-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H0Fb4HXLQGNnZ4xR5AdlM+bJFeKhUTQExYxWL6vMpan1UNS1/8ukTpXzZH7MrvWo 4tVJ6QR78rlYHIjBZMxYMA== 0000098618-97-000005.txt : 19970930 0000098618-97-000005.hdr.sgml : 19970930 ACCESSION NUMBER: 0000098618-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALANCO ENVIRONMENTAL RESOURCES CORP CENTRAL INDEX KEY: 0000098618 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 860220694 STATE OF INCORPORATION: AZ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09347 FILM NUMBER: 97687159 BUSINESS ADDRESS: STREET 1: 15900 N 78TH ST STREET 2: SUITE 101 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 602-607-1010 MAIL ADDRESS: STREET 1: 15900 N 78TH ST STREET 2: SUITE 101 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 FORMER COMPANY: FORMER CONFORMED NAME: ALANCO RESOURCES CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ALANCO LTD DATE OF NAME CHANGE: 19901004 FORMER COMPANY: FORMER CONFORMED NAME: TOMBSTONE MINERAL RESERVES INC DATE OF NAME CHANGE: 19801106 10-K 1 Form 10-K Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1997 Commission file number 0-9347 ALANCO ENVIRONMENTAL RESOURCES CORPORATION ------------------------------------------ (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 ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number: (602) 607 1010 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE -------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ X ] State the aggregate market value of the voting stock held by non- affiliates of the registrant: $21,418,343 as of September 19, 1997 Indicate the number of shares outstanding of each of the issuer's classes of common stock: 35,346,527 as of September 19, 1997. Documents incorporated by reference: None 1 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Alanco Environmental Resources Corporation is an Arizona corporation which was organized in 1969. Unless otherwise noted, "Company" refers to Alanco Environmental Resources Corporation and its wholly-owned subsidiaries. The Company's operations, primarily through subsidiaries, are diversified and include: (i) air pollution control product manufacturing, technology design and marketing; (ii) industrial and agricultural equipment manufacturing, technology design and marketing; (iii) restaurant equipment/food marketing and distribution; and (iv) mineral property ownership. RECENT BUSINESS DEVELOPMENTS Fry Guy Update. The Company's Fry Guy subsidiary has shown significant growth. In December 1996, the Company completed the initial nationwide roll- out of its Integrated Finger Food Marketing ("IFFM") program, featuring the Company's private label SGT. FRY food menu, in 1,150 Wal-Mart stores. By fiscal year end, the Wal-Mart penetration had increased to 1,300 locations. More than half of the new locations added after the initial roll-out represent conversion of stores with other national branded food programs to Wal-Mart's Radio Grill, which features the Fry Guy program and SGT. FRY foods. The Company expects to add additional Wal-Mart locations during the current fiscal year. Over the course of the fiscal year, the menu items have expanded to 17 items including French fries, chicken nuggets, chicken strips, onion rings, French toast, cheese sticks and jalapeno peppers. In December 1996, the Company also announced an agreement with Salubre Foods International, Inc., based in Cincinnati, Ohio, to take the Fry Guy program to the independent retail market through Salubre's network of institutional and independent distributors. After a slow start-up, the Salubre program began to grow in March 1997. Salubre has signed participation agreements with approximately 26 independent distributors, each of which is placing the program with individual retail outlets. Management believes the Salubre program will accelerate as additional distributors are added. Fry Guy is now serving the Mann Theatre group of Los Angeles. Mann operates 65 movie theatres in California, Oregon and Colorado. The fryers are currently installed in 3 theatres in the Denver area and 11 theatres in Los Angeles and Orange Counties. The roll-out continues at this time. The Company also reached an agreement in December 1996 with Shantou Sez Jian Machine and Electronics Co., Ltd. ("Jian"), providing Jian with exclusive marketing rights to Fry Guy's SGT. FRY foods in the People's Republic of China for five years in conjunction with Jian's proprietary Chinese-patented deep frying machines. As of fiscal year end, Jian's food orders have been limited to sample orders and test products. 2 CDSI Update. Basic testing of the Charged Dry Sorbent Injection (CDSI) system to measure the electric charge on inert sorbent materials, such as lime, was completed in March 1997 with satisfactory results. The results showed that lime could be charged. A design study and testing of the old CDSI units has resulted in the development of a new prototype CDSI system. The new system includes a new three prong charging chamber as opposed to the older single prong unit. Laboratory tests of the new charging chamber show it to have three to five times the charging capacity of the older units. Also, a new automated power supply has been designed to maximize the charging chamber's potential. In addition, the basic pneumatic hardware for the unit has been refined into a superior product. The old units previously sold in China could only pneumatically inject sorbent into a stack at about 610 pounds per hour, thus requiring multiple units for even small outputs by industry standards. The new unit will charge over three times the sorbent as did its predecessor. Finally, the new unit has a new electronics package designed to be totally automatic, leaving only on and off controls for the operator. The prototype CDSI system is nearing assembly completion at Alanco's factory in Falls City, Nebraska. An owner's manual to be furnished with each machine is also being developed. The owner's manual discusses the theory of operation, compares CDSI to other dry scrubbing systems, contains detailed operating and maintenance instructions, and includes comprehensive parts lists for all components in the system. Presently, Alanco is seeking an actual user location of a boiler system in which the prototype CDSI can be installed and certified according to the Environmental Protection Agency ("EPA") for use in the United States. The Company also reports progress in its environmental operations in China. The Company's wholly owned Chinese incorporated subsidiary, Alanco Environmental Technology (Beijing) Co., Ltd., reached an agreement at the end of the fiscal year with Guangzhou Paper Ltd., in Guangzhou Province, China, to sell the paper mill eight CDSI industrial air pollution control systems. The installation schedule on the $1,050,000 contract calls for completion at the end of February 1998. Subsequent to the fiscal year end, the Company received a $120,000 deposit on the contract. Guangzhou Paper is China's largest production paper mill and one of China's 500 largest business enterprises. Management believes the Guangzhou agreement represents acceptance of the CDSI system's performance at the highest level of Chinese industry, and expects ongoing negotiations in China to result in subsequent agreements. The Gaungzhou Paper contract represents Alanco's third CDSI installation in China. In April the Company announced receipt of compliance approval for its CDSI system from Hangzhou Iron and Steel Company, the largest steel producing factory in China's Zheijiang Province. In January Alanco announced that it had received a Certificate of Final Acceptance for the CDSI system installed in the Dezhou Thermal Power Plant in China. That certification was issued after the Shandong Province EPA Monitoring Center completed over a year of tests of emissions from the CDSI system and found the system met China's 3 national emissions standards. The Company has agreed to sell Hangzhou Iron and Steel and Dezhou Thermal additional CDSI systems. Manufacturing Update. In April the Company announced its wholly owned subsidiary, Alanco Environmental Manufacturing Incorporated (AEMI), had been awarded a major dust control contract for the world's largest fiberboard plant, currently under construction in Eldorado, Arkansas. In a contract valued in excess of $600,000, Alanco will provide the Del- Tin Fiber, LLC, Medium Density Fiberboard Plant with 13 state of the art low pressure cartridge filters for capturing wood dust in the processing plant. The Alanco filters will process and clean approximately 436,000 cubic feet of air per minute. Del-Tin is a joint venture between Deltic Timber Corporation and Temple Inland Forest Products Corporation. The Del-Tin joint venture will have an annual capacity of 150 million square feet of medium density fiberboard, and will begin production in early 1998. AEMI, located in Falls City, Nebraska, designs and manufactures industrial air pollution control filters for nuisance or hazardous dusts and associated peripheral equipment, as well as agricultural aeration and drying equipment and systems, and pneumatic conveying packages and systems to handle bulk commodities. The Company also offers custom design and fabrication of specialized equipment. Another key AEMI development is the company`s new E-86 cartridge dust control filter, for which a patent is pending. When patented, management expects sales of the new cartridge filter to provide significant revenues. Insurance Update. As of June 30, 1997, the Company discontinued the operations of its insurance claims adjusting subsidiary, Unique Systems, Inc., d/b/a National Affiliated Adjustment Company. The decision to discontinue these operations was based upon the subsidiary's losses and Management's plans to reduce the Company's overhead and focus upon its Fry Guy and air pollution control operations. Mining Update. During the fiscal year just ended, the contingent sale to Kennecott Copper of 56 mining claims, located in the Tombstone Mining District, was terminated. In addition, the Company, in complying with new accounting standards relating to asset impairment, has reduced the carrying value of its mining properties by $2,593,000. Refer to Note 6 of the Consolidated Financial Statements for further discussion. DESCRIPTION OF BUSINESS Air Pollution Control Segment The Company's principal air pollution control technology is the CDSI system. The Company acquired the rights to this technology and others in 1989 and has spent the past several years in engineering and testing. A new production model of the CDSI is now available to the market. The new CDSI has improved electronics and new components which will make it more effective and reliable than previous units. 4 The CDSI system is a patented process that utilizes an electrostatically charged sorbent to remove noxious gases, such as sulfur dioxide, from a hot exhaust gas stream from a stationary air pollution source, such as a factory. The electrostatic charge causes the sorbent particles to be more dispersed and to more readily react with a pollutant molecule in the gas stream. The solid product of this reaction is then later removed from the gas stream. The CDSI system has a significantly lower cost relative to competing technologies with similar levels of efficiency. The CDSI system injects a chemical agent called sorbent, such as lime, sodium carbonate, or ammonia, into the polluted gas stream generated by industrial activity. Sorbents are selected based on the chemical nature of the gas stream and the pollutant to be removed. As the sorbent is injected, it is passed through a corona discharge which imparts an electrostatic charge to the sorbent particles. As a result of this charge, the sorbent particles repel one another, thus providing rapid dispersal of the sorbent into the polluted gas stream. This greater dispersion results in a higher sorbent surface area being exposed to the pollutants in the gas stream for reaction. Once the sorbent has reacted with the pollutant, the resulting larger particles are filtered or otherwise removed from the gas stream. The CDSI system has significant advantages over competing technologies for remediating polluted gas streams. The most common of these competing technologies are wet scrubbers. Wet scrubbers spray a mixture of water and limestone into the polluted gas stream which reacts primarily with sulfur dioxide to produce a sludge composed of gypsum, limestone, and polluted water. This sludge must be disposed of and the water treated before reuse or release. Wet scrubbers are very expensive to build and have very high operating costs. They are subject to corrosion and frequent breakdown. The CDSI system is a dry process making collection and disposal of reaction products a much less costly and simpler procedure. Another significant advantage of the CDSI system is its ability to operate at temperatures above 2000 degrees Fahrenheit. Because many chemical reactions with sorbents occur more rapidly at these high temperatures, CDSI equipment can be used effectively where wet scrubbers cannot. The CDSI system is easily adapted to a wide variety of industrial applications and requires little maintenance. The Company believes the system is particularly well suited to use in power plants, mining and smelting facilities, incinerators, steel mills, and roaster/dryer facilities, such as hot mix asphalt plants. There are thousands of these facilities in North America alone. Many of these plants are experiencing problems complying with U.S. Environmental Protection Agency standards, and the CDSI presents a cost effective means of achieving compliance. The Company believes that the CDSI system has substantial market potential in this application. The proprietary portions of the CDSI system are fabricated and assembled by the Company. The Company's wholly-owned subsidiary, Alanco Environmental Manufacturing Inc., is capable of producing all the necessary ancillary equipment for a CDSI installation within the United States. Non-proprietary, 5 ancillary equipment required for an installation outside the United States will be contracted to local fabricators. Marketing. The Company's marketing strategy for the CDSI system is to continue its marketing efforts in the People's Republic of China through Alanco Beijing and initiate a marketing program in the United States, South America and Eastern Europe through contract marketing agreements with unrelated third parties. In the United States, the Company sees the highest demand for its CDSI products in the roaster/dryer, power generating, paper mills, steam boiler, and the metals refining and production industries. In the United States, the Company is contacting companies identified by the EPA as present or possibly future violators of SO2 emission standards and proposing use of the CDSI system on a test basis. Once a test site is obtained, the Company believes that the CDSI system should meet upcoming 1999 emission standards and that the CDSI system will be EPA approved for use in the United States. Once EPA approval is obtained, the Company intends to market the CDSI systems through third party marketing contracts wherein the contractor will arrange and provide all required engineering and construction services. Such third party marketing contractors will also be used in South America and Eastern Europe. The Company believes that China represents the largest single potential market for CDSI technology. There are currently more than 450,000 industrial coal-fired boilers in China, a country which consumes more coal than any other country in the world. Chinese central authorities are expected to release new regulations by year end regarding sulfur dioxide emission rates by industrial concerns. Officials of the Chinese environmental regulations authority have stated they believe the Company's CDSI technology is the best sulfur removing technology for the small to medium size boilers in China, estimated to number in excess of 300,000. The Company's interests in China are managed by its subsidiary, Alanco Environmental Technology (Beijing) Co., Ltd., a Chinese company ("Alanco Beijing"). The Company also has a marketing agreement with the China National Environment Protection Company, one of the largest environmental companies in China. Alanco Beijing currently has engineering and marketing staff in place, as well as people trained to represent its technology in China. In October, 1995, test results from the Dezhou Heat & Power Plant exceeded Chinese compliance standards for sulfur dioxide removal with a removal efficiency for sulfur dioxide of 69.5%. These results were also achieved using a much lower ratio of sorbent to sulfur than employed by traditional dry sorbent injection methods, which results in a significant cost savings. This facility is now certified as operating in compliance with Chinese standards. After completion of a one year testing period, Alanco Beijing permanently installed one CDSI unit at the Dezhou Heat & Power Plant. Dezhou Heat and Power is expected to purchase more units. The Company's CDSI system was one of five environmental technologies listed in Premier Li's "Agenda 21" plan for 6 cleaning up China's environment. The Agenda 21 listing is expected to result in additional sales of CDSI systems. Hangzhou purchased one CDSI unit with ancillary equipment for installation in October, 1996. The total price for this installation is $155,000, and the Company has received 80% of the purchase price of the contract to date with the final 20% to be paid in January 1998. Now that testing and acceptance of the initial installation is complete, Hangzhou has indicated that it will consider purchasing four additional systems, two of which will be designed for new boilers. Eight CDSI units have recently been sold to Guangzhou Paper Ltd., China's largest paper mill. Raw Materials. The Company has numerous sources for materials and parts used to manufacture the CDSI equipment. It does not foresee any difficulty in the availability of needed materials nor any substantial increase in the price of materials. Patents. The Company owns the following United States patents: U.S. Patent Application entitled "Apparatus For Removing Particulate Matter And Gases From A Polluted Gas Stream" issued as U.S. Patent No. 5,308,590 on May 3, 1994. This patent is also filed in China. U.S. Patent Application entitled "Method For Removing Particulate Matter And Gases From A Polluted Gas Stream" issued as U.S. Patent No. 5,332,562 on July 26, 1994. This patent is also filed in China. U.S. Patent Application entitled "Hopper System And Electrostatic Gun For Injection Of An Electrostatically Charged Sorbent Into A Polluted Gas Stream" issued as U.S. Patent No. 5,312,598 on May 17, 1994. In addition, this patent application has been filed in Argentina, Australia, Brazil, Canada, Chile, China, Europe, India, Japan, Korea, Mexico, Pakistan, Turkey and Venezuela. U.S. Patent Application entitled "Improved Electrostatic Gun For Injection Of An Electrostatically Charged Sorbent Into A Polluted Gas Stream" issued as U.S. Patent No. 5,591,412 on January 7, 1997. U.S. Patent Application entitled "Purging Electrostatic Gun For Injection Of A Charged Dry Sorbent Injection And Control System For The Remediation Of Pollutants In A Gas Stream" issued as U.S. Patent No. 5,648,049 on July 15, 1997. U.S. Patent Application entitled "Industrial Dust Collector And Method For Its Use" filed April 24, 1997, which is currently pending. The Company owns United States Patent No. 4,220,478 titled "Method For Removing Particulate Matter From A Gas Stream And A Method for Producing A Product Using The Removed Particulate Matter" and United States Patent No. 4,290,786 titled "Apparatus For Removing Particulate Matter From A Gas Stream". These are old patents which began to expire in 1997 and deal primarily with the 7 Environetics Dry Scrubber System ("EDSS") or media bed filter system for the capture of particulate matter. The Company believes that the rights to and/or ownership of these patents and patent applications are crucial to its future success. The Company has filed for additional U.S. and International patents and will continue to do so as developments warrant. Competitive Conditions. In the area of air pollution technology, the Company's competitors include: Wheelabrator; Pure Air; General Electric; Westinghouse; and Mitsubishi Corporation. The Company believes its proprietary technology to be superior to that of its competitors, because of the small space requirements and low maintenance, capital and operating costs associated with the CDSI unit. Two government-funded entities have been working in concert for nearly ten years to reduce sulfur dioxide from coal-fire plants. The technology which is currently being developed by Air and Energy Engineering Laboratory ("AEEL") and Energy and Environmental Research Corporation ("EERC") has been funded by the Department of Energy and may pose a competitive threat to the Company's CDSI system. EERC has developed a "gas re-burning sorbent injection" process for remediation of nitrogen oxide and sulfur dioxides, which can be retrofitted to existing coal-fire combustion equipment at low cost. However, its sulfur dioxide removal rate is only 50% to 60%. AEEL's sulfur dioxide removal technology is called ADVACATE. Reportedly, the process developed by AEEL is able to remove 90% of the sulfur dioxide produced during coal combustion. Its process involves injection of calcium silicant sorbent into the exhaust duct downstream of a boiler, which removes sulfur dioxide without any need for a scrubbing vessel. The technique was successfully tested as early as 1991, and AEEL claims that its technology will cost only half that of conventional wet scrubbers, measured both in terms of capital outlay and operating costs. The above process does not preclude the use of CDSI equipment to inject the advacate sorbent. Research and Development Activities. The Company continues to take every opportunity to enhance the performance capability of its systems through innovative configurations and special chemical sorbents. Recent research and development has demonstrated that the CDSI unit does charge lime (SO2 sorbent), and the theories are in fact correct. This year the CDSI unit has been redesigned into an industrial quality unit capable of the performance and reliability to perform in the most severe industrial environments. Employees. As of September 1, 1997, the Company had six individuals whose principal responsibilities were in this business segment. Air Pollution Control and Agricultural Aeration Equipment Manufacturing Segment Alanco Environmental Manufacturing, Inc., ("AEMI") is the Company's wholly-owned subsidiary which operates from its facility in Falls City, Nebraska. AEMI manufactures aeration equipment for the agricultural industry as well as baghouses and cyclones for industrial applications. The product lines are: Reverse Air Filters, Pulse Jet Filters, Cyclonic Collectors, Centrifugal Fans, Pneumatic Conveyors and Ducting. The manufacturing facility can also perform job shop and original equipment manufacturing for other entities. AEMI, as indicated above, also manufactures the CDSI system equipment for the parent company. AEMI accounted for 53% of consolidated revenues for the year ended June 30, 1997. 8 Marketing. AEMI uses a network of commissioned sales representatives located across the United States as its primary marketing and sales force. Personnel at Falls City conduct direct marketing and sales activities, including telephone sales. AEMI also maintains a small office for representative support in Kansas City, MO. Raw Materials. The principal raw materials used in manufacturing are sheet metal and plate steel, welding supplies, and various kinds of electrical components, none of which are uncommon to this industry. The Company currently uses several suppliers. Most of the suppliers are located in the Midwest, and none are relied upon as the sole source. In this regard, the Company believes that it has and should maintain an adequate supply of raw materials for the future. Patents. AEMI has developed a new Cartridge Filter called the "E-86". A patent has been applied for and is pending final approval. AEMI has developed this filter in conjunction with the passage of the new Clean Air Act of 1990. This filter falls in line with the proposed Pm2.5 ruling that will replace Pm10. Seasonality of Business. The Company's manufactured products are marketed to two separate industries. The agricultural segment is highly seasonal. The demand for agricultural products, such as fans, ducting and fan/heater assemblies, begins to heighten around April and May and normally tapers off around October and November. The industrial products are produced year round. Working Capital Practices. At year end, the manufacturing segment had a current ratio (current assets divided by current liabilities) of approximately 3.5 to 1. A strong current position is required to offset the seasonality of the business. In the past this segment was financed through the parent company. However, during the past two years, outside financing was not required. Based upon past performance, AEMI should generate needed capital internally. Dependence Upon Key Customers. The Company has recorded sales to over 500 different customers during the year ended June 30, 1997. Of these, no one customer accounted for 10% of consolidated revenues generated during the period. Continuation of customer base depends upon pricing, quality and availability. Backlog Orders. The Company had orders for approximately $1,101,000 as of September 12, 1997. The Company believes that all of this will be fulfilled in the coming fiscal year and that no material change should occur. The Company had a backlog of $250,000 for the comparable period last year. 9 Competitive Conditions. AEMI categorizes its competition into two groups. The aeration equipment group, which is seasonal, has three major manufacturers to compete against. On a competitive note, AEMI is the leader and produces equipment for the upper end customer. The second category is industrial air pollution equipment. AEMI is new to this market but has procured significant orders in the market, thereby demonstrating its sales, engineering and production abilities. Employees. As of September 1, 1997, the manufacturing segment employed a total of 45 people. Restaurant Equipment/Food Marketing and Distribution Segment Fry Guy Inc. ("Fry Guy") has developed an Integrated Finger Food Marketing ("IFFM") program whereby it supplies a deep fry machine to customers who are required to utilize foods of an affiliated distributor. The Company receives income for all foods sold to the customer utilizing the Company's deep fryer. In general, the Company has targeted qualified retail businesses offering or desiring to offer hot foods. Fry Guy created the IFFM program in conjunction with prominent food suppliers as strategic partners with whom it has agreements. These suppliers include Anchor Foods, Zartic Inc., Cargill, and the Lamb-Weston division of Conagra. Each strategic partner provides an essential ingredient for the IFFM program. Lamb-Weston, the world's largest supplier of food service French fries, provides the potato products, mainly French fries. Zartic Inc. provides the meat products including chicken nuggets and strips. Anchor Foods provides onion rings, French toast, cheese sticks and cheese stuffed jalapeno peppers. Cargill is the supplier of the cooking oil. The fryer, which operates with an air filtering system, eliminates the need for a venting system, which is necessary with conventional restaurant deep fryers. The machine operates, with an automated lowering and raising basket mechanism, on 110 volt electricity as compared to the 220 volts usually required by conventional deep fryers. The machines weigh only 70 pounds and can be operated from a countertop. A one gallon or two gallon fryer are available. As part of the continued growth of its IFFM program, the Company is now servicing 1,300 Wal-Mart stores and has just been awarded 85 Super Centers, which were not part of the original program. The IFFM program has replaced McDonald's, Taco Bell, Wendy's, A&W Root Beer and Little Caesar's Pizza in a number of Wal-Mart locations. Salubre Foods International, Inc., Fry Guy's master distributor, has thus far developed approximately 26 working distributors who are promoting the IFFM program. Fry Guy is now serving the Mann Theatre group of Los Angeles. Mann operates 65 movie theatres in California, Oregon and Colorado. The fryers are currently installed in 3 theatres in the Denver area and 11 theatres in Los Angeles and Orange Counties. The roll-out continues at this time. Marketing. In directing its marketing effort, Fry Guy, through Salubre, has targeted small food outlets and similar facilities in convenience stores, discount/department stores, shopping malls, bars and other premises with small snack bar facilities that previously were unable to offer hot food items. Fry Guy provides these facilities with the Fry Guy fryer without charge and receives payment from the food purchased by the distributor. As part of this Integrated Finger Food Marketing program, Fry Guy also provides warranty service and repairs to the fryer, training for the fryer operators, promotional 10 and point of sale materials and a program for the development and introduction of new food products. Under its agreement with Wal-Mart, Fry Guy will place a total of 1,750 fryers in Wal-Mart snack bars nationally. As of September 1, 1997, 1,300 of these fryers have been installed. The process of delivering fryers to the balance of the Wal-Mart snack bars is under way and will be completed by year end. Working Capital Practices. Fry Guy will continue its objective of placing frying machines in profitable locations and will continue to develop its distribution system. Fry Guy intends to use internally generated cash flow and available lease financing to fulfill its capital requirements. Dependence Upon Key Customers. The focus of the Company's restaurant equipment/food distribution segment has been almost entirely devoted to its relationship with Wal-Mart. Successful operations of Fry Guy are dependent upon the Company's ability to meet its obligations under its agreement with Wal-Mart. Although the Company has one year remaining on a two year commitment with Wal-Mart, a decision by Wal-Mart to cease or reduce its commitment with the Company's IFFM program would have a material adverse affect on its business. Negotiations are under way for a new contract with Wal-Mart. Backlog Orders. As of September 1, 1997, the Company has an order backlog for the placement of fryers of approximately 150. Competitive Conditions. Fry Guy is aware of only one direct competitor which actively markets a ventless small capacity deep fryer, but does not market food products. Numerous competitors offer equipment which requires venting to the outside. Also, they are unaware of any competitor providing both the sales and distribution of a finger food program. Employees. As of September 1, 1997, Fry Guy has 15 employees. Insurance Claims Adjusting Segment As of June 30, 1997, the Company chose to discontinue its insurance claims adjusting segment. The Company acquired National Affiliated Adjustment Company ("NAAC"), an independent claims loss adjustment company based in Scottsdale, Arizona, in 1995. Prior to its acquisition, NAAC and a predecessor had been in operation for more than 10 years and was one of the largest independent claims adjustment firms in Arizona. NAAC was operated by the Company's subsidiary, Unique Systems, Inc., doing business as National Affiliated Adjustment Company. NAAC was a processor of property, casualty, health insurance and workmen's compensation claims. It also provided automobile appraisals for a variety of insurance companies. NAAC's operating revenues for the year ended June 30, 1997, were $403,000 compared to $1,194,000 for the prior year. The decision to discontinue NAAC's operations was a result of several factors. NAAC ceased processing workmen's compensation claims during the 1996 fiscal year. The Company's efforts to replace the lost revenues proved unsuccessful, and NAAC has been unable to generate sufficient income to pay its expenses. Management determined that focusing the Company's resources and attention on the food service segment and the pollution control segment was in the Company's best interest. 11 Mining Segment The Company has classified its mineral properties as assets held for sale. It currently holds mining properties without any exploration or development activity. The Company has been informed by its consulting geologist that certain of the Company's mining properties lack economic feasibility, based on the extent of exploration to date. The geologist has, however, encouraged the Company to continue exploration efforts until a feasible ore body is proven or a decision is reached to abandon the property. The Company had previously recorded a contingent sale of 56 mining claims located in the Tombstone Mining District. This contingent sale was recorded as an installment sale contract and any profit was recorded pro-rata based upon the payments received. As of June 30, 1996, the Company has received payments of $55,000 of the total sale price of $1,180,000. The installment due on or about July 15, 1997 was not received and the contingent sale has been terminated. The Company is actively seeking a sale or joint venture agreement for operation of the mining properties. As of fiscal year end, there are no significant negotiations in process. Based upon the time to complete due diligence by a potential purchaser and the costs involved from their eventual disposition, the Company has determined a write-down of $2,593,000 is required as of June 30, 1997. This write-down is consistent with the application of SFAS (Statement of Financial Accounting Standards) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Environmental Disclosure. There are numerous federal and state laws and regulations relating to environmental protection which have direct application to mining, milling and mineralized material processing operations. The more significant of these laws deal with mined land reclamation and waste water discharge from such operations. The principal mining operations, exploration and development of mining properties by the Company has been accomplished underground with a minimum of surface disturbance. Two properties which would require limited environmental and/or surface reclamation are the C.O.D. Mine and the Tombstone Metallurgical Facility. The Tombstone Metallurgical Facility is located on federal lands which are administered by the Bureau of Land Management ("BLM"). The facility was constructed in the 1970's when no permitting was required from the BLM. Since that time, the facility has operated intermittently, and the Company has complied with all regulations as they existed. At present, the facility remains idle. The other property is the C.O.D. Mine, which is also on BLM land and is also presently idle. For a more detailed description of the mining properties, see Item 2. Properties below. Employees. None. ITEM 2. PROPERTIES The Company's corporate office is located in a 4,527 square foot leased facility in Scottsdale, Arizona. The Company moved to this facility in January 1997 in order to reduce its lease expense and consolidate its facilities. Fry Guy corporate operations, Air Pollution Control Services and Mining operations are headquartered at the corporate office. A previous location of 3,883 square feet is being subleased to an unrelated party. 12 Fry Guy is currently located in a 4,800 square foot leased facility in Scottsdale, Arizona. The Restaurant Equipment Marketing Segment also leases 770 square feet of warehouse space and 2,708 square feet of office space in Las Vegas, Nevada. Two previous locations of 3,472 and 1,609 square feet are being subleased to unrelated parties. NAAC, which discontinued operations as of June 30, 1997, currently leases 946 square feet of office space in Las Vegas, Nevada. Other office space of 1,348 square feet, located in Tucson, Arizona, is being subleased to an unrelated party. AEMI's operating facility is located at Falls City, Nebraska. This facility is approximately 73,000 square feet under roof and is located on approximately 6.84 acres. The Company owns this facility. AEMI also leases a sales office in Kansas City, Missouri. This facility is approximately 297 square feet. Mining Properties At June 30, 1997, the Company owned mineral rights in four unpatented mineral mining and millsite properties in Arizona. The Company's mining properties include the Tombstone Metallurgical Facility and a mill on the site of the C.O.D. Mine. The following table sets forth the Company's major mineral land holdings for the fiscal years ended June 30, 1997 and 1996. MAJOR MINERAL LAND HOLDINGS AT JUNE 30, 1997 AND 1996 Mineral Property Location Acreage Ownership - ---------------- ----------------- ------- --------- C.O.D. Mine Mohave County, AZ 3,500 100% Mineral Mountain Pinal County, AZ 4,660 100% Cherry Creek Yavapai County, AZ 940 100% Tombstone/STC Claims Cochise County, AZ 9,140 100% 13 Mining/Milling Equipment Location Acreage Ownership - ------------------------ ----------------- ------- --------- C.O.D. Mine Mohave County, AZ 150 100% Tombstone Cochise County, AZ 75 100% The following tables set forth the current appraised value and the adjusted carrying value as of June 30, 1997 and 1996, respectively. MAJOR MINERAL HOLDINGS AT JUNE 30, 1997 Appraised Adjusted Mineral Property Value (1) Value (2) - ---------------- ------------- ------------ C.O.D. Mine $ 11,514,385 $ 5,539,328 Mineral Mountain 250,510 221,520 Cherry Creek 195,621 0 Tombstone/STC Claims 783,872 670,275 Mining/Milling Equipment - ------------------------ C.O.D. Mine Included Above 107,831 Tombstone Mill 205,687 296,702 ------------ ------------ Subtotal Mineral Property & Equipment $12,950,075 $ 6,835,656 Less: Carrying Value Reserve -- (2,592,656) ------------ ------------ Total Mineral Property & Equipment $12,950,075 $ 4,243,000 ============ ============ (1) The fair market value as determined by the appraisal completed for the fiscal year ended June 30, 1997. (2) The adjusted book value after giving consideration to any write-down in certain mineral property values and reflects the lower of historical cost or appraised value. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in several lawsuits. The Company believes that any financial exposure is adequately provided for in its financial statements and that these matters will not have a material adverse effect on the financial condition or results of operations or cash flows of the Company. However, the Company is a defendant in the following lawsuits: In April, 1995, the case of Sun Valley Products, Inc. v. Alanco Environmental Services, Inc., et. al was filed in the United States District Court, Southeastern Division, District of North Dakota. Sun Valley Products, Inc., produces roasted sunflower seeds and purchased a bag filter system from the George A. Rolfes Company (which later became Heartland Systems, Inc. ("Heartland") in 1992. In 1994, the Company purchased the assets of Heartland through AEMI. Installation and service of the bag filter system occurred before and after the time the Company purchased the business assets from Heartland. The complaint alleged breach of contract, breach of warranties, and negligence and seeks in excess of $50,000 in damages, though the plaintiff has not otherwise quantified its damages. The Company negotiated a settlement of this action in April, 1997. As stipulated by the principal terms of the settlement agreement, Alanco paid $40,000 of the total $220,000 paid by all defendants to Sun Valley and waived any damage claim against Sun Valley. 14 On June 21, 1996, the Company was served with a complaint entitled Loveit Baumgardner and Ping Zhang v. Alanco Environmental Resources Corporation, filed in Utah District Court, Salt Lake City, Utah. Ms. Baumgardner was a clerical employee of the Company. Mr. Ping was an employee of the Company whose services were rendered in the People's Republic of China. Ms. Baumgardner and Mr. Ping seek 28,000 and 30,000 shares of the Company's common stock, respectively, which they allege were promised to them by Kevin Jones, the former chief financial officer of the Company. The Company has denied all allegations contained in the Complaint. The case is currently in the discovery stage. The Company and the Plaintiffs have exchanged documents. The Company has requested depositions of the former officers and directors who the Plaintiffs allege granted the stock to the Plaintiffs. The Plaintiffs have been unable to produce these witnesses and their appearances cannot be compelled as the witnesses reside beyond the jurisdiction of the Utah court. Failure to produce these witnesses for depositions could result in the Plaintiffs being unable to present testimony at trial in support of their allegations. In April, 1996, the registrant's subsidiary, National Affiliated Adjustment Company, Katherine Meyer, then President of NAAC, and Norman Meyer, then President of the Company, were named as Defendants in a civil action filed by the U.S. Department of Labor in U.S. District Court, Nashville, Tennessee. The action also names the International Association of Entrepreneurs of America Benefit Trust, a self-insured employer's workers compensation trust, IAEA, Inc., Stockton Fuller & Co., Inc., and six other individual defendants. The action alleges NAAC received excessive compensation under the Employee Retirement Income Security Act of 1974 (ERISA) and as employees of NAAC, the Meyers benefited indirectly from their compensation. NAAC and its predecessor, Realistic Adjustment Company, served as the claims processing facility for the IAEA Trust. NAAC and the Meyers had no discretionary authority with respect to the Trust assets or decision making and deny any breach of fiduciary duty. The IAEA Trust has been placed into Receivership, and NAAC and the Meyers have fully cooperated with the Receiver and the Department of Labor. NAAC and the Meyers have filed an Answer to the Complaint denying all material allegations and intend to vigorously defend the action. In addition, the Company filed a Motion to Dismiss alleging that the Department of Labor had failed allege sufficient facts on which to base a claim against NAAC and the Meyers. The Court denied the motion to dismiss and ordered the Department of Labor to amend its complaint. The Department of Labor has amended its complaint and answers have been filed. Following completion of expert witness discovery, the Company intends to file a motion for summary judgement which states that even if the facts are as alleged by the Department of Labor, NAAC and the Meyers did not breach any duty nor violate ERISA. In July, 1997, the Company was served with a complaint and motion for a temporary restraining order filed by Harbinger Capital, L.P., in the Superior Court for the State of Arizona in and for the County of Maricopa. The complaint sought to compel the Company to hold a special shareholders meeting for the purpose of the election of a new Board of Directors. The Company responded to the complaint and motion stating that a special meeting was not necessary as the Company intended to hold its annual meeting for the purpose of electing Directors in November, 1997, this date being as soon as possible after the Company's annual report and audited financial statements could be completed and distributed to the shareholders. As a result of the hearing held on July 31, 1997, the Court ordered that the Company hold its annual meeting for the election of Directors on November 7, 1997, and provide certain shareholder information to Harbinger. The Company has complied with the court's order and 15 has called its annual meeting for November 7, 1997, to be held in Scottsdale, Arizona. In August 1997, the Company's Fry Guy subsidiary filed an action in the Superior Court for the State of Arizona, in and for the County of Maricopa against Terrence D. Montford in order to collect upon Mr. Montford's promissory notes to the Company in the principal amount of $48,186.10. Mr. Montford had served as Vice President of the Company's Fry Guy subsidiary from January 1996 until February 1997, when he was terminated for cause. The causes of Mr. Montford's termination included mis-use of Company credit cards, cash advances and expense accounts for personal benefit (acknowledged by Mr. Montford's promissory notes) and other incidents of dishonesty and breaches of loyalty to the Company. On September 25, 1997, Mr. Montford filed an answer admitting the promissory notes and asserting a counterclaim for breach of his employment contract alleging that his termination was without cause. The Company considers Mr. Montford's counterclaim to be without merit and intends to vigorously defend against it. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Shareholders during the fourth quarter of the fiscal year ended June 30, 1997. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (1) Market Information: Alanco's common stock is traded on the NASDAQ Small Cap Market under the symbol "ALAN". (2) High and Low Sale Prices: The following table sets forth high and low sale prices for each fiscal quarter for the last two fiscal years. Such quotations represent inter-dealer prices without retail mark-ups, mark-downs, or commissions and, accordingly, may not represent actual transactions. Fiscal 1997 Fiscal 1996 Quarter Ended High Low High Low ------------- --------------- --------------- September 30 2.50 1.12 2.62 1.75 December 31 2.28 1.00 2.62 1.81 March 31 2.12 1.06 4.93 1.90 June 30 1.31 0.75 4.00 2.00 (3) Security Holders: As of September 12, 1997, Alanco had approximately 1,938 holders of record of its Common Stock. This does not include beneficial owners holding shares in street name. (4) Dividend Plans: Alanco has paid no common stock cash dividends and has no current plans to do so. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the Company and its subsidiaries can be found in the following table. This information includes information for the Company and its subsidiaries on a consolidated basis and should be read in conjunction with the audited financial statements and accompanying notes. 17
SELECTED FINANCIAL DATA (Not covered by Report of Independent Certified Public Accountant) Fiscal Year Ended -------------------------------------------------------------------------------------- Selected Income Statement Data June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993 - --------------------------------- -------------- -------------- -------------- -------------- -------------- Operating Revenue 7,057,874 3,769,110 3,438,183 1,581,515 10,987 Net Loss - Continuing Operations (4,746,386) (3,528,353) (4,753,380) (3,839,964) (4,102,173) - Discontinued Operations (2,360,774) -- -- -- -- ============== ============== ============== ============== ============== Net Loss per share of common stock Continuing Operations (0.14) (0.11) (0.20) (0.21) (0.32) Discontinued Operations (0.07) (0.01) -- -- -- ============== ============== ============== ============== ============== Weighted average number of shares 34,320,608 31,782,296 23,839,969 18,253,730 12,974,995 -------------- -------------- -------------- -------------- -------------- Fiscal Year Ended -------------------------------------------------------------------------------------- Selected Balance Sheet Data June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993 - --------------------------------- -------------- -------------- -------------- -------------- -------------- Current Assets 3,083,517 3,685,510 3,104,491 4,283,308 20,208 Current Liabilities 2,000,625 737,626 980,390 852,184 632,937 -------------- -------------- -------------- -------------- -------------- Working Capital (deficit) 1,082,892 2,947,884 2,124,101 3,431,124 (612,729) ============== ============== ============== ============== ============== Total Assets 16,958,929 21,275,574 21,189,502 18,281,763 8,432,262 Long Term Debt/Capitalized Leases 1,136,242 372,020 344,129 -- -- Redeemable Preferred Stock -- 330,468 295,062 -- -- Common Stock and Other Shareholders' Equity 13,822,062 18,970,907 18,600,816 16,327,796 7,799,325 -------------- -------------- -------------- -------------- --------------
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources As of June 30, 1997, the Company's current assets exceeded current liabilities by $1,083,000 or a ratio of 1.5 to 1. This decrease from the prior year can be attributed largely to a reduction in inventory levels of $705,000 and an increase of $766,000 in current maturities of capitalized machine leases associated with the Fry Guy food program. Subsequent to fiscal year end, the Company secured a line of credit to provide additional working capital, if needed. Aside from lease obligations, the Company is relatively debt free. It does not see the need for further issuance of equity securities at this time. The Company is not anticipating any significant capital additions aside from the Fry Guy expansion, which will be funded through available leasing sources. As revenue from the food program increases, the Company will rely less upon outside funding to fulfill its requirements. During June 1997, the Company signed a $1,050,000 contract for the installation of pollution control equipment in China. This sale was finalized through the Company's wholly owned subsidiary, Alanco Environmental Technology Co., Ltd., which is incorporated in Beijing, China. The contract terms require deposits and progress payments during the construction period. Subsequent to year end, the Company received a $120,000 deposit on the above contract. Additional contracts are anticipated during the coming year. The Company discontinued operating its insurance adjustment business in favor of concentrating its efforts on the Fry Guy expansion and sales in the environmental equipment business segments. The shutdown of the insurance segment will result in significant savings in operating expenses and will help reduce the Company's overall cash requirements. The manufacturing business segment has generated internally the necessary working capital to finance its activities. It is projecting a profit and is not budgeting any significant capital needs. During the past fiscal year, this segment successfully developed a state of the art commercial dust filter that currently has a patent pending. Significant sales from this product line are anticipated during the year. Results of Operations Fiscal 1997 Compared to Fiscal 1996 Consolidated revenues for fiscal year 1997 increased 87% or $3,289,000 over fiscal year 1996. Effective June 30, 1997, the insurance business segment was shut down and all prior amounts have been restated for comparative purposes. The food service segment, Fry Guy Inc., accounted for 82% of the increase in revenue as the food program developed rapidly during 1997. Revenue in the manufacturing segment increased by 13% during the year. Sales of 19 pollution control equipment during 1997 were $155,000. There were no pollution equipment sales in the prior year. Consolidated selling, general and administrative expenses increased by $626,000 or 18% over the prior year. Sixty-nine percent of the increase was in the food service segment and reflects expenses associated with sales growth. The balance of the increase was in the manufacturing segment and reflects additional marketing efforts. Consolidated Loss from Operations, before other income and expenses, was a negative $1,650,000. This was an improvement over the prior year by $1,346,000. This gain can be directly attributed to the success of the Fry Guy good program which was not fully implemented during 1996. Included under other income and expenses is a $2,593,000 asset write-down of the Company's mining properties. This represents $0.08 per share of the loss reported from continuing operations of $0.14 per share. This is a book entry necessitated by generally accepted accounting principles and complying with SFAS121 relating to the impairment of assets. The write-down takes into account the cost of any sale and the time value of future cash flows. The Company has not given up any mining rights and is not anticipating further reductions. The Company is still seeking a joint venture or sale of the mining assets. A decision was made to close the insurance business segment as of June 30, 1997. This segment reported losses in both years and efforts to improve performance have not been successful. Management felt the closure would conserve cash and shift resources toward the remaining core businesses. The operating losses and write-off of the investment are reported under discontinued operations. All anticipated expenses associated with the closure have been accrued in the 1997 statements. Cash flow from continuing operating activities for current fiscal year end was a negative $1,233,000. This is an improvement of $1,573,000 over the prior comparable period. Management expects this trend to continue in the future. The Company reported a loss per share from continuing operations of $0.14 for 1997. Eliminating the write-down of the mining properties of $0.08, results in a $0.06 per share loss compared to a loss of $0.10 per share for fiscal year 1996. Fiscal 1996 Compared to Fiscal 1995 Consolidated revenues and expenses for fiscal years 1996 and 1995 have been restated to reflect the shutdown of the insurance segment effective June 30, 1997. After restatement, the 1996 consolidated revenues increased by 10% over 1995. The manufacturing revenues, which increased 8% from the prior period, accounted for 88% of consolidated revenues for fiscal year 1996. The food distribution segment, which increased from $26,000 to $463,000, made up the balance of the revenues. 20 During 1996, 61% of food service revenue was generated from the sale of equipment. The Company is currently retaining ownership of the equipment, ultimately leading to a significant increase in gross profit. The Company has an agreement in place for the sale of pollution control equipment which will not be installed or revenue recognized until after fiscal year end. See Note 15 of the Consolidated Financial Statements for additional segment information. For the year ended June 30, 1996, the restated consolidated loss from continuing operations was $3,205,000 compared to a loss of $4,753,000 in the prior year. Fiscal year 1995 included a write down of assets of $1,743,000. Loss from operations increased by $506,000 over the prior year. Included in this increase is $262,000 due to higher depreciation and amortization of goodwill expense. Consolidated selling, general and administrative expenses increased by $808,000. The food service segment, reporting for a full fiscal year, represented $489,000 or 61% of the increase. The manufacturing segment represented 18% of the increase. During 1996, the Company increased its marketing efforts especially in the food service and pollution control equipment segments, established a shareholder relations department and developed an information retrieval system for Fry Guy Inc. Product and Environmental Contingencies The Company is not aware of any material product or environmental liabilities. Also refer to the environmental disclosure section of the mining business segment of Item 1. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Consolidated Financial Statements. 21 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Alanco Environmental Resources Corporation We have audited the accompanying consolidated balance sheets of Alanco Environmental Resources Corporation (formerly known as Alanco Resources Corporation) and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alanco Environmental Resources Corporation and subsidiaries as of June 30, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company has incurred operating losses and has had negative cash flows from operations for the last three years. These factors, among others, as discussed in Note 1 to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/SINGER LEWAK GREENBAUM & GOLDSTEIN LLP SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California August 15, 1997 F - 1 BILLIE J. ALLRED CERTIFIED PUBLIC ACCOUNTANT Suite J-1 4625 South Ash Avenue Tempe, Arizona 85282 Tel. (602) 820-2092 Fax (602) 820-4584 INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders Alanco Environmental Resources Corporation I have audited the accompanying consolidated statements of operations, shareholders' equity and cash flows of Alanco Environmental Resources Corporation (formerly known as Alanco Resources Corporation) for the year ended June 30, 1995. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the consolidated financial statements referred to above, present fairly, in all material respects the consolidated results of operations and cash flows of Alanco Environmental Resources Corporation and subsidiaries for the year ended June 30, 1995, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the consolidated financial statements, the Company has incurred operating losses and has had negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Billie J. Allred BILLIE J. ALLRED CPA Tempe, Arizona September 28, 1995 F - 2 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of June 30, - ------------------------------------------------------------------------------- ASSETS 1997 1996 ------------ ----------- Current assets Cash $ 526,851 $ 552,010 Accounts receivable, net of allowance for doubtful accounts of $27,765 and $11,000, respectively 1,169,290 565,120 Notes receivable, current portion (Note 3) 586,739 1,274,647 Inventories (Note 4) 527,479 1,232,705 Prepaid expenses and other current assets 273,158 61,028 ------------ ----------- Total current assets 3,083,517 3,685,510 Notes receivable, long-term portion (Note 3) 223,733 - Property, plant, and equipment, net (Notes 5 and 7) 5,049,080 3,196,584 Costs in excess of book value on acquisition of wholly-owned subsidiaries, net of accumulated amortization of $681,814 and $529,066, respectively 3,967,791 4,287,969 Intangible assets, net of accumulated amortization of $129,294 and $108,119, respectively 175,155 188,808 Assets held for sale (Note 6) 4,243,000 6,855,063 Other assets 216,653 1,272,240 Net assets of discontinued operations (Note 2) - 1,789,400 ------------ ----------- Total assets $ 16,958,929 $21,275,574 ============ =========== The accompanying notes are an integral part of these financial statements. F - 3 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) As of June 30, - ------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 ------------ ------------ Current liabilities Capital lease obligations, current portion (Note 7)$ 772,419 $ 124,571 Notes payable, current portion (Note 8) 117,965 - Accounts payable and accrued expenses (Note 9) 882,920 613,055 Net liabilities of discontinued operations (Note 2) 227,321 - ------------ ------------ Total current liabilities 2,000,625 737,626 Capital lease obligations, long-term (Note 7) 1,021,843 372,020 Notes payable, long-term (Note 8) 114,399 - Unrealized installment sales - 864,553 ------------ ------------ Total liabilities 3,136,867 1,974,199 Commitments and contingencies (Notes 7 and 14) Redeemable Preferred Stock (Note 10) - 330,468 Shareholders' equity (Note 11) Preferred Stock, Class B, cumulative voting 20,000,000 shares authorized none issued Common Stock, no par value 100,000,000 shares authorized 35,346,527 and 33,209,544 shares issued and outstanding 53,742,005 51,783,690 Accumulated deficit (39,919,943) (32,812,783) ------------ ------------ Total shareholders' equity 13,822,062 18,970,907 ------------ ------------ Total liabilities and shareholders' equity $ 16,958,929 $ 21,275,574 ============ ============ The accompanying notes are an integral part of these financial statements. F - 4 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS As of June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 ----------- -------------- ------------ Net sales (Note 12) $7,057,874 $ 3,769,110 $ 3,438,183 ----------- -------------- ------------ Operating expenses Direct service and cost of goods sold 3,636,314 2,507,803 2,740,812 Selling, general, and administrative 4,138,811 3,512,650 2,731,060 Depreciation and amortization 932,567 744,466 455,791 ----------- -------------- ------------ Total operating expenses 8,707,692 6,764,919 5,927,663 ----------- -------------- ------------ Loss from operations (1,649,818) (2,995,809) (2,489,480) ----------- -------------- ------------ Other income (expense) Interest income 40,135 69,266 62,043 Interest expense (222,868) (101,763) (16,831) Write-down of assets (Note 6) (2,835,472) (162,772) (1,743,043) Loss on disposal of assets (78,363) (48,921) (616,543) Other, net - 34,551 50,474 ----------- -------------- ------------ Total other income (expense) (3,096,568) (209,639) (2,263,900) ----------- -------------- ------------ Loss before provision for income taxes (4,746,386) (3,205,448) (4,753,380) Provision for income taxes (Note 13) - - - ----------- -------------- ------------ Loss from continuing operations (4,746,386) (3,205,448) (4,753,380) ----------- -------------- ------------ Loss from operations of discontinued insurance adjusting subsidiary(Note 2) (2,046,256) (322,905) - Estimated loss on disposal of insurance adjusting subsidiary (Note 2) (314,518) - - ----------- -------------- ------------ Loss from discontinued operations (2,360,774) (322,905) - ----------- ------------- ------------ Net loss $(7,107,160) $ (3,528,353) $(4,753,380) ============ ============= ============ Net loss per share Loss from continuing operations $ (0.14) $ (0.10) $ (0.20) Loss from discontinued operations (0.07) (0.01) - ----------- ------------- ------------ Net loss per common share $ (0.21) $ (0.11) $ (0.20) =========== ============= ============ Weighted average common shares outstanding 34,320,608 31,782,296 23,839,969 =========== ============= ============ The accompanying notes are an integral part of these financial statements. F - 5 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended June 30, - -------------------------------------------------------------------------------
Common Stock Subscriptions Accumulated -------------------------- Shares Amount Receivable Deficit Total ----------- ------------ ------------ ------------- ------------ Balance, June 30, 1994 22,687,487 $40,958,847 $ (100,000) $(24,531,050) $16,327,797 Write-off of subscription receivable (100,000) 100,000 - Common stock issued for (Note 11) Cash 440,600 279,938 279,938 Satisfaction of debt 50,000 37,500 37,500 Services rendered 395,600 358,591 358,591 Acquisition of subsidiary in Restaurant equipment industry 4,600,000 4,600,000 4,600,000 Insurance adjusting industry 1,750,370 1,750,370 1,750,370 Net loss (4,753,380) (4,753,380) ----------- ------------ ------------ ------------- ------------ Balance, June 30, 1995 29,924,057 47,885,246 - (29,284,430) 18,600,816 Common stock issued for (Note 11) Cash 2,861,333 3,129,988 3,129,988 Stock option plans 384,500 704,935 704,935 Intangible assets 18,750 41,016 41,016 Services rendered 20,904 22,505 22,505 Net loss (3,528,353) (3,528,353) ----------- ------------ ------------ ------------- ------------ Balance, June 30, 1996 33,209,544 51,783,690 - (32,812,783) 18,970,907 Common stock issued for (Note 11) Cash 300,000 318,000 318,000 Conversion of convertible and redeemable preferred stock 1,769,768 1,569,021 1,569,021 Stock options and warrants 57,215 63,444 63,444 Legal settlement 10,000 7,850 7,850 Net loss (7,107,160) (7,107,160) ----------- ------------ ------------ ------------- ------------ Balance, June 30, 1997 35,346,527 $53,742,005 $ - $(39,919,943) $13,822,062 =========== ============ ============ ============= ============
The accompanying notes are an integral part of these financial statements. F - 6 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 ------------ ------------- ------------- Cash flows from operating activities Net loss from continuing operations $(4,746,386) $ (3,205,448) $ (4,753,380) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 932,567 744,466 455,791 Loss on disposition of assets 78,363 48,921 616,543 Write-down of assets 2,835,472 162,772 1,743,043 Stock issued for services rendered and expenses 7,850 59,465 358,591 Imputed interest on redeemable preferred stock 43,806 35,406 - (Increase) decrease in Accounts receivable (604,170) (174,570) (118,152) Inventories 231,062 (526,810) 95,063 Prepaid expenses and other current assets (212,130) 123,994 2,835 Other assets (69,413) 167,067 (59,644) Increase (decrease) in Accounts payable and accrued expenses 269,865 (136,988) 51,700 Unrealized installment sales - (104,552) - ------------ ------------- ------------- Net cash used in continuing operating activities (1,233,114) (2,806,277) (1,607,610) Net cash used in discontinued operating activities (356,588) (220,680) - ------------ ------------- ------------- Net cash used in operating activities (1,589,702) (3,026,957) (1,607,610) ------------ ------------- ------------- Cash flows from investing activities Advance for notes receivable (91,779) (770,387) (214,208) Collection of notes receivable 579,154 416,915 - Purchase of property, plant, and equipment (321,661) (262,126) (391,625) Proceeds from disposition of assets 12,391 22,365 623,954 Purchase of intangible assets (48,498) (50,566) (18,925) ------------ ------------- ------------- Net cash provided by (used in) continuing investing activities 129,607 (643,799) (804) Net cash provided by (used in) discontinued investing activities 12,535 (34,132) (110,982) ------------ ------------- ------------- Net cash provided by (used in) investing activities 142,142 (677,931) (111,786) ------------ ------------- -------------
The accompanying notes are an integral part of these financial statements. F - 7 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Cash flows from financing activities Repayments on notes payable, shareholders $ - $ (51,196) $ - Advances from borrowings 300,000 - 38,265 Repayments on borrowings (67,636) - - Repayments on capital lease obligations (386,154) (94,791) (24,299) Proceeds from the sale of stock 1,576,191 3,797,963 279,938 Other - - (13,995) ------------ ------------ ------------ Net cash provided by continuing investing activities 1,422,401 3,651,976 279,909 Net cash provided by discontinued investing activities - 108,493 - ------------ ------------ ------------ Net cash provided by financing activities 1,422,401 3,760,469 279,909 ------------ ------------ ------------ Net (decrease) increase in cash (25,159) 55,581 (1,439,487) Cash, beginning of year 552,010 496,429 1,935,916 ------------ ------------ ------------ Cash, end of year $ 526,851 $ 552,010 $ 496,429 ============ ============ ============
Supplemental schedule of non-cash investing and financing activities (See Notes 3, 7, and 11) The accompanying notes are an integral part of these financial statements. F - 8 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Line of Business --------------------------------- Alanco Environmental Resources Corporation and subsidiaries' (the "Company") business activities for the past several years have emphasized diversification. The Company has expended substantial time and resources on the development of its pollution control devices, the Environetics Dry Scrubber System ("EDDS") and the Charged Dry Sorbent Injection System ("CDSI"), and the acquisition of operating subsidiaries in three different business segments. These business segments include: i) manufacturing for the agricultural and dust control industry; acquisition was effective on January 1, 1994; ii) wholesale equipment supplier to the food service industry; acquisition was effective May 1, 1995; in 1997, the Company changed operations to food marketing and distribution; and iii) insurance adjusting, a service-oriented business segment; acquisition was effective May 1, 1995 and operations were discontinued on June 30, 1997 (see Note 2). Principles of Consolidation --------------------------- The accompanying consolidated financial statements include the accounts of Alanco Environmental Resources Corporation and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. Going Concern and Basis of Presentation --------------------------------------- The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which contemplate continuation of the Company as a going concern. As shown in the consolidated financial statements, the Company has incurred operating losses and has had negative cash flows from operations for the last three years. These factors raise substantial doubt about the Company's ability to continue as a going concern. In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to continue to raise capital and generate positive cash flows from operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence. F - 9 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Management plans to take the following steps that it believes will be sufficient to provide the Company with the ability to continue in existence: . The Company has secured financing which management believes will allow the expansion of its food service segment to full capability, and the Company intends to continue the current course which has proven to be profitable. Cash flows from this segment improved substantially during the last half of the year ended June 30, 1997. . The Company plans to obtain a line of credit for use during periods of cash fluctuations. . The Company has discontinued operations for the insurance adjusting segment which used operating cash during years ended June 30, 1997 and 1996. . In June 1997, the Company executed a $1,050,000 contract for the installation of CDSI equipment. This contract, to be completed during the next fiscal year, will enhance the Company's cash position. Also, the Company is in negotiations for additional contracts for the CDSI equipment to be installed during 1998. Estimates --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Fair Value of Financial Instruments ----------------------------------- The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of the Company's financial instruments including cash, accounts receivable, and accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The amounts shown for notes payable and capital lease obligations also approximate fair value because current interest rates and terms offered to the Company for similar notes and lease agreements are substantially the same. F - 10 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Property, Plant, and Equipment ------------------------------ Property, plant, and equipment, including amounts for capitalized leases, are stated at cost. Depreciation is computed using the straight-line method over the useful lives of the assets as follows: Buildings 32 years Machinery and equipment 5 to 7 years Furniture and office equipment 5 to 7 years Betterments, renewals, and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to assets retired are removed from the accounts, and the gain or loss on disposition is recognized in income. Mineral Properties and Related Assets (Assets Held For Sale) ------------------------------------------------------------ Mineral properties and related assets are carried at the lower of historical cost or appraised value. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company reviews its assets held for sale for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable (see Note 6). Costs in Excess of Book Value on Acquisition of Wholly-Owned Subsidiaries ------------------------------------------------------------------------- and Intangible Assets --------------------- The Company continually monitors its costs in excess of book value on acquisition of wholly-owned subsidiaries (which is amortized over 15 years) and its other intangible assets to determine whether any impairment of these assets has occurred. In making such determination with respect to costs in excess of book value on acquisition of wholly-owned subsidiaries, the Company evaluates the performance, on an undiscounted cash flow basis, of the underlying assets or group of assets which gave rise to such amounts. With respect to other intangibles, which include patents, the Company bases its determination on the performance, on an undiscounted basis, of the related products. Revenue Recognition ------------------- Substantially all revenues are recognized when finished products are shipped or services have been rendered with appropriate provision for uncollectible accounts. F - 11 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Advertising ----------- The Company follows the policy of charging the costs of advertising to expense as incurred. Concentrations of Credit Risks ------------------------------ The Company sells products (primarily in the United States and China) and extends credit based on an evaluation of the customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. Income Taxes ------------ The Company uses the liability method of accounting for income taxes pursuant to SFAS No. 109, "Accounting for Income Taxes." Net Loss Per Share ------------------ Net loss per share has been calculated based on net losses for the periods divided by the weighted average number of shares of common stock outstanding during the periods presented. Supplemental Cash Flow Information ---------------------------------- The Company paid no income taxes and interest of $184,662, $66,357, and $16,831 for the years ended June 30, 1997, 1996, and 1995, respectively. For the non-cash investing and financing activity, see Notes 2, 3, 7, and 11. Recently Issued Accounting Pronouncement ---------------------------------------- The Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which is effective for financial statements issued for periods ending after December 31, 1997. SFAS No. 128 requires public companies to present basic earnings per share and, if applicable, diluted earnings per share instead of primary and fully-diluted earnings per share. The Company does not believe that reporting earnings per share in accordance with SFAS No. 128 will be materially different from the earnings per share previously reported. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, _Disclosures about Segments of an Enterprise and Related Information,_ effective for fiscal years beginning after December 15, 1997. SFAS 131 requires a company to report certain information about its operating segments including factors used to identify the reportable segments and types of products and services from which each reportable segment derives its revenues. The Company does not anticipate any material change in the manner that it reports its segment information under this new pronouncement. F - 12 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 2 - DISPOSAL OF OPERATIONS As of June 30, 1997, the Company and its board of directors shut down its insurance adjusting operations. As a result, the insurance adjusting operations are accounted for as discontinued operations and, accordingly, its operations are reported in this manner for all periods presented. For 1996, all assets and liabilities of discontinued operations are presented as net assets of discontinued operations and for 1997, all assets and liabilities of discontinued operations are presented as net liabilities of discontinued operations in the consolidated balance sheets. Included in loss from discontinued operations are the insurance adjusting total revenues of approximately $403,000 and $1,194,000 and the net loss from operations of approximately $2,046,000 and $323,000 for the years ended June 30, 1997 and 1996, respectively. Included in the 1997 net loss from operations is a write-off of cost in excess of book value on acquisition of the wholly-owned subsidiary of $1,498,110. The Company estimates that the operations will incur approximately $266,000 in expenses during the shutdown period and will incur a loss approximately $48,000 for the disposal of the remaining assets. Given the Company's and discontinued operations' historical losses, there is no tax effect on the disposition of the operations. The following is a summary of net (liabilities) assets from discontinued operations: 1997 1996 ----------- ------------ Current assets $ 15,449 $ 155,867 Property, plant, and equipment 33,350 110,674 Other assets 10,251 1,594,996 Current liabilities (286,371) (72,137) ----------- ------------ Net (liabilities) assets from discontinued operations $ (227,321) $ 1,789,400 =========== ============ F - 13 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 3 - NOTES RECEIVABLE Notes receivable at June 30 consisted of the following: 1997 1996 ---------- ----------- Note receivable, six monthly installments of $75,000 with balance due December 31, 1995 (A) $ - $ 495,000 Notes receivable, quarterly interest payments at prime plus 2%, principal was due June 26, 1997 (B) 771,581 620,238 Notes receivable - balance was due March 1997 50,458 - Note receivable, 9.5% annum with $1,892 monthly payments of principal and interest, secured by first lien on the subject property (C) 225,000 - Notes receivable - trade 30,096 103,403 Notes receivable - other 57,985 95,006 ---------- ----------- 1,135,120 1,313,647 Less allowance for uncollectible accounts 324,648 39,000 ---------- ----------- 810,472 1,274,647 Less current portion 586,739 1,274,647 ---------- ----------- Long-term portion $ 223,733 $ - ========== =========== (A) During the year ended June 30, 1995, the Company sold 86% of its 70% interest in Phoenix Medical Management, Inc. ("PMM") to Amarante Financial S.A., an unrelated third party, for $870,000. The note receivable was collected during 1997. (B) As part of the Company's acquisition of its 70% interest in PMM's common stock, the Company agreed to indemnify certain unrelated third parties against losses on their continuing guarantees on leased facilities and equipment. As a result of these guarantees, the Company has loaned PMM $771,581 plus accrued interest. PMM's accounts receivable are collateral for this loan. Also, the Company's former President and CEO was the former CEO of PMM, and PMM's current President and CEO is a former officer and director of the Company. As of June 30, 1997, this note was in default. Also, subsequent to June 30, 1997, the Company has begun collection procedures for payment of this note. F - 14 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 3 - NOTES RECEIVABLE (Continued) (C) The Company sold a warehouse, accounted for as an asset held for sale in 1996, for $250,000 with a down payment of $25,000 and a note receivable of $225,000. The principal and accrued interest is due the later of the following: 1) May 1999, or 2) sixty days after the maker receives a letter from the Iowa Department of Natural Resources of a "no action" regarding an underground storage tank on the subject premises. NOTE 4 - INVENTORIES At June 30, inventories consisted of the following: 1997 1996 ---------- ----------- Purchased machine and parts $ 45,843 $ 532,746 Finished goods 192,985 229,231 Work-in-process 10,919 122,037 Raw material 277,732 348,691 ---------- ----------- Total $ 527,479 $ 1,232,705 ========== =========== NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT At June 30, property, plant, and equipment consisted of the following: 1997 1996 ------------ ----------- Land $ 60,431 $ 60,231 Buildings 1,350,668 1,330,338 Machinery and equipment 4,397,243 2,044,716 Furniture and office equipment 484,523 465,689 ------------ ----------- 6,292,865 3,900,974 Less accumulated depreciation 1,243,785 704,390 ------------ ----------- Total $ 5,049,080 $3,196,584 ============ =========== F - 15 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 6 - MINERAL PROPERTIES AND RELATED ASSETS (ASSETS HELD FOR SALE) At June 30, mineral properties and related assets consisted of the following: 1997 1996 ----------- ----------- Mineral properties $ 3,838,467 $ 6,170,676 Mill and refinery 688,696 688,696 Other mining equipment 866,614 866,614 Building - 279,854 ----------- ----------- 5,393,777 8,005,840 Less accumulated depreciation 1,150,777 1,150,777 ----------- ----------- Total $ 4,243,000 $ 6,855,063 =========== =========== As of June 30, 1996, the Company was actively soliciting the sale of or a joint venture agreement for the operations of these assets. Accordingly, the Company has classified these mineral properties as assets held for sale. For the year ended June 30, 1997, the Company retained an independent geologist ("Geologist") to appraise the mineral properties. A majority of the mining properties are undeveloped claims which generally do not have a readily demonstrated market value because they lack sufficient exploration of an ore body to determine the recoverability of the amount and grade of the potential ore body. The appraiser assigned a value to these properties based upon the accumulated monies expended on the claims as of June 30, 1997. Further, the appraiser indicated that these properties lack economical feasibility based upon the exploration and development to date. However, he stated further that there existed considerable evidence as to the potential of these mineral properties and recommended that the Company increase exploration and development efforts on these properties until an economically feasible ore body is proved or a decision is reached to abandon the property. The minority of the mining properties had past mining activity which gave evidence of an ore grade and recoverability. The Geologist performed a net present value analysis of the ore grade and recoverability. The net present value analysis resulted in the current market value exceeding the historical cost for these mining properties; however, in accordance with SFAS No. 121, the Company has evaluated the mineral properties for impairment. The Company's evaluation of these assets is based on the estimated cash flows expected to result from their eventual disposition. The Company has estimated the expected timing and selling cost and determined a write-down of $2,592,656, which is included in other income (expense) write-down of assets, is required as of June 30, 1997. F - 16 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 7 - LEASE COMMITMENTS The Company leases certain facilities and equipment under non-cancelable operating lease agreements that expire through 2001. The Company also leases certain machinery and office and computer equipment under non- cancelable capital lease arrangements. Future minimum lease payments under non-cancelable capital and operating leases with initial or remaining terms of one year or more at June 30, 1997 are as follows: Year ending Operating Capital June 30, Leases Leases ----------- ------------ ------------ 1998 $ 284,546 $ 1,055,140 1999 180,746 977,863 2000 95,892 214,932 2001 3,706 - ------------ ------------ $ 564,890 2,247,935 ------------ Less amount representing interest 319,278 Less executory costs (taxes) 134,395 ------------ 1,794,262 Less current portion 772,419 ------------ Long-term portion $ 1,021,843 ============ At June 30, leased capital assets included in property, plant, and equipment consisted of the following: 1997 1996 ----------- ----------- Machinery and equipment $ 2,223,825 $ 540,000 Furniture and equipment 68,103 68,103 ----------- ----------- 2,291,928 608,103 Less accumulated amortization 309,176 119,000 ----------- ----------- Total $ 1,982,752 $ 489,103 =========== =========== The Company entered into capital lease arrangements of $1,683,825 and $608,103 in 1997 and 1996, respectively. F - 17 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 8 - NOTES PAYABLE The Company has two $150,000, 12% per annum notes payable to a financial corporation. The notes are payable in 30-month installments of $5,813 each and mature in May and June 2000. The notes are secured by 325 Fry D'Lite Fryer systems or other similar ventless, hoodless fryers as well as all assets of the Company and its subsidiaries. As of June 30, 1997, the outstanding balance due was $232,364. NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES At June 30, accounts payable and accrued expenses consisted of the following: 1997 1996 --------- --------- Accounts payable $ 402,988 $ 233,978 Payroll and related accrual 14,843 155,779 Other accrued expense 465,089 223,298 --------- --------- Total $ 882,920 $ 613,055 ========= ========= NOTE 10 - REDEEMABLE PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of Class A convertible and redeemable preferred stock ("Preferred Stock"). As of June 30, 1997, Preferred Stock was authorized by Series as follows: Series 1, 26 shares authorized, issued, and redeemed; Series 2, 110,000 shares authorized, issued, and redeemed; and Series 3, 25,000 shares authorized, issued, and redeemed. As of June 30, 1996, there were 26 shares of Series 1 authorized, issued, and outstanding. During the year ended June 30, 1995, the Company issued 26 shares of $20,000 par value Series 1 Preferred Stock to K.D. International, S.A. as part of the acquisition price paid for the insurance adjusting company, Unique Systems, Inc., dba National Affiliated Adjustment Company ("NAAC"). The stock is redeemable five years from the date of issuance at the stated par value. Based upon future redemption, the Company has determined the present value of the future payments by imputing a 12% discount factor. The Company will reduce future earnings with the annual imputed interest through the date of redemption. These shares were converted to common shares as of June 30, 1997 (see Note 11). F - 18 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 10 - REDEEMABLE PREFERRED STOCK (Continued) Subsequent to the acquisition of NAAC, the Chief Executive Officer of NAAC who is the wife of the Company's former CEO and President, acquired these shares in an unrelated transaction. During the year ended June 30, 1997, the Company issued 110,000 shares of $10.00 par value Series 2 Preferred Stock. The stock is convertible 50% at October 20, 1996 and 100% at November 19, 1996 and redeemable at October 15, 2001. Also, the shareholders were entitled to an $0.80 per annum dividend. These shares were converted to common shares as of June 30, 1997 (see Note 11). During the year ended June 30, 1997, the Company issued 25,000 shares of $10.00 par value Series 3 Preferred Stock. The stock is convertible 50% at November 8, 1996 and 100% at December 9, 1996 and redeemable at November 8, 2001. Also, the shareholders were entitled to an $0.80 per annum dividend. These shares were converted to common shares as of June 30, 1997 (see Note 11). NOTE 11 - SHAREHOLDERS' EQUITY During the year ended June 30, 1997, the Company completed the following common stock transactions of previously unissued common shares: . Issued for a legal judgment 10,000 shares for an aggregate value of $7,850. . Issued for conversion of the Series 1 Preferred Stock 345,866 shares which equaled a conversion rate of 75% of the closing bid price per share on the conversion date. . Issued for conversion of the Series 2 Preferred Stock 1,144,763 shares which equaled, in aggregate, a conversion rate of 75% of the closing bid price per share on the conversion date. . Issued for conversion of the Series 3 Preferred Stock 279,139 shares which equaled, in aggregate, a conversion rate of 75% of the closing bid price per share on the conversion date. During the year ended June 30, 1996, the Company completed the following common stock transactions of previously unissued common shares: . Issued to four directors for services performed 1,000, 1,000, 858, and 746 shares, respectively, at values ranging from $1.00 to $.82 per share for an aggregate value of $6,000. F - 19 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 11 - SHAREHOLDERS' EQUITY (Continued) . Issued to an unaffiliated company for the rights to manufacture a machine 18,750 shares at a contract price of $41,016. . Issued for a legal judgment 12,800 shares for an aggregate value of $8,000. . Issued to two employees of a subsidiary, for services performed 4,000 and 500 shares, respectively, for an aggregate value of $8,505. During the year ended June 30, 1995, the Company completed the following common stock transactions of previously unissued common shares: . Issued 1,750,370 shares to an unrelated third party in exchange for the purchase of a company in the insurance adjusting industry. . Issued 4,600,000 shares to an unrelated third party in exchange for the purchase of a company in the wholesale food equipment supply industry. . Issued 79,100 shares for services provided by unrelated third parties. These services were valued at $85,341. . Issued 316,500 shares to several individuals and companies, all of whom are related parties, for services. . Issued 50,000 shares to an unrelated party to obtain a judgment against a third-party defendant who had refused to return a certificate placed in escrow. The Company valued the shares issued at $37,500. The transaction under which the certificate had been placed in escrow, for the benefit of the third-party defendant, had been canceled pursuant to mutually agreed-upon terms, and the third-party defendant failed to return the certificate in a timely manner. The Company began legal proceedings against the party and, based upon multiple jurisdictional issues, management believed the issuance of the shares under this transaction would result in more expedient results. The certificate which was placed in escrow has been returned as a result of this transaction. Warrants -------- For the year ended June 30, 1996, the Company had a private placement offering for its common stock. In accordance with the private placement, the Company has outstanding warrants as of June 30, 1997 and 1996 to purchase 1,316,166 and 1,366,381 shares of common stock, respectively, at $3 per share for an aggregate value of $3,948,498 and $4,099,143, respectively. The warrants may be exercised through January 1999. F - 20 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 11 - SHAREHOLDERS' EQUITY (Continued) Stock Option Plans ------------------ The Company has adopted only the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." It applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for restricted stock and options issued to outside third parties. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by SFAS 123, the Company's net loss and loss per share would be reduced to the pro forma amounts indicated below: Year Ended June 30, ----------------------------- 1997 1996 ------------ ------------- Net loss As reported $(7,107,160) $ (3,528,353) Pro forma $(7,277,460) $ (4,494,873) Loss per common share As reported $ (0.21) $ (0.11) Pro forma $ (0.21) $ (0.14) These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before June 30, 1996. The fair value of these options was estimated at the date of grant using the Black-Scholes option- pricing model with the following weighted-average assumptions for the years ended June 30, 1997 and 1996: dividend yields of 0%; expected volatility of 84%; risk-free interest rates of 5.6%; and expected life of 5.0 and 2.5 years, respectively. The weighted-average fair value of options granted during the years ended June 30, 1997 and 1996 was $0.68 and $1.04, respectively, and the weighted-average exercise price was $1.06 and $1.48, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F - 21 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 11 - SHAREHOLDERS' EQUITY (Continued) Stock Option Plans (Continued) ------------------------------ The market value of the Company's common stock used to value compensation expense for certain options that contained trading restrictions was estimated by management. Compensation expense recognized as a result of the issuance of stock options was $0 and $36,960 for the years ended June 30, 1997 and 1996, respectively. 1995 1995 Granted Directors and Granted Incentive Price Officers Stock Price Stock Plan Per Share Option Plan Per Share ----------- ------------- -------------- ---------- Outstanding, June 30, 1995 - $ - - $ - Granted 737,500 $ 1.89 - 2.09 225,000 $ 0.10 Exercised 159,500 $ 1.89 - 2.09 225,000 $ 0.10 Canceled 18,000 $ 1.89 - $ - ----------- ------------- Outstanding, June 30, 1996 560,000 $ 1.89 - 2.09 - $ - Granted 50,000 $ 1.25 - 2.00 200,000 $ 0.90 Exercised 7,000 $ 1.89 - $ - Canceled 323,000 $ 1.89 - 2.00 - $ - ----------- ------------- Outstanding, June 30, 1997 280,000 $ 1.25 - 2.09 200,000 $ 0.90 =========== ============= ============== ========== Exercisable at June 30, 1997 280,000 $ 1.25 - 2.09 200,000 $ 0.90 =========== ============= ============== ========== The weighted-average remaining contractual life of options outstanding issued under the 1995 Incentive Stock Plan and the 1995 Directors and Officers Stock Option Plan is 3.4 and 4.2 years, respectively, at June 30, 1997. NOTE 12 - SALES Major Customers --------------- During the year ended June 30, 1997, the Company did business with one customer whose sales comprised 42% of sales. During the year ended June 30, 1996, the Company did business with one customer whose sales comprised 25% of sales. During the year ended June 30, 1995, the Company did business with two customers whose sales comprised 49% and 12% of net sales, respectively. F - 22 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 13 - INCOME TAXES At June 30, significant components of the Company's deferred tax assets and liabilities for income taxes consist of the following: 1997 1996 ------------ ---------- Deferred tax asset (liability) Unrealized loss reserve $ 1,045,000 $ - Estimated costs of discontinued operations 125,000 - Bad debt reserve 12,000 5,000 Net operating losses 8,570,000 7,677,000 ------------ ---------- 9,752,000 7,682,000 Valuation allowance 9,752,000 7,682,000 ------------ ---------- Net deferred tax asset (liability) $ - $ - ============ ========== The valuation allowance increased by approximately $2,070,000. For the year ended June 30, 1997, the difference between the federal statutory rate of 34% and the Company's effective tax rate of 0% is due primarily to the valuation allowance change of approximately $2,070,000 resulting from the net loss incurred by the Company and the permanent difference of goodwill expense of approximately $1,901,000. For the year ended June 30, 1996, the difference between the federal statutory rate of 34% and the Company's effective tax rate of 0% is due primarily to the valuation allowance change of approximately $1,400,000 resulting from the net loss incurred by the Company. As of June 30, 1997, the Company had net federal operating loss carryforwards totaling approximately $21,423,000. The net operating loss carryforwards expire in various years through 2012. NOTE 14 - COMMITMENTS AND CONTINGENCIES Environmental Liabilities ------------------------- The Company is not aware of any environmental liabilities that would have a material impact on the Company's financial position, results of operations, or cash flows. F - 23 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued) Legal Proceedings ----------------- The Company is subject to legal proceedings which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations, or cash flows of the Company. NOTE 15 - SEGMENT INFORMATION The Company operates primarily in three industry segments: development and marketing of pollution control devices (corporate and other), manufacturing for agricultural and dust control industry, and food marketing and distribution. The following table is a summary of results by major segments: June 30, ----------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Net sales Corporate and other $ 155,195 $ - $ 342,373 Manufacturing 3,736,931 3,306,437 3,069,773 Food distribution 3,165,748 462,673 26,037 ------------ ------------ ------------ Total $ 7,057,874 $ 3,769,110 $ 3,438,183 ============ ============ ============ Net income (loss) from continuing operations Corporate and other $(5,217,661) $(2,567,427) $(3,560,612) Manufacturing (188,710) 12,842 (1,051,222) Food distribution 659,985 (650,863) (141,546) ------------ ------------ ------------ Total $(4,746,386) $(3,205,448) $(4,753,380) ============ ============ ============ Depreciation and amortization Corporate and other $ 387,280 $ 409,353 $ 212,558 Manufacturing 225,484 227,246 225,149 Food distribution 319,803 107,867 18,084 ------------ ------------ ------------ Total $ 932,567 $ 744,466 $ 455,791 ============ ============ ============ F - 24 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 - ------------------------------------------------------------------------------- NOTE 15 - SEGMENT INFORMATION (Continued) June 30, ----------------------------- 1997 1996 ------------- ------------ Identifiable assets Corporate and other $ 10,036,457 $14,108,630 Manufacturing 2,984,131 3,786,344 Food distribution 3,938,341 1,591,200 ------------- ------------ Total $ 16,958,929 $19,486,174 ============= ============ Property, plant, and equipment additions Corporate and other $ 21,557 $ 169,460 Manufacturing 79,033 97,475 Food distribution 2,381,130 328,915 ------------- ------------ Total $ 2,481,720 $ 595,850 ============= ============ NOTE 16 - UNAUDITED QUARTERLY FINANCIAL DATA 1997 ---------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ------------ ------------ ------------ Net sales $1,503,857 $ 1,592,610 $ 1,743,789 $ 2,217,618 Loss from operations $ (341,157) $ (266,499) $ (716,128) $ (326,034) Net loss $ (350,569) $ (290,116) $ (754,520) $(3,351,181) Net loss per share $ (0.011) $ (0.009) $ (0.022) $ (0.095) Weighted average common shares outstanding 33,364,278 33,830,716 34,765,533 35,341,475 1996 ---------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ------------ ------------ ------------ Net sales $1,386,704 $ 888,170 $ 599,257 $ 894,979 Loss from operations $ (421,084) $ (633,228) $ (998,295) $ (943,202) Net loss $ (434,841) $ (697,921) $(1,001,372) $(1,071,314) Net loss per share $ (0.014) $ (0.022) $ (0.029) $ (0.032) Weighted average common shares outstanding 30,303,406 31,308,113 34,403,029 33,138,224 F - 25 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders Alanco Environmental Resources Corporation Our report on the consolidated financial statements of Alanco Environmental Resources Corporation is included on page F1 of this Annual Report on Form 10- K. In connection with our audits of such financial statements as of June 30, 1997 and 1996 and for the years then ended, we have also audited the related financial statement schedule on page F - 28 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/SINGER LEWAK GREENBAUM & GOLDSTEIN LLP SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California August 15, 1997 F - 26 BILLIE J. ALLRED CERTIFIED PUBLIC ACCOUNTANT Suite J-1 4625 South Ash Avenue Tempe, Arizona 85282 Tel. (602) 820-2092 Fax (602) 820-4584 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT Board of Directors and Shareholders Alanco Environmental Resources Corporation My report on the consolidated financial statements of Alanco Environmental Resources Corporation and subsidiaries is included on page F2 of the Annual Report on Form 10-K. In connection with my audit of such financial statements for the year ended June 30, 1995, I have also audited the related financial statement schedule listed in the index on page F28 of this Form 10-K. In my opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ Billie J. Allred BILLIE J. ALLRED CPA Tempe, Arizona September 28, 1995 F - 27 ALANCO ENVIRONMENTAL RESOURCES CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS As of June 30, 1997 - ------------------------------------------------------------------------------- (CAPTION> Column A Column B Column C Column D Column E - ------------------------- --------------- --------------------------- ------------- --------------- Additions --------------------------- Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Description Period Expenses Accounts Deductions Period -------------------- --------------- ------------ ------------ ------------- --------------- Allowance deducted from asset to which it applies Allowance for doubtful accounts Year Ended June 30, 1997 $ 11,000 $ 22,201 $ - $ 5,436 $ 27,765 June 30, 1996 25,189 11,000 - 25,189 11,000 June 30, 1995 25,600 25,189 - 25,600 25,189 Allowance for notes receivable Year Ended June 30, 1997 39,000 285,648 - - 324,648 June 30, 1996 - 39,000 - - 39,000 Allowance for obsolete inventory Year Ended June 30, 1997 100,000 - - 35,000 65,000 June 30, 1996 - 100,000 - - 100,000
F - 28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 16, 1996, Billie J. Allred, the Company's Certifying Accountant for the previous two fiscal years, declined to stand for re-election as auditor. Singer Lewak Greenbaum & Goldstein LLP, Certified Public Accountants, were engaged to serve as the Company's new auditors. The selection of Singer Lewak Greenbaum & Goldstein LLP, was approved by the Audit Committee of the Company's Board of Directors. Mr. Allred's report on the financial statements for the fiscal years ended June 30, 1995 and 1994 contained a qualification based upon the Company's ability to continue as a going concern. Except for this qualification, Mr. Allred's reports have not contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles. Nor has there been any disagreement with Mr. Allred on any matter of principles or practices, financial statement disclosure or auditing scope or procedure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Company and their ages are as follows: Name Age Position with Alanco - ------------------- --- -------------------------- Dennis Schlegel 47 C.E.O./Director Chairman of the Board Edward J. Maley 54 President/C.O.O./Director John E. Haggar 55 Chief Financial Officer Treasurer/Vice President Cynthia L. Castellano 35 Corporate Secretary Harold S. Carpenter 63 Director Charles Clay Miller 56 Director Executive Director - Environmental Technologies Group John Gilchrist 69 Director The Directors serve until their successors are elected by the shareholders. Vacancies on the Board of Directors may be filled by appointment of the majority of the continuing directors. The executive officers serve at the discretion of the Board of Directors. 22 Dennis Schlegel. Mr. Schlegel was appointed to the position of C.E.O. in April, 1997. Mr. Schlegel was elected Chairman of the Board in September 1996. Since 1987, Mr. Schlegel has been an independent investor in small and start-up companies as well as a consultant to small and start-up businesses in the areas of corporate management and financing. Prior to this, Mr. Schlegel owned and operated Schlegel Investment Co. in Des Moines, Iowa, and Schlegel Ranch Company, in Iowa and Washington, both of which were engaged in land development. Mr. Schlegel attended one year at Drake University until he withdrew to devote his full time to business pursuits. Edward J. Maley. Edward Maley joined the Company in January 1997 as Vice President of the Fry Guy division. He is currently President of Alanco and President of the Fry Guy subsidiary. Mr. Maley was appointed to the Board of Directors in September 1997. Prior to joining Alanco, Mr. Maley was President of the U.S. operations for Rhea Vendors, a Milan, Italy, manufacturer of Espresso/Cappuccino equipment. He was also Vice President of U.S. operations for Aqua Di Heppi, a Rome, Italy, bottler of sparkling waters. He holds a Bachelors degree in Political Science from Fairleigh Dickinson University and is a Marine Corps veteran. John E. Haggar. Mr. Haggar has been an employee of the Company since June 1995, Treasurer since July 1995, and Chief Financial Officer since February 1996. From December 1994, until June 1995, Mr. Haggar was Chief Financial Officer of Universal Management Services. Previously, Mr. Haggar was a sole practitioner engaged in providing accounting services to the general public in the State of Washington. Mr. Haggar holds a Bachelor of Science in Business from the University of Minnesota. He is a member of the American Institute of Certified Public Accountants and is certified in Arizona and Washington State. From January 1995 to July 1996, Mr. Haggar was a director of Ethika Corporation, a publicly owned company whose stock is traded on the NASDAQ System. Cynthia L. Castellano. Ms. Castellano joined the Company in June 1995 as Manager of Administration. Ms. Castellano was appointed Assistant Secretary in December 1995 and then Secretary in February 1996. From January to June, 1995, Ms. Castellano was Manager of Administration for Universal Management Services, Inc. From 1992 through 1994, Ms. Castellano was Administrative Manager for a general contractor in Tempe, Arizona. Ms. Castellano graduated from the University of Phoenix with a Bachelor of Science degree in Business Administration. Harold S. Carpenter. Mr. Carpenter is presently the President of Superiorgas Co., Des Moines, Iowa, which is engaged in the business of trading and brokering bulk refined petroleum products with gross sales of approximately $500 million per year. He is also the General Partner of Superiorgas L.P., an investment company affiliated with Superiorgas Co. Mr. Carpenter founded these companies in 1984 and 1980, respectively. Mr. Carpenter is also the President of Carpenter Investment Company, Des Moines, Iowa, which is a real estate investment company holding properties primarily in central Iowa. From 1970 until 1994, Mr. Carpenter was the Chairman of the George A. Rolfes Company of Boone, Iowa, which manufactured air pollution control equipment. Mr. Carpenter is currently a member of the Board of Directors of the Allied Group, Inc., a publicly owned insurance company headquartered in Des Moines, Iowa. Mr. Carpenter graduated from the University of Iowa in 1958 with a Bachelors of Science and Commerce degree. Charles Clay Miller. Charles Clay Miller, an environmental engineer, has a professional background of more than 25 years of management, operations, research, design, and construction in the environmental industry, in both 23 government and private industry, as well as first hand experience in the development and implementation of environmental standards in regulatory environments. Most recently, Mr. Miller was Director of the Escambia County, Florida, Solid Waste Department, with management of a $9 million annual budget. Mr. Miller also served as Director of the Air and Land Quality Division of the Iowa Department of Environmental Quality. During this period Iowa became the first state in the nation to obtain federal approval for its primary and secondary Air Quality State Implementation Plans according to the Clean Air Act Amendments of 1977. Mr. Miller holds B.S. Degrees in Mathematics and Mechanical Engineering, as well as a Master of Science Degree in Environmental Engineering and Planning. He has completed course work for a Ph. D. in Civil Engineering at the University of Missouri, Rolla. Mr. Miller was named to the Board on September 9, 1996. John L. Gilchrist. John Gilchrist has been an entrepreneur and business executive for more than forty years. He holds a Business and Accounting degree from the American Institute of Business, and from 1968 until 1990 he was the owner and Chief Executive Officer of Dean Studios, Inc., a photo finishing laboratory in Des Moines, Iowa. Mr. Gilchrist developed the operations to include photo finishing innovations, and the business was expanded from one to three locations which had twenty six employees. Mr. Gilchrist has also been a successful, self-directed investor for many years. Mr. Gilchrist was nominated for election to the Company's Board of Directors in November 1996. Compensation of Directors Directors are entitled to receive reimbursement for all out-of-pocket expenses incurred for attendance at Board of Directors meetings. In addition, all Directors not otherwise employed or compensated by the Company are entitled to receive up to January 1997, $500, or beginning in February 1997, $750, per meeting per day up to a maximum of $1,500, or $250 per telephonic meeting, in cash, in common stock at the market price per share, or in health insurance benefits. Pursuant to these directors fees, no shares of common stock were issued. In addition, on September 10, 1996, Harold Carpenter and Dennis Schlegel were awarded options to acquire 100,000 shares each of stock pursuant to the Company's 1996 Directors and Officers Stock Option Plan at an exercise price of $0.90 per share. At the April 1997 Board of Directors meeting, the Board accelerated the vesting of Norman E. Meyer's previously reported option of 100,000 shares of stock issued pursuant to the 1995 Directors and Officers Stock Option Plan. Also, on July 16, 1997, Wang Yee Lin, Charles Miller and Edward Maley were awarded options to acquire 40,000 shares each of stock pursuant to the Company's 1996 Directors and Officers Stock Option Plan at an exercise price of $0.875 per share. On August 27, 1997, the Board of Directors approved a two year employment contract for Charles Miller in which he was awarded another option to purchase an additional 40,000 shares of stock pursuant to the Company's 1996 Directors and Officers Stock Option Plan at an exercise price of $0.672 per share exercisable at the beginning of the second year of the employment contract. Under a two year employment agreement approved by the Board of Directors on August 27, 1997, Dennis Schlegel was awarded an option to purchase 50,000 shares of stock pursuant to the Company's 1996 Directors and Officers Stock Option Plan at an exercise price of $0.672 per share exercisable at the start of contract. The Board of Directors also separately authorized Dennis Schlegel another option to purchase 70,000 shares of stock (exclusive of the Company's 1996 Directors and Officers Stock Option Plan) at an exercise price of $0.672 per share exercisable at the beginning of the second year of his employment contract. 24 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table shows for the fiscal year ending June 30, 1997, the compensation awarded or paid by the Company to its Chief Executive Officer and any of the executive officers of the Company whose total salary and bonus exceeded $100,000 during such year (The "Named Executive Officers"): Long Term Compensation Awards Restricted Securities Name and Stock Underlying All Other Principal Fiscal Annual Compensation Awards Options Compen- Position Year Salary Bonus ($) (#shares) sation Norman E. Meyer 1996 $ 81,250 - $209,000 150,000 - President, Chief 1997 $156,526 - - - - Executive Officer (1) Dennis Schlegel 1997 $ 10,000 - $50,625 100,000 - Chief Executive 120,000 (3) Officer (2) (1) Mr. Meyer served as C.E.O. and President from April 1995 until April 1997. (2) Mr. Schlegel was elected C.E.O. in April 1997. (3) See Director Compensation Section. No other executive officer earned more than $100,000 during the current fiscal year. Option Grants in Last Fiscal Year The following table sets forth each grant of stock options made during the fiscal year ended June 30, 1997, to each of the Named Executive Officers. No stock appreciation rights ("SARs") have been granted by the Company. Individual Grants Percent of Number of Total Potential Realizable Securities Options Mkt Assumed Annual Rates Underlying Granted to Exer- Price of Stock Price Options Employees cise Date Appreciation for Granted(1) in Fiscal Price of Expir Option Term (2) Name (#) Year ($/Sh) Grant Date 5% 10% 0% Dennis Schlegel 100,000 100.0 $0.90 $1.406 9/10/01 89,500 136,500 50,600 (1) Options for common shares only, granted through the 1996 Directors and Officers Stock Option Plan. (2) Calculated based on given interest rate for the five year life of the option. The column headed 0% shows the potential gain (assuming no restrictions) upon exercise of Directors and Officers Options at market price on the date of grant. 25 Option Grants Subsequent to Fiscal Year End Number of Securities Underlying Options Date of Date Expiration Option Name Granted Grant Exercisable Date Price - --------------- ----------- -------- ------------ ----------- ------ Wang Yee Lin 40,000 7/16/97 7/16/97 7/16/2002 .875 Edward Maley 40,000 7/16/97 7/16/97 7/16/2002 .875 Charles Miller 40,000 7/16/97 7/16/97 7/16/2002 .875 Charles Miller 40,000 8/27/97 9/01/98 8/27/2002 .672 Dennis Schlegel 50,000 8/27/97 9/01/98 8/27/2002 .672 Dennis Schlegel 70,000 8/27/97 9/01/98 8/27/2002 .672 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option/Values The following table sets forth the number and value of the unexercised options held by each of the Named Executive Officers at June 30, 1997. None of the Named Executive Officers who hold unexercised options exercised options in the fiscal year ended June 30, 1997. Value of Number of Unexercised Unexercised In-the-Money Options at Options at Shares Acquired Value FY-End (#) FY-End ($) Name On Exercise (#) Realized ($) Exercisable Exercisable - ------------------ --------------- ------------ ----------- ------------ Dennis Schlegel 0 0 100,000 0 Norman Meyer 0 0 50,000 (1) 0 John Haggar 0 0 50,000 0 Cynthia Castellano 0 0 7,500 0 (1) Option expired subsequent to year end Employment Agreements and Executive Compensation Dennis Schlegel, Chief Executive Officer, has a two year employment agreement with the Company whereby he receives during the first year, $6,250 per month in regular compensation and options to purchase 50,000 shares of the Company stock at $0.672 per share, and during the second year, a minimum of $10,000 per month in regular compensation and options to purchase 70,000 shares of the Company stock at $0.672 per share. Mr. Schlegel's employment agreement with the Company expires August 31, 1999. Mr. Maley, the Company's President and Chief Operating Officer, is currently serving with no employment contract at a rate of $8,000 per month in regular compensation and has options to purchase 40,000 shares of the Company stock at $0.875 per share. Mr. Haggar, the Company's Chief Financial Officer and Vice President, receives $8,000 per month in regular compensation under the terms of an employment agreement valid through April 24, 1998. 26 Incentive Stock Option Plan On December 16, 1995, the Shareholders approved the Company's 1995 Incentive Stock Option Plan (the Plan). The purpose of the Plan is to advance the business and development of the Company and its shareholders by affording to the key employees of the Company the opportunity to acquire a propriety interest in the Company by the grant of Options to acquire shares of the Company's common stock. The Options granted are "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, for certain key employees. The Plan is administered by an Administrative Committee whom shall serve a one year term. The Administrative Committee is composed of the Board's Compensation/Administration Committee. The current members of the Compensation Committee are Charles Miller and Harold Carpenter. The Plan was approved by the Board of Directors on September 28, 1995, subject to Shareholder approval, and shall terminate on September 28, 2005. Subject to anti-dilution provisions, the Plan may issue Options to acquire up to 1,000,000 shares to Key Employees. The maximum number of shares subject to Options granted to any one Key Employee shall not exceed 100,000 shares. The exercise price for Options shall be set by the Administrative Committee but shall not be for less than the fair market value of the shares on the date the Option is granted. The period in which Options can be exercised shall be set by the Administrative Committee not to exceed five years from the date of Grant. The Plan may be terminated, modified or amended by the Board of directors upon the recommendation of the Administrative Committee. The issuance of options pursuant to this Plan is not expected to be a taxable event for recipient until such time that the recipient elects to exercise the option whereupon the recipient is expected to recognize income to the extent the market price of the shares exceeds the exercise price of the option on the date of exercise. All Key Employees of the Company and its subsidiaries are eligible to participate in the Incentive Stock Options. A Key Employee is defined in the Plan as a Company employee who in the judgement of the Administrative Committee has the ability to positively affect the profitability and economic well-being of the Company. Part time employees, independent contractors, consultants and advisors performing bona fide services to the Company shall be considered employees for purposes of participation in the Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) The following table sets forth persons known to the Company as beneficially owning more than five percent (5%) of the outstanding shares of the Registrant. % of Shares Name and Address Shares Outstanding - ------------------------------- ----------- ------------ Harbinger Capital L.P. 4365 Executive Drive, Suite 740 San Diego, CA 92121 7,455,720 21.1% 27 (b) The following table sets forth the number of shares of the Company's Common Stock beneficially owned as of June 30, 1997, by individual directors and executive officers and by all directors and executive officers of the Company as a group. % of Shares Name and Address Shares Outstanding - ------------------- ------- ----------- Dennis Schlegel 204,445 (1) 0.58% Harold S. Carpenter 728,986 (2) 2.06% John E. Haggar 50,000 0.14% Charles Clay Miller 13,000 0.04% John Gilchrist 80,747 (3) 0.23% Officers and Directors as a Group (5 individuals) 1,077,178 3.05% (1) Includes 153,440 shares indirect ownership (2) Includes 256,606 shares indirect ownership (3) Includes 5,747 shares indirect ownership ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In January, 1997, the Board of Directors approved the conversion of 26 shares of the Company's Series I Preferred Stock held by Kamco Holdings Inc., into 345,866 shares of the Company's Common Stock. These shares were originally issued in 1995 to K. D. International, S.A., as part of the acquisition price paid for Unique Systems, Inc. d/b/a National Affiliated Adjustment Company, and later acquired by Katherine Meyer in an unrelated transaction. Mrs. Meyer is the wife of the Company's former C.E.O. and President, Norman E. Meyer, and a shareholder of Kamco Holdings Inc. 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. Exhibits (3)(i) Restated and Amended Articles of Incorporation (3)(ii) By-Laws of Corporation (21) Subsidiaries of Registrant (27) Financial Data Schedule B. Schedule (II) Valuation and Qualifying Accounts C. Reports on Form 8-K Report to be filed, resignation of one of Registrant's Directors. On September 22, 1997, the Company received notice from Wang Yee (Sammy) Lin resigning as a Director of Alanco Environmental Resources Corporation, and citing disagreement and conflict with policies and actions taken by the Company's Board of Directors. Mr. Lin remains as Chairman, President and Chief Executive Officer of Alanco Environmental Technology (Beijing) Co. Ltd., the Company's wholly-owned subsidiary incorporated in China. Exhibits or schedules other than those mentioned above are omitted because the conditions requiring their filing do not exist or because the required information is given in the financial statements, including the notes thereto. 29 EXHIBIT (21) SUBSIDIARIES OF THE REGISTRANT NAME STATE OF INCORPORATION - ----------------------------------------------- -------------------------- Alanco Environmental Services, Inc. Nevada Alanco Environmental Manufacturing, Inc. Nebraska Alanco Financial Services Corp. Nevada Alanco Environmental Technology People's Republic of China (Beijing) Co. Ltd. Fry Guy Inc. Nevada Unique Systems, Inc. d/b/a National Affiliated Adjustment Company Nevada 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Alanco Environmental Resources Corporation /s/ Dennis Schlegel ----------------------- Dennis Schlegel, CEO, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. NAME TITLE DATE ---- ----- ---- /s/ John Gilchrist Director 9/26/97 - -------------------------- ---------------- John Gilchrist /s/ Harold S. Carpenter Director 9/26/97 - -------------------------- ----------------- Harold S. Carpenter /s/ Charles Clay Miller Director 9/26/97 - -------------------------- ----------------- Charles Clay Miller /s/ Edward J. Maley Director 9/26/97 - -------------------------- ----------------- Edward J. Maley /s/ John E. Haggar Chief Financial Officer 9/26/97 - -------------------------- ----------------- John E. Haggar 31 EX-27 2
5 YEAR JUN-30-1997 JUN-30-1997 526851 0 2108442 352413 527479 3083517 6292865 1243785 16958929 2000625 1136242 0 0 53742005 (39919943) 16958929 7011702 7057874 3636314 8707692 2873700 307849 222868 (4746386) 0 (4746386) (2360774) 0 0 (7107160) (.21) (.21)
EX-3.1 3 AMENDED AND RESTATED --------------------- ARTICLES OF INCORPORATION OF ALANCO ENVIRONMENTAL RESOURCES CORPORATION ARTICLE I ---------- The name of the Corporation shall be ALANCO ENVIRONMENTAL RESOURCES CORPORATION. ARTICLE II ---------- The known place of business of the Corporation shall be 15900 North 78th Street, Scottsdale, Arizona 85260. ARTICLE III ----------- The Corporation initially intends to engage in the business of researching, designing, manufacturing and selling environmental technology and related equipment, to engage in the business of mining, and to perform any and all things related to said business. ARTICLE IV ----------- The capital stock of the Corporation shall consist of the following: 1) One Hundred Million (100,000,000) shares of no par value Common Stock; 2) Five Million (5,000,000) shares of Class A Cumulative Convertible Preferred Shares; 3) Twenty Million (20,000,000) shares of Class B Cumulative Preferred Shares. All such stock shall be paid in from time to time upon such conditions as may be determined by the Board of Directors. The stock may be issued in payment for real or personal property, services, or any other right or things of value for the use and purpose of the Corporation, and all such stock, when so issued, shall become and be fully paid as though paid for in cash, the Board of Directors to be the sole judges, in the absence of fraud, of the value of any property or rights acquired in exchange for capital stock, and all such stock when issued shall be deemed fully paid and non-assessable. All of the above stock shall be entitled to one vote per share, provided, however, that in the case of the election of directors of the Corporation, every shareholder shall be entitled to cumulate their votes and give one (1) candidate for election as a director a number of votes equal to the number of directors to be elected, multiplied by the number of votes to which their shares are entitled, or distribute their votes on the same principle among as many candidates as said shareholder deems fit. 1 Subject to the terms and provisions of this Article, the Board of Directors is authorized to provide from time to time for the issuance of shares of any class of Preferred Stock in series and to fix from time to time before issuance or if after issuance upon the mutual written consent of all the designated series shareholders of the series for which said amended designation, preferences and/or privileges is sought, the designation, preferences and privileges of the shares of each series of Preferred Stock and the restrictions or qualifications thereof, including, without limiting the generality of the foregoing, the following: (a) The series designation and authorized number of shares; (b) The dividend rate, the date or dates on which such dividends will be payable, and the extent to which such dividends may be cumulative; (c) The amount or amounts to be received by the holders in the event of voluntary or involuntary dissolution or liquidation of the Corporation; (d) The price or prices at which shares may be redeemed and any terms, conditions and limitations upon such redemption; (e) Any sinking fund provisions for redemption or purchase of shares of each series; and (f) The terms and conditions, if any, on which shares may be converted at the election of the holders thereof into shares of other capital stock, or of other series of Preferred Stock, or other debt securities of the Corporation. Each series of Preferred Stock, in preference to the Common Stock, will be entitled to dividends, from funds or other assets legally available therefor, at such rates, payable at such time and cumulative to such extent as may be fixed by the Board of Directors pursuant to the authority herein conferred upon it. In the event of dissolution or liquidation of the Corporation, voluntary or involuntary, the holders of the Preferred Stock, in preference to the Common Stock, will be entitled to receive such amount or amounts as may be fixed by the Board of Directors pursuant to the authority, herein conferred upon it. Each series of Preferred Stock may be subject to redemption in whole or in part at such price or prices and on such terms, conditions and limitations, as may be fixed by the Board of Directors pursuant to the authority herein conferred upon it, of such series. If less than all of the shares of any series of the Preferred Stock are to be redeemed, they will be selected in such manner as the Board of Directors shall then determine. Nothing herein contained is to limit any right of the Corporation to purchase or otherwise acquire any shares of any series of the Preferred Stock. Any shares of the Preferred Stock redeemed or otherwise acquired by the Corporation and which revert to the status of authorized and unissued shares shall be undesignated as to series, and may thereafter, in the discretion of the Board of Directors and to the extent permitted by law, be sold or reissued from time to time as part of another series or (unless prohibited by the terms of such series as fixed by the Board of Directors) of the same series, subject to the terms and conditions therein set forth. 2 Notice of the intention of the Corporation to redeem shares of any series of the Preferred Stock shall be mailed at least thirty (30) days before the date of redemption to each holder of record of shares to be redeemed at his or her last known post office address as shown by the records of the Corporation. At any time after such notice has been mailed as aforesaid, the Corporation may deposit (separately as to the series) the aggregate redemption price payable with respect to the shares to be redeemed (or the portion thereof not already paid in the redemption of such shares) with any bank or trust company in the United States named in the notice of redemption. Such deposits are to be payable in amounts as aforesaid to the respective orders of the holders of record of the shares to be redeemed on endorsement (if required) and surrender of their certificates, thereupon such holders will cease to be shareholders with respect to said shares and, from and after the making of such deposit, such holders will have no interest or claim against the Corporation with respect to said shares, but will be entitled only to receive from such bank or trust company, without interest, the moneys so deposited with it. Dividends may be paid upon the Common Stock only when dividends have been paid, or funds have been set apart for the payment of dividends, on the Preferred Stock from the date after which dividends on the Preferred Stock became cumulative to the beginning of the then current dividend period, but whenever there shall have been paid, or funds shall have been set apart for the payment of, all such dividends upon the Preferred Stock, then dividends upon the Common Stock may be declared for payment then or thereafter out of remaining funds or other assets legally available for such payments. After the payment of the designated dividends, and amounts payable upon dissolution or liquidation, if any, to which the shares of the Preferred Stock are expressly entitled in preference to the Common Stock in accordance with the provisions herein set forth, the Common Stock is to receive all further such dividends and amounts. Neither a consolidation, merger or amalgamation of this Corporation with or into any other corporation or corporations, nor the sale, lease or conveyance of all or part of its assets shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of any provision herein. ARTICLE V ---------- The business and affairs of this Corporation shall be conducted by a Board of Directors of not less than three (3) and no more than nine (9) members. The directors need not be shareholders. The Board of Directors shall have the power to increase or decrease the Board within the limits above provided. The Board of Directors may also fill any vacancies which may occur in the Board of Directors resulting from an increase in the Board of Directors or otherwise, pending the next annual meeting of the stockholders. The Board of Directors shall be elected at the regular annual meetings of the stockholders. The Directors shall each year upon their election organize into a Board of Directors and elect a President and/or Chief Executive Officer, one or more Vice Presidents, a Secretary and a Treasurer, any two (2) of which offices, except the offices of the President and/or Chief Executive Officer and Vice President, or President and/or Chief Executive Officer and Secretary, may be 3 held by the same persons. All officers shall serve for one (1) year or until their successors are elected and qualified. The Board of Directors of this Corporation shall have power without any action on the part of the stockholders to make, alter, amend or repeal By-Laws of the Corporation. ARTICLE VI ---------- Pursuant to the vote of the holders of a majority in interest of the capital stock issued and outstanding, the Board of Directors shall have the power and authority to lease, sell, assign, transfer, convey or otherwise dispose of the entire property of the Corporation, irrespective of the effect thereof upon the continuance of the business of the Corporation and the exercise of its franchise; but the Corporation shall not be dissolved, except as provided by the laws of the State of Arizona. ARTICLE VII ----------- No director of the Corporation shall be liable to the Corporation or its shareholders for money damages for the breach of fiduciary duty as a director, except for liability for any of the following: (i) the amount of a financial benefit received by a director to which such director is not entitled; (ii) an intentional infliction of harm on the Corporation or its shareholders; (iii) a violation of A.R.S. 10-833; or (iv) an intentional violation of criminal law. The directors of the Corporation shall be indemnified for liability, as defined in A.R.S. 10-850, to any person for any action taken, or any failure to take any action as a director, except liability for any of the exceptions described in the prior sentence and except in connection with any matter for which indemnification is prohibited under A.R.S. 10-851(D), to the fullest extent permitted by the Arizona Business Corporation Act, A.R.S. 10-101 et seq. The officers of the Corporation shall be indemnified to the same extent as directors of the Corporation; and any officer who is not also a director or who is a party to a proceeding on the basis of an act or omission solely as an officer shall further be indemnified against liability for any of the exceptions described in the first sentence of this Article VII, except that an officer who is not also a director shall not be indemnified for (a) liability in connection with a proceeding by or in the right of the Corporation other than for reasonable expenses incurred in connection with the proceeding; or (b) liability arising out of conduct that constitutes: (i) receipt by the officer of a financial benefit to which the officer is not entitled; (ii) an intentional infliction of harm on the Corporation or the shareholders; or (iii) an intentional violation of criminal law. If the Arizona Business Corporation Act is amended to authorize corporate actions further eliminating or limiting the personal liability of officers or directors, or to expand the matters for which indemnification is permissible, then the liability of an officer or director of the Corporation shall be automatically eliminated or limited and the indemnification of the officers and directors shall be automatically expanded, to the fullest extent permitted by the Arizona Business Corporation Act, as so amended, without any further corporate or shareholder action being required. Any repeal or modification of this Article VII by the shareholders of the Corporation shall not adversely affect any right or protection of an officer or director of the Corporation existing at the time of such repeal or modification. 4 ARTICLE VIII ------------ The private property of the officers, directors and stockholders of the Corporation shall be exempt from all corporate debts of any kind whatsoever. ARTICLE IX ---------- The name and address of the statutory agent of the Corporation is: Dean A. Douglas, 15900 North 78th Street, Scottsdale, Arizona 85260. The statutory agent may be changed by the Corporation at any time by the filing of an appointment of a successor statutory agent. /s/ Cynthia L. Castellano -------------------------- Corporate Secretary 5 EX-3.2 4 By-Laws of Alanco Environmental Resources Corporation I. CORPORATION ARTICLES 1.01 - References Thereto. Any reference herein made to the Corporation's Articles will be deemed to refer to its Articles of Incorporation and all Amendments thereto as at any given time on file with the Arizona Corporation Commission, together with any and all certificates theretofore filed by the Corporation with the Arizona Corporation Commission pursuant to applicable law. 1.02 - Seniority Thereof. The Articles will in all respects be considered senior and superior to these By-Laws, with any inconsistency to be resolved in favor of the Articles, and with these By-Laws to be deemed automatically amended from time to time to eliminate any such inconsistency which may then exist. II. STOCKHOLDERS MEETINGS 2.01 - Annual Meetings. Each annual meeting of the stockholders is to be held on the date determined in accordance with the Corporation's Articles of Incorporation, at a time of day and place as determined by the Board of Directors, or in the absence of action by the Board, as set forth in the notice given, or waiver signed, with respect to such meeting pursuant to Section 2.03 below. If any such annual meeting is for any reason not held on the date determined as aforesaid, a special meeting may thereafter be called and held in lieu thereof, and the same proceedings (including the election of Directors) may be conducted thereat as at a regular meeting. Any Director elected at any annual meeting or special meeting in lieu of an annual meeting, will continue in office until the election of his/her successor, subject to his/her earlier resignation pursuant to Section 6.01 below. 2.02 - Special Meetings. Special meetings of the stockholders may be held whenever and wherever called for by the Chairman of the Board, the President or the Board of Directors, or by the written demand of the holders of 10% of all issued and outstanding shares of the stock, regardless of class. The business which may be conducted at any such special meeting will be confined to the purposes, stated in the notice thereof, and to such additional matters as the Chairman of such meeting may rule to be germane to such purposes. 2.03 - Notices. At least twenty (20) days (inclusive of the date of meeting) before the date of any meeting of the stockholders and at the direction of the person or persons calling the meeting, the Secretary of the Corporation will cause a written notice setting forth the time, place and general purposes of the meeting to be deposited in the mail, with postage prepaid, addressed to each stockholder of record at his last address as it then, or on the applicable record date, appears on the Corporation's records. Any stockholder may waive call or notice of any annual, or special meeting (and any adjournment thereof) at any time before, during which or after it is held. Attendance of a stockholder at any such meeting in person or by proxy will automatically - 1 - By-Laws of Alanco Environmental Resources Corporation evidence his/her waiver of call and notice of such meeting ( and any adjournment thereof) unless he/she or his/her proxy is attending the meeting for the express purpose of objecting to the transaction of business thereat because it has not been properly called or noticed. No call or notice of a meeting of the stockholders will be necessary if each of them waives the same in writing or by attendance as aforesaid. 2.04 - Registered Stockholders. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders (and at any adjournment thereof), or stockholders entitled to express written consent to corporate action without a meeting, or in order to make a determination of stockholders for any other lawful action, the Board of Directors may fix in advance a record date which shall not be more than sixty (60) days before the date of such meeting, nor more than sixty (60) days prior to any such other action. If no record date is fixed for determining stockholders entitled to notice of or to vote at a meeting of stockholders, the record date shall be at four o'clock in the afternoon on the day before the day on which notice is given, or, if notice is waived, at the commencement of the meeting. If no record date is fixed for determining shareholders entitled to express written consent to corporate action without meeting, the record dated shall be the time of the day on which the first written consent is served upon an Officer or Director of the Corporation. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting and further provided that the adjournment or adjournments of any such meeting do not exceed sixty (60) days in the aggregate. 2.05 - Voting Record. The Officer or Agent having charge of the stock transfer books for shares of the Corporation shall make a complete record of the stockholders entitled to vote at a meeting of the stockholders (and at any adjournment thereof), arranged in alphabetical order, with the address of and the number of shares held by each. Such record shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting for the purposes thereof. 2.06 - Proxies. At all meetings of the stockholders (and at any adjournment thereof), any stockholder entitled to vote thereat, may vote by proxy, executed in writing by the stockholder or by his duly authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. The burden of proving the validity of any proxy undated, irrevocable, or otherwise contested at any such meeting of the stockholders will rest with the person seeking to exercise the same. A telegram, facsimile or cablegram appearing to have been transmitted by a stockholder or by his duly authorized attorney-in-fact may be accepted as a sufficiently written and executed proxy. 2.07 - Voting. Except for the election of Directors (which will be governed by cumulative - 2 - By-Laws of Alanco Environmental Resources Corporation voting pursuant to applicable law) and except as may otherwise be required by the Corporation's Articles, Section 2.08 below, or by applicable statutes, each issued and outstanding share of the Corporation's capital stock (specifically excluding shares held in the treasury of the Corporation) represented at any meeting of the stockholders, in person or by proxy, given pursuant to Section 2.06 above, will be entitled to one vote. Unless otherwise required by the Corporation's Articles or by applicable statutes, any question submitted to the stockholders will be resolved by a majority of the votes cast thereon provided that such votes constitute a majority and the quorum is then present. The voting will be by ballot on any question as to which a ballot vote is demanded, prior to the time the voting begins, by any person entitled to vote on such question; otherwise, a voice vote will suffice. No ballot or change of vote will be accepted after the polls have been declared closed following the ending of the announced time for voting. 2.08 - Voting of Shares by Certain Holders. Shares of the Corporation held by another corporation may be voted by such corporation's officer, agent or proxy as its by-laws may prescribe, or in absence of such by-law provision, by any other person designated by resolution of its Board of Directors, and such officer, agent or other person so designated may vote such corporation's shares in this Corporation in person or by proxy appointed by him. Shares held by an administrator, executor, guardian or conservator may be voted by such representative, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee, other than a trustee in bankruptcy, may be voted by such representative, either in person or by proxy, but no such trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver, trustee in bankruptcy, or assignee for the benefit of creditors may be voted by such representative, either in person or by proxy. Shares held by or under the control of such a receiver or trustee may be voted by such receiver or trustee, either in person or by proxy, without the transfer thereof into his name if authority so to do be contained in an appropriate order of the court by which such receiver or trustee was appointed. A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. If shares stand in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by community property or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (1) If only one votes, his act binds; (2) If more than one votes, the act of the majority so voting binds all; and (3) If more than one votes, but the vote is evenly split on any particular matter, each fraction may vote the shares in question proportionally. Shares standing in the name of a married woman but not also standing in the name of her husband with such a designation of mutual relationship on the certificate, may be voted and all rights incident thereto may be exercised in - 3 - By-Laws of Alanco Environmental Resources Corporation the same manner as if she were unmarried. Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the elections of Directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor counted for quorum purposes. Nothing in this Section shall be construed as limiting the right of the Corporation to vote its own stock held by it in a fiduciary capacity. Shares standing in the name of a broker-dealer or similar institution for beneficial owners to whom the broker-dealer distributed notice of the stockholder's meeting and proxy information shall be voted as instructed by the beneficial owners thereof. The foregoing notwithstanding, such shares may be counted as present for purposes of determining the presence of a quorum as stated below. In addition, the Corporation shall rely solely upon the proxy information returned by such broker-dealers regardless of all other proxies purported to be signed by said beneficial owner or requests to vote such shares in person. 2.09 - Quorum. At any meeting of the stockholders, the presence in person or by proxy of the holders of a majority of all issued and outstanding shares of the Corporation, (including shares registered in the name of a broker-dealer or similar institution for beneficial owners to whom the broker-dealer distributed notice of the stockholder's meeting and proxy information regardless of whether such beneficial owners have returned proxies or otherwise instructed the broker-dealer as to voting their shares), which would then be entitled to vote, will constitute a quorum of the stockholders for all purposes. In the absence of a quorum, any meeting may be adjourned, from time to time, but any such adjournment shall not exceed sixty (60) days in the aggregate, by its Chairman until a quorum is formed. At any such adjourned meeting, at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal or temporary absence of enough stockholders which leaves less than a quorum present. 2.10 - Election Inspectors. The Board of Directors, in advance of any meeting of the stockholders, may appoint an election inspector(s) to act at such meeting (and at any adjournment thereof). If an election inspector(s) is/are not so appointed, the Chairman of the meeting may, or upon request of any person entitled to vote at the meeting will, make such appointment. If any person appointed as an inspector fails to appear or to act, a substitute may be appointed by the Chairman of the meeting. If appointed, the election inspector(s) (acting through a majority) will determine the number of shares outstanding, the authenticity, validity and effect of proxies and the number of shares represented at the meeting in person and by proxy; they will receive and count votes, ballots and consents and announce the results thereof; they will hear and determine all challenges and questions pertaining to proxies and voting; and, in general, they will perform such acts as may be proper to conduct elections and voting with complete fairness to all stockholders. No such election inspector(s) need be a stockholder of the Corporation. 2.11 - Organization and Conduct of Meetings. - 4 - By-Laws of Alanco Environmental Resources Corporation Stockholders meetings will be called to order and thereafter chaired by the Chairman of the Board of Directors if there is one or, if not, or if the Chairman of the Board is absent or so requests, then by the Vice-Chairman or if both the Chairman of the Board and the Vice-Chairman are unavailable, then by the President or if Chairman of the Board, Vice-Chairman and President are all unavailable, then by such other officer of the Corporation or such stockholder as may be appointed by the Board of Directors. The Corporation's Secretary will act as Secretary of each meeting of the Stockholders; in his absence the Chairman of the meeting may appoint any person (whether a stockholder or not) to act as Secretary thereat. After calling a meeting to order, the Chairman thereof may require the registration of all stockholders intending to vote in person, and the filing of all proxies, with the election inspector(s), if one or more have been appointed (or, if not, with the secretary of the meeting). After the announced time for such filing of proxies has ended, no further proxies or changes, substitutions or revocations of proxies will be accepted. If Directors are to be elected, a tabulation of the proxies so filed will, if any person entitled to vote in such election so requests, be announced at the meeting (or adjournment thereof) prior to the closing of the election polls. Absent a showing of bad faith on his part, the Chairman of a meeting will, among other things, have absolute authority to fix the period of time allowed for the registration of stockholders and the filing of proxies, to determine the order of business to be conducted at such meeting and to establish reasonable rules for expediting the business of the meeting (including any informal, or question and answer portions thereof). 2.12 - Stockholder Approval or Ratification. The Board of Directors may submit any contract or act for approval or ratification of the stockholders, either at a duly constituted meeting of the stockholders (the notice of which either includes mention of the proposed submittal or is waived pursuant to Section 2.03). If any contract or act so submitted is approved or ratified by a majority of the votes cast thereon at such meeting or by such unanimous written consent, the same will be valid and binding upon the Corporation as the act of its stockholders pursuant to Section 2.07. 2.13 - Informalities and Irregularities. All informalities or irregularities in any call or notice of a meeting of the stockholders or in the areas of credentials, proxies, quorums, voting and similar matters, will be deemed waived if no objection is made at the meeting. III. BOARD OF DIRECTORS 3.01 - Membership. The Board of Directors will be comprised of not less than five (5) nor more than nine (9) members, except when the total number of stockholders of the Corporation is less than three (3) then the number of Directors may be equal to the number of stockholders. Directors of the Corporation need not be stockholders. The Board of Directors will have the power and authority to decrease or increase its membership, provided the same falls within the aforesaid limits and to fill any vacancies up to the maximum number of Directors allowed, whether or not such vacancies were created by a resigned Director or a vacant position. - 5 - By-Laws of Alanco Environmental Resources Corporation The election of the members of the Board of Directors, so slated for election as set forth above, will take place at each regularly scheduled annual meeting of the stockholders, but such election may be held at any other meeting of the stockholders. 3.02 - Regular Meetings. A regular annual meeting of the Board of Directors is to be held immediately after each annual meeting of the stockholders at the place at which such stockholders meeting was held. Regular meetings, other than the annual ones, may be held at regular intervals at such places and at such times as the Board of Directors may provide. 3.03 - Special Meetings. Special meetings of the Board of Directors may be held whenever and wherever (if within the continental United States) called for by the Chairman of the Board, the President or the number of Directors which would be required to constitute a quorum. 3.04 - Notices. No notice need be given of regular meetings of the Board of Directors. Written notice of the time and place (but not necessarily the purpose or all of the purposes) of any special meeting will be given to each Director in person or via mail, facsimile or telegram addressed to him at his latest address or telephone number appearing on the Corporation's records. Notice to any Director of any such special meeting will be deemed given sufficiently in advance when, if given by mail, the same is deposited in the United States mail, with first class or air mail, postage prepaid, at least four days before the meeting date, or if personally delivered or given by facsimile or telegram, the same is handed to the Director, or the facsimile or telegram is sent at least 48 hours prior to the convening of the meeting. Any Director may waive call or notice of any meeting (and any adjournment thereof) at any time before, during which or after it is held. Attendance of a Director at any meeting will automatically evidence his waiver of call and notice of such meeting (and any adjournment thereof) unless he is attending the meeting for the express purpose of objecting to the transaction of business thereat because it has not been properly called or noticed. No call or notice of a meeting of Directors will be necessary if each of them waives the same in writing or by attendance as aforesaid. Any meeting, once properly called and noticed (or as to which call and notice have been waived as aforesaid) and at which a quorum is formed, may be adjourned to another time and place by a majority of those in attendance. 3.05 - Quorum. A quorum for the transaction of business at any meeting or adjourned meeting of the Board of Directors will consist of majority of those then in office. 3.06 - Voting. Any question submitted to any meeting or adjourned meeting of the Board of Directors will be resolved by a majority of the votes cast thereon; in case of an equality of votes, the Chairman of the meeting will have a second or deciding vote. 3.07 - Executive Committee. - 6 - By-Laws of Alanco Environmental Resources Corporation The Board of Directors may, by resolution adopted by a majority of the whole Board, name two or more of its members as an Executive Committee. Such Executive Committee will have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation while the Board is not in session, subject to such limitations as may be included in Board's resolution; provided, however, that such Executive Committee shall not have the authority of the Board of Directors in reference to the following matters: (1) the submission to stockholders of any action that requires the authorization or approval under applicable law; (2) the filling of vacancies on the Board of Directors or in any committee of the Board of Directors; (3) the amendment or repeal of the bylaws, or the adoption of new bylaws; and (4) the fixing of compensation of Directors for serving on the Board or on any Committee of the Board of Directors. A majority of those named to the Executive Committee will constitute a quorum and the Committee may at any time act by the written consent of a quorum thereof, although not formally convened. 3.08 - Other Committees. The Board of Directors shall by resolution adopted by a majority of the whole Board, appoint a Compensation/Administration Committee, an Audit Committee and other standing or temporary Committees from its membership and vest such Committees with such powers as the Board may include in its resolution; provided, however, that such Committees shall be restricted in their authority as specifically set forth with respect to the Executive Committee in Section 3.07 above. A majority of those named to any such Committees will constitute a quorum and the Committee may at any time act by the written consent of a quorum thereof, although not formally convened. 3.09 - Presumption of Assent. A Director of the Corporation who is present at a meeting of the Board of Directors, or of any Committee, at which action is taken on any corporate matter will be presumed to have assented to the action taken unless his dissent is entered in the minutes of the meeting or unless he files his written dissent to such action with the person acting as Secretary of the meeting before the adjournment thereof or forwards such dissent by registered or certified mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent will not be available to a Director who voted in favor of the action. 3.10 - Compensation. By resolution of the Board of Directors, each Director may be paid his expenses, if any, for the attendance at each meeting of the Board of Directors or of any Committee, and may be paid a fixed sum for attendance at each such meeting or a stated salary as a Director or Committee member. If a Director also serves the Corporation in another capacity, on a full time basis, and is compensated therefor, then that Director shall not be entitled to receive compensation for attendance at meetings, but shall still be entitled to expenses for such attendance. 3.11 - Action by Directors Without a Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors or of a Committee of the Corporation may be taken without a meeting if all Directors or Committee members, as the case may be, consent thereto in writing. Such consent shall have the same effect as a unanimous vote of the - 7 - By-Laws of Alanco Environmental Resources Corporation Directors or Committee members of the Corporation. 3.12 - Meetings by Conference Telephone. Any member of the Board of Directors or of a Committee of the Corporation may participate in any meeting thereof by means of a conference telephone or similar communication equipment whereby all members participating in such meeting can hear one another. Such participation shall constitute attendance in person, unless otherwise stated as provided in Section 3.04. - 8 - By-Laws of Alanco Environmental Resources Corporation IV. OFFICERS - GENERAL 4.01 - Election of Chief Executive Officer. The Board of Directors will elect the Chief Executive Officer of the Corporation who shall also be the Chairman of the Board of Directors or the President. Such election will regularly take place at each annual meeting of the Board of Directors, but maybe held at any other meeting of the Board of Directors. A person elected to the office of Chief Executive Officer will continue to hold this office until the election of his successor, subject to action earlier taken pursuant to Sections 4.04 or 6.01. 4.02 - Appointment of Additional Officers. The Chief Executive Officer will select and the Board of Directors shall appoint the Officers set forth in Section 5. In addition to the Officers contemplated in Section 5, the Chief Executive Officer may select and the Board of Directors shall appoint other corporate Officers (as, for example, one or more Assistant Secretaries) having such authority to perform such duties as may be prescribed from time to time by the Chief Executive Officer, by the President or in the case of Assistant Officers, by his/her or their superior Officers (which, in the foregoing example, would be the Secretary). Each of such Assistant Officers will be vested with all of the powers and charged with all of the duties (including those herein specifically set forth) of his superior officer in the event of such superior officer's absence or disability. 4.03 - Bonds and Other Requirements. The Board of Directors may require any Officer to give bond to the Corporation (with sufficient surety, and conditioned for the faithful performance of the duties of his/her office) and to comply with such other conditions as may from time to time be required of him/her by the Board. 4.04 - Removal or Delegations. The Chief Executive Officer may at his sole discretion remove any Officer of the Corporation at any time and with or without cause. In addition, provided that two-thirds (2/3) of the whole membership thereof concurs therein, the Board of Directors may at any time, with or without cause and whenever in its judgment the best interests of the Corporation will be served thereby, remove any Officer, including the Chief Executive Officer, or Agent of the Corporation and declare his Office vacant or temporarily delegate his/her powers and duties to any other Officer or to any Director. Such removal or delegation shall be without prejudice to the contract rights, if any, of the person so removed or whose powers and duties have been delegated. Election or appointment of an Officer or Agent shall not of itself create contract rights. 4.05 - Salaries. The Compensation of the Chief Executive Officer shall be determined and set by the Compensation/Administration Committee. All other Officer salaries shall from time to time be fixed by the Chief Executive Officer. No Officer will be prevented from receiving a salary by reason of the fact that he/she is also a Director of the Corporation. - 9 - By-Laws of Alanco Environmental Resources Corporation V. SPECIFIC OFFICERS 5.01 - Chairman of the Board. The Board of Directors may elect a Chairman to serve as a Non-Executive Officer of the Corporation.. The Chairman will preside at all meetings of the Board of Directors and be vested with such other powers and duties as the Board may from time to time delegate to him. 5.02 - Chief Officers. The Board of Directors shall elect a Chief Executive Officer who shall also be a Director of the Corporation. The Corporation may also have a Chief Financial Officer who shall also be the Treasurer of the Corporation. The Corporation may also have a Chief Operating Officer who shall also be either the Executive Vice President or President of the Corporation. The Chief Executive Officer shall be the presiding officer over all business affairs of the Corporation, subject only to the direction of the Board of Directors. 5.03 - President. The President, in the absence of the Chief Executive Officer, will supervise the business and affairs of the Corporation and the performance by all of its other Officers of their respective duties, subject to the control of the Board of Directors. Except as may otherwise be specifically provided in a resolution of the Board of Directors, the President will be a proper Officer to sign on behalf of the Corporation any deed, bill of sale, assignment, option, mortgage, pledge, note, bond, evidence of indebtedness, application, consent (to service of process or otherwise), agreement, indenture or other instrument of any significant importance to the Corporation. The President may represent the Corporation at any meeting of the stockholders of any other Corporation in which this Corporation then holds shares, and may vote this Corporation's shares in such other corporation in person or by proxy appointed by him, provided that the Board of Directors may from time to time confer the foregoing authority upon any other person or persons. The President may designate any Vice President to perform any acts, on behalf of the Corporation, in his place. 5.04 - Vice Presidents. One or more Vice Presidents may be selected by the Chief Executive Officer each of whom will be vested with all of the powers and charged with all of the duties (including those herein before specifically set forth) of the President in the event of his absence or disability. Each Vice President will perform such other duties as may from time to time be delegated or assigned to him/her by the Board of Directors, Chief Executive Officer, the President or the Executive Vice President, in that order. 5.05 - Secretary. The Secretary will keep the minutes of meetings of the stockholders, Board of Directors and any Committee, and all unanimous written consents of the stockholders, Board of Directors and any Committee of the Corporation, see that all notices are duly given in accordance with the provisions of these By-Laws or as required by applicable law, be custodian of the Corporate Seal and Corporate Records, and, in general, perform all duties incident to the office. Except as may otherwise be specifically provided in a resolution of the Board of Directors, the Secretary and each Assistant Secretary will be a proper officer to take charge of the Corporation's stock transfer books, and to - 10 - By-Laws of Alanco Environmental Resources Corporation compile the voting record pursuant to Section 3.06, and to impress the Corporation's Seal on any instrument signed by a duly authorized or empowered Officer, and to attest to the same. 5.06 - Treasurer. The Treasurer, absent the election of a Chief Financial Officer, shall serve as the Chief Financial Officer and will maintain the financial records of the Corporation and supervise all Corporate reporting with any and all government agencies. The Treasurer will keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, and will cause all money and other valuable effects to be deposited in the name and to the credit of the Corporation in such depositories, subject to withdrawal in such manner as may be designated by the Board of Directors and the Chief Executive Officer. The Treasurer will render to the President and to the Directors (at the regular meetings of the Board or whenever they may require), an account of all his/her transactions, as Treasurer, and of the financial condition of the Corporation. VI RESIGNATIONS AND VACANCIES 6.01 - Resignations. Any Director, Committee member or Officer may resign from his office at any time by written notice delivered or addressed to the Corporation at its known place of business. Any such resignation will be effective upon its receipt by the Corporation unless some later time is therein fixed; and then from that time, the acceptance of a resignation will not be required to make it effective. 6.02 - Vacancies. If the office of any Director or Committee member becomes vacant by reason of his/her death, resignation, disqualification, removal or otherwise, the Board of Directors may choose a successor to hold office for the unexpired term. VII. SEAL 7.01 - Form Thereof. The Board of Directors may, if required by applicable Law, provide for a Seal of the Corporation which will have inscribed thereon the name of the Corporation, the state and year of its incorporation. VIII. CERTIFICATES REPRESENTING SHARES 8.01 - Form Thereof. Each certificate representing shares of the Corporation will be in such form as may from time to time be approved by the Board of Directors, will be consecutively numbered and will exhibit such information as may be required by applicable law. 8.02 - Signatures and Seal Thereon. - 11 - By-Laws of Alanco Environmental Resources Corporation All certificates issued for shares of the Corporation (whether new, reissued or transferred) will bear the signatures of the President or a Vice President, and of the Secretary or an Assistant Secretary, and the impression of the Corporation's Corporate Seal, if any. The signatures of such Officers of the Corporation, and the impression of its Corporate Seal, may be in facsimile form on any certificates which are manually countersigned by an independent transfer agent and/or registered by a registrar duly appointed by the Corporation and other than the Corporation itself or one of its employees. If a supply of unissued certificates bearing the facsimile signature of a person remains when that person ceases to hold the office, the unissued certificates may continue to be issued and delivered by the Corporation's transfer agent and/or registrar thereafter, the same as though such person had continued to hold the office indicated on such certificate. 8.03 - Ownership. The Corporation will be entitled to treat the registered owner of any share as the absolute owner thereof and, accordingly, will not be bound to recognize any beneficial, equitable or other claim to, or interest in, such share on the part of any other person, whether or not it has notice thereof, except as may expressly be provided by applicable law. 8.04 - Transfers. Transfers of shares of the Corporation may be made on the stock transfer books of the Corporation only at the direction of the person named in the certificate therefor (or by his duly authorized attorney-in-fact) and upon the surrender of such certificate. 8.05 - Lost Certificates. In the event of the loss, theft or destruction of any certificate representing shares of the Corporation or of any predecessor corporation, the Corporation may issue (or, in the case of any such shares as to which a transfer agent and/or registrar have been appointed, may direct and issue) a new certificate, and cause the same to be delivered to the owner of the shares represented thereby, provided that the owner shall have submitted such evidence showing the circumstances of the alleged loss, theft or destruction, and his/her ownership of the certificate, as the Corporation considers satisfactory, together with any other facts which the Corporation considers pertinent, and further provided that a bond shall have been provided in form and amount satisfactory to the Corporation (and to its transfer agent and/or registrar, if applicable), unless the shares represented by the certificate lost, stolen or destroyed have at the time of the issuance of the new certificate a market value of $500 or less (as determined by the Corporation on the basis of such information as it may select), in which case the requirements of a bond may be waived. The Corporation may act through its President, any Vice President, its Secretary or its Treasurer for any purpose of this Section 8.05. IX. DIVIDENDS 9.01 - Dividends. Subject to such restrictions or requirements as may be imposed by applicable law or the Corporation's Articles or as may otherwise be binding upon the Corporation, the Board of Directors may from time to time declare and the Corporation may pay dividends on shares of the Corporation outstanding on - 12 - By-Laws of Alanco Environmental Resources Corporation the dates of record fixed by the Board, to be paid in cash, in property, in shares of the Corporation or in shares of other corporations owned by the Corporation on or as of such payment or distribution dates as the Board may prescribe. X. INDEMNIFICATION 10.01 - Indemnification. Subject to the provisions of Arizona Corporate Law, as amended from time to time, the Corporation does hereby indemnify and hold harmless the Directors and Officers of the Corporation for the performance or failure to perform, as the case may be, any act, which act is not wilfully and/or grossly negligent and which was performed in the best interests of the Corporation at the time said act occurred. This indemnification shall not limit the Corporation's ability provide additional indemnification, under Law, when and if adjudicated. XI. AMENDMENTS 11.01 - Amendments to By-Laws. The By-Laws may be altered, amended, supplemented, repealed or temporarily or permanently suspended, in whole or in part, or new By-Laws may be adopted, at any duly constituted meeting of the stockholders or the Board of Directors (the notice of which meeting either includes mention of the proposed action relative to the By-Laws or is waived pursuant to Section 2.03 or Section 3.04, whichever is applicable) or, alternatively, by unanimous written consent to corporate action without a meeting of the stockholders or the Board of Directors pursuant to Section 3.11. if, however, any such action arises as a matter of necessity at any such meeting and is otherwise proper, no notice thereof will be required. The foregoing By-Laws were adopted by the Board of Directors of the Corporation at a meeting held on the 23rd day of May, 1995. /s/ Cynthia L. Castellano ---------------------------- Secretary of the Corporation (Seal) Amended 8/15/95 Amended 9/27/95 Amended 2/17/96 Amended 3/13/96 Amended 7/13/96 - 13 - -----END PRIVACY-ENHANCED MESSAGE-----