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