the fiscal
year ended June 30, 1997.
B. Schedule
(II) Valuation and Qualifying Accounts
C. Reports on Form 8-K
May 22, 1998: Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure. Please see Part II, Item 9, above.
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.
EXHIBIT (21) SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
Alanco Environmental Manufacturing, Inc. Nebraska
Alanco Environmental Technology People's Republic of China
(Beijing) Co. Ltd.
Fry Guy Inc. Nevada
16<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
DATE: September 28 , 1998 /s/Robert R. Kauffman
------------------------
Robert R. Kauffman, 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/Robert R. Kauffman Director September 28, 1998
- ------------------------
Robert R. Kauffman
/s/James T. Hecker Director September 28, 1998
- ------------------------
James T. Hecker
/s/Harold S. Carpenter Director September 28, 1998
- ------------------------
Harold S. Carpenter
/s/Edward J. Maley Director September 28, 1998
- ------------------------
Edward J. Maley
/s/Steven P. Oman Director September 28, 1998
- ------------------------
Steven P. Oman
/s/Joseph T. Connelly Chief Financial Officer September 28, 1998
- ------------------------
Joseph T. Connelly
17<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1116857
<SECURITIES> 0
<RECEIVABLES> 1560294
<ALLOWANCES> 18535
<INVENTORY> 540371
<CURRENT-ASSETS> 3368601
<PP&E> 5428406
<DEPRECIATION> 2048282
<TOTAL-ASSETS> 9658409
<CURRENT-LIABILITIES> 2080718
<BONDS> 410671
0
0
<COMMON> 53742005
<OTHER-SE> (46574985)
<TOTAL-LIABILITY-AND-EQUITY> 9658409
<SALES> 5585885
<TOTAL-REVENUES> 10975854
<CGS> 3623727
<TOTAL-COSTS> 15180333
<OTHER-EXPENSES> (20085)
<LOSS-PROVISION> 376317
<INTEREST-EXPENSE> 294331
<INCOME-PRETAX> (4855042)
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<INCOME-CONTINUING> (4855042)
<DISCONTINUED> (1800000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6655042)
<EPS-PRIMARY> (1.32)
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