Form 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1999
Commission file number 0-9347
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0220694
-------------------------------- --------------------
(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: (480) 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-KSB or any
amendments to this Form 10-KSB.
Yes X No
----- -----
The Issuer's revenues for the fiscal year ended June 30, 1999 were
$7,084,386.
State the aggregate market value, based upon the closing bid price of the
Common Stock as quoted on NASDAQ, of the voting stock held by non-affiliates of
the registrant: $6,383,995 as of September 24, 1999
Indicate the number of shares outstanding of each of the issuer's classes
of common stock: 5,342,486 as of September 24, 1999. (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 27, 1999.
THIS FORM 10-KSB CONTAINS STATEMENTS THAT MAY BE CONSIDERED FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN, AND THE
ACTUAL RESULTS MAY DIFFER FORM MANAGEMENT'S EXPECTATIONS.
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 marketing and distribution. The Company previously
operated mining properties and has mineral property assets that are presented
as "net assets of discontinued operations held for sale" on the consolidated
balance sheet at June 30, 1999 and 1998.
RECENT BUSINESS DEVELOPMENTS
During September of 1999, the Company sold its principal mining property,
the C.O.D. mine located near Kingman, Arizona, to Gold & Minerals, Inc. (G&M)
for $4.5 million of G&M Series A, 10% Cumulative, Convertible Preferred Stock.
The G&M Series A Preferred Stock received is convertible, after one year,
into a variable number of shares of G&M common stock determined by dividing the
face value of the Preferred Stock (plus accrued "paid_in-kind" dividends) by
the share market price at time of conversion. Although the face value of the
Preferred Stock received in this transaction is significantly higher than the
total mining property book value of approximately $2.5 million, the Company is
deferring recognition of any potential gain until such time as there exists an
active public market for G&M common stock.
DESCRIPTION OF BUSINESS
Pollution Control Products Segment
- ----------------------------------
The Pollution Control Products Segment consists of wholly-owned
subsidiary, Alanco Environmental Manufacturing Inc. ("AEMI"), a pollution
control products manufacturing company, located in Falls City, Nebraska, and a
patented technology for the removal of noxious gases from a gas stream called
CDSI (Charged Dry Sorbent Injection), which is primarily marketed through a
wholly-owned subsidiary in Beijing, China.
AEMI 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 services and
original equipment manufacturing for other entities.
The CDSI system utilizes an electrostatically charged sorbent to remove
noxious gases, particularly sulfur dioxide, from a gas stream pollution source
such as a power plant.
The CDSI system offers significant economic advantage over competing
technologies for flue gas desulfurization, such as wet scrubbers. The wet
scrubber sprays a mixture of water and limestone into the polluted gas stream
to produce a sludge composed of gypsum, limestone, and polluted water, which
must be treated and disposed. Wet scrubbers are relatively capital intensive,
have high operating costs and are subject to corrosion and frequent downtime.
The CDSI system is a dry process that permits simple, inexpensive disposal of
reaction products.
The Company believes that the CDSI technology is particularly cost
effective for use in small power plants, mining and smelting facilities,
incinerators and mini steel mills. The proprietary elements of the CDSI system
are fabricated by the Company's AEMI subsidiary located in Falls City,
Nebraska.
Pollution control products accounted for 75% and 51% of the company's
consolidated revenues for years ended June 30, 1999 and 1998, respectively.
Marketing. The Company's AEMI subsidiary markets pollution control
products primarily in the United States, through a national network of
independent sales representatives, supported and supplemented by Company
personnel.
The potential market for CDSI technology is primarily third world
countries. The Company CDSI marketing activities are focused on the People's
Republic of China through its wholly-owned subsidiary, Alanco Environmental
Technology (Beijing) Co., Ltd. ("Alanco Beijing"). Alanco Beijing employs a
six person engineering and technical support staff, and has a marketing
cooperation agreement with the China National Environment Protection Company,
one of the largest environmental companies in China.
Raw Materials. The Company has numerous domestic sources for materials
and parts used to manufacture its pollution control products. The Company
believes that it has an adequate supply of raw materials and does not foresee
any significant shortage of materials or substantial increase in prices.
Patents. The following United States patents are owned by the Company and
are considered to be of significant value:
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.
U.S. Patent Application entitled "Industrial Dust Collector And Method For
Its Use" issued as U.S. Patent No. 5,803,939 on September 8, 1998.
Competitive Conditions. The Company has numerous competitors in its
industrial and agricultural product markets, with no company dominating either
market. In CDSI technology and the flue gas desulfurization markets,
competitors include major companies such as Babcock Wilcox, Wheelabrator and
Mitsubishi Corporation offering alternative technologies.
Employees. As of June 30, 1999, the Company employed approximately 55
individuals primarily involved in the pollution control products segment.
Seasonality of Business. Some of the Company's products are
marketed to the agricultural market and are seasonal with demand increasing in
the spring and tapering off in late fall. Industrial pollution control
products, including CDSI systems, have minimal seasonality.
Dependence Upon Key Customers. The Company has recorded sales to over 500
different customers in each of the last two fiscal years. During the fiscal
year ended June 30, 1998, Guangzhou Paper Ltd. accounted for sales of
$1,053,000 or 18.9% of the segment revenue and 9.6% of the consolidated
revenue. During fiscal year ended June 30, 1999, no customer accounted for
more than 5% of the segment's revenue.
Backlog Orders. The Company operates using customary purchase orders for
orders received. Since customary purchase orders may not always be considered
firm and non-cancelable, the Company does not have a reportable backlog.
Restaurant Equipment Segment
- ----------------------------
In fiscal year ended 1996, the Company, through its Fry Guy Inc.
subsidiary, entered into a two-year contract with Wal-Mart whereby the Company
provided more than 1,500 ventless deep fryers to Wal-Mart stores nationally and
received income based on the number of individual servings processed by the
fryer units. Wal-Mart terminated the contract on August 9, 1998 and commenced
returning fryer units to the Company, completing this process by December 31,
1998.
Fry Guy established a refurbishing operation at its Scottsdale location to
receive and refurbish the Wal-Mart returned fryer units. The refurbishing
operation completed its mission by the end of the 1999 fiscal year and was shut
down.
Under terms of the contract, the Company charged Wal-Mart for fryers that
had been lost and/or destroyed, and billed Wal-Mart for certain costs
associated with refurbishing the returned machines.
A sales and marketing program to sell the refurbished fryer units and to
offer for sale new ventless fryers was commenced during the second half of the
year ended June 30, 1999. The program utilizes a national network of
independent sales representatives and is being directed by a sales and
marketing consultant located in Scottsdale, Arizona.
Dependence Upon Key Customers. During fiscal year 1999, Wal-Mart
accounted for in excess of 76% of this segment's revenue and 18% of the
Company's consolidated revenue.
Seasonality of Business. Restaurant Equipment products, including fryer
units, have minimal seasonality.
Competitive Conditions. The Company has numerous competitors in its
Restaurant equipment markets; however, competition in the used or refurbished
ventless fryer market is minimal.
Employees. As of September 1, 1999, Fry Guy has 2 part-time employees.
ITEM 2. PROPERTIES
The Company's corporate office has been located in a 4,527 square foot
leased facility in Scottsdale, Arizona. The Company moved to this facility in
January of 1997 in order to reduce its lease expense and consolidate its
facilities. During the current fiscal year, the Company subleased
approximately 2,250 square feet of the space to a non-affiliated party.
Fry Guy operations had previously been located in a 4,800 square foot
leased office/warehouse facility in Scottsdale, Arizona. Approximately 3,600
square feet of this space has been subleased to a non-affiliated party. The
remaining 1,200 square feet is being used by Fry Guy as warehouse space.
AEMI's manufacturing and warehouse operating facility is Company owned and
located at Falls City, Nebraska on 6.84 acres with approximately 73,000 square
feet under roof. AEMI also leases a small sales office in Kansas City,
Missouri.
Alanco Beijing leases approximately 1,500 square feet of office space in
Beijing, China.
Mining Claim Properties
The Company has classified its mineral claim property as assets held for
sale. At June 30, 1999 and 1998, the Company owned mineral rights in four
unpatented mineral mining and mill site 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.
In August of 1999, the Company reduced the number of mining claims from
479 to 28 claims with 13 related to the C.O.D. mining and mill site property
located (near Kingman, Arizona) in Mohave County. The remaining 15 claims were
filed on the Tombstone mill site located in Cochise County, Arizona. Four
hundred fifty-one claims were abandoned, including those relating to the Cherry
Creek property in Yavapai County, Arizona and the Mineral Mountain property
located in Pinal County, Arizona. This abandonment of over 90% of its
unpatented mining claims reduced the Company's annual claim filing fees to
$2,800 from an amount in excess of $47,000. The adjusted carrying value for
the mining properties and equipment at June 30, 1998 and 1999 is $2,443,000.
During September of 1999, the Company sold its principal mining property,
the C.O.D. mine located near Kingman, Arizona, to Gold & Minerals, Inc. (G&M)
for $4.5 million of G&M Series A, 10% Cumulative, Convertible Preferred Stock.
The G&M Series A Preferred Stock received is convertible, after one year,
into a variable number of shares of G&M common stock determined by dividing the
face value of the Preferred Stock (plus accrued "paid_in-kind" dividends) by
the share market price at time of conversion. Although the face value of the
Preferred Stock received in this transaction is significantly higher than the
total mining property book value of approximately $2.5 million, the Company is
deferring recognition of any potential gain until such time as there exists an
active public market for G&M common stock.
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 deals with mined land reclamation and waste water
discharge from such operations.
The Company's principal mining operations, exploration and development of
mining properties at the C.O.D. mine, has been accomplished underground with a
minimum of surface disturbance. The C.O.D. mine is located on land
administered by the Bureau of Land Management ("BLM") and was idle at June 30,
1999. The C.O.D. mine, including the mill site buildings and equipment was sold
to Gold & Minerals, Inc. in September of 1999.
The Tombstone Metallurgical Facility is also located on federal lands that
are administered by the BLM and requires limited environmental and/or surface
reclamation. The mill site 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 mill site is being dismantled and cleaned up in
exchange for the building material and equipment salvage value. The Company
does not believe the Tombstone claims will have significant value once the mill
site is removed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party in any litigation that is considered
material.
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, 1999.
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 price
without retail mark-ups, mark-downs, or commissions and, accordingly, may not
represent actual transactions.
Fiscal 1999 Fiscal 1998
Quarter Ended High Low High Low
September 30 1.406 .500 7.217 3.717
December 31 1.312 .312 7.875 4.375
March 31 1.312 .687 5.467 2.842
June 30 2.125 .656 4.158 1.125
(3) Security Holders: As of September 1, 1999 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. MANAGEMENT'S DISCUSSION AND ANALYSIS ON FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Consolidated revenues for fiscal year 1999 decreased 35% to $7,084,400, or
a decrease of $3,891,500 from the prior year. Fry Guy Inc., a wholly-owned
subsidiary, accounted for 93% of the decrease due to the loss of the Wal-Mart
contract that terminated during the first quarter of fiscal 1999 and
represented over 45% of the Company's consolidated revenues in fiscal 1998.
The Company had revenue decreases of approximately $294,100 in its pollution
control segment, of which CDSI system sales represented a decrease of
approximately $696,600. CDSI sales efforts in China have been negatively
affected by the recent economic downturn in Asia. AEMI sales grew to
$4,932,900, an increase of 9% over fiscal year 1998.
Direct service and cost of goods sold for fiscal year 1999 decreased
$1,335,500 or 26% from fiscal year 1998 due primarily to reduced costs
associated with the decreased sales of Fry Guy Inc. Selling, general and
administrative expenses decreased by $1,310,800 due to reduced sales and
managed administrative cost reductions. Depreciation expense decreased
$687,300 or 60% due to the reclassification of fryer units to Inventory.
For the fiscal year 1998 the Company incurred non-cash charges for
impairment of certain operating 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. The
contract termination resulted in a write-down of related goodwill of
$3,658,000, an additional write-down of $1,600,000 against Fry Guy deep fryer
units held for sale and a restructuring charge.
Consolidated income from operations, before other income and expenses, was
$119,100 compared to a loss of $4,581,000 for the prior year. The fiscal year
1998 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.
Fiscal year 1999 interest expense, net of interest income, decreased to
$99,900 from $258,700 for the previous year. Other income increased to
$102,100 in fiscal year 1999 from a loss of $15,500 in fiscal year 1998. The
decrease in net interest expense resulted from the scheduled payments of
capital lease and notes payable obligations of approximately $1,275,000. The
increase in other income was due to gain on debt restructuring and the
settlement of two lawsuits.
The net income for fiscal year ended June 30, 1999 was $121,300 or $.02
per share, compared to a loss of $6,655,000 or $1.32 per share reported in the
prior year.
The fiscal year 1998 Loss from Discontinued Operations of $1,800,000,
relative to the Company's mining properties (categorized as "assets held for
sale"), was a non-cash write-down 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 $877,500, compared with a positive cash flow for the prior
fiscal year of $1,800,600. Net cash provided in operating activities in fiscal
1999 and 1998 was $877,500 and $1,573,300, respectively.
Any new Statements of the Financial Accounting Standards affecting the
Company are disclosed in the "Notes to Consolidated Financial Statements" on
page F-10.
Liquidity and Capital Resources
At June 30, 1999, the Company's current assets exceeded current
liabilities by $2,710,600, a current ratio of 3.8 to 1. At June
30, 1998, the Company's current assets exceeded current liabilities by
$1,287,900 and reflected a current ratio of 1.6 to 1. The current ratio
improved, compared to the prior year, primarily due to the significant payoff
of capital lease obligations during the year and the reclassification of Fry
Guy Inc. fryer units to Inventory from Property, Plant and Equipment.
The Company's cash position at June 30, 1999 was $661,700 compared to
$1,116,900 at the end of the prior fiscal year. During the year, approximately
$1,264,000 of cash was used to repay borrowings and capital lease obligations.
In addition, the Company purchased 157,200 shares of treasury stock at a cost
of $172,300.
Long-term debt (capital lease obligations and notes payable) was reduced
during the year to $9,400 at year end, compared to $410,000 at the end of the
fiscal year 1998.
Cash used for additions to property, plant and equipment and investment in
intangible assets has continued to decrease to $94,500 for the current year
from $185,300 in fiscal year 1998. The balance of activity relating to cash
flow from investing activity during the two year period related to the
continued collection of notes receivable.
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. Wal-Mart elected to purchase new fryer equipment for its stores and
self-manage the very successful food program. Wal-Mart returned the fryer units
to the Company during the first half of the current fiscal year.
In response to the loss of the contract and to maximize the value of the
returned fryer units, a refurbishing operation was established in Scottsdale,
Arizona to receive and refurbish the returned fryers. In addition, the Company
reduced operating and overhead costs, and organized a sales program to sell the
refurbished fryers. The sales and marketing program was launched in the third
quarter of the fiscal year 1999 and has been moderately successful. The
Company anticipates liquidating the balance of the inventoried fryers during
the current fiscal year.
The company sold its principal mining asset in September of 1999 to Gold &
Minerals, Inc. in exchange for $4.5 million of G&M Series A, 10% Cumulative,
Convertible Preferred Stock. The transaction is explained in "Item 1,
Business-Recent Business Developments" and in "Item 2. Properties - Mining
Claim Properties." Based upon G&M projected operating results and a review of
the major G&M mining operation, Management believes the sale offered the best
opportunity for the Company to maximize the return on its mining assets;
however, there can be no assurance as to when the Company will liquidate the
investment, or as to what value the Company will receive upon liquidation of
the G&M Preferred Stock. Furthermore, based on preliminary unaudited financial
information the Company has received, G&M will require additional debt/equity
financing to increase its mining production to achieve planned production
levels on its existing operating mine. There is no assurance G&M will receive
the required additional debt/equity financing. If G&M is unable to
sufficiently develop the property or if ore reserves prove to be inadequate,
the Company's preferred stock could ultimately have minimal value.
The Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
process invoices, or engage in similar normal business activities.
Based upon a recent assessment, including consultation with outside
Management Information Systems Analysts, the Company has made a preliminary
determination to upgrade or replace certain portions of its software so that
the computer system will properly utilize dates beyond December 31, 1999. (The
Company is currently upgrading or replacing the identified software.) The
Company believes that with upgrades of existing software and conversions to new
software, the Year 2000 Issue can be mitigated. However, if such upgrades and
conversions are not made, or are not completed or available timely, the Year
2000 Issue could have a material impact on the operation of the Company.
The Company has initiated formal communications with its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. Expenditures in fiscal 1999 for the year 2000 project were nominal and
management expects that completion of the project may result in additional
expenditures; however, the amount should not be material.
In view of the foregoing, there is reasonable assurance that the Year 2000
Issues will not have a material adverse effect upon the Company. However,
there can be no guarantee that the systems of other companies on which the
Company's business relies will be timely converted, or that failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company. 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 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements.
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports....................................F-2
Consolidated Balance Sheets - For the Year Ended
June 30, 1999 and 1998..........................................F-3
Consolidated Statements of Operations - For the Years Ended
June 30, 1999 and 1998 .........................................F-5
Consolidated Statement of Changes in Shareholders' Equity -
For the Years Ended June 30, 1998 and 1999 ....................F-7
Consolidated Statements of Cash Flows - For the Years Ended
June 30, 1999 and 1998 .........................................F-8
Notes to Consolidated Financial Statements......................F-10
F-1
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, 1999 and
1998 and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alanco
Environmental Resources Corporation and subsidiaries as of June 30, 1999 and
1998, and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
August 19, 1999
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
For the Year ended June 30
<S> <C> <C>
1999 1998
------------ ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 661,700 $ 1,116,900
Accounts receivable - trade, net of allowance for doubtful 714,100 1,192,500
accounts of $29,400 and $18,500, respectively
Notes receivable 178,700 349,200
Inventories 2,069,700 540,400
Prepaid expenses and other current assets 68,800 64,600
Cost and estimated earnings in excess of billings on - 105,000
uncompleted contracts ------------ ----------------
Total current assets 3,693,000 3,368,600
PROPERTY, PLANT AND EQUIPMENT, net 1,696,900 3,380,100
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $170,800 199,600 223,400
and $138,900, respectively
Other assets 123,500 243,300
Net assets of discontinued operations held for sale 2,443,000 2,443,000
------------ ----------------
TOTAL ASSETS $ 8,156,000 $ 9,658,400
============ ================
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
For the Year Ended June 30
<S> <C> <C>
1999 1998
------------ ------------
CURRENT LIABILITIES:
Capital lease obligations $ 320,500 $ 1,042,300
Notes payable, current portion 96,000 264,400
Accounts payable 93,500 236,200
Accrued expenses 299,000 364,600
Billings in excess of costs and estimated earnings on 173,400 173,200
uncompleted contracts ------------ ------------
Total current liabilities 982,400 2,080,700
CAPITAL LEASE OBLIGATIONS, LONG-TERM 1,400 410,700
NOTES PAYABLE, LONG-TERM 8,000 -
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, 53,790,200 53,742,000
5,119,700 and 5,050,700 shares issued, respectively
Treasury stock, at cost; 157,200 shares in 1999 (172,300) -
Accumulated deficit (46,453,700) (46,575,000)
------------ ------------
Total shareholders' equity 7,164,200 7,167,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,156,000 $9,658,400
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
JUNE 30,
<S> <C> <C>
1999 1998
------------- -------------
NET SALES $7,084,400 $10,975,900
OPERATING EXPENSES:
Direct service and cost of goods sold 3,763,900 5,099,400
Selling, general and administrative 2,741,600 4,052,400
Depreciation and amortization 459,800 1,147,100
------------- -------------
Operating expenses before impairment 6,965,300 10,298,900
Other expenses:
Impairment of intangibles - 3,657,800
Impairment of equipment and other - 1,600,000
------------- -------------
Total impairment expenses - 5,257,800
------------- -------------
Total operating expenses 6,965,300 15,556,700
------------- -------------
INCOME (LOSS) FROM OPERATIONS 119,100 (4,580,800)
OTHER INCOME (EXPENSE)
Interest income 57,800 35,600
Interest expense (157,700) (294,300)
Other, net 102,100 (15,500)
------------- -------------
Total other income (expense) 2,200 (274,200)
------------- -------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS 121,300 (4,855,000)
------------- -------------
DISCONTINUED OPERATIONS -
Loss on planned disposal of mining properties - (1,800,000)
------------- -------------
NET INCOME (LOSS) $ 121,300 $(6,655,000)
============= =============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
FOR THE YEARS ENDED
JUNE 30,
<S> <C> <C>
1999 1998
------------- ------------
NET INCOME (LOSS) PER SHARE - BASIC:
Income (Loss) from continuing operations .02 (.96)
Income (Loss) from discontinued operations - (.36)
------------- ------------
Net income (loss) per basic common share $ .02 $ (1.32)
============= ============
NET INCOME (LOSS) PER SHARE - DILUTED:
Income (loss) from continuing operations $ .02 $ (.96)
Income (loss) from discontinued operations - (.36)
------------- ------------
Net income (loss) per diluted common share $ .02 $ (1.32)
============= ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 5,016,085 5,050,683
============= ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 5,575,895 5,050,683
============= ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<TABLE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
COMMON STOCK TREASURY STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
----------- ------------- ---------- ------------ --------------- --------------
BALANCES, July 1, 1997 5,050,700 $53,742,000 - $ - $ (39,920,000) $ 13,822,000
Net loss - - - - (6,655,000) (6,655,000)
----------- ------------- ---------- ------------ --------------- --------------
BALANCES, June 30, 1998 5,050,700 53,742,000 - - (46,575,000) 7,167,000
Stock issued for services 39,000 28,200 - - - 28,200
Exercise of options 30,000 20,000 - - - 20,000
Purchase of treasury stock - - 157,200 (172,300) - (172,300)
Net income - - - - 121,300 121,300
----------- ------------- ---------- ------------ --------------- --------------
BALANCES, June 30, 1999 5,119,700 $53,790,200 157,200 $ (172,300) $ (46,453,700) $ 7,164,200
=========== ============= ========== ============ =============== ==============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-7
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
<S> <C> <C>
1999 1998
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ 121,300 $(4,855,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 459,900 1,147,100
Loss on disposition of assets - 42,500
Gain on loan conversion (27,800) -
Impairment of intangibles - 3,657,800
Impairment of equipment and other - 1,600,000
Stock issued for services rendered and expenses 28,200 -
Bad debt 10,900 376,300
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 467,500 (23,200)
Inventories (excluding non-cash transfers) (183,300) (12,900)
Prepaid expenses (4,200) 208,600
Costs in excess of billings 105,000 (105,100)
Other assets 108,100 (26,700)
Increase (decrease) in:
Accounts payable and accrued expenses (208,300) (382,100)
Billings in excess of costs 200 173,300
------------- ------------
Net cash provided by continuing operating activities 877,500 1,800,600
Loss from discontinued operations - (1,800,000)
Write-off of mining properties - 1,800,000
Increase in other net assets - 227,300
------------- ------------
Net cash used in discontinued operations - 227,300
------------- ------------
Net cash provided by operating activities 877,500 1,573,300
------------- ------------
</TABLE>
See accompanying notes to these consolidated financial statements.
F-8
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
<S> <C> <C>
1999 1998
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of notes receivable 170,500 84,900
Purchase of property, plant and equipment (86,500) (124,500)
Proceeds from disposition of assets 7,400 -
Purchase of intangible assets (8,100) (60,800)
------------- ------------
Net cash provided by (used in) investing activities 83,300 (100,400)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from borrowings - 150,000
Repayments on borrowings (288,400) (118,000)
Repayments on capital lease obligations (975,300) (914,900)
Proceeds from the sale of stock 20,000 -
Purchase of treasury stock (172,300) -
------------- ------------
Net cash used in financing activities (1,416,000) (882,900)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (455,200) 590,000
CASH AND CASH EQUIVALENTS, beginning of year 1,116,900 526,900
------------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 661,700 $ 1,116,900
============= ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid for interest $ 156,800 $ 294,300
============= ============
Equipment acquired with capital leases $ - $ 573,600
============= ============
Fryer machines transferred from equipment to inventory, $ 1,346,000 $ -
============= ============
Capital lease refinanced to note payable $ 128,000 $ -
============= ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-9
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 was
incorporated in Arizona in 1969.
Alanco Environmental Resources Corporation and subsidiaries (the "Company")
includes the following segments:
(i) Manufacturing of pollution control products.
(ii) Food marketing and distribution. In 1999, the Company changed
operations to restaurant equipment.
(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.
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:
1999 1998
------------- -------------
Raw materials and purchased parts $ 380,800 $ 289,420
Work-in-process 243,100 24,835
Finished goods 144,100 226,116
Fryer equipment 1,301,700 -
------------- -------------
$ 2,069,700 $ 540,371
============= =============
During fiscal 1999, in conjunction with the change of operations in the food
marketing and distribution division, the Company transferred all fryer
equipment associated with the division to inventories. The amount
transferred totaled $1,345,300, net of $1,098,000 of accumulated
depreciation. This inventory is stated at the lower of cost or market.
F-10
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 Company's prior purchase of a wholesale
equipment supplier was written-off as a result of the Company's impairment
analysis. All remaining intangibles relate to patents and 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 fryer
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-11
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, approximately
$7,058,000 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.
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, 1999 and 1998 were immaterial.
Income (Loss) Per Share - The income (loss) per share is presented in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 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.
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
F-12
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock. In fiscal 1999, diluted common and common equivalent shares
outstanding includes 1,127,033 common equivalent shares consisting of stock
options and warrants, determined using the treasury stock method. Basic
and diluted EPS were the same for fiscal 1998 as the Company had losses
from operations and therefore, the effect of all potential common stocks
was antidilutive.
Stock-Based Compensation - As permitted under the Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based
Compensation, the Company accounts for its stock-based compensation to
employees in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. Certain
pro forma net income and EPS disclosures for employee stock option grants
are also included in the notes to the financial statements as if the fair
value method as defined in SFAS No. 123 had been applied. Transactions in
equity instruments with non-employees for goods or services are accounted
for by the fair value method.
F-13
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 and 1998, the Company did business with
one customer in the food equipment sales segment whose sales comprised 18%
and 45% of consolidated sales. This customer also accounted for
approximately 17% and 37% of consolidated accounts receivable for fiscal
1999 and 1998, respectively. During 1998, this customer ceased its
relationship with the Company and returned or purchased the Company's
equipment it was utilizing in its operations. The Company is currently
selling the returned equipment.
Segment Information - In 1999, the Company adopted SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic
areas, and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decisionmaker
in deciding how to allocate resources and in assessing performance. The
Company has identified the following reportable segments: pollution control
products, equipment sales/food distribution, and mining.
Reclassification - Certain reclassifications have been made to conform
fiscal 1998 financials to the presentation in fiscal 1999. The
reclassifications had no effect on net income.
2. LIQUIDITY:
During fiscal 1999, the Company's food and marketing distribution segment
lost a major customer which accounted for 18% and 45% of revenues for
fiscal 1999 and 1998 respectively. Although the Company experienced net
income in the current year and positive cash flows from operating
activities in the past two years, it has incurred significant losses in
prior years. Management is negotiating a line-of-credit for cash flow
purposes and expand operations of its pollution control manufacturing
division to continue to provide positive cash flow from operations.
Although management cannot assure that future operations will be profitable
nor that additional debt and/or equity capital will be raised, it believes
that its capital resources will be adequate to maintain and realize its
business strategy. Should, however, the Company incur future losses or
F-14
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
additional working capital is not obtained through either long-term debt or
equity capital, it could adversely affect future operations.
3. DISCONTINUED OPERATIONS:
During fiscal 1998, management of the Company determined that they would
actively pursue the sale of their mining properties and discontinued 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.
The Company has retained an independent geologist (Geologist) to appraise
the mineral properties. A majority of the mining properties are
undeveloped claims and generally do not have a readily demonstrated market
value. These properties lack sufficient exploration of an ore body to
determine the recoverability of the amount and grade of the potential ore
body. As a result, the Company has fully impaired these properties.
Certain other properties, however, had past mining activity which
gave evidence of an ore grade and recoverability. The Geologist
performed a net present value analysis of the ore grade and recoverability
of these properties. The net present value analysis resulted in a 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 proceeds expected to result from their eventual
disposition. During fiscal 1998, based on the Company's analysis of the
properties, $1,800,000 of the properties carrying value were reduced to
estimated market value. See note 11.
F-15
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES RECEIVABLE:
Notes receivable at June 30 are current and consisted of the following:
1999 1998
------------- ------------
Note receivable, quarterly interest
payments at prime plus 2%, principal $ 771,600 $ 771,600
was due June 26, 1997(1)
Notes receivable, 9.5% annum with
$1,892 monthly payments of principal - 223,600
and interest, secured by first lien on
the subject property(2)
Notes receivable - other. 78,200 29,600
------------- ------------
849,800 1,024,800
Less allowance for uncollectible (671,100) (675,600)
------------- ------------
accounts
$ 178,700 $ 349,200
============= ============
_______________________
(1)As part of the Company's acquisition of its 70% interest in a related
entity (PPM) 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 had loaned PMM $771,581 plus accrued interest. PMM's accounts
receivable are collateral for this loan. 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 fraudulent conveyance of assets. The
Company has reached a tentative agreement with the entity, who purchased
PMM's assets for repayment for $200,000 of the original $771,581 loan.
(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 note was paid in full during fiscal 1999.
F-16
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT:
At June 30, property plant and equipment consists of the following:
1999 1998
-------------- --------------
Land $ 60,200 $ 60,200
Buildings 1,373,600 1,366,700
Machinery and equipment 1,106,500 3,522,800
Furniture and office equipment 477,900 478,700
-------------- --------------
3,018,200 5,428,400
Less accumulated depreciation (1,321,300) (2,048,300)
-------------- --------------
$ 1,696,900 $ 3,380,100
============== ==============
Related depreciation expense for the years ended June 30, 1999 and 1998,
was $416,300 and $824,500, respectively.
In fiscal 1999, the Company transferred all fryer equipment totaling
$1,345,300, net of $1,098,000 in accumulated depreciation to inventory .
6. UNCOMPLETED CONTRACTS:
The following applies to contracts in progress as of June 30, 1999:
Costs incurred on uncompleted $ 780,200
contracts
Estimated earnings 610,100
----------------
1,390,300
Billings to date (1,563,700)
----------------
Billings in excess of costs
and estimated earnings on $ (173,400)
uncompleted contracts ================
7. NOTES PAYABLE:
The Company had two $150,000, 12% per annum notes payable to a financial
corporation. The notes were payable in 30 monthly installments of $5,813
each. The notes were collateralized by certain inventory. As of June 30,
1998, the outstanding balance due was $114,400 and was paid in full in
fiscal 1999. The Company also had a $300,000 line-of-credit at a 10.25%
interest rate with the same financial corporation collateralized by
inventory and equipment. The balance at June 30, 1998 was $150,000 and was
repaid during fiscal 1999.
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
F-17
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and repaid the balance prior to June 30, 1998. As consideration for the
line-of-credit, the director was paid interest at 3% of the highest
principal balance for every month the principal was outstanding and the
shareholder received warrants to purchase 60,715 shares of common stock.
These warrants expire in five years and are exercisable at $2.80 per share.
The fair value approximated the exercise price of the warrants on the date
of grant.
During fiscal 1999, the Company converted four capital leases with a
$12,000 cash payment to a note payable of $128,000 and recognized a gain of
$27,800. The note is payable in monthly installments of $8,000 with a 0%
interest rate and matures July 2000. As of June 30, 1999, the balance due
was $104,000, with $8,000 classified as long-term.
8. COMMITMENTS AND CONTINGENCIES:
The Company leases certain facilities and equipment under non-cancelable
operating lease agreements that expire through 2001. The Company also
leases certain equipment under non-cancelable capital lease arrangements.
Future minimum lease payments under non-cancelable capital and operating
leases with initial or remaining terms of one year or more at June 30, 1999
are as follow:
Year Operating Capital
Ending Leases Leases
June 30
----------- ---------- -----------
2000 $ 90,000 $ 352,300
2001 3,700 7,500
---------- -----------
$ 93,700 359,800
==========
Less amount representing interest (22,600)
Less executory costs (taxes) (15,300)
-----------
321,900
Less current portion (320,500)
-----------
Long-term portion $ 1,400
===========
F-18
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, leased capital assets included the following:
1999 1998
----------- ------------
Inventory, net $ 321,900 $ -
=========== ============
Machinery and equipment $ - $1,333,450
Furniture and equipment - 18,260
----------- ------------
- 1,351,710
Less accumulated amortization - (661,071)
----------- ------------
Total $ - $ 690,639
=========== ============
9. REDEEMABLE PREFERRED STOCK:
The Company is authorized to issue 20,000,000 shares of Class A convertible
and redeemable preferred stock (Preferred Stock). These shares may be
issued in such series and preferences as determined by the Board of
Directors.
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. In November 1998, the Company's shareholders
approved authorizing the Company's Board of Directors to effect up to a 1
for 3 reverse stock split at a future date through October 1999.
Warrants - During fiscal 1998, the Company reissued 60,715 warrants to a
director 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.
During 1996, the Company had a private placement offering for its common
stock. In accordance with the private placement, the Company had
outstanding warrants as of June 30, 1998 to purchase 168,456 shares of
common stock at $21 per share. All of these warrants expired December
1998.
Stock Options - In 1995, the Company adopted an Incentive Stock Option Plan
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-19
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, 1999, the Company has granted
all available options under the plan, of which all have vested, 48,785 have
been exercised, and the balance has been canceled. Options outstanding for
this plan at June 30, 1999 have exercise prices that range from $.50 to
$13.23.
During fiscal 1999, the Company adopted another Incentive Stock Option Plan
that authorizes the issuance of up to 750,000 shares of common stock.
Pursuant to the plan, incentive and non-qualified stock options may be
granted, with the incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended. The Plan
provides for a vesting schedule for incentive stock options of 25% after
six months from the date of grant, 25% after one year, and 50% after two
years. No one person shall be granted incentive stock options with a fair
market value of more than $100,000 during any single calendar year and the
maximum number of shares granted to any one employee shall be 100,000. The
Board of Directors shall determine the exercise price, which may not be
less than the fair market value of the common stock at the date of grant.
Each option must be granted within 10 years from the effective date of the
Plan, with the term of the options not exceeding 10 years. As of June 30,
1999, the Company has granted options under the plan to purchase
140,000 shares, of which 70,000 have been canceled, 5,000 have been
exercised, and 11,250 have been vested. Options outstanding for this Plan
at June 30, 1999 have exercise prices that range from $.50 to $1.00.
In 1996, the Company adopted a 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, 1999, the Company had granted options under the 1996
D&O Plan to purchase 106,070 shares of which all options are vested.
Exercise prices for the directors and officers options outstanding at June
30, 1999 range from $1.00 to $6.30.
In 1998, the Company adopted another Director and Officer Stock Option Plan
which authorizes the issuance of up to 750,000 shares of common stock.
Only executive officers and directors of the Company shall be eligible to
be granted options under the Plan. Each option must be granted at or above
fair market value within 10 years from the effective date of the Plan, with
the term of the option not exceeding 10 years. All shares vest one year
from the date of grant. Pursuant to the Plan, the Company will grant to
F-20
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
newly appointed non-employee directors an option to purchase 20,000 shares
of common stock at fair market value, and 10,000 shares at each subsequent
anniversary. As of June 30, 1999, the Company has granted options under
the Plan to purchase 650,000 shares, of which all have vested and none have
been exercised. Options outstanding for this Plan at June 30, 1999 have
exercise prices that range from $.50 to $1.00.
The Company also has granted options to officers outside of any plan at the
time of their employment. As of June 30, 1999, the Company has granted
options to two new officers to purchase 1,152,858 shares of which 1,060,000
have vested and 42,858 options have expired. Exercise prices for these
options outstanding at June 30, 1999 range from $.43 to $4.69.
The following is a table of activity of all options:
Weighted
Average
Number of Exercise
Shares Price
------------ -----------
OPTIONS OUTSTANDING, June 30, 1997 111,430 $ 9.07
Granted 50,004 5.34
Canceled (30,354) 11.62
------------ -----------
OPTIONS OUTSTANDING, June 30, 1998 131,080 7.01
Granted 1,355,000 .44
Granted 715,000 .84
Exercised (30,000) .67
Canceled (147,505) 4.29
------------ -----------
OPTIONS OUTSTANDING, June 30, 1999 2,023,575 $ .73
============ ===========
F-21
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For all options granted during 1999 and 1998, 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 of
their fair market price was $.50. The weighted average remaining
contractual life for all options and warrants as of June 30, 1999 was
approximately 9 years. At June 30, 1999, options for 1,919,825 shares were
exercisable and options for the remaining shares become exercisable within
the next year. If not previously exercised, options outstanding at June
30, 1999 will expire as follows:
Weighted
Average
Number of Exercise
Year Shares Price
------ ----------- ----------
2001 3,572 $13.23
2002 14,286 6.30
2003 35,717 3.66
2004 60,000 .50
2004 95,000 1.00
2009 1,210,000 .44
2009 605,000 .81
-----------
2,023,575
===========
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 SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below.
Year Ended June 30,
1999 1998
------------- --------------
Net income (loss) applicable to
common stockholders:
As reported $ 121,300 $ (6,655,042)
Pro forma $ (908,300) $ (6,820,859)
Net income (loss) per common
share - basic
As reported $ .02 $ (1.3)
Pro forma $ (.18) $ (1.4)
Net income (loss) per common
share - diluted
As reported $ .02 $ (1.3)
Pro forma $ (.18) $ (1.4)
F-22
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each employee option granted in 1999 and 1998 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Year Ended June 30,
1999 1998
-------- --------
Expected volatility 108% 104%
Risk-free interest rate 4.9% 6.1%
Expected dividends - -
Expected terms (in years) 7.8 5.0
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:
1999 1998
--------- ----------
Statutory rate 34.0% (34.0%)
State income taxes, net of 3.3% (3.3%)
Federal income tax benefit
Increase (reduction) in
valuation allowance related
to of net operating loss (37.3%) 37.3%
carryforwards and change in
temporary differences
--------- ----------
0% 0%
========= ==========
The components of the net deferred tax asset recognized as of June 30 are
as follows:
1999 1998
--------------- --------------
Long-term deferred tax assets
(liabilities):
Net operating loss $ 7,968,000 $ 7,676,000
carryforwards
Goodwill 1,364,000 1,364,000
Mining properties 1,702,000 2,613,000
Equipment and other (57,000) 581,000
Other 21,000 374,000
Valuation allowance (10,998,000) (12,608,000)
--------------- --------------
Net long-term deferred $ - $ -
tax asset
=============== ==============
The valuation allowance was decreased by $1,610,000 for the year ended June
30, 1999.
F-23
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 1999, the Company had net operating loss carryforwards for
Federal tax purposes of approximately $21,363,000 The loss carryforwards,
unless utilized, will expire from 2000 through 2012.
12. SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Company sold its principal mining asset
to an entity in exchange for $4.5 million of 10% Cumulative, Convertible
Preferred Stock. Based upon the projected operating results and a review
of the entity's major mining operation, management believes the sale
offered the best opportunity for the Company to maximize the return on its
mining assets; however, there can be no assurance as to when then Company
will liquidate the investment, or as to what value the Company will
receive upon liquidation of the entity's stock. Furthermore, based on
preliminary unaudited financial information the Company has received, the
entity will require additional debt/equity financing to increase its
mining production to achieve planned production levels on its existing
operating mine. There is no assurance the entity will receive the
required additional debt/equity financing. If the entity is unable to
sufficiently develop the property or if ore reserves prove to be
inadequate, the Company's preferred stock could ultimately have minimal
value.
13. SEGMENT INFORMATION:
The Company operates primarily in three industry segments: pollution
control products, equipment sellers, and mining. The accounting policies
of the segments are the same as those described in the summary of
significant policies.
F-24
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C> <C> <C> <C>
POLLUTION
CONTROL FOOD
PRODUCTS DISTRIBUTION MINING CORPORATE CONSOLIDATED
------------- -------------- ------------- -------------- -------------
1999
Revenues from external customers $ 5,291,800 $ 1,773,700 $ - $ 18,900 $ 7,084,400
Interest income $ 30,400 $ 12,000 $ - $ 15,400 $ 57,800
Interest expense $ - $ 156,800 $ - $ 900 $ 157,700
Depreciation and amortization $ 235,100 $ 176,200 $ - $ 48,600 $ 459,900
Segment profit (loss) $ 342,300 $ 583,800 $ (77,000) $ (727,800 $ 121,300
Segment assets $ 3,397,200 $ 1,617,600 $ 2,443,000 $ 698,200 $ 8,156,000
1998
Revenues from external customers $ 5,585,900 $ 5,390,000 $ - $ - $ 10,975,900
Interest income $ 30,500 $ 500 $ - $ 4,600 $ 35,600
Interest expense $ 1,500 $ 292,800 $ - $ - $ 294,300
Depreciation and amortization $ 234,700 $ 554,400 $ - $ 358,000 $ 1,147,100
Segment profit (loss) $ 438,600 $ 3,534,100 $ (1,868,900) $ (1,690,600) $ 6,655,000
Segment assets $ 3,962,900 $ 2,622,900 $ 2,443,000 $ 629,600 $ 9,658,400
</TABLE>
F-25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 9. 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 27, 1999.
ITEM 10. 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 27, 1999.
ITEM 11. 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 27, 1999.
ITEM 12. 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 27, 1999.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Exhibits
(10) Contract for Sale of principal mining property to
Gold & Mineral, Inc.
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
B. Schedules NONE
C. Reports on Form 8-K NONE
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.
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 , 1999 /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, 1999
- ------------------------
Robert R. Kauffman
/s/James T. Hecker Director September 28, 1999
- ------------------------
James T. Hecker
/s/Harold S. Carpenter Director September 28, 1999
- ------------------------
Harold S. Carpenter
/s/Thomas C. LaVoy Director September 28, 1999
- ------------------------
Thomas C. LaVoy
/s/Steven P. Oman Director September 28, 1999
- ------------------------
Steven P. Oman
/s/John A. Carlson Chief Financial Officer September 28, 1999
- ------------------------
John A. Carlson
EXHIBIT 10
AGREEMENT - PRIVATE
This agreement (the "Agreement") is entered into by and between Alanco
Environmental Resources Corporation ("Alanco") and Gold And Minerals Company,
Inc. ("GAM"), effective as of September 1, 1999.
WHEREAS, Alanco leases 13 mining claims on approximately 268 acres in
Mohave County, Arizona from the United States Bureau of Land Management (the
"BLM") known as the COD Mine (the "COD Mine").
WHEREAS, Alanco also owns various personal property (the "Property") and
buildings (the "Buildings") at the COD Mine.
WHEREAS, GAM desires to purchase the COD Mine, the Property and the
Buildings from Alanco and Alanco desires to sell said assets to GAM.
(Hereinafter the COD Mine, the Property and the Building may be referred to as
the "Assets.")
NOW, THEREFORE, the parties hereto agree as follows:
1. Alanco hereby sells, transfers, assigns and grants unto GAM: (a) the
COD Mine by way of the Quit Claim Deed set forth as Exhibit A attached hereto;
and (b) the Buildings and the Property by way of the Bill of Sale set forth as
Exhibit B attached hereto.
2. The purchase price for the Assets shall be Four Million Dollars
($4,000,000) (the "Purchase Price"). However, the Purchase Price shall be
subject to adjustment if the results of the 1999 appraisal of the COD Mine (the
"Appraisal") yield a value of less than $3,600,000 or more than $4,400,000.
3. The Purchase Price shall be paid by GAM by delivering to Alanco Four
Million (4,000,000) shares of its Series A Convertible Preferred Stock as more
fully described in Certificate of Designation set forth in Exhibit C attached
hereto (the "Series A Preferred Stock"), subject to adjustment per the
Appraisal.
4. GAM hereby represents and warrants to Alanco as follows:
(a) GAM is a corporation duly organized, validly existing and in good
standing under the laws of the State of Nevada and has all requisite corporate
power and authority to carry on its business as now conducted and as proposed
to be conducted.
(b) The authorized capital of GAM consists of, immediately prior to
closing, of: (i) 10,000,000 shares of Preferred Stock, par value $.001, of
which no shares have been issued; and (ii) 60,000,000 shares of Common Stock,
$.001 par value, of which 39,933,660 shares are issued and outstanding, with up
to an additional 10,000,000 shares may be issued to the Chairman and the
President of GAM upon conversion of GAM's outstanding debt to them.
(c) The issuance of the Series A Preferred Stock has been duly
authorized by GAM's Board of Directors and the Certificate of Designation for
the Preferred Stock shall be filed with and accepted by the Nevada Secretary Of
State prior to the closing of the transaction contemplated by this Agreement.
The Series A Preferred Stock when issued to Alanco will be duly validly issued,
fully paid and non-assessable.
5. GAM shall not sell, transfer, assign or pledge any of the Assets
without the prior written approval of Alanco, so long as any Series A Preferred
Stock is owned by Alanco. However, in the event Alanco pledges the Series A
Preferred Stock, the above-stated restriction on GAM's transfer of the Assets
shall cease and terminate.
6. Alanco warrants that the Appraisal is the true and correct appraisal
received from the appraiser. Alanco also warrants that its has full right,
title and interest in the Assets and it has the right to sell and transfer the
Assets, subject to the BLM owing the real estate at the COD Mine. Alanco
further warrants that the Assets are free from any liens and are unencumbered
by any debt.
7. Any controversy or claim arising out of or relating to this Agreement,
except for a request for injunctive relief, shall be settled by arbitration in
the Phoenix metropolitan area in accordance with the then governing rules of
the American Arbitration Association. The party to whom the arbitrator or
arbitration panel makes an award shall be entitled to receive as part of the
award the reasonable cost of its attorney fees and litigation expenses.
Judgment upon the award rendered in the arbitration may be enforced in court
described in Paragraph 10 below of this Agreement.
8. The transaction contemplated by this Agreement shall be consummated
as soon as reasonably possible, with Alanco holding the executed Exhibit A and
executed Exhibit B until such time on or before September 15, 1999 that GAM
delivers a duly authorized and executed Preferred Stock certificate
representing 4,000,000 shares of Series A Preferred Stock to Alanco.
9. This rights and obligations upon the parties to this Agreement may
not be assigned by one party without the prior written consent of the other
party.
10. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of Arizona, United States of America. The parties
hereby expressly agree that the proper venue for any claim or cause of action
by the parties shall be the Superior Court for Maricopa County, Arizona and the
each party upon execution of this Agreement consents to the service of process
from such court.
11. No modification or amendment of this Agreement shall be valid unless
it is in writing and signed by both parties hereto.
12. This Agreement constitutes the entire agreement between the parties
and supersedes all prior agreements and understandings between the Company and
Employee.
13. The waiver by either party of a breach of any term of this Agreement
shall not operate as, or be construed as, a waiver of any subsequent breach.
14. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement, effective
as of the date first above written.
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
By: /s/ Robert R. Kauffman
-----------------------------
Robert R. Kauffman, Chairman
GOLD AND MINERALS COMPANY, INC.
By: /s/ Charles C. Mottley
---------------------------
Charles C. Mottley, Chairman
EXHIBIT A
BILL OF SALE
Alanco Environmental Resources Corporation hereby sells, assigns,
transfers and grants unto Gold And Minerals Company, Inc. all Buildings located
on the COD Mine site in Mohave County, Arizona and the personal property set
forth on the attached schedule.
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
By: /s/ Robert R. Kauffman
-----------------------------
Robert R. Kauffman, Chairman
EXHIBIT A ATTACHMENT
EQUIPMENT AND BUILDING LIST, C.O.D. MINE
Item Quantity Description of Equipment and Current Condition
1 1 Metal Building housing Gravity Mill, 45' X 94'.
Building in good repair, except it
does need repair to doors
2 1 24" Wemco Spiral Classifier, Double Pitch, Flared
Tank, Type SH, Serial
No. 6137285-2. Needs minor work, but
essentially in good repair.
3 1 3'X 6' March Rod Mill, S/N 272, 24" Diameter
Discharge Trunnion,
Cast shell bolted to Cast Heads, End Liners
Good, Shell Liners Good,
Spur Gear and Pinion V-belt driven by 75 HP
Slip Ring Motor, 3/60/440
volt. Complete with non-reversing drum
controller and grids. Some new
spare rods associated with Mill.
4 1 Size 666 Deister Diagonal Deck Table, Triple
Deck, S/N 1008, with
motor and drive. Essentially in good shape
with one table needing
repairs to the rubber decking and riffle
cleats.
1 Pump associated with the Rod Mill/Screw
Classifier.
6 1 Crushing Circuit Equipment and Conveyors, less
motors
1. 10" X 20" Pacific Jaw Crusher, Type KH,
S/N 122, Flat face
pulley, V-belt driven by 25 HP motor
3/60/220/440 volt.
2. Conveyor belt from feed hopper to Jaw.
3. Conveyor belt from Jaw to Screen.
4. Conveyor belt from under Screen to
Stock Pile of crushed ore.
5. Conveyor belt from Screen oversize
(from Rolls) to conveyor.
6. Conveyor belt from the conveyor belt
from Rolls back to Jaw.
7. Feed Hopper with Pan Feeder for Raw
Ore. Feeds conveyor to
Jaw.
8. Feed Hopper with Weigh System for Mill.
Contains FMC
vibrator feeder and Detecto Scale.
9. Conveyor from Crushed ore Feed Hopper
to Rod Mill/Screw
classifier
10. Cedar Rapid 30" X 18" Rolls and Screen
Combination on
wheeled platform.
The crushing circuit is in ill repair,
all belts must be replaced and all new
motors must be installed.
7 1 Metal Building housing Atlas Copco
Compressor and work shop for head
frame area. Building in good shape
with minor repairs needed.
8 1 Atlas Copco Compressor, 500 CFM, S/N
53059. Stationary Electric Unit.
Needs minor repairs. Receiver tank
located outside in good shape.
9 1 Metal Buildig housing Hoist, 20' X 24".
Good shape with minor repairs
needed.
10 1 Hoist _ Lingerwood Mfg. Co. /" cable. 5'
drum with 50 HP Electric
Motor, 800' Capacity. The variable
speed controller has been badly
cannibalized for the copper wiring by
vandals. This along with the
majority of the wiring will have to be
replaced. The hoisting capacity
was rated at 120 T.P.D.. Modifications
to the shaft design and hoist can
increase this capacity.
11 1 52' Head Frame, Custom made in 1984. head
Frame, Ore Skip and work
car are in good shape with only minor
repairs needed.
12 1 Small portable hoist located at headframe
area. Used for the lowering
raising of the pump for pumping water
from the shaft. In fair shape.
13 1 Office Building and Change Room. Has been
badly vandalized and is in
need of major repairs. The main
structure is in good condition.
14 2 Two large Powder magazines available on
site. State Mine and MSHA
approved.
15 4 Various fuel and water storage tanks
available on the property.
* The electrical at the mine has been badly vandalized and is going to
need to be completely replaced. All PVC plumbing over the years has
deteriorated and will need to be replaced, besides being badly vandalized. The
road into the mine has been maintained on a minimal basis and will need to be
redone to allow access of any heavy equipment.
EXHIBIT B
WHEN RECORDED MAIL TO:
Gold and Minerals Company, Inc.
10115 E. Mountain View, Suite 1008
Scottsdale, Arizona 85258
QUIT-CLAIM DEED
For Ten Dollars and other valuable consideration, ALANCO ENVIRONMENTAL
RESOURCES CORPORATION, an Arizona corporation, hereby Quit-Claims to GOLD AND
MINERALS COMPANY, INC., a Nevada corporation, all right, title, or interest in
the following described real property situate in Mohave County, Arizona:
See exhibit A attached hereto.
Exempt per ARS 11-1134 A.7
Dated: September 3, 1999
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
an Arizona corporation
By /s/ Robert R. Kauffman
-----------------------------------------
Robert R. Kauffman, President
STATE OF ARIZONA )
) ss.
County of Maricopa )
This instrument was acknowledged and executed before me this 3rd day of
September, 1999, by Robert R.Kauffman, President of Alanco Environmental
Resources Corporation, an Arizona corporation, on behalf of the corporation.
/s/ Steven P. Oman
-------------------------
My Commission Expires: /stamp/ Oct 24, 1999
EXHIBIT B - Attachment
C.O.D. Property
County Recorder B.L.M.
Claim Name Book Page A.M.C. Nos.
- ------------ --------- ------- ---------------
JAYNE 841 806-807 175025
KIM 841 808-809 175026
ERIC 841 810-811 175015
MARC 841 812-813 175030
O.J.B. 841 814-815 175033
GOLDEN MOON 841 816-817 175024
RICO 841 834-835 175039
NOON NO.1 841 832-833 175032
WHITE EAGLE 841 850-851 175044
WHITE EAGLE #2 841 852-853 175045
REUBE 841 848-849 175035
UNIT 841 846-847 175043
RENO 841 844-845 175034
EXHIBIT C
CERTIFICATE OF DESIGNATION
ESTABLISHING THE RIGHTS AND PREFERENCES OF
10% SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
GOLD AND MINERALS COMPANY, INC.
a Nevada corporation
I, the undersigned, LARRY L. LOZENSKY, do hereby certify:
(1) I am the Chairman and Secretary of GOLD AND MINERALS COMPANY, INC.,
a Nevada corporation (the Corporation").
(2) Pursuant to the authority granted under the Corporation's Articles
of Incorporation, the Board of Directors of said Corporation, by unanimous
consent in writing effective as of August 31, 1999 has duly adopted the
following recitals and resolutions:
"WHEREAS, this Corporation is authorized by its Articles of
Incorporation to issue 10,000,000 shares of preferred stock, par value
$0.001 per share (the "Preferred Stock"); and
"WHEREAS, this Corporation has not previously designated any series
of its Preferred Stock; and
"WHEREAS, the Board of Directors of this Corporation is authorized,
as to the Preferred Stock, within the limitations and restrictions stated in
the Articles of Incorporation, to fix by resolution or resolutions the
designation of each series of Preferred Stock and the powers, preferences
and relative participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including, without
limitation, such provisions as may be desired concerning dividends,
redemption, voting, dissolution or the distribution of assets, conversion or
exchange, and such other subjects or matters as may be fixed by resolution
or resolutions of the Board of Directors; and
"WHEREAS, the Board of Directors of this Corporation desires,
pursuant to its authority granted under the Articles of Incorporation, to
determine and fix the rights, preferences, privileges and restrictions
relating to a first series of said Preferred Stock, and to fix the number of
shares constituting and the designation of such series;
"NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized a
series of Preferred Stock on the terms and with the provisions herein set
forth:
Section 1. Designation, Number and Restrictions on Issuance. The
designation of the series of Preferred Stock authorized by these resolutions
shall be "10% Series A Cumulative Convertible Preferred Stock" (the "Series
A Preferred Stock"). The authorized number of shares constituting the
Series A Preferred Stock shall be Five Million (5,000,000) shares. The
Board of Directors is further authorized, within the limitations and
restrictions set forth in the Articles of Incorporation or stated in any
resolution or resolutions of the Board of Directors, to increase or decrease
(but not below the number of shares of such series then outstanding) the
number of shares of Series A Preferred Stock subsequent to the issuance of
shares of such series. In case the number of shares of any series shall be
so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of these or any subsequent resolutions
originally fixing the number of shares of such series.
Section 2. Conversion Rights.
2.1. As used herein, the term "Common Stock" shall mean and include
the Corporation's Common Stock, $.001 par value, as constituted on August
31, 1999, and as the same shall be constituted thereafter including
adjustments required for any capital reorganization or reclassification
thereof subsequent to August 31, 1999. On September 1, 2000 if the Common
Stock of the Corporation is publicly traded as described below in Section
2.3 and without the election of the holders of Series A Preferred Stock
(except as permitted by Section 2.4 below) and up to the close of business
on the second business day immediately preceding a date fixed for redemption
of Series A Preferred Stock in accordance with Section 7 below at the
election of the respective holders of Series A Preferred Stock, subject to
the terms and conditions set forth herein, issued and outstanding shares of
the Series A Preferred Stock and any accrued and unpaid dividends thereon
shall be converted into fully paid and nonassessable shares of Common Stock
of the Corporation at the conversion ratio as defined in Section 2.2 below,
subject to adjustment as provided in Section 2.7 below (herein called the
"Conversion Ratio").
2.2. The Conversion Ratio shall be equal to the quotient of $1.00
divided by the Market Value of the Common Stock. The Market Value of the
Common Stock shall be determined as the average of the closing bid price of
the Common Stock on any securities exchange or as reported by the National
Association of Securities Dealers Automated Quotation System on the last ten
(10) trading days prior to the date of conversion. Upon conversion the
number of Common Stock shares to be issued to each Series A Preferred
Stockholder shall be equal to the number of Series A Preferred Stock shares
held by such Shareholder multiplied by the Conversion Ratio.
2.3 In the event the Common Stock is not trading on September 1,
2000, then the Series A Preferred Stock shall be converted into Common Stock
without the election of the holders of the Series A Preferred Stock at the
Conversion Ratio of 2.5 (2.5 shares of Common Stock upon conversion of 1.0
share of Series A Preferred Stock), subject to adjustment as provided in
Section 2.7 below. "Not trading" as used in the preceding sentence shall
mean if there is no closing bid price for the Common Stock on any securities
exchange or reported by the National Association of Securities Dealers
Automated Quotation System on any of the last ten (10) trading days prior to
September 1, 2000.
2.4. In the event the Market Value of the Common Stock shall equal
or exceed Ten Dollars ($10.00) per share before September 1, 2000 and
continues above said price, the respective holders of the Series A Preferred
Stock may convert their respective Series A Preferred Shares into Common
Stock at the Conversion Ratio.
2.5. In order to exercise the conversion privilege, a holder of
outstanding shares of Series A Preferred Stock shall surrender certificates
for the Series A Preferred Stock to be converted and exchanged at the
principal office of the Corporation, and shall give written notice to the
Corporation at said office that the holder elects to convert such Series A
Preferred Stock into shares of the Corporation's Common Stock. Such notice
shall also state the name or names (with addresses) in which certificates
for shares of Common Stock issuable on such conversion shall be issued,
subject to compliance with applicable securities laws.
2.6. The Corporation shall not issue fractions of shares of Common
Stock upon conversions of shares of Series A Preferred Stock. If more than
one certificate representing shares of the Series A Preferred Stock shall be
surrendered for conversion at one time by the same holder, the number of
full shares of Common Stock which shall be issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares of Series A
Preferred Stock so surrendered. If any fractional interest in a share of
Common Stock would otherwise be deliverable upon the conversion of any
shares of Series A Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fractional interest in an amount equal to the
Market Value of such fractional interest. So long as there is outstanding
any Series A Preferred Stock, there shall be reserved unissued, out of the
authorized but unissued shares of Common Stock, at least TEN MILLION
(10,000,000) shares of Common Stock to provide for conversion of Series A
Preferred Stock in accordance with the provisions of this Section 2.
2.7. The Conversion Ratio shall be subject to adjustment from time
to time hereafter as follows:
(A) In the event the Corporation at any time after August 31, 1999
shall issue a stock dividend on its outstanding shares of Common Stock or
shall subdivide or combine the outstanding shares of Common Stock issuable
upon conversion of the Series A Preferred Stock, the Conversion Ratio and
number of shares issuable upon conversion of the Series A Preferred Stock
shall be proportionately and equitably adjusted as if the holder of record
of Series A Preferred Stock had converted shares of Series A Preferred Stock
into Common Stock immediately prior to such event. Any such adjustment
shall become effective at the close of business on the date that such stock
dividend, subdivision or combination relating to the Common Stock shall
become effective. For the purposes of such adjustment, the Conversion Ratio
in effect immediately prior to such stock dividend, subdivision or combina-
tion shall forthwith be changed to a Conversion Ratio determined by:
(i) dividing the total number of shares of Common Stock
outstanding immediately after the stock dividend, subdivision or
combination, by an amount equal to the total number of shares of
Common Stock outstanding immediately prior to such stock dividend,
subdivision or combination; and
(ii) multiplying the result of clause (i) above by the actual
Conversion Ratio in effect immediately prior to such stock dividend,
subdivision or combination.
and the total of shares of Common Stock thereafter issuable and deliverable
on conversion of the Series A Preferred Stock shall be the number of shares
obtained by applying the Conversion Ratio as so adjusted.
(B) In case of any capital reorganization or any reclassification
of the shares of Common Stock of the Corporation (other than as a result of
a stock dividend, subdivision or combination, as aforesaid), or in case of
any consolidation with or merger of the Corporation into or with another
corporation, or the sale, lease or other disposition of the properties of
the Corporation as an entirety or substantially as an entirety, then as a
part of such reorganization, reclassification, consolidation, merger, sale,
lease or other disposition, as the case may be, lawful provision shall be
made so that the holders of record of the Series A Preferred Stock shall
have the right at that time to convert their respective Series A Preferred
Stock at the Market Value and to receive upon such conversion thereof the
kind and amount of shares of stock or other securities or property which
such holders would have been entitled to receive if, immediately prior to
such reorganization, reclassification, consolidation, merger, sale, lease or
other disposition, such holders had held the number of shares of Common
Stock which were then issuable upon the conversion of the Series A Preferred
Stock then held by them. In any such case, appropriate adjustment shall be
made in the application of the provisions set forth herein with respect to
the rights and interests thereafter of the holders of record of the Series A
Preferred Stock, to the end that the provisions set forth herein (including
provisions with respect to adjustments of the Conversion Ratio) shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other property thereafter deliverable upon the conversion
of such Series A Preferred Stock.
2.8. Upon any conversion of Series A Preferred Stock in accordance
with the foregoing, all of such shares of Series A Preferred Stock shall be
canceled and revert to the status of authorized and unissued shares of
Preferred Stock.
Section 3. Registration of Common Stock.
3.1.(a) If the Corporation proposes to register any
of its Common Stock under the Securities Act of 1933, as amended (the
"Securities Act"), on any registration statement, whether or not for its own
account (other than by a registration statement on Form S-8 or other form
which does not include substantially the same information as would be
required in a form for the general registration of securities, would not be
available for the Common Stock or relates to any employee benefit plan or
reorganization of the Corporation), it shall as expeditiously as possible
give written notice to all registered holders of Series A Preferred Stock of
such holders' "Piggyback Registration Rights" as set forth in this Section
3. Upon the written request (which request shall, if applicable, specify
that a holder shall be required to exercise the right to convert and the
number of shares of Common Stock intended to be sold by such holder after
exercise) of any holder made within 20 days after receipt of any such
notice, the Corporation shall (subject to the additional terms of this
Agreement) include in the registration statement the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock (the "Registrable
Securities") which the Corporation has been so requested to register by the
holder thereof and the Corporation shall keep such registration statement in
effect and maintain compliance with each federal and state law or regulation
for the period necessary for such holder to effect the proposed sale or
other disposition (but in no event for a period greater than 120 days).
(b) If, at any time after giving written notice of
its intention to register Registrable Securities in a Piggyback Registration
but prior to the effective date of the related registration statement, the
Corporation shall determine for any reason not to register any Common Stock,
the Corporation shall give notice of such determination to each holder and,
thereupon, shall be relieved of its obligation to register any Registrable
Securities in connection with such Piggyback Registration. All best efforts
obligations of the Corporation shall cease if the Corporation determines to
terminate prior to such effective date any registration pursuant to this
Section 3.1.
(c) If a Piggyback Registration involves an
offering by or through underwriters, all holders requesting to have their
Registrable Securities included in the Corporation's registration statement
must sell their Registrable Securities to the underwriters selected by the
Corporation on the same terms and conditions as apply to other selling
shareholders, and any holder requesting to have its Registrable Securities
included in such registration statement may elect in writing, not later than
three business days prior to the effectiveness of the registration statement
filed in connection with such registration, not to have its Registrable
Securities so included in connection with such registration.
(d) If a Piggyback Registration involves an
offering by or through underwriters, the Corporation, except as otherwise
provided herein, shall not be required to include Registrable Securities
therein if and to the extent the underwriter managing the offering
reasonably believes in good faith and advises each holder requesting to have
Registrable Securities included in the Corporation's registration statement
that such inclusion would materially adversely affect such offering,
provided that if other selling shareholders who are employees, officers,
directors or other affiliates of the Corporation have requested registration
of securities in the proposed offering, the Corporation will reduce or
eliminate such other selling shareholders' securities before any reduction
or elimination of Registrable Securities held by holders of the Series A
Preferred Stock, and any such reduction or elimination (after taking into
account the effect of preceding clause) shall be pro rata to all other
holders of the securities of the Corporation exercising 'piggyback
registration rights similar to those set forth herein in proportion to the
respective number of shares of Registrable Securities they have requested to
be registered.
3.2 . (a) At any time after September 1, 2000 and provided
the Registrable Securities, upon conversion, are not otherwise qualified for
sale under an exemption available under the Securities Act, holders of an
aggregate of 75% of all outstanding Series A Preferred Stock may exercise
their "Demand Registration Rights" as described herein for registration
covering the public sale of Registrable Securities hereunder. As soon as
practicable thereafter, the Corporation shall use its best efforts to file a
registration statement with respect to the Registrable Securities which
holders have requested to be registered and obtain the effectiveness
thereof, and to take all other action necessary under any federal or state
law or regulation to permit such Registrable Securities to be sold or
otherwise disposed of, and the Corporation shall maintain such compliance
with each such federal and state law and regulation for the period necessary
for such holders to effect the proposed sale or other disposition; provided
that the Corporation shall have the right to delay such registration under
certain circumstances for up to 90 days during any 12 month period. The
Corporation shall be required to effect one registration or qualification
pursuant to this Section 3.2, and shall not be obligated to effect a
registration during the six month period commencing with the date of any
other registration under the Securities Act in which Registrable Securities
were registered.
(b) The Corporation may delay any registration
under this Section 3.2 for not more than 90 days if management determines in
good faith that such delay is necessary to consummate a pending transaction.
If the registration is delayed, management will notify the holders of Series
A Preferred Stock within three weeks after receipt of notice specified in
Section 3.2(a) of the delay but shall not be required to provide any
information to any holder regarding the existence or the nature of any
pending transactions.
3.3.(a) Subject to paragraph (b) of this Section 3.3, the
registration rights of the holders pursuant to this Agreement and the
ability to offer and sell Registrable Securities pursuant to a registration
statement are subject to the following conditions and limitations, and each
holder agrees with the Corporation that:
(i) If the Corporation determines in its good faith
judgment that the filing of a registration statement under Section 3.1 or
Section 3.2 hereof or the use of any prospectus would require the disclosure
of important information which the Corporation has a bona fide business
purpose for preserving as confidential or the disclosure of which would
impede the Corporation's ability to consummate a significant transaction,
upon written notice of such determination by the Corporation, the rights of
the holders to offer, sell or distribute any securities pursuant to the
registration statement or to require the Corporation to take action with
respect to the registration or sale of any securities pursuant to the
registration statement (including any action contemplated by Section 3.4
hereof) will for up to 60 days in any 12 month period be suspended until the
date upon which the Corporation notifies the holders in writing that
suspension of such rights for the grounds set forth in this Section
3.3(a)(i) is no longer necessary.
(ii) If all reports required to be filed by the
Corporation pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), have not been filed by the required date without regard to
any extension, or if consummation of any business combination by the
Corporation has occurred or is probable for purposes of Rule 3-05 or Article
11 of Regulation S-X under the Securities Act, upon written notice thereof
by the Corporation to the holders, the rights of the holders to offer, sell
or distribute any securities pursuant to the registration statement or to
require the Corporation to take action with respect to the registration or
sale of any securities pursuant to the registration statement (including any
action contemplated by Section 3.4 hereof) will for up to 60 days in any 12
month period be suspended until the date upon which the Corporation has
filed such reports or obtained the financial information required by Rule
3-05 or Article 11 of Regulation S-X to be included in the registration
statement.
(iii) In the case of the registration of any
underwritten primary equity offering initiated by the Corporation (other
than any registration by the Corporation on Form S-8, or a successor or
substantially similar form, of (A) an employee stock option, stock purchase
or compensation plan or of securities issued or issuable pursuant to any
such plan, or (B) a dividend reinvestment plan), each holder agrees, if
requested in writing by the managing underwriter or underwriters
administering such offering, not to effect any offer, sale or distribution
of securities (or any option or right to acquire securities) during the
period commencing on the 10th day prior to the effective date of the
registration statement covering such underwritten primary equity offering
and ending on the date specified by such managing underwriter in such
written request to such holder, which period may be of a duration of 90 days
or more.
(iv) In the event that the Corporation plans to
repurchase or bid for securities of the Corporation in the open market, on a
private solicited basis or otherwise, and the Corporation determines, in its
reasonable good faith judgment and based upon the advice of counsel to the
Corporation (which counsel shall be experienced in securities laws matters),
that any such repurchase or bid may not, under Rule 10b-6 under the Exchange
Act, or any successor or similar rule ("Rule 10b-6"), be commenced or
consummated due to the existence or the possible commencement of a
"distribution" (within the meaning of Rule 10b-6) as a result of any offers
or sales by holders of any Registrable Securities, as the case may be, under
any registration statement filed pursuant to this Agreement, the Corporation
shall be entitled, for a period of 90 days or more, to request that holders
of Registrable Securities, to suspend or postpone such distribution pursuant
to such registration statement (a "10b-6 Election"). The Corporation shall,
as promptly as practicable, give such holder or holders written notice of
such 10b-6 Election, stating the basis for the Corporation's determination.
As promptly as practicable following the determination by the Corporation
that the holders or holders may commence or recommence their distribution
pursuant to the registration statement without causing the Corporation to be
in violation of Rule 10b-6, the Corporation shall give such holder or
holders written notice of such determination.
(b) Notwithstanding the provisions of Section 3.3(a)
above, the aggregate number of days (whether or not consecutive) during
which the Corporation may delay the effectiveness of a registration
statement or prevent offerings, sales or distribution by the holders
thereunder pursuant to Section 3.3(a) shall in no event exceed 180 days
during any 12-month period.
(c) The Corporation may require each selling holder of
Registrable Securities, as a condition to the inclusion of the Registrable
Securities of such selling holder in the registration statement or in any
offering thereunder, as the case may be, to furnish to the Corporation such
information regarding the holder and the distribution of such securities as
the Corporation may from time to time reasonably request (which request
shall be confirmed in writing if requested by the Corporation) in order to
comply with applicable law and such other information as may be legally
required in connection with such registration or offering, and the holder
shall promptly provide such information and a written consent to the
inclusion of such information in the registration statement or any
prospectus or supplement thereto; provided that the failure of any holder to
provide such information to the Corporation shall not in any way affect the
obligations of the Corporation hereunder with respect to any other holder.
3.4. In connection with the obligations of the Corporation with
respect to the registration statement pursuant to Section 3.1 or Section
3.2, hereof and subject to Section 3.3 hereof, the Corporation shall:
(a) (i) prepare and file with the Commission a registration
statement on the appropriate form under the Securities Act, (A) which form
shall be selected by the Corporation and shall be available for the sale of
the Registrable Securities in accordance with the intended method or methods
of distribution by the selling holders thereof (provided that the
Corporation shall not be required to use any form other than Form S-1, S-2
or S-3 or any successor form and shall not be required to file more than one
registration statement with the Commission) and (B) which registration
statement shall comply as to form in all material respects with the
requirements of the applicable form and include or incorporate by reference
all financial statements required by the Commission to be so included or
incorporated by reference, further provided that subject to the registration
statement and prospectus being in compliance with the requirements of the
Securities Act and the Exchange Act (including all rules and regulations of
the Commission thereunder), the Corporation has the sole discretion to
determine the form, substance and presentation of any financial or other
information included in any registration statement or prospectus, and
whether such information should be included in such registration statement
or prospectus; and (ii) use its reasonable best efforts to cause such
registration statement to become effective and remain effective in
accordance with Section 3.1 and Section 3.2 hereof;
(b) prepare and file with the Commission such amendments and
post-effective amendments to the registration statement as may be necessary
to keep such registration statement effective for the applicable period; and
cause each prospectus to be supplemented by any required prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under
the Securities Act;
(c) in the event that any federal law or regulation binding on
the Corporation and adopted after the date hereof so requires (and would
also so require if the Registrable Securities were being offered in a
primary offering by the Corporation rather than by the holders), use its
reasonable best efforts to cause such Registrable Securities to be
registered with or approved by such other federal governmental agencies or
authorities in the United States, if any, as may be required by virtue of
the business and operations of the Corporation to enable the selling holders
to consummate the disposition of such Registrable Securities;
(d) furnish to each holder of Registrable Securities and to
each managing underwriter of an underwritten offering of Registrable
Securities pursuant to Section 4(1) of the Securities Act, if any, without
charge, as many copies of each prospectus, including each preliminary
prospectus, and any amendment or supplement thereto as such holder or
underwriter may reasonably request, in order to facilitate the public sale
or other disposition of the Registrable Securities;
(e) use its reasonable best efforts to register or qualify the
Registrable Securities under all applicable state securities or "blue sky"
laws of such jurisdictions as any holder of Registrable Securities of such
class covered by the registration statement shall, on 20 days prior written
notice, reasonably request in writing. Such notice to be sent at any time
prior to the applicable registration statement being declared effective by
the Commission. The Corporation shall maintain such registration or
qualification in effect during the applicable period provided in Section 3.1
or Section 3.2 hereof; provided, however, that the Corporation shall not be
required to (i) qualify generally to do business in any jurisdiction where
it would not otherwise be required to qualify but for this Section 3.4(e);
(ii) subject itself to taxation in any such jurisdiction; (iii) make any
change to its Articles or Incorporation or Bylaws; or (iv) become subject to
general service of process in any jurisdiction where it is not then so
subject;
(f) notify each holder of Registrable Securities as promptly
as practicable after becoming aware thereof and (if requested by any such
holder) confirm such notice in writing (i) when the registration statement
has become effective and when any post-effective amendments and supplements
thereto become effective; (ii) of any request by the Commission or any state
securities authority for amendments and supplements to the registration
statement and any prospectus or for additional information relating to the
Registrable Securities or the registration or qualification thereof after
the registration statement has become effective; (iii) of the issuance by
the Commission or any state securities authority of any stop order
suspending the effectiveness of the registration statement or the initiation
of any proceedings for that purpose; (iv) if the representations and
warranties of the Corporation contained in any underwriting agreement,
securities sales agreement or other similar agreement, if any, relating to
the Registrable Securities cease to be true and correct in any material
respect prior to the closing date specified in such agreement (provided such
notice shall be given only to holders which are parties to the agreements
pursuant to which such representations and warranties are made), or if the
Corporation receives any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any jurisdiction or
the initiation of any proceeding for such purpose; and (v) of the happening
of any event during the period (other than any suspension period referred to
in Section 3.3(a)) during which the registration statement is required
hereunder to be effective as a result of which the registration statement or
any prospectus would contain an untrue statement of material fact or omit to
state a material fact necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading;
(g) use its reasonable best efforts to obtain the withdrawal
of any order suspending the effectiveness of the registration statement or
the qualification of the Registrable Securities for sale in any jurisdiction
as promptly as practicable;
(h) furnish to each holder of Registrable Securities, without
charge, at least one conformed copy of the registration statement and any
post-effective amendment thereto (without documents incorporated therein by
reference or exhibits thereto, unless requested in writing);
(i) cooperate with the holders of Registrable Securities to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to the registration statement and
not bearing any restrictive legends; and enable such Registrable Securities
to be in such denominations and registered in such names as the selling
holders may reasonably request (in each case, provided such certificates are
requested in writing at least three business days prior to any delivery
thereof);
(j) upon the occurrence of any event contemplated by Section
3.4(f)(v) hereof, use its reasonable best efforts as promptly as practicable to
prepare and file with the Commission a supplement or post-effective amendment
to the registration statement or the related prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities, such
prospectus will not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(k) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings
statement covering a period of 12 months, beginning within three months
after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section ll (a) of the Securities
Act and Rule 158 under the Securities Act;
(l) use its reasonable best efforts to (i) cause all
Registrable Securities to be listed or quoted on any securities exchange or
quotation system on which the Corporation's outstanding Common Stock is then
listed or quoted; and
(m) obtain a CUSIP number for all Registrable Securities not
later than the effective date of the registration statement.
Each holder agrees that, upon receipt of any notice from the Corporation of
the happening of any event of the kind described in Section 3.4(f)(v)
hereof, such holder will forthwith discontinue disposition of Registrable
Securities pursuant to the registration statement covering such Registrable
Securities until such holder's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3.4(j) hereof, or until it is
advised in writing by the Corporation that the use of such prospectus may be
resumed and, if so directed by the Corporation, such holder will deliver to
the Corporation (at the Corporation's expense) all copies, other than
permanent file copies then in such holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice; provided, however, that the Corporation shall use its reasonable
best efforts to promptly prepare and provide to the holders a supplemented
or amended prospectus contemplated by such Section 3.4(j) hereof. In the
event the Corporation shall give any such notice, the period during which
such registration statement shall be maintained effective shall be extended
by the number of days during the period from and including the date of the
giving of such notice pursuant to Section 3.4(f)(v) hereof to including the
date when each holder of Registrable Securities covered by such registration
statement shall have received the copies of the supplemented or amended
prospectus contemplated by Section 3.4(j) hereof.
3.5 (a) The Corporation will bear all reasonable expenses incident
to the performance of or compliance with its obligations of a Piggyback
Registration under this Agreement and the holders of the Series A Preferred
stock will bear all reasonable expenses incident to the performance of or
compliance with its obligations of a Demand Registration under this
Agreement. The phrase "all reaonsable expenses" in the preceding sentence
shall include without limitations, all registration and filing fees, all
fees and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of one firm of counsel for the holders in
connection with blue sky qualifications of the Registrable Securities),
printing expenses, messenger and delivery expenses, internal expenses
(including, without limitation, all salaries and expenses of the officers
and employees of the Corporation performing legal or accounting duties), and
reasonable fees and disbursement of counsel for the Corporation and its
independent certified public accountants (including the reasonable expenses
of any special audit or comfort letters required by or incident to such
performance), securities acts liability insurance (if the Corporation elects
to obtain such insurance), the reasonable fees and expenses of any special
experts retained by the Corporation in connection with such registration,
reasonable fees and expenses of any other persons retained by the
Corporation and the fees and expenses associated with any required filing
with the National Association of Securities Dealers, Inc. ("NASD") (all such
expenses being herein called "Registration Expenses"). Notwithstanding the
foregoing, the Corporation is not required to pay any fees or expenses of
holders, underwriters, the holder's or any underwriter's counsel (other than
the blue sky counsel referred to above) or accountant or any other advisers,
including any transfer taxes, underwriting, brokerage and other discounts
and commissions and finders' and similar fees payable in the respect of
Registrable Securities.
(b) Each holder shall pay all costs and expenses incurred by
such holder (including all transfer taxes, underwriting, brokerage and other
discounts and commissions and finders' and similar fees payable in respect
of Registrable Securities). To the extent that any Registration Expenses are
incurred, assumed or paid by any holder or any placement or sales agent
therefor or underwriter thereof with the Corporation's prior written
consent, the Corporation shall reimburse such person for the full amount of
the registration expenses so incurred, assumed or paid within a reasonable
time after receipt of a written request therefor. Any registration expenses
submitted by any holder, placement or sales agent or underwriter or on
behalf of any such person for payment by the Corporation shall be itemized
in detail and contain clear and accurate receipts of all expenditures made
by such parties.
Section 4. Voting Rights. The holders of Series A Preferred Stock
shall be entitled to vote with one vote per share as holders of Common Stock
on all matters on which Common Stockholders of the Corporation are entitled
to vote, in addition to any voting rights required by law.
Section 5. Rank and Preference. Shares of Series A Preferred Stock
shall, with respect to dividend rights, rights on redemption and rights on
liquidation, winding up and dissolution, have preference over and rank prior
to all classes of Common Stock and shall rank pari passu with all other
series of Preferred Stock. In case the stated dividends and the amounts
payable on liquidation, distribution or sale of assets, dissolution or
winding up of the Corporation are not paid in full, the shareholders of all
series of Preferred Stock shall share ratably in the payment of dividends,
including accumulations, if any, in accordance with the sums which would be
payable on such shares if all dividends were declared and paid in full and
in any distribution of assets other than by way of dividends, in accordance
with the sums which would be payable on such distribution if all sums
payable were discharged and paid in full.
Section 6. Dividends and Restrictions on Certain Repurchases.
6.1 The holders of the shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors, out
of funds legally available for the payment of dividends, cumulative
dividends at the annual rate of 10% per annum, or ten cents ($0.10) per
share. Each of such annual dividends shall be fully cumulative and shall
accrue (whether or not declared or permitted to be paid), from the first day
such shares were first issued. The Corporation shall declare annual
dividends and any appropriate portion thereof prior to any conversion or
redemption of the Series A Preferred Stock.
6.2. In the event any shares of Series A Preferred Stock shall be
outstanding for more or less than the period covered by such dividend year,
the amount of the dividend shall be prorated for such periods. Such
dividends shall be paid to the holders of record at the close of business on
the date specified by the Board of Directors of the Corporation at the time
the dividend is declared; provided, however, that such record date shall be
not more than 30 days nor less than 10 days prior to the respective dividend
payment date.
6.3. All dividends paid with respect to shares of the Series A
Preferred Stock shall be paid pro rata to the holders entitled thereto.
6.4. No dividends, other than dividends payable solely in Common
Stock, shall be declared by the Board of Directors on any class or series of
equity securities of the Corporation unless and until such time as all
accrued and unpaid dividends on the Series A Preferred Stock have been paid
in full or unless the Series A Preferred Stock has been redeemed in
accordance with its terms or are fully converted into Common Stock of the
Corporation or are otherwise reacquired and retired in full by the
Corporation. The Corporation may not pay or set apart for payment, other
than dividends or other distributions or payments payable solely in Common
Stock, any other distributions on any shares of the Corporation's Common
Stock, and may not purchase or otherwise redeem for cash or other tangible
property, other than in shares of Common Stock, any shares of the
Corporation's Common Stock or any warrants, rights or options exercisable
for or convertible into any shares of Common Stock unless and until such
time as the Series A Preferred Stock has been redeemed in accordance with
its terms or are fully converted into Common Stock of the Corporation or are
otherwise reacquired and retired in full by the Corporation.
6.5. (a) In event the Corporation shall have accrued the payment of
dividends beyond a date on which dividends would otherwise be declared
hereunder, the Corporation, at the election of its Board of Directors made
at any time thereafter (so long as such dividends have not been paid in
cash), may elect to pay all cumulative accrued dividends otherwise due and
payable in shares of Series A Preferred Stock in lieu of cash. In such
event, the Corporation shall advise each holder of record of Series A
Preferred Stock in writing on the Record Date, not more than 30 days nor
less than 10 days prior to the respective dividend payment date, of the
Corporation's election to make such dividend payment in shares of the Series
A Preferred Stock.
(b) For any dividend payment to be made in Series A Preferred
Stock as herein provided, the number of shares issuable for such dividend
payment shall be determined by dividing the cumulative accrued dividend
payments due on said dividend payment date by the $1.00 face value of the
Series A Preferred Stock.
Section 7. Liquidation, Dissolution or Winding-Up.
7.1. In the event of any liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock then outstanding shall be entitled to receive ratably, prior
and in preference to any distribution of any of the assets of the
Corporation to the holders of any other equity securities of the Corporation
other than Preferred Stock, by reason of their ownership thereof, the sum of
ONE DOLLAR ($1.00) per share outstanding plus all accrued and unpaid
dividends thereon, each payable in cash (which may be payable from either
capital or surplus) or, if cash is not then available, in property of the
Corporation. In the event it is necessary or advisable for the Corporation
to determine the value of property for any purpose hereunder, the value of
such property so received by holders of Series A Preferred Stock will be
deemed to be its fair market value as determined in good faith by the Board
of Directors of the Corporation unless a majority in interest of the holders
of issued and outstanding Series A Preferred Stock shall demand an
independent appraisal of such property. If, upon the occurrence of any such
event, the assets thus distributed among the holders of the Series A
Preferred Stock shall be insufficient to permit the payment to such holders
of the full preferential amount due to them hereunder, then the entire
assets of this Corporation legally available for distribution shall be
distributed ratably among the holders of all series of the Preferred Stock.
Except as provided above, holders of the Series A Preferred Stock shall not
be entitled to any distribution in the event of liquidation, dissolution or
winding up of the affairs of the Corporation.
7.2. For the purposes of this Section 7, a sale of all or
substantially all of the assets of this Corporation or a merger of the
Corporation with or into any other corporation or corporations where the
Corporation is not the surviving entity, shall not be deemed to be a
liquidation, dissolution or winding-up of the Corporation within the meaning
of Section 7.1 unless no provision has been made for the exchange of
securities for Series A Preferred Stock in connection with the consummation
of any such sale of assets or merger.
7.3. The liquidation payment with respect to each outstanding
fractional share of Series A Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each
outstanding share of Series A Preferred Stock.
Section 8. Redemption.
8.1. The Corporation shall have no mandatory obligation to redeem
shares of Series A Preferred Stock; provided, however, in the event of any
liquidation, dissolution or winding-up of the Corporation, either voluntary
or involuntary, or in the event or sale of all or substantially all of the
assets of this Corporation or a merger of the Corporation with or into any
other corporation or corporations where the Corporation is not the surviving
entity and in which no provision has been made for the exchange of
securities for Series A Preferred Stock, each share of Series A Preferred
Stock then outstanding shall be entitled to receive the consideration
specified in Section 7.1 above.
8.2. The Corporation at its option, at any time and from time to
time, may redeem all or any portion of the Series A Preferred Stock (and if
only a portion, in an amount equal to an even multiple of 10,000 shares)
then outstanding at a redemption price of ONE DOLLAR ($1.00) per share plus
the payment of all accrued and unpaid dividends on the shares so redeemed.
8.3. Upon any redemption of Series A Preferred Stock, written notice
shall be given to the holders of the Series A Preferred Stock for shares to
be purchased or redeemed at least thirty (30) days prior to the date fixed
for redemption. The notice shall be addressed to each such stockholder at
the address of such holder appearing on the books of the Corporation or
given by such holder to the Corporation for the purpose of notice, or, if no
such address appears or is so given, at the last known address of such
shareholder. Such notice shall specify the date fixed for redemption, shall
state that all shares of Series A Preferred Stock outstanding are to be
redeemed and the number of shares of Series A Preferred Stock to be so
redeemed, and shall call upon such holder to surrender to the Corporation on
said date, at the place designated in the notice, such holder's certificate
or certificates representing the shares to be redeemed on the date fixed for
redemption stated in such notice. Unless such person shall elect to convert
the same into Common Stock in accordance with Section 2 above, each holder
of shares of Series A Preferred Stock called for redemption shall surrender
the certificate or certificates evidencing such shares to the Corporation at
the place designated in such notice and shall thereupon be entitled to
receive payment of the redemption price on the date fixed for redemption.
8.4. If, on or prior to any date fixed for redemption, the
Corporation deposits, with any bank or trust company in the United States,
as a trust fund, a sum sufficient to redeem all shares of Series A Preferred
Stock called for redemption which have not theretofore been surrendered for
conversion, with irrevocable instructions and authority to the bank or trust
company to pay, on or after the date fixed for redemption, the redemption
price of the shares to their respective holders upon the surrender of their
share certificates, then from and after the date of redemption the shares to
be redeemed shall be redeemed and dividends and other distributions on those
shares shall cease to accrue after the date such shares were called for
redemption. The deposit shall constitute full payment for the shares of
Series A Preferred Stock to their holders and from and after the date of the
deposit the shares of Series A Preferred Stock shall no longer be
outstanding, and the holders thereof shall cease to be shareholders with
respect to such shares, and shall have no rights with respect thereto except
the right to receive from the bank or trust company payment of the
redemption price of the shares without interest upon surrender of their
certificates therefor and the right to receive from the Corporation any
accrued dividends thereon through the date such shares were called for
redemption. Any interest accrued on any funds so deposited shall be the
property of, and paid to, the Corporation.
8.5. In the event that fewer than all the outstanding shares of
Series A Preferred Stock are to be redeemed, the number of shares to be
redeemed shall be determined by the Board of Directors and the shares to be
redeemed shall be selected by lot or pro rata as may be determined by the
Board of Directors. In case it shall designate by lot the shares so to be
redeemed, the Board of Directors shall have full power and authority to
prescribe the manner in which the drawings by lot shall be conducted.
8.6. Notwithstanding anything contained herein to the contrary, the
Corporation may not redeem any shares of Series A Preferred Stock and no
sums therefor shall be paid or set aside for payment by the Corporation if,
at the time and after giving effect to such payment, the same is prohibited
by the laws of the State of Nevada.
8.7. Upon any redemption of Series A Preferred Stock in accordance
with the foregoing, all of such shares of Series A Preferred Stock shall be
canceled and revert to the status of authorized and unissued shares of
Preferred Stock.
Section 9. Required Notices. In case at any time:
(a) there shall be any capital reorganization or reclassification of the
capital stock of the Corporation, or any consolidation or merger of
the Corporation with, or sale of all or substantially all of its
assets to, another corporation; or
(b) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation;
then, in any one or more of such cases, the Corporation shall cause to be
mailed to the holders of record of then outstanding shares of Series A
Preferred Stock (i) at least 30 days' prior written notice of the date on
which the books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up, and (ii) in the case of
any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up, at least 30 days' prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (i) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and such notice in accordance with the
foregoing clause (ii) shall also specify the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, as the
case may be.
Section 10. Amendments and Additional Covenants.
10.1. So long as any Series A Preferred Stock shall be outstanding,
this Corporation shall not, without the prior approval of the holders of not
less than a majority of the then issued and outstanding shares of Series A
Preferred Stock voting as a class, permit the Corporation to amend or repeal
any provision of, or add any provision to, this Certificate or the
Corporation's Articles of Incorporation or bylaws, if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series A Preferred Stock.
10.2. So long as any Series A Preferred Stock shall be outstanding,
the Corporation shall:
(a) maintain its books of account and financial statements and records in
accordance with generally accepted accounting principles, and all
determinations hereunder, if any, which are dependent upon a
calculation of the Corporation's financial condition shall be
determined in accordance with generally accepted accounting
principles;
(b) promptly pay and discharge, or cause to be paid and discharged, when
due and payable, all lawful taxes, assessments and governmental
charges or levies imposed upon the income, profits, property, or
business of the Corporation or any subsidiary, except where the
Corporation is contesting any of the foregoing in good faith by
appropriate proceedings; and
(c) keep its properties in good repair, working order, and condition,
reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions, and
improvements thereto, and the Corporation shall at all times comply
with the provisions of all material leases to which it is a party or
under which it occupies property so as to prevent any loss or forfei-
ture thereof or thereunder.
10.3. So long as any Series A Preferred Stock shall be outstanding,
the Corporation shall furnish to each holder of record of the Series A
Preferred Stock as soon as practicable, but in any event within 150 days
after the end of each fiscal year of the Corporation, an income statement,
statement of cash flow and statement of changes in stockholders' equity for
such fiscal year, and a balance sheet of the Corporation as of the end of
such year, such year-end financial statements to be in reasonable detail,
prepared in accordance with generally accepted accounting principles, and
audited and certified by independent public accountants selected by the
Board of Directors of the Corporation.
"RESOLVED FURTHER, that the President or any Vice President of this
Corporation and the Secretary or any Assistant Secretary of the Corporation
are hereby authorized and directed to prepare, sign, and file with the
Secretary of the State of Nevada a Certificate of Designation of Series A
Preferred Stock of the Corporation in accordance with the resolutions set
forth herein."
(3) We further certify that the authorized number of shares of Preferred
Stock of this Corporation is 10,000,000 shares; and that the number of shares
constituting the first series of Preferred Stock established by the foregoing
resolutions, none of which have been issued, is 5,000,000 shares.
(Signature Page Follows)
IN WITNESS WHEREOF, we have executed this instrument as of the dates set
forth below.
/S/Larry L. Lozensku
- -----------------------------
Larry L. Lozensky, President
/Larry L. Lozensku
- ------------------------------
Larry L. Lozensky, Secretary
State of Arizona )
) ss.:
County of Maricopa )
On September __, 1999, personally appeared before me, a Notary
Public, Larry L. Lozensky, who acknowledged that he executed the above
instrument.
(Notary Stamp or Seal)
Signature of Notary
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
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 661700
<SECURITIES> 0
<RECEIVABLES> 888852
<ALLOWANCES> 3948
<INVENTORY> 2069700
<CURRENT-ASSETS> 3693000
<PP&E> 3018100
<DEPRECIATION> 1321200
<TOTAL-ASSETS> 8156000
<CURRENT-LIABILITIES> 982400
<BONDS> 9400
0
0
<COMMON> 53790200
<OTHER-SE> (46453700)
<TOTAL-LIABILITY-AND-EQUITY> 8156000
<SALES> 7084400
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<CGS> 3763900
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<OTHER-EXPENSES> (102100)
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<INTEREST-EXPENSE> 157700
<INCOME-PRETAX> 121300
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<EPS-BASIC> .02
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