<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(No Fee Required)
FOR THE TRANSITION PERIOD FROM ___________ TO __________
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:
NONE
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. [ X ]
Number of shares of Registrant's Common Stock, no par value per share,
outstanding as of April 14, 1998: 17,494,323
The approximate aggregate market value of voting stock held by non-affiliates
of the Registrant (based on the average of the closing bid and asked price of
April 14, 1998) was $3,005,144. For purposes of this computation, all
officers, directors and 10% beneficial owners are deemed to be affiliates.
Such determination should not be deemed an admission that such officers,
directors or 10% beneficial owners are in fact affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's Proxy Statement for 1998 Annual Meeting
of Shareholders, to be filed within 120 days of December 31, 1997, are
incorporated by reference in Part III, Items 10, 11, 12 and 13.
<PAGE>
RECENT EVENTS
On January 15, 1998, Waste Recovery, Inc. ("the Company") was in default on the
convertible subordinated notes as a result of nonpayment of interest due on
January 15, 1998. The convertible subordinated notes were issued by the
Company in connection with the acquisition of U.S. Tire Recycling Partners,
L.P. in December 1996.
On January 27, 1998, the Company announced a default by its wholly-owned
subsidiary, Waste Recovery-Illinois, General Partnership ("WR-Illinois"), with
respect to debt service payments due February 1, 1998.
On March 21, 1998, WR-Illinois' Marseilles, Illinois facility was substantially
damaged by fire. The facility is covered by replacement and business
interruption insurance.
On March 31, 1998, the Company was in default due to nonpayment of certain
promissory notes payable issued in connection with the acquisition of U.S. Tire
Recycling Partners, L.P.
For further discussion of these events, see Part I, Item 2, Properties, Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Result's of Operations, and notes 2, 11, 13, 14, and 28 of the Company's
Consolidated Financial Statements included in Part II, Item 8 of this Form 10-
K.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business", "Item 3. Legal
Proceedings", "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations", and elsewhere in this Form 10-K
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties,
and other factors which may cause the actual results, performance or
achievements of Waste Recovery, Inc. (the "Company" or "Registrant") to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business
conditions; competition; success of operating initiatives; development and
operating costs; adverse publicity; changes in business strategy or
development plans; quality of management; availability, terms and deployment
of capital; business abilities and judgment of personnel; availability of
qualified personnel; labor and employee benefit costs; changes in, or failure
to comply with, government regulations; and other factors referenced in this
Form 10-K.
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ITEM 1. BUSINESS
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional
factors relating to such statements.
GENERAL
Waste Recovery, Inc. (the "Company" or "WRI") 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; Philadelphia, Pennsylvania;
Marseilles, Illinois (near Chicago); Dupo, Illinois (near St. Louis); and
Concord, North Carolina.
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, and the Atlanta operation in 1988. In
March 1995 the Company acquired Domino Salvage, Tire Division, Inc. ("Domino")
and after the addition of specific, proprietary processing equipment, Domino
began producing a quality TDF in late 1995. The two Illinois facilities became
operational in late 1995 and were originally owned and operated by Waste
Recovery-Illinois (WR-Illinois), a general partnership of which the Company was
a partner. In December of 1996, WR-Illinois became a wholly-owned subsidiary
upon the Company's acquisition of its partner's interest in the general
partnership (see Part II, Item 5, Purchase of Interest in WR-Illinois). The
Concord facility was purchased by the Company in December of 1996 and conducts
business as U.S. Tire Recycling Partners, L.P. The Concord facility operates a
scrap tire monofill and primarily markets processed material for civil
engineering purposes.
The Company has made investments in facilities and developed expertise in the
areas of tire collection and 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 supplemental
fuel. Generally, the permitting process required before a utility or other
industrial fuel user may start burning TDF depends on many factors, such as
location, fuel volumes and mix, 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.
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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
for use 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 primarily with natural gas as a supplemental
fuel in steam generation facilities. The Company's business in this region has
continued to grow as the price of natural gas has been stable. Due to the
Baytown plant's location near marine transportation alternatives, the Company
has been able to develop TDF markets outside the State of Texas that this
facility can serve.
In December 1996, the Company concluded the acquisition of U.S. Tire Recycling
Partners, L.P. (U.S. Tire), a large collector and processor of scrap tires in
the Southeast, located in Concord, North Carolina (see Part II, Item 5,
Purchase of U.S. Tire Recycling Partners, L.P.). U.S. Tire operates a scrap
tire monofill and also processes material for sale into recycled rubber
markets. 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 most similar to coal. The Company's Concord facility
should give the Company the opportunity to further expand in this market as the
facility's processing capabilities are increased and improved.
The two Illinois facilities 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. Other
industrial boilers that utilize coal as a primary source of energy have also
begun to use TDF as a supplemental fuel in this region.
The Company completed its acquisition of the general partnership interest in WR-
Illinois held by Riverside Caloric Company (RCC), a wholly-owned subsidiary of
NIPSCO Industries, Inc., in December of 1996 (see Part II, Item 5, Purchase of
Interest in WR-Illinois). WR-Illinois was a general partnership created to
construct and operate two TDF producing facilities in Illinois. The
partnership was created after the Company obtained a contract to supply a large
Illinois electric utility with 60,000 tons of TDF per year. WR-Illinois'
operations were consolidated beginning December 1, 1996 (see notes 1, 2 and 9
of the Consolidated Financial Statements of the Company and related Notes
included in Item 8).
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OPERATIONS
The Company's seven scrap tire processing plants charged tip fees for the
collection of more than 31 million scrap tires in 1997. Approximately 70% of
the casings were obtained through the Company's own collection network, which
collects from retail stores or supplies collection trailers to major scrap
tire generators, and through arrangements with tire manufacturers for factory
rejects. 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 or generator accounted for more than 5% of the casings
processed by the Company during 1997.
Scrap tires collected by the Company for a fee are processed into various
forms of tire-derived material, the bulk of which is sold as 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 passed through 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 into TDF has been designed or extensively modified by the
Company's own technical personnel. The Company continually endeavors to
improve its process economics and product quality. During 1996, the Company
installed wire recycling systems at its Baytown, Texas, Atlanta, Georgia, and
Portland, Oregon facilities. These systems, designed and constructed by the
Company, allow the facilities to operate waste-free, I.E., there is no waste
residue from the manufacturing process, thus improving profit margins. These
systems were also included in both of the Company's Illinois facilities when
they were constructed in 1995.
The Company has also 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.
Approximate Annual Shredding Capacities (Based on 16 hrs./day, 252 days/yr.):
Approximate Utilization
Percentage in 1997
------------------
Portland TDF Plant 5.5 Million PTE's 69%
Houston TDF Plant 7.5 Million PTE's 73%
Atlanta TDF Plant 7.5 Million PTE's 44%
Philadelphia TDF Plant 6.0 Million PTE's 52%
Dupo TDF Plant 7.5 Million PTE's 52%
Marseilles TDF Plant 7.5 Million PTE's 63%
Concord Plant 6.5 Million PTE's 117%
PTE's are Passenger Tire Equivalents
The Company's production capacity has increased to 48 million PTE's as of
December 31, 1997, from 45 million as of December 31, 1996 and 25 million as of
December 31, 1995. This increase was obtained through the establishment of the
two new facilities in Illinois and the acquisition of the Philadelphia and
Concord facilities. Although TDF sales represent a small portion of the
Company's revenues, they provide the primary outlet for the Company's processed
material that supports the Company's growth. TDF sales accounted for 14%, 10%,
and 7%
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of total company revenues for 1997, 1996 and 1995, respectively, and wire
sales were 3%, 2%, and 0% for 1997, 1996, and 1995, respectively, whereas
tipping fees, hauling and other services accounted for 84%, 88%, and 93% of
total Company revenues for 1997, 1996 and 1995, respectively.
SEASONALITY
Historically, the Company's TDF sales volume has been seasonal in the Pacific
Northwest, with volumes 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. However, as the Company has expanded with facilities throughout
the country, the impact of seasonal fluctuations in the Pacific Northwest
region has diminished considerably compared to previous years.
The Company believes WR-Illinois' contract with Illinois Power Company for
the sale of 60,000 tons per year of TDF which has a term through July 1,
1999, as well as growing the Company's client base in the South and
Southeast, should help to dampen seasonal fluctuations over the foreseeable
future. The Company has also began supplying TDF to additional utility and
industrial customers in the Midwest, in an effort to further mitigate
seasonal fluctuations of TDF sales.
SCRAP-TIRE MARKET
The Rubber Manufacturing Association (RMA) estimates that approximately 350
million passenger tire equivalents (PTE's) (equivalent to approximately 255
million tire units) were scrapped in 1997.
If all tires scrapped in a year were converted to TDF utilizing the Company's
proprietary system, the potential output would be approximately 3.3 million
tons - more than 20 times the Company's 1997 tonnage sales of TDF. Even
after allowing for the 15% of tires scrapped annually that are used in other
applications, the 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 abandoned tire piles which further increases the
potential TDF output.
Demand for TDF appears to be growing, especially in the utility industry
based on the Company's experience with this type of customer over the last
three years. Certain of the benefits of TDF, such as 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 agreement with the Illinois Power Company. Under the terms of
the Company's contract, 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. WR-Illinois has recently extended an agreement with
Wisconsin Power and Light, further establishing itself in this growing market
segment. The agreement with Wisconsin Power & Light calls for the delivery
of up to 24,000 tons of TDF over a thirteen month period beginning January
1998.
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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 mosquito-borne health hazards associated with
stockpiles of scrap tires and the desire to curtail additional growth of
stockpiles, more restrictive regulation with respect to the disposal of
current generation of scrap tires has been implemented at all levels of
jurisdiction with increasing intensity in recent years.
In the past couple of years, legislation has had a significant effect on the
Company's Houston operation. The State of Texas had collected $2 for each
new passenger tire and $3.50 for each new truck tire sold. The proceeds fund
the clean-up of abandoned tire piles, as well as the disposal of current
scrap tire generation, and are the source of the $.85 per weighed 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 has been the
only processor in the state to recycle all of the scrap tires it received
under the program. The Company was under the State of Texas' allocation
program until September 1995, at which time the allocation system was
eliminated and now allows qualified processors to process tires on an
unlimited basis. However, the Company's ability to increase tire flow into
its facility was restrained since this legislation allowed competitors to
stockpile scrap tire material and continue to receive compensation from the
State. The result was the creation of large piles of shredded tires across
the State which approximated 90 million tires at December 31, 1997. In
efforts to curtail the growth of these shred piles, this legislation was
amended as of January 1, 1996 to require end-use markets such as TDF markets,
for example, for scrap tires collected. Although the effective date of the
requirement for end-use markets was January 1, 1996, the State allowed a
"grace period" for scrap tire processors to continue operating without
end-use markets. This grace period ended December 31, 1996. The Texas scrap
tire program was abolished on December 31, 1997, thus ending the state
supported subsidy for the disposal of scrap tires. The Company now charges a
disposal fee directly from scrap tire generation for the Company's disposal
services in Texas as it does in other states.
The burning of TDF is subject to regulation by federal, state and local
governmental agencies. 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 to burn TDF in new states will be thoroughly scrutinized by
regulatory bodies for emissions 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, which
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
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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. Approximately
four of these entities are still active and compete with the Company.
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 Minnesota and Georgia. During 1997, BFI sold its operation to
Greenman Technologies. Greenman is primarily a producer of crumb rubber.
The Company's primary competition for the acquisition of scrap tire casings
comes from the companies mentioned above, numerous individual collectors, and
Lakin General. Lakin is a large collector of scrap tires on a national
level. Lakin's primary business is the "culling" out of usable casings from
the scrap flow and selling them into secondary markets as used tires. The
Company, at some locations, is a recipient of scrap from Lakin.
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
compete on the basis of its expertise in the logistics of tire disposal and
TDF production technology. The Company's newly-constructed TDF plants
endeavor to 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.
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 Materials 02/22/83
4,519,550 Material Guide and Clearer for Commuting Apparatus 05/28/85
4,560,112 Scrap Shredding Apparatus Having Clearing Rings and Method for
Sharpening Same 12/24/85
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 for
Sharpening Same 04/14/87
1,279,051 Tire Processing Apparatus and Method 01/15/91
</TABLE>
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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. The Company was in default at December 31,
1997 with respect to debt of these facilities. See notes 2, 11, 13 and 28 of
the Consolidated Financial Statements of the Company beginning at page F-1 of
this Form 10-K.
EMPLOYEES
As of December 31, 1997, the Company had 336 full-time employees, of whom 274
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
generally good.
[End of Page]
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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. For a
more detailed description of the Company's executive officers, please see the
information under the caption "Executive Officers of the Company" in the
Company's Proxy Statement to be filed under Regulation 14A within 120 days
after December 31, 1997.
<TABLE>
<CAPTION>
Name Age Position Held With Registrant
---- --- -----------------------------
<S> <C> <C>
MARTIN B. BERNSTEIN 63 Chairman of the Board of Directors
THOMAS L. EARNSHAW 43 Vice Chairman of the Board of Directors
DAVID G. GREENSTEIN 37 President and Chief Executive Officer
ROBERT L. THELEN 58 Executive Vice President - Engineering
MARK W. HOPE 43 Senior Vice President
</TABLE>
The positions and offices of the executive officers of the Registrant are as
follows:
MARTIN B. BERNSTEIN was elected Chairman of the Board of Directors of the
Company at the February 13, 1997 Board of Directors meeting. Mr. Bernstein
joined the Board of the Company in December of 1996 in connection with the
Company's acquisition of U.S. Tire.
THOMAS L. EARNSHAW accepted the position of Vice Chairman on August 1, 1997.
He 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. Effective
January 1, 1998, Mr. Earnshaw resigned as an employee of the Company and was
retained as a consultant on a yearly basis.
DAVID G. GREENSTEIN joined the Company in December of 1996 in connection with
the Company's acquisition of U.S. Tire. He also serves as President of the
Company's U.S. Tire subsidiary. Mr. Greenstein was appointed President and CEO
on August 1, 1997, and elected as a Director of the Company in December 1997.
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.
MARK W. HOPE joined the Company at its inception in 1982. He was Vice
President of the Company's Northwest Region prior to accepting his current
position.
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ITEM 2. PROPERTIES
The Company currently occupies the following properties:
<TABLE>
<CAPTION>
Sq. Footage of Owned or Lease Current
Location and Description Building Expiration Monthly Rental
------------------------ -------------- -------------- --------------
<S> <C> <C> <C>
PORTLAND, OREGON:
25,000 sq. ft. paved property with metal
manufacturing building 1,000 12/31/99 $872
45,000 sq. ft. property with metal fabrication
and maintenance building 4,800 12/31/99 $3,200
20,000 sq. ft. graveled lot - 5/31/99 $800
Office and shop on 1.2 acres 8,000 7/31/99 $2,200
HOUSTON (HARRIS COUNTY), TEXAS:
Production facility on 9 acres partially paved
with metal building 13,800 Owned -
ATLANTA, GEORGIA:
Production facility on 3 acres partially paved
with metal building 4,800 12/31/99 $2,785
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
DUPO, ILLINOIS:
Production facility on 10 acres partially
paved with metal building 12,000 11/30/14 $1,000
MARSEILLES, ILLINOIS:
Production facility on 6.8 acres partially
paved with two metal buildings 9,600 Owned -
CONCORD, NORTH CAROLINA:
Production facility on 87 acres with office
and shop 5,600 Owned -
</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, Atlanta, Philadelphia, Dupo, Marseilles
and Concord 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.
On March 21, 1998, the Company's Marseilles, Illinois facility was
substantially damaged by fire. The facility is covered by replacement and
business interruption insurance; however, uninsured costs, if any, are unknown
and are not yet reasonably or practicably determinable.
ITEM 3. LEGAL PROCEEDINGS
Special Note: Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See
"Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.
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The Company is involved in routine litigation arising in the ordinary course of
business. In the opinion of management, such matters would not have a material
adverse effect on the financial condition or the results of operations of the
Company.
The Company has received certain demand letters from noteholders regarding the
Company's default on the convertible subordinated notes. Management is
currently assessing the impact of these demands on the Company. For further
discussion, see Part II, Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and notes 2, 14 and 28 of the
Company's Financial Statements included in Part II, Item 8 of this Form 10-K.
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 1996.
[End of Page]
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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
Stock was 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 Stock during the periods
indicated:
High Low
---- ---
Quarter Ended Bid Ask Bid Ask
- ------------- --- --- --- ---
03/31/96 1 3/8 1 9/16 1 1 5/32
06/30/96 1 13/16 2 1 1 1/4
09/30/96 1 1/2 1 9/16 1 1/16 1 1/4
12/31/96 2 5/16 2 3/8 1 1/2 1 5/8
03/31/97 2 1/4 2 1/4 1 1/4 1 7/16
06/30/97 1 9/16 1 9/16 1 5/32 1 9/32
09/30/97 1 7/32 1 7/16 29/32 7/8
12/31/97 15/16 15/16 1/2 19/32
(a) The quotations set out above represent prices between dealers and do not
include retail mark-up, mark-down or commissions and 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
April 13, 1998 was 600.
(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 accumulated on such preferred stock must be paid.
The Company does not anticipate paying dividends on its Common Stock in
the foreseeable future.
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
13
<PAGE>
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 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.
PURCHASE OF U.S. TIRE RECYCLING PARTNERS, L.P.
The Company issued 3,242,997 shares of unregistered Common Stock, $1,850,000
of convertible subordinated notes, and promissory notes in the aggregate
amount of $605,035 as consideration for the purchase of U.S. Tire Recycling
Partners, L.P. ("U.S. Tire") in December 1996. The Company also issued
243,224 unregistered shares of Common Stock to a third party as compensation
for services rendered as financial advisor to the Company in connection with
the acquisition of U.S. Tire. The convertible subordinated notes are
convertible at $2.50 per share and have an interest rate of 5% per annum in
1996 and 1997, 6% in 1998 and 7% in 1999 and 2000. Interest is paid
quarterly with principal payments beginning on March 31, 1999 in the amount
of $500,000, and $450,000 on September 30, 1999, March 31, 2000 and September
30, 2000. Principal amounts are subject to reduction if certain cash flow
tests are not met by the Company's U.S. Tire subsidiary. See notes 2, 14 and
28 of the Company's Consolidated Financial Statements beginning at page F-1
of this Form 10-K regarding the default by the Company with respect to the
debt issued in connection with the acquisition of U.S. Tire.
PURCHASE OF INTEREST IN WR-ILLINOIS
The Company issued 1,100,000 shares of unregistered Common Stock to acquire
Riverside Caloric Company's (RCC) 55% interest in WR-Illinois in December of
1996. The Company formed the Partnership in 1993 with RCC (a wholly-owned
subsidiary of NIPSCO Industries, Inc.) to build two production facilities in
Illinois. The Company owned 45% of the partnership prior to acquiring RCC's
interest.
ISSUANCE OF COMMON STOCK AND WARRANTS
On December 24, 1996 and December 26, 1996, the Company sold 1,050,000 shares
of unregistered Common Stock for $1.45 per share in a private placement. In
connection with issuing this stock, warrants to purchase a like amount were
also sold for $0.05 per share. This sale was made to qualifying individuals,
of which one was Mr.
14
<PAGE>
Michael Dodge, a director of the Company. Mr. Dodge purchased 300,000 shares
of unregistered Common Stock for $1.45 per share and $0.05 per warrant.
1997 REGISTRATION STATEMENT
In the agreement to acquire U.S. Tire, the Company agreed to file a
registration statement with the Securities and Exchange Commission (SEC) to
register shares issued to the sellers of U.S. Tire after its 1996 Form 10-K
had been filed. The shares of Common Stock issued to NIPSCO and those sold
in the December private placement were given the right to be included in this
filing.
[End of Page]
15
<PAGE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the consolidated
financial statements and should be read in conjunction with and are qualified
by reference to "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,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA
TDF sales $ 1,114,975 $ 1,104,691 $ 1,080,172 $ 1,589,405 $ 4,007,545
Wire sales - - - 397,701 801,283
Disposal and other revenues 7,625,518 11,320,714 13,059,751 14,687,426 24,499,916
------------ ----------- ----------- ----------- -----------
Total revenues 8,740,493 12,425,405 14,139,923 16,674,532 29,308,744
Operating expenses and
depreciation 6,902,545 9,753,225 12,098,884 13,103,362 25,270,437
General and administrative
expenses 1,660,449 2,099,579 2,568,094 3,171,418 5,677,265
------------ ----------- ----------- ----------- -----------
Income from operations 177,499 572,601 (527,055) 399,752 (1,638,958)
Interest expense, net 352,835 378,761 457,202 375,093 823,443
Other (income) expense (67,340) 10,567 (380,066) (935,795) (654,261)
Minority interest in income 87,617 - - - -
Loss in equity of Partnership - 20,260 322,630 668,504 -
------------ ----------- ----------- ----------- -----------
Income (loss) before income
taxes and extraordinary items (195,613) 163,013 (926,821) 291,950 (1,808,140)
Income tax benefit (expense) - 447,543 - (8,850) (517,204)
------------ ----------- ----------- ----------- -----------
Net income (loss) $ (195,613) $ 610,556 $ (926,821) $ 283,100 $(2,325,344)
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Net income (loss) per share $ (.08)** $ .07** $ (.12)** $ .01** $ (.14)**
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Net income (loss) per share -
assuming dilution $ (.08)** $ .06** $ (.12)** $ .01** $ (.14)**
------------ ----------- ----------- ----------- -----------
Weighted average number of
common shares outstanding 4,040,199 7,762,817 9,132,359 12,167,731 17,334,892
------------ ----------- ----------- ----------- -----------
Weighted average number of
common shares outstanding -
assuming dilution 4,040,199 7,466,955 9,132,359 12,353,963 17,334,892
------------ ----------- ----------- ----------- -----------
OTHER DATA
Earnings before interest, taxes,
depreciation & amortization
(EBITDA+) $ 899,619 $ 1,236,758 $ 486,089 $ 1,861,493 $ 1,835,883
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
EBITDA as a percentage of
revenues 10% 10% 3% 11% 6%
------------ ----------- ----------- ----------- -----------
Tons of TDF sold during
the period ended (unaudited) 62,156 62,564 72,961 102,929 168,263
------------ ----------- ----------- ----------- -----------
BALANCE SHEET DATA
Total assets $ 5,876,105 $ 8,745,077 $10,732,399 $28,391,800 $24,995,408
Total long-term debt $ 2,065,509* $ 4,002,585 $ 4,409,249 $12,053,395 $10,528,587*
Total shareholders' equity (deficit) $ (362,932) $ 1,258,819 $ 2,899,006 $ 8,329,123 $ 6,421,256
</TABLE>
+ The Company believes that EBITDA is a useful common yardstick for measuring
the capacity of companies to generate cash without reference to how they
are capitalized, how they account for significant non-cash charges for
depreciation and amortization associated with assets used in the business,
the bulk of which are long-lived assets, or what their tax attributes may
be. Additionally, since EBITDA is a basic source of funds not only for
growth but to service indebtedness, lenders in both the private and public
debt markets use EBITDA as a significant determinant of borrowing
capacity.
16
<PAGE>
*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 debt agreements (see notes 10 and 13 of the Consolidated
Financial Statements of the Company and the related Notes included in Item
8).
**Undeclared dividends on cumulative preferred stock of $142,502,
$142,502, $142,506, $142,896, and $142,506 for the years ended December
31, 1993, 1994, 1995, 1996, and 1997, respectively, have been added to net
loss or subtracted from net income for purposes of computing net income
(loss) per common share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Note: Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See
"Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.
GENERAL COMMENTS
In 1997, the deterioration of the Company's profitability has had a significant
adverse effect on the Company's liquidity. As a result of this liquidity
problem, the Company has defaulted on certain of its debt obligations. For
further discussion of these items, see the "Liquidity and Capital Resources"
section of Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and notes 2, 11, 13, 14 and 28 of the
Company's Consolidated Financial Statements included in Part II, Item 8 of this
Form 10-K.
The Company owns and operates tire processing facilities in Portland, Oregon,
Houston, Texas, Atlanta, Georgia, Philadelphia, Pennsylvania, Dupo, Illinois,
Marseilles, Illinois and Concord, North Carolina. Late in 1994, construction
began on the Dupo and Marseilles tire processing facilities which were
completed and began operations in late 1995. These plants were originally
owned by the Illinois Partnership, of which the Company owned a 45% interest
and was the managing partner until December of 1996 when the Company acquired
its partner's (NIPSCO) interest in the partnership in exchange for common stock
of the Company (see Part II, Item 5, Purchase of Interest in WR-Illinois). In
1995, the Company acquired the tire division of Domino Salvage, Inc. which
operated a tire collection and shredding operation located in Conshohocken,
Pennsylvania, for consideration of cash and notes. In the fourth quarter of
1996, the Company acquired U.S. Tire, L.P., located in Concord, North Carolina,
a company which collects tires, manufactures TDF and a leachate drainfill
material, and also operates its own tire monofill (see Part II, Item 5,
Purchase of U.S. Tire Recycling Partners, L.P.). Both Domino and U.S. Tire are
operated as wholly owned subsidiaries of the Company.
Regional services are provided from the seven operating facilities mentioned
above. Operations of these facilities include scrap tire collection, disposal,
and the recycling of tires into various products including tire-derived fuel
(TDF), drainfill or leachate collection material, a quarter-inch minus chip
used as a feedstock by the crumb rubber manufacturing industry, and scrap steel
produced from the wire content of the processed tires. The Company generates
revenues from scrap tire disposal fees, hauling of scrap tires, sales of used
tires in the used tire market, and the sale of products described immediately
above.
17
<PAGE>
During the past three years, the effects of inflation on the Company's
operations have been negligible.
In the last three years, the Company has experienced significant growth which
has resulted primarily from the acquisition of Domino, U.S. Tire, and the
purchase of NIPSCO's 55% ownership in the Illinois Partnership. These
acquisitions have caused the Company's scrap tire processing capacity to
increase from 20 million PTE's in 1994 to 48 million at the end of 1997.
Accompanying this increase in capacity, the Company more than doubled all
measures of volume in the period of 1995 - 1997. Set out below are selected
measures of volume for those periods which illustrate this statement.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
TDF Tons Sold 168,263 102,929 72,961
Passenger Tire Equivalents Received (Tons) 318,659 162,926 132,793
TDF Sales $ 4,007,545 $ 1,589,405 $ 1,080,172
Wire Sales $ 801,283 $ 397,701 -
Disposal and Hauling Fees $24,499,916 $14,687,426 $13,059,751
</TABLE>
Notwithstanding the volume increases illustrated above, the Company was
unsuccessful in increasing its levels of capacity utilization which totaled 62%
prior to the three acquisitions and 55% for the year 1997. Additionally, while
operating margins were squeezed by low capacity utilization rates, the
necessity of increasing tire flow had the overall affect of lowering tipping
fee margins.
The Company began 1997 with the belief that these volume increases would
translate into significantly improved operating results as a result of
increased overall volume. Actual results were disappointing primarily as a
result of the Company's inability to secure sufficient tire flow at certain of
its facilities, which has had the effect of causing the Company to operate at
levels of capacity utilization which are significantly below those budgeted by
the Company at the beginning of 1997. Additionally, the Company has
experienced other problems at its Atlanta and Philadelphia facilities which
have led to weak operating results in those facilities as described below. Set
out below is a matrix illustrating on a facility-by-facility basis, capacity
and volume measures for 1997 illustrating their relative importance.
[End of Page]
18
<PAGE>
WRI OPERATING FACILITIES
SELECTED STATISTICAL SUMMARY OF 1997 CAPACITY AND ACTIVITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
San
Atlanta, Portland, Concord, Marseilles, Dupo, Philadelphia, Baytown, Antonio, Calaveras,
GA OR NC IL IL PA TX TX** CA**
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Built/
Acquired 1988 1982 1996 1995 1995 1995 1986 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Wire System Yes Yes No Yes Yes No Yes NA NA
- ----------------------------------------------------------------------------------------------------------------------------------
Processing
Capacity
(millions PTEs) 7.5 5.5 6.5 7.5 7.5 6 7.5 2 2
- ----------------------------------------------------------------------------------------------------------------------------------
1997 Budget
(millions PTEs
processed) 3.3 3.8 7.6 4.7 3.9 3.1 4.1 1.6 1.2
- ----------------------------------------------------------------------------------------------------------------------------------
1997 Capacity
Utilization
Percentage 44% 69%* 117% 63% 52% 52% 55% 80% 60%
- ----------------------------------------------------------------------------------------------------------------------------------
1997 Tons
TDF Sold
(in thousands) 18.3 20.7 7.0 28.3 48.9 13.6 31.4 NA NA
- ----------------------------------------------------------------------------------------------------------------------------------
1997 Tons
Wire Sold
(in thousands) 3.6 3.1 NA 1.8 3.7 NA 7.4 NA NA
- ----------------------------------------------------------------------------------------------------------------------------------
1997 Tons
Landfilled
(in thousands) 0 11.3 5.8 0 0 10.0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*EXCLUDES WINLOCK REMOTE PROJECT OF 1.3 MILLION PTES IN 1997.
**VOLUME NOT INCLUDED IN PROCESSING CAPACITY.
DESCRIPTION OF OPERATIONS AT INDIVIDUAL FACILITIES
ILLINOIS FACILITIES (DUPO AND MARSEILLES)
During the fourth quarter of 1995, the Company began operations at two new
facilities located in the State of Illinois which were built to serve the
Chicago and St. Louis, Missouri scrap tire markets, respectively. These
facilities were originally scheduled to open in the early summer of 1995,
which date was postponed until the fall of that year, as a result of bad
weather and flooding in the Midwest region of the country which delayed
completion of their construction. This delayed entry date into the scrap
tire markets served by these facilities hampered the Company's ability to
build tire flow, and as a consequence both Illinois facilities suffered
during their start-up phases from a lack of scrap tire flow. While this
problem diminished by mid-1996, increasing demand for scrap tires in the
region has restricted the supply to these two facilities, resulting in
inadequate overall operating levels. During calendar 1997, the two
facilities operated at 57% of capacity utilization, versus 60% which the
Company believes is necessary for the facilities to break even. Demand for
TDF in the Midwest has continued to strengthen, and the Company believes that
TDF demand within the market area served by these two facilities presently
exceeds the facilities aggregate capacity to produce TDF. In an effort to
address this problem, the Company has lowered tipping fees to attract
additional tire flow which has met with encouraging results. As a
consequence, the Company now projects that operations of these two facilities
in 1998 will exceed the break even level and consequently will make their
first profitable contribution to the Company's bottom line.
19
<PAGE>
On March 21, 1998, the Company's Marseilles, Illinois facility was
substantially damaged by fire. The facility is covered by replacement and
business interruption insurance; however, uninsured costs, if any, are unknown
and are not reasonably or practicably determinable.
U.S. TIRE, INC. - CONCORD FACILITY
In December of 1996, the Company acquired U.S. Tire, a scrap tire processor
located in Concord, North Carolina, which operates a scrap tire collection
network throughout the state and surrounding Eastern corridor as well as its
own scrap tire monofill. The Concord facility landfills approximately 50% of
the scrap tires collected, with the balance being shredded and sold as
drainfill or leachate material, primarily in South Carolina where the product
is used as a substitute for gravel in septic tanks for single-family homes.
The Concord facility also produces some tire-derived fuel and other tire-
derived products which are used for civil engineering purposes. Tire flow at
this facility exceeded 7.5 million PTE's in 1997 which is a continuation of
U.S. Tire's historically strong operating results. This facility was a
significant contributor to the Company's operations in 1997 and met the overall
operating targets which were established when the company was purchased in
1996.
PORTLAND FACILITY
In 1997, the Portland facility continued to suffer from the loss of its largest
TDF customer, and from increasing competition for scrap tires. As a
consequence, this facility was a major disappointment with final results which
varied from those originally projected by a wide margin. In late 1996, a wire
recycling system was installed which created as a by-product, a 1/4 inch minus
wire free chip which is sold as a feedstock to the crumb rubber manufacturing
industry. Demand for this particular product exceeds supply by a wide margin.
The scrap steel market in this area of the country is significantly weaker than
in more industrialized areas resulting in very low or zero sales prices for the
Company's scrap steel which numbers have adversely affected this facilities
bottom line.
BAYTOWN FACILITY
The Baytown facility experienced a good year both in terms of disposal fees and
end product sales. The State of Texas' scrap tire allocation program expired
on December 31, 1997. This event caused significantly improved levels of
operations in the fourth quarter of the year as disposers of tires sought to
eliminate their inventories prior to the conclusion of the State subsidy.
Going forward, the Company expects that the beginning of the year will see a
significant decrease in operating levels due to the large volumes that were
processed through the facility in November and December. The Company maintains
its position of being the only processor in the State of Texas capable of
recycling 100% of each tire, and accordingly hopes that as the free market
environment created by the elimination of the State program takes effect, that
operations in the second half of the year will return to the levels experienced
in 1997.
20
<PAGE>
ATLANTA FACILITY
The mechanical fire that shut down the Atlanta facility in November of 1996,
caused a dramatic decrease in operations at that facility for 1997. While a
portion of the plant remained open to receive scrap tires which were shredded
and landfilled at the Company's U.S. Tire facility in Concord, North Carolina,
the plant did not regain full mechanical operation until June of 1997. During
the second half of the year, operating levels increased, but they did not reach
the prior year's levels until the fourth quarter. Notwithstanding these
events, because of business interruption insurance, the bottom line operations
for the facility came in at a level approximating the Company's internal budget
which was prepared prior to the fire. Additionally, because the facility was
adequately insured and much of the damaged equipment already fully depreciated,
the Company recognized an involuntary gain on the conversion of assets during
the fourth quarter of 1996.
PHILADELPHIA FACILITY
The Company's Pennsylvania facility which is located north of Philadelphia in
the town of Conshohocken was purchased by WRI in 1995. This facility has
remained unprofitable during the past two years because the TDF markets which
the Company foresaw failed to materialize. This facility is the only permitted
tire recycling plant in Pennsylvania and was awarded in excess of $1 million in
tire pile abatement projects in 1995. In April of 1998, the Company concluded
an agreement to sell TDF to International Paper's facility located in
Lockhaven, Pennsylvania at a level which it is hoped will bring this facility
closer to profitability in 1998.
A recap of the Company's operating results before income taxes follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Operating income (loss) $(1,638,958) $ 399,752 $(527,055)
Interest expense (net) (823,443) (375,093) (457,202)
Gains on sales of equipment and other income 489,343 311,576 380,066
Gain (loss) on involuntary conversion of assets 164,918 624,219 -
Equity in loss from Partnership operations - (668,504) (322,630)
----------- --------- ---------
Income (loss) before income taxes $(1,808,140) $ 291,950 $(926,821)
----------- --------- ---------
----------- --------- ---------
</TABLE>
21
<PAGE>
1997 VS. 1996 VS. 1995
The table below summarizes the activity of the Company as well as the basic
revenue categories for the last three years:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
TDF Tons Sold 168,263 102,929 72,961
Passenger Tire Equivalents Received (Tons) 318,659 162,926 132,793
TDF Sales $ 4,007,545 $ 1,589,405 $ 1,080,172
Wire Sales $ 801,283 $ 397,701 -
Disposal and Hauling Fees $24,499,916 $14,687,426 $13,059,751
</TABLE>
The Company's total revenues of $29,308,744 for 1997 were 76% higher than the
$16,674,532 received in 1996, and 107% higher than the $14,139,923 received in
1995. This increase is the result of a 152% and 271% increase in TDF sales,
and a 67% and 88% increase in disposal fees, hauling, and other revenue over
1996 and 1995, respectively, as well as sales of wire product for the first
time in 1996 generated from the newly installed wire systems. Tons of TDF sold
were improved in 1997 for an increase of 63% over 1996 and 131% over 1995.
These increases are primarily due to the December 1996 acquisitions of WR-
Illinois and U.S. Tire, which accounted for 44% of total revenues for the year
ending December 31, 1997. Tire flow increased for the year ending 1997 showing
an increase of 96% and 140% compared to the same periods ending 1996 and 1995,
primarily as a result of the acquisitions, with WR-Illinois and U.S. Tire
accounting for 51% of total 1997 tire flow.
TDF sales were down at the Portland plant for the year ending 1997 compared to
1996, while disposal fees decreased due to a decrease in related tire flow.
TDF sales and disposal fees decreased at the Atlanta plant due to the
rebuilding efforts, which were completed in late May 1997, as a result of the
November 1996 fire. The Houston plant showed improvement in TDF and wire sales
as the market for these products strengthened in that region. Margins in
Houston improved because of lower freight costs, and higher delivered prices
which are attributable to the increasing demand for TDF in the south central
states. Domino showed improvement for the year ending 1997 compared to 1996
and 1995 in part as a result of a cleanup project for the Commonwealth of
Pennsylvania. TDF sales for Domino, however, were flat for 1997 compared to
1996. WR-Illinois showed improved TDF sales with the Marseilles plant
producing and selling TDF beginning January 1997, while the Dupo plant's TDF
sales were flat for the year ending 1997 compared to 1996. Tire flow for WR-
Illinois improved 53% for the year ending December 1997 compared to the same
period in 1996.
The table below compares cost elements as a percentage of revenues (Revs.) over
the last three years:
<TABLE>
<CAPTION>
% of % of % of
1997 Revs. 1996 Revs. 1995 Revs.
----------- ----- ----------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Variable
Operating Expenses $22,449,857 76% $11,908,912 71% $11,143,176 79%
Depreciation 2,820,580 10% 1,194,450 7% 955,708 7%
----------- --- ----------- --- ----------- ---
Total Operating Expenses $25,270,437 86% $13,103,362 78% $12,098,884 86%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
</TABLE>
22
<PAGE>
Operating expense for the year ended December 31, 1997 increased compared to
the same periods ending in 1996 and 1995 due to the acquisitions of WR-Illinois
and U.S. Tire in December 1996. Operating expense as a percent of revenues
increased to 76% for the year ending December 31, 1997 from 71% for the same
period ending in 1996. This increase is primarily the result of a decreased
tire flow in Portland, and increased operating costs at the Houston plant due
to further expansion and tire collection efforts in Texas. Operating expense
as a percent of revenues for WR-Illinois and Domino improved from 87% to 78%
for 1996 and 1997, respectively, due to an increased tire flow for all three
plants, and improved TDF sales at the Marseilles plant. Operating expense as a
percent of revenues for the year ending 1996 compared to the same period in
1995 improved primarily as a result of the wire systems installed in 1996.
Prior to installation of the wire systems, the Company incurred costs to
dispose of the wire waste residue. The wire product is now sold in the scrap
steel market.
Depreciation expense increased significantly to $2,820,580 for the year ending
December 31, 1997 compared to $1,194,450 and $955,708 for the same periods
ending in 1996 and 1995, respectively. The increase in 1996 over 1995 was
primarily due to the installation of the wire systems installed in the Atlanta,
Baytown, and Portland plants. The increase in 1997 is due primarily to the
acquisition of U.S. Tire, and the inclusion of WR-Illinois in the Consolidated
Financial Statements of the Company which resulted from the acquisition of the
55% of WR-Illinois not owned by the Company prior to December 1996. In 1995,
WRI owned 45% of WR-Illinois, and in accordance with generally accepted
accounting principals, reported the results of operations of these two Illinois
facilities as a one-line item entitled "Equity in loss from partnership
operations" as required by the equity method of accounting for subsidiaries.
With the completion of the acquisition of the 55% majority interest in December
1996, the Company used the consolidation method of accounting for subsidiaries
to consolidate the operations of these facilities thereby including components
of income and expense in its operating statements. Depreciation expense as a
percent of revenues was 10% for the year ending December 31, 1997, compared
with 7% for the years 1996 and 1995, which resulted primarily from the
consolidation of WR-Illinois cited above and the inclusion of U.S. Tire.
[End of Page]
23
<PAGE>
General and administrative expenses increased to $5,677,265 for 1997, compared
with $3,171,418 for 1996, and $2,568,094 in 1995. These increases are
attributable primarily to the consolidation of WR-Illinois, the acquisition of
U.S. Tire, as well as increased staffing at the plant and corporate levels,
higher salaries and health insurance costs, and other administrative costs from
the overall increase in corporate activities as a result of the Company's
expansion. As a percent of revenues, general and administrative costs were
unchanged at 19% for 1997 and 1996, and were up compared to 18% for 1995. The
increases are primarily due to the acquisitions of WR-Illinois and U.S. Tire in
December 1996. Interest expense increased to $940,136 for 1997 from $447,176
for 1996. The increase is primarily attributable to the consolidation of WR-
Illinois. Interest expense decreased in 1996 compared to 1995 due to the
conversion of the subordinated convertible debentures on July 1, 1996, as well
as the capitalization of interest in connection with the construction and
installation of the wire systems in the Atlanta, Houston, and Portland plants
in 1996. Interest expense as a percent of revenues was unchanged at 3% for
1997 and 1996.
<TABLE>
<CAPTION>
% of % of % of
1997 Revs. 1996 Revs. 1995 Revs.
----------- ----- ----------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
General and
Administrative $5,677,265 19% $3,171,418 19% $2,568,094 18%
Interest Expense 940,136 3% 447,176 3% 517,986 4%
Interest Income (116,693) - (72,083) - (60,784) -
---------- -- ---------- -- ---------- --
$6,500,708 22% $3,546,511 22% $3,025,296 22%
---------- -- ---------- -- ---------- --
---------- -- ---------- -- ---------- --
</TABLE>
[End of Page]
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Despite the significant increases in operating levels in 1997 over 1996, the
deterioration in the Company's profitability has had a significant adverse
affect on the Company's liquidity, and on measures of financial leverage. As a
consequence of these poor operating results in 1997, management has focused its
attention on cost reduction and the deferral of capital expenditures and
improvement in operating efficiencies until such time as the Company is able to
restore its liquidity through obtaining additional capital and improvement in
its operations.
In order to meet liquidity needs, in 1997, various directors of the Company
advanced $300,000 in the form of convertible debt. An additional $385,000 was
advanced during the first quarter of 1998. Additionally, the Company's lead
financial institution, Chase Bank of Texas, modified its existing indebtedness
by increasing the overall amount by $350,000, and deferring principal
amortization by an aggregate of $154,000 in 1998. Despite these events, the
Company ended the year in a deficit cash position which is recorded as an
account payable reflecting a bank overdraft. While the funds contributed in
1998, along with the increased bank debt, have eliminated the overdraft
problem, the Company believes that it will need the proceeds from additional
equity and long-term debt to meet the levels of liquidity that are necessary
for future operations.
On March 20, 1997, the Domino debt was modified to change the due date of the
second installment of $225,000 to May 21, 1997. The third installment of
$275,000 was to remain due on March 21, 1998.
As a result of the poor operating results in 1997 and the related adverse
effect on the Company's liquidity, the Company defaulted on certain of its
debt.
On January 15, 1998, the Company was in default on the convertible subordinated
notes as a result of the nonpayment of interest. These notes were given as
consideration for the acquisition of U.S. Tire and are accounted for as a
contingent obligation (see note 14 of the financial statements beginning on
page F-1 of this Form 10-K.) The note agreement provides that, in the event of
a default, the noteholders may convert the notes to common stock at a reduced
price of $1.00 per share or foreclose on the common stock of New U.S. Tire
Recycling Corp., a wholly-owned subsidiary of the Company which owns 84% of
U.S. Tire.
On January 27, 1998, the Company announced a default by its wholly-owned
subsidiary, WR-Illinois with respect to debt service payments due February 1,
1998 in connection with the loan agreements relating to outstanding bonds
issued by the Southwestern Illinois Development Authority and the Upper
Illinois River Valley Development Authority. The bonds are secured by the
assets of WR-Illinois, restricted trust funds, and a corporate guaranty by the
Company. As a result of the default, the indenture trustee has made demand for
payment, and, although notice of acceleration has not been given, the
bondholders have the right to accelerate maturity.
Management is attempting to resolve each of these matters, as well as the
overall liquidity problems of the Company, through efforts to restructure debt,
obtain additional capital, limit capital expenditures, and improve operations.
25
<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-
[End of Page]
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is incorporated herein by
reference to the Company's Proxy Statement to be filed under Regulation 14A
within 120 days after December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated herein by
reference to the Company's Proxy Statement to be filed under Regulation 14A
within 120 days after December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated herein by
reference to the Company's Proxy Statement to be filed under Regulation 14A
within 120 days after December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated herein by
reference to the Company's Proxy Statement to be filed under Regulation 14A
within 120 days after December 31, 1997.
[End of Page]
27
<PAGE>
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 35 of this Form 10-K.
(a) 2. Exhibits are listed on page E-1 through E-4 of this
Form 10-K.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
3.1 Amended and Restated Articles of Incorporation filed July
5, 1988, with the Secretary of State of Texas,
incorporated herein by reference to Exhibit 3.4 to the
Company's Form 10-K filed March 24, 1989.
3.2 Articles of Amendment to the Articles of Incorporation
filed June 8, 1990, with the Secretary of State of Texas,
incorporated herein by reference to Exhibit 3.5 to the
Company's Form 10-K filed March 27, 1991.
3.3 By-Laws, amended and restated as of March 10, 1992,
incorporated herein by reference to Exhibit 3.6 to the
Company's Form 10-K filed March 26, 1992.
4.1 Form of Common Stock Certificate of Registrant,
incorporated herein by reference to the Company's Form S-
1, as amended, filed July 15, 1986.
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, incorporated herein by reference to Exhibit 4.2
to the Company's report on Form 8-K filed June 1, 1988.
4.6 Form of 10% Convertible Subordinated Debenture due March
15, 1996, incorporated herein by reference to Exhibit 4.6
to the Company's report on Form 8-K filed October 5, 1994.
10.6 Agreement dated May 9, 1986, between Registrant and The
Goodyear Tire and Rubber Company, incorporated herein by
reference to Exhibit 10.32 to the Company's Amendment No.
1 to Form S-1 filed July 1, 1986.
10.7 Lease Agreement dated January 15, 1988, between Southern
Metal Finishing Company, Inc. and the Registrant,
incorporated herein by reference to Exhibit 10.37 to the
Company's Form 10-K filed March 25, 1988.
10.8 Indemnity Agreement dated January 29, 1988, by the
Registrant and Southern Metal Finishing Company, Inc.,
incorporated herein by reference to Exhibit 10.38 to the
Company's Form 10-K filed March 25, 1988.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.10 Estoppel Deed, dated December 28, 1989, between the
Registrant as Grantor, and Tex A. Perkins, et al., as
Grantee, incorporated herein by reference to Exhibit 10.64
to the Company's Form 10-K filed March 26, 1990.
10.11 Lease of Real Property, dated January 1, 1990, between the
Registrant, as Lessee, and Tex A. Perkins, et al., as
Lessor, incorporated herein by reference to Exhibit 10.65
to the Company's Form 10-K filed March 26, 1990.
10.12 Warranty Deed, dated February 7, 1990, between Tex A.
Perkins, et al., as Grantor, and Wayne Easley, as Grantee,
incorporated herein by reference to Exhibit 10.66 to the
Company's Form 10-K filed March 26, 1990.
10.13 Assignment of Lease, dated February 7, 1990, from Tex A.
Perkins, et al., as Assignor, and Wayne Easley, as
Assignee, incorporated herein by reference to Exhibit
10.68 to the Company's Form 10-K filed March 26, 1990.
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, incorporated
herein by reference to Exhibit 10.73 to the Company's Form
10-K filed March 26, 1990.
10.15 Amendment No. 1 to the Registrant's 1989 Stock Plan for
Employees, incorporated herein by reference to Exhibit
10.15 to the Company's Form 10-K filed March 28, 1996.
10.16 Nonqualified Stock Option Agreement dated April 4, 1990,
granted by the Registrant to Allan Shivers, Jr. for
200,000 shares, incorporated herein by reference to
Exhibit 10.77 to the Company's Form 10-K filed March 27,
1991.
10.17 Form of Nonqualified Stock Option Agreement for grants to
employees made January 7, 1991, incorporated herein by
reference to Exhibit 10.89 to the Company's Form 10-K
filed March 26, 1992.
10.18 Form of Incentive Stock Option Agreement for grants to
employees made October 1, 1991, incorporated herein by
reference to Exhibit 10.90 to the Company's Form 10-K
filed March 26, 1992.
10.19 1992 Stock Plan for Non-Employee Directors, incorporated
herein by reference to Exhibit 4.8 of the Company's Form S-
8 filed May 8, 1992.
10.20 Form of Nonqualified Stock Option Agreement for grants to
non-employee directors made January 4, 1991, incorporated
herein by reference to Exhibit 10.88 to the Company's Form
10-K filed March 26, 1992.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.21 Indemnity and Security Agreement, dated June 1, 1990,
between Registrant and The Goodyear Tire and Rubber
Company, incorporated herein by reference to Exhibit 10.82
to the Company's Form 10-K filed March 27, 1991.
10.22 Amendment to Lease of Real Property dated April 25, 1991,
between the Registrant, as Lessee, and George Glanz, as
Lessor, Incorporated herein by reference to Exhibit 10.86
to the Company's Form 10-K filed March 26, 1992.
10.23 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), incorporated herein by reference
to Exhibit 10.007 to the Company's report on Amendment No.
1 to Form 8-K/A filed December 14, 1993.
10.24 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, incorporated herein by reference
to Exhibit 10.021 to the Company's Form 10-K filed March
30, 1995.
10.25 Stock Purchase Agreement for the purchase by the
Registrant of the outstanding stock of Domino Salvage,
Tire Division, Inc., dated March 21, 1995, incorporated
herein by reference to Exhibit 10.024 to the Company's
Form 10-K filed March 30, 1995.
10.26 Loan Agreements dated April 1, 1988, between Development
Authority of Fulton County and the Registrant,
incorporated herein by reference to Exhibit 28.2 to the
Company's report on Form 8-K filed June 1, 1988.
10.27 Promissory Note dated April 1, 1988, from the Registrant
to Development Authority of Fulton County, incorporated
herein by reference to Exhibit 28.3 to the Company's
report on Form 8-K filed June 1, 1988.
10.28 Leasehold Deed to Secure Debt and Security Agreement dated
April 1, 1988, between the Registrant and the Trustee,
incorporated herein by reference to Exhibit 28.5 to the
Company's report on Form 8-K filed June 1, 1988.
10.29 First Amendment to Lease Agreement dated April 1, 1988,
between Southern Metal Finishing Company, Inc. and the
Registrant, incorporated herein by reference to Exhibit
28.6 to the Company's report on Form 8-K filed June 1,
1988.
10.30 Assignment of Contracts dated April 1, 1988, between the
Registrant and Development Authority of Fulton County,
incorporated herein by reference to Exhibit 28.7 to the
Company's report on Form 8-K filed June 1, 1988.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.31 Promissory Note dated February 29, 1996, executed by the
Registrant as maker payable to Texas Commerce Bank
National Association in principal amount of $1,119,309.01,
incorporated herein by reference to Exhibit 10.31 to the
Company's Form 10-K filed April 15, 1997.
10.32 Note Purchase Agreement dated February 29, 1996, between
The Goodyear Tire and Rubber Company and Texas Commerce
Bank National Association, incorporated herein by
reference to Exhibit 10.32 to the Company's Form 10-K
filed April 15, 1997.
10.33 Form of Convertible Subordinated Debenture Conversion
Agreements effective July 1, 1996, incorporated herein by
reference to Exhibit 10.33 to the Company's Form 10-K
filed April 15, 1997.
10.34 Form of Warrant to Purchase Common Stock of Waste
Recovery, Inc. as of July 1, 1996, as Exhibit "A" to the
Convertible Subordinated Debenture Conversion Agreements
included herein in Exhibit 10.47, incorporated herein by
reference to Exhibit 10.34 to the Company's Form 10-K
filed April 15, 1997.
10.35 Dodge Common Stock and Warrant Purchase Agreement dated
December 24, 1996 between Waste Recovery, Inc. and Michael
C. Dodge, incorporated herein by reference to Exhibit
10.35 to the Company's Form 10-K filed April 15, 1997.
10.36 Common Stock and Warrant Purchase Agreement dated December
26, 1996 by and among Waste Recovery, Inc. and Bette
Nagelberg, Ronald I. Heller, Rachel Heller, Ronald I.
Heller as custodian for Evan Heller, Delaware Charter
Guaranty & Trust Co. FBO, and R. Anthony Cioffari,
incorporated herein by reference to Exhibit 10.36 to the
Company's Form 10-K filed April 15, 1997.
10.37 Agreement and Plan of Reorganization dated as of the 30th
day of September 1996 by and among Waste Recovery, Inc.,
New U.S. Tire Recycling Corp., U.S. Tire Recycling
Partners, L.P., Bodner/Greenstein Capital Holdings, Inc.,
Tirus, Inc., Tirus Associates, L.L.C., Environmental
Venture Fund, L.P., Argentum Capital, L.P., and Certain
Shareholders, incorporated herein by reference to Exhibit
1.1 of the Company's current report on From 8-K filed
December 20, 1996.
10.38 Partnership Purchase Agreement dated as of December 16,
1996, between Riverside Caloric Company, Waste Recovery,
Inc., and Waste Recovery-Illinois, L.L.C., incorporated
herein by reference to Exhibit 1.2 of the company's
current report on Form 8-K filed December 20, 1996.
10.39 Deed of Trust and Security Agreement between New U.S. Tire
Recycling Corp. (a wholly-owned subsidiary of the
Registrant) as Grantor, and the former partners and
shareholders of U.S. Tire Recycling Partners, L.P. as
Beneficiary, incorporated herein by reference to Exhibit
10.39 to the Company's Form 10-K filed April 15, 1997.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.40 Letter Agreement between Waste Recovery, Inc. and Cameron
& Associates relating to the retention of Cameron &
Associates as financial advisor in connection with the
acquisition of U.S. Tire, incorporated herein by reference
to Exhibit 10.40 to the Company's Form 10-K filed April
15, 1997.
10.41 Nonqualified Stock Option Agreement dated February 12,
1997, granted by the Registrant to Martin B. Bernstein for
1 million shares.(1)
10.42 Consulting Agreement dated December 31, 1997 between
Registrant and Thomas L. Earnshaw, as consultant.(1)
10.43 Promissory Note dated March 17, 1998, executed by
Registrant as maker payable to Chase Bank of Texas,
National Association in principal amount of $350,000.(1)
11.1 Statement regarding computation of per share earnings -
See page F-5 of this Form 10-K which is incorporated
herein by reference.
21.1 Subsidiaries of the Registrant, incorporated herein by
reference to Exhibit 21.1 to the Company's Form 10-K filed
April 15, 1997.
23 Consent of Independent Accountants.(1)
23.1 Consent of Independent Accountants.(1)
23.2 Consent of Independent Accountants.(1)
27.1 Financial Data Schedule.(1)
99.1 The Company's Proxy Statement for its 1998 Annual Meeting
of Shareholders, incorporated herein by reference pursuant
to Rule 12b-32 of the Securities Exchange Act of 1934.
Definitive copies of such Proxy Statement to be filed
under Regulation 14A within 120 days after December 31,
1997.
</TABLE>
--------------------
(1) Filed herewith
32
<PAGE>
(b) (i) On December 24, 1996, the Company filed a current
report on Form 8-K dated December 9, 1996, as amended by current
report on Form 8-K/A filed February 24, 1997 and current report
on Form 8-K/A filed February 28, 1997, and as further amended by
current report on Form 8-K/A filed August 27, 1997, pursuant to
Item 2 thereof, reporting the acquisitions of U.S. Tire
Recycling Partners, L.P. and Waste Recovery-Illinois, general
partnership.
(ii) On December 19, 1997, the Company filed a current
report on Form 8-K dated December 16, 1997 pursuant to item 4
thereof, reporting the dismissal of Price Waterhouse LLP as its
independent certified public accounts, and the engagement of
Grant Thornton LLP to act as the Company's new independent
certified public accountant.
(iii) On January 27, 1998, the Company filed a current
report on Form 8-K dated January 27, 1998 pursuant to item 5
thereof, reporting the default by one of the Company's
subsidiaries, Waste Recovery-Illinois, General Partnership, with
respect to certain of such subsidiary's debt service obligations
on two industrial revenue bond issues.
[End of Page]
33
<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 April 15, 1998, by the
following duly authorized person on behalf of the Company.
WASTE RECOVERY, INC.
(Registrant)
Date: April 15, 1998 By: /s/ DAVID G. GREENSTEIN
--------------------------------------
David G. Greenstein
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David G. Greenstein and Donald R.
Phillips, and each of them, such individual's true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for such
individual and in his name, place and stead, in any and all capacities, to sign
any and all amendments to this Form 10-K under the Securities Exchange Act of
1934, and to file the same, with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements to the Securities Exchange Act of 1934, this
report has been signed below on March 31, 1998, by the following persons on
behalf of the Registrant in the capacities indicated.
/s/ DAVID G. GREENSTEIN /s/ CRANDALL S. CONNORS
----------------------------------- --------------------------------
By: David G. Greenstein By: Crandall S. Connors, Director
President and Chief Executive
Officer (Principal Executive Officer, /s/ MICHAEL C. DODGE
and Principal Financial and -------------------------------
Accounting Officer), and Director By: Michael C. Dodge, Director
/s/ THOMAS L. EARNSHAW
-------------------------------
/s/ STEPHEN P. ADIK By: Thomas L. Earnshaw, Director
-----------------------------------
By: Stephen P. Adik, Director
/s/ JOHN C. KERR
-------------------------------
/s/ JAY I. ANDERSON By: John C. Kerr, Director
-----------------------------------
By: Jay I. Anderson, Director
/s/ STEVEN E. MACINTYRE
-------------------------------
/s/ MARTIN B. BERNSTEIN By: Steven E. MacIntyre, Director
------------------------------------
By: Martin B. Bernstein, Director
/s/ ROBERT L. THELEN
-------------------------------
By: Robert L. Thelen, Director
34
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR WASTE RECOVERY, INC.
Reports of Independent Accountants F-1
Financial Statements:
Consolidated Balance Sheets at December 31, 1997 and 1996 F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-8
Notes to Consolidated Financial Statements F-9
Schedule II. Valuation and Qualifying Accounts S-2
</TABLE>
All other schedules are omitted because they are not required, not applicable,
or the required information is presented in the accompanying financial
statements.
35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Waste Recovery, Inc.
We have audited the accompanying consolidated balance sheet of Waste Recovery,
Inc. and Subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Waste
Recovery, Inc. and Subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company incurred a net loss of $2,325,344 in 1997, is
in default on $8,790,000 principal amount of debt obligations which are subject
to acceleration of maturity by the lenders, and had a working capital deficit
of $9,551,085 at December 31, 1997. The Company does not have the financial
resources to pay the aforementioned debt obligations. As further discussed in
note 2, the Company is in default on convertible subordinated notes in the
amount of $1,850,000. These notes were given as consideration for the
acquisition of U.S. Tire Recycling Partners, L.P. and are accounted for as a
contingent obligation. The note agreement provides that, in the event of a
default, the note holders may convert the notes to common stock at a reduced
price of $1.00 per share or foreclose on the common stock of New U.S. Tire
Recycling Corporation (U.S. Tire). A substantial portion of the Company's
revenues and cash flows for 1997 were generated by U.S. Tire. Because of
uncertainties with respect to the ultimate resolution of the aforementioned
liquidity matters and the Company's continued ownership of U.S. Tire, there is
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in note 2. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
GRANT THORNTON LLP
Dallas, Texas
March 16, 1998, except for Note 28,
as to which the date is March 31, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Waste Recovery, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Waste Recovery, Inc. and its subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, 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 did not
audit the financial statements of U.S. Tire Recycling Partners, L.P., a
wholly-owned subsidiary, which statements reflect total assets of $4,466,037
at December 31, 1996, and total revenues of $470,540 for the one month period
ended December 31, 1996. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for U.S. Tire Recycling
Partners, L.P., is based solely on the report of the other auditors. 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 and the report of other auditors provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
March 31, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Partners of U.S. Tire Recycling Partners, L.P.
Concord, North Carolina
We have audited the accompanying balance sheet of U.S. Tire Recycling
Partners, L.P. (a limited partnership) as at December 31, 1996, and the
related statements of income, partners' capital and cash flows for the month
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Tire Recycling
Partners, L.P. as at December 31, 1996, and the results of its operations and
its cash flows for the month then ended.
COHEN & ROSEN, P.C.
New York, New York
January 24, 1997
F-3
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ - $ 1,892,427
Accounts receivable, less allowance for doubtful accounts
of $128,602 and $51,017, respectively (notes 13 and 24) 3,047,265 2,736,388
Other receivables (notes 4 and 21) 82,180 1,061,958
Inventories (notes 5 and 13) 186,563 602,769
Other current assets (note 6) 933,760 992,672
Restricted cash and cash equivalents (notes 9, 11, and 13) 2,145,362 -
-------------- -------------
Total current assets 6,395,130 7,286,214
-------------- -------------
Property, plant and equipment (notes 7, 8, 11, 13 and 18) 26,451,740 24,226,392
Less accumulated depreciation (10,429,868) (7,923,939)
-------------- -------------
Net property, plant and equipment 16,021,872 16,302,453
-------------- -------------
Restricted cash and cash equivalents (notes 9, 11 and 13) 171,898 1,914,795
Bond and debt issuance costs, less accumulated amortization of
$197,580 and $181,275, respectively 130,754 147,059
Deferred income taxes (note 20) - 447,543
Goodwill, less accumulated amortization of $238,025 and
$102,787, respectively 1,833,888 1,895,678
Other assets 441,866 398,058
-------------- -------------
$ 24,995,408 $28,391,800
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Current Liabilities:
Current installments and accelerated maturities of bonds
payable (notes 11 and 28) $ 7,567,795 $ 883,024
Notes payable (note 12) 713,861 632,003
Current installments of long-term debt (note 13) 2,373,858 998,719
Current installments of capital lease obligations (note 8) 83,328 111,982
Accounts payable 3,168,128 3,269,300
Other accrued liabilities 1,652,425 1,105,193
Deferred revenue - 16,071
Deferred grant revenue (notes 10 and 15) 386,820 296,940
-------------- -------------
Total current liabilities 15,946,215 7,313,232
-------------- -------------
Bonds payable, noncurrent (notes 11 and 28) - 7,567,795
Long-term debt, excluding current installments (note 13) 2,495,195 4,069,498
Notes payable (note 12) 170,684 312,085
Obligations under capital leases, excluding current
installments (note 8) 22,708 104,017
Deferred grant revenue, noncurrent (notes 10 and 15) 219,350 696,050
-------------- -------------
Total liabilities 18,854,152 20,062,677
-------------- -------------
Stockholders' Equity (notes 14, 16, 17, 18 and 19):
Cumulative preferred stock, $1.00 par value, 250,000 shares
authorized, 203,580 issued and outstanding in 1997 and 1996
(liquidating preference $15.31 per share, aggregating
$3,117,031, and $14.61 per share, aggregating $2,974,525, in
1997 and 1996, respectively) 203,580 203,580
Preferred stock, $1.00 par value, authorized and unissued
9,750,000 shares in 1997 and 1996 - -
Common stock, no par value, authorized 30,000,000 shares,
17,494,323 and 17,322,121 shares issued and outstanding
in 1997 and 1996, respectively 407,800 407,800
Additional paid-in capital 18,604,904 18,467,427
Accumulated deficit (13,001,148) (10,675,804)
-------------- -------------
6,215,136 8,403,003
Treasury stock, at cost, 103,760 common shares (73,880) (73,880)
-------------- -------------
Total stockholders' equity 6,141,256 8,329,123
-------------- -------------
Commitments and contingencies (notes 2, 3, 8, 10, 14, 23, 26,
and 28) - -
$24,995,408 $28,391,800
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -------------
<S> <C> <C> <C>
Revenues (note 24):
Tire-derived fuel sales $ 4,007,545 $ 1,589,405 $ 1,080,172
Wire sales 801,283 397,701 -
Disposal fees, hauling and other revenue 24,499,916 14,687,426 13,059,751
------------ ------------ -------------
Total revenues 29,308,744 16,674,532 14,139,923
Operating expenses 22,449,857 11,908,912 11,143,176
General and administrative expenses 5,677,265 3,171,418 2,568,094
Depreciation and amortization 2,820,580 1,194,450 955,708
------------ ------------ -------------
Operating profit (loss) (1,638,958) 399,752 (527,055)
------------ ------------ -------------
Other income (expense):
Interest income 116,693 72,083 60,784
Interest expense (940,136) (447,176) (517,986)
Other income 470,833 302,306 355,360
Gains on sales of property and equipment 18,510 9,270 24,706
Gain on involuntary conversion of assets (note 21) 164,918 624,219 -
Equity in loss from partnership operations (note 10) - (668,504) (322,630)
------------ ------------ -------------
(169,182) (107,802) (399,766)
Income (loss) before income taxes (1,808,140) 291,950 (926,821)
Income tax expense (note 20) (517,204) (8,850) -
------------ ------------ -------------
Net income (loss) (2,325,344) 283,100 (926,821)
Undeclared cumulative preferred stock dividends 142,506 142,896 142,506
------------ ------------ -------------
Net income (loss) allocable to common
stockholders $(2,467,850) $ 140,204 $(1,069,327)
------------ ------------ -------------
Net income (loss) per share $ (.14) $ .01 $ (.12)
------------ ------------ -------------
Weighted average number of common shares
outstanding 17,334,892 11,549,750 9,132,359
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Cumulative
Preferred Stock Common Stock
------------------------ --------------------------
Shares Par Value Shares Par Value
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
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
Stock issued to Directors - - 10,806 -
Options exercised under incentive
stock option plan - - 178,000 -
Stock issued in connection with
U.S. Tire acquisition - - 3,486,221 -
Stock issued in connection with
WR-Illinois acquisition - - 1,100,000 -
Conversion of subordinated
debentures - - 666,924 -
Warrants issued to subordinated
debenture holders upon conversion - - - -
Sale of common stock and warrants - - 1,050,000 -
Net income - - - -
---------- ------------ ----------- -------------
Balances at December 31, 1996 203,580 $ 203,580 17,322,121 $ 407,800
Options exercised - - 122,000 -
Stock issued in connection with
U.S. Tire acquisition - - 50,202 -
Net loss - - - -
---------- ------------ ----------- -------------
Balances at December 31, 1997 203,580 $ 203,580 17,494,323 $ 407,800
---------- ------------ ----------- -------------
---------- ------------ ----------- -------------
<CAPTION>
Additional
Paid-In Accumulated Treasury Stockholders'
Capital Deficit Stock Equity
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
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
Stock issued to Directors 12,000 - - 12,000
Options exercised under incentive
stock option plan 71,477 - - 71,477
Stock issued in connection with
U.S. Tire acquisition 2,086,000 - - 2,086,000
Stock issued in connection with
WR-Illinois acquisition 869,000 - - 869,000
Conversion of subordinated
debentures 583,559 - - 583,559
Warrants issued to subordinated
debenture holders upon conversion 10,000 - - 10,000
Sale of common stock and warrants 1,514,981 - - 1,514,981
Net income - 283,100 - 283,100
------------- ------------- ------------- --------------
Balances at December 31, 1996 $ 18,467,427 $(10,675,804) $ (73,880) $ 8,329,123
Options exercised 64,030 - - 64,030
Stock issued in connection with
U.S. Tire acquisition 73,447 - - 73,447
Net loss - (2,325,344) - (2,325,344)
------------- ------------- ------------- --------------
Balances at December 31, 1997 $ 18,604,904 $(13,001,148) $ (73,880) $ 6,141,256
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,325,344) $ 283,100 $ (926,821)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Charge-off of other receivables - - 28,582
Depreciation and amortization 2,685,343 1,132,827 1,515,759
Gains on sales of property and equipment (18,510) (9,270) (24,706)
Amortization of goodwill 135,237 61,623 41,164
Deferred income taxes 447,543 - -
Interest imputed on discounted note payable 8,599 18,009 13,508
Amortization of bond premium (78,024) - -
Equity in loss from partnership operations - 668,504 322,630
Stock issued to Directors - 12,000 12,000
Warrants issued to debenture holders - 10,000 -
Changes in assets and liabilities:
Accounts receivable (310,877) 95,492 143,420
Note and other receivables 979,778 (1,049,211) -
Inventories 416,206 (24,083) (583,898)
Other current assets 58,912 (415,306) 28,004
Other assets (105,398) (11,333) 75,157
Accounts payable 76,328 846,740 (387,772)
Payable to/receivable from affiliate - (1,058,266) (25,846)
Accrued liabilities 569,034 86,371 (45,920)
Bond interest payable (21,802) 43,956 -
Deferred grant revenue (386,820) (32,235) -
Deferred revenue (16,071) (115,409) 289,814
Other (30,414) (19,604) 12,546
-------------- ---------- ------------
Net cash provided by operating activities 2,083,720 523,905 487,621
-------------- ---------- ------------
Cash flows from investing activities:
Proceeds received on note and other receivables - - 490,320
Proceeds from sales of property, plant and
equipment 18,510 7,813 78,000
Purchases of property, plant and equipment (2,296,453) (1,625,475) (1,681,169)
Net cash received in connection with the purchase
of WR-Illinois - 64,744 -
Net cash received in connection with the purchase
of U.S. Tire - 315,744 -
Cash placed in restricted accounts (1,952,578) (52,084) (530,200)
Cash payments out of restricted accounts 1,550,113 516,931 38,686
Purchase of Domino Salvage, Tire Division, Inc.,
net of cash received of $16,165 - - (170,019)
-------------- ---------- ------------
Net cash used by investing activities (2,680,408) (772,327) (1,774,382)
-------------- ---------- ------------
Cash flows from financing activities:
Payment of bonds payable (805,000) - -
Proceeds from issuance of notes payable 1,079,525 298,405 64,764
Payment of notes payable (1,325,167) (150,382) (206,734)
Proceeds from issuance of convertible
subordinated debentures - 85,000 -
Payment upon maturity of convertible
subordinated debentures - (85,000) -
Proceeds from issuance of long-term debt 553,290 - 88,230
Repayment of long-term debt (752,454) (222,669) (297,013)
Repayment of capital lease obligations (109,963) (97,525) (117,798)
Proceeds from issuance of common stock and
warrants 64,030 1,586,458 2,220,756
-------------- ---------- ------------
Net cash provided (used) by financing activities (1,295,739) 1,414,287 1,752,205
-------------- ---------- ------------
Net increase (decrease) in cash and cash equivalents (1,892,427) 1,165,865 465,444
Cash and cash equivalents at beginning of year 1,892,427 726,562 261,118
------------- ---------- ------------
Cash and cash equivalents at end of year $ - $ 1,892,427 $ 726,562
------------- ---------- ------------
------------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
December 31, 1997
NOTE 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 wire, 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 located
in or near Portland, Oregon, Houston, Texas, Atlanta, Georgia,
Philadelphia, Pennsylvania, Dupo, Illinois, Marseilles, Illinois
and Concord, North Carolina.
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 owned a 45% interest. Riverside Caloric Company (RCC), an
Indiana corporation, owned 55% of the Illinois partnership. In
December 1996, the Company acquired RCC's 55% ownership interest
in WR-Illinois (see note 3).
In December 1996, the Company acquired U.S. Tire Recycling
Partners, L.P., a scrap tire collector which recycles tires and
operates a scrap tire monofill (see note 3).
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 3).
(b) Principles of Consolidation. For 1997 and 1996, the consolidated
financial statements include the financial statements of Waste
Recovery-Illinois, General Partnership (WR-Illinois), a
wholly-owned subsidiary of the Company and its affiliates
which was purchased in December 1996 (see note 3), and the
financial statements of U.S. Tire Recycling Partners, L.P.
(U.S. Tire), a wholly-owned subsidiary of the Company and its
affiliates which was purchased in December 1996 (see note 3).
The 1996 consolidated financial statements include the
operations of WR-Illinois and U.S. Tire for the period
December 1, 1996 through December 31, 1996.
For all years, 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 3). The 1995
consolidated financial statements include the operations of
Domino for the period March 21, 1995 through December 31, 1995.
F-9
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
All significant intercompany balances and transactions have
been eliminated in consolidation. The Company's investment in
and equity in earnings of WR-Illinois were accounted for by
the equity method until the December 1, 1996 acquisition date
(see notes 3 and 10).
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. TDF and wire inventories are stated at the lower
of cost or market. Cost is determined using a weighted
average cost method. Work-in-process is valued at the lower
of cost or estimated net realizable value.
(e) OTHER CURRENT ASSETS. Parts inventories, which are included in
other current assets, represent 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 twelve months.
(f) PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment
are stated at cost. Property, plant and equipment acquired in
connection with the purchase of WR-Illinois and U.S. Tire were
recorded at fair value. 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.
(g) BOND ISSUANCE COSTS. Bond issuance costs are recorded at cost
and amortized over the life of the associated debt using the
effective interest method.
(h) 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
F-10
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
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 of $548,859 (see note 3) is being
amortized on a straight-line basis over 10 years. Goodwill
associated with the purchases of WR-Illinois of $947,712 (see
note 3) and U.S. Tire of $575,341 (see note 3) is being
amortized over 20 and 15 years, respectively.
(i) OTHER ASSETS. Patents are recorded at cost and amortized over a
15-year period using the straight-line method. Site license and
permits in connection with the U.S. Tire landfill operation were
recorded at their fair value as of the acquisition date of U.S.
Tire, and are being amortized using the straight-line method over
their estimated useful lives of five years.
(j) DEFERRED GRANT REVENUE. WR-Illinois has an agreement whereby it
has received $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, 1995, WR-Illinois
had received $800,000 from these grants; the remaining
$200,000 was received in January 1996. The grant award is
being amortized, beginning when the plants were placed in
operation, through the term of the grants, which expire July
31, 1999.
In 1995, WR-Illinois also received $365,903 through a grant
awarded to Illinois Power Company for the construction and
installation of a metering unit at Illinois Power. At
December 31, 1995, 20% of the total amount of the grant was
retained pending satisfaction of certain operational
requirements. WR-Illinois received payment for the retainage
of approximately $91,000 in 1996. Ownership of the metering
unit reverts to Illinois Power at the end of the contract.
(k) INCOME TAXES. Deferred taxes are recognized for the tax
consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on
deferred taxes for a change in tax rates is recognized in
income in the period that includes the enactment date. In
addition, future tax benefits are recognized to the extent
that realization of such benefits is more likely than not. A
valuation allowance is provided for a portion or all of the
deferred tax assets when there is sufficient uncertainty
regarding the Company's ability to recognize the benefits of
the assets in future years.
(l) NET INCOME (LOSS) PER COMMON SHARE. In the fourth quarter of
1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). In accordance with SFAS No. 128, the Company
computes income (loss) per common share based on the weighted
average number of common shares outstanding. Income
F-11
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
(loss) per common share - assuming dilution is computed based
on the weighted average number of common shares outstanding
plus the number of additional common shares that would have
been outstanding if dilutive potential common shares,
consisting of stock options, warrants and shares issuable upon
conversion of debt, had been issued; income is adjusted for
interest on the convertible debt. Retroactive application,
which is required by SFAS No. 128, did not result in
restatement of 1995 or 1996 per share data. Per share data -
assuming dilution has not been presented because the effect of
potential common shares is insignificant.
Net income or loss is adjusted by the effect of undeclared
dividends on preferred stock of $142,506, $142,896, and
$142,506 for the years ended December 31, 1997, 1996 and 1995,
respectively. The effect was to: (1) increase the net loss
per common share by $0.01 in 1997, (2) reduce the net income
per common share by $0.01 in 1996, and (3) increase the net
loss per common share by $0.02 in 1995.
(m) STATEMENTS OF CASH FLOWS. The Company paid $915,150, $425,964,
and $469,903 for interest in 1997, 1996 and 1995,
respectively. The Company paid $8,850 in income taxes in
1997. No income taxes were paid during 1996 or 1995. See
note 22 for further discussion of noncash transactions.
(n) RECENT ACCOUNTING PRONOUNCEMENTS. In 1995, the Financial
Accounting Standards Board (FASB) issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
the Long-Lived Assets to be Disposed of" and Statement No.
123, "Accounting for Stock-Based Compensation." Both
statements were effective for 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. Based on its most recent analysis,
the Company believes no impairment existed at December 31,
1997.
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 Principles Board Opinion No. 25
(Opinion 25), "Accounting for Stock Issued to Employees."
Entities that continue to apply the provisions of Opinion 25
F-12
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been
applied. In 1996, the Company adopted this statement on a
disclosure basis only.
In February 1997, the FASB issued Statement No. 128, "Earnings
Per Share." The Company adopted this statement in 1997 as
required.
(o) RECLASSIFICATIONS. Certain prior year amounts have been
reclassified to conform with the current year presentation.
NOTE 2. GOING CONCERN MATTERS
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going
concern. The Company had a net loss of $2,325,344 for 1997
and, as discussed in notes 11, 13 and 28, is in default under
loan agreements relating to a $1,480,000 note payable and
outstanding bonds in the amount of $7,310,000. The defaults
give the lenders the right to accelerate maturity. Payment
has been demanded by the Trustee for the bondholders. The
entire unpaid balances of the notes and the bonds have been
classified as current liabilities in the balance sheet at
December 31, 1997. As a result, the Company has an excess of
current liabilities over currents assets of $9,551,085 at
December 31, 1997. The Company does not currently have the
financial resources to pay these obligations. To resolve
these matters, the Company is attempting to restructure the
debt or obtain additional capital, or combination thereof.
As discussed in note 28, the Company became in default on
convertible subordinated notes in the amount of $1,850,000 as
a result of nonpayment of interest due January 15, 1998.
These notes were given as consideration for the acquisition of
U.S. Tire and are accounted for as a contingent obligation
(see note 14). The note agreement provides that, in the event
of a default, the noteholders may convert the notes to common
stock at a reduced price of $1.00 per share or foreclose on
the common stock of New U.S. Tire Recycling Corp., a
wholly-owned subsidiary of the Company which owns 84% of U.S.
Tire. A substantial portion of the Company's revenues and
cash flows for 1997 were generated by U.S. Tire.
Because of the uncertainties with respect to the ultimate
resolution of the aforementioned liquidity matters and the
Company's continued ownership of U.S. Tire, there is
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
F-13
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
NOTE 3. ACQUISITIONS
In December 1996, WRI acquired from Riverside Caloric Company
(RCC) its 55% interest in the Waste Recovery-Illinois general
partnership, in which the Company owned the remaining 45%
interest (see note 10).
Also in December 1996, WRI through its subsidiaries acquired
all of the partnership interests in U.S. Tire Recycling
Partners, L.P. (U.S. Tire), which collects and processes scrap
tires, and operates a scrap tire monofill in Concord, North
Carolina.
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 acquisitions were accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on estimated fair
values at the date of acquisition. The results of operations
of WR-Illinois, U.S. Tire, and Domino have been included in
the Company's consolidated statements of operations from the
date of acquisition.
A summary of the assets acquired and liabilities assumed
follows:
<TABLE>
<CAPTION>
WR-Illinois U.S. Tire Domino
------------ ----------- ----------
<S> <C> <C> <C>
Current assets $ 829,328 $ 907,438 $ 134,996
Property, plant and equipment 7,981,325 1,967,838 650,765
Other assets 1,462,517 195,960 -
Debt and notes payable (8,115,000) (1,271,958) (368,149)
Deferred grant revenue (1,025,225) - -
Accounts payable and accrued
liabilities (558,964) (349,118) (96,452)
------------ ----------- ----------
$ 573,981 $ 1,450,160 $ 321,160
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
[End of Page]
F-14
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
The following unaudited pro forma summary presents the
consolidated results of the Company's operations as if the
acquisitions 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.
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1996 December 31, 1995
Unaudited Unaudited
------------------ ------------------
<S> <C> <C>
Revenues $ 24,583,814 $ 20,042,222
------------------ ------------------
------------------ ------------------
Net loss $ (749,435) $ (961,502)
------------------ ------------------
------------------ ------------------
Loss per share $ (0.06) $ (0.11)
------------------ ------------------
------------------ ------------------
</TABLE>
The Company purchased RCC's interest in WR-Illinois in exchange
for 1.1 million unregistered shares of Common Stock of the
Company (see note 17).
The Company purchased U.S. Tire in exchange for 3,242,997
unregistered shares of Common Stock (see note 17), contingent
convertible subordinated notes in the amount of $1,850,000 (see
note 14), and notes payable (see note 12) in the amount of
$605,035. The debt is secured by the assets of U.S. Tire.
Additionally, the Company issued 243,224 unregistered shares of
Common Stock to a third party as compensation for services
rendered as financial advisor to the Company in connection with
the acquisition of U.S. Tire (see notes 17 and 19). In 1997, the
Company gave additional consideration to the former owners of
U.S. Tire in connection with the requirements of a contingency
agreement with regard to the involuntary conversion of assets at
the Atlanta plant (see note 21). The additional consideration
consisted of 50,202 unregistered shares of Common Stock, and
$27,857 in contingent convertible subordinated notes with the
same terms and provisions as the original convertible
subordinated notes issued for the acquisition of U.S. Tire (see
notes 14 and 17).
The Company purchased Domino for approximately $867,000,
including legal costs, with an initial cash payment to the former
shareholders of $100,000 and a note for $700,000. The Company is
withholding an additional $50,000, payment of which is contingent
upon resolution of certain events. The note was originally due
as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 66,664
1997 358,336
1998 275,000
$ 700,000
</TABLE>
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. Effective
F-15
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
March 20, 1997, this note was modified to change the due date of
the second installment of $225,000 to May 21, 1997. The third
installment of $275,000 is to remain due on March 21, 1998. This
note bears interest at the rate of 1% over prime and the note is
secured by the assets and the stock of Domino. 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.
NOTE 4. OTHER RECEIVABLES
Included in other receivables at December 31, 1996 is a
receivable for $985,000 from an insurance company for property
damage and business interruption insurance related to the Atlanta
fire (see note 21). The Company received the full amount of this
receivable in the first and second quarters of 1997.
NOTE 5. INVENTORIES
Inventory components at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Manufactured fuel inventory $ 103,245 $ 281,938
Manufactured wire inventory 8,478 27,761
Work in process 74,840 293,070
---------- ----------
$ 186,563 $ 602,769
---------- ----------
---------- ----------
</TABLE>
NOTE 6. OTHER CURRENT ASSETS
Other current assets at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Prepaid insurance $ 386,684 $ 259,443
Parts inventory 473,473 636,714
Other 73,603 96,515
---------- ----------
$ 933,760 $ 992,672
---------- ----------
---------- ----------
</TABLE>
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land $ 2,491,076 $ 2,389,580
Buildings 1,472,270 1,472,270
Tire processing equipment 15,205,945 14,346,593
Hauling equipment 2,233,121 1,435,781
Metering units 836,606 817,785
Shop tools and yard equipment 245,063 209,177
Furniture and fixtures 416,596 313,294
Leasehold improvements 3,544,795 2,970,747
Construction in progress 6,268 271,165
------------ ------------
$26,451,740 $24,226,392
------------ ------------
------------ ------------
</TABLE>
Approximately $68,000 of capitalized interest is included in tire
processing equipment in connection with the construction of the
wire systems in 1996.
F-16
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
NOTE 8. LEASES
The Company leases certain property and equipment under capital
leases, and certain other property and equipment is leased under
noncancelable operating leases. Property and equipment include
the following amounts for capital leases at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Hauling equipment $ 210,829 $ 210,829
Tire processing equipment 107,574 107,574
Furniture and fixtures 57,533 57,533
375,936 375,936
Less accumulated depreciation (201,729) (145,474)
---------- ----------
$ 174,207 $ 230,462
---------- ----------
---------- ----------
</TABLE>
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, 1997 is as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
Year ending December 31:
1998 $ 88,291 $ 687,843
1999 19,908 491,333
2000 8,499 233,740
2001 - 124,751
2002 - 103,487
Thereafter - 144,000
--------- ----------
116,698 $1,785,154
Less: amount representing interest (10,662) ----------
--------- ----------
Present value of minimum lease payments $ 106,036
---------
</TABLE>
Total rent expense for operating leases for the years ended
December 31, 1997, 1996 and 1995 was $1,686,455, $1,136,209, and
$813,397, respectively.
[End of Page]
F-17
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
NOTE 9. RESTRICTED CASH
Under terms of various debt agreements (see notes 11 and 13), the
Company is required to maintain cash balances which have certain
withdrawal restrictions. Amounts on deposit at December 31, 1997
and 1996 consisted of certificates of deposit or money market
accounts as follows:
<TABLE>
<CAPTION>
Release
1997 1996 Date
------------ ---------- --------
<S> <C> <C> <C>
Atlanta plant financing debt reserve $ 390,000 $ 390,000 2007
Illinois plant financing debt reserve
(see note 11) 1,366,755 1,362,174 2004
Secured operating permits 105,829 93,853 -
Repair and maintenance fund 113,911 49,275 2007
Illinois financial assurance trust 66,069 19,493 -
Security for Illinois debt (see note 11) 274,696 - -
2,317,260 1,914,795
Less current portion (2,145,362) -
Noncurrent restricted cash $ 171,898 $1,914,795
</TABLE>
Under terms of the bond agreements (see note 11), WR-Illinois is
required to maintain cash balances for the debt service reserve
funds which have certain withdrawal restrictions. Interest
earned on this restricted cash may only be used for payment of
current debt service or sinking fund requirements on the bonds.
Restricted cash and cash equivalents relating to the Atlanta
plant debt and Illinois plant debt are classified as current
assets at December 31, 1997 as a result of the current
classification of the related debt (see notes 11, 13, and 28).
NOTE 10. INVESTMENT IN WASTE RECOVERY - ILLINOIS
Effective December 1, 1996, the Company acquired from Riverside
Caloric Company (RCC) its 55% interest in the Waste
Recovery-Illinois general partnership, in which the Company owned
the remaining 45% interest (see note 3). Until the December 1,
1996 acquisition date, the Company's investment in WR-Illinois
was accounted for under the equity method of accounting.
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.
F-18
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
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
managing partner of the Illinois partnership until the December
1, 1996 acquisition date, was subject to receive administrative
fees of $4,000 per month plus a management fee based on net
income, as defined. During 1996 and 1995, the Company collected
management fees of $36,000 and $12,000, respectively.
Until the December 1, 1996 acquisition date, under the equity
method of accounting, the Company recognized $668,504 and
$322,630 as losses from partnership operations for the years
ended December 31, 1996 and 1995, respectively.
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 the five-year contract with
Illinois Power Company. In 1995, 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. Until the December 1, 1996 acquisition date, 55%
of this fee, representing the percentage of the Illinois
partnership not owned by the Company, was recognized in other
income for the eleven months ending November 30, 1996 and the
year ended December 31, 1995. The remaining 45% had been
recorded as deferred revenue to be recognized such that it would
offset the Company's interest in the excess depreciation expense
recorded by WR-Illinois related to this portion of the cost of
the plants. The remaining unrecognized portion of deferred
revenue at December 1, 1996 was included in the purchase price
for WR-Illinois and allocated to the assets and liabilities
acquired on December 1, 1996.
NOTE 11. BONDS PAYABLE
To provide funding for the construction of the Dupo and
Marseilles plants, WR-Illinois 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.
F-19
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
The Bonds 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 Bonds are collateralized by the property, plant and equipment of WR-
Illinois, $1,641,451 in restricted cash (see note 9), and are guaranteed
by Waste Recovery, Inc. Future minimum payments as of February 1 each
year are as follows:
<TABLE>
<CAPTION>
YEAR SWIDA UIRVDA TOTAL
---- ---------- ---------- ----------
<S> <C> <C> <C>
1998 $ 470,000 $ 390,000 $ 860,000
1999 500,000 415,000 915,000
2000 530,000 440,000 970,000
2001 565,000 470,000 1,035,000
2002 600,000 500,000 1,100,000
Thereafter 1,325,000 1,105,000 2,430,000
---------- ---------- ----------
Total $3,990,000 $3,320,000 $7,310,000
Bond Premium 140,644 117,151 257,795
---------- ---------- ----------
Total Bonds Payable $4,130,644 $3,437,151 $7,567,795
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Bond premium represents the purchase adjustment recorded to reflect the
Bonds at market on December 1, 1996 when the Company acquired WR-Illinois
(see note 3). Amortization of $78,024 and $7,153 was recorded for the
years ended December 31, 1997 and 1996, respectively.
In August of 1997, the indenture trustee for the Bonds determined that,
although the debt service reserve fund was fully funded, supplementary
sinking fund requirements had not been adequately funded, resulting in a
default and the reclassification of the Bonds to current liabilities.
The Company has entered into an agreement with the bondholders which
provides for a cure of this default through periodic payments, which is
composed of monthly payments of $5,500, plus excess funds transferred
from the debt service reserve fund representing interest income thereon
which exceeded the debt service reserve fund's minimum reserve
requirement.
On January 27, 1998, the Company announced an additional default by WR-
Illinois with respect to the debt service payments due February 1, 1998
(see note 28) which included a default on the aforementioned agreement
with respect to the supplementary sinking fund. Other debt of the
Company affected by this default includes the 10.5% note payable (see
note 13).
NOTE 12. 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 $228,787 and $176,968 at December 31, 1997 and 1996,
respectively.
F-20
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
In 1997, the Company borrowed money to meet current working capital
requirements (see note 19). The note is non-interest bearing, secured by
receivables and payable on demand. The balance of this note is $300,000
at December 31, 1997.
In connection with the acquisition of U.S. Tire (see note 3), the Company
issued promissory notes payable to the sellers in the aggregate amount of
$605,035. The notes are non-interest bearing and payable in two
installments with the first installment of $455,035 due February 1, 1997,
and the final installment of $150,000 due March 31, 1998 (see note 28).
With the acquisition of Domino (see note 3), 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. The present value at
December 31, 1996 was $162,085. On May 21, 1997, this note was replaced
with a new note for the original amount of $180,095. The terms of the
new note provide for interest and principal to be deferred until June 24,
2000, at which time monthly principal and interest payments are to be
made at 11.25% over a one-year term. The present value of this note at
December 31, 1997 was $170,684.
At December 31, 1997, the Company had other notes payable totaling
$35,074.
[End of Page]
F-21
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
NOTE 13. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996, substantially all of which
is collateralized, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
10.5% note payable to corporation; due on various dates
through December 2007; interest payable semi-annually* $1,480,000 $1,560,000
Prime plus .5% note payable to bank; due December 2004,
guaranteed by The Goodyear Tire & Rubber Company; principal
and interest payable monthly** 899,309 1,019,309
Mortgage payable to corporation, interest at prime rate;
due July 2003; principal and interest payable monthly 797,619 940,476
Notes payable to banks with interest rates ranging from 8% to
10.5%; expiring through November 2000; principal and
interest payable monthly 347,612 321,755
7.6% note payable to Small Business Administration; due
May 2001; principal and interest payable monthly 168,515 210,065
Prime plus 1% note payable to former Domino shareholders;
payments due beginning September 1996 (see note 3); due
March 1998 614,954 654,222
Prime plus 1% note payable to bank; due July 1998; principal
and interest due monthly 41,417 112,417
7.9% note payable to financial institution; due April 28, 2001;
principal and interest payable monthly 99,828 167,707
9% note payable to bank; due May 10, 2000; principal and
interest payable monthly 13,626 18,456
Notes payable to finance companies with interest rates from
8.25% to 10.0%, expiring through December 2001; principal
and interest payable monthly 406,173 -
13.25% notes payable to financial institution; due
September 1997; principal and interest payable monthly - 31,137
7.9% note payable to financial institution; due November 1997;
principal and interest payable monthly - 22,726
Notes payable to finance companies with interest rates from
8.95% to 12%, expiring through June 1997; principal and
interest payable monthly - 4,994
10.5% note payable to financial institution; due August 1997;
principal and interest payable monthly - 4,953
--------- ---------
4,869,053 5,068,217
Less:
Current installments of long-term debt (2,373,858) (998,719)
Long-term debt $2,495,195 $4,069,498
--------- ---------
--------- ---------
</TABLE>
*The Loan Agreement contains various restrictions, including a
prohibition against the payment of dividends when such payment would
cause an event of default, as defined, and financial ratio maintenance
requirements, which includes minimum working capital and net worth
requirements. As of December 31, 1997, the Company was not in compliance
with all required covenants as a result of non-compliance with certain
financial covenants, and the default by the Company's subsidiary, WR-
Illinois, on certain of its debt (see notes 11 and 28). Accordingly, the
note has been classified as current.
**As of February 29, 1996, this note was transferred to another bank.
The interest rate with the original bank was prime plus 1%.
F-22
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
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 (see note 9).
The aggregate maturities of long-term debt at December 31, 1997 are as
follows:
Year ending December 31:
1998 $ 2,373,858
1999 902,414
2000 623,952
2001 323,330
2002 262,857
Thereafter 382,642
$ 4,869,053
NOTE 14. CONVERTIBLE SUBORDINATED NOTES
In connection with the purchase of U.S. Tire (see note 3), the Company
issued convertible subordinated notes in the aggregate amount of
$1,850,000 payable to the former equity holders of U.S. Tire. As a
result of the Atlanta fire (see note 21), the Company agreed to amend its
agreement with the equity holders of U.S. Tire and to issue additional
common stock and convertible subordinated notes to the former equity
holders of U.S. Tire (see notes 3 and 17). The agreement called for
additional consideration in the form of common stock and convertible
subordinated notes based on any uninsured reconstruction costs and on
certain cash flow requirements of the Atlanta facility during the period
of reconstruction. As a result of this agreement, the Company issued
$27,857 of additional convertible subordinated notes to the former equity
holders of U.S. Tire.
The notes bear interest at an annual rate of 5% for the first twelve
months, 6% for the second twelve months and 7% until maturity. Principal
payments are due in the amounts of $507,604 on March 31, 1999, $456,751
on September 30, 1999, $456,751 on March 31, 2000, and $456,751 on
September 30, 2000. Interest payments are due quarterly. On January 15,
1998, the Company was in default on the notes as a result of non-payment
of interest due January 15, 1998 (see note 28).
The holders of the notes have the right at their option, at any time
after September 30, 1997, to convert all but not less than all of the
principal amount of the notes then outstanding into Common Stock of the
Company at the price of $2.50 per share, provided that such election to
convert shall be agreed upon unanimously by the holders of the notes then
outstanding.
F-23
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
The convertible subordinated note agreements provide for adjustments as
reductions to the principal amount of the notes based on certain minimum
future cash flow of U.S. Tire, as defined for the period from October 1,
1996 to September 30, 2000. In accordance with APB Opinion No. 16, the
convertible subordinated notes are treated as "contingent consideration",
and accordingly, have not been recorded as a liability as of December 31,
1996, and will remain unrecorded until such time as the contingency is
resolved or the contingency period expires. Interest payments on the
convertible subordinated notes during the contingency period are recorded
as a deferred charge. If the contingency is resolved in favor of the
note holders, the contingent consideration and deferred interest will be
recorded as an additional cost of the assets acquired (goodwill) and
amortized prospectively over its remaining life.
NOTE 15. DEFERRED GRANT REVENUE
WR-Illinois (Grantee) entered into two grant agreements with the Illinois
Department of Commerce and Community Affairs (Department) (formerly, the
Illinois Department of Energy and Natural Resources) 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.
WR-Illinois requested funding assistance to build its TDF processing
plants in Dupo and Marseilles, Illinois. The Department agreed to
provide grants towards WR-Illinois' "projects", as defined. The Grantee
agreed 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). As of December 31,
1996, the full amount of the grants has been received.
The grant agreements require WR-Illinois 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.
WR-Illinois received additional funding through a grant of approximately
$450,000 awarded by the Department to Illinois Power Company for the
construction of a TDF metering unit at its Baldwin Power Plant. This
award is being amortized over the remainder of the original contract with
Illinois Power Company, which expires July 1999.
As of December 31, 1997, $606,170 of the total grant money received is
recorded as deferred grant revenue in the accompanying balance sheet and
is being amortized to income through July 31, 1999, at approximately
$32,000 per month.
F-24
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
NOTE 16. STOCK OPTIONS AND WARRANTS
1989 INCENTIVE STOCK OPTION PLAN
In 1989, the Company adopted the 1989 Incentive Stock Option Plan for
employees (the Incentive Plan). The purpose of the Incentive 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 Incentive 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. All options issued to date have terms of
ten years and vest either immediately or over a five year period.
Shares of Common Stock issued under the Incentive 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 Incentive 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 multiplied by
the number of units of SARs exercised subsequent to the date of grant.
As of December 31, 1997, 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.
The stock options discussed herein were granted at the market price at
the date of grant, thus no compensation expense has been recorded.
NONQUALIFIED STOCK OPTIONS TO NON-EMPLOYEE DIRECTORS
On February 12, 1997, the Company granted 1,000,000 nonqualified stock
options to the Chairman of the Company's Board of Directors. The options
fully vest on February 12, 1998 and are exercisable at prices ranging
from $2.06 to $7.00 per share. The options expire on February 12, 2002.
During 1988
F-25
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
and 1991, the Company granted nonqualified stock options to non-employee
directors (the Nonqualified Issuances) for continued service to the
Company. Such options were exercisable through December 1993 and
January 1996, respectively.
1992 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
At the 1992 Annual Meeting, the shareholders approved the 1992 Stock Plan
for Non-Employee Directors (the Directors Plan). 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, 10,806
and 12,366 shares were issued for the years ended December 31, 1996 and
1995, respectively. No shares were issued for the year ended December
31, 1997. The option terms are ten years and vest immediately.
WARRANT ISSUANCES
In 1995, 100,000 warrants were issued to an investment company. These
warrants are exercisable in 1996 at $0.86 per share. The warrants expire
July 1, 1998.
See note 17 for warrant issuances in 1996.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1997, 1996 and
1995, respectively; no dividend yield, expected volatility of 72%, 73.2%
and 74.3%, risk free interest rates of 5.7%, 6.7% and 6.1% and expected
lives of 4.6, 8.4 and 8.4 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
As As As
Reported Pro forma Reported Pro forma Reported Pro forma
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) applicable
to common share $(2,467,850) $(3,339,547) $140,204 $(32,893) $(1,069,327) $(1,123,281)
Income (loss) per
common share $(0.14) $(0.19) $0.01 $0.00 $(0.12) $(0.12)
</TABLE>
F-26
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as SFAS No. 123 does not apply to awards
prior to 1995 and additional awards are anticipated in future years.
A summary of stock option transactions under the Incentive Plan and
Directors Plan, as well as Nonqualified Issuances, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 739,900 $1.05 761,100 $0.83 565,900 $0.69
Granted 1,100,000 4.12 214,900 1.30 275,000 1.01
Exercised (122,000) 0.52 (178,000) 0.40 (59,800) 0.26
Forfeited (51,500) 1.20 (58,100) 1.12 (20,000) 0.73
---------
Outstanding at end of year 1,666,400 3.11 739,900 $1.05 761,100 $0.83
Exercisable at end of year 451,400 1.22 559,900 $1.07 516,100 $0.76
Weighted-average fair value of
options granted during the year $0.96 $0.96 $1.12
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------
Shares Weighted-Average Shares
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- --------------- ------------- ----------------- ---------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
$0.75 66,000 5.1 years $0.75 66,000 $0.75
$0.98-$1.11 252,500 7.5 years $0.99 117,500 $1.00
$1.19 25,000 8.3 years $1.19 25,000 $1.19
$1.31 142,900 8.6 years $1.31 142,900 $1.31
$1.57 80,000 5.4 years $1.57 80,000 $1.57
$2.03-$2.14 350,000 5.5 years $2.06 20,000 $2.14
$3.50 250,000 4.1 years $3.50 - -
$4.75 250,000 4.1 years $4.75 - -
$7.00 250,000 4.1 years $7.00 - -
Totals 1,666,400 5.5 years $3.11 451,400 $1.22
</TABLE>
At December 31, 1997, 885,300 shares were available for grant as options
or incentive grants under the Incentive Plan and 186,803 shares were
available for grant as options under the Directors Plan.
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
NOTE 17. STOCKHOLDERS' EQUITY
On October 1, 1997, as a result of the Atlanta fire (see note 21), the
Company agreed to amend its agreement with the equity holders of U.S.
Tire and to issue additional common stock and convertible subordinated
notes to the former equity holders of U.S. Tire in connection with the
acquisition of U.S. Tire (see notes 3 and 14). The agreement called for
additional consideration in the form of common stock and convertible
subordinated notes based on any uninsured reconstruction costs and on
certain cash flow requirements of the Atlanta facility during the period
of reconstruction. As a result of this agreement, the Company issued
50,202 shares of common stock valued at $73,447 to the former equity
holders of U.S. Tire.
On December 26, 1996, the Company sold 750,000 shares of unregistered
Common Stock at a price of $1.45 per share and 750,000 warrants to
purchase Common Stock at $0.05 per warrant. The exercise price of the
warrants is $2.06, which equals the quoted market price for the Company's
Common Stock on December 26, 1996. The warrants expire December 26,
2000.
On December 24, 1996, the Company sold 300,000 shares of unregistered
Common Stock at a price of $1.45 per share and 300,000 warrants to
purchase Common Stock at $0.05 per warrant (see note 19). The exercise
price of the warrants is $2.06, which equals the quoted market price for
the Company's Common Stock on December 24, 1996. The warrants expire
December 24, 2000.
In connection with the conversion of $495,000 convertible debentures and
$46,564 of accrued interest on July 1, 1996, the debenture holders also
received warrants to purchase 304,425 shares of common stock at $1.25 per
share, the market price at date of conversion. The warrants expire July
1, 1998.
In December 1996, the Company issued 1.1 million shares of unregistered
Common Stock in connection with the acquisition of WR-Illinois (see note
3).
In December 1996, the Company issued 3,486,221 shares of unregistered
Common Stock in connection with the acquisition of U.S. Tire (see note
3). Included in the 3,486,221 shares issued are 243,224 (see note 19)
shares issued to a third party as compensation for services rendered as
financial advisor to the Company in connection with the acquisition of
U.S. Tire.
As a condition of the acquisition of U.S. Tire, the Company committed to
file a registration statement with the Securities and Exchange Commission
to register shares issued to the sellers of U.S. Tire. The shares of
Common Stock issued in connection with the WR-Illinois acquisition and
those sold in the December 1996 private placement were given the right to
be included in this filing.
F-28
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
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
have been declared or paid on such preferred stock. Accordingly,
undeclared dividends on cumulative preferred stock aggregated $1,081,231
at December 31, 1997 which represents $5.31 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.
NOTE 18. RIGHTS OFFERING
The Company completed a rights offering on June 26, 1995, which
distributed nontransferable subscription rights to eligible stockholders,
as defined, to subscribe to the Company's Common Stock at an offering
price of $.75. This "Rights Offering" raised approximately $2.2 million
in capital, which was to be 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.
NOTE 19. RELATED PARTY TRANSACTIONS
In 1997, the Company borrowed money (see note 12) for working capital
needs from a third-party lender which is controlled by two members of the
Company's Board of Directors.
In 1997, in connection with the Atlanta fire (see note 21), the Company
agreed to amend its agreement with the former equity holders of U.S. Tire
and to issue additional common stock and convertible subordinated notes
to the former equity holders of U.S. Tire (see notes 14 and 17). Certain
of these former equity holders are directors of the Company.
In 1997, the Company incurred consulting fees of $30,000 to a director
for advisory services and assistance with various financial matters of
the Company.
In 1997, the Company paid approximately $530,000 in debt service payments
for promissory notes payable (see note 12) and convertible subordinated
notes (see note 14) issued in connection with the purchase of U.S. Tire
(see note 3). Certain of the note holders are members of the Company's
Board of Directors.
In 1996, the Company incurred a consulting fee of $20,000 to a director
in connection with the private placement sale of unregistered Common
Stock of the Company (see note 17).
In connection with the acquisition of U.S. Tire (see note 3), the Company
paid a third party public relations firm, which is also a shareholder of
the Company, 243,224 shares of Common Stock of the Company for its
assistance as a financial advisor in arranging and facilitating the
acquisition of U.S.
F-29
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
Tire. A director of the Company, as an employee of the Company's
financial advisor, received $175,000 in connection with his assistance
to the Company's financial advisor in closing the U.S. Tire transaction.
In 1996, the Company loaned $40,000 to an officer of the Company. The
loan is non-interest bearing and is payable on demand.
In 1996, the Company sold to a director 300,000 shares of unregistered
Common Stock at a price of $1.45 per share and 300,000 warrants to
purchase Common Stock at $0.05 per warrant (see note 17). The exercise
price of the warrants is $2.06 which equals the quoted market price of
the Company's Common Stock on the date the warrants were purchased.
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.
NOTE 20. INCOME TAXES
The provision (benefit) for income taxes consists of the following
components for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 69,661 8,850 -
---------- --------- ---------
Total current 69,661 8,850 -
---------- --------- ---------
Deferred:
Deferred taxes (769,946) (119,278) 284,862
Deferred tax asset valuation allowance 1,217,489 119,278 (284,862)
---------- --------- ---------
Total deferred 447,543 - -
---------- --------- ---------
$ 517,204 $ 8,850 $ -
---------- --------- ---------
---------- --------- ---------
</TABLE>
In the fourth quarter of 1997, the Company increased the deferred tax
valuation allowance to $3,904,366 because of uncertainties regarding the
realization of the previously recorded net deferred tax asset in the
amount of $447,543.
[End of Page]
F-30
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
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>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
U.S. federal income tax, at statutory rates $ (790,617) $ 96,254 $(315,119)
Penalties 17,259 220 20,216
Amortization of goodwill 20,110 20,115 13,996
Change in valuation allowance 1,217,489 (119,278) 284,862
State income tax 69,661 8,850 -
Other (16,698) 2,689 (3,955)
------------ ---------- ----------
$ 517,204 $ 8,850 $ -
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The deferred tax assets (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <S> <S>
Deferred tax assets:
Net operating loss carry forwards $ 3,524,051 $ 2,622,220
Depreciation 91,050 312,269
Deferred grant revenues 222,101 91,587
Accruals for financial reporting purposes
currently not deductible for tax 201,693 32,104
Capitalization of general and administrative
costs for tax 70,491 62,098
Carrying differences for investment in Illinois - 269,386
Other 47,120 13,080
----------- ------------
Gross deferred tax asset 4,156,506 3,402,744
Valuation allowance (3,904,366) (2,686,877)
----------- ------------
252,140 715,867
----------- ------------
Deferred tax liabilities:
Book/tax basis in fixed assets and
deferred gain (252,140) (268,324)
----------- ------------
Net deferred tax asset $ - $ 447,543
----------- ------------
----------- ------------
</TABLE>
As of December 31, 1997, the Company has approximately $9,618,000 in net
operating loss carry forwards which expire between the years 2002 and
2012. The deferred tax asset recorded at December 31, 1996, is based on
the expected utilization of net operating loss carry forwards based on
projected positive results. Due to changes in ownership which occurred
in 1996, there will be an annual limitation of approximately $1 million
on the amount of net operating losses available to offset future taxable
income.
As a result of the December 1996 acquisitions discussed in note 3, a
deferred tax asset of $145,336 was set up in the opening balance sheet.
A valuation allowance for the full amount of the deferred tax asset was
also set up in the opening balance sheet.
F-31
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
NOTE 21. INVOLUNTARY CONVERSION OF ASSETS
On November 26, 1996, the Atlanta plant sustained damage due to a
mechanical fire. The shredding machinery and equipment was not damaged,
thus allowing the plant to continue accepting scrap tires for disposal
which were then shredded and disposed of. The reconstruction of the
Atlanta plant was completed in late May 1997, at which time the plant
became fully operational. This involuntary conversion of assets was
estimated and recognized in the year ending December 31, 1996, as
follows:
Estimated insurance proceeds to be received on property $ 901,815
Net book value of property destroyed (151,844)
-----------
Gain on involuntary conversion of property 749,971
Estimated insurance proceeds from business interruption
insurance 83,333
Costs incurred in clean-up (209,085)
-----------
Net gain on involuntary conversion $ 624,219
-----------
The estimated insurance proceeds are included in other receivables (see
note 4) at December 31, 1996, all of which was received in 1997.
Proceeds exceeded the estimate by $164,918 and were recognized in income
in 1997, as well as $333,332 in insurance proceeds from business
interruption insurance.
NOTE 22. NONCASH TRANSACTIONS
During 1997, the Company issued additional Common Stock valued at $73,447
to the former equity holders of U.S. Tire (see notes 3 and 17) which was
excluded as a noncash transaction from the statements of cash flows.
During 1996, the Company had the following noncash transactions which
have been excluded from the statements of cash flows:
Increase
(Decrease)
-----------
Additions of equipment under capital lease $ (41,304)
New capital lease obligations 41,304
Convertible, subordinated debentures converted to
common stock 535,000
Interest on debentures converted to common stock 48,559
Decrease in debentures payable (535,000)
Decrease in interest payable on debentures (48,559)
-----------
$ -
-----------
-----------
F-32
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
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)
------------
$ -
------------
------------
Note 23. SIGNIFICANT CONTRACTS
WR-Illinois entered into a contract with Illinois Power Company on
October 12, 1993, to supply it with 60,000 tons of TDF per year for a
period of five years. If WR-Illinois is unable to fulfill this
requirement, the Company will sell TDF produced at its other facilities
to Illinois Power. Sales to Illinois Power of TDF produced at the Dupo
facility began in September 1995.
Note 24. BUSINESS AND CREDIT CONCENTRATIONS
The Company's customers are located throughout the United States. Five
customers accounted for significant Company sales for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Customer one $5,483,000 $2,940,000 $2,221,000
Customer two 1,535,000 - -
Customer three 1,255,000 - -
Customer four 1,137,000 1,840,000 1,604,000
Customer five 434,000 566,000 535,000
Customer six - 364,000 2,999,000
Customer seven - 257,000 832,000
---------- ---------- -----------
Total $9,844,000 $5,967,000 $8,191,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
In addition to these customers, 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.
F-33
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
NOTE 25. 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 years ended
December 31, 1997, 1996 and 1995.
NOTE 26. 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, results of operations, or cash flows , 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, 1997, no such
costs had been accrued and management does not believe the effects of the
aforementioned activities will have a material effect on the Company's
financial statements.
NOTE 27. 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 and notes payable as they are unique as debt instruments for
which there is no public market and as discussed in note 2, the Company's
ability to honor these obligations is uncertain.
NOTE 28. SUBSEQUENT EVENTS
On January 27, 1998, the Company announced a default by its wholly-owned
subsidiary, WR-Illinois, with respect to the debt service payments due
February 1, 1998 in connection with the loan agreements between WR-
Illinois and the Southwestern Illinois Development Authority (SWIDA), and
the Upper Illinois River Valley Development Authority (UIRVDA) (see note
11). The debt is classified in current liabilities as of December 31,
1997. As a result of the default, the indenture trustee has made demand
for payment. The bondholders have the right to accelerate maturity.
F-34
<PAGE>
WASTE RECOVERY, INC.
Notes to Consolidated Financial Statements
On January 15, 1998, the Company was in default on the convertible
subordinated notes (see note 14) as a result of nonpayment of interest
due January 15, 1998. As a result of the default, one of the noteholders
has made demand for payment. Upon occurrence of an event of default, as
defined, the noteholders may convert the notes to common stock of the
Company at a reduced price of $1.00 per share or foreclose on the common
stock of New U.S. Tire Recycling Corp., a wholly-owned subsidiary of the
Company which owns 84% of U.S. Tire.
On March 31, 1998, the Company was in default due to non-payment of the
final installment of promissory notes payable in the amount of $150,000
issued in connection with the acquisition of U.S. Tire. One of the
noteholders has made demand for payment.
On March 21, 1998, the Company's Marseilles, Illinois facility was
substantially damaged by fire. The facility is covered by replacement
and business interruption insurance; however, uninsured costs, if any,
are unknown and are not reasonably or practicably determinable.
[End of Page]
F-35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors and Stockholders
Waste Recovery, Inc.
In connection with our audit of the consolidated financial statements of Waste
Recovery, Inc. and Subsidiaries referred to in our report dated March 16, 1998,
which is included in Part II of this Form 10-K, we have also audited Schedule
II at December 31, 1997 and for the year then ended. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein. Our report on the financial statements referred to above
includes an explanatory paragraph which discusses that there is substantial
doubt about the Company's ability to continue as a going concern.
GRANT THORNTON LLP
Dallas, Texas
March 16, 1998
S-1
<PAGE>
SCHEDULE II
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(1)
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 1995:
Allowance for doubtful accounts $25,000 $38,917 $ - $36,834 $27,083
------- ------- --------- ------- ---------
Year ended December 1996:
Allowance for doubtful accounts $27,083 $63,554 $ - $39,620 $51,017
------- ------- --------- ------- ---------
Year ended December 1997:
Allowance for doubtful accounts $51,017 $96,000 $ - $18,415 $128,602
------- ------- --------- ------- ---------
</TABLE>
(1) Amount represents the allowance for doubtful accounts, a contra account to
trade accounts receivable.
S-2
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------- ------- ------------
3.1 Amended and Restated Articles of Incorporation filed
July 5, 1988, with the Secretary of State of Texas,
incorporated herein by reference to Exhibit 3.4 to the
Company's Form 10-K filed March 24, 1989.
3.2 Articles of Amendment to the Articles of Incorporation
filed June 8, 1990, with the Secretary of State of
Texas, incorporated herein by reference to Exhibit 3.5
to the Company's Form 10-K filed March 27, 1991.
3.3 By-Laws, amended and restated as of March 10, 1992,
incorporated herein by reference to Exhibit 3.6 to the
Company's Form 10-K filed March 26, 1992.
4.1 Form of Common Stock Certificate of Registrant,
incorporated herein by reference to the Company's Form
S-1, as amended, filed July 15, 1986.
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, incorporated herein by
reference to Exhibit 4.2 to the Company's report on
Form 8-K filed June 1, 1988.
4.6 Form of 10% Convertible Subordinated Debenture due
March 15, 1996, incorporated herein by reference to
Exhibit 4.6 to the Company's report on Form 8-K filed
October 5, 1994.
10.6 Agreement dated May 9, 1986, between Registrant and
The Goodyear Tire and Rubber Company, incorporated
herein by reference to Exhibit 10.32 to the Company's
Amendment No. 1 to Form S-1 filed July 1, 1986.
10.7 Lease Agreement dated January 15, 1988, between
Southern Metal Finishing Company, Inc. and the
Registrant, incorporated herein by reference to
Exhibit 10.37 to the Company's Form 10-K filed March
25, 1988.
10.8 Indemnity Agreement dated January 29, 1988, by the
Registrant and Southern Metal Finishing Company, Inc.,
incorporated herein by reference to Exhibit 10.38 to
the Company's Form 10-K filed March 25, 1988.
10.10 Estoppel Deed, dated December 28, 1989, between the
Registrant as Grantor, and Tex A. Perkins, et al., as
Grantee, incorporated herein by reference to Exhibit
10.64 to the Company's Form 10-K filed March 26, 1990.
10.11 Lease of Real Property, dated January 1, 1990, between
the Registrant, as Lessee, and Tex A. Perkins, et al.,
as Lessor, incorporated herein by reference to Exhibit
10.65 to the Company's Form 10-K filed March 26, 1990.
10.12 Warranty Deed, dated February 7, 1990, between Tex A.
Perkins, et al., as Grantor, and Wayne Easley, as
Grantee, incorporated herein by reference to Exhibit
10.66 to the Company's Form 10-K filed March 26, 1990.
10.13 Assignment of Lease, dated February 7, 1990, from Tex
A. Perkins, et al., as Assignor, and Wayne Easley, as
Assignee, incorporated herein by reference to Exhibit
10.68 to the Company's Form 10-K filed March 26, 1990.
E-1
<PAGE>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------- ------- ------------
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,
incorporated herein by reference to Exhibit 10.73 to
the Company's Form 10-K filed March 26, 1990.
10.15 Amendment No. 1 to the Registrant's 1989 Stock Plan
for Employees, incorporated herein by reference to
Exhibit 10.15 to the Company's Form 10-K filed March
28, 1996.
10.16 Nonqualified Stock Option Agreement dated April 4,
1990, granted by the Registrant to Allan Shivers, Jr.
for 200,000 shares, incorporated herein by reference
to Exhibit 10.77 to the Company's Form 10-K filed
March 27, 1991.
10.17 Form of Nonqualified Stock Option Agreement for grants
to employees made January 7, 1991, incorporated herein
by reference to Exhibit 10.89 to the Company's Form 10-
K filed March 26, 1992.
10.18 Form of Incentive Stock Option Agreement for grants to
employees made October 1, 1991, incorporated herein by
reference to Exhibit 10.90 to the Company's Form 10-K
filed March 26, 1992.
10.19 1992 Stock Plan for Non-Employee Directors,
incorporated herein by reference to Exhibit 4.8 of the
Company's Form S-8 filed May 8, 1992.
10.20 Form of Nonqualified Stock Option Agreement for grants
to non-employee directors made January 4, 1991,
incorporated herein by reference to Exhibit 10.88 to
the Company's Form 10-K filed March 26, 1992.
10.21 Indemnity and Security Agreement, dated June 1, 1990,
between Registrant and The Goodyear Tire and Rubber
Company, incorporated herein by reference to Exhibit
10.82 to the Company's Form 10-K filed March 27, 1991.
10.22 Amendment to Lease of Real Property dated April 25,
1991, between the Registrant, as Lessee, and George
Glanz, as Lessor, incorporated herein by reference to
Exhibit 10.86 to the Company's Form 10-K filed March
26, 1992.
10.23 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), incorporated herein by
reference to Exhibit 10.007 to the Company's report on
Amendment No. 1 to Form 8-K/A filed December 14, 1993.
10.24 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,
incorporated herein by reference to Exhibit 10.021 to
the Company's Form 10-K filed March 30, 1995.
10.25 Stock Purchase Agreement for the purchase by the
Registrant of the outstanding stock of Domino Salvage,
Tire Division, Inc., dated March 21, 1995,
incorporated herein by reference to Exhibit 10.024 to
the Company's Form 10-K filed March 30, 1995.
10.26 Loan Agreements dated April 1, 1988, between
Development Authority of Fulton County and the
Registrant, incorporated herein by reference to
Exhibit 28.2 to the Company's report on Form 8-K filed
June 1, 1988.
E-2
<PAGE>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------- ------- ------------
10.27 Promissory Note dated April 1, 1988, from the
Registrant to Development Authority of Fulton County,
incorporated herein by reference to Exhibit 28.3 to
the Company's report on Form 8-K filed June 1, 1988.
10.28 Leasehold Deed to Secure Debt and Security Agreement
dated April 1, 1988, between the Registrant and the
Trustee, incorporated herein by reference to Exhibit
28.5 to the Company's report on Form 8-K filed June 1,
1988.
10.29 First Amendment to Lease Agreement dated April 1,
1988, between Southern Metal Finishing Company, Inc.
and the Registrant, incorporated herein by reference
to Exhibit 28.6 to the Company's report on Form 8-K
filed June 1, 1988.
10.30 Assignment of Contracts dated April 1, 1988, between
the Registrant and Development Authority of Fulton
County, incorporated herein by reference to Exhibit
28.7 to the Company's report on Form 8-K filed June 1,
1988.
10.31 Promissory Note dated February 29, 1996, executed by
the Registrant as maker payable to Texas Commerce Bank
National Association in principal amount of
$1,119,309.01, incorporated herein by reference to
Exhibit 10.31 to the Company's Form 10-K filed April
15, 1997.
10.32 Note Purchase Agreement dated February 29, 1996,
between The Goodyear Tire and Rubber Company and Texas
Commerce Bank National Association, incorporated
herein by reference to Exhibit 10.32 to the Company's
Form 10-K filed April 15, 1997.
10.33 Form of Convertible Subordinated Debenture Conversion
Agreements effective July 1, 1996, incorporated herein
by reference to Exhibit 10.33 to the Company's Form 10-
K filed April 15, 1997.
10.34 Form of Warrant to Purchase Common Stock of Waste
Recovery, Inc. as of July 1, 1996, as Exhibit "A" to
the Convertible Subordinated Debenture Conversion
Agreements included herein in Exhibit 10.47,
incorporated herein by reference to Exhibit 10.34 to
the Company's Form 10-K filed April 15, 1997.
10.35 Dodge Common Stock and Warrant Purchase Agreement
dated December 24, 1996 between Waste Recovery, Inc.
and Michael C. Dodge, incorporated herein by reference
to Exhibit 10.35 to the Company's Form 10-K filed
April 15, 1997.
10.36 Common Stock and Warrant Purchase Agreement dated
December 26, 1996 by and among Waste Recovery, Inc.
and Bette Nagelberg, Ronald I. Heller, Rachel Heller,
Ronald I. Heller as custodian for Evan Heller,
Delaware Charter Guaranty & Trust Co. FBO, and R.
Anthony Cioffari, incorporated herein by reference to
Exhibit 10.36 to the Company's Form 10-K filed April
15, 1997.
10.37 Agreement and Plan of Reorganization dated as of the
30th day of September 1996 by and among Waste
Recovery, Inc., New U.S. Tire Recycling Corp., U.S.
Tire Recycling Partners, L.P., Bodner/Greenstein
Capital Holdings, Inc., Tirus, Inc., Tirus Associates,
L.L.C., Environmental Venture Fund, L.P., Argentum
Capital, L.P., and Certain Shareholders, incorporated
herein by reference to Exhibit 1.1 of the Company's
current report on From 8-K filed December 20, 1996.
E-3
<PAGE>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------- ------- ------------
10.38 Partnership Purchase Agreement dated as of December
16, 1996, between Riverside Caloric Company, Waste
Recovery, Inc., and Waste Recovery-Illinois, L.L.C.,
incorporated herein by reference to Exhibit 1.2 of the
company's current report on Form 8-K filed December
20, 1996.
10.39 Deed of Trust and Security Agreement between New U.S.
Tire Recycling Corp. (a wholly-owned subsidiary of the
Registrant) as Grantor, and the former partners and
shareholders of U.S. Tire Recycling Partners, L.P. as
Beneficiary, incorporated herein by reference to
Exhibit 10.39 to the Company's Form 10-K filed April
15, 1997.
10.40 Letter Agreement between Waste Recovery, Inc. and
Cameron & Associates relating to the retention of
Cameron & Associates as financial advisor in
connection with the acquisition of U.S. Tire,
incorporated herein by reference to Exhibit 10.40 to
the Company's Form 10-K filed April 15, 1997.
10.41 Nonqualified Stock Option Agreement dated February 12,
1997, granted by the Registrant to Martin B. Bernstein
for 1 million shares.(1)
10.42 Consulting Agreement dated December 31, 1997 between
Registrant and Thomas L. Earnshaw, as consultant.(1)
10.43 Promissory Note dated March 17, 1998, executed by
Registrant as maker payable to Chase Bank of Texas,
National Association in principal amount of
$350,000.(1)
11.1 Statement regarding computation of per share earnings
- See page F-5 of this Form 10-K which is incorporated
herein by reference.
21.1 Subsidiaries of the Registrant, incorporated herein by
reference to Exhibit 21.1 to the Company's Form 10-K
filed April 15, 1997.
23 Consent of Independent Accountants.(1)
23.1 Consent of Independent Accountants.(1)
23.2 Consent of Independent Accountants.(1)
27.1 Financial Data Schedule.(1)
99.1 The Company's Proxy Statement for its 1997 Annual
Meeting of Shareholders, incorporated herein by
reference pursuant to Rule 12b-32 of the Securities
Exchange Act of 1934. Definitive copies of such Proxy
Statement to be filed under Regulation 14A within 120
days after December 31, 1996.
- --------------------
(1) Filed herewith.
E-4
<PAGE>
EXHIBIT 10.41
STOCK OPTION AGREEMENT
WASTE RECOVERY, INC.
Date of Grant: February 12, 1997
Name of Optionee: MARTIN BERNSTEIN
Number of Shares: 1,000,000 Shares of Common Stock
Prices Per Share: $2.03 per Share with respect to 250,000 Shares of
Common Stock; $3.50 per Share with respect to 250,000
Shares of Common Stock; $4.75 per Share with respect to
250,000 Shares of Common Stock; and $7.00 per Share
with respect to 250,000 Shares of Common Stock
WASTE RECOVERY, INC., a Texas corporation (the "Corporation"), hereby
grants to the above-named optionee (the "Optionee") an option (the "Option") to
purchase from the Corporation, for the price per share set forth above, the
number of shares of Common Stock, no par value per share (the "Shares"), of the
Corporation set forth above pursuant to the terms and conditions set forth
herein. This option is not intended by the parties to be an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
The terms and conditions of the Option granted hereby are as follows:
(a) EXERCISE PRICES. The prices at which each Share subject to this
Option may be purchased shall be the prices set forth above, subject to any
adjustments as set forth in this Section 1.
SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the outstanding
shares of the Corporation's Common Stock at any time while this Option remains
outstanding and unexpired shall be subdivided or split into a greater number of
shares, or a dividend in Common Stock shall be paid in respect of Common Stock,
or a similar change in the Corporation's capitalization occurs which affects the
outstanding Common Stock, as a class, then the exercise prices set forth in the
first paragraph of this Option in effect immediately prior to such subdivision
or at the record date of such dividend shall, simultaneously with the
effectiveness of such subdivision or split or immediately after the record date
of such dividend (as the case may be), be proportionately decreased. If the
outstanding shares of Common Stock shall be combined or reverse-split into a
smaller number of shares, the exercise prices set forth in the first paragraph
of this Option in effect
<PAGE>
immediately prior to such combination or reverse split shall, simultaneously
with the effectiveness of such combination or reverse split, be
proportionately increased.
RECLASSIFICATION, REORGANIZATION, CONSOLIDATION OR MERGER. In the
case of any reclassification of the Common Stock or any reorganization,
consolidation or merger of the Corporation with or into another corporation
(other than a merger or reorganization with respect to which the Corporation is
the continuing corporation and which does not result in any reclassification of
the Common Stock), or a transfer of all or substantially all of the assets of
the Corporation, or the payment of a liquidating distribution then, as part of
any such reorganization, reclassification, consolidation, merger, sale or
liquidating distribution, the Corporation shall arrange for the other party to
the transaction to agree to, and lawful provision shall be made, so that the
Optionee shall have the right thereafter to receive upon the exercise of this
Option (to the extent, if any, still exercisable), the kind and amount of Shares
or other securities or property which the Optionee would have been entitled to
receive if, immediately prior to any such reorganization, reclassification,
consolidation, merger, sale or liquidating distribution, as the case may be,
such Optionee had held the number of Shares that were then purchasable upon the
exercise of this Option. In any such case, appropriate adjustment (as
reasonably determined by the Board of Directors of the Corporation) shall be
made in the application of the provisions set forth herein with respect to the
rights and interests thereafter of the Optionee such that the provisions set
forth in this SECTION 1(c) (including provisions with respect to the exercise
prices as set forth in the first paragraph of this Option) shall thereafter be
applicable as nearly as is reasonably practicable, in relation to any Shares or
other securities or property thereafter deliverable upon the exercise of this
Option.
VESTING. This Option shall vest and may be exercised no earlier than
the date that is one (1) year after the Date of Grant, at which time it shall
become one hundred percent (100%) exercisable. In no event shall this Option be
exercisable after the date five (5) years from the Date of Grant. In the event
that for any reason the Optionee is no longer serving as Chairman of the Board
of Directors of the Corporation, the Optionee shall have a period of ninety (90)
days from the date of such termination of service to exercise this Option to the
extent then exercisable, and at the end of the 90-day period, all rights of the
Optionee under this Option shall terminate and be forfeited immediately as to
any unexercised portion thereof.
EXERCISE OF OPTION. The Optionee (or his legal representative or
guardian, as applicable) may exercise any portion of this Option that has become
exercisable in accordance with the terms hereof as to all or any of the Shares
then available for purchase by delivering to the Corporation written notice
specifying:
The number of whole Shares to be purchased together with payment
in full of the aggregate option price of such Shares specified in the
written notice, provided that this Option may not be exercised for less
than one thousand (1,000) Shares or the number of Shares remaining subject
to this Option, whichever is smaller;
The address to which dividends, notices, reports, etc. are to be
sent; and
The Optionee's social security number.
-2-
<PAGE>
Payment shall be in cash (or by certified or cashier's check payable to the
order of the Corporation). The Optionee shall not be entitled to any rights and
privileges as a shareholder of the Corporation in respect of any Shares covered
by this Option until such Shares shall have been paid for in full and issued to
the Optionee.
DELIVERY OF CERTIFICATE(S). As soon as practicable after the
Corporation receives payment for Shares covered by this Option, it shall deliver
a certificate or certificates representing the Shares so purchased to the
Optionee. Only one certificate evidencing the Shares will be issued unless the
Optionee otherwise requests in writing. Such certificate shall be registered in
the name of the Optionee. Such stock certificate shall carry such appropriate
legends, and such written instructions shall be given to the Corporation's
transfer agent, if any, as may be deemed necessary or advisable by counsel to
the Corporation in order to comply with the requirements of the Securities Act
of 1933, as amended (the "1933 Act"), and any state securities laws or any other
applicable laws.
SECURITIES LAWS. Optionee acknowledges that this Option and the
Shares subject to this Option have not been registered under the 1933 Act,
and agrees not to sell, pledge, distribute, offer for sale, transfer or
otherwise dispose of this Option or any Shares subject to this Option issued
upon its exercise in the absence of (a) an effective registration statement
under the 1933 Act as to this Option or such Shares subject to this Option
and registration or qualification of this Option or such Shares subject to
this Option under any applicable Blue Sky or state securities law then in
effect or (b) an opinion of counsel, satisfactory to the Corporation, that
such registration and qualification are not required. Without limiting the
generality of the foregoing, unless the offering and sale of the Shares
subject to this Option to be issued upon the exercise of this Option shall
have been effectively registered under the 1933 Act, the Corporation shall be
under no obligation to issue the Shares covered by such exercise unless and
until the Optionee shall have executed an investment letter in form and
substance satisfactory to the Corporation, including a warranty at the time
of such exercise that it is acquiring such Shares for its own account, and
will not transfer the Shares subject to this Option unless pursuant to an
effective and current registration statement under the 1933 Act or an
exemption from the registration requirements of the 1933 Act and any other
applicable restrictions, in which event the Optionee shall be bound by the
provisions of a legend or legends to such effect which shall be endorsed upon
the certificate(s) representing the Shares subject to this Option issued
pursuant to such exercise. The Shares subject to this Option issued upon
exercise thereof shall be imprinted with legends in substantially the
following form:
"THE SECURITIES REPRESENTED BY THE STOCK OPTION AGREEMENT DATED AS OF
FEBRUARY 12, 1997 BETWEEN THE CORPORATION AND MARTIN BERNSTEIN HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD,
PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT WITH RESPECT THERETO UNDER THE ACT OR PURSUANT TO AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND
COMPLIANCE WITH ANY
-3-
<PAGE>
APPLICABLE STATE SECURITIES LAW, OR UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT
SUCH REGISTRATION IS NOT REQUIRED."
After the Registration Statement referred to in SECTION 6 below is declared
effective by the Securities and Exchange Commission (the "Commission"), the
Optionee may deliver to the Corporation the certificates representing the Shares
subject to this Option so registered, and the Corporation will, within three
days after receipt by the Corporation of the foregoing, issue new certificates
representing and in exchange for the aforementioned certificates, which new
certificates shall be legended as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY BE
SOLD PURSUANT TO THE REGISTRATION STATEMENT PROVIDED THAT (i) THE
REGISTRATION STATEMENT IS CURRENT AND EFFECTIVE, (ii) THE HOLDER
COMPLIES WITH THE PROSPECTUS DELIVERY REQUIREMENTS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND (iii) THE SALE IS IN
COMPLIANCE WITH THE PLAN OF DISTRIBUTION SET FORTH IN THE PROSPECTUS."
REGISTRATION RIGHTS OF OPTIONEE. The Corporation shall register the
Shares subject to this Option on a Registration Statement under the 1933 Act
(the "Registration Statement") with the Commission in accordance with
Section 10.1 of the Agreement and Plan of Reorganization dated as of September
30, 1996 by and among the Corporation, New U.S. Tire Recycling Corp., U.S. Tire
Recycling Partners, L.P., Bodner/Greenstein Capital Holdings, Inc., Tirus, Inc.,
Tirus Associates, L.L.C., Environmental Venture Fund, L.P., Argentum Capital,
L.P. and the Shareholders named therein (the "Reorganization Agreement")
relating to Section 6.7 of the Old Asset Purchase Agreement (as defined in the
Reorganization Agreement). These registration rights shall inure to the benefit
of any transferee of the Shares subject to this Option.
TRANSFERABILITY; ASSIGNABILITY. This Option is personal to the
Optionee and during the Optionee's lifetime may be exercised only by the
Optionee or his guardian or legal representative as set forth herein. In the
event of the death or permanent disability of the Optionee, the Option may be
exercised by the person or persons entitled to do so under the Optionee's will,
if he shall die intestate, by his legal representative or representatives, or,
in the case of his permanent disability, by the Optionee or his guardian or
legal representative. This Option shall not be transferable otherwise than by
will or the laws of descent and distribution, or to a Permitted Transferee. For
purposes of this SECTION 7, the term "Permitted Transferee" shall mean Immediate
Family Members or the Optionee, trusts for the benefit of such Immediate Family
Members of the Optionee, and partnerships in which the Optionee and/or such
Immediate Family Members are the only partners, provided in each event that no
consideration is provided for such transfer; and the term "Immediate Family
Member" shall mean the Optionee's descendants (children, grandchildren and more
remote descendants), and shall include step-children and relationships arising
from legal adoption.
-4-
<PAGE>
WITHHOLDING. (a) The Corporation shall have the right to deduct
from all amounts paid in cash in consequence of the exercise of the Option any
taxes required by law to be withheld with respect to such cash payments.
Subject to SECTION 8(b) below, where the Optionee is entitled to receive Shares
pursuant to the exercise of the Option, the Corporation shall have the right to
require the Optionee to pay to the Corporation the amount of any taxes that the
Corporation is required to withhold with respect to such Shares, or, in lieu
thereof, to retain, or sell without notice, a sufficient number of such Shares
to cover the amount required to be withheld.
(b) SURRENDER OF SHARES. For so long as the Optionee is subject to
Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
all tax withholding obligations shall be satisfied through the withholding or
surrender of Shares as necessary to comply with Section 16 of the 1934 Act and
the rules and regulations thereunder or to obtain any exemption therefrom.
NO GUARANTEE. This Option does not confer on the Optionee any right
to continue in his present position as Chairman of the Board of the Corporation
for any period of time or at any particular rate of compensation.
NOTICES. All notices hereunder to the parties to this Stock Option
Agreement shall be delivered, mailed or telecopied (with confirmation of
receipt) to the following addresses:
If to the Corporation:
Waste Recovery, Inc.
309 South Pearl Expressway
Dallas, Texas 75201
Attention: President
Telecopy Number: (214) 745-8945
If to the Optionee:
Martin Bernstein
The File Organization
7 Penn Plaza
370 Seventh Avenue, Suite 618
New York, New York 10001
Telecopy Number: (212) 563-6657
Such addresses for the service of notices may be changed at any time provided
notice of such change is furnished in advance to the other party.
GOVERNING LAW. This Stock Option Agreement shall be governed by and
construed in accordance with the laws of the State of Texas without application
of the conflict of laws principles thereof, except to the extent preempted by
federal law, which shall govern to such extent.
-5-
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Stock Option Agreement
to be duly executed as of the date first above written.
CORPORATION:
WASTE RECOVERY, INC.
By: ___________________________________
Its:___________________________________
OPTIONEE:
________________________________________
Signature
Social Security # ______________________
<PAGE>
EXHIBIT 10.42
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into as
of the 31st day of December, 1997, by and between Waste Recovery, Inc., a
Texas corporation (the "Company"), and Thomas L. Earnshaw ("Consultant").
This Agreement hereby supersedes any other consulting or employment
agreements or understandings, written or oral, between the Company and
Consultant.
W I T N E S S E T H :
WHEREAS, Consultant has been an employee of the Company since its founding
in 1982, and has served as President of the Company and, most recently, as Vice
Chairman of the Board of Directors of the Company; and
WHEREAS, Consultant's employment agreement with the Company is to expire at
December 31, 1997, and at such time Consultant shall resign as an employee of
the Company; and
WHEREAS, it is the desire of the Company to engage Consultant as a
consultant in order to enjoy the benefits of Consultant's business experience
and background and business contacts;
NOW, THEREFORE, for and in consideration of the premises and of the mutual
representations, warranties, covenants and agreements contained herein, and of
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and upon the terms and subject to the conditions
hereinafter set forth, the parties do hereby agree as follows:
DUTIES AND TERM OF CONSULTANCY. The Company hereby engages
Consultant, and Consultant hereby accepts such engagement, as a consultant to
consult with and assist the Company with respect to the scrap tire disposal and
conversion business (the "Business") to be conducted by the Company following
the Closing and with respect to business advice, business development and
investment opportunities relating to the Business or to the Company generally.
The term of this Agreement shall be for one (1) year commencing January 1, 1998
and thereafter for consecutive renewal terms each of one (1) year (the "Term")
unless and until either party to this Agreement provides not less than three (3)
months' written notice to the other of its or his election not to renew this
Agreement at the end of the initial term or any renewal term.
FEES AND BENEFITS.
As a fee for the performance of Consultant's duties under this
Agreement, the Company shall pay Consultant $10,000 per month during the
term hereof, payable monthly or in such other increments in accordance with
the Company's payroll practices as existing from time to time during the
Term.
<PAGE>
Consultant shall be eligible for bonus opportunities with respect
to (i) the development of business for the Company by or with the
assistance of Consultant during the Term and (ii) acquisitions made by the
Company with respect to which Consultant has provided significant
assistance and guidance during the Term, as follows:
DEVELOPMENT OF BUSINESS. In the event that Company obtains
a regional or national account (E.G., Wal-Mart, Sears or the
like) providing for the payment of fees to the Company for
the receiving, hauling, handling and/or disposal of scrap
tires ("tipping fees") during the Term, the Company shall
pay Consultant an aggregate commission of $.01 per scrap
tire (determined with respect to each individual unit of the
account and for the first eighteen (18) months of providing
the applicable individual unit with scrap tire disposal
services), payable in the following increments:
(A) Fifty percent (50%) (or $.005 per tire) shall be paid
at the time of commencement of the services with
respect to an account for each scrap tire estimated to
be picked up under the agreement on an annual basis, as
determined and agreed upon in good faith by the Company
and Consultant. Such amount shall be paid in three (3)
equal monthly increments over the first three (3)
months following the commencement of services by the
Company with respect to the account.
(B) Fifty percent (50%) (or $.005 per tire) shall be paid
with respect to each scrap tire with respect to which
the Company actually collects tipping fees in
connection with its services on behalf of the account.
Such amount shall be determined on a monthly basis and
paid on or before the 15th day of the following month
for the term of the Company's agreement with the
account or for eighteen (18) months, whichever is
shorter.
ACQUISITIONS. In the event that Consultant identifies,
negotiates on behalf of and/or otherwise assists the Company
with respect to an acquisition by the Company of the stock,
assets or contract rights of an unaffiliated third party,
the Company shall pay Consultant an advisory fee of $10,000
at the closing of such acquisition.
The obligations of the Company to pay any amounts accrued under this Section
2(b) shall survive the expiration or termination of this Agreement.
The Company shall pay all premiums for coverage of Consultant and
his dependent family members under health, hospitalization, disability,
dental, life and other
-2-
<PAGE>
insurance plans of the Company to ensure coverage of such individuals to
the same extent provided by the Company prior to Consultant's
termination of employment with the Company.
The Company shall take such actions as shall be necessary to
cause the stock options previously granted to Consultant by the Company to
remain exercisable during the Term to the extent that such options were
exercisable at the date of this Agreement.
Upon execution of this Agreement, the Company shall cause title
to the 1992 Mercury Grand Marquis automobile (vehicle identification number
2MECM74WXNX671921) to be transferred to Consultant.
During the Term, Consultant shall have the use of an office at
the Company's executive offices in Dallas, Texas with the use of a
telephone, copier and telecopier to perform Consultant's services
hereunder. In the event that the Company relocates its executive offices
during the Term, the Company shall provide Consultant with, or assist
Consultant financially in order to secure, modest office arrangements with
the office equipment described above.
The Company shall reimburse Consultant for all business travel
and other out-of-pocket expenses reasonably incurred by Consultant in the
performance of his services pursuant to this Agreement. All such
reimbursable expenses shall be appropriately documented in reasonable
detail by Consultant in a manner and format consistent with the Company's
expense reporting policies from time to time in effect.
TERMINATION; RIGHTS ON TERMINATION. This Agreement and Consultant's
engagement may be terminated in any one of the following ways:
DEATH. The death of Consultant shall immediately terminate the
Agreement with termination or severance fees due to Consultant's estate for
whatever time period is remaining under the Term or for six (6) months,
whichever amount is lesser.
GOOD CAUSE. The Company may terminate the Agreement after
written notice to Consultant for good cause, which shall be: (i)
Consultant's breach of this Agreement and the failure to cure after ten
(10) days' written notice is delivered to Consultant by the Company; (ii)
Consultant's negligence in the performance or nonperformance of any of
Consultant's duties and responsibilities hereunder and the failure to cure
after ten (10) days' written notice is delivered to Consultant by the
Company; (iii) Consultant's dishonesty, fraud or misconduct with respect to
the business or affairs of the Company that adversely affects the
operations or reputation of the Company; (iv) Consultant's conviction of a
felony crime; or (v) chronic alcohol abuse or illegal drug abuse by
Consultant. Consultant may terminate the Agreement after written notice to
the Company for good cause, which shall be the Company's breach of this
Agreement and the failure to cure after ten (10) days' written notice is
delivered to the Company by Consultant. In the event of a termination of
this Agreement by the Company for good cause, as enumerated above,
Consultant shall have no right to any termination or severance fees. In
the event of a termination of this Agreement by Consultant for good cause,
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<PAGE>
as enumerated above, Consultant shall be entitled to receive from the
Company, in a lump sum payment due on the effective date of termination,
the fees payable to Consultant as then in effect for whatever time period
is remaining under the Term of this Agreement.
RELATION OF PARTIES.
INDEPENDENT CONTRACTOR. It is expressly understood and agreed
that Consultant will remain at all times an independent contractor, and
that nothing contained herein shall be construed to be inconsistent with
such status. Consultant shall not take any actions or make any
representations to any person that would suggest that any relationship
exists between the Company and Consultant other than as independent
contractor. Consultant shall have no right or authority to assume or
create any obligations on behalf of the Company, express or implied, nor
shall Consultant represent to any person that he has such authority or that
he serves the Company in any capacity other than as an outside consultant.
The Company shall not retain, nor attempt to exercise, the right to control
or direct Consultant in his manner of operation or any other means, method
or course of operation, except as set forth in this Agreement.
TAXES. Consultant shall pay all federal, state and local income,
social security, unemployment and excise taxes required to be paid by
independent contractors.
NOTICES. Any notice, request, instruction, document or other
communication to be given hereunder by either party hereto to the other party
hereto shall be in writing and validly given if (i) delivered personally, (ii)
sent by telecopy with electronic confirmation of receipt, (iii) delivered by
overnight express, or (iv) sent by registered or certified mail, postage
prepaid, as follows:
If to the Company:
Waste Recovery, Inc.
309 South Pearl Expressway
Dallas, Texas 75201
Attention: Mr. David Greenstein
Telecopy No. (214) 745-8945
If to Consultant:
Mr. Thomas L. Earnshaw
3650 Asbury
Dallas, Texas 75205
or at such other address for a party as shall be specified by like notice. Any
notice that is delivered personally, or sent by telecopy or overnight express in
the manner provided herein shall be deemed to have been duly given to the party
to whom it is directed upon actual receipt by such party. Any notice that is
addressed and mailed in the manner herein provided shall be conclusively
presumed to have been
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<PAGE>
given to the party to whom it is addressed at the close of business,
local time of the recipient, on the fourth day after the day it is so
placed in the mail.
ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties hereto with respect to the matters covered hereby, and supersedes
all prior agreements and understandings, both written and oral, between the
parties hereto with respect to the subject matter hereof, and no party shall be
liable or bound to the other in any manner by any representations or warranties
not set forth herein.
SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns. Neither this Agreement nor any
rights, interests or obligations hereunder may be assigned by either party
hereto without the prior written consent of the other party hereto, and any
purported assignment in violation of this Section 7 shall be null and void.
COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and such counterparts together
shall constitute one and the same instrument.
HEADINGS. The headings of the sections of this Agreement are inserted
for convenience of reference only and shall not be deemed to constitute part of
this Agreement or to affect the construction hereof.
MODIFICATION AND WAIVER. Any of the terms or conditions of this
Agreement may be waived in writing at any time by the party that is entitled to
the benefits thereof, and this Agreement may be modified or amended by a written
instrument executed by the Company and Consultant. No supplement, modification,
or amendment of this Agreement shall be binding unless executed in writing by
both parties. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO ITS
CHOICE OF LAW PRINCIPLES).
INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws, such provision
shall be fully severable, this Agreement shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part of
this Agreement, and the remaining provisions of this Agreement shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement.
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to
be executed as of the date first above written.
THE COMPANY:
WASTE RECOVERY, INC.
By: _______________________________
Printed Name: _____________________
Title: ____________________________
CONSULTANT:
____________________________________
Thomas L. Earnshaw
<PAGE>
EXHIBIT 10.43
TERM PROMISSORY NOTE
(FLOATING RATE)
(this "Note")
NAME(S) AND ADDRESS(ES) OF BORROWER(S)
WASTE RECOVERY, INC.
309 S. PEARL EXPRESSWAY
DALLAS, TX 75201
U.S. $350,000.00 March 17, 1998 (THE "DATE")
ACCOUNT NUMBER/NOTE NUMBER TRANSACTION CODE PREPARED BY OFFICER
4008-0080275719-009003 N Michelle Redmon 127400
FOR VALUE RECEIVED, the "Borrower", (jointly and severally if more than
one), promises to pay to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
("BANK") on or before June 17, 1998, ("STATED MATURITY DATE") at its office at
712 MAIN, HOUSTON, TEXAS 77252-2558, or at such other location as Bank may
designate, in immediately available funds,
THREE HUNDRED FIFTY THOUSAND AND NO/100, UNITED STATES DOLLARS (U.S.
$350,000.00) or so much thereof as may be advanced. Borrower will also pay
interest on the unpaid principal balance outstanding from time to time at a rate
per annum equal to the lesser of (i) the sum of the Prime Rate (as hereinafter
defined) from time to time in effect plus TWO percent (2.000%), (the "STATED
RATE") or (ii) the maximum nonusurious rate of interest from time to time
permitted by applicable law, (the "HIGHEST LAWFUL RATE"). If the Stated Rate at
any time exceeds the Highest Lawful Rate, the actual rate of interest to accrue
on the unpaid principal amount of this Note will be limited to the Highest
Lawful Rate, but any subsequent reductions in the Stated Rate due to reductions
in the Prime Rate will not reduce the interest rate payable upon the unpaid
principal amount of this Note below the Highest Lawful Rate until the total
amount of interest accrued on this Note equals the amount of interest which
would have accrued if the Stated Rate had at all times been in effect.
"PRIME RATE" means the rate determined from time to time by Bank as its
prime rate. The Prime Rate will change automatically from time to time without
notice to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND
MAY NOT BE BANK'S LOWEST RATE.
If Texas law determines the Highest Lawful Rate, Bank has elected the
"indicated" (weekly) ceiling as defined in the Texas Credit Code or any
successor statute.
PAYMENT SCHEDULE
This Note shall be due and payable as follows (check applicable boxes):
/ / (SINGLE PAYMENT) All ACCRUED AND UNPAID INTEREST and PRINCIPAL is finally
due and payable on the Stated Maturity Date.
/x/ ACCRUED AND UNPAID INTEREST is due
/x/ monthly, beginning on APRIL 17, 1998 and continuing on the 17TH day
of each month thereafter.
/ / quarterly, beginning on ____________ and continuing on the _______ day
of each third month thereafter.
/ / semiannually, beginning on ______________ and continuing on the ______
day of each sixth month thereafter.
/ / annually, beginning on ______________ and continuing on the _______
day of each calendar year thereafter.
/ / PRINCIPAL PAYMENTS in the amount of $___________________ each are due
/ / monthly, beginning on ______________ and continuing on the _________
day of each month thereafter.
/ / quarterly, beginning on _____________ and continuing on the ________
day of each third month thereafter.
/ / semiannually, beginning on _____________ and continuing on the
________ day of each sixth month thereafter.
/ / annually, beginning on ____________ and continuing on the ________
day of each calendar year thereafter.
/ / FIXED PAYMENTS (PRINCIPAL AND INTEREST INCLUDED) in the amount of
$________________ each are due
/ / monthly, beginning on ____________ and continuing on the ________ day
of each month thereafter.
/ / quarterly, beginning on ____________ and continuing on the________ day
of each third month thereafter.
/ / semiannually, beginning on ______________ and continuing on the
________ day of each sixth month thereafter.
/ / annually, beginning on __________ and continuing on the ________ day
of each calendar year thereafter.
<PAGE>
All remaining unpaid principal and accrued and unpaid interest is finally due
and payable at the Stated Maturity Date.
All payments may, at Bank's sole option, be applied to accrued interest, to
principal, or to both.
Interest will be computed on the basis of the actual number of days
elapsed and a year comprised of: / / 365 (or 366 as the case may be) days /x/
360 days, unless such calculation would result in a usurious interest rate,
in which case such interest will be calculated on the basis of a 365 or 366
day year, as the case may be.
All past-due principal and, to the extent permitted by applicable law,
interest on this Note will, at Bank's option, bear interest at the Highest
Lawful Rate, or if applicable law does not provide for a maximum nonusurious
rate of interest, at a rate per annum equal to 18%.
In addition to all principal and accrued interest on this Note, Borrower
agrees to pay: (a) all reasonable costs and expenses incurred by Bank and all
owners and holders of this Note in collecting this Note through probate,
reorganization, bankruptcy or any other proceeding; and (b) reasonable
attorney's fees if and when this Note is placed in the hands of an attorney
for collection.
Borrower and Bank intend to conform strictly to applicable usury laws.
Therefore, the total amount of interest (as defined under applicable law)
contracted for, charged or collected under this Note will never exceed the
Highest Lawful Rate. If the Bank contracts for, charges or receives any
excess interest, it will be deemed a mistake. Bank will automatically reform
the contract or charge to conform to applicable law, and if excess interest
has been received, Bank will either refund the excess to Borrower or credit
the excess on the unpaid principal amount of this Note. All amounts
constituting interest will be spread throughout the full term of this Note in
determining whether interest exceeds lawful amounts.
The unpaid principal balance of this Note at any time will be the total
amounts advanced by Bank, less the amount of all payments or prepayments of
principal. Absent manifest error, the records of Bank will be conclusive as
to amounts owed.
"LOAN DOCUMENT" means this Note and any document or instrument
evidencing, securing, guaranteeing or given in connection with this Note.
"OBLIGATIONS" means all principal, interest and other amounts which are or
become owing under this Note or any other Loan Document. "OBLIGOR" means
Borrower and any guarantor, surety, co-signer, general partner or other
person who may now or hereafter be obligated to pay all or any part of the
Obligations. Where appropriate the neuter gender includes the feminine and
the masculine and the singular number includes the plural number.
Each of the following events or conditions is an "EVENT OF DEFAULT:" (1)
any Obligor fails to pay any of the Obligations when due; (2) any warranty,
representation or statement now or hereafter contained in or made in
connection with any Loan Document was false or misleading in any respect when
made; (3) any Obligor violates any covenant, condition or agreement contained
in any Loan Document; (4) any Obligor fails or refuses to submit financial
information requested by Bank or to permit Bank to inspect its books and
records on request; (5) any event of default occurs under any other Loan
Document; (6) any individual Obligor dies, or any Obligor that is an entity
dissolves; (7) a receiver, conservator or similar official is appointed for
any Obligor or any Obligor's assets; (8) any petition is filed by or against
any Obligor under any bankruptcy, insolvency or similar law; (9) any Obligor
makes an assignment for the benefit of creditors; (10) a final judgment is
entered against any Obligor and remains unsatisfied for 30 days after entry,
or any property of any Obligor is attached, garnished or otherwise made
subject to legal process; (11) any material adverse change occurs in the
business, assets, affairs or financial condition of any Obligor; and (12)
Borrower is in default of any other obligation to or any other agreement with
Bank.
If any Event of Default occurs, then Bank may do any or all of the
following: (i) declare the Obligations to be immediately due and payable,
without notice of acceleration or of intention to accelerate, presentment and
demand or protest or notice of any kind, all of which are hereby expressly
waived; (ii) set off, in any order, against the Obligations any debt owing by
Bank to any Obligor, including, but not limited to, any deposit account,
which right is hereby granted by each Obligor to Bank; and (iii) exercise any
and all other rights under any Loan Document, at law, in equity or otherwise.
No waiver of any default is a waiver of any other default. Bank's delay
in exercising any right or power under any Loan Document is not a waiver of
such right or power.
Each and all Obligors severally waive notice, demand, presentment for
payment, notice of nonpayment, notice of intent to accelerate, notice of
acceleration, protest, notice of protest, and the filing of suit and
diligence in collecting this Note and all other demands and notices, and
consent and agree that their liabilities and obligations shall not be
released or discharged by any or all of the following, whether with or
without notice to them or any of them, and whether before or after the stated
maturity hereof; (i) extensions of the time of payment; (ii) renewals; (iii)
acceptances of partial payments; (iv) releases or substitutions of any
collateral or any Obligor; and (v) failure, if any, to perfect or maintain
perfection of any security interest in any collateral. Each Obligor agrees
that acceptance of any partial payment shall not constitute a waiver and that
waiver of any default shall not constitute waiver of any prior or subsequent
default.
Borrower warrants and represents to Bank that: all advances evidenced by
this Note are and will be for business, commercial, investment or other
similar purpose and not primarily for personal, family, or household use as
such terms are used in Chapter One of the Texas Credit Code. Borrower
represents and warrants that each of the following statements is true unless
the box preceding that statement is checked and initialed by Borrower and
Bank: (i) / / ____________________ ____________________ No advances will be
used primarily for agricultural purposes as such term is used in the Texas
Credit Code. (ii) / / ____________________ ____________________ No
advances will be used for the purpose of purchasing or carrying any margin
stock as that term is defined in Regulation U of the Board
<PAGE>
of Governors of the Federal Reserve System (the "Board"). Notwithstanding
anything contained herein or in any other Loan Document, if this is a
consumer credit obligation (as defined or described in 12 C.F.R. 227,
Regulation AA, promulgated by the Board), the security for this Credit
obligation shall not extend to any non-possessory security interest in
household goods (as defined in Regulation AA) other than a purchase money
security interest, and no waiver of any notice contained herein or therein
shall be construed under any circumstances to extend to any waiver of notice
prohibited by Regulation AA.
This Note is governed by Texas law. If any provision of this Note is
illegal or unenforceable, that illegality or unenforceability will not affect
the remaining provisions of this Note. BORROWER(S) AND BANK AGREE THAT THIS
NOTE WILL BE PERFORMED IN THE COUNTY IN WHICH BANK'S PRINCIPAL OFFICE IS LOCATED
IN TEXAS, AND THAT SUCH COUNTY IS PROPER VENUE FOR ANY ACTION OR PROCEEDING
BROUGHT BY BORROWER(S) OR BANK, WHETHER IN CONTRACT, TORT, OR OTHERWISE. ANY
ACTION OR PROCEEDING AGAINST BORROWER(S) MAY BE BROUGHT IN ANY STATE OR FEDERAL
COURT IN SUCH COUNTY TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW. TO THE
EXTENT PERMITTED BY APPLICABLE LAW BORROWER(S) HEREBY IRREVOCABLY (A) SUBMITS TO
THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B) WAIVES ANY OBJECTION IT
MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT OR THAT ANY SUCH COURT IS AN INCONVENIENT FORUM.
BORROWER(S) AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR
REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS SPECIFIED ABOVE. BANK
MAY SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW AND MAY BRING ANY ACTION
OR PROCEEDING AGAINST BORROWER(S) OR WITH RESPECT TO ANY OF ITS PROPERTY IN
COURTS IN OTHER PROPER JURISDICTIONS OR VENUES.
For purposes of this Note, any assignee or subsequent holder of this
Note will be considered the "Bank," and each successor to Borrower will he
considered the "Borrower."
Each Borrower and cosigner represents and warrants to Bank that if it is
not a natural person, it is duly organized and validly existing and in good
standing under the laws of the state of its incorporation or organization;
has full power to own its properties and to carry on its business as now
Conducted; is duly qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it makes such
qualification desirable; and has not commenced any dissolution proceedings.
Each Borrower and cosigner that is subject to the Texas Revised Partnership
Act ("TRPA") agrees that Bank is not required to comply with Section 3.05(d)
of the TRPA and agrees that Bank may proceed directly against one or more
partners or their property without first seeking satisfaction from
partnership property. Each Borrower and cosigner represents and warrants
that if it conducts business under an assumed business or professional name
it has properly filed Assumed Name Certificate(s) in the office(s) required
by Chapter 36 of the Texas Business and Commerce Code. Each of the persons
signing below as Borrower or cosigner represents and warrants that he/she has
full requisite power and authority to execute and deliver this Note to Bank
on behalf of the party for whom he/she signs and to bind such party to the
terms and conditions of this Note and that this Note is enforceable against
such party.
NO COURSE OF DEALING BETWEEN BORROWER AND BANK, NO COURSE OF PERFORMANCE,
NO TRADE PRACTICES, AND NO EXTRINSIC EVIDENCE OF ANY NATURE MAY BE USED TO
CONTRADICT OR MODIFY ANY TERM OF THIS NOTE OR ANY OTHER LOAN DOCUMENT.
THIS NOTE AND THE OTHER WRITTEN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, Borrower has executed this Note effective as of MARCH 17,
1998,
Signature(s) of BORROWER(S):
WASTE RECOVERY, INC.
BY: /s/DAVID G. GREENSTEIN TITLE: PRESIDENT
(Bank's signature is provided as its acknowledgment of the above as the final
written agreement between the parties and as its agreement with each Borrower
subject to TRPA that Bank is not required to comply with section 3.05(d) of
TRPA.)
BANK: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
By: ____________________________________________________
Title: _________________________________________________
<PAGE>
SECURITY AGREEMENT - ACCOUNTS AND GENERAL INTANGIBLES
(this "Agreement")
WASTE RECOVERY, INC.
309 S. PEARL EXPRESSWAY, DALLAS, DALLAS COUNTY, TX 75201 ("Debtor"),
and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
712 MAIN, HOUSTON, TEXAS 77252-2558, ("Secured Party"), agree as follows:
SECTION 1. DEFINITIONS. (a) "Collateral" means all Accounts and all
Proceeds, together with all books and records of Debtor, whether in paper or
electronic form, relating to the Collateral. "Accounts" means all accounts,
general intangibles, instruments, negotiable documents, chattel paper,
deposit accounts and intellectual property. If, but only if, this box / / is
checked by Secured Party, the Accounts are limited to those Accounts
described on the schedule or schedules attached to this Agreement. (b)
"Obligations" means all debts, obligations and liabilities of every kind and
character, whether joint or several, contingent or otherwise, of Debtor now
or hereafter existing in favor of Secured Party, including without limitation
all liabilities arising under or from any note, open account, overdraft,
letter of credit application, endorsement, surety agreement, guaranty,
interest rate swap or other derivative product, acceptance, foreign exchange
contract or depository service contract, whether payable to Secured Party or
to a third party and subsequently acquired by secured Party. Debtor and
Secured Patty specifically contemplate that Debtor may hereafter become
further indebted to Secured Party. (c) "Past Due Rate" means the highest
nonusurious rate of interest that Secured Party may contract for, charge or
receive under applicable law, or 18% if applicable law does not specify such
a rate. (d) "Proceeds" means the rights and interests of Debtor in goods,
the Sale and delivery of which give rise to any Account, including all
returned or repossessed goods, and all products and proceeds in cash or
otherwise, of all Collateral. (e) "Security Interest" means the Security
Interest created by this Agreement. (f) "UCC" means the Texas Uniform
Commercial Code, as amended from time to time. All terms defined in the UCC
are used in this Agreement as defined in the UCC unless otherwise defined in
this Agreement.
SECTION 2. CREATION OF SECURITY INTEREST. To secure the payment and
performance of the obligations, Debtor grants to Secured Party a security
interest in and assigns to Secured Party all Collateral which Debtor owns or
later acquires.
SECTION 3. DEBTOR'S REPRESENTATIONS. (a) Debtor is the sole lawful owner of
the collateral, free and clear of all encumbrances, and has the right and
power to transfer the Collateral to Secured Party. No financing statement
covering the Collateral other than in favor of Secured Party, is on file in
any public office. (b) This Agreement constitutes the legal valid and
binding obligation of Debtor, enforceable in accordance with its terms. (c)
The Collateral and the Debtor's use thereof comply with all applicable laws,
rules and regulations, and Debtor has obtained any consents necessary to
execute, deliver and perform its obligations under this Agreement. (d) The
address set forth above is Debtor's place of business, if Debtor has only one
place of business, Debtor's chief executive office, if Debtor has more than
one place of business, or Debtor's residence, if Debtor has no place of
business.
SECTION 4. DEBTOR'S AGREEMENTS. (a) Debtor will warrant and defend its
title to and Secured Party's interest in the Collateral against any adverse
claimant. Debtor will promptly take all reasonable and appropriate steps to
collect the Collateral. Debtor will not agree to a material modification of
the terms of any Account without the written consent of Secured Party. (b)
Notwithstanding the security interest in Proceeds granted herein, Debtor will
not sell, transfer, assign or otherwise dispose of any interest in the
Collateral, except as authorized in this Agreement or in writing by Secured
Party, and Debtor will keep the Collateral (including proceeds) free from
unpaid charges, including taxes and assessments, and from all encumbrances
other than those in favor of Secured Party. (c) Secured Party may require
that Debtor (i) deposit all payments on the Accounts in a special bank
account over which Secured Party alone has power of withdrawal, and (ii)
direct each account debtor to send remittances to an address designated by
Secured Party. Secured Party may hold the funds in the account as security,
or apply the funds to pay the Obligations. (d) Debtor will furnish Secured
Party all information Secured Party may request with respect to the
Collateral. Debtor will notify Secured Party promptly of any event that
could have a material adverse effect on the aggregate value of the Collateral
or on the Security Interest, or any change in Debtor's location name,
identity or organizational structure. (e) Debtor will keep accurate books
and records regarding the Collateral and will allow Secured Party to inspect
and make copies (including electronic copies) of its books and records during
regular business hours. Secured Party may make test verifications of the
Collateral.
SECTION 5. FURTHER ASSURANCES. Secured Party may file this Agreement or any
financing statements wherever Secured Party believes necessary to perfect the
Security Interest. A photographic or other reproduction of this Agreement or
any financing statement relating to this Agreement will be sufficient as a
financing statement. Debtor authorizes Secured Party and irrevocably
appoints Secured Party as Debtor's attorney-in-fact to file any financing
statement (including any amendments) relating to this Agreement
electronically, and Secured Party's transmission of Debtor's name as part of
any filing relating to this Agreement will constitute Debtor's signature on
the financing statement. Debtor will take such action as Secured Party may at
any time require to protect, assure or enforce the Security Interest. Debtor
will promptly deliver to Secured Party any part of the Collateral that
constitutes instruments, and will make a designation on all of its chattel
paper, instruments and negotiable documents to reflect the Security interest.
<PAGE>
SECTION 6. COSTS AND EXPENSES. Debtor will pay, or reimburse Secured Party
for, all costs and expenses of every character incurred from time to time in
connection with this Agreement (including all modifications and renewals) and
the Obligations, including costs and expenses incurred (a) for mortgage or
recording taxes, (b) to satisfy any obligation of Debtor under this Agreement
or to protect the Collateral, (c) in connection with the evaluation,
monitoring or administration of the Obligations of the Collateral (whether or
not an Event of Default has occurred), and (d) in connection with the
exercise of Secured Party's rights and remedies. Costs and expenses include
reasonable fees and expenses of outside counsel and other outside
professionals and charges imposed for the services of attorneys and other
professionals employed by Secured Party or its affiliates. Any amount owing
under this Section will be due and payable on demand and will bear interest
from the date of expenditure by Secured Party until paid at the Past Due
Rate. If any part of the Obligations is governed by Chapter 3, 4, 5 or 15 of
the Texas Credit Code, this Section is limited to the extent required by
these chapters.
SECTION 7. DEFAULT. Each of the following events or conditions is an "Event
of Default:" (a) Debtor fails to pay when due (or within any contractually
agreed grace period) any of the Obligations; (b) any event occurs that gives
Secured Party the immediate right to declare any of the obligations due and
payable in full prior to final maturity; (c) any warranty, representation or
statement contained in this Agreement or made in connection with this
Agreement or any of the obligations was false or misleading in any respect
when made; (d) Debtor violates any covenant, condition or agreement contained
in this Agreement or any other document relating to the obligations; (e) any
Collateral is lost, stolen, substantially damaged, destroyed, abandoned,
levied upon, seized or attached; or (f) Debtor conceals or removes any part
of the Collateral with intent to hinder, delay of defraud the Secured Party.
After an Event of Default occurs, Secured Party may, without notice to any
person, declare the Obligations to be immediately due and payable. Debtor
WAIVES demand, presentment and all notices, including without limitation
notice of dishonor and default, notice of intent to accelerate and notice of
acceleration.
SECTION 8. SECURED PARTY'S RIGHTS AND REMEDIES. After an Event of Default
occurs, Secured Party will have all rights and remedies of a secured party
after default under the UCC and other applicable law. Secured Party may,
without waving any default, do anything Debtor is required to do by this
Agreement and fails to do. Secured Party may require Debtor to assemble the
Collateral and make it available at a reasonably convenient place Secured
Party designates. Except for the safe custody of any Collateral in its
possession and accounting for moneys actually received by it, Secured Party
will have no duty as to any Collateral, including any duty to preserve rights
against prior parties. Debtor irrevocably appoints Secured Party Debtor's
attorney-in-fact to endorse any checks or other instruments included in the
Collateral, or to take any Other action to enforce collect or compromise the
Collateral. Secured Party is not required to take possession of any
Collateral prior to any sale, nor to have any Collateral present at any sale.
Secured Party may sell part of the Collateral without waiving its right to
proceed against the remaining Collateral. If any sale is not completed or is
defective in the opinion of Secured Party, Secured Party may make a
subsequent sale of the same Collateral. Any bill of sale or other instrument
evidencing any foreclosure sale will be prima facie evidence of factual
matters stated or recited therein. If a Sale of Collateral is conducted in
conformity with customary practices of banks disposing of similar property,
the sale will be deemed commercially reasonable, but Secured Party will have
no obligation to advertise or to sell Collateral on credit. Written notice
to Debtor mailed 10 days prior to public or private sale is reasonable
notice. By exercising its rights, Secured Party will not become liable for,
and Debtor will not be released from, any of Debtor's duties or obligations
under the contracts and agreement included in the Collateral. Secured Party
may purchase Collateral at any public sale, and may credit the purchase price
against the Obligations. All remedies in this Agreement are cumulative and
any and all other legal, equitable or contractual remedies available to
Secured Party. Debtor WAIVES any rights to a marshaling of assets or sale
in inverse order of alienation, and any rights to notice except as provided
in the UCC.
SECTION 9. ADDITIONAL AGREEMENTS. (a) This Agreement will remain in effect
until Secured Party executes and delivers to Debtor a written termination
statement. (b) No modification or waiver of the terms of this Agreement will
be effective unless in writing and signed by Secured Party. Secured Party
may waive any default without waiving any other prior or subsequent default.
Secured Party's failure to exercise or delay in exercising any right under
this Agreement will not operate as a waiver of such right. No single or
partial exercise of any right under this Agreement will preclude any other or
further exercise of that right or any other right. (c) Any notice required
or permitted under this Agreement will be given in writing by United States
mail, by hand delivery or delivery service, or by telegraphic, telex,
telecopy or cable communication, sent to the intended addressee at the
address shown in this Agreement, or to such different address as the
addressee designates by 10 days notice. Notice by United States mail will be
effective when mailed. All other notices will be effective when received.
Written confirmation of receipt will be conclusive. (d) If any provision of
this Agreement is unenforceable or invalid, that provision will not affect
the enforceability or validity of any other provision. If the application of
any provision of this Agreement to any other person or circumstance is
illegal or unenforceable, that application will not affect the legality or
enforceability of the provision as to any other person or circumstance. (e)
If more than one person executes this Agreement as Debtor, their obligations
under this Agreement are joint and several, and the term Collateral includes
any property described in Section 1 that is owned by any Debtor individually
or jointly with any other Debtor and the term "Obligations" includes both
several and joint obligations of each Debtor. (f) The section headings in
this Agreement are for convenience only and shall not be considered in
construing this Agreement. (g) This Agreement may be executed in any number
of counterparts and by different parties in separate counterparts, each of
which will constitute one and the same agreement. (h) This Agreement
benefits the Secured Party and its successors and assigns and is binding on
Debtor and its heirs, legal representatives, successors and assigns. (i) If
any of the Obligations are subject to Chapter 3, 4, 5 or 15 of the Texas
Credit Code or Regulation AA of the Board of Governors of the Federal Reserve
System (collectively, the "Consumer Restrictions"), (1) nothing in this
Agreement waives any rights which cannot be legally waived under the Consumer
Restrictions, and (2) the Collateral does not include any assignment of wages
or any non-possessory, non-purchase money security interest in household
goods. (j) This Agreement is governed by the laws of the State of
<PAGE>
Texas. (k) Secured Party is executing this Agreement for the purpose of
acknowledging the following notice, and Secured Party's to execute this
Agreement will not invalidate this Agreement.
EXECUTED EFFECTIVE AS OF March 17, 1998.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
DEBTOR(S):
WASTE RECOVERY, INC.
BY: /s/ DAVID G. GREENSTEIN TITLE: PRESIDENT
SECURED PARTY: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
BY: __________________________________________________________________________
TITLE: ______________________________________________________________________
<PAGE>
SECURITY AGREEMENT - ACCOUNTS AND GENERAL INTANGIBLES
(this "Agreement" )
U.S. TIRE RECYCLING
309 S. PEARL EXPRESSWAY, DALLAS, DALLAS COUNTY, TX 75201 ("Debtor"),
and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
712 MAIN, HOUSTON, TEXAS 77252-2558 , ("Secured Party"), agree as follows:
SECTION 1. DEFINITIONS. (a) "Collateral" means all Accounts and all
Proceeds, together with all books and records of Debtor, whether in paper or
electronic form, relating to the Collateral. "Accounts" means all accounts,
general intangibles, instruments, negotiable documents, chattel paper,
deposit accounts and intellectual property. If, but only if, this box / / is
checked by Secured Party, the Accounts are limited to those Accounts
described on the schedule or schedules attached to this Agreement. (b)
"Obligations" means all debts, obligations and liabilities of every kind and
character, whether joint or several, contingent or otherwise, of Debtor now
or hereafter existing in favor of Secured Party, including without limitation
all liabilities arising under or from any note, open account, overdraft,
letter of credit application, endorsement, surety agreement, guaranty,
interest rate swap or other derivative product, acceptance, foreign exchange
contract or depository service contract, whether payable to Secured Party or
to a third party and subsequently acquired by Secured Party. Debtor and
Secured Party specifically contemplate that Debtor may hereafter become
further indebted to Secured Party. (c) "Past Due Rate" means the highest
nonusurious rate of interest that Secured Party may contract for, charge or
receive under applicable law, or 18% if applicable law does not specify such
a rate. (d) "Proceeds" means the rights and interests of Debtor in goods,
the sale and delivery of which give rise to any Account, including all
returned or repossessed goods, and all products and proceeds, in cash or
otherwise, of all Collateral. (e) "Security Interest' means the security
interests created by this Agreement. (f) "UCC" means the Texas Uniform
Commercial Code, as amended from time to time. All terms defined in the UCC
are used in this Agreement as defined in the UCC unless otherwise defined in
this Agreement.
SECTION 2. CREATION OF SECURITY INTEREST. To secure the payment and
performance of the Obligations, Debtor grants to Secured Party a security
interest in and assigns to Secured Party all Collateral which Debtor owns or
later acquires.
SECTION 3. DEBTOR'S REPRESENTATIONS. (a) Debtor is the sole lawful owner of
the Collateral, free and clear of all encumbrances, and has the right and
power to transfer the Collateral to Secured Party. No financing statement
covering the Collateral, other than in favor of Secured Party, is on file in
any public office. (b) This Agreement constitutes the legal, valid and
binding obligation of Debtor, enforceable in accordance with its terms. (c)
The Collateral and the Debtor's use thereof comply with all applicable laws,
rules and regulations, and Debtor has obtained any consents necessary to
execute, deliver and perform its obligations under this Agreement. (d) The
address set forth above is Debtor's place of business, if Debtor has only one
place of business, Debtor's chief executive office, if Debtor has more than
one place of business, or Debtor's residence, if Debtor has no place of
business.
SECTION 4. DEBTOR'S AGREEMENTS. (a) Debtor will warrant and defend its
title to and Secured Party's interest in the Collateral against any adverse
claimant. Debtor will promptly take all reasonable and appropriate steps to
collect the Collateral. Debtor will not agree to a material modification of
the terms of any Account without the written consent of Secured Party. (b)
Notwithstanding the security interest in Proceeds granted herein, Debtor will
not sell, transfer, assign or otherwise dispose of any interest in the
Collateral, except as authorized in this Agreement or in writing by Secured
Party, and Debtor will keep the Collateral (including Proceeds) free from
unpaid charges, including taxes and assessments, and from all encumbrances
other than those in favor of Secured Party. (c) Secured Party may require
that Debtor (i) deposit all payments on the Accounts in a special bank
account over which Secured Party alone has power of withdrawal, and (ii)
direct each account debtor to send remittances to an address designated by
Secured Party. Secured Party may hold the funds in the account as security,
or apply the funds to pay the Obligations. (d) Debtor will furnish Secured
Party all information Secured Party may request with respect to the
Collateral. Debtor will notify Secured Party promptly of any event that
could have a material adverse effect on the aggregate value of the Collateral
or on the Security Interest, or any change in Debtor's location, name,
identity or organizational structure. (e) Debtor will keep accurate books
and records regarding the Collateral and will allow Secured Party to inspect
and make copies (including electronic copies) of its books and records during
regular business hours. Secured Party may make test verifications of the
Collateral.
SECTION 5. FURTHER ASSURANCES. Secured Party may file this Agreement or any
financing statements wherever Secured Party believes necessary to perfect the
Security Interest. A photographic or other reproduction of this Agreement or
any financing statement relating to this Agreement will be sufficient as a
financing statement. Debtor authorizes Secured Party and irrevocably
appoints Secured Party as Debtor's attorney-in-fact to file any financing
statement (including any amendments) relating to this Agreement
electronically, and Secured Party's transmission of Debtor's name as part of
any filing relating to this Agreement will constitute Debtor's signature on
the financing Statement. Debtor will take such action as Secured Party may at
any time require to protect, assure or enforce the Security Interest. Debtor
will promptly deliver to Secured Party any part of the Collateral that
constitutes instruments, and will make a designation on all of its chattel
paper, instruments and negotiable documents to reflect the Security Interest.
<PAGE>
SECTION 6. COSTS AND EXPENSES. Debtor will pay, or reimburse Secured Party
for, all costs and expenses of every character incurred from time to time in
Connection with this Agreement (including all modifications and renewals) and
the Obligations, including costs and expenses incurred (a) for mortgage or
recording taxes, (b) to satisfy any obligation of Debtor under this Agreement
or to protect the Collateral, (c) in connection with the evaluation,
monitoring or administration of the Obligations or the Collateral (whether or
not an Event of default has occurred), and (d) in connection with the
exercise of Secured Party's rights and remedies. Costs and expenses include
reasonable fees and expenses of outside counsel and other outside
professionals and charges imposed for the services of attorneys and other
professionals employed by Secured Party or its affiliates. Any amount owing
under this Section will be due and payable on demand and will bear interest
from the date of expenditure by Secured Party until paid at the Past Due
Rate. If any part of the Obligations is governed by Chapter 3, 4, 5 or 15 of
the Texas Credit Code, this Section is limited to the extent required by
these chapters.
SECTION 7. DEFAULT. Each of the following events or conditions is an "Event
of Default:" (a) Debtor fails to pay when due (or within any contractually
agreed grace period) any of the Obligations; (b) any event occurs that gives
Secured Party the immediate right to declare any of the obligations due and
payable in full prior to final maturity; (c) any warranty, representation or
statement contained in this Agreement or made in connection with this
Agreement or any of the Obligations was false or misleading in any respect
when made; (d) Debtor violates any covenant, condition or agreement contained
in this Agreement or any other document relating to the Obligations; (e) any
Collateral is lost, stolen, substantially damaged, destroyed, abandoned,
levied upon, seized or attached; or (f) Debtor conceals or removes any part
of the Collateral with intent to hinder, delay or defraud the Secured Party.
After an Event of Default occurs, Secured Party may, without notice to any
person, declare the Obligations to be immediately due and payable. Debtor
WAIVES demand, presentment and all notices, including without limitation
notice of dishonor and default, notice of intent to accelerate and notice of
acceleration.
SECTION 8. SECURED PARTY'S RIGHTS AND REMEDIES. After an Event of Default
occurs, Secured Party will have all rights and remedies of a secured party
after default under the UCC and other applicable law. Secured Party may,
without waving any default, do anything Debtor is required to do by this
Agreement and fails to do. Secured Party may require Debtor to assemble the
Collateral and make it available at a reasonably convenient place Secured
Party designates. Except for the safe custody of any Collateral in its
possession and accounting for moneys actually received by it, Secured Party
will have no duty as to any Collateral, including any duty to preserve rights
against prior parties. Debtor irrevocably appoints Secured Party Debtor's
attorney-in-fact to endorse any checks or other instruments included in the
Collateral, or to take any other action to enforce, collect or compromise the
Collateral. Secured Party is not required to take possession of any
Collateral prior to any sale, nor to have any Collateral present at any sale.
Secured Party may sell part of the Collateral without waiving its right to
proceed against the remaining Collateral. If any sale is not completed or is
defective in the opinion of Secured Party, Secured Party may make a
subsequent sale of the same Collateral. Any bill of sale or other instrument
evidencing any foreclosure sale will be prima facie evidence of factual
matters stated or recited therein. If a sale of Collateral is conducted in
conformity with customary practices of banks disposing of similar property,
the sale will be deemed commercially reasonable, but Secured Party will have
no obligation to advertise or to sell Collateral on credit. Written notice
to Debtor mailed 10 days prior to public or private sale is reasonable
notice. By exercising its rights, Secured Party will not become liable for,
and Debtor will not be released from, any of Debtor's duties or obligations
under the contracts and agreement included in the Collateral. Secured Party
may purchase Collateral at any public sale, and may credit the purchase price
against the Obligations. All remedies in this Agreement are cumulative of any
and all other legal, equitable or contractual remedies available to Secured
Party. Debtor WAIVES any rights to a marshaling of assets or sale in inverse
order of alienation, and any rights to notice except as provided in the UCC.
SECTION 9. ADDITIONAL AGREEMENTS. (a) This Agreement will remain in effect
until Secured Party executes and delivers to Debtor a written termination
statement. (b) No modification or waiver of the terms of this Agreement will
be effective unless in writing and signed by Secured Party. Secured Party
may waive any default without waiving any other prior or subsequent default.
Secured Party's failure to exercise or delay in exercising any right under
this Agreement will not operate as a waiver of such right. No single or
partial exercise of any right under this Agreement will preclude any other or
further exercise of that right or any other right. (c) Any notice required
or permitted under this Agreement will be given in writing by United States
mail, by hand delivery or delivery service, or by telegraphic, telex,
telecopy or cable communication, sent to the intended addressee at the
address shown in this Agreement, or to such different address as the
addressee designates by 10 days notice. Notice by United States mail will be
effective when mailed. All other notices will be effective when received.
Written confirmation of receipt will be conclusive. (d) If any provision of
this Agreement is unenforceable or invalid, that provision will not affect
the enforceability or validity of any other provision. If the application of
any provision of this Agreement to any other person or circumstance is
illegal or unenforceable, that application will not affect the legality or
enforceability of the provision as to any other person or circumstance. (e)
If more than one person executes this Agreement as Debtor, their obligations
under this Agreement are joint and several, and the term Collateral includes
any property described in Section 1 that is owned by any Debtor individually
or jointly with any other Debtor and the term "Obligations" includes both
several and joint obligations of each Debtor. (f) The section headings in
this Agreement are for convenience only and shall not be considered in
construing this Agreement. (g) This Agreement may be executed in any number
of counterparts and by different parties in separate counterparts, each of
which will constitute one and the same agreement. (h) This Agreement
benefits the Secured Party and its successors and assigns and is binding on
Debtor and its heirs, legal representatives, successors and assigns. (i) If
any of the Obligations are subject to Chapter 3, 4, 5 or 15 of the Texas
Credit Code or Regulation AA of the Board of Governors of the Federal Reserve
System (collectively, the "Consumer Restrictions"), (1) nothing in this
Agreement waives any rights which cannot be legally waived under the Consumer
Restrictions, and (2) the Collateral does not include any assignment of wages
or any non-possessory, non-purchase money security interest in household
goods. (j) This Agreement is governed by the laws of the State of Texas. (k)
Secured Party is executing this Agreement for the purpose of acknowledging
the following notice, and Secured Party's to execute this Agreement will not
invalidate this Agreement.
<PAGE>
EXECUTED EFFECTIVE AS OF March 17, 1998,
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
DEBTOR(S):
U.S. TIRE RECYCLING
BY: /s/ DAVID G. GREENSTEIN TITLE: PRESIDENT
SECURED PARTY: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
BY: ________________________________________________________________________
TITLE: _____________________________________________________________________
<PAGE>
ANNEX A
TO
SECURITY AGREEMENT - ACCOUNTS AND GENERAL INTANGIBLES
(the "Agreement")
between U.S. TIRE RECYCLING ("Debtor") and
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION ("Secured Party")
dated March 17, 1998
THIS ANNEX A is attached to and made a part of the Agreement.
1. "Obligations" for purposes of the Agreement means all debts, obligations
and liabilities of every kind and character of Debtor or of WASTE RECOVERY,
INC.
(whether one or more, "Borrower"), whether joint or several, contingent or
otherwise, now or hereafter existing in favor of Secured Party, including
without limitation all liabilities arising under or from any note, open
account, overdraft, letter of credit application, endorsement, surety
agreement, guaranty, interest rate swap or other derivative product,
acceptance, foreign exchange contract or depository service contract,
whether payable to Secured Party or to a third party and subsequently
acquired by Secured Party. If more than one person is listed as Borrower,
the term "Obligations" includes both several and joint obligations of each
Borrower. Debtor and Secured Party specifically contemplate that Borrower
may hereafter become further indebted to Secured Party.
2. "Debtor" means Debtor, Borrower or both, as appropriate, in Section 7 of
the Agreement.
3. Written notice mailed to Borrower 10 days prior to public or private sale
of the Collateral is reasonable notice.
EXECUTED EFFECTIVE AS OF March 17, 1998.
DEBTOR(S):
U.S. TIRE RECYCLING
BY: /s/ DAVID G. GREENSTEIN TITLE: PRESIDENT
SECURED PARTY: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
BY: ________________________________________________________________________
TITLE: _____________________________________________________________________
<PAGE>
CERTIFIED RESOLUTION AUTHORIZING SECURITY AGREEMENT
I, the undersigned duly elected officer certify that:
I,______________________ am a ________________________________ of
__________________________________________ a ________________________ / /
corporation / / association / / limited liability company / /
other______________ ("the company"); at a meeting of the Board of
Directors/Managers of the company, a quorum being present, the following
resolutions were duly adopted and recorded in the minute books of the
company, kept by me, and are in accordance with the articles or certificate
of incorporation/association/organization and bylaws and regulations of the
company and are now in full force and effect:
RESOLVED, that the company execute and deliver to_____________________
__________________________________________________________________________
__________________________________________________________________________
("Bank"), security agreement(s), assignment(s), pledge(s) and other security
devices and instruments and related financing statements, all in substantially
the forms submitted to this board, covering the property of the company
described therein, all with such additions and changes as an Authorized Person
approves, such approval to be conclusively binding on this company (the
"Security Documents") in favor of Bank in order to secure the payment and
performance of any and all indebtedness and obligations of the company and
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
(jointly and severally, "Borrowers") to the Bank at any time existing, all as
set forth in the Security Documents;
FURTHER RESOLVED, that this company has determined that the execution and
delivery of the Security Documents and the granting of security interests and
other interests in this company's property to secure the debts of Borrowers to
Bank may reasonably be expected to benefit directly or indirectly this company,
and that this company has or will receive reasonably equivalent value therefor;
FURTHER RESOLVED, that each of the Authorized Persons whose name appears
below is authorized and directed, for and on behalf of and as the act and deed
of this company, to execute and deliver to Bank the Security Documents and to
execute such other documents as may be required by Bank to secure the
obligations of Borrowers to Bank and to take such other actions in the
consummation of the transactions herein contemplated upon such terms deemed
advisable by any Authorized Person as evidenced by the execution by such person
of the Security Documents;
FURTHER RESOLVED, that this company hereby specifically ratifies and
confirms as the acts and deeds of this company the actions of any Authorized
Person taken prior to the date of the adoption of the above resolutions when
such actions are consistent with the authorization described in the above
resolutions including but not limited to the execution of documents relating to
any indebtedness owing by Borrowers to Bank, any arrangement whereby Bank
extends credit to this company, and any security provided by this company for
extensions of credit by Bank to or on behalf of the Borrowers.
FURTHER RESOLVED, that the foregoing authority shall be and continue in
full force and effect until revoked or modified by written notice actually
delivered to the President or a Vice President of Bank; provided that such
revocation shall not be effective with respect to the exercise of such authority
prior to the receipt by Bank of notice.
NAME OF
SIGNATURE OFFICE AUTHORIZED PERSON OFFICE
_____________________ ________________________ ________________
_____________________ ________________________ ________________
_____________________ ________________________ ________________
_____________________ ________________________ ________________
_____________________ ________________________ ________________
I FURTHER CERTIFY that attached hereto are true and complete copies of
those Security Documents referred to in the preceding resolutions that were
submitted to the board;
I FURTHER CERTIFY that each of the above named Authorized Persons has been
duly elected and presently holds the office indicated opposite his/her name and
that the signature appearing opposite his/her name is the true and correct
signature of that person authorized pursuant to the above resolutions to perform
the actions described above and that the seal affixed hereto, if any, is the
authentic seal of the company;
<PAGE>
IN WITNESS WHEREOF, I have hereunto subscribed my hand and affixed the seal
of this company by order of the Board of Directors this ___________ day of
________________________ , ________.
Strike the inapplicable; ____________________________________
(SEAL) /s/ DAVID G. GREENSTEIN
____________________________________
Printed Name: David G. Greenstein
______________________
This company has no seal. Title: President
______________________
STATE OF TEXAS
COUNTY OF ________________________
This instruments was acknowledged before me on the ________ day of
________________________,________________________ by
______________________________________.
_________________________________
Notary Public in and for the State
of TEXAS
(SEAL)
My commission expires:___________
<PAGE>
BORROWING RESOLUTION FOR
CORPORATIONS/PROFESSIONAL ASSOCIATIONS AND SECRETARY'S CERTIFICATE
I, the undersigned, Secretary of Waste Recovery, Inc. ("this Company"), a
Texas corporation/professional association, do hereby certify
- ------------------------
State of Incorporation
that at a meeting of the Board of Directors of this Company duly and
regularly called on the ____________ day of ____________,__________, a quorum
being present, or pursuant to a waiver of notice and unanimous consent to
action of all directors dated the 17th day of March, 1998, the following
resolutions were unanimously adopted and recorded in the minute books of this
Company kept by me, and are in accord with and pursuant to the charter and
by-laws of this Company and are now in full force and effect, to wit:
RESOLVED, that (SPECIFY NUMBER OF SIGNATURES REQUIRED ON EACH
INSTRUMENT) one of the following officers or employees of this Company,
herein called "Authorized Persons," whether one or more:
PLEASE TYPE OR PRINT PLAINLY BELOW THE NAMES OF AUTHORIZED PERSONS.
NAME TITLE SIGNATURE
David G. Greenstein President /s/ DAVID G. GREENSTEIN
____________________ _______________________ _________________________
____________________ _______________________ _________________________
____________________ _______________________ _________________________
____________________ _______________________ _________________________
____________________ _______________________ _________________________
are hereby authorized for and on behalf of and as the act and deed of this
Company to borrow money or to obtain credit from
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
712 MAIN, HOUSTON, TEXAS 77252-2558
("Bank") in such amounts, for such times, in such forms (including, but not
limited to, notes, facilities, acceptances, letters of credit and overdrafts)
and upon such terms as may be deemed by such Authorized Persons to be advisable;
to renew and extend from time to time any such loan or credit arrangement; to
execute and deliver to Bank, in such form as may be required by Bank, notes,
loan agreements, drafts, letters of credit applications and other instruments
and documents relating to any indebtedness owing by this Company to Bank or
relating to any other arrangement whereby Bank extends credit to this Company,
whether fixed or contingent; to mortgage, hypothecate, encumber, pledge, assign
or transfer to Bank, or otherwise subject to any lien or security interest in
favor of Bank, as security for any such indebtedness, any property of this
Company, real or personal, tangible or intangible; to sell to Bank with or
without recourse, any of this Company's notes, bills receivable, acceptances or
other paper, whether or not negotiable; and to take all such other actions as
such Authorized Persons may deem to be necessary or desirable, or as Bank may
require, to consummate any transaction contemplated in these resolutions.
FURTHER RESOLVED, that Bank be and it hereby is authorized to credit this
Company on Bank's books with the proceeds as directed by such Authorized
persons, whether to the order of any of said persons in his individual capacity
or not, and whether such proceeds are deposited to the individual credit of any
such person or not.
FURTHER RESOLVED, that the foregoing authority shall be and continue in
full force and effect until revoked or modified by written notice actually
delivered to the President or a Vice President of Bank; provided that such
revocation shall not be effective with respect to any exercise of any said
authority prior to receipt by Bank of such notice.
I FURTHER CERTIFY that each title indicated and each signature appearing
above next to a designated Authorized Person is the title and signature of that
designated Authorized Person.
I FURTHER CERTIFY, that Company
/x/ does not conduct business under an assumed business or professional
name(s).
/ / does conduct business under an assumed business or professional name(s)
and it has properly filed an Assumed Name Certificate(s) in the office(s)
required by Chapter 36 of the Texas Business and Commerce Code for the following
name(s):
<PAGE>
ASSUMED BUSINESS/PROFESSIONAL NAMES USED:
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
I FURTHER CERTIFY that this Company is duly organized, validly existing
and in good standing under the laws governing its creation and existence;
that all requisite licenses, permits and franchises for the operation of
Company's business are in full force and effect; and that all taxes,
assessments and governmental charges due upon Company's income, profits, or
property have been paid except for those that Company is contesting in good
faith and for which it has established adequate reserves.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal* of this Company by order of the Board of Directors this 17th day of
March, 1998.
(SEAL)* /s/ DONALD R. PHILLIPS
________________________
(If Company has no seal, type "none.") Secretary
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (nos. 33-47817 and 33-47818) of Waste Recovery, Inc.
of our report dated March 16, 1998 appearing on page F-1 of this Form 10-K.
GRANT THORNTON LLP
Dallas, Texas
March 16, 1998
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (nos. 33-47817 and 33-47818) of Waste Recovery, Inc.
of our report dated March 31, 1997 appearing on page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Dallas, Texas
March 16, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (nos. 33-47817 and 33-47818) of Waste Recovery, Inc.
of our report dated January 24, 1997 appearing on page F-3 of this Form 10-K.
COHEN & ROSEN, CPA, P.C.
New York, New York
March 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,175,867
<ALLOWANCES> (128,602)
<INVENTORY> 186,563
<CURRENT-ASSETS> 6,395,130
<PP&E> 26,451,740
<DEPRECIATION> (10,429,868)
<TOTAL-ASSETS> 24,995,408
<CURRENT-LIABILITIES> 15,946,215
<BONDS> 7,567,795
0
203,580
<COMMON> 407,800
<OTHER-SE> 5,529,876
<TOTAL-LIABILITY-AND-EQUITY> 24,995,408
<SALES> 29,308,744
<TOTAL-REVENUES> 30,079,698
<CGS> (22,449,857)
<TOTAL-COSTS> (30,947,702)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (96,000)
<INTEREST-EXPENSE> (940,136)
<INCOME-PRETAX> (1,808,140)
<INCOME-TAX> (517,204)
<INCOME-CONTINUING> (2,325,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,325,344)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
