SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
The Securities and Exchange Act of 1934
For the quarter ended . . . . . . . . . . . . . . . . . . . .December 31, 1998
Commission file number. . . . . . . . . . . . . . . . . . . . . . . . . .0-9347
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
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(Exact name of registrant as specified in its charter)
Arizona 86-0220694
--------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15900 North 78th Street, Suite 101, Scottsdale, Arizona 85260
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(Address of principal executive offices) (Zip Code)
(602) 607-1010
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(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES XX NO
------ ------
As of January 31, 1999, there were 5,056,126 shares of common stock
outstanding.<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
FORM 10-Q INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1998 (unaudited) and
June 30, 1998 (audited) . . . . . . . . . . . . . 3
Consolidated Statements of Operations
For the three months ended December 31,
1998 and 1997 (unaudited) . . . . . . . . . . . . 4
Consolidated Statements of Operations
For the six months ended December 31,
1998 and 1997 (unaudited) . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
For the six months ended December 31,
1998 and 1997 (unaudited) . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements
(unaudited) . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 9
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2<PAGE>
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1998
<S> <C> <C>
Dec 31, 1998 June 30, 1998
ASSETS ---------------- ---------------
Current Assets:
Cash $ 1,203,286 $ 1,116,857
Accounts receivable, net 1,065,757 1,192,547
Notes receivable 323,468 349,212
Inventories 1,679,897 540,371
Prepaid expenses and other current assets 93,025 64,544
Cost & estimated earnings in excess of
billings on uncompleted projects - 105,070
---------------- ---------------
Total current assets 4,365,433 3,368,601
Property, plant and equipment, net 2,034,127 3,380,124
Intangible assets, net 214,814 223,381
Assets held for sale 2,443,000 2,443,000
Other assets 222,959 243,303
---------------- ---------------
Total assets $ 9,280,333 $ 9,658,409
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Capital lease obligations and notes payable,
current portion $ 983,438 $ 1,306,672
Accounts payable and accrued expenses 544,207 600,798
Billings in excess of cost and est earnings 282,473 173,248
---------------- ---------------
Total current liabilities 1,810,118 2,080,718
Capital lease obligations and notes payable,
long-term portion 105,272 410,671
Shareholders' equity
Preferred Stock, Class B, cumulative voting;
20,000,000 shares authorized and none issued
Common Stock, no par value, 100,000,000 shares
authorized; 5,050,683 shares issued and
outstanding 53,742,005 53,742,005
Accumulated deficit (46,377,062) (46,574,985)
---------------- ---------------
Total shareholders' equity 7,364,943 7,167,020
---------------- ---------------
Total liabilities & shareholders' equity $ 9,280,333 $ 9,658,409
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 1998 and 1997
December 31
1998 1997
--------------- --------------
Net sales $ 1,837,567 $ 2,613,335
--------------- --------------
Operating expenses:
Direct service and cost of goods sold 906,318 1,209,965
Selling, general and administrative 721,680 852,400
Depreciation and amortization 135,375 283,078
--------------- --------------
Total operating expenses 1,763,373 2,345,443
--------------- --------------
Income (loss) from operations 74,194 267,892
Other expense (27,637) (65,359)
--------------- --------------
Net income (loss) $ 46,557 $ 202,533
=============== ==============
Earnings per common share
- Basic and diluted $ 0.01 $ 0.04
=============== ==============
Weighted average common shares and equivalents
outstanding during period
-Basic 5,050,683 5,049,504
=============== ==============
-Diluted 5,558,349 5,049,504
=============== ==============
Earnings per share and shares outstanding information has been restated to
reflect a reverse stock split which was effected in May of 1998.
The accompanying notes are an integral part of these financial statements.
4<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended December 31, 1998 and 1997
December 31,
1998 1997
------------- -------------
Net sales $ 4,163,167 $ 5,219,692
------------- -------------
Operating expenses:
Direct service and cost of goods sold 2,007,855 2,504,482
Selling, general and administrative 1,602,342 1,875,518
Depreciation and amortization 290,330 558,334
------------- -------------
Total operating expenses 3,900,527 4,938,334
------------- -------------
Income (loss) from operations 262,640 281,358
Other expense (64,718) (129,908)
------------- -------------
Net income(loss) $ 197,922 $ 151,450
============= =============
Earnings per common share
- Basic and diluted $ 0.04 $ 0.03
============= =============
Weighted average common shares and equivalents
outstanding during period
- Basic 5,050,683 5,049,504
============= =============
-Diluted 5,375,054 5,049,504
============= =============
Earnings per share and shares outstanding information has been restated to
reflect a reverse stock split which was effected in May of 1998.
The accompanying notes are an integral part of these financial statements.
5<PAGE>
<TABLE>
<CAPTION>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1998 and 1997
December 31,
<S> <C> <C>
1998 1997
------------- --------------
Cash flows from operating activities:
Net income from continuing operations $ 197,922 $ 151,450
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 246,679 559,234
(Increase) decrease in:
Accounts receivable and notes receivable 151,790 (168,218)
Cost & est earnings in excess of billing 105,070 -
Inventory (43,326) (40,508)
Prepaid expenses and other current assets (28,481) 124,250
Other assets 20,344 (25,654)
Increase (decrease) in:
Accounts payable and accrued expenses (56,591) (79,702)
Billings in excess of costs and est earnings 109,225 -
------------- --------------
Net cash provided by continuing operations 702,632 520,852
Net cash used in discontinued operations - (37,904)
------------- --------------
Net cash provided by (used in) operating activities 702,632 482,948
------------- --------------
Cash flows from investing activities:
Purchase of property, plant and equipment (12,715) (67,053)
Proceeds from disposal of assets 28,878 -
Other (3,735) 6,567
------------- --------------
Net cash provided by (used in)investing activities 12,428 (60,486)
------------- --------------
Cash flows from financing activities:
Payments on capital lease obligations (628,633) (459,016)
Net cash provided by (used in) financing activities (628,633) (459,016)
------------- --------------
Net increase (decrease) in cash $ 86,427 $ (36,554)
Cash, beginning of period 1,116,857 526,851
------------- --------------
Cash, end of period $ 1,203,284 $ 490,297
============= ==============
Supplemental disclosures:
Transfer of equipment to inventory, net of $ 1,096,200 -
accumulated depreciation of 897,280* --------------
Capital leases entered into during period: - $ 440,375
</TABLE>
* See Management's analysis of Liquidity & Capital Resources
The accompanying notes are an integral part of these financial statements.
6<PAGE>
ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED DECEMBER 31, 1998
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles for
interim financial information and in accordance with the instructions to Form
10-Q. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with Generally Accepted
Accounting Principles have been condensed or omitted. These interim
consolidated financial statements should be read in conjunction with the
Company's June 30, 1998, Annual Report on Form 10-K. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments consisting of normal recurring accruals necessary to present fairly
the financial position, results of operations and statements of cash flows as
of December 31, 1998, and for all periods presented. The results of operations
for the three months ending December 31, are not necessarily indicative of the
operating results to be expected for an entire year.
All significant intercompany balances, transactions and stock holdings
have been eliminated from the accompanying interim financial statements.
Note 2 - Inventories
Inventories have been recorded at the lower of cost or market. The
composition of inventories as of December 31, 1998, and June 30, 1998, is
listed below:
December 31, 1998 June 30, 1998
----------------- --------------
Finished goods $1,267,755 $ 226,116
Work-in-process 538 24,835
Raw material 411,604 289,420
----------------- --------------
$1,679,897 $ 540,371
7<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1. Liquidity and Capital Resources
As of December 31, 1998, the Company's current assets exceeded current
liabilities by $2,555,000, or a ratio of 2.4 to 1 compared to $1,288,000 or a
ratio of 1.6 to 1 as of June 30, 1998. The increase in the current ratio
resulted primarily from a reclassification of fryer units from Property, Plant
and Equipment to inventory due to the Company's decision to market the units
related to the Wal-Mart contract. (See discussion below concerning termination
of the Wal-Mart contract.) Without the transfer of Equipment to Inventory, the
ratio would have increased to 1.8 to 1. Net cash provided from continuing
operations of $703,000 was an increase of $182,000 compared to the same period
of the prior year. Payments on capital lease obligations were $629,000, an
increase of $170,000 compared to the six months ended December 31, 1997. Net
cash increased $86,400 for the six month period compared to a decrease of
$36,600 for the same period a year earlier.
During fiscal year 1998, Wal-Mart, which accounted for approximately 45%
of the Company's consolidated revenue, terminated its contract with the Fry
Guy food service operations and has returned over 1,400 fryers to the Company.
Sales to Wal-Mart under the food program have ceased during the second 1999
fiscal quarter. The termination of the Wal-Mart contract resulted from Wal-
Mart's decision to purchase new fryer equipment for its stores and self-manage
its food program.
To respond to the contract loss, the Company is refurbishing the returned
fryer units, revitalizing its sales program to replace declining revenues and
is attempting to reduce operating and overhead expenses. The Company is
expanding its distribution system to place machines under the Sgt. Fry food
program and/or to sell the refurbished fryers into appropriate markets.
2. Results of Operations
(a.) Three months ended 12/31/98 versus 12/31/97
Consolidated revenue for the quarter ended December 31, 1998, was
$1,838,000 compared to $2,613,000 for the quarter ended December 31, 1997, a
decrease of $776,000 or 30%. The decrease in consolidated revenue resulted
from a 67.9% decrease in Fry Guy food service revenue offset by a 23% increase
in revenues from the Company's environmental products segment. The decrease in
the Fry Guy food service revenue was the result of the termination of the Wal-
Mart Contract. The increase in environmental products segment revenue
resulted primarily from growth in aeration products sales.
Net income for the three months decreased to $47,000, or $.01 per share,
compared to $203,000 or $.04 per share, for the comparable quarter ended
December 31, 1997. The decrease in income resulted from decreased sales offset
by a 24.8% reduction in operating expenses and a 57.7% reduction in other
expenses.
Direct service and cost of goods sold decreased by $304,000 or 25.1%,
compared to the first quarter of last year. Selling, general and
administrative expenses for the quarter decreased by $131,000 or 15.3%
compared to the quarter ended December 31, 1997. Depreciation and
amortization expense decreased by $148,000 or 52% compared to the same period
a year earlier, as a result of reclassification of Fry Guy equipment. The
decrease in direct service and cost of goods sold related to a corresponding
8<PAGE>
decrease in net sales. The decrease in selling, general and administrative
expenses was due to reduced sales commissions and a planned reduction in
overhead expenses.
(b.) Six months ended 12/31/98 versus 12/31/97
Consolidated sales for the six months ended December 31, 1998 were
$4,163,000 compared to $5,220,000 or a 20% decrease from the prior comparable
period. The decrease resulted from a 47% decrease in the Fry Guy food service
revenues due to the termination of the Wal-Mart contract, offset by an
increase of 8.9% in sales from the Company's environmental products segment.
Consolidated net income for the period was $198,000, or $.04 per share, a
30.7% increase from the $151,000, or $.03 per share reported for the six month
period ending December 31, 1997. The increase in net earnings resulted from a
$1,038,000, or 21% reduction in operating expenses and a $65,000, or 50.2%
reduction in other expenses.
Item 3 - Year 2000 Issue
The Company has consulted with an outside Management Information Systems
analyst and determined that all computer systems currently in use by the
Company are either in compliance with the Year 2000 issue or can be made to
comply with minor modifications. The estimate for modification required for
the Year 2000 issue is under $10,000.
The Company does not anticipate significant problems with any of its
suppliers of data necessary for the Company's operations. The potential risk
to the Company concerning the Year 2000 issue appears to be problems that
customers may incur and the effect on their ability to pay the Company for
services and products. The Company does not have a formal contingency plan to
resolve this issue. However, due to the Company's diverse customer base,
management anticipates the problems should be limited in scope.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 13, 1998 the case of Norman E. Meyer v. Alanco
Environmental Resources Corporation was settled.
Item 6. Exhibits
(A) (27)Financial Data Schedule
(B) Reports on Form 8-K
None
(C) Reports on Form S-8: 1 filed 10/22/98
9<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ALANCO ENVIRONMENTAL
RESOURCES CORPORATION
(Registrant)
/s/John Carlson
-----------------------
John Carlson
Chief Financial Officer
Date: February 12, 1999
10<PAGE>
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