SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For The Fiscal Year Ended December 31, 1995
Commission file number 0-14881
WASTE RECOVERY, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 75-1833498
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
309 S. PEARL EXPRESSWAY, DALLAS, TX 75201
(Address of Principal Executive Offices) (Zip Code)
(214) 741-3865
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None N/A
Securities registered pursuant to section 12(g) of the Act:
Common Stock (no par value per share)
(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 amendment to this
Form 10-K. [ ]
Number of shares of Registrant's Common Stock, no par value per share,
outstanding as of March 22, 1996: 10,907,076
The approximate aggregate market value of voting stock held by
non-affiliates of the Registrant (based on average of the closing bid and asked
price of March 22, 1996) was $2,373,870.
Documents Incorporated by Reference
Selected portions of the Registrant's Proxy Statement for 1996 Annual Meeting of
Shareholders, to be filed within 120 days of December 31, 1995, are incorporated
by reference in Part III, Items 10, 11, 12 and 13.
<PAGE>
WASTE RECOVERY, INC.
Index to 1995 Form 10-K
<TABLE>
<CAPTION>
Part 1 Page
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal proceedings 8
Item 4. Submission of matters to a vote of security holders 8
Part II
Item 5. Market for Registrant's stock and related security holder matters 9
Item 6. Selected consolidated financial data 11
Item 7. Management's discussion and analysis of financial condition and
results of operations 12
Item 8. Financial statements and supplementary data 16
Item 9. Disagreements on accounting and financial disclosure 16
Part III
Item 10. Directors and executive officers of the Registrant 16
Item 11. Executive compensation 16
Item 12. Security ownership of certain beneficial owners and management 16
Item 13. Certain relationships and related transactions 16
Part IV
Item 14. Exhibits, financial statement schedules, and reports on Form 8-K 16
Signatures 17
Financial Statements Index F-1
Exhibit Index E-1
Schedule II, Valuation and Qualifying Accounts S-1
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
General
- -------
Waste Recovery, Inc. (the Company or Registrant) is a specialized service
and process company operating in the environmental services industry. The
Company is involved in all aspects of scrap tire disposal and in conversion of
scrap tires, through a proprietary process, into a uniform, high quality,
wire-free, tire-derived fuel (TDF).
The Company believes it is the largest firm in the United States specializing in
disposal and recycling of scrap tires into a high quality fuel supplement.
Presently, the Company has TDF producing facilities operating in Portland,
Oregon; Houston, Texas; Atlanta, Georgia and Philadelphia, Pennsylvania. The
Company is a partner in a partnership, Waste Recovery-Illinois (the
Partnership), which completed the construction of two tire-derived fuel
processing facilities in Marseilles, Illinois and Dupo, Illinois (the Illinois
Partnership Facilities) during 1995. As of March 21, 1995, the Company
established operations in the Northeastern United States (see acquisition of
Domino Salvage, Tire Division, Inc. (Domino) below in this Item 1, Business).
The Company was organized in 1982 to acquire the assets of two operations in
Portland, Oregon, one of which had been producing TDF since 1976. The Houston
facility began producing TDF in 1986, the Atlanta operation in 1988, and the two
Illinois facilities became operational in late 1995. After the March 1995
acquisition of Domino and the addition of specific, proprietary, processing
equipment, Domino began producing a quality TDF in late 1995.
The Company has made investments in facilities and developed expertise in the
area of tire disposal. The system is flexible in order to serve as a disposal
service for scrap tire sources ranging from current scrap tire generators, such
as tire dealers, all the way to large, sometimes long-abandoned, scrap tire
piles. Scrap tire pick-up service must be regular and on a time schedule
sufficiently predictable in order to minimize the storage requirements of the
scrap tire generators and to provide continuity of supply to TDF users.
The Company uses its tire shredding equipment and handling systems for the
production of a high grade TDF. In addition to improving systems and equipment,
the Company has worked to make TDF more acceptable as a fuel supplement.
Generally, the permitting process required before a utility or other industrial
fuel user may start burning TDF is a process that depends on many factors, such
as the location, the volumes, the traditional fuels being supplemented, types of
burners, boilers and fuel handling systems. The Company uses its experience in
the TDF supplement business to help customers obtain permits and to equip their
facilities to most efficiently use TDF as a fuel supplement.
Waste Recovery pursues an integrated approach to scrap tire disposal and
conversion of scrap tires into TDF and works to increase the total number of TDF
users in order to increase demand for the Company's TDF. The Company has not
historically had a significant amount of backlog orders for TDF.
The Company's TDF competes against a different mix of traditional fuels and
electric power sources in various regions of the country. In the Pacific
Northwest, industry is served by hydroelectric systems that provide electric
power at a low enough rate that fossil fuel burning co-generation power systems
are not justified at industrial plants. Thus, the pulp and paper mills typical
of this region require fuel essentially for the production of heat and steam to
be used in their manufacturing process. Much of this fuel is provided from their
own "Hog Fuel," or wood waste from the logging, debarking and sawing operations.
TDF is a well-suited supplement to this internally generated fuel, especially
during the winter and spring months when waste wood fuel is wet.
In the Southwest, TDF competes with natural gas as a supplemental fuel in steam
generation facilities. Despite natural gas being relatively inexpensive in
recent years, the Company's business in this region has continued to grow. The
increasing need to dispose of abandoned tire piles, coupled with WRI's
participation in the Texas Waste Tire Recycling Program, suggests further
improvement in the future.
1
<PAGE>
The pulp and paper industries in the Southeast typically require a much greater
proportion of on-site generated power because they generate much more of their
own electric power. Since the bulk of this power is traditionally coal-based,
TDF is well-suited as a competitive energy source in the region, primarily due
to the fact that TDF's handling and burning characteristics are the closest to
coal.
The Company's 45% ownership interest in the two Illinois Partnership Facilities
will strengthen the Company's position as one of the nation's largest TDF
producers. These plants are the first of the Company's plants that are
economically justified due solely to having traditional, coal burning electric
utilities as the primary recipients of the TDF plants' output.
On March 21, 1995, the Company purchased all of the outstanding stock of Domino
Salvage, Tire Division, Inc., a scrap tire recycler located in Conshohocken,
Pennsylvania near Philadelphia that has been in business since 1988. Andrew
Sabia, former President of Domino, is managing Domino and the Company's
Northeastern operations. The Company invested approximately $500,000 in
improvements during 1995 to increase the facility's capacity. Management
believes that the existing market presence and position of Domino in the region
will facilitate the Company's expansion into the promising Northeastern markets.
Operations
- ----------
The Company receives scrap tires and processes them into TDF. In general, the
TDF production process consists of conveying whole tires to a primary shredder
which cuts them into thin strips. These strips are processed into a chip form
and then run across a magnetic separator to remove most of the bead wire and
steel belting. The resulting product is a chip of rubber compound nominally less
than two inches in any dimension and 98% free of bead wire. Most of the
processing equipment by which scrap tires are converted to a quality
tire-derived fuel has been designed or extensively modified by the Company's own
technical people. The Company continually endeavors to improve its process
economics and product quality. During the first quarter of 1996, the Company
installed a new wire recycling system at its Baytown, Texas facility. This
system, designed and manufactured by the Company, will allow the facility to
operate waste-free, significantly improving its profit margins. Two similar
systems will be installed during 1996 in the Atlanta and Portland facilities.
Since 1982, the Company has been refining and improving its production process
and has improved tire shredding techniques, equipment durability, and the
process for removal of most of the steel wire in scrap tires. The Company has
developed proprietary metering devices for use by TDF customers to control the
flow of TDF as a fuel supplement to maximize TDF utilization within each
customer's particular requirements and the framework of existing environmental
constraints.
The Company's four scrap tire processing plants received more than 12 million
scrap tires for shredding in 1995. Many of these casings were delivered by
independent operators. The Company is not dependent on any single supplier for
scrap tires. No one independent collector accounted for more than 5% of the
casings processed by the Company during 1995. Most of the casings are obtained
through the Company's own collection network, which collects from retail stores
or supplies trailers to major scrap tire generators, and through arrangements
with tire manufacturers for factory defectives. The Goodyear Tire & Rubber
Company disposed of approximately 700,000 casings with the Company, or less than
6% of all casings received in 1995.
Approximate Annual Shredding Capacities (Based on 16 hrs./day, 252 days/yr.):
<TABLE>
<CAPTION>
Approximate Utilization
Percentage in 1995
-----------------------
<S> <C> <C>
Portland TDF Plant 6.0 Million PTE's 91%
Houston TDF Plant 7.0 Million PTE's 31%
Atlanta TDF Plant 7.0 Million PTE's 54%
Philadelphia TDF Plant 5.0 Million PTE's<F1> 36%
Dupo TDF Plant<F2> 7.5 Million PTE's 12%
Marseilles TDF Plant<F2> 7.5 Million PTE's 2%
PTE's are Passenger Tire Equivalents
<FN>
<F1>Projected annual capacity after upgrades are complete.
<F2>Projected capacity when fully operational; Dupo began operations in
September 1995; Marseilles began operations in October 1995.
</FN>
</TABLE>
2
<PAGE>
A continued contributor to growth in 1995 was a large tire abatement project for
the State of West Virginia. This project has involved the clean-up of
approximately two million scrap tires at an abandoned tire site near Inwood,
West Virginia, which accounted for 21% of 1995 revenues. This project was
completed in the first quarter of 1996. TDF sales accounted for 7%, 9%, and 13%
of total company revenues for 1995, 1994 and 1993, respectively. Tipping fees,
hauling and other services accounted for 93%, 91% and 81% of total Company
revenues for 1995, 1994 and 1993, respectively.
Seasonality
- -----------
Given its origins in the Pacific Northwest, the Company's TDF sales volume has
traditionally been seasonal, with volume diminishing between June and November
of each year when the major customers in that region, pulp and paper mills, need
less fuel supplementation than in the winter and spring months when their waste
wood fuel is wet.
The Company believes the Partnership's five-year contract with Illinois Power
Company for the sale of 60,000 tons per year of TDF, as well as its own growing
client base in the South and Southeast, will help dampen seasonal fluctuations
over the foreseeable future.
Scrap-Tire Market
- -----------------
The tire manufacturing industry estimates that approximately 315 million
passenger tire equivalents (PTE's) (equivalent to approximately 225 million tire
units) were scrapped in 1995.
In recent years, the average yield in the TDF process has been a ton of product
from approximately 130 PTE's. Thus, if all tires scrapped in a year were
converted to TDF, the potential output would be close to 2.4 million tons - more
than 30 times the Company's 1995 tonnage sales of TDF. Even after allowing for
the 15% of tires scrapped annually that are used in other applications, it is
apparent that scrap tire supply, in general, should not have a limiting effect
on the Company's ability to continue its growth for the foreseeable future. This
calculation does not take into account the additional "raw material" represented
by the "tire piles" which further increase the potential TDF output. Tire
Business, a leading industry publication, reported last year that approximately
800 million discarded scrap tires are in stockpiles around the U.S.
Demand for TDF is growing, especially in the utility industry. High BTUs, low
cost, and reduced sulfur emissions have contributed to increased TDF utilization
by electric power generating facilities. Management believes there are
continuing opportunities to increase demand for this fuel. One example of this
is the recent agreement with the Illinois Power Company. Under the terms of the
contract with the Illinois Partnership, the Illinois Power Company will burn up
to 7.5 million reprocessed tires, or 60,000 tons of TDF, per year at its Baldwin
Power Station (Baldwin). This figure, which constitutes about 60% of the tires
annually discarded in Illinois, equates to only 2% of the energy needs at the
Baldwin plant.
Government Regulation
- ---------------------
The Company works within a network of government regulations and programs at
both the scrap tire supply side and the TDF supply side of the business. Due to
the recognized fire and health hazards associated with stockpiles of scrap tires
and the desire to curtail additional growth of stockpiles, stricter regulations
with respect to the disposal of current take-off tires have been implemented at
all levels of jurisdiction with increasing intensity in recent years.
3
<PAGE>
In the past couple of years, legislation has had a significant effect on the
Company's Houston operation. The State of Texas collects $2 for each new
passenger tire and $3.50 for each truck tire sold. The proceeds fund the
clean-up of abandoned tire piles, as well as the disposal of current take-offs,
and are the source of the $.85 per weighted tire unit (18.7 lbs.) paid to
licensed and registered scrap tire processors. The Company was one of the first
processors registered in 1992, and the only processor in the state to recycle
all of the scrap tires it has received under the program. The Company was under
the State of Texas' allocation program until September 1995, at which time the
allocation system was revoked and now allows qualified processors to process
tires on an unlimited basis.
The burning of TDF is subject to regulation by federal, state and local
governments. Generally, the Company and its customers must comply with
established mandatory disposal regulations and safety guidelines. TDF customers
must comply with certain emissions and ash content standards and with the
requirements of the U.S. Environmental Protection Agency and certain portions of
the Clean Air Act. It is anticipated that initial permit applications for TDF
burns in new states will be thoroughly scrutinized by regulatory bodies for
emission standards and ash content compliance. The Company has developed
historical information from its current customer base, as well as from the
numerous trial burns it has been associated with, that provides a potential
advantage in working with customers in their contacts with regulatory agencies.
Competition
- -----------
The scrap tire disposal and recycling industry is highly fragmented.
Participants include the divisions of a few large companies and many small
operators who, for the most part, either stockpile tires or shred and landfill
them. One of the largest collectors and processors of scrap tires into fuel on
the East Coast is Emanuel Tire Company in Baltimore, Maryland. Archer Daniels
Midland Company of Decatur, Illinois, one of the largest scrap tire processors
in Illinois, processes tires it receives into supplemental fuel for its own use.
In the Southwest, the implementation of legislation in Texas in 1992 fostered
the establishment of approximately 20 new tire processors. Many of these
processors are still active, but recently, several laws have been implemented
that provide that (i) as of September 1, 1995, limitations are removed on the
number of PTE's that the Company can process and receive payment for on a
monthly basis and, (ii) as of January 1, 1996, only tire processors with an
end-use market may qualify for reimbursement from the State of Texas. These laws
place pressure on the Company's competitors to produce and market a better
quality tire chip than is required by current State of Texas specifications. The
Company is the only processor in Texas to have marketed all material it has
processed and feels that with the increased liability of the State of Texas of
growing shred piles produced by other processors, it should ultimately gain a
stronger position in the market for tire procurement and increased processing.
Browning Ferris Industries, Inc. ("BFI") entered the scrap tire processing
business through the acquisition of Maust Tire Recyclers of Savage, Minnesota in
1991. BFI, headquartered in Houston, Texas, is one of the largest waste
disposers in the United States and operates tire processing facilities in the
states of Illinois, Minnesota and Georgia.
The Company's primary competition for the acquisition of scrap tire casings
comes from the companies mentioned above and numerous individual collectors.
Several programs for the use of whole tires as supplemental fuel in electric
power plants are underway with utility companies around the country.
The Company recognizes that its operations and expansions are and will be
subject to competition from other companies, some of whom have substantially
greater financial, marketing, research and development, and personnel resources
than the Company. However, the Company believes that it can effectively compete
on the basis of its expertise in the logistics of tire disposal and TDF
production technology. The Partnership's newly-constructed Illinois TDF plants
will incorporate process equipment design modifications that improve operating
efficiency as compared with the original Portland operation. The Company
believes that its processing costs and reliability are better than those
achievable by competitors using commercially available tire processing
equipment.
4
<PAGE>
<TABLE>
<CAPTION>
SCRAP TIRE STATE LEGISLATION
Nov-85 Jan-87 Jul-90 Feb-92 Jan-96
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Proposals Being Prepared or No Laws/Regulations Enacted 8 9.5 3 3 3
Active Bills in Legislature ........................... 3 6 8 9.5 0
Laws Enacted or Regulatory Requirements ............... 1 3 25 32 48
</TABLE>
5
<PAGE>
Patents and Proprietary Protection
- ----------------------------------
The Company owns the United States patents set forth in the following table:
<TABLE>
<CAPTION>
Patent No. Title/Description Issue Date
- ---------- ---------------------------------------------------------- ----------
<S> <C> <C>
4,374,573 Apparatus for Shredding Rubber Tires and Other Waste 02/22/83
Materials
4,519,550 Material Guide and Clearer for Comminuting Apparatus 05/28/85
4,560,112 Scrap Shredding Apparatus Having Clearing Rings and Method 12/24/85
for Sharpening Same
4,561,467 Triple Gate Valve 12/31/85
4,714,201 Tire Processing Apparatus and Method 12/22/87
4,750,437 Method for Disposal of Waste Materials by Incineration 06/14/88
4,804,031 Apparatus for Removing Tires From Wheels 02/14/89
4,806,056 Modular Fuel Metering Apparatus and Method 02/21/89
</TABLE>
The Company owns the Canadian patents (and pending applications) set forth in
the following table:
<TABLE>
<CAPTION>
Patent No. Title/Description Issue Date
- ---------- ---------------------------------------------------------- ----------
<S> <C> <C>
1,220,461 Scrap Shredding Apparatus Having Clearing Rings and Method 04/14/87
for Sharpening Same
1,279,051 Tire Processing Apparatus and Method Pending
</TABLE>
The Company's service mark "Making Waste a Resource" was federally registered
with the U.S. Patent and Trademark Office on July 5, 1983. The patents set forth
in the foregoing tables afford some protection in the areas in which the Company
intends to concentrate. Management believes, however, that its know-how and
regular improvements to equipment and procedures are equally important in the
waste-to-energy business.
In 1988, pursuant to its industrial development bond financing for construction
of the Atlanta plant, the Company licensed its technology, including such
patents, to the indenture trustee. In 1993, the Company licensed such technology
to the Illinois Partnership in connection with the construction of the two
facilities in Illinois.
Employees
- ---------
As of December 31, 1995, the Company and the Illinois Partnership together had
200 full-time employees, of whom 175 were in operations and the balance in
administration, sales, planning and engineering. None of the employees are
covered by collective bargaining agreements, and the Company believes its
relations with its employees are good.
6
<PAGE>
Executive Officers of the Company
- ---------------------------------
All executives hereunder are elected annually in accordance with the by-laws and
serve until their successors are elected and qualified. There are no family
relationships among any of the Company's executive officers.
Name Age Position Held With Registrant
- ------------------ --- -----------------------------
ALLAN SHIVERS, JR. 50 Chairman of the Board of Directors
THOMAS L. EARNSHAW 41 President and Chief Executive Officer
ROBERT L. THELEN 57 Executive Vice President - Engineering
SHARON K. PRICE 40 Vice President of Finance-Chief Financial Officer
ANDREW J. SABIA 28 Vice President - Northeast Region
The positions and offices of the executive officers of the Registrant are as
follows:
ALLAN SHIVERS, JR. was elected Chairman of the Board of Directors of the Company
at the April 4, 1990 Board of Directors meeting. He has served as a Director of
the Company since 1984.
THOMAS L. EARNSHAW was elected President and Chief Executive Officer, as well as
a Director, of the Company at the March 1, 1990 Board of Directors meeting. Mr.
Earnshaw joined the Company at its inception in 1982. He was elected Vice
President-Operations in 1985 and Executive Vice President-Operations in 1987.
ROBERT L. THELEN has been with the Company since 1982, and is one of the
Company's original founders. He is responsible for the design and improvement of
plant equipment, plant construction, and technical assistance to customers. He
was elected Vice President-Engineering in 1989, a Director in 1990, and
Executive Vice President-Engineering in May, 1991.
SHARON K. PRICE joined the Company on December 12, 1994, as Vice President of
Finance and Chief Financial Officer. She had been an Audit Senior Manager with
KPMG Peat Marwick LLP, where she had been employed since 1987.
ANDREW J. SABIA joined the Company with the acquisition of Domino Salvage, Tire
Division, Inc. on March 21, 1995. He has been President and an owner of Domino
since its incorporation in 1988 and joins the Company as Vice President -
Northeast Region.
7
<PAGE>
ITEM 2. PROPERTIES
The Company currently occupies the following properties:
<TABLE>
<CAPTION>
Sq. Footage of Owned or Lease Current Monthly
Location and Description Building Expiration Rental
------------------------ -------- ---------- ------
<S> <C> <C> <C>
Portland, Oregon:
25,000 sq. ft. paved property with metal 1,000 12/31/99 $872
manufacturing building
45,000 sq. ft. property with metal fabrication 4,800 12/31/99 $3,200
and maintenance building
20,000 sq. ft. graveled lot - 05/31/99 $800
Houston (Harris County), Texas:
Production facility on 9 acres partially paved 13,800 Owned -
with metal building
Atlanta, Georgia:
Production facility on 3 acres partially paved 4,800 12/31/97 $2,785
with metal building
Philadelphia, Pennsylvania
4 acres of land holding processing facility 1,500 2/28/05 $3,200
Dallas, Texas:
Office space 4,500 2/28/00 $2,765
</TABLE>
In Portland, Oregon the Company occupies a 1,500 square foot building and 400
square feet of office space on the second floor of the 4,800 square foot metal
fabrication building which serves as its administrative offices. The
administrative offices of the Houston and Atlanta facilities are in office
trailers of approximately 600 square feet. The Company's executive offices
occupy approximately 4,500 square feet in Dallas, Texas. The Company believes
that its facilities are adequate for its immediate needs, and that it has the
capacity to accommodate significant additional volume at its tire shredding
plants.
The March 21, 1995, acquisition of Domino includes three trailers used for
office space which occupy approximately 1,500 square feet, and the production
facility utilizes approximately 4 acres.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine litigation arising in the ordinary course of
business. In the opinion of the Company, such matters would not have a material
adverse effect on the financial condition or the results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company shareholders during the fourth
quarter of 1995.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's no par value common stock is presently being traded on the
over-the-counter market.
Trading commenced on July 17, 1986 and the Registrant's common shares were
quoted on the NASDAQ system until February 20, 1990 at which time the common
shares were delisted as a result of the Company's failure to meet applicable
capital and surplus requirements. The following table sets forth the range of
bid and ask prices for the Registrant's common shares during the periods
indicated:
High Low
Quarter Ended Bid Ask Bid Ask
- ------------- --- --- --- ---
03/31/94 1 1/2 2 7/8 1 3/8
06/30/94 1 7/8 2 7/8 7/8 1 3/8
09/30/94 1 3/8 1 7/8 5/8 1 1/8
12/31/94 1 9/16 2 1/2 1
03/31/95 1 1 1/2 1/2 1
06/30/95 1 5/8 2 1/8 1/2 15/16
09/30/95 1 11/16 2 1/8 7/8 1 5/16
12/31/95 1 3/8 1 7/8 3/4 1 1/16
(a) The quotations set out above represent prices between dealers and do not
include retail mark-up, mark-down or commissions. They may not represent
actual transactions. Prior to termination by NASDAQ (February 20, 1990),
such quotations were received from NASDAQ. Quotations after such time are
obtained from the National Quotation Bureau.
(b) The approximate number of record holders (not including participants in
securities position listings) of the Registrant's common shares as of March
22, 1996 was 444.
(c) To date, the Registrant has not paid any dividends on its common stock.
Future dividends, if any, will be paid in compliance with the Company's
loan agreements. The Company has outstanding 203,580 shares of its 7%
cumulative preferred stock. Prior to payment of a dividend on its common
stock, all dividends cumulated on such preferred stock must be paid. The
Company does not anticipate paying dividends on its common stock in the
foreseeable future.
Conversion of Partnership Interest
- ----------------------------------
Effective January 1, 1994, the partners of KCT Associates, Ltd. (KCT) effected
the conversion of their limited partnership interest in Waste Recovery Partners,
Ltd. (the Partnership) into unregistered common stock of the Company, as
provided for in the KCT limited partnership agreement, as amended. The
Partnership was formed in 1991 to provide needed cash to the Company in return
for a preferential return on the cash investment, 35% of the Company's Portland
operation's net profits, and conversion privileges which now have been
exercised. During the period that the Partnership was in effect, the Company, as
the general partner, continued as the manager of the Partnership and received
management and incentive fees, as well as 65% of net operating profits of the
Company's Portland operation after payment of the preferential return on the KCT
investment. In addition to the conversions referenced above, certain principals
of KCT exercised a warrant and a stock option to purchase a total of 325,000
shares of common stock which were granted pursuant to financial advisors
agreements entered into in 1991 and 1993. Pursuant to the conversions, and the
warrant and option exercises, the Company issued 2,985,323 unregistered shares
of common stock under these agreements in 1994.
On February 17, 1994, the Company announced that it received a Schedule 13D
whereby a group, comprised in part of certain affiliates of KCT and representing
approximately 35% of the outstanding common stock, had entered into an oral
agreement with respect to the voting and transfer of such stock.
9
<PAGE>
Rights Offering
- ---------------
The Company distributed nontransferable subscription rights (the Rights) to
subscribe for an aggregate of 3,238,857 shares of its common stock for an
offering price of $0.75 per share (the "Subscription Price") to the holders of
record of the common stock at the close of business on April 14, 1995 (the
"Record Date"), and to certain holders of the Company's convertible debentures,
provided that on or before June 7, 1995 (the "Conversion Date") such debenture
holders converted the debentures to common stock (collectively, the "Eligible
Shareholders"). The Eligible Shareholders received in this offering two Rights
for each five shares of common stock held on the Record Date or the Conversion
Date. Each Right entitled the holder to subscribe for and purchase one share of
common stock upon payment of the Subscription Price. Each Right also entitled
the holder to subscribe for additional shares of common stock available in this
offering that were not subscribed and paid for by other Eligible Stockholders
under the basic subscription privilege.
At the conclusion of the Rights offering on June 26, 1995, the full amount of
the subscription had been exercised; 3,238,857 shares of common stock were
issued and $2.2 million in capital was raised which has been utilized for
specific equipment improvements and working capital. In conjunction with the
offering, $265,000 plus accrued interest of $17,951 of the convertible,
subordinated debentures were converted at the rate of $0.875 per share into
323,373 shares of common stock.
10
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data has been derived from the consolidated
financial statements and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7 and the consolidated financial statements and related notes
included in Item 8.
<TABLE>
<CAPTION>
For the Years Ended December 31
-------------------------------
Operating Data 1991 1992 1993 1994 1995
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
TDF sales $1,275,492 $1,242,464 $1,114,975 $ 1,104,691 $ 1,080,172
Disposal and other revenues 4,800,072 6,820,392 7,625,518 11,320,714 13,059,751
---------- ---------- ---------- ------------ -------------
Total revenues 6,075,564 8,062,856 8,740,493 12,425,405 14,139,923
Operating expenses and
depreciation 4,656,719 5,790,747 6,902,545 12,098,884
9,753,225
General and administrative
expenses 1,436,934 1,559,784 1,660,449 2,099,579 2,568,094
---------- ---------- ---------- ------------ ------------
Income from operations (18,089) 712,325 177,499 572,601 (527,055)
Interest expense, net 422,960 353,396 352,835 378,761 457,202
Other (income) expense (56,402) (248,880) (67,340) 10,567 (380,066)
Minority interest in income 91,833 360,766 87,617 - -
Loss in equity of Partnership - - - 20,260 322,630
---------- ---------- ---------- ------------ ------------
Income (loss) before income
taxes and extraordinary items (476,480) 247,043 (195,613) 163,013 (926,821)
Income taxes benefit (expense) - (100,000) - 447,543 -
---------- ---------- ---------- ------------ ------------
Income (loss) before
extraordinary item (476,480) 147,043 (195,613) 610,556 (926,821)
Extraordinary item utilization
of income tax carry-forwards*** - 100,000 - - -
---------- ---------- ---------- ------------ ------------
Net income (loss) $ (476,480) $ 247,043 $ (195,613) $ 610,556 $ (926,821)
Net income (loss) per share:
Income (loss) before
extraordinary item $ (.16) $ .00 $ (.08) $ .06 $ (.12)
Extraordinary item - .02 - - -
---------- ---------- ---------- ------------ ------------
Net income (loss) $ (.16) .02<F2> (.08)<F2> .06<F2> (.12)
========== ========== ========== ============ ============
Weighted average number of
common and dilutive common
equivalent shares outstanding 3,975,818 4,354,995 4,040,199 7,762,817 9,132,359
========== ========== ========== ============ ============
For the Years Ended December 31
-------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Balance Sheet Data
Total assets $5,249,563 $5,394,772 $5,876,105 $ 8,745,077 $ 10,732,399
Total long-term debt $2,405,339<F1> $2,294,758<F1> $2,065,509<F1> $ 4,002,585 $ 4,409,249
Total shareholders' equity
(deficit) $ (438,752) $ (225,049) $ (362,932) $ 1,258,819 $ 2,899,006
Other Data (Unaudited)
Tons of TDF sold during the
period ended 53,451 59,494 62,156 62,564 72,961
========== ========== ========== ============ ============
<FN>
<F1> Includes long-term debt then classified as short-term debt as a result of
the Company's noncompliance during such period with certain financial
covenants in its agreement.
<F2> Undeclared dividends on cumulative preferred stock of $142,311, $142,895,
$142,502, $142,502, and $142,506 at December 31, 1991, 1992, 1993, 1994 and
1995 respectively, have been added to net loss or subtracted from net
income for purposes of computing net income (loss) per common share.
</FN>
</TABLE>
*** The Company adopted Statement of Financial Accounting Standard 109,
"Accounting for Income Taxes", January 1993.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company owns and operates plants in Portland, Oregon; Houston, Texas;
Atlanta, Georgia and Philadelphia, Pennsylvania. During 1993 and until January
10, 1994, the Portland facility was owned by Waste Recovery Partners, Ltd., a
limited partnership, of which the Company had a 65% ownership position and
served as the managing partner. Late in 1994, construction began in central and
southern Illinois on two new tire processing plants which began operations in
late 1995. These plants are owned by the Illinois Partnership, of which the
Company owns a 45% interest and is the managing partner. The Company is
operating the Illinois Partnership Facilities in close coordination with the
rest of its national system and is expanding its presence in this region of the
United States.
Regional services are coordinated from the operating bases mentioned above.
Operations encompass full-service scrap tire disposal and the recycling of tires
into a supplemental fuel form. The Company generates revenues from scrap tire
disposal fees, hauling of scrap tires and from the sale of TDF. At the plants,
scrap tires are converted and refined into TDF, a high BTU supplemental fuel
that is sold primarily to major domestic cement and paper manufacturers. The TDF
output of the Illinois facilities will initially be dedicated to use in electric
power generating boilers of Illinois Power Company.
To date, the effects of inflation on the Company's operations have been
negligible.
General Comments
- ----------------
The Company experienced significant growth during 1995 as its production
capabilities increased from 20 million passenger tire equivalents ("PTE's") to
40 million PTE's. This growth did come at a cost, as is reflected in the
Company's financial results for the year. The increase in capacity came from two
areas, (i) the acquisition of Domino and, (ii) the establishment of the two
facilities in Illinois.
With the acquisition of Domino in the first quarter of 1995, the Company
committed to restructure and rebuild Domino's facility and equipment to enable
it to produce a quality TDF. Although the capital improvements were funded
through the Rights offering, the time spent in rebuilding the plant severely
hindered the earnings capacity of the plant. The rebuild of Domino was completed
in late 1995, but did not allow sufficient time to make up for lost business
before year end. Domino was also affected by a downturn in the tire disposal
market as competitors in the Northeast drove down prices by receiving tires at a
rate significantly less than that received in the beginning of 1995 and past
years. Likewise, the TDF market has decreased in the Northeast as several major
consumers either temporarily stopped or reduced their utilization of TDF. These
factors together generated a loss from this wholly owned subsidiary of $382,514
for the period from March 21, 1995 through December 31, 1995.
The Company's 45% interest in the Illinois Partnership generated a $322,630 loss
for the year ended December 31, 1995. Most of 1995 was spent completing the
construction of the two Illinois facilities at Dupo and Marseilles, Illinois.
Completion was originally scheduled before the summer of 1995, but due to a late
start in 1994, followed by problematic weather in the Spring of 1995 and other
construction hold-ups, the facilities were not finished until September 1995.
This late entry into the scrap tire market and the coming of the winter months
severely hampered marketing efforts. The final months of the year were spent in
tire procurement and producing TDF from the 1,000,000 tires that were received
by the two plants, over 800,000 of which were in Dupo. The revenue generated
from the disposal of tires and the production and sale of TDF and wire was not
enough to overcome the operating and other overhead costs incurred during this
period of start-up and initial market development. Further contributing to the
Partnership's loss is over $438,000 of depreciation and amortization of the
property, plants and equipment, and bond issuance and preoperating costs.
The losses as discussed above total over $700,000, which comprises approximately
76% of the Company's net loss for the year ended December 31, 1995. The
remaining 24% of the loss was caused by various factors also related to the
pressures of growth and specifically, the effect on the Baytown plant of the
Texas Tire Program's allocation process which, until September 1995, limited the
monthly amount of revenue that could be generated therefrom. Higher depreciation
amounts from the rebuild of the Baytown plant in 1994 and the overhaul of
certain equipment at the Company's Atlanta facility during 1995 also contributed
to the loss.
12
<PAGE>
The Company received $750,000 from the gain on sale of equipment from the
Illinois partnership in 1995 which was earned upon the successful completion of
the Illinois Partnership Facilities within the defined budget. Of this amount,
$412,500 was recognized in other income in 1995, with the remaining $337,500
recorded as deferred revenue which will be recognized in income over the term of
the lives of the related capitalized property and equipment of the Partnership.
The West Virginia tire abatement project continued to contribute to the earnings
of the Company during 1995, although shut-down for the summer months. This tire
pile clean-up of two million tires was completed in February 1996 and proved
very profitable to the Company over its two-year term.
The income tax benefit recorded in 1994 for the gain on equipment ($750,000, as
noted above) and certain other items was effectively utilized during 1995.
However, due to the overall loss of the Company during 1995, the tax expense is
not recognized in 1995. The benefit of this deferred tax asset is the net
operating loss carry-forward available to the Company in future years.
Therefore, after reclassifying $447,543 as a noncurrent asset in 1995, its
ultimate use is expected to be realized over the two-year period ending December
31, 1997.
The losses from the Domino plant and Illinois Partnership during 1995 were
substantial and are primarily due to operations hindered by construction and to
the late start-up, respectively. The Waste Recovery plants have identified their
problem areas and appear to be back on track for 1996. It is management's belief
that although an immediate turnaround is not expected, the initial burdens of
new growth are beginning to subside as increased tire flow at all of the
facilities, additional TDF customers and a more visible market position provide
the Company with the impetus to catch up with its growth and return to
profitibility.
A recap of the Company's operating results before income taxes is as follows:
<TABLE>
<CAPTION>
1995<F1> 1994<F2> 1993
-------- -------- ----
<S> <C> <C> <C>
Operating income (loss) $ (527,055) $ 572,601 $ 177,499
Interest expense (net) (457,202) (378,761) (352,835)
Gains on sales of equipment and other income 380,066 175,675 67,340
Loss on involuntary conversion of assets - (186,242) -
Minority interest in income of Partnership - - (87,617)
Equity in loss from Partnership operations (322,630) (20,260) -
---------- ---------- ---------
Income (loss) before income taxes and
extraordinary item $ (926,821) $ 163,013 $ 195,613)
========== ========== =========
<FN>
<F1> Includes the operations of Domino for the period March 21, 1995 through
December 31, 1995.
<F2> During the months of August through November 1994, operations at the
Baytown facility were ceased due to fire related damages.
</FN>
</TABLE>
13
<PAGE>
1995 vs. 1994 vs. 1993
- ----------------------
The table below summarizes the physical activity of the Company as well as the
basic revenue categories for the last three years:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
TDF Tons Sold ............................ 72,961 62,564 62,156
Passenger Tire Equivalents Received (Tons) 132,793 108,165 96,089
TDF Sales ................................ $ 1,080,172 $ 1,104,691 $ 1,114,975
Disposal and Hauling Fees ................ $13,059,751 $11,320,714 $ 7,625,518
TDF Inventory - Year End (Tons) .......... 8,194 14,477 6,341
</TABLE>
Total revenues for 1995 at $14,140,000 are $1,715,000 higher than 1994 revenues,
representing a 14% increase. Total revenues for 1994 were more than $3,685,000
or 42% over the $8,740,000 level obtained in 1993. Thus, revenues increased by
over 60% in the last two years and by the end of 1996, capacity at the plants is
expected to provide further increases in revenues.
The average price per ton of TDF was lower in 1995 than 1994 or 1993, but the
overall customer base is expanding. Through the Portland facility, the Company
also contributed TDF to engineering and landfill projects which, although not
generating revenue, avoided some of the fees that disposal would have cost.
Tonnage of TDF sold in 1995 was higher than the 1994 and 1993 levels as the
Company continued to develop new markets for its TDF. The lower inventory level
at the 1995 year end is attributable to the larger market and focus of the
Company to keep its product turned.
The table below compares cost elements as a percentage of revenues (Revs.) over
the last three years:
<TABLE>
<CAPTION>
% of % of % of
1995 Revs. 1994 Revs. 1993 Revs.
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Total Variable Operating Expenses $11,143,176 79% $ 9,058,241 73% $ 6,160,148 71%
Depreciation .................... 955,708 7% 694,984 6% 742,397 8%
----------- ----- ----------- ----- ----------- -----
Total Operating Expenses ........ $12,098,884 86% $ 9,753,225 79% $ 6,902,545 79%
=========== ===== =========== ===== =========== =====
</TABLE>
Depreciation charges increased significantly from 1994 to 1995 in dollar terms
due to a 24% addition of property plant and equipment, 55% of which relates to
the acquisition of Domino. The percentage relationship of operating expense to
revenues also was affected by the acquisition of Domino and the lack of revenues
it generated during the period the facility was being rebuilt. Costs to operate
the Atlanta plant were relatively higher in 1995 due to mechanical problems that
affected its production efficiency.
General, administrative and interest expense increased $468,515, a comparable
increase to the prior year and remains at a comparable percentage of revenues.
Interest expense increased due to additional debt from the acquisition of Domino
and the interest accrued on the remaining convertible debentures. Interest
expense comprised 4% of total revenues compared with 3% in 1994 and 4% in 1993.
<TABLE>
<CAPTION>
% of % of % of
1995 Revs. 1994 Revs. 1993 Revs.
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
General and Administrative $ 2,568,094 18% $ 2,099,579 17% $ 1,660,449 19%
Interest Expense ......... 517,986 4% 400,314 3% 367,786 4%
Interest Income .......... 60,784 -- (21,553) -- (14,951) --
----------- ----- ----------- ----- ----------- -----
$ 3,025,296 22% $ 2,478,340 20% $ 2,013,284 23%
=========== ===== =========== ===== =========== =====
</TABLE>
14
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The operating and net loss from 1995 have required significant working capital,
but due to the growth generated in late 1994 and the successful Rights offering
completed in June 1995, the Company maintains a stronger equity position than as
of the end of 1994. One-third of the loss has been generated from the 45%
ownership in the Illinois Partnership, therefore this loss is not a direct use
of cash. The Domino facility has used significant cash resources of the Company,
which had been partially anticipated, and management anticipates improved
performance at Domino in 1996 as the plant became fully operational in late
1995.
Management remains sensitive to the risks that the Company will not have the
financial strength to take advantage of opportunities that are developing. It is
anticipated that if operating results stabilize in 1996, the Company will be
able to adequately fund its working capital requirements for at least the next
twelve months. Capital expenditures for 1996 are expected to be lower than the
past two years as all of the plants' machinery and equipment are in good working
order, and the wire reclamation systems are in the process of being installed.
These two factors should reduce operating costs. However, to capitalize on the
substantial growth that has developed over the past year, the Company will
continue to explore ways to improve its financial position.
Capital expenditures totaled $1,680,000 in 1995. Other than construction outlays
at the plant sites in Illinois, where expenditures are on the books of the
Partnership rather than the Company, the largest amounts were at the Domino
plant for its rebuild and the Atlanta plant for the rework and replacement of
several major pieces of machinery. The Portland plant also had its annual
maintenance overhaul, and over thirty trailers were purchased to handle the
increased tire flow coming into the plants. The Company's strategy for
operations and growth continues to be based on continuous improvement in both
process and logistical equipment, control of production costs, and increased
marketing of TDF and reclaimed wire.
The Company's working capital balance at December 31, 1995 was $237,503. This is
the second time in five years that management has been able to report a positive
working capital balance. The favorable prospects for growth have been convincing
arguments for management to use in achieving re-negotiation of the terms of the
Domino debt in March 1996, the exchange of the remaining convertible
subordinated debentures in March 1996, and a lower interest rate on a
significant portion of the Company's term debt.
The Domino debt has been modified to extend the first annual payment of
$200,000, which was due March 21, 1996, to twelve equal monthly principal
installments of $16,666 beginning September 21, 1996.
Effective March 15, 1996, convertible subordinated debentures in the amount of
$410,000 have been exchanged for debentures with an interest rate of 18% which
will mature on January 31, 1997, with the original conversion rate of $0.875 per
share.
In February 1996, the Company switched financial institutions and was able to
secure a preferred interest rate of prime less .5% on its term note in the
amount of $1.1 million, which remains guaranteed by the Goodyear Tire and Rubber
Company.
These modified debt agreements will allow the Company to better manage its cash
flow to match the revenue stream.
Management believes that the 1995 results reflect the initial burden of starting
the Illinois facilities, acquiring Domino and restructuring its facility, and an
active, competitive market. Debt service charges and depreciation continue to
increase annually as the Company experiences high growth. However, management
still believes that the Company's operating strategies are on the right track,
and they continue to have confidence in the future potential for the Company.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item begin at page F-1 hereof.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
-None-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding directors, see "Election of Directors" in the
Company's Proxy Statement to be filed under Regulation 14A within 120 days after
December 31, 1995, which information is incorporated herein by reference. For
information regarding executive officers, see "Executive Officers of the
Company" in Item 1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, refer to a like caption in the Company's
Proxy Statement to be filed under Regulation 14A within 120 days after December
31, 1995, which information is incorporated herein by reference. However,
subparts captioned "Board Compensation Committee Report on Executive
Compensation" and "Performance Graph" are specifically not incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning this item, refer to a like caption in the Company's
Proxy Statement to be filed under Regulation 14A within 120 days after December
31, 1995, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, refer to a like caption in the Company's
Proxy Statement to be filed under Regulation 14A within 120 days after December
31, 1995, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial statements are listed in the "Index to Consolidated Financial
Statements for Waste Recovery, Inc." on page F-1 of this Form 10-K and
incorporated herein by reference.
(a) 2. Financial statements are listed in the "Index to Financial Statements
for Waste Recovery - Illinois" on page F-1 of this Form 10-K and
incorporated herein by reference.
(a) 3. Exhibits are listed on page E-1 through E-4 of this Form 10-K and
incorporated herein by reference.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below on March 28, 1996, by the
following duly authorized person on behalf of the Company.
WASTE RECOVERY, INC.
(Registrant)
Date: March 28, 1996 By: /s/ THOMAS L. EARNSHAW
Thomas L. Earnshaw
President and Chief Executive Officer
Pursuant to the requirements to the Securities Exchange Act of 1934, this report
has been signed below on March 28, 1996, by the following persons on behalf of
the Registrant in the capacities indicated.
/s/ THOMAS L. EARNSHAW
By: Thomas L. Earnshaw By: Roger W. Cope, Director
President and Chief Executive
Officer (Principal Executive Officer), /s/ MICHAEL C. DODGE
Treasurer and Director By: Michael C. Dodge, Director
/s/ SHARON K. PRICE /s/ ROBERT L. THELEN
By: Sharon K. Price By: Robert L. Thelen, Director
Vice President of Finance
(Principal Financial and Accounting /s/ W. DAVID WALLS
Officer) By: W. David Walls, Director
/s/ ALLAN SHIVERS, JR. /s/ CRANDALL S. CONNORS
By: Allan Shivers, Jr., Director By: Crandall S. Connors, Director
/s/ STEVEN E. MACINTYRE
By: Steven E. MacIntyre, Director
/s/ JOHN C. KERR
By: John C. Kerr, Director
17
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR WASTE RECOVERY, INC.
Page
----
<S> <C>
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and 1994 F-3,4
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1995, 1994 and 1993 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-7
Notes to Consolidated Financial Statements F-8
Schedule:
VIII. Valuation and Qualifying Accounts S-1
INDEX TO FINANCIAL STATEMENTS FOR WASTE RECOVERY - ILLINOIS
Report of Independent Accountants F-27
Financial Statements:
Balance Sheets at December 31, 1995 and 1994 F-28,29
Statements of Operations for the years ended
December 31, 1995 and 1994 F-30
Statements of Changes in Partners' Capital for the years ended
December 31, 1995 and 1994 F-31
Statements of Cash Flows for the years ended
December 31, 1995 and 1994 F-32
Notes to Financial Statements F-33
</TABLE>
All other schedules are omitted because they are not required, not applicable or
the required information is presented in the accompanying financial statements.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
Waste Recovery, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Waste
Recovery, Inc. and its subsidiary at December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
March 27, 1996
F-2
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................... $ 726,562 $ 261,118
Accounts receivable, less allowance for doubtful accounts
of $27,083 and $25,000, respectively (notes 12 and 21) 1,887,426 1,919,004
Note and other receivables (notes 3 and 19) ............. 5,758 514,816
Inventories (notes 4 and 12) ............................ 645,651 800,805
Deferred income taxes (note 18) ......................... -- 447,543
Other current assets (note 5) ........................... 149,912 243,765
--------- ---------
Total current assets ............................... 3,415,309 4,187,051
--------- ---------
Property, plant and equipment (notes 6, 7, 12 and 19) ........ 11,700,255 9,442,172
Less accumulated depreciation ........................... 6,840,820 6,103,133
--------- ---------
Net property, plant and equipment .................. 4,859,435 3,339,039
--------- ---------
Restricted cash and cash equivalents (notes 8, 12 and 25) .... 998,035 506,521
Investment in Waste Recovery - Illinois (note 9) ............. 258,539 335,035
Bond and debt issuance costs, less accumulated amortization of
$153,287 and $101,786, respectively ....................... 175,046 226,547
Deferred income taxes (note 18) .............................. 447,543 --
Goodwill, less accumulated amortization of $41,164 ........... 507,695 --
Other assets ................................................. 70,797 150,884
--------- ---------
$10,732,399 $ 8,745,077
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Liabilities:
Notes payable (note 10) ...................................... $ 28,945 $ 170,915
Convertible subordinated debentures (note 11) ................ 40,000 --
Current installments of long-term debt (note 12) ............. 427,552 224,683
Current installments of capital lease obligations (note 7) ... 93,423 111,327
Accounts payable (note 17) ................................... 1,996,857 2,318,365
Accrued wages and payroll taxes .............................. 174,753 374,881
Other accrued liabilities .................................... 372,800 283,502
Deferred revenue (note 9) .................................... 43,476 --
--------- ---------
Total current liabilities ............................... 3,177,806 3,483,673
--------- ---------
Convertible subordinated debentures, noncurrent (note 11) ......... 495,000 800,000
Long-term debt, excluding current installments (note 12) .......... 3,591,376 3,065,447
Obligations under capital leases, excluding current
installments (note 7) .......................................... 178,797 137,138
Deferred revenue, noncurrent (note 9) ............................. 246,338 --
Note payable (note 10) ............................................ 144,076 --
--------- ---------
Total liabilities ....................................... 7,833,393 7,486,258
--------- ---------
Stockholders' Equity (notes 11, 13, 14, 15, 16 and 17):
Cumulative preferred stock, $1.00 par value, 250,000 shares
authorized, 203,580 issued and outstanding in 1995 and 1994
(liquidating preference $13.91 per share, aggregating
$2,831,629) 203,580 203,580
Preferred stock, $1.00 par value, authorized and unissued
9,750,000 shares in 1995 and 1994
Common stock, no par value, authorized 30,000,000 shares,
10,830,170 and 7,137,143 shares issued and outstanding
in 1995 and 1994, respectively ............................ 407,800 407,800
Additional paid-in capital ................................... 13,320,410 10,753,402
Accumulated deficit .......................................... (10,958,904) (10,032,083)
---------- ----------
2,972,886 1,332,699
Treasury stock, at cost, 103,760 common shares ............... (73,880) (73,880)
---------- ----------
Total stockholders' equity .............................. 2,899,006 1,258,819
---------- ----------
Commitments and contingencies (notes 7, 9, 23 and 24)
$10,732,399 $ 8,745,077
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues (note 21):
Tire-derived fuel sales ........................... $ 1,080,172 $ 1,104,691 $ 1,114,975
Disposal fees, hauling and other revenue (note 17) 13,059,751 11,320,714 7,625,518
---------- ---------- ---------
Total revenues ............................... 14,139,923 12,425,405 8,740,493
Operating expenses ..................................... 11,143,176 9,058,241 6,160,148
---------- ---------- ----------
2,996,747 3,367,164 2,580,345
General and administrative expenses .................... 2,568,094 2,099,579 1,660,449
Depreciation and amortization .......................... 955,708 694,984 742,397
---------- ---------- ----------
(527,055) 572,601 177,499
Other income (expense):
Interest income ................................... 60,784 21,553 14,951
Interest expense .................................. (517,986) (400,314) (367,786)
Other income (note 9) ............................. 355,360 9,697 67,340
Gains on sales of property and equipment .......... 24,706 165,978 --
Loss on involuntary conversion of assets (note 19) -- (186,242) --
Minority interest in income of partnership
(note 13) ...................................... -- -- (87,617)
Equity in loss from partnership operations (note 9) (322,630) (20,260) --
---------- ---------- ----------
(399,766) (409,588) (373,112)
Income (loss) before income taxes ...................... (926,821) 163,013 (195,613)
Income tax benefit (expense) (note 18) ................. -- 447,543 --
---------- ---------- ----------
Net income (loss) ............................ (926,821) 610,556 (195,613)
Undeclared cumulative preferred stock dividends ........ 142,506 142,502 142,502
---------- ---------- ----------
Net income (loss) available to common
shareholders .............................. $ (1,069,327) $ 468,054 $ (338,115)
============ ============ ============
Net income (loss) per share .................. $ (.12) $ .06 $ (.08)
============ ============ ============
Weighted average number of common and dilutive
common equivalent shares outstanding .............. 9,132,359 7,762,817 4,040,199
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Cumulative
Preferred Stock Common Stock
Shares Par Value Shares Par Value
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Balances at December 31, 1992 .................. 203,580 $ 203,580 4,103,495 $ 407,800
Stock issued to Directors ...................... -- -- 37,464 --
Options exercised under incentive
stock option plan ........................... -- -- 3,000 --
Reduction in note receivable charged
to compensation expense ..................... -- -- -- --
Net loss -- -- -- --
------- ------- --------- -------
Balances at December 31, 1993 .................. 203,580 203,580 4,143,959 407,800
Conversion of Waste Recovery
Partners, Ltd. interests .................... -- -- 2,660,323 --
Stock issued to Directors ...................... -- -- 4,361 --
stock option plan ........................... -- -- 3,500 --
Options exercised by financial
advisors .................................... -- -- 325,000 --
Reduction in note receivable charged
to compensation expense ..................... -- -- -- --
Net income ..................................... -- -- -- --
------- ------- --------- -------
Balances at December 31, 1994 .................. 203,580 203,580 7,137,143 407,800
Stock issued to Directors ...................... -- -- 27,366 --
Options exercised under stock
option plan ................................. -- -- 44,800 --
Conversion of subordinated
debentures .................................. -- -- 382,004 --
Rights offering to common
shareholders ................................ -- -- 3,238,857 --
Net loss -- -- -- --
------- ------- --------- -------
Balances at December 31, 1995 .................. 203,580 $ 203,580 10,830,170 $ 407,800
======= ======= ========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6.1
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Additional Note Total
Paid-In Accumulated Treasury Receivable for Stockholders'
Capital Deficit Stock Stock Sold Equity/(Deficit)
------- ------- ----- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992 ...... $ 9,699,477 $(10,477,026) $ (73,880) $ (15,000) $ (225,049)
Stock issued to Directors .......... 49,450 -- -- -- 49,450
Options exercised under incentive
stock option plan ............... 780 -- -- -- 780
Reduction in note receivable charged
to compensation expense ......... -- -- -- 7,500 7,500
Net loss ........................... -- (195,613) -- -- (195,613)
--------- ----------- ------- ------- --------
Balances at December 31, 1993 ...... 9,749,707 (10,642,639) (73,880) (7,500) (362,932)
Conversion of Waste Recovery
Partners, Ltd. interests ........ 807,900 -- -- -- 807,900
Stock issued to Directors .......... 6,000 -- -- -- 6,000
Options exercised under incentive
stock option plan ............... 2,885 -- -- -- 2,885
Options exercised by financial
advisors ........................ 186,910 -- -- -- 186,910
Reduction in note receivable charged
to compensation expense ......... -- -- -- 7,500 7,500
Net income
-- 610,556 -- -- 610,556
--------- ----------- ------- ------- --------
Balances at December 31, 1994 ...... 10,753,402 (10,032,083) (73,880) -- 1,258,819
Stock issued to Directors .......... 15,900 -- -- -- 15,900
Options exercised under stock
option plan ..................... 11,648 -- -- -- 11,648
Conversion of subordinated
debentures ...................... 334,252 -- -- -- 334,252
Rights offering to common
shareholders .................... 2,205,208 -- -- -- 2,205,208
Net loss ........................... -- (926,821) -- -- (926,821)
--------- ---------- ------- ------- --------
Balances at December 31, 1995 ...... $ 13,320,410 $(10,958,904) $ (73,880) -- $ 2,899,006
============ ============ ========= ======= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6.2
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ (926,821) $ 610,556 $ (195,613)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Charge-off of other receivables ........... 28,582 -- --
Depreciation and amortization ............. 1,515,759 1,149,878 1,298,068
(Gains) losses on sales of property and
equipment .............................. (24,706) (165,978) 169
Amortization of goodwill .................. 41,164 -- --
Deferred income taxes ..................... -- (447,543) --
Interest imputed on discounted note payable 13,508 -- --
Minority interest in income of partnership -- -- 87,617
Equity in loss from partnership operations 335,176 20,260 --
Stock issued to Directors ................. 12,000 -- --
Changes in assets and liabilities:
Accounts receivable ....................... 143,420 (1,002,815) (362,619)
Note and other receivables ................ -- (401,816) --
Inventories ............................... (663,057) (721,117) (671,771)
Other current assets ...................... 107,163 (11,591) (22,561)
Other assets .............................. 75,157 (31,736) 21,451
Accounts payable .......................... (387,772) 1,019,420 626,158
Payable to affiliate ...................... (25,846) 81,083 --
Accrued liabilities ....................... (45,920) 301,566 171,912
Deferred revenue .......................... 289,814 (45,000) --
--------- -------- --------
Net cash provided by operating activities 487,621 400,167 907,811
--------- -------- --------
Cash flows from investing activities:
Proceeds received on note and other receivables .. 490,320 100,000 --
Proceeds from sales of property, plant and
equipment ..................................... 78,000 205,737 6,131
Purchases of property, plant and equipment ....... (1,681,169) (804,790) (473,850)
Cash placed in restricted accounts ............... (530,200) (238,400) (32,585)
Cash payments out of restricted accounts ......... 38,686 90,000 75,000
Purchase of Domino Salvage, Tire Division, Inc.,
net of cash received of $16,165 ............... (170,019) -- --
Investment in Waste Recovery - Illinois .......... -- (328,721) (100,338)
---------- -------- --------
Net cash used by investing activities .. (1,774,382) (976,174) (525,642)
---------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable .......... 64,764 242,673 247,850
Payment of notes payable ......................... (206,734) (223,091) (197,775)
Proceeds from issuance of long-term debt ......... 88,230 95,637 --
Repayment of long-term debt ...................... (297,013) (198,591) (212,130)
Repayment of capital lease obligations ........... (117,798) (175,262) (119,987)
Issuance of convertible subordinated debentures .. -- 800,000 --
Proceeds from issuance of common stock ........... 2,220,756 155,795 42,320
Cash distributions to minority interest .......... -- -- (81,551)
---------- -------- --------
Net cash provided (used) by financing
activities .......................... 1,752,205 697,161 (321,273)
---------- -------- --------
Net increase in cash and cash equivalents ............. 465,444 121,154 60,896
Cash and cash equivalents at beginning of year ........ 261,118 139,964 79,068
---------- -------- --------
Cash and cash equivalents at end of year .............. $ 726,562 $ 261,118 $ 139,964
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
December 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) Organization and Operations
Waste Recovery, Inc. (the Company or WRI) is a tire recovery company
that specializes in processing scrap tires into a refined fuel
supplement more commonly referred to as tire-derived fuel (TDF). The
Company generates income from the sale of TDF and from tipping fees
charged for the disposal of tires.
The Company is incorporated in the State of Texas and has its
headquarters in Dallas, Texas. The operating plants are in Portland,
Oregon; Houston, Texas; Atlanta, Georgia; and Conshohocken,
Pennsylvania.
The Company entered into an agreement as of November 29, 1993, to form
a joint venture in a partnership, Waste Recovery - Illinois, an
Illinois general partnership (Illinois partnership), in which it has a
45% ownership interest. Riverside Caloric Company, an Indiana
corporation, has a 55% ownership in this Illinois partnership.
On March 21, 1995, the Company acquired 100% of the outstanding stock
of Domino Salvage, Tire Division, Inc. (Domino), a scrap tire
recycling company located in Conshohocken, Pennsylvania, a suburb of
Philadelphia (see note 2).
(b) Principles of Consolidation
For 1995, the consolidated financial statements include the financial
statements of Domino Salvage, Tire Division, Inc., a wholly-owned
subsidiary of the Company, which was purchased on March 21, 1995 (see
note 2). The 1995 consolidated financial statements include the
operations of Domino for the period March 21, 1995 through December
31, 1995.
For 1993, the consolidated financial statements included the financial
statements of Waste Recovery, Inc. and Waste Recovery Partners, Ltd.
in which the Company owned a 65% interest. References in the 1993
consolidated financial statements to minority interest pertain to the
other 35% owner (see note 13).
Effective January 1, 1994, the limited partners of Waste Recovery
Partners, Ltd. converted their limited partnership interests into 2.6
million unregistered shares of WRI common stock. Due to this
conversion, the operations of Waste Recovery Partners, Ltd. became
wholly-owned by the Company. The 1994 consolidated financial
statements reflect the operations of the combined entities.
F-8
<PAGE>
All significant intercompany balances and transactions have been
eliminated in consolidation. The Company's investment in and earnings
or losses from Waste Recovery - Illinois are accounted for by the
equity method (see note 9).
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 disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Cash and Cash Equivalents
The Company considers all unrestricted cash and highly liquid debt
instruments with original maturities of three months or less to be
cash equivalents.
(d) Inventories
Parts inventory represents primarily the cost of the grinder knives
and machinery parts used in the TDF manufacturing process. These
inventories are stated at cost (first-in, first-out) and are
depreciated over the useful lives of these parts, generally six to
eighteen months. TDF inventory is stated at the lower of cost or
market. Cost is determined using a weighted average cost method.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property and
equipment under capital leases are stated at the lower of the present
value of minimum lease payments or fair value of the asset at the
inception of the lease.
Depreciation of property, plant and equipment is calculated using the
straight-line method over the estimated useful lives of the assets
(generally three to ten years). Property, plant and equipment held
under capital leases and leasehold improvements are amortized using
the straight-line method over the shorter of the lease term or
estimated useful life of the asset.
(f) Bond Issuance Costs
Bond issuance costs are recorded at cost and amortized over the life
of the associated debt using the effective interest method.
F-9
<PAGE>
(g) Goodwill
The Company assesses the recoverability of goodwill by determining
whether the amortization of the asset balance over its remaining life
can be recovered through undiscounted future operating cash flows of
the acquired operation. The amount of impairment, if any, is measured
based on the estimated fair value of the operation. Goodwill
associated with the purchase of Domino (see note 2) is being amortized
on a straight-line basis over ten years.
(h) Other Assets
Patents, which are included in other assets, are recorded at cost and
amortized over a fifteen-year period using the straight-line method.
Also included in other assets as of December 31, 1994 is the
noncurrent portion of a note receivable, which approximates $87,000 at
December 31, 1994, and which was received in full in 1995 (see note
3).
(i) Income Taxes
The Company utilizes the asset and the liability method of accounting
for income taxes which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial carrying amounts and the
tax bases of assets and liabilities.
(j) Net Income (Loss) Per Common Share
Net income or loss per common share is computed on the weighted
average number of common shares and dilutive common equivalent shares
outstanding each year. Outstanding stock options, warrants, and
conversion rights are common stock equivalents but are excluded in
1995 and 1993 from the calculation of loss per common share since the
effect would be antidilutive. Primary and fully diluted earnings per
share are the same in 1994.
Net income or loss is adjusted by the effect of undeclared dividends
on preferred stock of $142,506, $142,502, and $142,502 for the years
ended December 31, 1995, 1994 and 1993, respectively. The effect was
to: (1) increase the net loss per common share by .01 in 1995; (2)
reduce the net income per common share by .02 in 1994; and (3)
increase the net loss per common share by .03 in 1993.
(k) Statements of Cash Flows
The Company paid $469,903, $377,558, and $370,888 for interest in
1995, 1994 and 1993, respectively. No federal income taxes were paid
during 1995, 1994 or 1993. See note 20 for further information on
noncash transactions.
F-10
<PAGE>
(l) Recent Accounting Pronouncements
In 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" and Statement No. 123,
"Accounting for Stock-Based Compensation." Both statements are
required for adoption in 1996.
Statement No. 121 requires the review of long-lived assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
An impairment loss will be recognized if the sum of the expected
future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset. The amount of the impairment
loss will be measured as the difference between the carrying amount of
the asset and its estimated fair value. The Company will adopt this
statement in 1996 and does not anticipate its adoption to be material
to the consolidated financial statements.
Statement No. 123 establishes accounting and reporting standards for
various stock-based compensation plans. Statement No. 123 encourages
the adoption of a fair value based method of accounting for employee
stock options, but permits continued application of the accounting
method prescribed by Accounting Principle Board Opinion No. 25
(Opinion 25), "Accounting for Stock Issued to Employees." Entities
that continue to apply the provisions of Opinion 25 must make pro
forma disclosures of net income and earnings per share as if the fair
value based method of accounting had been applied. The Company will
adopt Statement No. 123 in 1996 and currently expects to continue to
account for its employee stock options in accordance with Opinion 25.
(m) Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) ACQUISITION OF SUBSIDIARY
-------------------------
On March 21, 1995, WRI acquired 100% of the outstanding stock of
Domino Salvage, Tire Division, Inc., (Domino), a scrap tire recycling
company located in Conshohocken, Pennsylvania, a suburb of
Philadelphia. WRI invested approximately $500,000 during 1995 into
Domino to bring Domino's scrap tire recycling capacity up to 5 million
passenger tire equivalents (PTE's) per year. Reconstruction of the
plant was completed in late 1995, and the plant became fully
operational in early 1996.
The acquisition was accounted for as a purchase and, accordingly, the
purchase price has been allocated to the assets acquired and
liabilities assumed based on estimated fair values at the date of
acquisition. The results of operations of Domino have been included in
the Company's consolidated statements of operations from the date of
acquisition through December 31, 1995.
F-11
<PAGE>
A summary of the assets acquired and liabilities assumed follows:
Current assets ......................... $ 134,996
Plant, property and equipment .......... 650,765
Debt and notes payable ................. (368,149)
Accounts payable and accrued liabilities (96,452)
---------
$ 321,160
=========
The following unaudited pro forma summary presents the consolidated
result of the Company's operations as if the acquisition had occurred
at the beginning of the periods presented. The information does not
purport to be indicative of the results that actually would have been
obtained if the operations were combined during the periods presented
and is not intended to be a projection of future results or trends.
For the year ended For the year ended
December 31, 1995 December 31, 1994
Unaudited Unaudited
--------- ---------
Revenues ................ $ 14,370,000 $ 9,600,000
============ ============
Net income (loss) ....... $ (960,000) $ 560,000
============ ============
Earnings (loss) per share $ (.10) $ .05
============ ============
The Company purchased Domino for approximately $867,000, including
legal costs, with an initial cash payment to the former shareholders
of $100,000. The Company is withholding an additional $50,000, payment
of which is contingent upon certain events being resolved. The
remaining payments will be made as follows:
1996 $ 66,664
1997 358,336
1998 275,000
-------
$700,000
========
Effective March 21, 1996, this note was modified to commence monthly
installment payments on September 21, 1996, in the amount of $16,666
per month for twelve consecutive months. The second and third
installments of $225,000 and $275,000, respectively, are to remain due
on March 21, 1997 and 1998, respectively. Accrued interest as of March
21, 1996, is to be paid with one payment of $30,000 in March 1996,
followed by monthly payments of $4,222 plus interest at prime plus 1%
beginning April 21, 1996, and continuing through December 21, 1996.
The sum of payments is subject to certain cash flow calculations which
may cause larger payments beginning as of June 30, 1996. This note
bears interest at the rate of 1% over prime and the note is secured by
the assets and the stock of Domino (included in note 12). The new
terms of the modified agreement are reflected in the above remaining
payments schedule. The acquisition also includes a five-year
employment agreement with the former President and owner of Domino.
F-12
<PAGE>
(3) NOTE AND OTHER RECEIVABLES
--------------------------
During 1994, the Company sold equipment for $300,000 and recognized a
gain of $90,078. The terms of the sale included a down payment of
$100,000, followed by a $75,000 payment due March 10, 1995, with the
remaining $125,000 to be paid over a two-year term beginning April 10,
1995. The current portion ($113,000) of the note was included in the
note and other receivables account and the noncurrent portion
($87,000) was included in other assets as of December 31, 1994. The
debtor remitted the full amount owed on this note during 1995.
Also included in the note and other receivables account at December
31, 1994, was a $402,000 receivable from an insurance company for
property damage and business interruption insurance related to the
Baytown fire (see note 19). The Company received approximately
$300,000 of this amount in January 1995, then received a final payment
in August 1995. A difference of $28,582 is included in other income
(expense) as a charge for the year ended December 31, 1995.
(4) INVENTORIES
-----------
Inventory components at December 31, 1995 and 1994 are as follows:
1995 1994
---- ----
Manufactured fuel inventory $228,303 $303,764
Work in progress .......... 12,324 171,176
Parts inventory ........... 405,024 325,865
-------- --------
$645,651 $800,805
======== ========
(5) OTHER CURRENT ASSETS
--------------------
Other current assets at December 31, 1995 and 1994 are as follows:
1995 1994
---- ----
Prepaid insurance $ 94,395 $211,982
Other ........... 55,517 31,783
-------- --------
$149,912 $243,765
======== ========
F-13
<PAGE>
(6) PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment at December 31, 1995 and 1994 are
summarized as follows:
1995 1994
---- ----
Land ........................ $ 574,280 $ 574,280
Buildings ................... 50,145 --
Tire processing equipment ... 7,049,520 6,472,306
Hauling equipment ........... 1,047,327 743,507
Metering units .............. 340,338 287,164
Shop tools and yard equipment 341,981 159,097
Furniture and fixtures ...... 207,661 139,897
Leasehold improvements ...... 1,467,722 889,730
Construction in progress .... 621,281 176,191
----------- -----------
$11,700,255 $ 9,442,172
=========== ===========
(7) LEASES
------
The Company leases certain property and equipment under capital leases
and certain other property and equipment is leased under noncancelable
operating leases which expire over the next five years. Property and
equipment include the following amounts for capital leases at December
31, 1995:
<PAGE>
1995 1994
---- ----
Hauling equipment ........... $ 282,462 $ 358,524
Tire processing equipment ... 107,574 109,983
Furniture and fixtures ...... 66,204 19,033
--------- ---------
456,240 487,540
Less accumulated depreciation (130,040) (154,018)
--------- ----------
$ 326,200 $ 333,522
========= =========
A summary of the minimum rental commitments under noncancelable
operating leases and the present value of future minimum capital lease
payments as of December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
Year ending December 31:
1996 $108,370 $240,701
1997 103,569 214,722
1998 79,269 168,795
1999 16,719 140,857
2000 7,847 47,407
Thereafter - 176,000
-------- --------
315,774 $988,482
========
Less: amount representing interest 43,554
--------
Present value of minimum lease payments $272,220
========
</TABLE>
Total rent expense for operating leases for the years ended December
31, 1995, 1994 and 1993 was $813,397, $696,750, and $506,513,
respectively.
F-14
<PAGE>
(8) RESTRICTED CASH
---------------
Under terms of various debt agreements (see note 12), the Company is
required to maintain cash balances which have certain withdrawal
restrictions. Amounts on deposit at December 31, 1995 and 1994
consisted of certificates of deposit or money market accounts as
follows:
Release
1995 1994 Date
---- ---- ----
Plant financing debt reserve .......... $390,000 $390,000 2007
Secured operating permits ............. 93,853 98,939 --
Repair and maintenance fund ........... 14,182 17,582 2007
Security for Illinois debt (see note 9) 500,000 -- --
-------- --------
$998,035 $506,521
======== ========
Pursuant to provisions in the loan agreement, funds were disbursed
from the repair and maintenance fund in 1995 and 1994.
In connection with the guaranty by the Company of the bonds sold by
Waste Recovery - Illinois in September 1994, certain holders of
long-term debt of the Company required that an additional $195,000 of
collateral be placed in the plant financing debt reserve. The Company
utilized some of the funds obtained from the private placement of its
convertible subordinated debentures for this purpose (see note 11).
The Company was also required to provide to these debt holders an
additional lien of $600,000 on its Portland facility.
(9) INVESTMENT IN WASTE RECOVERY - ILLINOIS
---------------------------------------
Waste Recovery - Illinois was formed to jointly build and operate two
tire-derived fuel processing facilities in Dupo and Marseilles,
Illinois. The facilities cost approximately $5 million each and began
operation in late 1995. Waste Recovery - Illinois has a five year
contract to supply Illinois Power Company with 60,000 tons of TDF
annually which represents 50% of the facilities' estimated production
capacity.
Waste Recovery - Illinois completed the sale of $8.875 million in
solid waste disposal revenue bonds as of September 27, 1994. The
proceeds of the bonds were used to finance the construction of the two
facilities. The Company is guarantor on the bonds and, as manager of
the Illinois partnership, is subject to receive administrative fees of
$4,000 per month plus a management fee based on net income, as
defined. During 1995, the Company collected $12,000 in such fees as
both plants were operational in October 1995.
At December 31, 1994, the Company's investment in the Illinois
partnership included costs and expenses incurred by WRI which were not
reimbursable to the Company under the terms of the Illinois
partnership agreement. Also, under the equity method of accounting,
the Company recognized $322,630 and $20,260 as losses from partnership
operations for the years ended December 31, 1995 and 1994,
respectively. No income or loss from partnership operations was
incurred for 1993.
F-15
<PAGE>
At December 31, 1995 and 1994, the Company's investment in the
Illinois partnership includes $258,680 and $61,882, respectively, in
inventories which were transferred to the Partnership at cost.
Riverside Caloric Company (RCC) contributed $2 million and the Company
contributed a license of its technology and assigned the Illinois
partnership all of its right, title and interest in a five-year
contract with Illinois Power Company. The Company received $750,000
upon reaching certain performance objectives for the construction of
equipment used by the Illinois partnership upon the startup of the
facilities. Fifty-five percent of this fee, representing the
percentage of the Illinois partnership not owned by the Company, is
being recognized in other income for the year ended December 31, 1995.
The remaining 45% has been recorded as deferred revenue to be
recognized such that it will offset the Company's interest in the
excess depreciation expense recorded by the Partnership related to
this portion of the cost of the plants. Of the $750,000 received,
$500,000 of it is restricted until certain criteria regarding cash
flow before debt service, as defined, is attained for successive
years, as defined.
Profits, losses and credits of the Illinois partnership are basically
allocated in accordance with the partners' percentage interests,
except that net capital event proceeds, as defined, shall be
distributed to the partners first, 100% to RCC until it has received
$2,000,000 of distributions, and second, 100% to the Company until it
has received $2,000,000 of distributions. Thereafter, any remaining
balance is distributed in accordance with the percentage interests.
The Company has the option to purchase a portion of RCC's partnership
interest in the Illinois partnership to reduce RCC's interest to 50%
at specified dates throughout the first five years of operations. The
Company also has the option to purchase all of RCC's interest based
upon certain defined criteria after four years of operations. RCC has
the option to require the Company to purchase RCC's entire partnership
interest for a purchase price, as defined. This option may be
exercised at any time on or after the third anniversary of the
operating date and prior to the fifth anniversary of the operating
date.
(10)NOTES PAYABLE
-------------
The Company finances insurance premiums under note agreements
providing for fixed monthly principal and interest payments due over
terms not to exceed nine months. Balances outstanding under such note
agreements aggregated $28,945 and $121,757 at December 31, 1995 and
1994, respectively. Included in notes payable at December 31, 1994 is
$25,000 due to an individual and $22,050 due officers of the Company,
all of which were paid in full in 1995. In addition, the Company also
had $2,108 remaining on a note payable to a bank at December 31, 1994
for a vehicle.
With the acquisition of Domino (see note 2), the Company assumed debt
to an affiliate of Domino in the original amount of $180,095. The
terms of this note provide for interest and principal to be deferred
until January 1, 1998, at which time monthly principal and interest
payments are to be made at prime over a two-year term. Consequently,
this note has been recorded as of March 21, 1995 (acquisition date) at
its present value of $130,569, discounted at a rate of ten percent.
F-16
<PAGE>
(11)CONVERTIBLE SUBORDINATED DEBENTURES
-----------------------------------
Effective September 30, 1994, the Company privately placed with
accredited investors and certain shareholders $800,000 of 10%
convertible subordinated debentures due March 15, 1996. The debentures
are convertible at the option of the registered holders in minimum
amounts of $10,000 at any time prior to maturity at the rate of one
share of common stock for each $.875 in debenture principal and
accrued interest amount. The indebtedness evidenced by the debentures
is subordinate to all senior indebtedness of the Company and is
unsecured. As of December 31, 1994, none of these debentures had been
converted.
In conjunction with the Rights Offering (see note 16) in June 1995,
$265,000 of the subordinated convertible debentures, plus accrued
interest of $17,951, were converted at the rate of $.875 per share
into 323,373 shares of common stock. At the first interest payment
date, September 15, 1995, the remaining debenture holders elected to
convert interest due on the debentures in the amount of $51,301 to
58,631 shares of common stock.
As of the original maturity date, March 15, 1996, $40,000 of the
debentures plus interest of $1,995 were converted at the rate of $.875
per share into 47,994 shares of common stock; $85,000 plus interest of
$4,238 of the debentures were converted into cash; an unaffiliated
individual purchased $85,000 in debentures under the exchange terms;
and the remaining $410,000 in debentures were exchanged for new
debentures which carry an interest rate of 18% and mature on January
31, 1997. Other terms and conversion privileges are the same as in the
original debentures. Consequently, as of December 31, 1995, $40,000 of
the debentures are recorded in current liabilities and $495,000 are
recorded in noncurrent liabilities in the accompanying 1995 balance
sheet.
F-17
<PAGE>
(12)LONG-TERM DEBT
--------------
Long-term debt at December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
10.5% note payable to corporation; due on various dates through
December 2007; interest payable monthly $1,635,000 $1,700,000
Prime plus 1% note payable to bank; due December 2004,
guaranteed by Goodyear Tire & Rubber Company; principal
and interest payable monthly<F1> 1,128,329 1,200,000
7.6% note payable to Small Business Administration; due
May 2001; principal and interest payable monthly 248,554 284,204
Prime plus 1% note payable to former Domino shareholders;
payments due beginning September 1996 (see note 2); due
March 1998 700,000 -
Prime plus 1% note payable to bank; due July 1998; principal of
$5,917 plus interest due monthly 183,418 -
13.25% notes payable to financial institution; due September
1997; principal and interest payable monthly 66,103 -
7.9% note payable to financial institution; due November
1997; principal and interest payable monthly 45,749 72,973
10.5% note payable to financial institution; due August
1997; principal and interest payable monthly 11,775 17,898
12% note payable to corporation; paid in full in 1995 - 13,540
8.5% note payable to bank; paid in full in 1995 - 1,515
--------- ---------
4,018,928 3,290,130
Less:
Current installments of long-term debt 427,552 224,683
--------- ---------
Long-term debt $3,591,376 $3,065,447
========== ==========
<FN>
<F1> As of February 29, 1996, this note was transferred to another bank;
principal of $10,000 plus interest is payable monthly; the term and
guarantor remain unchanged. The interest rate is prime less .5%. Current
and long-term portions of debt have been reclassified to represent the new
debt agreement.
</FN>
</TABLE>
Debt is secured by substantially all of the Company's accounts
receivable, inventories and property, plant and equipment and $390,000
of the restricted cash accounts.
The aggregate maturities of long-term debt at December 31, 1995 are as follows:
Year ending December 31:
1996 $ 427,552
1997 729,701
1998 571,454
1999 268,427
2000 282,281
Thereafter 1,739,513
---------
$4,018,928
==========
F-18
<PAGE>
(13)MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP
---------------------------------------------
During 1993, the Company owned a 65% interest in Waste Recovery
Partners, Ltd. (Partnership). The minority interest owner was KCT
Associates, Ltd., an investment limited partnership (KCT), which owned
35% of the Partnership. The Partnership owned the TDF production plant
in Portland, Oregon, and the Company acted as manager and general
partner of the Partnership for management and profit incentives of
$4,000 per month and 5% of partnership income, respectively.
Effective January 1, 1994, KCT converted its limited partnership
interests in the Partnership into 2.6 million unregistered shares of
the Company's common stock which equated to approximately 35% of the
fully diluted outstanding common stock at the time of the conversion.
Due to this conversion, the operations of the Partnership became
wholly-owned by the Company. The 1994 consolidated financial
statements reflect the operations of the combined entities. KCT's 35%
interest is reflected in the 1993 consolidated financial statements as
minority interest.
(14)INCENTIVE STOCK OPTION PLAN, RESTRICTED STOCK PURCHASE PLAN AND WARRANTS
------------------------------------------------------------------------
In 1989, the Company adopted the 1989 Stock Plan for employees (the
Plan). The purpose of the Plan is to provide certain key employees of
the Company with a proprietary interest in the Company through the
granting of options, restricted stock or other stock rights. The
Company has reserved 1,550,000 shares of common stock for issuance
upon exercise of such options and rights issued pursuant to this Plan.
The terms and amounts of options are determined by the Board of
Directors. The Plan provides that option prices will be no less than
50% (or 100% depending on the type of option) of the fair market value
per share at the grant date. The aggregate fair market value of common
stock underlying an incentive stock option determined at the date of
the grant shall not exceed $100,000 in the year in which the options
are first exercisable.
Shares of common stock issued under the Plan as restricted stock are
determined by the Board of Directors. Restrictions, including
forfeiture provisions and consideration for issuance of such shares,
are determined by the Board of Directors. The consideration to be
received by the Company for issuance of such restricted stock shall be
no more than 50% of the fair market value at the date of the grant.
The Plan also provides that the Board of Directors may grant stock
appreciation rights (SARs) entitling the grantee, upon exercise of
such rights, to receive cash from the Company equal to the increase of
the fair market value of the common stock of the Company times the
number of units of SARs exercised subsequent to the date of grant. As
of December 31, 1995, no restricted stock or SARs had been granted.
The terms of the grants, including the grantees, are administered by a
Stock Option Committee which was formed by the Board of Directors.
F-19
<PAGE>
The stock options and warrants indicated above and on the following
pages were granted at the market price at the date of grant.
Stock option transactions for the Plan are summarized below:
Number of Exercise
Shares Price
------ -----
Outstanding and exercisable at December 31, 1992 256,000 $.26 to $1.19
Granted during year ............................ 180,500 $.75 to $1.57
Exercised during year .......................... (3,000) $ .26
Canceled during year ........................... (116,100) $.26 to $1.55
-------- -------------
Outstanding and exercisable at December 31, 1993 317,400 $.26 to $1.57
Exercised during year .......................... (3,500) $.26 to $1.19
Canceled during year ........................... (3,000) $1.19
------ -------------
Outstanding and exercisable at December 31, 1994 310,900 $.26 to $1.19
Granted during year ............................ 260,000 $.98 to $1.41
Exercised during year .......................... (44,800) $ .26
Canceled during year ........................... (20,000) $.26 to $1.19
------- -------------
Outstanding at December 31, 1995 ............... 506,100 $.26 to $1.57
======= =============
Exercisable at December 31, 1995 ............... 261,100 $.26 to $1.57
======= =============
In 1990, the Company entered into an agreement with the Chairman of
the Company's Board of Directors granting him options to purchase
200,000 shares of common stock at $.41 per share for a seven-year
period ending April 3, 1997. Such options may only be exercised once
the Company has achieved twelve months of profitability or in the
event of a change in control. These options became exercisable in 1992
as the Company achieved twelve months of profitability. At December
31, 1995, none of the aforementioned options had been exercised.
During 1988 and 1991, the Company granted nonqualified stock options
to non-employee directors for continued service to the Company. Such
options were exercisable through December 1993 and January 1996,
respectively. Transactions related to these options are summarized
below:
Number of Exercise
Shares Price
Outstanding at December 31, 1992 ........ 98,600 $ .26 to $1.55
Granted during year ..................... 10,000 $1.57
Exercised during year ................... (26,800) $1.55
Canceled during year .................... (26,800) $1.55
------- --------------
Outstanding at December 31, 1993 and 1994 55,000 $ .26 to $1.57
Granted during year ..................... 15,000 $1.41
Exercised during year ................... (15,000) $ .26
------- --------------
Outstanding at December 31, 1995 ........ 55,000 $ .26 to $1.57
======= ==============
F-20
<PAGE>
No transactions occurred during the year ended December 31, 1994.
At the 1992 Annual Meeting, the shareholders approved the 1992 Stock
Plan for Non-Employee Directors. Pursuant to such plan, non-employee
directors of the Company receive annually (1) after the annual
meeting, a stock option to purchase 2,500 shares of common stock so
long as the Company's net income for the fiscal year just ended
improved over the prior year, and (2) in January, a common stock grant
valued at $2,000 for service as a director if attendance criteria are
met. Such plan terminates January 31, 2000 and 250,000 shares were
reserved by the Company for grants thereunder. Under this plan,
12,366, 4,361 and 10,664 shares were issued for the years ended
December 31, 1995, 1994 and 1993, respectively.
In connection with the formation of Waste Recovery Partners, Ltd., the
Company granted the general partner of KCT (see note 13) warrants to
purchase 300,000 shares of common stock for investment banking
services and 25,000 shares of common stock at $.01/share for financial
advisory services. Both warrants were exercised in February 1994.
(15)STOCKHOLDERS' EQUITY
--------------------
In 1990, the Company issued 203,580 shares of 7% cumulative preferred
stock redeemable at the Company's option for $10 per share. No
dividends were declared or paid on such preferred stock in 1995, 1994
or 1993. Accordingly, dividends in arrears on cumulative preferred
stock aggregated $795,829 at December 31, 1995 which represents $3.91
per share of such stock outstanding. Dividends on cumulative preferred
stock have been added to net loss or deducted from net income for
purposes of computing per common share amounts.
(16)RIGHTS OFFERING
---------------
Waste Recovery, Inc. completed a rights offering on June 26, 1995,
which distributed nontransferable subscription rights to eligible
stockholders, as defined, to subscribe for the Company's common stock
at an offering price of $.75. This "Rights Offering" raised
approximately $2.2 million in capital, which is being utilized for
specific equipment improvements at each of the Company's facilities,
including Domino. The Company issued 3,238,857 shares of common stock
with this rights offering.
(17)RELATED PARTY TRANSACTIONS
--------------------------
The Company received fees of $535,000 in 1995, $556,000 in 1994, and
$515,000 in 1993 for accepting and hauling scrap tires from a
significant stockholder.
In 1994 and 1993, in lieu of directors' fees, 4,361 and 10,664 shares
of the Company's common stock were issued to the outside directors,
respectively. In 1995, the outside directors received $36,000 ($6,000
each) as compensation for services, $6,000 ($1,000 each) for
attendance at Board of Directors meetings, and a total of 12,366
shares of common stock as described in note 14.
The Company incurred $60,000 in consulting fees to certain directors
for assistance with the sale of the Waste Recovery - Illinois bonds,
which was recorded in 1994 and paid in 1995.
F-21
<PAGE>
Included in accounts payable at December 31, 1995 and 1994, is $55,237
and $81,083 due to Waste Recovery - Illinois, respectively. During
1995, the Company disposed of approximately 7,514 tons of tires at the
Partnership's Dupo, Illinois plant and incurred disposal fees to the
partnership in the amount of $336,382.
(18)INCOME TAXES
------------
Upon adoption of FAS 109 at January 1, 1993, a gross deferred tax
asset of approximately $2,889,000 was recorded which primarily related
to the future tax benefits of net operating loss carry forwards of
approximately $6,200,000 which expire in 2000 - 2005 and excess book
over tax depreciation. Should certain changes occur in the Company's
ownership, there could be an annual limitation on the amount of net
operating loss available to offset taxable income. Upon adoption, the
Company believed that it was more likely than not that a significant
portion of the deferred tax asset would not be realizable and recorded
a valuation allowance of approximately $2,807,000 against the deferred
tax assets. The deferred tax assets were considered realizable only to
the extent they offset deferred tax liabilities on that date of
approximately $82,000. The Company had no deferred tax assets or
liabilities previously recorded. Accordingly, there was no cumulative
effect adjustment for the adoption of FAS 109.
For the year ended December 31, 1994, the Company adjusted its gross
deferred tax asset, including a reduction in the valuation allowance
of $508,761, which reflected the expected utilization of the net
operating loss carry forwards that were previously expected to expire
unutilized. The net operating loss carry-forwards were expected to be
utilized based on projected taxable income in 1995 from a significant
nonrecurring gain on the sale of equipment to Waste Recovery -
Illinois together with projected positive results from operations. The
net change in the deferred tax asset of $447,543 represented a tax
benefit for the year ended December 31, 1994.
The deferred tax asset recorded at December 31, 1995, is based on a
net operating loss carry-forward expected to be utilized based on
projected positive results.
The provision (benefit) for income taxes consists of the following
components for the year ended December 31:
1995 1994 1993
Current:
Federal ......... $-- $-- $--
State ........... -- -- --
----- ----- -----
Total current -- -- --
----- ----- -----
Deferred:
Deferred taxes ...... 284,862 61,218 --
Deferred tax asset
valuation allowance (284,862) (508,761) --
-------- -------- -----
Total deferred ...........$ -- $(447,543) $ --
======== ======== =====
F-22
<PAGE>
Total income tax expense (benefit) differs from the amount computed by
applying the U.S. federal income tax rate of 34% to income before
income taxes for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
U.S. federal income tax, at statutory rates ........ $(315,119) $ 55,424 $ (66,508)
Penalties .......................................... 20,216 13,418 --
Amortization of goodwill ........................... 13,996
Deferred tax assets deemed not realizable .......... -- -- 65,697
Change in valuation allowance ...................... 284,862 (508,761) --
Other .............................................. (3,955) (7,624) 811
--------- -------- -------
$ -- $(447,543) $ --
========= ======== =======
</TABLE>
The deferred tax assets (liabilities) are comprised of the following
at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards ........................ $ 2,451,107 $ 2,283,392
Depreciation ............................................. 361,297 408,337
Deferred grant revenues .................................. 106,188 --
Accruals for financial reporting purposes currently not
deductible for tax .................................... 48,527 33,525
Capitalization of general and administrative costs for tax 16,505 171,490
Carrying differences for investment in Illinois .......... 114,814 --
Other 9,924 --
---------- ----------
Gross deferred tax asset ...................................... 3,108,362 2,896,744
Valuation allowance ........................................... (2,660,819) (2,375,957)
---------- ----------
447,543 520,787
---------- ----------
Deferred tax liabilities:
Book/tax difference on asset sale ........................ -- (73,244)
Other -- --
---------- ----------
Gross deferred tax liabilities ................................ -- (73,244)
---------- ----------
Net deferred tax asset ........................................ $ 447,543 $ 447,543
========== ==========
</TABLE>
As of December 31, 1995, the Company has approximately $6 million in
net operating loss carry forwards to be utilized in various amounts
through the year 2010.
F-23
<PAGE>
(19)INVOLUNTARY CONVERSION OF ASSETS
--------------------------------
On August 7, 1994, the Baytown (outside Houston, Texas) plant
sustained substantial damage due to a fire. Consequently, the plant's
operations were shut down from that time until the last week of
December 1994. During this period, the plant incurred a major
renovation and clean-up. This involuntary conversion of assets has
been recognized in the year ending December 31, 1994, as follows:
Net insurance proceeds received on property ... $ 372,137
Net book value of property destroyed ..... (8,750)
---------
Gain on involuntary conversion of property 363,387
Estimated insurance proceeds from business
interruption insurance ................ 120,000
Cost incurred in clean-up and remediation (669,629)
---------
Net loss on involuntary conversion of assets .. $(186,242)
=========
The renovation of the Baytown plant was completed in late December
1994. The cost of the renovation is included in plant, property and
equipment in the amount of $263,035 at December 31, 1994.
The Company applied for business interruption insurance to cover the
loss of operating revenues during the time the plant was shut down.
The claim was not processed until the fall of 1995; of the $120,000
recorded as receivable in the accompanying 1994 financial statements,
only $91,418 was received and the difference of $28,582 was recorded
as an expense during 1995.
(20)NONCASH TRANSACTIONS
--------------------
During 1995, the Company had the following noncash transactions which
have been excluded from the statements of cash flows:
Increase
(Decrease)
----------
Transfer of manufactured inventory to Illinois ............... $(258,680)
Investment in Illinois Partnership ........................... 258,680
Additions of equipment under capital lease ................... (141,553)
New capital lease obligations ................................ 141,553
Convertible, subordinated debentures converted to common stock 265,000
Interest on debentures converted to common stock ............. 69,252
Decrease in debentures payable ............................... (265,000)
Decrease in interest payable on debentures ................... (69,252)
-------
$ --
=======
In addition to the above noncash transactions during 1995, see note 2
regarding the assets and liabilities acquired and the additional
$700,000 in debt incurred with the acquisition of Domino.
F-24
<PAGE>
Capital lease obligations of $192,274 and $156,906 were incurred in
1994 and 1993, respectively, when the Company entered into leases for
new machinery and equipment.
(21)BUSINESS AND CREDIT CONCENTRATIONS
----------------------------------
The Company's customers are located throughout the United States. The
Company derived revenues of $535,000, $556,000 and $515,000 during the
years ended December 31, 1995, 1994 and 1993, respectively, for
accepting and hauling scrap tires from a significant stockholder. Four
additional customers accounted for significant Company sales for the
years ended December 31:
1995 1994 1993
Customer one . $2,999,000 $3,041,000 $ --
Customer two . 1,604,000 1,566,000 1,138,000
Customer three 2,221,000 1,506,000 1,762,000
Customer four 832,000 750,000 679,000
---------- ---------- ----------
Total ........ $7,656,000 $6,863,000 $3,579,000
========== ========== ==========
In addition to these customers, which are all significant entities,
the Company does business with a variety of companies with diverse
credit risk. The Company does not generally require collateral or
other security from its customers and has historically encountered
very little loss on its receivables.
(22)PROFIT SHARING PLAN
-------------------
Effective January 1, 1995, the Company adopted the Waste Recovery,
Inc., 401(k) Plan (the Plan), a defined contribution plan. Employees
who have completed six months of service and have attained the age of
twenty-one are eligible to become participants in the Plan.
Participants may contribute up to 15% of their compensation, as
defined, annually. Company contributions to the Plan are determined at
the discretion of the Board of Directors. No contributions were made
during the year ended December 31, 1995.
(23)LITIGATION AND CONTINGENCIES
----------------------------
The Company is a party to certain lawsuits which are generally
incidental to its business. Management does not believe the ultimate
resolution of such matters will have a significant effect on the
Company's financial position and, therefore, no liabilities have been
recorded in the accompanying consolidated financial statements.
Like other waste management companies, the Company's operations are
subject to extensive and changing federal and state environmental
regulations governing emissions into the atmosphere, wastewater
discharges, solid and hazardous waste management activities and site
restoration and abandonment activities. As of December 31, 1995, no
such costs had been accrued and management does not believe the
affects of the aforementioned activities will have a material effect
on the Company's financial statements.
F-25
<PAGE>
(24)FOURTH QUARTER ADJUSTMENTS
--------------------------
During the fourth quarter of 1995, several significant adjustments
occurred which negatively impacted the Company's 1995 net loss. These
are as follows:
(a) The Company was liable for a special clean-up project in Harris County,
Texas as retribution for the fire in Baytown, Texas in 1994. This clean-up
was performed in February 1996 and cost approximately $50,000 and was
accrued for as of December 31, 1995.
(b) Inventory adjustments at year end for the Portland and Atlanta plants
caused approximately $135,000 in write-offs and write-downs, respectively.
The year end observation in Portland revealed a miscalculation of TDF
yield, which generated a $100,000 downward adjustment in the amount of
inventory on hand. Atlanta's pricing on TDF decreased between December 1995
and January 1996 by $7.00 per ton. To properly value inventory at the lower
of cost or market, this caused a $35,000 write-down as of December 31,
1995.
(c) Other negative year end adjustments of approximately $100,000 were caused
by identification of machinery previously disposed, accrual of sales
commissions for TDF sales, and other adjustments of prepaids and accrued
liabilities.
(25)DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
The fair value of the Company's current assets, restricted cash and
accounts payable approximates the recorded amounts because of the
liquidity and short maturity of these instruments.
It is not practicable to estimate the fair value of the Company's
long-term debt as it is unique as a debt instrument for which there is
no public market.
(26)SUBSEQUENT EVENTS
-----------------
On January 30, 1996, the Company advanced Waste Recovery - Illinois
$500,000 for the Illinois partnership's February 1, 1996 debt payment.
The loan was approved by the Executive Committee of the Illinois
partnership. Terms of the note are in the process of being finalized
and will be defined on an arm's length basis.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Waste Recovery - Illinois
(An Illinois General Partnership)
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Waste
Recovery - Illinois (An Illinois General Partnership) at December 31, 1995 and
1994, and the results of its operations and cash flows for the years then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
March 27, 1996
F-27
<PAGE>
WASTE RECOVERY - ILLINOIS
(AN ILLINOIS GENERAL PARTNERSHIP)
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................. $ 464,184 $ 2,669,079
Investments ............................................... -- 4,253,322
Accounts receivable, trade ................................ 125,956 --
Interest receivable ....................................... 10,565 164,095
Receivable from Waste Recovery, Inc. (note 12) ............ 55,237 81,083
Inventories (notes 2 and 4) ............................... 294,788 58,797
Other current assets (note 4) ............................. 265,166 60,327
- --------- ---------
Total current assets ................................. 1,215,896 7,286,703
--------- ---------
Property, plant and equipment (notes 3, 6 and 8) ............... 9,219,615 107,786
Less accumulated depreciation ............................. (311,153) --
--------- ---------
Net property, plant and equipment .................... 8,908,462 107,786
--------- ---------
Construction in progress ....................................... -- 3,012,628
Preoperating costs ............................................. 256,888 179,493
Restricted cash (note 5) ....................................... 1,429,476 1,366,400
Industrial revenue bond issuance costs, less accumulated
amortization of $119,068 and $23,813 at December 31, 1995
and 1994, respectively .................................... 435,800 524,055
Other assets, less accumulated amortization of $5,780 and $2,156
at December 31, 1995 and 1994, respectively ............... 66,783 70,357
--------- ----------
$ 12,313,305 $ 12,547,422
============ ============
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
WASTE RECOVERY - ILLINOIS
(AN ILLINOIS GENERAL PARTNERSHIP)
BALANCE SHEETS
December 31, 1995 and 1994
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Liabilities:
Current installments of bonds payable (note 8) ... $ 760,000 $ --
Current installments of long-term debt (note 6) .. 14,846 10,436
Accounts payable ................................. 321,376 647,271
Bond interest payable ............................ 240,365 192,292
Other accrued liabilities ........................ 60,474 --
Deferred grant revenue (note 7) .................. 356,328 800,000
--------- ---------
Total current liabilities ................... 1,753,389 1,649,999
--------- ---------
Bonds payable, excluding current installments (note 8) 8,115,000 8,875,000
Long-term debt, excluding current installments (note 6) -- 5,564
Deferred grant revenue, noncurrent (note 7) ........... 914,219 --
--------- ---------
Total liabilities ........................... 10,782,608 10,530,563
---------- ----------
Partners' capital (notes 4 and 9) ..................... 1,530,697 2,016,859
--------- ---------
Commitments and contingencies (notes 8, 10, 11 and 15)
$12,313,305 $12,547,422
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
WASTE RECOVERY - ILLINOIS
(AN ILLINOIS GENERAL PARTNERSHIP)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, 1995 and 1994
1995 1994
---- ----
<S> <C> <C>
Revenues:
Tire-derived fuel sales (notes 11 and 12) ......... $ 539,616 $ --
Wire sales ........................................ 12,009 --
Disposal fees, hauling, and other revenue (note 12) 545,132 --
--------- -------
Total revenues ............................... 1,096,757 --
Operating expenses ..................................... 1,115,976 --
--------- -------
(19,219) --
General and administrative expenses .................... 271,462 24,472
Depreciation and amortization .......................... 412,531 25,969
--------- -------
(703,212) (50,441)
--------- -------
Other income (expense):
Interest income ................................... 18,371 5,418
Interest expense .................................. (155,358) --
Grant income (note 7) ............................. 95,357 --
--------- -------
(41,630) 5,418
--------- -------
Net loss ..................................... $ (744,842) $ (45,023)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
WASTE RECOVERY - ILLINOIS
(AN ILLINOIS GENERAL PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Riverside Caloric Waste
Company Recovery, Inc. Total
------- -------------- -----
<S> <C> <C> <C>
Balances at December 31, 1993 ...... $ 1,000,000 $ -- $ 1,000,000
Contributions from partners (note 9) 1,000,000 61,882 1,061,882
Net loss ........................... (24,763) (20,260) (45,023)
---------- ---------- ---------
Balances at December 31, 1994 ...... 1,975,237 41,622 2,016,859
Contributions from partner (note 4) -- 258,680 258,680
Net loss ........................... (409,663) (335,179) (744,842)
---------- ---------- ----------
Balances at December 31, 1995 ...... $ 1,565,574 $ (34,877) $ 1,530,697
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
WASTE RECOVERY - ILLINOIS
(AN ILLINOIS GENERAL PARTNERSHIP)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (744,842) $ (45,023)
Adjustments to reconcile net loss to net cash used by operating
activities: ................................................. 311,153 --
Depreciation
Amortization ............................................. 101,378 25,969
Preoperating expenses .................................... 26,213 --
Deferred grant income .................................... (95,357) --
Changes in assets and liabilities:
Accounts receivable, trade ............................... (125,956) --
Inventories .............................................. 22,689 3,085
Other current assets ..................................... (4,839) (41,370)
Payment of bond issuance costs ........................... (7,000) (547,868)
Other assets ............................................. (2,549) (72,513)
Accounts payable ......................................... (325,895) 13,148
Bond interest payable .................................... 48,073 --
Other accrued liabilities ................................ 60,474 --
-------- --------
Net cash used by operating activities ............... (736,458) (664,572)
-------- --------
Cash flows from investing activities:
Cash placed in investment accounts ............................ -- (7,396,918)
Cash payments out of investment accounts ...................... 4,406,852 3,119,441
Cash placed in restricted cash ................................ (63,077) (1,366,400)
Receivable from Waste Recovery, Inc. .......................... 25,846 (100,040)
Purchases of property, plant and equipment .................... (453,112) (107,786)
Additions to construction in progress ......................... (5,646,087) (1,922,817)
Preoperating costs ............................................ (103,608) (179,493)
Deferred grant revenue ........................................ 365,903 800,000
---------- ----------
Net cash used by investing activities ............... (1,467,283) (7,154,013)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of bonds payable ....................... -- 8,916,664
Proceeds from issuance of long-term debt ...................... 18,000 16,000
Proceeds from partner's contribution .......................... -- 1,000,000
Payments on long-term debt .................................... (19,154) --
--------- ---------
Net cash provided (used) by financing activities .... (1,154) 9,932,664
--------- ---------
Net increase (decrease) in cash and cash equivalents ............... (2,204,895) 2,114,079
Cash and cash equivalents at beginning of year ..................... 2,669,079 555,000
--------- -------
Cash and cash equivalents at end of year ........................... $ 464,184 $ 2,669,079
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
WASTE RECOVERY - ILLINOIS
(AN ILLINOIS GENERAL PARTNERSHIP)
Notes to Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) Organization and Operations
Waste Recovery - Illinois, an Illinois general partnership (the
Partnership), was formed November 29, 1993, to jointly build and
operate two tire-derived fuel processing facilities in Dupo and
Marseilles, Illinois (Illinois plants). The facilities, which cost
approximately $5 million each and began operations in the fall of
1995, supply Illinois Power Company (Illinois Power) at its Baldwin
facility (Baldwin) with 60,000 tons of TDF annually over a five year
period. The Illinois Power contract accounts for 50% of the
facilities' estimated production capacity.
The Partnership specializes in processing scrap tires into a refined
fuel supplement more commonly referred to as tire-derived fuel (TDF).
The Partnership generates income from the sale of TDF and from tipping
fees charged for the disposal of tires. The Partnership's operations
are presently in Illinois and nearby states.
The managing partner of the Partnership is Waste Recovery, Inc. (WRI),
a Texas corporation, which has a 45% interest in the Partnership;
Riverside Caloric Company (RCC), an Indiana corporation, has a 55%
interest in the Partnership.
(b) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Cash and Cash Equivalents
The Partnership considers all unrestricted cash and highly liquid debt
instruments with original maturities of three months or less to be
cash equivalents.
(d) Investments
In 1994, the bond proceeds were invested into various interest-bearing
accounts for periods ranging from approximately 30 days to 16 months,
with interest rates varying from 4.25% to 8.875% per annum.
Investments with maturity dates greater than one year (approximately
$148,760) are included in restricted cash in the accompanying 1994
balance sheet. The investments matured during 1995, and the proceeds
were used for the construction of the plants.
F-33
<PAGE>
(e) Inventories
Parts inventory represents primarily the cost of the grinder knives
and machinery parts used in the TDF manufacturing process. These
inventories are stated at cost (first-in, first-out) and are
depreciated over the useful lives of these parts, generally six to
eighteen months.
TDF inventory is stated at the lower of cost or market. Cost is
determined using a weighted average cost method.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of
property, plant and equipment is calculated using the straight-line
method over the estimated useful lives of the assets (generally three
to ten years), beginning at the point in time the assets are placed in
service. No depreciation was recorded in 1994 as the assets had not
been placed in service or were acquired at the end of the year.
(g) Construction in Progress
Construction of the Illinois plants began in 1994; Dupo was completed
in September 1995, and Marseilles was completed in October 1995. The
costs incurred to build the plants and equipment were capitalized as
construction in progress until the projects were completed and
individual assets could be identified, at which time, the assets were
transferred into property, plant and equipment.
(h) Preoperating Costs
Preoperating costs represent those costs incurred in the planning,
engineering and development of the Illinois plants. These costs are
being amortized over three years on a straight-line basis, beginning
with the operation of the plants.
(i) Bond Issuance Costs
Bond issuance costs are recorded at cost and amortized over the life
of the associated debt using the amount of bonds outstanding method.
(j) Other Assets
Other assets are recorded at cost and consist mainly of prepaid,
additional rent for the land at the Dupo plant, which is being
amortized over the term of the lease, and bank finance fees, which are
being amortized over the term of the bonds.
F-34
<PAGE>
(k) Deferred Grant Revenue
The Partnership has an agreement whereby it has earned $1,000,000 in
grants from the State of Illinois with the successful completion of
certain pieces of equipment at the Illinois plants. As of December 31,
1994, the Partnership had received $800,000 from these grants; the
remaining $200,000 is included in other current assets as of December
31, 1995, and was received in January 1996. The grant money is being
amortized, beginning when the plants were placed in operation, through
the term of the grants, which is July 31, 1999.
In 1995, the Partnership also received $365,903 through a grant
awarded to the Illinois Power Company for the construction and
installation of a metering unit at Illinois Power. Twenty percent of
the total amount of the grant is being retained pending satisfaction
of certain operational requirements. Ownership of the metering unit
reverts to Illinois Power at the end of the contract.
(l) Income Taxes
No provision or credit for federal income taxes has been made because
income taxes are the responsibility of the individual partners. The
net difference between the tax bases and the reported amounts of the
Partnership's assets and liabilities is approximately $700,000 at
December 31, 1995.
(m) Statements of Cash Flows
During 1995, the Partnership paid $530,447 for interest and did not
pay any income taxes. Interest expense totaled $578,899 and interest
income totaled $207,079 for the year ended December 31, 1995. Of these
amounts, $188,708 of interest expense was offset against eligible
interest income, and $234,833 was capitalized into the cost of
construction.
The Partnership did not pay any interest or income taxes during 1994.
Interest expense totaled $150,629 and interest income totaled $145,359
for the year ended December 31, 1994. Of these amounts, $139,941 of
interest expense was offset against eligible interest income, and
$10,688 was capitalized into the cost of construction.
(n) Reclassification
Certain 1994 amounts have been reclassified to conform to the 1995
presentation.
F-35
<PAGE>
(2) INVENTORIES
-----------
Inventory components at December 31, 1995 and 1994 are as follows:
1995 1994
---- ----
Manufactured fuel inventory $ 28,891 $ 58,797
Wire inventory ............ 5,595 --
Work in progress .......... 104,816 --
Parts inventory ........... 155,486 --
-------- --------
$294,788 $ 58,797
======== ========
Inventory at December 31, 1994 consisted of TDF contributed by WRI's
Portland and Houston plants.
(3) PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment at December 31, 1995 and 1994 are
summarized as follows:
1995 1994
---- ----
Land ........................ $ 72,208 $ 47,836
Buildings ................... 1,114,140 --
Tire processing equipment ... 5,511,681 --
Hauling equipment ........... 264,928 34,023
Metering unit ............... 589,210 --
Shop tools and yard equipment 66,789 --
Furniture and fixtures ...... 92,100 6,530
Leasehold improvements ...... 1,443,686 --
Vehicles .................... 64,873 19,397
---------- ----------
$9,219,615 $ 107,786
========== ==========
(4) NONCASH ACTIVITIES
------------------
The Partnership received $258,680 and $61,882 in TDF inventory from
Waste Recovery, Inc. in 1995 and 1994, respectively. In 1994, the
related shipping charges of $18,957 were recorded in other current
assets. The $258,680 and $61,882 were recorded as contributions by WRI
and the $18,957 was recorded as an intercompany transaction with WRI.
F-36
<PAGE>
(5) RESTRICTED CASH
---------------
Under terms of the bond agreements (see note 8), the Partnership is
required to maintain cash balances for the debt service reserve funds
which have certain withdrawal restrictions. The amounts reserved at
December 31, 1995 and 1994, were $1,429,476 and $1,366,400,
respectively. Interest earned on this restricted cash may only be used
for payment of current debt service on the bonds.
(6) LONG-TERM DEBT
--------------
Long-term debt at December 31, 1995 and 1994, consists of two notes
payable to a financial institution. The notes are payable in eighteen
equal installments of principal and interest at $951 and $1,074 per
month with interest at 8.5% per annum. The notes are collateralized by
vehicles and will be fully paid in June and December 1996,
respectively.
(7) DEFERRED GRANT REVENUE
----------------------
The Partnership (Grantee) entered into two grant agreements with the
Illinois Department of Commerce and Community Affairs (Department)
(formerly, the Illinois Department of Energy and Natural Resource) as
of June 1, 1994. The Department administers the Used Tire Recovery
Program which offers financial incentives for projects which reuse,
recycle or recover energy from Illinois used or scrap tires.
The Partnership requested funding assistance to build its TDF
processing plants in Dupo and Marseilles, Illinois. The Department
agreed to provide grants towards the Partnership's "projects," as
defined. The Grantee agrees that at least 30% of the scrap tires it
processes will come from Illinois sources, and that a minimum of one
million Illinois PTE's (passenger tire equivalents), as defined, will
be collected and processed annually at each plant. The Department
awarded the Grantee $1,000,000 towards specified equipment ($500,000
at each plant), payable at 80% ($800,000) as based upon the specified
equipment budget. The Department held back 20% of the funds as a
retainer until verification that all equipment purchased with Grant
Funds, as defined, had been installed and was operational. As of
December 31, 1995, the 20% retainage ($200,000) had been applied for
and was received in January 1996.
The term of the grants is through July 31, 1999, and requires the
Partnership to maintain the equipment for the purpose as originally
set forth in the agreement, to provide the Department with semi-annual
reports, and to meet certain other listed criteria.
The Partnership received additional funding through a grant awarded to
the Illinois Power Company for the construction of a metering unit at
the Baldwin Power Plant of the Illinois Power Company. The Partnership
has received 80% of this award ($365,903) as of December 31, 1995, and
approximately 20% is being retained pending satisfaction of certain
operational requirements. This award is being amortized through the
remainder of the contract with Illinois Power, which is through July
1999.
F-37
<PAGE>
As of December 31, 1995, $1,270,547 of the total grant money
recognized is recorded as deferred grant revenue in the accompanying
balance sheet and is being amortized into income through July 31,
1999, at approximately $30,000 per month.
(8) BONDS PAYABLE
-------------
To provide funding for the construction of the Dupo and Marseilles
plants, the Partnership entered into two loan agreements: 1)
$4,845,000 with the Southwestern Illinois Development Authority
(SWIDA) and 2) $4,030,000 with the Upper Illinois River Valley
Development Authority (UIRVDA) (together, the Bonds), respectively.
The Bonds were issued through the Solid Waste Disposal Revenue Bonds,
Series 1994 (Waste Recovery - Illinois Project) dated September 1,
1994, under an Indenture of Trust. The proceeds to the Partnership
were to fund a debt service reserve fund, to pay the costs of issuing
the Bonds, to pay interest during construction, and to finance the
cost of the construction of buildings and related improvements and the
acquisition and installation of machinery, equipment and related
property, all constituting industrial, commercial and solid waste
disposal facilities located at Dupo and Marseilles, Illinois.
The notes bear interest at 6.5% per annum with interest payable
February 1 and August 1 each year, beginning February 1, 1995.
Principal payments are due annually on February 1 beginning in 1996
through 2004.
The notes are collateralized by the property, plant and equipment of
the Partnership and are guaranteed by Waste Recovery, Inc. Future
minimum payments as of February 1 each year are as follows:
YEAR SWIDA UIRVDA TOTAL
---- ----- ------ -----
1996 $ 415,000 $ 345,000 $ 760,000
1997 440,000 365,000 805,000
1998 470,000 390,000 860,000
1999 500,000 415,000 915,000
2000 530,000 440,000 970,000
Thereafter 2,490,000 2,075,000 4,565,000
--------- --------- ---------
Total $4,845,000 $4,030,000 $8,875,000
========== ========== ==========
(9) PARTNERS' CAPITAL
-----------------
(a) Capital Contributions
At the execution of the Partnership Agreement (Agreement), RCC
contributed $1,000,000 to the Partnership. RCC contributed an
additional $1,000,000 with the closing of the SWIDA and UIRVDA bond
issues. WRI contributed a license of its technology and assigned the
Partnership all of its right, title and interest in the contract with
Illinois Power Company (see note 11). After the completion and
start-up of the facilities in 1995, WRI received $750,000 from the
Partnership for the construction of equipment used by the Partnership.
F-38
<PAGE>
The records of the Partnership maintain separate capital accounts for
each partner which are credited with the cash and the gross asset
value, as defined, of property contributed by the partner to the
Partnership and the partner's share of partnership profit and are
charged with the partner's share of partnership loss, cash and
property distributions and the gross asset value of property
distributed to the partner by the Partnership and the partner's share
of the nondeductible expenses to the Partnership.
No other capital contributions are required.
(b) Ownership Interests
The interests in the assets, liabilities, profits and losses of the
Partnership shall be as follows:
RCC 55%
WRI 45%
(c) Loans
Neither partner shall be obligated to lend any money to the
Partnership. No such monies shall be borrowed from the partners
without the approval of the Executive Committee. Each loan by a
partner shall be an obligation of the Partnership. On January 30,
1996, Waste Recovery, Inc., a General Partner, loaned $500,000 to the
Partnership. The loan was approved by the Executive Committee of the
Partnership. Terms of the note are in the process of being finalized
and will be defined on an arm's length basis.
(d) Distributions of Net Cash Flow
Within 30 days after the end of each fiscal quarter ending after the
Operating Date, as defined, 100% of the Net Cash Flow, as defined, of
the Partnership for such quarter, or a lesser amount as determined by
the Executive Committee, shall be distributed to the partners pro rata
in proportion to their respective percentage interests in the
Partnership. As of December 31, 1995, no such distributions have been
made.
F-39
<PAGE>
(e) Distributions of Proceeds from a Capital Event
Net Capital Event Proceeds, as defined, shall be distributed to the
partners first, 100% to RCC until it has received $2,000,000 of
distributions, and second, 100% to WRI until it has received
$2,000,000 of distributions. Thereafter, any remaining balance is
distributed in accordance with the percentage interests. As of
December 31, 1995, no such distributions have been made.
(f) Allocations of Profit, Loss and Credits
Profits, losses and credits of the Partnership shall be allocated in
accordance with the Partnership agreement, which provides for the
partners' capital account balances and certain other defined
circumstances.
(g) Buydown and Buyout Options
WRI has the option to purchase a portion of RCC's partnership interest
in the Partnership to reduce RCC's interest to 50% based upon certain
specified dates throughout the first five years of operations. WRI
also has the option to purchase all of RCC's interest based upon
certain defined criteria. As of December 31, 1995, no such options
have been exercised.
(h) Sale Option
RCC has the option to require Waste Recovery, Inc. to purchase RCC's
entire partnership interest in the Partnership for a purchase price,
as defined. This option may be exercised at any time on or after the
third anniversary of the operating date and prior to the fifth
anniversary of the operating date. WRI may purchase RCC's interest
under the sale option in either cash or WRI common stock at WRI's
election.
(i) Management of the Partnership
Each partner has the right to appoint two members to an Executive
Committee, which provides for overall management of the Partnership
and gives approval to actions requiring such. WRI is the designated
Manager of the Partnership and manages the day-to-day operations
subject to the direction and control of the Executive Committee. WRI
receives a monthly administrative fee of $4,000 from the Partnership
and a management fee in an amount equal to 5% of the Partnership's net
income for a fiscal year, as determined.
As of December 31, 1995, WRI has been paid $12,000 in administrative
fees; no management fees have been earned.
F-40
<PAGE>
(j) Dissolution
Dissolution of the Partnership will occur on the earlier of December
31, 2023, or upon certain other defined events.
(10)LEASES
------
The Partnership leases the land for the Dupo facility from the Village
of Dupo under a non-cancelable operating lease. The lease began on
September 27, 1994, with the issuance of the Southwestern Illinois
Development Authority Bond. The lease term is twenty years at $1,000
per month. The Partnership also prepaid $50,000 in "additional rent,"
as defined, which is being amortized over the term of the lease.
A summary of the minimum rental commitment under this noncancelable
operating lease as of December 31, 1995 is as follows:
Year ending December 31
-----------------------
1996 $ 12,000
1997 12,000
1998 12,000
1999 12,000
2000 12,000
Later years through 2014 165,000
-------
Total minimum payments $225,000
========
Total rental expense for the land in Dupo and various equipment
rentals for the year ended December 31, 1995, was $36,718.
(11)SIGNIFICANT CONTRACTS
---------------------
The Partnership entered into a contract with the Illinois Power
Company on October 12, 1993, to supply it with at least 60,000 tons of
TDF per year for a period of five years. If the Partnership is unable
to fulfill this requirement, WRI will sell TDF produced at its other
facilities to the Partnership. Sales to Illinois Power of TDF produced
in Dupo began in September 1995.
(12)BUSINESS AND CREDIT CONCENTRATIONS
----------------------------------
During 1995, the Partnership derived revenues of $336,382 in disposal
fees from WRI for approximately 7,514 tons of tires received in Dupo
from a WRI project. As of December 31, 1995, WRI owed the Partnership
$55,237 from these disposal fees.
F-41
<PAGE>
The Partnership's tire-derived fuel sales were exclusively to Illinois
Power Company (see note 11) and amounted to 49% of the total 1995
revenues.
The Partnership's customers are located in the Midwestern and Eastern
United States. The Partnership does business with a variety of
companies with diverse credit risk. The Partnership does not generally
require collateral or other security from its customers and has
encountered very little loss on its receivables.
(13)FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The fair value of the Partnership's current assets, restricted cash
and accounts payable approximates the recorded amounts because of the
liquidity and short maturity of these instruments.
It is not practicable to estimate the fair value of the Partnership's
long-term debt as it is a unique debt instrument for which there is no
public market.
(14)PROFIT SHARING PLAN
-------------------
The employees of the Partnership may participate in the Waste
Recovery, Inc., 401(k) Plan (the Plan), a defined contribution plan.
Employees who have completed six months of service and have attained
the age of twenty-one are eligible to become participants in the Plan.
Participants may contribute up to 15% of their compensation, as
defined, annually. Any employer contributions are totally
discretionary; none were made during 1995.
(15)CONTINGENCIES
-------------
Like other waste management companies, the Partnership's operations
are subject to extensive and changing federal and state environmental
regulations governing emissions into the atmosphere, wastewater
discharges, solid and hazardous waste management activities and site
restoration and abandonment activities. As of December 31, 1995, no
such costs had been accrued and management does not believe the
affects of the aforementioned activities will have a material effect
on the Partnership's financial statements.
F-42
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- ----------
3 ARTICLES OF INCORPORATION AND BY-LAWS
3.1 Amended and Restated Articles of Incorporation filed July 5, 1988,
with the Secretary of State of Texas(1)
3.2 Articles of Amendment to the Articles of Incorporation filed June 8,
1990, with the Secretary of State of Texas(1)
3.3 By-Laws, amended and restated as of March 10, 1992(1)
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS INCLUDING
INDENTURES
4.1 Form of Common Stock Certificate of Registrant(1)
4.2 Indenture of Trust dated April 1, 1988, between Development Authority
of Fulton County and Citizens and Southern Trust Company (Georgia),
National Association, as Trustee(1)
4.3 Private Placement Memorandum dated May 18, 1988, regarding Development
Authority of Fulton County Industrial Development Revenue Bonds(1)
4.4 Form of Development Authority of Fulton County Industrial Development
Revenue Bond(1)
4.5 Amended and Restated Certificate of Designations of 7% Cumulative
Preferred Stock(1)
4.6 Form of 10% Convertible Subordinated Debenture due March 15, 1996(1)
10 MATERIAL CONTRACTS
10.1 Fiscal Agent Agreement dated March 17, 1986 between Registrant,
Houston-Galveston Area Land Development Corporation and the Chemical
Bank, as Central Fiscal Agent, with respect to the Small Business
Administration $500,000 Loan to Registrant(1)
10.2 U.S. Patent No. 4,374,573 issued February 22, 1983(1)
10.3 U.S. Patent No. 4,519,550 issued May 28, 1985(1)
10.4 U.S. Patent No. 4,560,112 issued December 25, 1985(1)
10.5 U.S. Patent No. 4,561,467 issued December 31, 1985(1)
10.6 Agreement dated May 9, 1986, between Registrant and The Goodyear Tire
and Rubber Company(1)
10.7 Lease Agreement dated January 15, 1988, between Southern Metal
Finishing Company, Inc. and the Registrant(1)
E-1
<PAGE>
10.8 Indemnity Agreement dated January 29, 1988, by the Registrant and
Southern Metal Finishing Company, Inc.(1)
10.9 Lease Agreement dated June 29, 1987 between ENERCON Holdings, N.V.
and Registrant(1)
10.10 Estoppel Deed, dated December 28, 1989, between the Registrant as
Grantor, and Tex A. Perkins, et al., as Grantee(1)
10.11 Lease of Real Property, dated January 1, 1990, between the Registrant,
as Lessee, and Tex A. Perkins, et al., as Lessor(1)
10.12 Warranty Deed, dated February 7, 1990, between Tex A. Perkins, et al.,
as Grantor, and Wayne Easley, as Grantee(1)
10.13 Assignment of Lease, dated February 7, 1990, from Tex A. Perkins, et
al., as Assignor, and Wayne Easley, as Assignee(1)
10.14 The Registrant's 1989 Stock Plan for Employees, effective March 6,
1989, and approved by the Registrant's shareholders at the 1989 Annual
Meeting(1)
10.15 Amendment No. 1 to the Registrant's 1989 Stock Plan for Employees
10.16 Nonqualified Stock Option Agreement dated April 4, 1990, granted by
the Registrant to Allan Shivers, Jr. for 200,000 shares(1)
10.17 Form of Nonqualified Stock Option Agreement for grants to employees
made January 7, 1991(1)
10.18 Form of Incentive Stock Option Agreement for grants to employees made
October 1, 1991(1)
10.19 1992 Stock Plan for Non-Employee Directors(1)
10.20 Form of Nonqualified Stock Option Agreement for grants to non-employee
directors made January 4, 1991(1)
10.21 Indemnity and Security Agreement, dated June 1, 1990, between
Registrant and The Goodyear Tire and Rubber Company(1)
10.22 Amendment to Lease of Real Property dated pril 25, 1991, between the
Registrant, as Lessee, and George Glanz, as Lessor(1)
10.23 Trailer Lease Agreement dated as of July 2, 1992, between Waste
Recovery Partners, Ltd., and Central International Trucks, Inc.(1)
10.24 Lease Addendum (trailer) dated November 15, 1992, between Waste
Recovery Partners, Ltd. and Central International Trucks, Inc.(1)
10.25 Agreement(for supply of TDF) between the Registrant and Illinois Power
Company dated October 12, 1993, (paragraph 4 of Exhibit 10.007 is
subject to a request for confidential treatment)(1)
E-2
<PAGE>
10.26 Partnership Agreement of Waste Recovery - Illinois between Riverside
Caloric Company and the Registrant dated November 29, 1993(1)
10.27 Lease Agreement (front end loader), dated effective June 15, 1993,
between the Registrant as Lessee, and J.I. Case as Lessor(1)
10.28 Tire Remediation Agreement between M.A. Associates, Inc., and the
Registrant, dated March 31, 1994(1)
10.29 Guaranty Agreement dated September 1, 1994, executed by the Registrant
for the benefit of Amalgamated Bank of Chicago, Trustee (Upper
Illinois River Valley Development Authority, Issuer)(1)
10.30 Guaranty Agreement dated September 1, 1994, executed by the Registrant
for the benefit of Amalgamated Bank of Chicago, Trustee (Southwestern
Illinois Development Authority, Issuer)(1)
10.31 Modification of Loan Agreement of April 1, 1988, executed by Colonial
Municipal Income Trust and Colonial High Yield Municipal Fund on
September 22, 1994(1)
10.32 Modification of Loan Agreement of April 1, 1988, executed by Colonial
Municipal Income Trust and Colonial High Yield Municipal Fund on March
20, 1995(1)
10.33 Leasehold Commercial Deed of Trust, Security Agreement, Fixture
Filing, Financing Statement, and Assignment of Leases and Rents dated
September 20, 1994, executed by the Registrant as Grantor, for the
benefit of NationsBank of Georgia N.A. as Trustee(1)
10.34 Promissory Note dated December 15, 1994, executed by the Registrant as
maker payable to Comerica Bank - Texas in principal amount of
$1,200,000(1)
10.35 Note Purchase Agreement dated December 15, 1994, between The Goodyear
Tire and Rubber Company and Comerica Bank - Texas(1)
10.36 Stock Purchase Agreement for the purchase by the Registrant of the
outstanding stock of Domino Salvage, Tire Division, Inc., dated March
21, 1995(1)
10.37 Resolution of March 14, 1995, ratifying Robert L. Thelen debt to
equity conversion(1)
10.38 Employment Agreement dated March 21, 1995, between the egistrant and
Andrew J. Sabia(1)
10.39 Form of Standby Purchase Agreement(1)
10.40 Loan Agreements dated April 1, 1988, between Development Authority of
Fulton County and the Registrant(1)
10.41 Promissory Note dated April 1, 1988, from the Registrant to
Development Authority of Fulton County(1)
10.42 Leasehold Deed to Secure Debt and Security Agreement dated April 1,
1988, between the Registrant and the Trustee(1)
10.43 First Amendment to Lease Agreement dated April 1, 1988, between
Southern Metal Finishing Company, Inc. and the Registrant(1)
E-3
<PAGE>
10.44 Assignment of Contracts dated April 1, 1988, between the Registrant
and Development Authority of Fulton County(1)
11.1 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS-See page F-5 of
this 10-K which is incorporated herein by reference.
21.1 SUBSIDIARIES OF THE REGISTRANT - See Exhibit 21 of Form 10-K for year
ended December 31, 1994(1)
23 CONSENT OF INDEPENDENT ACCOUNTANTS
27.1 FINANCIAL DATA SCHEDULE
(1) Previously filed with the Securities and Exchange Commission and
incorporated by reference pursuant to Rule 12b-32 of the Securities
Exchange Act of 1934.
(2) Filed herewith.
E-4
<PAGE>
SCHEDULE VIII
WASTE RECOVERY, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Year Expenses Accounts Deductions Year
----------- ---- -------- -------- ---------- ----
<S> <C> <C> <C> <C> <C>
Year ended December 1993:
Allowance for doubtful accounts $12,801 $32,667 $ -- $15,150 $30,318
======= ======= ========= ======= =======
Year ended December 1994:
Allowance for doubtful accounts $30,318 $36,063 $ -- $41,381 $25,000
======= ======= ========= ======= =======
Year ended December 1995:
Allowance for doubtful accounts $25,000 $38,917 $ -- $36,834 $27,083
======= ======= ========= ======= =======
</TABLE>
(1) Amount represents the allowance for doubtful accounts, a contra account to
trade accounts receivable.
S-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 726,562
<SECURITIES> 0
<RECEIVABLES> 1,920,267
<ALLOWANCES> (27,083)
<INVENTORY> 645,651
<CURRENT-ASSETS> 3,415,309
<PP&E> 11,700,255
<DEPRECIATION> 6,840,820
<TOTAL-ASSETS> 10,732,399
<CURRENT-LIABILITIES> 3,177,806
<BONDS> 0
0
203,580
<COMMON> 407,800
<OTHER-SE> 2,287,626
<TOTAL-LIABILITY-AND-EQUITY> 10,732,399
<SALES> 14,139,923
<TOTAL-REVENUES> 14,580,773
<CGS> 11,143,176
<TOTAL-COSTS> 14,666,978
<OTHER-EXPENSES> (322,630)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (517,986)
<INCOME-PRETAX> (926,821)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (926,821)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> 0
