<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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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 [ ] No [X ]
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 November 9, 1999: 17,494,321.
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
November 9, 1999) was $1,049,659. 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.
<PAGE>
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.
2
<PAGE>
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.
At year's end, the Company had TDF producing facilities operating in
Portland, Oregon; Houston, Texas; Atlanta, Georgia; Philadelphia,
Pennsylvania; Marseilles, Illinois (near Chicago); and Dupo, Illinois (near
St. Louis).
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). In the same month the Company purchased U.S. Tire
Recycling Partners, L.P., based in Concord, N.C. This facility operated a
scrap tire monofill and primarily marketed processed material for civil
engineering purposes. In October of 1998, the Concord facility was sold back
to its original equity holders (See note 3 of the financial statements).
The Company has made investments in facilities and developed expertise in the
areas of tire collection and disposal, which allows it to serve as a disposal
service for scrap tire sources ranging from current scrap tire generators,
such as tire dealers, to large, sometimes long-abandoned, scrap tire piles.
Scrap tire pick-up service must be regular and on a sufficiently predictable
time schedule to minimize the storage requirements of the scrap tire
generators and to provide continuity of supply to TDF users.
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 with TDF to help customers to obtain permits to burn TDF and to
equip their facilities most efficiently using TDF as a fuel supplement.
3
<PAGE>
Waste Recovery 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 traditional fuels in various regions of
the country. In the Pacific Northwest, hydroelectric plants provide electric
power at rates which obviate the need for fossil fuel burning co-generation
power systems. Consequently, pulp and paper mills typical of this region
require fuel essentially for the production of heat and steam for use in
their manufacturing process. In the recent past, due in part to the
increasing restriction on the harvesting of timber in the Northwest, this
industry has shifted its operations to the Southeastern region of the United
States. Consequently, demand for TDF in the Northwest region of the country
has declined in recent years.
This movement of the forest products industry has led to increased demand for
TDF in the South, where 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 generally
exceeded the price of TDF as calculated on a BTU basis. Due to the location
of its Baytown, Texas and Atlanta, Georgia facilities, the Company is well
positioned to serve this market.
TDF produced at the Company's two Illinois facilities is sold primarily to
coal burning electric utilities. 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. 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 the Consolidated Financial Statements of the Company
and related Notes included in Item 8).
OPERATIONS
The Company's scrap tire processing plants charged tip fees for the
collection of more than 21.9 million scrap tires in 1998. 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. While the Company is not dependent on any single supplier for
scrap tires, it recently concluded an agreement with Wal-Mart under the terms
of which it will collect and recycle tires from approximately 600 Wal-Mart
stores located throughout the United States. This program is being rolled out
in a six step process which the company anticipates will be completed by the
end of the year 2000.
4
<PAGE>
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 originally constructed in 1995, and rebuilt in 1998 after their
destruction by fire.
The Company's production capacity has increased to 36.5 million PTE's as of
December 31, 1998, from 25 million as of December 31, 1995. This increase
resulted from the establishment of the two new facilities in Illinois and the
acquisition of the Philadelphia facility. Although TDF sales represent a
small portion of the Company's revenues, they provide the primary outlet for
the Company's processed material. TDF sales accounted for 17%, 14% and 10% of
total company revenues for 1998, 1997, and 1996, respectively, and wire sales
were 3%, 3% and 2% for 1998, 1997, and 1996, respectively, whereas tipping
fees, hauling and other services accounted for 80%, 84%, and 88% of total
Company revenues for 1998, 1997 and 1996, respectively. These percentages
were reduced in 1998 as a result of production stoppage at both Illinois plants
after their respective destruction by fire. (See note 19 of the financial
statements.)
Approximate Annual Shredding Capacities at 12/31/98:
<TABLE>
<CAPTION>
Approximate Utilization
Percentage in 1998
------------------
<S> <C> <C>
Portland TDF Plant 5.5 Million PTE's 34%
Houston TDF Plant 7.0 Million PTE's 61%
Atlanta TDF Plant 5.0 Million PTE's 60%
Philadelphia TDF Plant 4.0 Million PTE's 64%
Dupo TDF Plant 7.5 Million PTE's 45%
Marseilles TDF Plant 7.5 Million PTE's 13%
PTE's are Passenger Tire Equivalents
</TABLE>
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.
5
<PAGE>
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 pulp and paper mills need less supplemental fuel than in the winter
and spring months when their primary fuel, waste wood, is wet.
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, 2000
will reduce 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 reduce seasonal fluctuations of TDF
sales.
SCRAP-TIRE MARKET
The Rubber Manufacturing Association (RMA) estimates that approximately 350
million passenger tire equivalents (PTE's) were scrapped in 1998.
If all tires scrapped in a year were converted to TDF utilizing the Company's
proprietary system, the potential output would be approximately 3 million
tons 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 immediate future. This calculation does not take into account the
additional "raw material" represented by abandoned tire piles which are a
further source of supply.
Demand for TDF appears to be growing, especially in the utility industry and
in the pulp and paper industry. 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
that 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.
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 public 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.
6
<PAGE>
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 of which
funded the clean-up of abandoned tire piles, as well as the disposal of
current scrap tire generation, and were the source of the $.85 per PTE paid
to licensed and registered scrap tire processors. The Company was one of the
first processors registered in 1992, and has been the only large volume
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.
During that time, the Company's ability to increase tire flow into its
facility was impaired by this legislation, which 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 approximate 80 million tires at December 31, 1998. 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, for scrap tires
collected. The Texas scrap tire program was abolished on December 31, 1997,
thus ending the state supported subsidy for the processing 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.
The Company's primary competition for the acquisition of scrap tire casings
comes from numerous individual collectors. The Company recognizes that its
operations and expansion are and will be subject to competition from these
companies, some of who have 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 believes that its
processing costs and reliability are better than those achievable by
competitors using commercially available tire processing equipment.
7
<PAGE>
PATENTS AND PROPRIETARY PROTECTION
The Company owns the United States patents set forth in the following table:
<TABLE>
<CAPTION>
Patent No. Title/Description Issue Date
---------- ----------------- ----------
<S> <C> <C>
4,374,573 Apparatus for Shredding Rubber Tires and Other Waste 02/22/83
Materials
4,519,550 Material Guide and Clearer for Commuting Apparatus 05/28/85
4,560,112 Scrap Shredding Apparatus Having Clearing Rings and Method 12/24/85
for Sharpening Same
4,714,201 Tire Processing Apparatus and Method 12/22/87
4,750,437 Method for Disposal of Waste Materials by Incineration 06/14/88
4,804,031 Apparatus for Removing Tires From Wheels 02/14/89
4,806,056 Modular Fuel Metering Apparatus and Method 02/21/89
</TABLE>
The Company owns the Canadian patents (and pending applications) set forth in
the following table:
<TABLE>
<CAPTION>
Patent No. Title/Description Issue Date
---------- ----------------- ----------
<S> <C> <C>
1,220,461 Scrap Shredding Apparatus Having Clearing Rings and Method 04/14/87
for Sharpening Same
1,279,051 Tire Processing Apparatus and Method 01/15/91
</TABLE>
The Company's service mark "Making Waste a Resource" was federally registered
with the U.S. Patent and Trademark Office on July 5, 1983. The patents set
forth in the foregoing tables afford some protection in the areas in which
the Company intends to concentrate. Management believes, however, that its
know-how and regular improvements to equipment and procedures are equally
important in the waste-to-energy business.
In 1988, pursuant to its industrial development bond financing for
construction of the Atlanta plant, the Company licensed its technology,
including such patents, to the indenture trustee. In January 1999, the
Company retired the Atlanta plant bond financing. In 1993, the Company
licensed such technology to the Illinois Partnership in connection with the
construction of the two facilities in Illinois.
EMPLOYEES
As of December 31, 1998, the Company had 254 full-time employees, of whom 213
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.
8
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
All executives hereunder are elected annually in accordance with the by-laws
and serve until their successors are elected and qualified. There are no
family relationships among any of the Company's executive officers.
<TABLE>
<CAPTION>
Name Age Position Held With Registrant
---- --- -----------------------------
<S> <C> <C>
THOMAS L. EARNSHAW 44 President and Vice Chairman of the Board of Directors
ROBERT L. THELEN 59 Executive Vice President - Engineering
</TABLE>
The positions and offices of the executive officers of the Registrant are as
follows:
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. In October 1998
Mr. Earnshaw was re-elected President of the Company following the
resignation of David G. Greenstein from his positions as President and Chief
Executive Officer and Director on the Company's Board of Directors.
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. Subsequent to
December 31, 1998, he has resigned as Director.
9
<PAGE>
ITEM 2. PROPERTIES
The Company currently occupies the following properties:
<TABLE>
<CAPTION>
Sq. Footage of Owned or Lease Current Monthly
Location and Description Building Expiration Rental
------------------------ -------- ---------- ------
<S> <C> <C> <C>
PORTLAND, OREGON:
Engineering 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 13,800 Owned -
with metal building
ATLANTA, GEORGIA:
Production facility on 3 acres partially paved 4,800 12/31/99 $2,785
with metal building
PHILADELPHIA, PENNSYLVANIA
4 acres of land holding processing facility 1,500 2/28/05 $3,200
DALLAS, TEXAS:
Office space 4,500 2/28/00 $2,765
DUPO, ILLINOIS:
Production facility on 10 acres partially paved 12,000 11/30/14 $1,000
with metal building
MARSEILLES, ILLINOIS:
Production facility on 6.8 acres partially paved 9,600 Owned -
with two metal buildings
</TABLE>
The administrative offices of the Houston, Atlanta, Philadelphia, Dupo, and
Marseilles 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.
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.
The Company is involved in routine litigation arising in the ordinary course
of business. The volume of this litigation has risen in the recent past as a
result of the Company's lateness in paying certain vendors. 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.
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 1998.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's no par value Common Stock is presently being traded on the
over-the-counter market.
Trading commenced on July 17, 1986 and the Registrant's common shares were
quoted on the NASDAQ system until February 20, 1990 at which time the Common
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:
<TABLE>
<CAPTION>
High Low
---- ---
Quarter Ended Bid Ask Bid Ask
------------- --- --- --- ---
<S> <C> <C> <C> <C>
03/31/97 2.25 2.25 1.25 1.44
06/30/97 1.56 1.56 1.16 1.28
09/30/97 1.22 1.44 .91 .88
12/31/97 .94 .94 .50 .59
03/31/98 .56 .63 .22 .25
06/30/98 .40 .45 .22 .22
09/30/97 .25 .26 .09 .10
12/31/98 .19 .24 .07 .07
</TABLE>
(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, 1999 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.
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 were
convertible at $2.50 per
11
<PAGE>
share and had an interest rate of 5% per annum in 1996 and 1997, 6% in 1998
and 7% in 1999 and 2000. Interest was to be 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 were subject to reduction if certain cash flow tests were not met by
the Company's U.S. Tire subsidiary. On October 13, 1998, the Company sold
U.S. Tire back to the original equity holders in exchange for consideration
of cash, Waste Recovery, Inc. common stock, and forgiveness of the
convertible subordinated notes and other debt.
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. Michael Dodge, then 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.
12
<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,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA
TDF sales $ 3,862,776 $ 4,007,545 $ 1,589,405 $ 1,080,172 $ 1,104,691
Wire sales 617,162 801,283 397,701 - -
Disposal and other revenues 17,847,780 24,499,916 14,687,426 13,059,751 11,320,714
------------ ------------ ------------ ------------ ------------
Total revenues 22,327,718 29,308,744 16,674,532 14,139,923 12,425,405
Operating expenses and
Depreciation 19,869,779 25,270,437 13,103,362 12,098,884 9,753,225
General and administrative
Expenses 6,215,134 5,677,265 3,171,418 2,568,094 2,099,579
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (3,757,195) (1,638,958) 399,752 (527,055) 572,601
Interest expense, net 878,162 823,443 375,093 457,202 378,761
Other (income) expense 1,112,086 (654,261) (935,795) (380,066) 10,567
Equity in loss of Partnership - - 668,504 322,630 20,260
------------ ------------ ------------ ------------ ------------
Income (loss) before income
taxes and extraordinary items (5,747,443) (1,808,140) 291,950 (926,821) 163,013
Income tax benefit (expense) - (517,204) (8,850) - 447,543
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (5,747,443) $ (2,325,344) $ 283,100 $ (926,821) $ 610,556
============ ============ ============ ============ ============
Net income (loss) per share $ (.35)** $ (.14)** $ .01** $ (.12)** $ .07**
============ ============ ============ ============ ============
Net income (loss) per share-
assuming dilution $ (.35)** $ (.14)** $ .01** $ (.12)** $ .06**
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 17,070,015 17,334,892 11,549,750 9,132,359 7,005,716
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding-
assuming dilution 17,070,015 17,334,892 12,167,731 9,132,359 7,762,817
============ ============ ============ ============ ============
OTHER DATA
Earnings before interest, taxes,
depreciation & amortization
(EBITDA+) $ (2,473,758) $ 1,835,883 $1 ,861,493 $ 486,089 $ 1,236,758
============ ============ ============ ============ ============
EBITDA as a percentage of
Revenues (11%) 6% 11% 3% 10%
============ ============ ============ ============ ============
Tons of TDF sold during
the period ended (unaudited) 141,894 168,263 102,929 72,961 62,564
============ ============ ============ ============ ============
BALANCE SHEET DATA
Total assets $ 18,546,948 $ 24,995,408 $ 28,391,800 $ 10,732,399 $ 8,745,077
Total long-term debt $ 10,197,163 $ 10,528,587* $ 12,053,395 $ 4,409,249 $ 4,002,585*
Total shareholders' equity $ 273,813 $ 6,141,256 $ 8,329,123 $ 2,899,006 $ 1,258,819
</TABLE>
*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 the Consolidated
Financial Statements of the Company and the related Notes included in
Item 8). **Undeclared dividends on cumulative preferred stock of
$142,506, $142,506, $142,896, $142,506, and $142,506 for the years
ended December 31, 1998, 1997, 1996, 1995, and 1994, respectively, have
been
13
<PAGE>
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
The deterioration of the Company's operating results in 1997 and 1998 has had
a significant adverse effect on its financial condition. As a result of this
problem on February 1, 1998, the Company defaulted on certain of its debt
obligations, which defaults have since been cured. 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 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;
and Marseilles, Illinois. The two Illinois 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, at which time the Company
acquired its partner's interest in the partnership in exchange for common
shares of the Company (see Part II, Item 5, Purchase of Interest in
WR-Illinois). In separate events during 1998 both of these facilities were
substantially destroyed by fire. In 1995, the Company acquired the tire
division of Domino Salvage, Inc. which operates a tire collection and
shredding operation located in Conshohocken, Pennsylvania, for consideration
of cash and notes. Domino is operated as a wholly owned subsidiary of the
Company. 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 which was resold to its original owners in October of 1998.
Regional services are provided from the 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.
During the past three years, the effects of inflation on the Company's
operations have been negligible.
14
<PAGE>
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. 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.
On March 21, 1998 the Marseilles Plant was completely destroyed by a
catastrophic fire. Three months later on June 28, 1998 the Dupo facility was
substantially damaged by fire. Insurance coverage was sufficient in both
cases to rebuild the facilities, and the Dupo facility resumed operations in
January, 1999 and the Marseilles facility shortly thereafter. The Company
believes that the cause of the Marseilles fire was mechanical. With respect
to the fire at the Dupo facility, local fire authorities have ruled out all
accidental causes.
U.S. TIRE - CONCORD, NORTH CAROLINA
In December of 1996, the Company acquired U.S. Tire, a scrap tire processor
located in Concord, North Carolina, which operated a scrap tire collection
network throughout the state and surrounding Eastern corridor as well as its
own scrap tire monofill. The Concord facility landfilled 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
was used as a substitute for gravel in septic tanks for single-family homes.
The Concord facility also produced some tire-derived fuel and other
tire-derived products which were used for civil engineering purposes. In
October of 1998 the facility was sold to its original shareholders.
PORTLAND, OREGON FACILITY
In 1998, the Portland, Oregon 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. As a consequence of
continuous operating losses in December 1998, the Company entered into a
contract to sell this facility for cash which subsequently occurred in
February 1999.
15
<PAGE>
BAYTOWN FACILITY
The Baytown facility experienced a good year both in terms of disposal fees
and end product sales. 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 in 1997 takes effect, that operations will
continue to improve.
ATLANTA FACILITY
The Atlanta facility continues to experience a strong market demand for TDF;
however, the mechanical condition of the facility and an inexperienced labor
force inhibited the facility from optimizing 1998 market conditions. During
the last quarter of 1998 significant improvement to the plant was achieved
and aggressive steps addressing the quality of management at the plant was
initiated.
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 three years because the TDF markets
which the Company foresaw failed to materialize. In April of 1998, the
Company concluded an agreement to sell TDF to International Paper's facility
located in Lockhaven, Pennsylvania. In order to service this contract,
significant capital improvements have been made to the facility during the
year, including the addition of a wire system.
A recap of the Company's operating results before income taxes follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating income (loss) $(3,757,195) $(1,638,958) $ 399,752
Interest expense (net) (878,162) (823,443) (375,093)
Gains (losses) on sales of equipment and other income $(1,781,914) 489,343 311,576
Gain on involuntary conversion of assets 669,828 164,918 624,219
Equity in loss from Partnership operations - - (668,504)
----------- ----------- -----------
Income (loss) before income taxes $(5,747,443) $(1,808,140) $ 291,950
=========== =========== ===========
</TABLE>
16
<PAGE>
1998 VS. 1997 VS. 1996
The table below summarizes the activity of the Company as well as the basic
revenue categories for the last three years:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
TDF Tons Sold 141,894 168,263 102,929
Passenger Tire Equivalents Received (Tons) 219,077 318,659 162,926
TDF Sales $3,862,776 $4,007,545 $1,589,405
Wire Sales $617,162 $801,283 $397,701
Disposal and Hauling Fees $17,847,780 $24,499,916 $14,687,426
</TABLE>
The Company's total revenues of $22,327,718 for 1998 were 23.8% lower than
the $29,308,744 received in 1997and 33.9% higher than the $16,674,532
received in 1996. The increase in revenues for the year ending 1997 compared
to 1996 is primarily due to the December 1996 acquisitions of WR-Illinois and
U.S. Tire. The decrease in 1998 revenues compared to 1997 is primarily due to
a 27% decrease in disposal fees, hauling, and other revenue, as well as a
3.6% decrease in TDF sales and a 23% decrease in wire sales. The reductions
can be attributed to several factors. Portland's results for the year were
55% lower due to sluggish demand for TDF in the Northwest. Tire flow and TDF
sales at the Portland facility also decreased in 1998 compared to 1997 as a
result of the Company's decision to convert the plant from a TDF production
facility to a "black rubber" (a feedstock rubber) facility. The conversion of
the Portland plant was necessitated by the weak demand for TDF. Consequently,
on June 30, 1998 the Company discontinued the acceptance of automobile tires
at the Portland plant, which resulted in a substantially reduced tire flow
compared to 1997 and 1996. The Marseilles and Dupo facilities had a 52% and
32% respective decrease in total revenue from 1998 to 1997, which is
primarily attributable to the fires that occurred at both plants in 1998 and
disrupted operations. TDF and wire sales and production, as well as tire flow
and disposal fees were significantly lower for both Illinois plants in 1998
compared to 1997 and 1996 as a result of the damage sustained by the plants
in 1998. Atlanta posted higher TDF sales in 1998 compared to 1997 since sales
were off in 1997 while that facility was under reconstruction following the
November 1996 fire. The Philadelphia facility reflected significantly higher
TDF sales with the addition of a new TDF customer in 1998. The Baytown plant
had a 24% decrease in revenue in 1998 compared to 1997. Tire flow was down at
the Baytown plant in 1998 compared to 1997 primarily due to the elimination
of the state subsidy in Texas for the disposal of tires. Tipping fees in
Texas were also lower due to downward pressure resulting from the elimination
of the subsidy, thus resulting in a decrease in disposal revenue for Baytown
in 1998 compared to 1997 and 1996. On October 13, 1998, the Company sold its
U.S. Tire unit, which also contributed to the overall decrease in tire flow
and disposal and hauling fees.
17
<PAGE>
The table below compares cost elements as a percentage of revenues (Revs.)
over the last three years:
<TABLE>
<CAPTION>
% of % of % of
1998 Revs. 1997 Revs. 1996 Revs.
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Total Variable
Operating Expenses $17,474,256 78% $22,449,857 76% $11,908,912 71%
Depreciation and Amortization 2,395,523 11% 2,820,580 10% 1,194,450 7%
--------- --- --------- --- --------- --
Total Operating Expenses $19,869,779 89% $25,270,437 86% $13,103,362 78%
=========== === =========== === =========== ===
</TABLE>
Operating expenses for the year ended December 31, 1998 decreased by
$4,975,601 or 22% in 1998 compared to 1997. Operating expenses for the year
ended December 31, 1998 were $17,474,256 or 78% of total revenues compared to
$22,449,857 or 76% of total revenues for 1997. Operating expenses decreased
overall primarily due to decreases in operating expenses at the Illinois
plants of approximately 29% as a result of the fires at those plants.
Operating costs were also down by approximately 50% at the Portland plant as
a result of the scale-down of that plant in conjunction with the conversion
from TDF production to crumb rubber. Operating costs as a percent of revenues
increased primarily as a result of the decreased tire flow at the Portland
plant, lower tipping fees associated with the elimination of the Texas scrap
tire disposal subsidy, and the fires at the Illinois facilities. Operating
expenses for the year ended December 31, 1997 increased compared to 1996 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 year ending 1996 primarily as a result of
a decreased tire flow in Portland and increased operating costs at the
Baytown plant due to further expansion and tire collection efforts in Texas
in 1997.
Depreciation expense decreased 15% to $2,395,523 for the year ending December
31, 1998 compared to $2,820,580 for the year ending 1997. The decrease is
primarily due to the destruction of the Illinois facilities in 1998.
Depreciation expense for the year ending December 31, 1997 increased
significantly to $2,820,580 compared to $1,194,450 for 1996. The increase in
1997 was due primarily to the acquisition of U.S. Tire and WR-Illinois in
December 1996. Depreciation expense as a percent of revenues was 11% for the
year ending December 31, 1998 compared with 10% for 1997 and 7% for 1996. The
increase in 1998 compared to 1997 was primarily due to the decreased
production levels and tire flow at the Portland and Illinois plants.
<TABLE>
<CAPTION>
% of % of % of
1998 Revs. 1997 Revs. 1996 Revs.
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
General and
Administrative $6,558,171 29% $5,677,265 19% $3,171,418 19%
Interest Expense 982,348 4% 940,136 3% 447,176 3%
Interest Income (104,186) - (116,693) - (72,083) -
---------- --- ---------- --- ---------- ---
$7,436,333 33% $6,500,708 22% $3,546,511 22%
========== === ========== === ========== ===
</TABLE>
General and administrative expenses increased to $6,558,171 for 1998 compared
with $5,677,265 for 1997 and $3,171,418 for 1996. The increase is
attributable primarily to increased staffing at the plant and corporate
levels, higher salaries, increases in medical insurance costs, increases in
workers' compensation insurance, professional and consulting services, and
increased bad debt charges. As a percent of revenues, general and administrative
18
<PAGE>
costs increased to 29% for 1998 compared to 19% for 1997 and 1996.
Administrative costs have increased while revenues have decreased at the
Portland and Illinois plants. Interest expense increased to $982,348 for 1998
and $940,136 for 1997. The increased interest expense is related to new debt
with higher interest rates. Interest expense as a percent of revenues
increased to 4% for 1998 and 3% for 1997 and 1996 due to the decrease in
total revenues in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The deterioration in the Company's operating results in 1998 have had a
significant adverse effect on the Company's current liquidity. These
operating losses can be directly traced to the two casualty losses. While
these fire casualties were covered by both replacement insurance which was
used to fund reconstruction of the plants, and business interruption
insurance, these events, nevertheless, adversely effected liquidity in
several ways:
1. Significant management time and attention were focused on the
rebuilding programs rather than the operations of the Company.
2. Settlements with the Company's insurance carrier resulted in
termination of business interruption insurance before the plants
were put back into operation.
3. Significant losses were incurred after the plants were put back
into operation as they sought to reach breakeven capacity
utilization levels.
As a consequence of these poor operating results in 1998, 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.
The Company took several steps during 1998 in order to meet its liquidity needs:
a) The Company renegotiated the terms of the moral obligation
guarantee provided by the State of Illinois based upon which it
was able to raise an aggregate amount of $6,675,000 from new
industrial revenue bond issues. Proceeds from which, along with a
portion of associated restricted cash, were used to retire the
outstanding balance of the original industrial revenue issues.
b) The Company secured new term financing of $300,000 collaterialized
by mortgages of the Atlanta and Houston plants.
c) The Company secured a commitment in the maximum amount of
$2,500,000 under which it can borrow against its receivables.
d) The Company sold certain rolling stock and intangible assets which
were part of its Portland, Oregon facility to a third party.
e) The Domino debt was modified to change the beginning date for
principal amortization from March 21, 1998 to July 24, 1999. All
payments required under this financing have been made timely.
19
<PAGE>
As a result of the poor operating results in 1998 and the related adverse
effect on the Company's liquidity, the Company defaulted on certain of its
debt.
As of 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). 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. This
obligation was retired in its entirety as a result of the sale of U.S. Tire
in October 1998.
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 were secured by the
assets of WR-Illinois, restricted trust funds, and a corporate guaranty by
the Company. This indebtedness was repaid in full in July 1998, with the
proceeds of new industrial revenue bond debt as describe above.
As a result of the Company's failure to comply with various financial
covenants with its revolving line of credit agreement, the Company was in
default as of March 31, 1999 under the terms of this agreement; however, all
payments required under the line were made timely and the lender has not
given notice of intention to accelerate maturity.
As a result of violation of certain net worth and liquidity tests, the
Company was in default of its Fulton County industrial revenue bonds. This
default was cured in February 1999 as a result of repayment of the debt in
full.
While the funds obtained through these various transactions have allowed for
the continued operation of the Company, 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.
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-
20
<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, 1998.
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, 1998.
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, 1998.
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, 1998.
21
<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.
22
<PAGE>
<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.
23
<PAGE>
<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.
24
<PAGE>
<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.
25
<PAGE>
<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,
incorporated herein by reference to Exhibit
10.41 to the Company's Form 10-K filed April
15, 1998.
10.42 Consulting Agreement dated December 31, 1997
between Registrant and Thomas L. Earnshaw, as
consultant, incorporated herein by reference
to Exhibit 10.42 to the Company's Form 10-K
filed April 15, 1998.
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, incorporated
herein by reference to Exhibit 10.43 to the
Company's Form 10-K filed April 15, 1998.
10.44 Loan and Security Agreement for a credit
facility of $2,500,000 and a note payable for
$250,000 dated November 6, 1998, executed by
Registrant as maker payable to Fidelity
Funding, Inc.(1)
10.45 First Amended and Restated Loan and Security
Agreement dated February 1, 1999, executed by
Registrant as maker payable to Fidelity
Funding, Inc.(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.(1)
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)
- --------------------------------
(1) Filed herewith
</TABLE>
26
<PAGE>
(b) (i) On October 28, 1998, the Company filed a current
report on Form 8-K dated October 13, 1998, pursuant
to Item 2 thereof, reporting the disposition of its
subsidiary, New U.S. Tire Recycling Corp.
[End of Page]
27
<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 November 9, 1999,
by the following duly authorized person on behalf of the Company.
WASTE RECOVERY, INC.
(Registrant)
Date: November 9, 1999 By: /s/ THOMAS L. EARNSHAW
-----------------------------------
Thomas L. Earnshaw
President (Principal Executive Officer
and Principal Financial Officer)
/s/ WILLIAM R. HOWE
-----------------------------------
William R. Howe
Vice President (Principal Accounting
Officer)
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas L. Earnshaw and William R.
Howe, 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 November 9, 1999, by the following persons on
behalf of the Registrant in the capacities indicated.
/s/ THOMAS L. EARNSHAW /s/ CRANDALL S. CONNORS
---------------------- -----------------------
By: Thomas L. Earnshaw By: Crandall S. Connors, Director
President (Principal Executive Officer
and Principal Financial Officer) and /s/ JOHN C. KERR
Director -----------------------
By: John C. Kerr, Director
28
<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, 1998 and 1997 F-4
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 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.
29
<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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows from the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying 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 net losses of $6,090,480 and
$2,325,344 in 1998 and 1997, respectively, and had a working capital deficit of
$4,911,031 at December 31, 1998. The Company's continued existence is dependent
upon restructuring its debt or obtaining additional capital, or a combination
thereof. These matters raise 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 this uncertainty.
GRANT THORNTON LLP
Dallas, Texas
April 14, 1999
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, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 69,594 $ -
Accounts receivable, less allowance for doubtful accounts
of $135,435 and $128,602, respectively 1,889,440 3,047,265
Other receivables 6,066 82,180
Inventories 16,398 186,563
Other current assets 801,592 933,760
Restricted cash and cash equivalents 43,640 2,145,362
------------ ------------
Total current assets 2,826,730 6,395,130
------------ ------------
Property, plant and equipment 23,291,611 26,451,740
Less accumulated depreciation (11,113,546) (10,429,868)
------------ ------------
Net property, plant and equipment 12,178,065 16,021,872
------------ ------------
Restricted cash and cash equivalents 1,454,358 171,898
Bond and debt issuance costs, less accumulated amortization of
$197,580 and $181,275, respectively 576,250 130,754
Goodwill, less accumulated amortization of $98,720 and
$238,025, respectively 848,992 1,833,888
Other assets 319,516 441,866
------------ ------------
$ 18,203,911 $ 24,995,408
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current Liabilities:
Current installments and accelerated maturities of bonds payable $ 260,000 $ 7,567,795
Notes payable 1,270,800 713,861
Current installments of long-term debt 878,901 2,373,858
Current installments of capital lease obligations 24,938 83,328
Accounts payable 2,549,389 3,168,128
Other accrued liabilities 2,494,383 1,652,425
Deferred grant revenue 259,350 386,820
------------ ------------
Total current liabilities 7,737,761 15,946,215
------------ ------------
Bonds payable, excluding current installments 6,415,000 -
Long-term debt, excluding current installments 3,777,629 2,495,195
Notes payable 174,578 170,684
Obligations under capital leases, excluding current installments 8,167 22,708
Deferred grant revenue, noncurrent 160,000 219,350
------------ ------------
Total liabilities 18,273,135 18,854,152
------------ ------------
Stockholders' Equity (Deficit):
Cumulative preferred stock, $1.00 par value; 250,000 shares
authorized, 203,580 issued and outstanding in 1998 and 1997
(liquidating preference $16.01 per share, aggregating
$3,259,537, and $15.31 per share, aggregating $3,117,031, in
1998 and 1997, respectively) 203,580 203,580
Preferred stock, $1.00 par value, authorized and unissued,
9,750,000 shares - -
Common stock, no par value, authorized 30,000,000 shares,
17,494,323 shares issued and outstanding
in 1998 and 1997 407,800 407,800
Additional paid-in capital 18,604,904 18,604,904
Accumulated deficit (19,091,628) (13,001,148)
------------ ------------
124,656 6,215,136
Treasury stock, at cost (1,603,760 common shares in 1998
and 103,760 common shares in 1997) (193,880) (73,880)
------------ ------------
Total stockholders' equity (deficit) (69,224) 6,141,256
------------ ------------
Commitments and contingencies $ 18,203,911 $ 24,995,408
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Tire-derived fuel sales $ 3,862,776 $ 4,007,545 $ 1,589,405
Wire sales 617,162 801,283 397,701
Disposal fees, hauling and other revenue 17,847,780 24,499,916 14,687,426
----------- ----------- -----------
Total revenues 22,327,718 29,308,744 16,674,532
Operating expenses 17,474,256 22,449,857 11,908,912
General and administrative expenses 6,558,171 5,677,265 3,171,418
Depreciation and amortization 2,395,523 2,820,580 1,194,450
----------- ----------- -----------
Operating profit (loss) (4,100,232) (1,638,958) 399,752
----------- ----------- -----------
Other income (expense):
Interest income 104,186 116,693 72,083
Interest expense (982,348) (940,136) (447,176)
Other income 502,684 470,833 302,306
Gains (losses) on sales of assets (2,284,598) 18,510 9,270
Gain on involuntary conversion of assets 669,828 164,918 624,219
Equity in loss from partnership operations - - (668,504)
----------- ----------- -----------
(1,990,248) (169,182) (107,802)
Income (loss) before income taxes (6,090,480) (1,808,140) 291,950
Income tax expense - (517,204) (8,850)
----------- ----------- -----------
Net income (loss) (6,090,480) (2,325,344) 283,100
Undeclared cumulative preferred stock dividends 142,506 142,506 142,896
----------- ----------- -----------
Net income (loss) allocable to common
stockholders $(6,232,986) $(2,467,850) $ 140,204
=========== =========== ===========
Net income (loss) per share - basic and diluted $ (.37) $ (.14) $ .01
=========== =========== ===========
Weighted average number of common shares
outstanding - basic 17,070,015 17,334,892 11,549,750
=========== =========== ===========
- assuming dilution 17,070,015 17,334,892 12,167,731
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Cumulative Additional
Preferred Stock Common Stock Paid-in
Shares Par Value Shares Par Value Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 203,580 $ 203,580 10,830,170 $ 407,800 $ 13,320,410
Stock issued to Directors - - 10,806 - 12,000
Options exercised under incentive
stock option plan - - 178,000 - 71,477
Stock issued in connection with
U.S. Tire acquisition - - 3,486,221 - 2,086,000
Stock issued in connection with
WR-Illinois acquisition - - 1,100,000 - 869,000
Conversion of subordinated
Debentures - - 666,924 - 583,559
Warrants issued to subordinated
debenture holders upon conversion - - - - 10,000
Sale of common stock and warrants - - 1,050,000 - 1,514,981
Net income - - - - -
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 203,580 $ 203,580 17,322,121 $ 407,800 $ 18,467,427
Options exercised - - 122,000 - 64,030
Stock issued in connection with
U.S. Tire acquisition - - 50,202 - 73,447
Net loss - - - - -
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 203,580 $ 203,580 17,494,323 $ 407,800 $ 18,604,904
Common stock acquired in connection with
U.S. Tire sale (1,500,000 shares) - - - - -
Net loss - - - - -
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 203,580 $ 203,580 17,494,323 $ 407,800 $ 18,604,904
============ ============ ============ ============ ============
Total
Accumulated Treasury Stockholders'
Deficit Stock Equity (Deficit)
------------ ------------ -----------------
<S> <C> <C> <C>
Balances at December 31, 1995 $(10,958,904) $ (73,880) $ 2,899,006
Stock issued to Directors - - 12,000
Options exercised under incentive
stock option plan - - 71,477
Stock issued in connection with
U.S. Tire acquisition - - 2,086,000
Stock issued in connection with
WR-Illinois acquisition - - 869,000
Conversion of subordinated
Debentures - - 583,559
Warrants issued to subordinated
debenture holders upon conversion - - 10,000
Sale of common stock and warrants - - 1,514,981
Net income 283,100 - 283,100
------------ ------------ ------------
Balances at December 31, 1996 $(10,675,804) $ (73,880) $ 8,329,123
Options exercised - - 64,030
Stock issued in connection with
U.S. Tire acquisition - - 73,447
Net loss (2,325,344) - (2,325,344)
------------ ------------ ------------
Balances at December 31, 1997 $(13,001,148) $ (73,880) $ 6,141,256
Common stock acquired in connection with
U.S. Tire sale (1,500,000 shares) - (120,000) (120,000)
Net loss (6,090,480) - (6,090,480)
------------ ------------ ------------
Balances at December 31, 1998 $(19,091,628) $ (193,880) $ (69,224)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
WASTE RECOVERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,090,480) $(2,325,344) $ 283,100
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,269,866 2,685,343 1,132,827
Loss (gains) on sales of assets 2,284,598 (18,510) (9,270)
Gain on involuntary conversion of assets (669,828) - -
Amortization of goodwill 125,657 135,237 61,623
Deferred income taxes - 447,543 -
Write off of goodwill 343,037 - -
Interest imputed on discounted note payable 3,894 8,599 18,009
Amortization of bond premium (40,552) (78,024) -
Loss on early retirement of debt 22,561 - -
Equity in loss from partnership operations - - 668,504
Stock issued to Directors - - 12,000
Warrants issued to debenture holders - - 10,000
Changes in assets and liabilities:
Accounts receivable 516,262 (310,877) 95,492
Note and other receivables 41,328 979,778 (1,049,211)
Inventories 161,108 416,206 (24,083)
Other current assets 127,862 58,912 (415,306)
Other assets (276,614) (105,398) (11,333)
Accounts payable (196,569) 76,328 846,740
Payable to/receivable from affiliate - - (1,058,266)
Accrued liabilities 501,029 547,232 130,327
Deferred grant revenue (186,820) (386,820) (32,235)
Deferred revenue - (16,071) (115,409)
Other 16,826 (30,414) (19,604)
----------- ----------- -----------
Net cash provided (used) by operating activities (1,046,835) 2,083,720 523,905
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of property, plant and
Equipment 122,000 18,510 7,813
Purchases of property, plant and equipment (4,627,061) (2,296,453) (1,625,475)
Insurance proceeds received on involuntary conversion
of assets 4,763,159 - -
Proceeds received from sale of U.S. Tire 282,291 - -
Net cash received in connection with purchase WR-Ill - - 64,744
Net cash received in connection with purchase U.S. Tire - - 315,744
Cash placed in restricted accounts (4,053,378) (1,952,578) (52,084)
Cash payments out of restricted accounts 4,872,640 1,550,113 516,931
----------- ----------- -----------
Net cash provided (used) by investing activities 1,359,651 (2,680,408) (772,327)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of bonds payable, net of costs 6,191,563 - -
Payment of bonds payable (7,549,805) (805,000) -
Proceeds from issuance of notes payable 3,191,054 1,079,525 298,405
Payment of notes payable (2,151,792) (1,325,167) (150,382)
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 1,121,028 553,290 -
Repayment of long-term debt (972,339) (752,454) (222,669)
Repayment of capital lease obligations (72,931) (109,963) (97,525)
Proceeds from issuance of common stock and
warrants - 64,030 1,586,458
----------- ----------- -----------
Net cash provided (used) by financing activities (243,222) (1,295,739) 1,414,287
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 69,594 (1,892,427) 1,165,865
Cash and cash equivalents at beginning of year - 1,892,427 726,562
----------- ----------- -----------
Cash and cash equivalents at end of year $ 69,594 $ - $ 1,892,427
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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 Houston, Texas; Atlanta, Georgia;
Philadelphia, Pennsylvania; Dupo, Illinois; and Marseilles,
Illinois.
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 or WR-Illinois), 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.
In December 1996, the Company acquired U.S. Tire Recycling
Partners, L.P. (U.S. Tire), a scrap tire collector which
recycles tires and operates a scrap tire monofill. On
October 13, 1998 the Company sold U.S. Tire in exchange for
cash, Waste Recovery, Inc. common stock, and the forgiveness
of debt.
On June 30, 1998 the Company restructured its Portland
facility and discontinued the production of TDF. In July 1998
the Company began producing a crumb rubber feedstock at the
Portland plant for sale as a raw material to a manufacturer of
consumer rubber products. The crumb rubber feedstock product
is produced only from recycled truck tires. Accordingly, the
Company discontinued the acceptance of automobile tires and
consequently sold a portion of the Portland facility's hauling
equipment, which was used for hauling scrap automobile tires.
(b) PRINCIPLES OF CONSOLIDATION. For 1998 and 1997, 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 were purchased in December 1996, and the
financial statements of U.S. Tire, a wholly-owned subsidiary
of the Company, and its affiliates which were purchased in
December 1996. 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. U.S. Tire
was subsequently sold on October 13, 1998. The 1998
consolidated financial statements include the operations of
U.S. Tire through the date of sale.
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.
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 Salvage, Tire Division, Inc.
(Domino), which was being amortized on a straight-line basis
over 10 years, was written off in 1998 because it was
concluded that the unamortized balance of $343,037 could not
be recovered from further operations. Goodwill associated with
the purchase of WR-Illinois of $947,712 is being amortized
over 20 years. Until the sale of U.S. Tire, goodwill
associated with it of $575,341 was being amortized over 15
years.
(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, until the sale of U.S.
Tire, were being amortized using the straight-line method over
their estimated useful lives of five years.
(j) DEFERRED GRANT REVENUE. In November 1998 Domino received a
$200,000 grant from the Commonwealth of Pennsylvania with the
successful implementation of wire recycling equipment at the
Philadelphia plant. The grant will be amortized over the life
of the equipment beginning in January 1999. 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. 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. The Company computes basic
income (loss) per common share based on the weighted average
number of common shares outstanding. Income (loss) per
F-11
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common share - diluted 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.
Net income or loss is adjusted by the effect of undeclared
dividends on preferred stock of $142,506, $142,506, and
$142,896 for the years ended December 31, 1998, 1997 and 1996,
respectively. The effect was to increase the net loss per
common share by $0.01 and $0.01 in 1998 and 1997,
respectively, and reduce the net income per common share by
$0.01 in 1996.
(m) STATEMENTS OF CASH FLOWS. The Company paid $841,162, $915,150,
and $425,964 for interest in 1998, 1997 and 1996,
respectively. The Company paid $8,850 in income taxes in 1997.
No income taxes were paid during 1998 or 1996. See note 20 for
further discussion of noncash transactions.
(n) 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 net losses of $6,090,480 and $2,325,344 for 1998 and 1997,
respectively. At December 31, 1998, the Company had a working capital
deficit of $4,911,031. The Company's continued existence is dependent
on restructuring its debt or obtaining additional capital, or a
combination thereof.
The aforementioned matters raise 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.
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.
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 October 13, 1998, the
Company sold U.S. Tire.
F-12
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and U.S. Tire
have been included in the Company's consolidated statements of
operations from the date of acquisition.
The Company purchased RCC's interest in WR-Illinois in exchange for
1.1 million unregistered shares of Common Stock of the Company.
The Company purchased U.S. Tire in exchange for 3,242,997
unregistered shares of Common Stock, contingent convertible
subordinated notes in the amount of $1,850,000, and notes payable in
the amount of $605,035. The debt was 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. 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
November 1996 involuntary conversion of assets at the Atlanta plant.
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.
On October 13, 1998 the Company sold U.S. Tire in exchange for
$400,000 in cash, 1.5 million shares of Waste Recovery, Inc. stock
with a fair value of $120,000, and forgiveness of debt consisting of
$1,877,857 of contingent convertible subordinated notes plus accrued
interest and a note payable for $150,000. The Company incurred a loss
of $2,358,749 on the sale. U.S. Tire was sold to the former owners of
U.S. Tire, certain of whom were former directors and a former officer
of the Company.
NOTE 4. INVENTORIES
Inventory components at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Manufactured fuel inventory $16,398 $103,245
Manufactured wire inventory - 8,478
Work in process - 74,840
------- --------
$16,398 $186,563
======= ========
</TABLE>
NOTE 5. OTHER CURRENT ASSETS
Other current assets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Prepaid insurance $460,917 $386,684
Parts inventory 338,590 473,473
Other 2,085 73,603
-------- --------
$801,592 $933,760
======== ========
</TABLE>
F-13
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 828,772 $ 2,491,076
Buildings 871,715 1,472,270
Tire processing equipment 11,493,223 15,205,945
Hauling equipment 1,469,421 2,233,121
Metering units 836,606 836,606
Shop tools and yard equipment 228,501 245,063
Furniture and fixtures 417,727 416,596
Leasehold improvements 3,044,090 3,544,795
Construction in progress 4,101,556 6,268
----------- -----------
$23,291,611 $26,451,740
=========== ===========
</TABLE>
NOTE 7. 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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<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 (287,330) (201,729)
--------- ---------
$ 88,606 $ 174,207
========= =========
</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, 1998 is as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year ending December 31:
1999 $24,938 $264,707
2000 8,167 24,786
2001 - 12,000
2002 - 12,000
2003 - 12,000
Thereafter - 132,000
------- --------
33,105 $457,493
========
Less: amount representing interest (2,633)
-------
Present value of minimum lease payments $30,472
=======
</TABLE>
Total rent expense for operating leases for the years ended December
31, 1998, 1997 and 1996 was $1,561,458, $1,686,455, and $1,136,209,
respectively.
F-14
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. RESTRICTED CASH
Under terms of various debt agreements, the Company is required to
maintain cash balances which have certain withdrawal restrictions.
Amounts on deposit at December 31, 1998 and 1997 consisted of
certificates of deposit or money market accounts as follows:
<TABLE>
<CAPTION> Release
1998 1997 Date
----------- ---------- --------
<S> <C> <C> <C>
Atlanta plant financing debt reserve $ 390,000 $ 390,000 2007
Illinois plant financing debt reserve 711,159 1,366,755 2004
Secured operating permits 105,607 105,829 -
Repair and maintenance fund 64,923 113,911 2007
Illinois financial assurance trust 69,507 66,069 -
Security for Illinois debt - 274,696 -
Pennsylvania financial assurance 156,802 -
----------- -----------
1,497,998 2,317,260
Less current portion (43,640) (2,145,362)
----------- -----------
Noncurrent restricted cash $ 1,454,358 $ 171,898
=========== ===========
</TABLE>
Under terms of the 1998 Bond agreements, 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 on the 1998
Bonds.
NOTE 9. 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. 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.
Waste Recovery - Illinois completed the sale of $8.875 million in
solid waste disposal revenue bonds (the "1994 Bonds") as of September
27, 1994. The proceeds of the bonds were used to finance the
construction of the two facilities. On August 12, 1998, Waste
Recovery-Illinois completed the sale of $6,675,000 in solid waste
disposal refunding revenue bonds (the "1998 Bonds") for the purpose of
F-15
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
refunding the 1994 Bonds. The Company, 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, the
Company collected management fees of $36,000.
Until the December 1, 1996 acquisition date, under the equity method
of accounting, the Company recognized a loss of $668,504 from
partnership operations for the year ended December 31, 1996.
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.
NOTE 10. BONDS PAYABLE
In 1994 WR-Illinois entered into two loan agreements to provide
funding for the construction of the Dupo and Marseilles plants: 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 "1994 Bonds"). The 1994
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 were used to fund a
debt service reserve fund, to pay the costs of issuing the 1994
Bonds, to pay interest during construction, and to finance the cost
of the construction of buildings and related improvements and the
acquisition and installation of machinery, equipment and related
property, all constituting industrial, commercial and solid waste
disposal facilities located at Dupo and Marseilles, Illinois.
The 1994 Bonds bore interest at 6.5% per annum with interest payable
February 1 and August 1 each year, beginning February 1, 1995.
Principal payments were due annually on February 1 beginning in 1996
through 2004.
F-16
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 1994 Bonds were collateralized by the property, plant and
equipment of WR-Illinois, restricted cash, and were guaranteed by
Waste Recovery, Inc. Future minimum payments as of February 1 each
year were 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 1994 Bonds Payable $4,130,644 $3,437,151 $7,567,795
========== ========== ==========
</TABLE>
Bond premium represented the purchase adjustment recorded to reflect
the 1994 Bonds at market on December 1, 1996 when the Company
acquired WR-Illinois. Amortization of $40,552, $78,024 and $7,153 was
recorded for the years ended December 31, 1998, 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 1994
Bonds to current liabilities at December 31, 1997. The Company
entered into an agreement with the bondholders which provided for a
cure of this default through 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, which included a default on the aforementioned agreement with
respect to the supplementary sinking fund.
On August 12, 1998 for the purpose of refunding the outstanding 1994
Bonds, WR-Illinois entered into three new loan agreements with SWIDA
and UIRVDA, each dated July 1, 1998 (collectively referred to as the
"1998 Bonds"): 1) $2,895,000 with SWIDA (the SWIDA-A Bonds), 2)
$850,000 with SWIDA (the SWIDA-B Bonds), and 3) $2,930,000 with
UIRVDA (the UIRVDA Bonds). The 1998 Bonds were each issued and
secured under separate Indentures of Trust, each dated July 1, 1998.
The SWIDA-A Bonds and the UIRVDA Bonds bear interest at 5.9% per
annum, and the SWIDA-B Bonds bear interest at 6.9% per annum.
Interest is payable February 1 and August 1 each year commencing on
February 1, 1999 until the payment of principal in full.
F-17
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 1998 Bonds are collateralized by the property, plant and
equipment of WR-Illinois, restricted cash, and are guaranteed by
Waste Recovery, Inc. Future minimum payments as of February 1 each
year are as follows:
<TABLE>
<CAPTION>
YEAR SWIDA-A SWIDA-B UIRVDA TOTAL
---- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
1999 $ - $ 145,000 $ 115,000 $ 260,000
2000 - 160,000 120,000 280,000
2001 - 170,000 130,000 300,000
2002 - 180,000 135,000 315,000
2003 - 195,000 145,000 340,000
Thereafter 2,895,000 - 2,285,000 5,180,000
----------- --------- ----------- -----------
Total 1998 Bonds Payable $ 2,895,000 $ 850,000 $ 2,930,000 $ 6,675,000
=========== ========= =========== ===========
</TABLE>
NOTE 11. 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 $424,723 and $228,787 at December 31, 1998 and
1997, respectively.
In 1998 the Company borrowed money through a revolving line of credit
agreement. The line of credit is secured by accounts receivable of
the Company, and has a credit limit of 80% of eligible accounts
receivable, as defined. The note bears interest at prime + 3%, with a
term of three years expiring on November 6, 2001, at which time the
agreement is automatically renewed annually. The balance of the note
was $619,275 at December 31, 1998. At March 31, 1999, the Company was
not in compliance with certain financial covenants contained in the
credit agreement. Accordingly, the balance outstanding has been
classified as a current liability in the balance sheet at December
31, 1998. However, all payments required under the line have been
timely made, and the lender has not given notice of intention to
accelerate the maturity.
In 1998 the Company borrowed $156,802 for the purpose of obtaining a
letter of credit to provide financial assurance required by the
Pennsylvania Department of Environmental Protection. The note is
interest bearing at 11.25% per annum with interest due monthly and
principal due at maturity. The note, which matured on December 31,
1998, was extended to July 24, 1999. The note is secured by all of
the assets of the Company's Philadelphia facility, Domino Salvage,
Tire Division, Inc.
In 1998 the Company borrowed $85,000 from certain members of the
Board of Directors of the Company. The notes are unsecured and bear
interest at 10% per annum with principal and interest due at maturity
on December 31, 1998. The notes are convertible into common stock of
the Company at a rate of $.50 per share. At December 31, 1998,
$70,000 remained outstanding and unpaid.
F-18
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1997, the Company borrowed money to meet current working capital
requirements. The note is interest bearing at 10%, unsecured and
payable on demand. The balance of this note was $300,000 at December
31, 1997. In 1998 an additional $300,000 was borrowed. On October 13,
1998 the note was converted to long-term debt at prime + 1% with
interest payable quarterly beginning January 2, 1999, and principal
due quarterly beginning January 13, 2000 until maturity on October
13, 2000.
In connection with the acquisition of U.S. Tire in December 1996, the
Company issued promissory notes payable to the sellers in the
aggregate amount of $605,035. The notes were non-interest bearing and
payable in two installments. The first installment of $455,035 was
paid by February 1, 1997, and the final installment of $150,000,
which was due March 31, 1998 was forgiven on October 13, 1998 in
connection with the sale of U.S. Tire.
With the acquisition of Domino, the Company assumed debt to an
affiliate of Domino in the original amount of $180,095. The terms of
this note provided for interest and principal to be deferred until
January 1, 1998, at which time monthly principal and interest
payments were to be made at prime over a two-year term. Consequently,
this note was originally recorded at present value, discounted at a
rate of ten percent. 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, 1998 and 1997 was $174,578 and $170,684,
respectively.
At December 31, 1997, the Company had other notes payable totaling
$35,074.
F-19
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997, substantially all of
which is collateralized, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
10.5% note payable to corporation; due on various dates through
December 2007; interest payable semi-annually* $ 1,140,000 $ 1,480,000
Prime plus .5% note payable to bank; due December 2004, guaranteed
by The Goodyear Tire & Rubber Company; principal and interest
payable monthly 1,229,000 899,309
Prime +3% note payable to corporation; due November 6, 2001;
principal and interest payable monthly 243,056 -
7.6% note payable to Small Business Administration; due May 2001;
principal and interest payable monthly 123,658 168,515
Prime +1% note payable to corporation; due October 13, 2000;
principal due quarterly beginning January 13, 2000, interest
payable quarterly beginning January 2, 1999 600,000 -
11.25% note payable to former Domino shareholders; payments
due beginning September 1996; due June 2001 596,402 614,954
9% note payable to corporation; due August 2000; principal and
interest payable monthly beginning in May 1999 259,789 -
Notes payable to finance companies and banks with interest rates
from 7.9% to 15.2%, expiring through May 2001; principal and
interest payable monthly 464,625 519,627
Mortgage payable to corporation, interest at prime rate; due July
2003; principal and interest payable monthly - 797,619
Notes payable to banks with interest rates ranging from 8% to
10.5%; expiring through November 2000; principal and interest
payable monthly - 347,612
Prime plus 1% note payable to bank; due July 1998; principal and
interest due monthly - 41,417
----------- -----------
4,656,530 4,869,053
Less:
Current installments of long-term debt (878,901) (2,373,858)
----------- -----------
$ 3,777,629 $ 2,495,195
=========== ===========
</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, 1998, the Company was not
in compliance with certain financial covenants. On February 1, 1999
the Company paid this loan in full.
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 at December 31, 1998.
F-20
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate maturities of long-term debt at December 31, 1998 are
as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999 $ 878,901
2000 1,574,753
2001 537,576
2002 995,300
2003 150,000
Thereafter 520,000
----------
$4,656,530
==========
</TABLE>
NOTE 13. CONVERTIBLE SUBORDINATED NOTES
In connection with the purchase of U.S. Tire, the Company issued
convertible subordinated notes in the aggregate amount of $1,850,000
payable to the former equity holders of U.S. Tire. Upon the sale of
U.S. Tire on October 13, 1998 to the former equity holders of U.S.
Tire, the convertible subordinated notes and accrued interest were
forgiven.
In 1997, as a result of the November 1996 Atlanta fire, 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. 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 and 50,202 shares of additional common stock in
1997 to the former equity holders of U.S. Tire.
The convertible subordinated note agreements provided 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 were treated as
"contingent consideration", and accordingly, were not recorded as a
liability as of December 31, 1996, and remained unrecorded until the
sale of U.S. Tire on October 13, 1998. Interest payments on the
convertible subordinated notes during the contingency period were
recorded as a deferred charge.
NOTE 14. DEFERRED GRANT REVENUE
On June 8, 1998 the Domino facility entered into a grant agreement
with the Pennsylvania Department of Environmental Protection (DEP).
DEP awarded the grant to Domino under the Pennsylvania Municipal
Waste Planning, Recycling and Waste Reduction Act, which provides
funding for grants relating to projects pertaining to municipal waste
management systems.
F-21
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon the successful implementation of a wire recycling system, Domino
received a $200,000 grant in November 1998. The grant is recorded as
deferred grant revenue in the accompanying balance sheet and is being
amortized over the life of the wire recycling equipment of 5 years.
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.
The WR-Illinois grants are recorded as deferred grant revenue in the
accompanying balance sheet and are being amortized over the term of
the grants, which expire July 31, 1999.
NOTE 15. 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.
F-22
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, 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 was recorded.
NONQUALIFIED STOCK OPTIONS TO NON-EMPLOYEE DIRECTORS
On February 12, 1997, the Company granted 1 million nonqualified
stock options to the Chairman of the Company's Board of Directors.
The options fully vested on February 12, 1998 and were exercisable at
prices ranging from $2.06 to $7.00 per share. Upon the resignation of
the Company's Chairman of the Board of Directors on September 17,
1998, the 1 million nonqualified stock options were cancelled.
1992 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (THE 1992 PLAN)
Pursuant to the 1992 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 shares were
issued for the year ended December 31, 1996. No shares were issued
for the years ended December 31, 1998 and 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 became exercisable in 1996 at $0.86 per share and expired
July 1, 1998. See note 16 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 1998, 1997 and 1996, respectively; no dividend yield, expected
volatility of 74.9%, 72%, and 73.2%, risk free interest rates of
4.9%, 5.7%, and 6.7% and expected lives of 4.0, 4.6, and 8.4 years.
F-23
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
1998 1997 1996
---- ---- ----
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 $(5,889,949) $(6,090,396) $(2,467,850) $(3,339,547) $140,204 $(32,893)
Income (loss) per
common share $(0.35) $(0.36) $(0.14) $(0.19) $0.01 $0.00
</TABLE>
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>
1998 1997 1996
---- ---- ----
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 1,666,400 $3.11 739,900 $1.05 761,100 $0.83
Granted 25,000 .42 1,100,000 4.12 214,900 1.30
Exercised - - (122,000) 0.52 (178,000) 0.40
Forfeited (1,116,900) 3.99 (51,500) 1.20 (58,100) 1.12
---------- --------- --------
Outstanding at end of year 574,500 $1.27 1,666,400 $3.11 739,900 $1.05
Exercisable at end of year 434,500 $1.21 451,400 $1.22 559,900 $1.07
Weighted-average fair value of
options granted during the year $0.16 $0.96 $0.96
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Shares Weighted-Average Shares
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.42 25,000 9.4 years $0.42 25,000 $0.42
$0.75 56,000 4.1 years $0.75 56,000 $0.75
$0.98-$1.11 220,000 6.5 years $0.99 140,000 $1.00
$1.31 93,500 7.5 years $1.31 93,500 $1.31
$1.57 80,000 4.4 years $1.57 80,000 $1.57
$2.14 100,000 8.1 years $2.14 40,000 $2.14
------- -------
Totals 574,500 6.5 years $1.27 434,500 $1.21
======= =======
</TABLE>
F-24
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998, 859,700 shares were available for grant as
options or incentive grants under the Incentive Plan and 204,303
shares were available for grant as options under the Directors Plan.
NOTE 16. STOCKHOLDERS' EQUITY
On October 13, 1998 the Company sold U.S. Tire to the former owners.
A portion of the consideration received by the Company was composed
of 1.5 million shares of Waste Recovery, Inc. common stock, which had
a fair value of $120,000 on October 13, 1998.
On October 1, 1997, as a result of the November 1996 Atlanta fire,
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 in connection with the acquisition of U.S. Tire. 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. 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 expired 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.
In December 1996, the Company issued 3,486,221 shares of unregistered
Common Stock in connection with the acquisition of U.S. Tire.
Included in the 3,486,221 shares issued are 243,224 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.
F-25
<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 $1,223,737 at December 31, 1998 which represents $16.01
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 17. RELATED PARTY TRANSACTIONS
In 1998 and 1997, the Company borrowed a total of $600,000 for
working capital needs from a third-party lender which was controlled
by two members of the Company's Board of Directors. On September 17,
1998, both Directors resigned from the Company's Board of Directors.
See Note 11 regarding loans from directors in 1998 and Note 16
regarding sale of U.S. Tire.
In 1998 a director of the Company received $184,000 in fees and
expenses for consulting services provided to the Company in 1998 and
1997; a consulting fee of $69,500 to a director for services rendered
in arranging and facilitating the closing of the 1998 Bonds; and a
loan of $24,000.
In 1998 a director, who was also an officer of the Company until
January 1, 1998, received $90,000 in fees for consulting services
provided to the Company in 1998 and $12,500 in sales commissions.
In 1997, in connection with the Atlanta fire, 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. Certain of these former
equity holders were directors and an officer of the Company in 1997
and 1998.
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 and convertible subordinated
notes issued in connection with the purchase of U.S. Tire. Certain of
the note holders were members of the Company's Board of Directors in
1997 and 1998.
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.
In connection with the acquisition of U.S. Tire, 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
F-26
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assistance as a financial advisor in arranging and facilitating the
acquisition of U.S. 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. 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 Director resigned from the Company's Board of
Directors on October 1, 1998.
NOTE 18. INCOME TAXES
The provision (benefit) for income taxes consists of the following
components for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - 69,661 8,850
----------- ---------- ---------
Total current - 69,661 8,850
----------- ---------- ---------
Deferred:
Deferred taxes (1,992,251) (769,946) (119,278)
Deferred tax asset valuation allowance 1,992,251 1,217,489 119,278
----------- ---------- ---------
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.
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. federal income tax, at statutory rates $(2,070,761) $ (790,617) $ 96,254
Penalties 4,839 17,259 220
Amortization of goodwill 34,772 20,110 20,115
Change in valuation allowance 1,992,251 1,217,489 (119,278)
State income tax - 69,661 8,850
Other 38,899 (16,698) 2,689
----------- ---------- ---------
$ - $ 517,204 $ 8,850
=========== ========== =========
</TABLE>
F-27
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax assets (liabilities) are comprised of the following
at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $ 5,868,258 $ 3,524,051
Deferred grant revenues 142,579 222,101
Accruals for financial reporting purposes currently not
deductible for tax 205,168 201,693
Capitalization of general and administrative costs for tax 65,412 70,491
Other 162,678 47,120
---------- -----------
Gross deferred tax asset 6,444,095 4,065,456
Valuation allowance (5,896,617) (3,904,366)
---------- -----------
547,478 161,090
Deferred tax liabilities:
Property, plant and equipment (493,228) (161,090)
Other (54,250) -
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
As of December 31, 1998, the Company has approximately $16,025,000 in
net operating loss carry forwards which expire between the years 2002
and 2017. 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.
NOTE 19. INVOLUNTARY CONVERSION OF ASSETS
In 1998, the Company's Marseilles, Illinois facility and Dupo,
Illinois facility had substantial fire damage. The facilities were
covered by replacement and business interruption insurance. The
reconstruction of the Marseilles plant was completed in January 1999,
and the reconstruction of the Dupo plant was completed in December
1998. The involuntary conversion of assets was recognized in the year
ending December 31, 1998, as follows:
<TABLE>
<S> <C>
Insurance proceeds received on property $ 4,763,159
Net book value of property destroyed (3,373,510)
-----------
Gain on involuntary conversion of property 1,389,649
Clean-up costs (719,821)
-----------
Net gain on involuntary conversion $ 669,828
===========
</TABLE>
The Company also received $1,037,800 in insurance proceeds from
business interruption insurance, all of which was recognized in the
year ending December 31, 1998.
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:
F-28
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
=========
</TABLE>
Actual insurance 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 20. NON-CASH TRANSACTIONS
During 1998, the Company converted a $292,000 trade payable into a
note payable, and a $300,000 note payable into long-term debt which
were excluded as non-cash transactions from the consolidated
statements of cash flows.
During 1997, the Company issued additional Common Stock valued at
$73,447 to the former equity holders of U.S. Tire which was excluded
as a non-cash transaction from the consolidated statements of cash
flows.
During 1996, the Company had the following noncash transactions which
have been excluded from the statements of cash flows:
<TABLE>
<S> <C>
Purchases of equipment financed by capital lease $(41,304)
Convertible subordinated debentures converted to common stock 535,000
Interest on debentures converted to common stock 48,559
</TABLE>
NOTE 21. 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.
F-29
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. BUSINESS AND CREDIT CONCENTRATIONS
The Company's customers are located throughout the United States. The
following customers accounted for significant Company sales for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer one $1,808,000 - -
Customer two 1,196,000 - -
Customer three 813,000 - -
Customer four 717,000 434,000 566,000
Customer five 450,000 1,535,000 -
Customer six 113,000 1,137,000 1,840,000
Customer seven 107,000 1,255,000 -
Customer eight 13,000 5,483,000 2,940,000
Customer nine - - 364,000
Customer ten - - 257,000
---------- ---------- ----------
Total $5,217,000 $9,844,000 $5,967,000
========== ========== ==========
</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.
NOTE 23. 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, 1998, 1997 and 1996.
NOTE 24. 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, 1998, no
such costs had been accrued and management
F-30
<PAGE>
WASTE RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
does not believe the effects of the aforementioned activities will
have a material effect on the Company's financial statements.
NOTE 25. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's current assets, restricted cash and
accounts payable approximates the recorded amounts because of the
liquidity and short maturity of these instruments.
It is not practicable to estimate the fair value of the Company's
long-term debt 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.
F-31
<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 April 14, 1999,
which is included in Part II of this Form 10-K, we have also audited Schedule II
at December 31, 1998 and 1997 and for the years 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
April 14, 1999
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 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
======== ======== ========= ======== ========
Year ended December 1998:
Allowance for doubtful accounts $128,602 $294,000 $ - $287,166 $135,436
======== ======== ========= ======== ========
</TABLE>
(1) Amount represents the allowance for doubtful accounts, a contra account to
trade accounts receivable.
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <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.
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>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
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>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
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>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
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,
incorporated herein by reference to Exhibit 10.41 to the Company's
Form 10-K filed April 15, 1998.
10.42 Consulting Agreement dated December 31, 1997 between Registrant and
Thomas L. Earnshaw, as consultant, incorporated herein by reference to
Exhibit 10.42 to the Company's Form 10-K filed April 15, 1998.
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, incorporated herein by reference to Exhibit 10.43
to the Company's Form 10-K filed April 15, 1998.
10.44 Loan and Security Agreement for a credit facility of $2,500,000 and a
note payable for $250,000 dated November 6, 1998, executed by
Registrant as maker payable to Fidelity Funding, Inc. (1)
10.45 First Amended and Restated Loan and Security Agreement dated February
1, 1999, executed by Registrant as maker payable to Fidelity Funding,
Inc.(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. (1)
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)
- -------------------------
(1) Filed herewith.
</TABLE>
E-4
<PAGE>
EXHIBIT 10.44
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (this "AGREEMENT"), dated as of
November 6, 1998, is entered into by and between Waste Recovery, Inc., a
Texas corporation (the "COMPANY"), and Fidelity Funding, Inc., a Texas
corporation ("FIDELITY"). In consideration of the mutual covenants and
agreements contained herein, the Company and Fidelity hereby agree as follows:
SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION.
1.1 When used herein, the following terms shall have the following
meanings:
"ACCOUNT" means the right of the Company to payment for goods sold or
leased or for services rendered by the Company which is not evidenced by an
instrument or chattel paper, whether or not earned by performance.
"ACCOUNT DEBTOR" means the Person obligated to make payment on an
Account.
"ADVANCE" has the meaning given to it in Section 2.1.
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly controls, or is controlled by or under common control
with, such Person.
"BAYTOWN FACILITY" means the Company's place of business located at 5302
Wade Road, Harris County, Baytown, Texas 77520.
"BORROWING BASE" means an amount, determined by Fidelity from time to
time, equal to 80% of the face amount of Eligible Accounts of the Company.
Fidelity may change the percentage of Eligible Accounts constituting the
Borrowing Base from time to time based upon dilution and other factors deemed
appropriate by Fidelity.
"BORROWING BASE CERTIFICATE" means a certificate in the form attached
hereto as Exhibit A, duly executed by an authorized officer of the Company.
"CAPITAL EXPENDITURES" means, for any period, the aggregate expenditures
by the Company during such period that are classified as capital expenditures
in accordance with GAAP.
"CASH COLLATERAL" has the meaning given to it in Section 7.
"COLLATERAL" has the meaning given to it in Section 6.
"CONCENTRATION LIMIT" means, as of any date, an amount equal to 20% of
the face amount of Eligible Accounts of the Company outstanding on such date.
"CONTRACT RATE" means, prior to the occurrence of an Event of Default or
an event or circumstance that would, with the giving of notice, the passage
of time or both, constitute an Event of Default, a rate of interest equal to
the lesser of (a) the Prime Rate in effect from time to time plus 3.00% per
annum and (b) the maximum rate permitted by applicable law and means, after
the occurrence of an Event of Default or an event or circumstance that would,
with the giving of notice, the passage of time or both, constitute an Event
of Default, a rate of interest equal to the lesser of (x) the Prime Rate in
effect from time to time plus 8.00% per annum and (y) the maximum rate
permitted by applicable law. The Contract Rate shall be automatically
increased or decreased, as the case may be, without notice to the Company
from time to time as of the effective date of each change in the Prime Rate.
"CURRENT ASSETS" means, as of any date (determined on a consolidated
basis, without duplication), only those assets of the Company that may, in
the ordinary course of business, be converted into cash within a period of
one year from such date, but excluding (a) amounts due from employees,
officers, shareholders or directors of the Company, (b) prepaid expenses for
services or for supplies that are not purchased for resale, (c) amounts due
from any insurance company as business interruption insurance or fire and
casualty insurance, and (d) amounts due from Affiliates of the Company.
<PAGE>
"CURRENT LIABILITIES" means, as of any date (determined on a
consolidated basis, without duplication), the Advances outstanding on such
date and all other Obligations of the Company that are due within one year
from such date.
"DCR REQUIREMENT" means (i) with respect to any date on or after January
1, 1999, but on or prior to March 31, 1999, 0.35 to 1.00, (ii) with respect
to any date on or after April 1, 1999, but on or prior to June 30, 1999, 0.50
to 1.00, (iii) with respect to any date on or after July 1, 1999, but on or
prior to December 31, 1999, 1.00 to 1.00, and (iv) with respect to any date
on or after January 1, 2000, 1.10 to 1.00.
"DEBT" means, with respect to any Person, all indebtedness, obligations
and liabilities of such Person, including without limitation: (a) all
liabilities which would be reflected on a balance sheet of such Person
prepared in accordance with GAAP, (b) all obligations of such Person in
respect of any guaranty of any Debt of another Person, and (c) all
obligations, indebtedness and liabilities secured by any lien on or security
interest in any property or assets of such Person.
"DEBT SERVICE COVERAGE RATIO" means, as of any date (determined on a
consolidated basis, without duplication), the ratio of EBITDA for the
twelve-month period ending on such date (or, in the case of any date prior to
December 31, 1999, the ratio of EBITDA for the Period from January 1, 1999
through such date annualized) to the sum of (a) the Interest Expense incurred
by the Company the twelve-month period ending on such date (or, in the case
of any date prior to January 1, 1999, the ratio of EBITDA for the Period from
December 31, 1999 through such date annualized) (b) all scheduled principal
payments on all Debt for money borrowed or assets financed under capitalized
leases by the Company (including the Obligations) for the twelve-month period
beginning on such date (including all scheduled principal payments on Debt
expected to be incurred during such period).
"EBITDA" means, for any period, the sum (determined without duplication,
on a consolidated basis and in accordance with GAAP) of (a) the Company's net
income (or net loss) (including gains and losses from the sales of assets in
the ordinary course of business) for such period before provisions for income
taxes, (b) the Interest Expense of the Company for such period, and (c) any
depreciation or amortization expenses incurred by the Company in determining
its net income (or net loss) for such period.
"ELIGIBLE ACCOUNTS" means, at the time of determination thereof, all
Accounts other than (i) any Account which is payable more than 30 days from
invoice date, (ii) any Account which has been outstanding for more than 90
days from invoice date, (iii) any Account as to which Fidelity does not have
a valid and perfected, first priority security interest, (iv) to the extent
that the aggregate outstanding Accounts owed by any single Account Debtor
exceeds the Concentration Limit, any Account owed by such Account Debtor, (v)
any Account that is owed by an Account Debtor that is an Affiliate of the
Company or an officer or employee of the Company, (vi) any Account that
arises out of a sale made or services performed outside of the United States
or that is owed by an Account Debtor located outside the United States, (vii)
any Account that is owed by a creditor or supplier of the Company or with
respect to which any defense, counterclaim or right of set off has been
asserted, (viii) any Account owed by an Account Debtor if more than 25% (in
dollar amount) of such Account Debtor's Accounts have been outstanding more
than 90 days from invoice date, (ix) any Account that is owed by the United
States or any department, agency or instrumentality thereof, unless the right
to payment under such Account is assigned to Fidelity as Collateral in full
compliance with the Assignment of Claims Act of 1940, as amended (31 U.S.C.
3727), and (x) any Account that has not been approved by Fidelity for
inclusion in the Borrowing Base.
"ELIGIBLE MACHINERY AND EQUIPMENT" means, at the time of determination,
all machinery and equipment that (i) are owned by the Company, are located in
the United States of America and, if located on leased or mortgaged premises,
are subject to the terms of a lien waiver letter executed by the landlord or
mortgagee of such premises if deemed necessary by Fidelity in its sole
discretion, (ii) are not on lease or consignment to any Person, (iii) are
subject to an enforceable, first priority, perfected security interest in
favor of Fidelity, (iv) are not, in the opinion of Fidelity, damaged or
obsolete, (v) are not fixtures, and (vi) have been approved by Fidelity as
Eligible Machinery and Equipment.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign
statutes, laws, regulations, rules, orders, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants or industrial, toxic or hazardous
substances into the environment, or otherwise relating to the manufacture,
processing, treatment, transport or handling of pollutants or industrial,
toxic or hazardous substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations
promulgated with respect thereto.
"ERISA PLAN" means any pension benefit plan subject to Title IV of ERISA
maintained by the Company or any Affiliate thereof with respect to which the
Company has a fixed or contingent liability.
<PAGE>
"EVENT OF DEFAULT" has the meaning given it in Section 9.
"FACILITY LIMIT" means $2,500,000.
"GAAP" means generally accepted accounting principles and practices as
promulgated by the American Institute of Certified Public Accountants,
applied on basis consistent with past practices.
"GUARANTOR DOCUMENTS" means the general continuing guarantees executed
by each guarantor of the Obligations and all other documents and instruments
executed and delivered in connection herewith or therewith.
"INDEMNIFIED CLAIMS" means any and all claims, demands, actions, causes
of action, judgments, liabilities, damages and consequential damages,
penalties, fines, costs, fees, expenses and disbursements (including, without
limitation, fees and expenses of attorneys and other professional consultants
and experts in connection with any investigation or defense) of every kind,
known or unknown, existing or hereafter arising, foreseeable or
unforeseeable, which may be imposed upon, threatened or asserted against or
incurred or paid by any Indemnified Person at any time and from time to time,
because of, resulting from, in connection with or arising out of any
transaction, act, omission, event or circumstance in any way connected with
the Collateral, the Transaction Documents or the Guarantor Documents
(including but not limited to enforcement of Fidelity's rights thereunder or
the defense of Fidelity's actions thereunder), excluding with respect to any
Indemnified Persons, any of the foregoing resulting from such Indemnified
Person's gross negligence or willful misconduct.
"INDEMNIFIED PERSONS" means Fidelity and its officers, directors,
shareholders, employees, attorneys, representatives and Affiliates.
"INTANGIBLE ASSETS" means, the Company's assets as are treated as
intangible pursuant to GAAP, including, without limitation: (a) obligations
owing by officers, directors, shareholders, employees, subsidiaries,
Affiliates or any Person in which any such officer, director, shareholder,
employee, subsidiary, or Affiliate owns any interest and (b) any asset which
is intangible or lacks intrinsic or marketable value or collectibility,
including, without limitation, goodwill, noncompetition agreements, patents,
copyrights, trademarks, franchises, organization or research and development
costs, which in the case of the Company, shall be determined on a
consolidated basis, without duplication.
"INTEREST EXPENSE" means, for any period, all interest charges paid or
accrued by the Company on a consolidated basis, with duplication, in
accordance with GAAP during such period.
"INVENTORY" means all goods, now owned or hereafter acquired by the
Company, wherever located, that are held for sale or lease or are to be
furnished under any contract of service (including, but not limited to raw
materials, work in process, finished goods and materials used or consumed in
the manufacture or production thereof, goods in which the Company has an
interest in mass or a joint or other interest or rights of any kind, and
goods which have been returned to or repossessed or stopped in transit by the
Company).
"NET PROFIT" means, for any period, the Company's net income after tax
for such period determined on a consolidated basis, without duplication, and
in accordance with GAAP.
"OBLIGATIONS" means all indebtedness, obligations and liabilities of the
Company to Fidelity arising under the Transaction Documents, and all other
indebtedness, obligations and liabilities of the Company to Fidelity, whether
presently existing or hereafter arising, direct or indirect, primary or
secondary, joint or several, fixed or contingent, and whether originally
payable to Fidelity or to a third party and subsequently acquired by Fidelity.
"PATENT COLLATERAL ASSIGNMENTS" means the separate Patent Collateral
Assignments, each dated as of the date hereof, made by the Company for the
benefit of Fidelity, as amended, modified or otherwise supplemented from time
to time.
"PERSON" means any individual, corporation, joint venture, partnership,
trust, unincorporated organization or governmental entity or agency.
"PRIME RATE" means the rate per annum published from time to time by THE
WALL STREET JOURNAL as the base rate for corporate loans at large commercial
banks (or, if more than one such rate is published, the higher or highest of
the rates so published). If such rate is no longer published by THE WALL
STREET JOURNAL, then Fidelity shall, in its sole discretion substitute the
base or prime rate for corporate loans at a large commercial bank for the
base rate published in THE WALL STREET JOURNAL. Such rate may not necessarily
be the lowest or best rate actually charged to any customer of such
commercial bank.
<PAGE>
"REMITTANCE ADDRESS" means such address as Fidelity shall direct the
Company from time to time in writing in accordance with the terms hereof.
"SHAREHOLDERS EQUITY" means, as of any date, the sum of (a) the
shareholders' equity of the Company as of such date determined in accordance
with GAAP and (b) the then outstanding principal balance of any Debt of the
Company subordinated to the Obligations pursuant to a subordination agreement
acceptable to Fidelity between Fidelity and the Person to whom such Debt is
owed, when, in the case of the Company, shall be determined on a consolidated
basis, without duplication.
"TANGIBLE NET WORTH" means, as of any date, the amount obtained by
subtracting the Company's Intangible Assets as of such date from the
Company's Shareholders' Equity as of such date. In the case of the Company,
"Tangible Net Worth" shall be determined on a consolidated basis, without
duplication.
"TANGIBLE NET WORTH REQUIREMENT" means, (a) with respect to any date on
or after the date hereof, but on or prior to December 31, 1998, negative
$1,300,000, (b) with respect to any date on or after January 1, 1999, but on
or prior to September 30, 1999, negative $1,900,000, (c) with respect to any
date on or after October 1, 1999 but on or prior to March 31, 2000, negative
$2,300,000, and (d) for any date on or after April 1, 2000, the Tangible Net
Worth Requirement as of the last day of the preceding calendar month plus
$20,000.
"TERM" has the meaning given to it in Section 11.4.
"TERM ADVANCE" has the meaning given to it in Section 2.6.
"TERMINATION EVENT" means (a) the occurrence with respect to any ERISA
Plan of (i) a reportable event described in Sections 4043(b)(5) of ERISA or
(ii) any other reportable event described in Section 4043(b) of ERISA other
than a reportable event not subject to the provision for 30-day notice to the
Pension Benefit Guaranty Corporation pursuant to a waiver by such corporation
under Section 4043(a) of ERISA or (b) the withdrawal of the Company or any
Affiliate of the Company from any ERISA Plan during a plan year in which it
was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or
(c) any event or condition which might constitute grounds under Section 4042
of ERISA for the termination of, or the appointment of a trustee to
administer, any ERISA Plan.
"TRADEMARK SECURITY AGREEMENTS" means the separate Trademark Security
Agreements, each dated as of the date hereof, between the Company and
Fidelity, as amended, modified or otherwise supplemented from time to time.
"TRANSACTION DOCUMENTS" means this Agreement, the Patent Collateral
Assignments, the Trademark Security Agreements and all other documents and
instruments executed and delivered in connection herewith or therewith.
"UCC" means the Uniform Commercial Code as in effect in the applicable
jurisdiction.
"WORKING CAPITAL" means, as of any date, the excess of Current Assets
over Current Liabilities as of such date.
"WORKING CAPITAL REQUIREMENT" means (a) negative $5,300,000 until March
31, 2000 and (b) for any date on or after April 1, 2000, the Working Capital
Requirement as of the last day of the preceding calendar month plus $20,000.
1.2 Terms defined in the UCC and used but not defined herein shall
have the meanings ascribed to them in the UCC.
1.3 References herein to a particular agreement, instrument or
document also shall be deemed to refer to and include all renewals,
extensions and modifications of such agreement, instrument or document. All
addenda, exhibits and schedules attached to this Agreement are a part hereof
for all purposes. Words in the singular form shall be construed to include
the plural and vice versa, unless the context otherwise requires.
1.4 All interest accruing hereunder shall be calculated on the basis
of actual days elapsed (including the first but excluding the last day) plus
three business days and a year of 360 days. Unless otherwise expressly
provided herein or unless Fidelity otherwise consents, all financial
statements and reports furnished to Fidelity hereunder shall be prepared, and
all financial computations and determinations pursuant hereto shall be made,
in accordance with GAAP. All payments received by Fidelity after its
internally established time for closing business on any business day shall be
applied as of the next succeeding business day. Any payment which is due on a
day which is not a business day shall instead be deemed to be due on the next
succeeding business day, and interest thereon shall accrue and be payable at
the then applicable rate during the time of such extension. Fidelity's
records in
<PAGE>
respect of loans advanced, accrued interest, payments received and applied
and other matters in respect of calculation of the amount of the Obligations
shall be deemed conclusive absent demonstration of error. All statements of
account rendered by Fidelity to the Company relating to principal, accrued
interest or costs owing by the Company under this Agreement shall be presumed
to be correct and accurate unless, within 30 days after receipt thereof, the
Company shall notify Fidelity in writing of any claimed error therein.
SECTION 2. ADVANCES.
2.1 Subject to the terms of this Agreement, including, without
limitation, Section 3, Fidelity shall make advances to the Company (each an
"Advance and collectively the "Advances") from time to time during the Term;
provided, however, that the aggregate principal amount of Advances
outstanding at any time to the Company shall not exceed the Borrowing Base
determined by Fidelity from time to time; and provided, further, however,
that the aggregate principal amount of Advances outstanding at any time to
the Company shall not exceed the Facility Limit. Each Advance must be in a
minimum amount of $5,000 or, if less, the unadvanced portion of the Borrowing
Base. The Company hereby agrees to repay to Fidelity all Advances made to the
Company hereunder, together with interest thereon, in the manner provided
herein. The principal owing hereunder in respect of the Advances at any given
time shall equal the aggregate amount of Advances made hereunder minus all
principal payments thereon received by Fidelity hereunder. Subject to the
terms and conditions hereof, the Company may borrow, repay and reborrow under
this Agreement.
2.2 Each request by the Company to Fidelity for an Advance hereunder
must be in writing or promptly confirmed in writing. Each such written
request or confirmation shall be accompanied by a "Borrowing Base
Certificate" in the form attached hereto as Exhibit "A," together with such
supporting information as Fidelity shall request, signed by an authorized
representative of the Company.
2.3 Promptly after receiving each Borrowing Base Certificate,
Fidelity shall, based upon such Borrowing Base Certificate and such other
information available to Fidelity, redetermine the Borrowing Base, which
redetermination shall take effect immediately and remain in effect until the
next such redetermination. If all conditions precedent to any Advance
requested have been met, Fidelity will on the date requested make such
Advance available to the Company by wire transfer to the account designated
in writing by the Company. In the event Fidelity does not receive an
appropriately completed Borrowing Base Certificate, Fidelity shall have no
obligation to redetermine any Borrowing Base or make any additional Advances
hereunder.
2.4 If the aggregate unpaid principal balance of the Advances to the
Company exceeds the Borrowing Base at any time, the Company shall, upon
receipt of notice thereof from Fidelity, immediately repay the principal of
the Advances in an amount at least equal to such excess. Any principal repaid
pursuant to this Section 2.4 shall be in addition to, and not in lieu of, all
payments otherwise required to be paid under the Transaction Documents.
2.5 The aggregate unpaid principal balance of the Advances plus all
accrued but unpaid interest thereon shall be payable by the Company to
Fidelity on demand, or if no demand is made, on the last day of the Term.
2.6 Subject to the terms and conditions hereof, including, without
limitation, Section 3, Fidelity agrees to make a single advance (the "Term
Advance") to the Company on the date of the first Advance hereunder in the
amount of $250,000. The Company hereby agrees to repay to Fidelity the Term
Advance, together with interest thereon, in the manner provided herein. The
principal owing hereunder in respect of the Term Advance at any given time
shall equal the initial amount of the Term Advance made hereunder minus all
principal payments thereon received by Fidelity hereunder. Amounts repaid in
respect of the Term Advance may not be reborrowed hereunder.
2.7 The request by the Company to Fidelity for the Term Advance must
be in writing. If all conditions precedent to the Term Advance have been
met, Fidelity will, on the date requested, make the Term Advance available to
the Company in immediately available funds by wire transfer to the account
designated in writing by the Company.
2.8 The aggregate principal balance of the Term Advance plus all
accrued but unpaid interest thereon shall be due and payable by the Company
to Fidelity on demand, or if no demand is made, as follows: the principal
balance of the Term Advance shall be repaid in 35 equal monthly installments
of $6,944.44, due and payable on the last day of each calendar month,
commencing on November 30, 1998, and a final installment of the remaining
principal balance of the Term Advance, due and payable on October 31, 2001;
provided, however, that the remaining unpaid principal balance of the Term
Advance and all accrued and unpaid interest thereon shall be due and payable
on the earlier of (a) the payment of the remaining unpaid principal balance
of the Advances and (b) the last day of the Term. The Term Advance may be
prepaid in whole or part prior to maturity without penalty or premium. Any
prepayment shall be applied to principal installments owed in respect of the
Term Advance in reverse order of due dates.
<PAGE>
2.9 The Eligible Machinery and Equipment shall, at all times, have an
appraised forced liquidation value of not less than 185% of the outstanding
principal balance of the Term Advance. Fidelity may, from time to time, have
the Eligible Machinery and Equipment appraised by an appraiser selected by
Fidelity, and the Company shall pay the costs of any such appraisal. If any
such appraisal indicates that the forced liquidation value of the Eligible
Machinery and Equipment is less than 185% of the outstanding principal
balance of the Term Advance, the Company shall, at Fidelity's option, either
(a) grant a security interest to Fidelity in additional collateral
satisfactory to Fidelity having a force liquidation value, which together
with the forced liquidation value of the Eligible Machinery and Equipment,
equals or exceeds 185% of the outstanding principal balance of the Term
Advance or (b) immediately pay down the outstanding principal balance of the
Term Advance, plus all accrued interest on the amount prepaid, to an amount
equal to 185% of the forced liquidation value of the Eligible Machinery and
Equipment.
2.10 The aggregate unpaid principal balance of all Advances and the
Term Advance shall bear interest at the Contract Rate in effect from time to
time. Except as provided in Section 2.5 and Section 2.8, all accrued but
unpaid interest thereon shall be due and payable by the Company to Fidelity
on the last day of each calendar month.
2.11 The Company shall pay to Fidelity (a) an initial facility fee in
the amount of $85,000, payable in twelve monthly installments of $7,083.33
due and payable on the date of the first Advance hereunder and on the first
day of the next eleven successive calendar months, and (b) thereafter, an
annual facility fee in the amount of 1.00% of the Facility Limit, payable on
each anniversary of the date hereof during the Term. The Company hereby
authorizes Fidelity, at its sole discretion, to deduct any facility fee from
any Advance or the Term Advance hereunder.
2.12 Subject to the limitations set forth in Section 2.17, beginning
with November, 1998, as consideration for Fidelity's commitment to make
Advances hereunder the Company shall pay to Fidelity a minimum usage fee (in
this section called the "Minimum Usage Fee") for each calendar month (or
fraction thereof, on a prorated basis) during the Term in an amount equal to
the difference (if positive) between (a) the aggregate income Fidelity would
earn during such calendar month (or fraction thereof, on a prorated basis)
pursuant to Section 2.10 (excluding any income earned on any Term Advance) if
the aggregate principal amount of all Advances outstanding and owing by the
Company is $1,000,000 MINUS (b) the aggregate income earned by Fidelity
during such calendar month (or fraction thereof, on a prorated basis)
pursuant to Section 2.10 (excluding any income earned on any Term Advance) .
The Minimum Usage Fee for each calendar month shall be due and payable on the
first day of the next calendar month.
2.13 In addition to, and not in lieu of, any termination fee required
by Section 11.4, the Company shall pay to Fidelity a liquidation fee (in this
section called the "Liquidation Fee") in the amount of 5.00% of the face
amount of each Eligible Account included in the Borrowing Base that is
outstanding at any time during the Liquidation Period (as defined below). The
Liquidation Fee shall be payable on the earlier to occur of (i) the date on
which Fidelity collects the applicable Eligible Account and (ii) the
ninetieth day after the invoice date of the applicable Eligible Account. For
purposes of this section, the term "Liquidation Period" means a period
beginning on the earliest of (i) the date of commencement against or by the
Company of any voluntary or involuntary case under the federal Bankruptcy
Code, (ii) the date of any general assignment by the Company for the benefit
of its creditors; (iii) the date of any appointment or taking possession by a
receiver, liquidator, assignee, custodian or similar official of all or a
substantial part of the Company's assets, or (iv) the date of the cessation
of business of the Company (other than in connection with the sale of
substantially all of the assets of the Company, provided that Fidelity
consented in writing to such sale prior thereto), and ending on the date on
which Fidelity has actually received all fees, costs, expenses and other
amounts owing to it hereunder.
2.14 Contemporaneously with the execution and delivery hereof, the
Company shall pay to Fidelity a fee of $24,000 plus out-of-pocket expenses to
cover the charges of Fidelity's counsel for the negotiation, preparation,
execution and delivery of the Transaction Documents. In addition, the Company
shall pay or reimburse Fidelity upon demand for (a) all other costs and
expenses incurred by Fidelity in connection with its due diligence review of
the Company and the closing of the transactions contemplated hereby, and (b)
all reasonable attorney's fees, court costs and other expenses incurred by
Fidelity (whether or not litigation is commenced or judgment issued, and if
litigation is commenced whether at trial or any appellate level) in
connection with the enforcement by Fidelity of this Agreement or any other
Transaction Document, the protection or enforcement of Fidelity's interest in
the Collateral, the collection by Fidelity of the Collateral, or the
representation of Fidelity in connection with any bankruptcy case or
insolvency proceeding involving the Company, the Collateral, or any Account
Debtor, including, without limitation, any representation involving relief
from a stay motion, a cash collateral dispute, an assumption or rejection
motion or a dispute concerning any proposed disclosure statement and plan
proposed in any such proceeding. The Company has heretofore paid to Fidelity
a "good faith" deposit of $15,000. Upon the closing of the transaction
contemplated hereby, such "good faith" deposit shall be applied to the
payment of the Company's obligations hereunder.
2.15 Fidelity shall be entitled to collect upon demand its normal and
customary charges for the following routine services provided or obtained in
the course of performing its functions with respect to the Collateral:
appraisals, lock box charges, credit reports, wire transfers, overnight mail
delivery, and UCC, judgment, litigation and tax lien searches and filings.
<PAGE>
2.16 All interest, fees and other amounts due to Fidelity pursuant to
this Section 2 shall be payable on demand, and may, in Fidelity's sole
discretion, be deducted from any Advance or Term Advance or paid from the
Cash Collateral.
2.17 As provided in Section 11.11, it is the intention and agreement
of the Company and Fidelity that all matters or issues relating to usury or
the maximum charges allowable by law for the use, detention or forbearance
of money be governed by the laws of the State of Texas. The parties hereto
intend to contract in strict compliance with applicable usury law from time
to time in effect. In furtherance thereof, the parties hereto stipulate and
agree that none of the terms and provisions contained in this Agreement or
any other Transaction Document or Guarantor Document shall ever be construed
to create a contract to pay, for the use, forbearance or detention of money,
interest in excess of the maximum amount of interest permitted to be charged
by applicable law from time to time in effect. None of the Company, any
present or future guarantor or any other Person hereafter becoming liable for
the payment of the Obligations, shall ever be liable for unearned interest
thereon or shall ever be required to pay interest thereon in excess of the
maximum amount that may be lawfully charged under applicable law from time to
time in effect, and the provisions of this paragraph shall control over all
other provisions of the Transaction Documents and Guarantor Documents which
may be in conflict therewith. If any indebtedness or obligation owed by the
Company under any Transaction Document is prepaid or accelerated and as a
result any amounts held to constitute interest are determined to be in excess
of the legal maximum, or Fidelity shall otherwise collect moneys which are
determined to constitute interest which would otherwise increase the interest
on all or any part of such obligations to an amounts in excess of that
permitted to be charged by applicable law then in effect, then all such sums
determined to constitute interest in excess of such legal limit shall,
without penalty, be promptly applied to reduce the then outstanding principal
of the related indebtedness or obligations or, at Fidelity's option returned
to the Company or the other payor thereof upon such determination. In
determining whether or not any amount paid or payable, under any
circumstance, exceeds the maximum amount permitted under applicable law,
Fidelity and the Company shall to the greatest extent permitted under
applicable law, characterize any non-principal payment as an expense, fee or
premium rather than as interest, and amortize, prorate, allocate and spread
the total amount of interest throughout the entire contemplated term of this
Agreement in accordance with the amounts outstanding from time to time
hereunder and the Maximum Rate from time to time in effect under applicable
law in order to lawfully charge the maximum amount of interest permitted
under applicable law. If at any time the rate at which interest is payable
hereunder exceeds the Maximum Rate, the amount outstanding hereunder shall
bear interest at the Maximum Rate only, but shall continue to bear interest
at the Maximum Rate until such time as the total amount of interest accrued
hereunder equals (but does not exceed) the total amount of interest which
would have accrued hereunder had there been no Maximum Rate applicable
hereto. In the event applicable law provides for an interest ceiling under
Chapter 1D of the Texas Credit Title, that ceiling shall be the indicated
(weekly) ceiling and shall be used when appropriate in determining the
maximum rate permitted by applicable law. As used in this paragraph, (i) the
term "applicable law" means the laws of the State of Texas or the laws of the
United States of America, whichever laws allow the greater interest, as such
laws now exist or may be changed or amended or come into effect in the
future, and (ii) the term "MAXIMUM RATE" means, at the time of determination,
the maximum rate of interest which, under applicable law, may then be charged
hereunder. The parties agree that this Agreement shall not be subject to
Chapter 346 of the Texas Finance Code.
SECTION 3. CONDITIONS PRECEDENT TO ADVANCES.
3.1 Fidelity shall not be obligated to make any Advance or Term
Advance hereunder (including the first) until it shall have received the
following documents, duly executed in form and substance satisfactory to
Fidelity and its counsel:
(a) general continuing guarantees of the Obligations executed by Waste
Recovery-Illinois, Waste Recovery-Illinois, L.L.C. and Domino
Salvage, Tire Lending, Inc., respectively;
(b) certificates executed by the President and the Secretary of the
Company and each guarantor of the Obligations certifying (i) the
names and signatures of the officers of the Company or guarantor,
as the case may be, authorized to execute Transaction Documents,
(ii) the resolutions duly adopted by the Board of Directors of the
Company or guarantor, as the case may be, authorizing the execution
of the Transaction Documents to which the Company or guarantor is a
party, and (iii) correctness and completeness of the copy of the
bylaws of the Company or guarantor, as the case may be, attached
thereto;
(c) a certificate executed by the President and the Chief Financial
Officer/Treasurer of the Company certifying the satisfaction of the
conditions set forth in Section 3.2;
(d) certificates regarding the due formation, valid existence and good
standing of the Company and each corporate guarantor in the state
of its organization issued by the appropriate governmental
authorities in such jurisdiction;
(e) releases executed by Chase Bank releasing all liens and security
interests of Chase Bank in the Collateral;
<PAGE>
(f) a favorable opinion of counsel for the Company and each guarantor
of the Obligations covering such matters as Fidelity may reasonably
request;
(g) endorsements naming Fidelity as an additional insured or loss
payee, as appropriate, on all liability insurance and all property
insurance policies of the Company;
(h) an appraisal of the Company's Eligible Machinery and Equipment
performed by an appraiser selected by Fidelity in its sole and
absolute discretion showing that the forced liquidation value of
such Eligible Machinery and Equipment is at least $461,575;
(i) the Patent Collateral Assignment and the Trademark Security
Agreement, duly executed by the Company;
(j) a subordination agreement with each of the U.S. Small Business
Administration and The Bank of New York (as trustee for the
Development Authority of Fulton County Georgia), respectively,
pursuant to which each subordinates in favor of Fidelity any liens
or security interests that it may have now or hereafter in the
Collateral, to the satisfaction of Fidelity, to Fidelity's security
interest therein;
(k) a letter from NationsBank, N.A. stating that the financing
statements filed in its favor with the Texas Secretary of State
covering Waste Recovery Services, Inc. do not cover the Collateral;
(l) tax lien releases from the City of Atlanta, the State of Georgia,
and Multnomah County, Oregon; and
(m) evidence that financing statement no. 97-007725 filed by Associates
Commercial Corporation with the Texas Secretary of State has been
amended to reflect that it does not cover any of the Collateral.
3.2 Fidelity shall not be obligated to make any Advance or Term
Advance hereunder (including the first), unless: (i) all representations and
warranties made by the Company in the Transaction Documents are true on and
as of the date of such Advance or Term Advance as if such representations and
warranties had been made as of the date of such Advance or Term Advance, (ii)
the Company has performed and complied with all agreements and conditions
required in the Transaction Documents to be performed or complied with by it
on or prior to the date of such Advance or Term Advance, (iii) no Event of
Default or any event or circumstance that, with the passage of time, the
giving of notice or both, would become an Event of Default shall have
occurred, (iv) such Advance or Term Advance shall not be prohibited by any
law or any regulation or any order of any court or governmental agency or
authority, (v) none of the Company or any guarantor shall have repudiated or
made any anticipatory breach of any of its obligations under any Transaction
Document, and (vi) Fidelity shall not have disapproved such Advance or Term
Advance in whole or in part.
3.3 Fidelity shall not be obligated to make the first Advance to the
Company hereunder, unless, at the time thereof, the Borrowing Base exceeds
the aggregate principal amount of the first Advance to the Company hereunder
(after taking into account the use of the proceeds of each such first Advance
and the Term Advance), by at least $300,000.
SECTION 4. THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The Company
represents and warrants to Fidelity on the date hereof, and shall be deemed
to represent and warrant to Fidelity on each date on which an Advance or a
Term Advance is made to the Company hereunder, that:
4.1 The Company is a corporation duly organized, validly existing and
in good standing under the laws of the state of its incorporation, with all
requisite power and authority to execute, deliver and perform its obligations
under this Agreement and the other Transaction Documents to which it is a
party and to conduct its business as presently conducted. The Company is duly
qualified and authorized to do business as a foreign corporation and is in
good standing in all states in which such qualification and good standing are
necessary or desirable for the conduct by the Company of its business or the
performance by the Company of its obligations hereunder. The execution,
delivery and performance by the Company of this Agreement and the other
Transaction Documents to which it is a party do not and will not constitute
(a) a violation of any applicable law or the Company's articles or
certificate of incorporation or bylaws or (b) a material breach of any other
document, agreement or instrument to which the Company is a party or by which
the Company is bound. This Agreement and the other Transaction Documents to
which the Company is a party have been duly authorized, executed and
delivered by the Company, and are legal, valid and binding obligations of the
Company enforceable against the Company in accordance with their terms. No
consent of, approval by, registration or filing with or authorization from
any governmental authority or agency is required in connection with the
execution, delivery or performance by the Company of this Agreement or the
other Transaction Documents to which it is a party.
<PAGE>
4.2 Except as described on Schedule 4.2 attached hereto, none of the
Collateral is subject to any lien, encumbrance, security interest or other
claim of any kind or nature, the Company has not transferred, sold, pledged
or given a security interest in any of its Accounts, Inventory, machinery or
equipment to anyone other than Fidelity, and there are no financing
statements on file in any public office governing any property of the Company
of any kind, real or personal, in which the Company is named in or has signed
as the debtor.
4.3 Except as described on Schedule 4.2 attached hereto, the Company
is the sole owner and holder of, and has good and marketable title to, all
Collateral purported to be owned by it. This Agreement creates a valid
security interest in the Collateral in favor of Fidelity, and, except as
described in Schedule 4.2 attached hereto, such security interest is a
perfected, first-priority security interest in the Collateral superior to the
rights of any other Persons therein.
4.4 The amount of each Eligible Account of the Company is due and
owing to the Company and represents an accurate statement of a bona fide
sale, delivery and acceptance of Inventory or performance of service by the
Company to or for an Account Debtor. The terms for payment of the Eligible
Accounts are 30 days from date of invoice and the payment of the Eligible
Accounts is not contingent upon the fulfillment by the Company of any further
performance of any nature whatsoever. There are no set-offs, allowances,
discounts, deductions, counterclaims against the Eligible Accounts or any
claims by Account Debtors, of any kind whatsoever, valid or invalid, that
have been or may be asserted as a basis for refusing to pay an Eligible
Account, in whole or in part, either at the time it is accepted by Fidelity
for inclusion in any Borrowing Base or prior to the date it is to be paid. To
the best of the Company's knowledge, each Account Debtor's business is
solvent. The Company has served or caused to be served any and all
preliminary notices required by law to perfect or enforce any mechanic's lien
or stop notice or bonded stop notice for the Eligible Accounts and the
information contained in those notices is true and correct to the best of the
Company's knowledge.
4.5 The addresses set forth in the perfection certificates delivered
by the Company to Fidelity in connection herewith are, and for at least the
last six months have been, the mailing addresses, the chief executive office,
the principal place of business, the offices where all of the books and
records concerning the Eligible Accounts are maintained and the location of
all Collateral of the Company. The Company does not transact business, nor
has it transacted business during the past five years, under any trade,
fictitious or assumed name other than those set forth under the Company's
signature hereon. During the past five years, the Company has not been a
party to a merger or consolidation and has not acquired all or substantially
all of the assets of any Person except as described on Schedule 4.5 attached
hereto.
4.6 Except as described on Schedule 4.6 attached hereto, the Company
has filed all tax reports and returns required to be filed by it and has paid
all federal, state and local taxes and governmental charges imposed upon the
Company.
4.7 The Company is in compliance with ERISA, and is not required to
contribute to any "multiemployer plan" as defined in Section 4001 of ERISA.
The Company has conducted its business in compliance with all applicable
laws, including but not limited to, applicable Environmental Laws, and
maintains and is in compliance with all licenses and permits required under
any such laws to conduct its business and perform its obligations hereunder.
The Company does not have any known material contingent liability under any
Environmental Law.
4.8 The application made by the Company to Fidelity in connection
with this Agreement and the statements made therein and in any materials
furnished in connection therewith are true and correct as of the date hereof.
All financial statements furnished by the Company to Fidelity in connection
with such application or hereunder have been prepared in accordance with GAAP
and fairly present the financial condition and results of operations of the
Company as of the dates and for the periods indicated therein.
4.9 There is no fact which the Company has not disclosed to Fidelity
in writing which could materially adversely affect the properties, business
or financial condition of the Company or any of the Collateral, or which it
is necessary to disclose in order to keep the foregoing representations and
warranties from being misleading.
SECTION 5. COVENANTS OF THE COMPANY. From the date hereof and until
the payment and performance in full of all of the Obligations, the Company
covenants with Fidelity that:
5.1 The Company shall preserve and maintain its corporate existence,
good standing and authority to transact business in all jurisdictions where
necessary for the proper conduct of its business, and shall maintain all of
its properties, rights, privileges and franchises necessary or desirable in
the normal conduct of its business.
5.2 The Company shall permit Fidelity and its representatives,
including any appraisers, auditors and accountants selected by Fidelity, to
inspect any of the Collateral at any time during normal business hours. In
addition, Fidelity shall have the
<PAGE>
right, from time to time, to audit the Company's books and records during
normal business hours. The Company shall pay all costs associated with any
such audits at the rate of $700 per day per auditor plus reasonable
out-of-pocket expenses.
5.3 The Company shall maintain its books and records in accordance
with GAAP. The Company shall furnish Fidelity, upon request, such information
and statements as Fidelity shall request from time to time regarding the
Company's business affairs, financial condition and results of its
operations. Without limiting the generality of the foregoing, the Company
shall provide Fidelity, (i) on or prior to the 45th day after each month,
unaudited financial statements with respect to such month, (ii) on or prior
to the 60th day after each month, unaudited consolidated and consolidating
financial statements with respect to such month, and (iii), within 90 days
after the end of each of the Company's fiscal years, audited annual
consolidated and consolidating financial statements, together with such
certificates relating to the foregoing as Fidelity may request including,
without limitation, a monthly certificate from the president and chief
financial officer of the Company stating whether any Events of Default have
occurred and stating in detail the nature thereof. The Company shall provide
Fidelity a Borrowing Base Certificate, appropriately completed and with all
attachments, at any time that Fidelity shall request and on or before the
last day of any calendar week in which the Company does not request an
Advance. In addition, the Company shall furnish to Fidelity upon request a
current listing of all open and unpaid accounts payable and accounts
receivable, names, addresses and contact persons for Account Debtors, and
such other items of information that Fidelity may deem necessary or
appropriate from time to time. The Company immediately shall notify Fidelity
in writing upon becoming aware of the existence of any condition or
circumstance that constitutes an Event of Default or that would, with the
giving of notice, the passage of time or both, constitute an Event of
Default. Any such written notice shall specify the nature of such condition
or circumstance, the period of the existence thereof and the action that the
Company proposes to take with respect thereto. The Company, shall, within
two business days after the filing or delivery thereof, deliver to Fidelity a
copy of any report, statement or other filing made with the Securities
Exchange Commission or provided to its stockholders generally.
5.4 The Company promptly shall notify Fidelity of any attachment or
any other legal process levied against the Company and any action, suit,
proceeding or other similar claim initiated against the Company.
5.5 The Company shall keep and maintain adequate insurance by
insurers acceptable to Fidelity with respect to its business and all
Collateral. Such insurance shall cover loss, damages and liability of amounts
not less than reasonably requested by Fidelity and shall include, at a
minimum, business interruption insurance, insurance for workers compensation,
general premises liability, fire, casualty, theft and all risk. The Company
shall cause Fidelity to be an additional insured and loss payee under all
policies of insurance covering any of the Collateral, to the extent of
Fidelity's interest. The Company shall deliver copies of each insurance
policy to Fidelity upon request.
5.6 The Company shall file all tax reports and returns required to be
filed by it in the manner and at the times required by applicable law, and
shall pay all federal, state and local taxes and charges imposed upon the
Company when due (subject to any valid extension).
5.7 The Company shall comply with ERISA and shall not become required
to contribute to any "multiemployee plan" as defined in Section 4001 of
ERISA. The Company shall conduct its business in compliance with all
applicable laws, and shall maintain and comply with all licenses and permits
required under any such laws to conduct its business and perform its
obligations hereunder. Without limiting the generality of the foregoing, the
Company shall comply with all Environmental Laws now or hereafter applicable
to the Company and shall obtain, at or prior to the time required by
applicable Environmental Laws, all environmental, health and safety permits,
licenses and other authorizations necessary for its operations. The Company
promptly shall furnish to Fidelity all written notices of violation,
complaints, penalty assessments, suits or other proceedings received by the
Company with respect to any alleged violation of or non-compliance with any
Environmental Laws.
5.8 The Company shall not incur Capital Expenditures in excess of
$500,000 in the aggregate during any fiscal year, excluding any such Capital
Expenditures funded with the proceeds of any casualty or loss insurance.
5.9 The Company shall maintain a Tangible Net Worth of not less than
the Tangible Net Worth Requirement at all times.
5.10 The Company shall maintain a Debt Service Coverage Ratio of not
less than the DCR Requirement at all times on and after March 31, 1999.
5.11 The Company's Net Profit for each fiscal year of the Company
shall equal or exceed negative $1,000,000 for calendar year 1999 and $240,000
for each calendar year thereafter. The Company's Net Profit shall not be
negative for any four or more consecutive calendar months beginning with
March 1999.
<PAGE>
5.12 The Company shall maintain Working Capital of not less than the
Working Capital Requirement at all times.
5.13 The Company shall not grant, create or allow to exist any
security interest, lien or other encumbrance on any of the Collateral other
than (a) the lien and security interest granted to Fidelity herein, (b) the
security interests, liens or other encumbrances described on Schedule 4.2
attached hereto and any liens and security interests granted to holders of
Debt refinancing any Debt secured by such security interests, liens or other
encumbrances to the extent permitted by Section 5.13(c), (c) purchase money
liens or security interests granted to secure Debt not exceeding $500,000 in
the aggregate per fiscal year of the Company, including, without limitation,
Debt incurred to finance Capital Expenditures, and (d) liens and security
interests securing Debt permitted under Section 5.13(c), and the Company
shall not execute any financing statement in favor of any Person other than
Fidelity, the Persons described on Schedule 4.2 attached hereto and any
Person to whom a purchase money lien or security interest or other lien or
security interest permitted above has been granted. The Company shall not
change its mailing address, chief executive office, principal place of
business or place where such records are maintained, open any new place of
business, close any existing place of business or change the location of any
of the Collateral or transact business under any trade, fictitious or assumed
name other than those set forth under the Company's signature hereon without
providing at least 30 days' prior written notice thereof to Fidelity.
5.14 The Company shall not accept any returns or grant any allowance
or credit (other than those returns, allowances and credits accepted or
granted in the ordinary course of the Company's business) to any Account
Debtor without notice to and the prior written approval of Fidelity. The
Company shall provide to Fidelity for each Account Debtor on Eligible
Accounts a weekly report, in form and substance satisfactory to Fidelity,
itemizing all such returns and allowances made during the previous week with
respect to such Eligible Accounts.
5.15 The Company shall not incur, directly, or indirectly, any Debt
for borrowed money or otherwise under any promissory note, bond, indenture or
similar instrument, or in connection with the obligations of any Person
(whether by guaranty, suretyship, purchase or repurchase agreement or
agreement to make investments or otherwise), other than (a) Debt incurred in
favor of Fidelity, (b) Debt secured by purchase money liens or security
interests permitted by Section 5.13, (c) Debt incurred to refinance any other
Debt then existing and permitted hereunder to the extent that such Debt does
not exceed the amount of Debt refinanced and such Debt is secured only by the
properties and assets that secured the Debt refinanced, (d) Debt incurred in
the normal and ordinary course of the Company's business, or (e) third-party
"mezzanine" Debt incurred by the Company on or before December 31, 1999 in an
aggregate principal amount not to exceed $13,500,000 which Debt is
subordinated to the Obligations, in form and substance satisfactory to
Fidelity.
5.16 The Company shall not use any of the funds paid to the Company
hereunder directly or indirectly for personal, family, household or
agricultural purposes.
5.17 Except in connection with any transaction permitted under Section
5.15, the Company shall not directly or indirectly become liable in
connection with the Debt of any Person, whether by guarantee, surety,
endorsement (other than endorsement of negotiable instruments for collection
in the ordinary course of business), agreement to purchase or repurchase,
agreement to make investments, agreement to provide funds or maintain working
capital, or any agreement to assure a creditor against loss, other than in
favor of Fidelity.
5.18 The Company shall not discontinue, or make any material change
in, its business as currently established, or enter any new or different line
of business not directly related to the Company's existing line of business.
5.19 The Company shall not declare, pay or issue any dividends or
other distributions in respect of its capital stock or distribute, reserve,
secure, or otherwise make or commit distributions on account of its capital
stock, or make any payment on account of the purchase, redemption or other
acquisition or retirement of any shares of its capital stock (each, a
"Distribution"); provided, however, that so long as immediately prior thereto
and after giving effect thereto, no Event of Default or any event or
circumstance that, with the giving of notice, the passage of time or both,
would constitute an Event of Default, has occurred.
5.20 The Company shall not make any loans or advances to or for the
benefit of any officer, director, shareholder or Affiliate of the Company;
provided, however, that the Company may make advances for routine expense
allowances to its officers and directors in the ordinary course of business.
The Company shall not make any payment on any obligation owing to any
officer, director, shareholder or Affiliate of the Company.
5.21 Without the prior written consent of Fidelity, the Company shall
not purchase or otherwise acquire assets from any Person outside the ordinary
course of business of the Company.
<PAGE>
5.22 Without the prior written consent of Fidelity, the Company shall
not invest in or otherwise purchase or acquire the securities of any Person.
5.23 Without the prior written consent of Fidelity, the Company shall
not dispose of any of its assets other than the sale of Inventory in the
ordinary course of business, and the Company shall not dissolve or liquidate
or become a party to any merger or consolidation with any Person.
5.24 The Company (a) shall keep and maintain its furniture, fixtures
machinery and equipment in good operating condition and repair (normal wear
and tear excepted), (b) shall make all necessary repairs thereto so that the
value and operating efficiency thereof shall at all times be maintained and
preserved, and (c) shall not remove any furniture, fixtures machinery or
equipment that is now or hereafter located on the Company's Baytown Facility
(including, without limitation, the furniture, fixtures machinery and
equipment listed or described on Schedule 6A attached hereto) from the
Company's Baytown Facility, except in the ordinary course of the Company's
business, without the prior consent of Fidelity. The Company shall notify
Fidelity immediately in writing of any material loss or damage to any item of
its furniture, fixtures, machinery and equipment.
5.25 If the Company now owns or hereafter acquires any vehicles,
aircraft, watercraft or other machinery and equipment for which a certificate
of title has been issued or applied for, the Company immediately shall
deliver to Fidelity, properly endorsed, each certificate of title or
application for title or other evidence of ownership for each such item of
machinery and equipment. The Company shall take all actions necessary to have
Fidelity's security interest properly recorded on each such certificate of
title and shall take all other actions necessary to perfect Fidelity's
security interest in all such assets now or hereafter acquired by the Company.
SECTION 6. COLLATERAL. In order to secure the payment and
performance of all Obligations, the Company hereby grants to Fidelity a
security interest in and lien upon all of the Company's right, title and
interest in and to (a) all Accounts, contract rights and general intangibles,
receivables and claims, whether now or hereafter arising, all guaranties and
security therefor and all of the Company's right title and interest in the
goods purchased and represented thereby, if any, including all of the
Company's rights in and to returned goods and rights of stoppage in transit,
replevin and reclamation as unpaid vendor; (b) all Inventory, and all
accessions thereto and products thereof and documents therefor; (c) all
furniture, fixtures, equipment and machinery located at the Company's Baytown
Facility (including, without limitation, all furniture, fixtures, equipment
and machinery listed or described on Schedule 6A attached hereto) whether now
or hereafter existing, and whether now or hereafter removed from the
Company's Baytown Facility, and all parts thereof, accessions thereto, and
replacements therefor and all documents and general intangibles covering or
relating thereto; (d) all trademarks, rights and interests protectable as
trademarks, trade names, corporate names, company names, business names,
fictitious business names, trade styles, service marks, logos and any other
designs or sources of business identifies, indicia of origin or similar
devices, all registrations with respect thereto, including, without
limitation, those listed or described on Schedule 6B attached hereto, all
applications with respect to the foregoing, and all extensions and renewals
with respect to any of the foregoing, together with all of the goodwill
associated therewith, in each case whether now or hereafter existing, and all
rights and interest associated with the foregoing including any licenses,
license rights and royalties and all rights by opposition or cancellation
proceedings or otherwise to sue for past, present and future infringements of
such rights; (e) all patents and all applications with respect thereto, all
rights existing with respect to the foregoing, including any licenses,
license rights or royalties, any proceeds of infringement suits, and all
rights to such for past, present and future infringements, in each case,
whether now or hereafter existing; all rights corresponding thereto
throughout the world and all reissues, divisions, continuations, renewals,
extensions and continuations-in-part thereof; (f) all books and records
pertaining to the foregoing, including but not limited to computer programs,
data, certificates, records, circulation lists, subscriber lists, advertiser
lists, supplier lists, customer lists, customer and supplier contracts, sales
orders, and purchasing records; and (g) all proceeds of the foregoing
(collectively, the "Collateral"). The Company agrees to comply with all
appropriate laws in order and to take all actions necessary or desirable in
Fidelity's judgment to perfect Fidelity's security interest in and to the
Collateral, to execute any financing statement or additional documents as
Fidelity may request and to deliver to Fidelity a list of all locations of
its Inventory, equipment and machinery and landlord and or mortgagee lien
waivers with respect to each site where Inventory, equipment or machinery is
located and which is either leased by the Company or has been mortgaged by
the Company, upon request by Fidelity. The parties acknowledge that Waste
Recovery Illinois Partnership is a distinct legal entity separate and apart
from the Company and that none of its assets and properties constitute part
of the Collateral.
SECTION 7. COLLECTION. Each invoice representing an Account shall
state on its face that amounts payable thereunder are payable only at the
Remittance Address. Fidelity shall have the right at any time, either before
or after the occurrence of an Event of Default and without notice to the
Company, to notify any or all Account Debtors on the Collateral of the
assignment of the Collateral to Fidelity and to direct such Account Debtors
to make payment of all amounts due or to become due to the Company directly
to Fidelity, and to the extent permitted by law, to enforce collection of any
Collateral and to adjust, settle or compromise the amount or payment thereof.
So long as no Event of Default or event that, with the passage of time, the
giving of notice or both, would become an Event of Default has occurred and
is continuing, all collections of Collateral of the Company received by
Fidelity shall be
<PAGE>
applied by Fidelity to the payment of the outstanding Advances of the
Company, whether or not then due, then to the principal amount of the Term
Advance, if any, to the Company then due, then to accrued and unpaid interest
on the Advances and Term Advance, if any to the Company then due, then to any
other charges or fees then due and allocable or attributable directly to the
Company, then to all other Obligations then due and any remaining funds shall
be delivered to the Company. Upon the occurrence of an Event of Default or an
event that, with the passage of time, the giving of notice or both, would
become an Event of Default, any such remaining funds may be applied to any of
the Obligations of the Company, whether or not then due, or held by Fidelity
as cash collateral ("Cash Collateral") until all Obligations have been paid
in full and Fidelity has no further obligation to advance funds to the
Company. All amounts and proceeds (including instruments and writings)
received by the Company in respect of the Collateral shall be received in
trust for the benefit of Fidelity hereunder, shall be segregated from other
funds of the Company and shall be immediately paid over to Fidelity in the
same form as received (with any necessary endorsement) to be applied in the
same manner as payments received directly by Fidelity.
SECTION 8. POWER OF ATTORNEY. The Company grants to Fidelity an
irrevocable power of attorney coupled with an interest authorizing and
permitting Fidelity, at its option, with or without notice to the Company, to
do any or all of the following: (a) endorse the name of the Company on any
checks or other evidences of payment whatsoever that may come into the
possession of Fidelity regarding Collateral, including checks received by
Fidelity pursuant to Section 7 hereof; (b) receive, open and forward any mail
addressed to the Company and put Fidelity's address on any statements mailed
to Account Debtors; (c) pay, settle, compromise, prosecute or defend any
action, claim, conditional waiver and release, or proceeding relating to
Collateral; (d) upon the occurrence of an Event of Default, notify, in the
name of the Company, the U.S. Post Office to change the address for delivery
of mail addressed to the Company to such address as Fidelity may designate
(provided that Fidelity shall turn over to the Company all such mail not
relating to Collateral); (e) execute and file on behalf of the Company any
financing statement, amendment thereto or continuation thereof (i) deemed
necessary or appropriate by Fidelity to protect Fidelity's interest in and to
the Collateral or (ii) required or permitted under any provision of this
Agreement; and (f) do all other things necessary and proper in order to carry
out this Agreement. The authority granted to Fidelity herein is irrevocable
until this Agreement is terminated and all amounts due to Fidelity hereunder
have been paid in full. The Company acknowledges that Fidelity may verify or
confirm the Eligible Accounts from time to time, by among other means,
contacting the related Account Debtors, and the Company consents to such
verification and confirmation.
SECTION 9. DEFAULT. An event of default ("Event of Default") shall
be deemed to have occurred hereunder, Fidelity shall have no further
obligation to make any further Advances or Term Advance and may immediately
exercise its rights and remedies with respect to the Collateral under this
Agreement, the UCC and applicable law, upon the happening of one or more of
the following:
(a) The Company shall fail to pay on demand or otherwise as and when
required or due any amount required to be paid or owed by the Company to
Fidelity, whether hereunder or otherwise.
(b) The Company shall breach any covenant or agreement made herein or
in any other Transaction Document (other than those covered by clause (a)
above) and the same shall not be cured to Fidelity's satisfaction within 15
days after the earlier of (i) the date on which Company first has knowledge
that such covenant or agreement has been breached or (ii) the date on which
Fidelity notifies the Company that such covenant or agreement has been
breached.
(c) Any warranty or representation made herein or in any other
Transaction Document shall be untrue in any material respect when made or any
report, certificate, schedule, financial statement, profit and loss statement
or other statement furnished by the Company, or by any other Person on behalf
of the Company, to Fidelity is not true and correct in all material respects
when furnished.
(d) There shall be commenced by or against the Company any voluntary
or involuntary case under the federal Bankruptcy Code, or the Company shall
make an assignment for the benefit of its creditors, or of a receiver or
custodian shall be appointed for the Company for a substantial portion of its
assets.
(e) The Company shall become insolvent in that its debts are greater
than the fair value of its assets, or the Company is generally not paying its
debts as they become due.
(f) Any involuntary lien, garnishment, attachment or the like in
excess of $25,000 shall be issued against or shall attach to the Collateral
and the same is not within 10 days (i) released or (ii) bonded or insured to
the satisfaction of Fidelity.
(g) An event or circumstance shall have occurred which Fidelity
believes has or may result in a material adverse change in the Company's
financial condition, business or operations or the value of the Collateral.
<PAGE>
(h) The Company shall have a federal or state tax lien filed against
any of its properties, or shall fail to pay any federal or state tax when
due, or shall fail to file any federal or state tax form or report as and
when due (subject to any valid extension).
(i) Either (i) any "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) in excess of
$25,000 exists with respect to any ERISA Plan, or (ii) any Termination Event
occurs with respect to any ERISA Plan and the then current value of such
ERISA Plan's benefit liabilities exceeds the then current value of such ERISA
Plan's assets available for the payment of such benefit liabilities by more
than $25,000.
(j) The Company suffers the entry against it of a final judgment for
the payment of money in excess of $25,000, and either (i) such judgment is
not paid in full within 30 days after the entry of such judgment or (ii) such
judgement is not bonded or insured to the satisfaction of Fidelity.
(k) Fidelity shall believe that the prospect for payment or
performance of the Obligations has become impaired.
(l) Any guarantor of the Obligations shall repudiate his, her or its
obligations in respect of such guaranty.
(m) Tom Earnshaw or Randall Connors shall cease to be a member of the
Board of Directors of the Company, or more than one-half of the Board of
Directors of the Company shall be replaced, retire or resign during any
12-month period.
(n) An "Event of Default" shall have occurred under any of the
Transaction Documents.
(o) (i) An "event of default" shall have occurred under any
agreement, document or instrument evidencing Debt exceeding $50,000 of the
Company and such "event of default" is not waived by the holder of such Debt
or otherwise cured by the Company within the "cure period", if any, provided
for in such agreement, document or instrument for such "event of default", or
(ii) any Debt exceeding $50,000 of the Company is accelerated or called for
payment prior to the due date thereof.
Upon the occurrence of an Event of Default described in subsection (d) of
this section, all of the Obligations owing by the Company to Fidelity under
any of the Transaction Documents shall thereupon be immediately due and
payable, without demand, presentment, notice of demand or of dishonor and
nonpayment, or any other notice or declaration of any kind, all of which are
hereby expressly waived by the Company. During the continuation of any other
Event of Default, Fidelity, at any time and from time to time, may declare
any or all of the Obligations owing by the Company to Fidelity under any of
the Transaction Documents immediately due and payable, all without notice,
demand, presentment, notice of demand or of dishonor and nonpayment, or any
notice or declaration of any kind, all of which are hereby expressly waived
by the Company. After any such acceleration (whether automatic or due to
declaration by Fidelity), any obligation of Fidelity to make any further
Advances, Term Advance or loans of any kind under this Agreement or any other
agreement with the Company shall terminate.
The enumeration of Events of Default shall not impair the nature of the
Obligations as demand obligations, at all times payable upon demand pursuant
hereto. All Advances and the Term Advance hereunder are subject to approval
by Fidelity in its sole discretion, and may be declined in whole or in part,
without prior notice to the Company, whether or not an Event of Default may
then be in existence.
SECTION 10. REMEDIES AND APPLICATION OF PROCEEDS.
10.1 In addition to, and without limitation of, the foregoing
provisions of this Agreement, if an Event of Default shall have occurred and
be continuing, Fidelity may from time to time in its discretion, without
limitation and without notice except as expressly herein: (a) exercise in
respect of the Collateral, in addition to other rights and remedies provided
for herein, under the other Transaction Documents or otherwise available to
it, all the rights and remedies of a secured party on default under the UCC
(whether or not the UCC applies to the affected Collateral); (b) require the
Company to, and the Company hereby agrees that it will at its expense,
assemble all or part of the Collateral as directed by Fidelity and make it
available to Fidelity at a place to be designated by Fidelity that is
reasonably convenient to both parties; (c) reduce its claim to judgment or
foreclose or otherwise enforce, in whole or in part, the security interest
created hereby by any available judicial procedure; (d) dispose of, at its
office, on the premises or the Company or elsewhere, all or any part of the
Collateral, as a unit or in parcels, by public or private proceedings; (e)
buy the Collateral, or any part thereof, at any public sale, or at any
private sale if the Collateral is of a type customarily sold in a recognized
market or is of a type that is the subject to widely distributed standard
price quotations; (f) apply by appropriate judicial proceedings for
appointment of a receiver for the Collateral, or any part thereof, and the
Company hereby consents to any such appointment; and (g) at its discretion,
retain the Collateral in satisfaction of the Obligations whenever the
circumstances are such that Fidelity is entitled to do so under the UCC or
otherwise. The Company agrees that, to the extent notice of sale shall be
required by law, at least five
<PAGE>
business days' notice to the Company of the time and place of any public sale
of the Collateral or the time after which any private sale of the Collateral
is to be made shall constitute reasonable notification. Fidelity shall not be
obligated to make any sale of Collateral regardless of whether any notice of
sale has been given. Fidelity may adjourn any public or private sale from
time to time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it
was so adjourned.
10.2 If any Event of Default shall have occurred and be continuing,
Fidelity may in its discretion apply any Cash Collateral, and any cash
proceeds received by Fidelity in respect of any sale of, collection from, or
other realization upon all or any part of the Collateral, to any or all of
the following in such order as Fidelity may elect: (a) the repayment of all
or any portion of the Obligations; (b) the repayment of reasonable costs and
expenses, including reasonable attorneys' fees and legal expenses, incurred
by Fidelity in connection with (i) the administration of this Agreement, (ii)
the custody, preservation, use or operation of, or the sale of, collection
from, or other realization upon, any Collateral, (iii) the exercise or
enforcement of any of the rights of Fidelity hereunder, or (iv) the failure
of the Company to perform or observe any of the provisions hereof; (c) the
payment or other satisfaction of any liens and other encumbrances upon any of
the Collateral; (d) the reimbursement of Fidelity for the amount of any
obligations of the Company paid or discharged by Fidelity, and of any
expenses of Fidelity payable by the Company hereunder or under the other
Transaction Documents; (e) by holding the same as Collateral; (f) the payment
of any other amounts required by applicable law (including, without
limitation, Part 5 of Article 9 of the UCC or any successor or similar
applicable statutory provision); and (g) by delivery to the Company or to
whomsoever shall be lawfully entitled to receive the same or as a court of
competent jurisdiction shall direct.
Section 11. MISCELLANEOUS.
11.1 In the event that the Company commits any act or omission that
prevents or unreasonably interferes with (a) Fidelity's exercise of the
rights and privileges arising under the power of attorney granted in Section
8 of this Agreement or (b) Fidelity's perfection of or levy upon the security
interest granted in the Collateral, including any seizure of any Collateral,
the Company acknowledges that such conduct will cause immediate, severe,
incalculable and irreparable harm and injury, and agrees that such conduct
shall constitute sufficient grounds to entitle Fidelity to an injunction,
writ of possession, or other applicable relief in equity, and to make such
application for such relief in any court of competent jurisdiction, without
any prior notice to the Company.
11.2 All rights, remedies and powers granted to Fidelity in this
Agreement, or in any other instrument or agreement given by the Company to
Fidelity or otherwise available to Fidelity in equity or at law, are
cumulative and may be exercised singularly or concurrently with such other
rights as Fidelity may have. These rights may be exercised from time to time
as to all or any part of the Collateral as Fidelity in its discretion may
determine. No waiver by Fidelity of its rights and remedies shall be
effective unless the waiver is in writing and signed by Fidelity. A waiver by
Fidelity of a right or remedy under this Agreement or any other Transaction
Document on one occasion shall not be deemed to be a waiver of such right or
remedy on any subsequent occasion. An Advance or Term Advance by Fidelity
during the continuation of an Event of Default shall not obligate Fidelity to
make any further Advances or Term Advances during the continuation of such
Event of Default.
11.3 Any notice or communication with respect to this Agreement or any
other Transaction Document shall be given in writing, sent by (i) personal
delivery, (ii) expedited delivery service with proof of delivery, (iii)
United States mail, postage prepaid, registered or certified mail, or (iv)
prepaid telegram, telex or telecopy, addressed to each party hereto at its
address set forth below its signature hereon or to such other address or to
the attention of such other Person as hereafter shall be designated in
writing by the applicable party sent in accordance herewith. Any such notice
or communication shall be deemed to have been given either at the time of
personal delivery or, in the case of delivery service or mail, as of the date
of first attempted delivery at the address and in the manner provided herein,
or in the case of telegram, telex or telecopy, upon receipt. The Company
hereby agrees that Fidelity may publicize the transaction contemplated by
this Agreement in newspapers, trade and similar publications including,
without limitation, the publication of a "tombstone".
11.4 (a) The term of this Agreement shall be for three years from
the date hereof (the original term and any extension thereof are herein
called the "Term") and from year to year thereafter unless either party
hereto gives notice to the other party hereto not more than 90 days or less
than 60 days prior to the end of the Term; provided, however, that Fidelity
may terminate this Agreement at any time effective immediately upon the
occurrence of an Event of Default. The Company acknowledges that, except as
provided in Section 11.4(b), it shall have no right to terminate this
Agreement prior to the end of the Term, that termination of this Agreement at
any time prior to the end of the Term would result in the loss by Fidelity of
benefits under this Agreement and that the damages incurred by Fidelity as a
result of such termination would be difficult and impractical to ascertain.
Therefore, except as provided in Section 11.4(b), in the event this Agreement
is terminated for any reason during the first year of the Term, the Company
shall pay to Fidelity an early termination fee in the amount of 5.00% of the
Facility Limit; if this Agreement is terminated for any reason during the
second year of the Term, the Company shall pay to Fidelity an early
termination fee in the amount of 2.00%
<PAGE>
of the Facility Limit; and if this Agreement is terminated for any reason
during the remainder of the Term, the Company shall pay to Fidelity an early
termination fee in the amount of 1.00% of the Facility Limit; in each case,
to the maximum extent permitted by applicable law. Any termination of this
Agreement shall not affect Fidelity's security interest in the Collateral,
and this Agreement shall continue to be effective, until all transactions
entered into and obligations incurred hereunder have been completed and
satisfied in full.
(b) The Company shall not be entitled to terminate this
Agreement, unless Fidelity consents to such termination. If the Company pays
the Obligations in full after the third year of the Term with the proceeds of
a credit facility provided to the Company by a bank, the Company may
terminate this Agreement in connection therewith without the payment of any
early termination fee. The Company's acceptance of any such credit facility
shall, however, be subject to the terms of Section 11.5. In addition, if the
Company pays the Obligations in full after the second year of the Term solely
with the proceeds of the issuance and sale of shares of the capital stock of
the Company or funds generated from the Company's operations and not
constituting proceeds of indebtedness for money borrowed, the Company may
terminate this Agreement in connection therewith without the payment of any
early termination fee.
11.5 The Company hereby agrees that in the event the Company receives
an offer either during or at the end of the Term from a third party to
provide financing or factoring to the Company, which offer the Company
intends to accept, it shall require the offeror to reduce such offer to a
written commitment (the "new commitment"). In addition, the Company will (a)
notify Fidelity in writing of the identity of the offeror and the complete
terms of the new commitment and (b) if, within 30 days after Fidelity's
receipt of such notice and a signed copy of the new commitment, Fidelity
elects, in its sole discretion, to offer to terminate this Agreement in
accordance with Section 11.4 and match the new commitment, accept Fidelity's
offer.
11.6 Each and every provision, condition, covenant and representation
contained in this Agreement is, and shall be construed, to be a separate and
independent covenant and agreement. If any term or provision of this
Agreement shall to any extent be invalid or unenforceable, the remainder of
the Agreement shall not be affected thereby.
11.7 The Company agrees to indemnify, hold harmless and defend all
Indemnified Persons from and against any and all Indemnified Claims other
than those arising out of the gross negligence or willful misconduct of the
applicable Indemnified Person. THE FOREGOING INDEMNIFICATION SHALL APPLY
WHETHER OR NOT SUCH INDEMNIFIED CLAIMS ARE IN ANY WAY OR TO ANY EXTENT OWED,
IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE
CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY
INDEMNIFIED PERSON. Upon notification and demand, the Company agrees to
provide defense of any Indemnified Claim and to pay all costs and expenses of
counsel selected by any Indemnified Person in respect thereof. Any
Indemnified Person against whom any Indemnified Claim may be asserted
reserves the right to settle or compromise any such Indemnified Claim as such
Indemnified Person may determine in its sole discretion, and the obligations
of such Indemnified Person, if any, pursuant to any such settlement or
compromise shall be deemed included within the Indemnified Claims. Except as
specifically provided in this section, the Company waives all notices from
any Indemnified Person. The provisions of this Section 11.7 shall survive the
termination of this Agreement.
11.8 All grants, covenants and agreements contained in this Agreement
shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that the Company may
not delegate or assign any of its duties or obligations under this Agreement
without the prior written consent of Fidelity. FIDELITY RESERVES THE RIGHT TO
ASSIGN ITS RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT IN WHOLE OR IN PART TO
ANY PERSON OR ENTITY. Without limiting the generality of the foregoing,
Fidelity may from time to time grant participations in all or any part of the
Obligations to any Person on such terms and conditions as may be determined
by Fidelity in its sole and absolute discretion, provided that the grant of
such participation shall not relieve Fidelity of its obligations hereunder
nor create any additional obligation of the Company.
11.9 Any action permitted or provided to be taken or omitted by
Fidelity hereunder may be taken or omitted, as the case may be, by Fidelity
in its sole and absolute discretion, and any consent or waiver required of
Fidelity or determination to be made by Fidelity hereunder may be given,
withheld or made, as the case may be, by Fidelity in its sole and absolute
discretion.
11.10 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO THE
RULES THEREOF RELATING TO CONFLICTS OF LAW. THE COMPANY HEREBY IRREVOCABLY
SUBMITS ITSELF TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS
LOCATED IN DALLAS COUNTY, TEXAS AND AGREES AND CONSENTS THAT SERVICE OF
PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS
AGREEMENT, ANY BORROWING HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN FIDELITY
AND THE COMPANY BY ANY MEANS ALLOWED UNDER STATE OR
<PAGE>
FEDERAL LAW. ANY LEGAL PROCEEDING ARISING OUT OF OR IN ANY WAY RELATED TO
THIS AGREEMENT, ANY BORROWING HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN
FIDELITY AND THE COMPANY SHALL BE BROUGHT AND LITIGATED EXCLUSIVELY IN ANY
ONE OF THE STATE OR FEDERAL COURTS LOCATED IN DALLAS COUNTY, TEXAS HAVING
JURISDICTION. THE PARTIES HERETO HEREBY WAIVE AND AGREE NOT TO ASSERT, BY WAY
OF MOTION, AS A DEFENSE OR OTHERWISE, THAT ANY SUCH PROCEEDING IS BROUGHT IN
AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER.
11.11 EACH OF THE COMPANY AND FIDELITY HEREBY (A) IRREVOCABLY WAIVES,
TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH; (B) IRREVOCABLY WAIVES, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL
DAMAGES; (C) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT
OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR
IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY BASED
UPON, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN
THIS PARAGRAPH.
11.12 THIS AGREEMENT AND THE DOCUMENTS DESCRIBED HEREIN AND DELIVERED
IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT OF 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. NO MODIFICATION OR AMENDMENT OF OR SUPPLEMENT TO THIS AGREEMENT OR
TO ANY SUCH DOCUMENTS SHALL BE VALID OR EFFECTIVE UNLESS THE SAME IS IN
WRITING AND SIGNED BY THE PARTY AGAINST WHOM IT IS SOUGHT TO BE ENFORCED.
<PAGE>
The undersigned have entered into this Agreement as of the date first
written above.
FIDELITY FUNDING, INC., WASTE RECOVERY, INC.,
a Texas corporation a Texas corporation
By: /s/ MICHAEL D. HADDAD By: /s/ CRANDALL S. CONNORS
Michael D. Haddad Randy Connors
President Authorized Representative
Mailing Address: Mailing Address:
12770 Merit Drive, Suite 600 309 S. Pearl Expressway
Dallas, Texas 75251 Dallas, Texas 75201
Street Address: Street Address:
12770 Merit Drive, Suit 600 309 S. Pearl Expressway
Dallas, Texas 75251 Dallas, Texas 75201
TRADE, FICTITIOUS AND ASSUMED NAMES USED:
None.
TRADE, FICTITIOUS AND ASSUMED NAMES USED:
None.
<PAGE>
EXHIBIT 10.45
FIRST AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This First Amended and Restated Loan and Security Agreement (this
"AGREEMENT"), dated as of February 1, 1999, is entered into by and between
Waste Recovery, Inc., a Texas corporation ("WRI"), and Waste Recovery -
Illinois Partnership, an Illinois general partnership (the "Partnership," and
together with WRI, the "COMPANIES"), and Fidelity Funding, Inc., a Texas
corporation ("FIDELITY"). In consideration of the mutual covenants and
agreements contained herein, the Company and Fidelity hereby agree as follows:
SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION.
1.1 When used herein, the following terms shall have the following
meanings:
"ACCOUNT" means the right of a Company to payment for goods sold or
leased or for services rendered by such Company which is not evidenced by an
instrument or chattel paper, whether or not earned by performance.
"ACCOUNT DEBTOR" means the Person obligated to make payment on an
Account.
"ADVANCE" has the meaning given to it in Section 2.1.
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly controls, or is controlled by or under common control
with, such Person.
"ATLANTA FACILITY" means WRI's place of business located at 1593 Huber
Street, N.W., Fulton County, Atlanta, Georgia 30318
"BAYTOWN FACILITY" means WRI's place of business located at 5302 Wade
Road, Harris County, Baytown, Texas 77520.
"BORROWING BASE" means, with respect to either Company, an amount,
determined by Fidelity from time to time, equal to 80% of the face amount of
Eligible Accounts of such Company. Fidelity may change the percentage of
Eligible Accounts constituting the Borrowing Base of either Company from time
to time based upon dilution and other factors deemed appropriate by Fidelity.
"BORROWING BASE CERTIFICATE" means a certificate in the form attached
hereto as Exhibit A, duly executed by an authorized officer of the applicable
Company.
"CAPITAL EXPENDITURES" means, for any period, the aggregate expenditures
by WRI during such period that are classified as capital expenditures in
accordance with GAAP.
"CASH COLLATERAL" has the meaning given to it in Section 7.
"COLLATERAL" has the meaning given to it in Section 6.
"CONCENTRATION LIMIT" means, as of any date, an amount equal to 20% of
the face amount of Eligible Accounts of both Companies outstanding on such
date.
"CONTRACT RATE" means, prior to the occurrence of an Event of Default or
an event or circumstance that would, with the giving of notice, the passage
of time or both, constitute an Event of Default, a rate of interest equal to
the lesser of (a) the Prime Rate in effect from time to time plus 3.00% per
annum and (b) the maximum rate
<PAGE>
permitted by applicable law and means, after the occurrence of an Event of
Default or an event or circumstance that would, with the giving of notice,
the passage of time or both, constitute an Event of Default, a rate of
interest equal to the lesser of (x) the Prime Rate in effect from time to
time plus 8.00% per annum and (y) the maximum rate permitted by applicable
law. The Contract Rate shall be automatically increased or decreased, as the
case may be, without notice to the Companies from time to time as of the
effective date of each change in the Prime Rate.
"CURRENT ASSETS" means, as of any date (determined on a consolidated
basis, without duplication), only those assets of WRI that may, in the
ordinary course of business, be converted into cash within a period of one
year from such date, but excluding (a) amounts due from employees, officers,
shareholders or directors of WRI, (b) prepaid expenses for services or for
supplies that are not purchased for resale, (c) amounts due from any
insurance company as business interruption insurance or fire and casualty
insurance, and (d) amounts due from Affiliates of WRI.
"CURRENT LIABILITIES" means, as of any date (determined on a
consolidated basis, without duplication), all Obligations of WRI, including,
for this purpose, the Advances, that are due within one year from such date.
"DCR REQUIREMENT" means (i) with respect to any date on or after January
1, 1999, but on or prior to March 31, 1999, 0.35 to 1.00, (ii) with respect
to any date on or after April 1, 1999, but on or prior to June 30, 1999, 0.50
to 1.00, (iii) with respect to any date on or after July 1, 1999, but on or
prior to December 31, 1999, 1.00 to 1.00, and (iv) with respect to any date
on or after January 1, 2000, 1.10 to 1.00.
"DEBT" means, with respect to any Person, all indebtedness, obligations
and liabilities of such Person, including without limitation: (a) all
liabilities which would be reflected on a balance sheet of such Person
prepared in accordance with GAAP, (b) all obligations of such Person in
respect of any guaranty of any Debt of another Person, and (c) all
obligations, indebtedness and liabilities secured by any lien on or security
interest in any property or assets of such Person.
"DEBT SERVICE COVERAGE RATIO" means, as of any date (determined on a
consolidated basis, without duplication), the ratio of EBITDA for the
twelve-month period ending on such date (or, in the case of any date prior to
December 31, 1999, the ratio of EBITDA for the period from January 1, 1999
through such date, annualized) to the sum of (a) the Interest Expense
incurred by WRI during the twelve-month period ending on such date (or, in
the case of any date prior to December 31, 1999, the Interest Expenses
incurred by the Company during the period from January 1, 1999 through such
date, annualized) (b) all scheduled principal payments on all Debt for money
borrowed or assets financed under capitalized leases by WRI (including the
Obligations) for the twelve-month period beginning on such date (including
all scheduled principal payments on Debt expected to be incurred during such
period).
"EBITDA" means, for any period, the sum (determined without duplication,
on a consolidated basis and in accordance with GAAP) of (a) WRI's net income
(or net loss) (including gains and losses from the sales of assets in the
ordinary course of business) for such period before provisions for income
taxes, (b) the Interest Expense of WRI for such period, and (c) any
depreciation or amortization expenses incurred by WRI in determining its net
income (or net loss) for such period.
"ELIGIBLE ACCOUNTS" means, at the time of determination thereof, all
Accounts other than (i) any Account which is payable more than 30 days from
invoice date, (ii) any Account which has been outstanding for more than 90
days from invoice date, (iii) any Account as to which Fidelity does not have
a valid and perfected, first priority security interest, (iv) to the extent
that the aggregate outstanding Accounts owed by any single Account Debtor
exceeds the Concentration Limit, any Account owed by such Account Debtor, (v)
any Account that is owed by an Account Debtor that is an Affiliate of either
Company or an officer or employee of either Company, (vi) any Account that
arises out of a sale made or services performed outside of the United States
or that is owed by an Account Debtor located outside the United States, (vii)
any Account that is owed by a creditor or supplier of either Company or with
respect to which any defense, counterclaim or right of set off has been
asserted, (viii) any Account owed by an Account Debtor if more than 25% (in
dollar amount) of such Account Debtor's Accounts owed to either
<PAGE>
Company have been outstanding more than 90 days from invoice date, (ix) any
Account that is owed by the United States or any department, agency or
instrumentality thereof, unless the right to payment under such Account is
assigned to Fidelity as Collateral in full compliance with the Assignment of
Claims Act of 1940, as amended (31 U.S.C. 3727), and (x) any Account that has
not been approved by Fidelity for inclusion in the Borrowing Base.
"ELIGIBLE MACHINERY AND EQUIPMENT" means, at the time of determination,
all machinery and equipment that (i) are owned by WRI, are located at the
Atlanta Facility or the Baytown Facility and, if located on leased or
mortgaged premises, are subject to the terms of a lien waiver letter executed
by the landlord or mortgagee of such premises if deemed necessary by Fidelity
in its sole discretion, (ii) are not on lease or consignment to any Person,
(iii) are subject to an enforceable, first priority, perfected security
interest in favor of Fidelity, (iv) are not, in the opinion of Fidelity,
damaged or obsolete, (v) are not fixtures, and (vi) have been approved by
Fidelity as Eligible Machinery and Equipment.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign
statutes, laws, regulations, rules, orders, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants or industrial, toxic or hazardous
substances into the environment, or otherwise relating to the manufacture,
processing, treatment, transport or handling of pollutants or industrial,
toxic or hazardous substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations
promulgated with respect thereto.
"ERISA PLAN" means any pension benefit plan subject to Title IV of ERISA
maintained by a Company or any Affiliate thereof with respect to which such
Company has a fixed or contingent liability.
"EVENT OF DEFAULT" has the meaning given it in Section 9.
"FACILITY LIMIT" means $3,500,000.
"GAAP" means generally accepted accounting principles and practices as
promulgated by the American Institute of Certified Public Accountants,
applied on basis consistent with past practices.
"GUARANTOR DOCUMENTS" means the general continuing guarantees executed
by each guarantor of the Obligations and all other documents and instruments
executed and delivered in connection herewith or therewith.
"INDEMNIFIED CLAIMS" means any and all claims, demands, actions, causes
of action, judgments, liabilities, damages and consequential damages,
penalties, fines, costs, fees, expenses and disbursements (including, without
limitation, fees and expenses of attorneys and other professional consultants
and experts in connection with any investigation or defense) of every kind,
known or unknown, existing or hereafter arising, foreseeable or
unforeseeable, which may be imposed upon, threatened or asserted against or
incurred or paid by any Indemnified Person at any time and from time to time,
because of, resulting from, in connection with or arising out of any
transaction, act, omission, event or circumstance in any way connected with
the Collateral, the Transaction Documents or the Guarantor Documents
(including but not limited to enforcement of Fidelity's rights thereunder or
the defense of Fidelity's actions thereunder), excluding with respect to any
Indemnified Persons, any of the foregoing resulting from such Indemnified
Person's gross negligence or willful misconduct.
"INDEMNIFIED PERSONS" means Fidelity and its officers, directors,
shareholders, employees, attorneys, representatives and Affiliates.
"INTANGIBLE ASSETS" means, WRI's assets as are treated as intangible
pursuant to GAAP, including, without limitation: (a) obligations owing by
officers, directors, shareholders, employees, subsidiaries, Affiliates or any
Person in which any such officer, director, shareholder, employee,
subsidiary, or Affiliate owns any interest and (b) any asset which is
intangible or lacks intrinsic or marketable value or collectibility,
including, without limitation,
<PAGE>
goodwill, noncompetition agreements, patents, copyrights, trademarks,
franchises, organization or research and development costs, which in the case
of WRI, shall be determined on a consolidated basis, without duplication.
"INTEREST EXPENSE" means, for any period, all interest charges paid or
accrued by WRI on a consolidated basis, with duplication, in accordance with
GAAP during such period.
"INVENTORY" means all goods, now owned or hereafter acquired by a
Company, wherever located, that are held for sale or lease or are to be
furnished under any contract of service (including, but not limited to raw
materials, work in process, finished goods and materials used or consumed in
the manufacture or production thereof, goods in which a Company has an
interest in mass or a joint or other interest or rights of any kind, and
goods which have been returned to or repossessed or stopped in transit by a
Company).
"NET PROFIT" means, for any period, WRI's net income after tax for such
period determined on a consolidated basis, without duplication, and in
accordance with GAAP.
"NEW TERM ADVANCE" has the meaning given to it in Section 2.6.
"OBLIGATIONS" means all indebtedness, obligations and liabilities of
either Company to Fidelity arising under the Transaction Documents, and all
other indebtedness, obligations and liabilities of either Company to
Fidelity, whether presently existing or hereafter arising, direct or
indirect, primary or secondary, joint or several, fixed or contingent, and
whether originally payable to Fidelity or to a third party and subsequently
acquired by Fidelity.
"OLD TERM ADVANCE" has the meaning given to it in Section 2.6.
"PERSON" means any individual, corporation, joint venture, partnership,
trust, unincorporated organization or governmental entity or agency.
"PRIME RATE" means the rate per annum published from time to time by THE
WALL STREET JOURNAL as the base rate for corporate loans at large commercial
banks (or, if more than one such rate is published, the higher or highest of
the rates so published). If such rate is no longer published by THE WALL
STREET JOURNAL, then Fidelity shall, in its sole discretion substitute the
base or prime rate for corporate loans at a large commercial bank for the
base rate published in THE WALL STREET JOURNAL. Such rate may not necessarily
be the lowest or best rate actually charged to any customer of such
commercial bank.
"PROPORTIONATE SHARE" means, with respect to any Company and as of any
date, the ratio obtained by dividing (a) the outstanding principal balance of
the Advances, if any, and the Term Advance to such Company as of such date,
by (b) the sum of the outstanding principal balance of all Advances and Term
Advances as of such date.
"REMITTANCE ADDRESS" means such address as Fidelity shall direct the
Companies from time to time in writing in accordance with the terms hereof.
"SHAREHOLDERS EQUITY" means, as of any date, the sum of (a) the
shareholders' equity of WRI as of such date determined in accordance with
GAAP and (b) the then outstanding principal balance of any Debt of WRI
subordinated to the Obligations pursuant to a subordination agreement
acceptable to Fidelity between Fidelity and the Person to whom such Debt is
owed, which shall be determined on a consolidated basis, without duplication.
"TANGIBLE NET WORTH" means, as of any date, the amount obtained by
subtracting WRI's Intangible Assets as of such date from WRI's Shareholders'
Equity as of such date. In the case of WRI, "Tangible Net Worth" shall be
determined on a consolidated basis, without duplication.
"TANGIBLE NET WORTH REQUIREMENT" means, (a) with respect to any date on
or after the date hereof, but on or prior to December 31, 1998, negative
$1,300,000, (b) with respect to any date on or after January 1, 1999, but on
or prior to September 30, 1999, negative $1,900,000, (c) with respect to any
date on or after October 1, 1999 but
<PAGE>
on or prior to March 31, 2000, negative $2,300,000, and (d) for any date on
or after April 1, 2000, the Tangible Net Worth Requirement as of the last day
of the preceding calendar month plus $20,000.
"TERM" has the meaning given to it in Section 11.4.
"TERM ADVANCE" means the Old Term Advance or the New Term Advance.
"TERMINATION EVENT" means (a) the occurrence with respect to any ERISA
Plan of (i) a reportable event described in Sections 4043(b)(5) of ERISA or
(ii) any other reportable event described in Section 4043(b) of ERISA other
than a reportable event not subject to the provision for 30-day notice to the
Pension Benefit Guaranty Corporation pursuant to a waiver by such corporation
under Section 4043(a) of ERISA or (b) the withdrawal of either Company or any
Affiliate of either Company from any ERISA Plan during a plan year in which
it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or
(c) any event or condition which might constitute grounds under Section 4042
of ERISA for the termination of, or the appointment of a trustee to
administer, any ERISA Plan.
"TRADEMARK SECURITY AGREEMENTS" means the separate Trademark Security
Agreements, each dated as of November 6, 1998, between WRI and Fidelity, as
amended, modified or otherwise supplemented from time to time.
"TRANSACTION DOCUMENTS" means this Agreement, the Trademark Security
Agreements and all other documents and instruments executed and delivered in
connection herewith or therewith.
"UCC" means the Uniform Commercial Code as in effect in the applicable
jurisdiction.
"WORKING CAPITAL" means, as of any date, the excess of Current Assets
over Current Liabilities as of such date.
"WORKING CAPITAL REQUIREMENT" means (a) negative $5,300,000 until March
31, 2000 and (b) for any date on or after April 1, 2000, the Working Capital
Requirement as of the last day of the preceding calendar month plus $20,000.
1.2 Terms defined in the UCC and used but not defined herein shall
have the meanings ascribed to them in the UCC.
1.3 References herein to a particular agreement, instrument or
document also shall be deemed to refer to and include all renewals,
extensions and modifications of such agreement, instrument or document. All
addenda, exhibits and schedules attached to this Agreement are a part hereof
for all purposes. Words in the singular form shall be construed to include
the plural and vice versa, unless the context otherwise requires.
1.4 All interest accruing hereunder shall be calculated on the basis
of actual days elapsed (including the first but excluding the last day) plus
three business days and a year of 360 days. Unless otherwise expressly
provided herein or unless Fidelity otherwise consents, all financial
statements and reports furnished to Fidelity hereunder shall be prepared, and
all financial computations and determinations pursuant hereto shall be made,
in accordance with GAAP. All payments received by Fidelity after its
internally established time for closing business on any business day shall be
applied as of the next succeeding business day. Any payment which is due on a
day which is not a business day shall instead be deemed to be due on the next
succeeding business day, and interest thereon shall accrue and be payable at
the then applicable rate during the time of such extension. Fidelity's
records in respect of loans advanced, accrued interest, payments received and
applied and other matters in respect of calculation of the amount of the
Obligations shall be deemed conclusive absent demonstration of error. All
statements of account rendered by Fidelity to the Companies relating to
principal, accrued interest or costs owing by the Companies under this
Agreement shall be presumed to be correct and accurate unless, within 30 days
after receipt thereof, the Companies shall notify Fidelity in writing of any
claimed error therein.
<PAGE>
SECTION 2. ADVANCES.
2.1 Subject to the terms of this Agreement, including, without
limitation, Section 3, Fidelity shall make advances to each Company (each an
"Advance and collectively the "Advances") from time to time during the Term;
provided, however, that the aggregate principal amount of Advances
outstanding at any time to any Company shall not exceed such Company's
Borrowing Base determined by Fidelity from time to time; and provided,
further, however, that the aggregate principal amount of Advances outstanding
at any time to the Companies shall not exceed the Facility Limit. Each
Advance must be in a minimum amount of $5,000 or, if less, the unadvanced
portion of the Borrowing Base. The Companies hereby agree to repay to
Fidelity all Advances made to the Companies hereunder, together with interest
thereon, in the manner provided herein. The principal owing hereunder in
respect of the Advances at any given time shall equal the aggregate amount of
Advances made hereunder minus all principal payments thereon received by
Fidelity hereunder. Subject to the terms and conditions hereof, the Companies
may borrow, repay and reborrow under this Agreement.
2.2 Each request by the Company to Fidelity for an Advance hereunder
must be in writing or promptly confirmed in writing. Each such written
request or confirmation shall be accompanied by a "Borrowing Base
Certificate" in the form attached hereto as Exhibit "A," together with such
supporting information as Fidelity shall request, signed by an authorized
representative of such Company.
2.3 Promptly after receiving each Borrowing Base Certificate,
Fidelity shall, based upon such Borrowing Base Certificate and such other
information available to Fidelity, redetermine the applicable Borrowing Base,
which redetermination shall take effect immediately and remain in effect
until the next such redetermination. If all conditions precedent to any
Advance requested have been met, Fidelity will on the date requested make
such Advance available to the applicable Company by wire transfer to the
account designated in writing by such Company. In the event Fidelity does not
receive an appropriately completed Borrowing Base Certificate, Fidelity shall
have no obligation to redetermine any Borrowing Base or make any additional
Advances hereunder.
2.4 If the aggregate unpaid principal balance of the Advances to
either Company exceeds such Company's Borrowing Base at any time, the
Companies shall, upon receipt of notice thereof from Fidelity, immediately
repay the principal of the Advances in an amount at least equal to such
excess. Any principal repaid pursuant to this Section 2.4 shall be in
addition to, and not in lieu of, all payments otherwise required to be paid
under the Transaction Documents.
2.5 The aggregate unpaid principal balance of the Advances plus all
accrued but unpaid interest thereon shall be payable by the Companies to
Fidelity on demand, or if no demand is made, on the last day of the Term.
2.6 Fidelity previously has made a term advance (the "Old Term
Advance") in the amount of $250,000 to WRI based upon WRI's Eligible
Machinery and Equipment located at its Baytown Facility. The outstanding
principal balance of the Old Term Advance on the date hereof is $236,111.12.
Subject to the terms and conditions hereof, including, without limitation,
Section 3, Fidelity agrees to make a single term advance (the "New Term
Advance") to WRI on the date hereof in the amount of $363,888.88 based upon
WRI's Eligible Machinery and Equipment located at its Atlanta Facility. The
Companies hereby agree to repay to Fidelity the Term Advances, together with
interest thereon, in the manner provided herein. The principal owing
hereunder in respect of the Term Advances at any given time shall equal the
initial amount of the Term Advances made hereunder minus all principal
payments thereon received by Fidelity hereunder. Amounts repaid in respect
of the Term Advances may not be reborrowed hereunder.
2.7 The request by WRI to Fidelity for the New Term Advance must be
in writing. If all conditions precedent to the New Term Advance have been
met, Fidelity will, on the date requested, make the New Term Advance
available to WRI in immediately available funds by wire transfer to the
account designated in writing by WRI.
<PAGE>
2.8 The aggregate principal balance of the Term Advances plus all
accrued but unpaid interest thereon shall be due and payable by the Companies
to Fidelity on demand, or if no demand is made, as follows: the principal
balance of the Term Advances shall be repaid in 38 equal monthly installments
of $15,384.61, due and payable on the last day of each calendar month,
commencing on February 28, 1999, and a final installment of the remaining
principal balance of the Term Advance, due and payable on April 30, 2002;
provided, however, that the remaining unpaid principal balance of the Term
Advances and all accrued and unpaid interest thereon shall be due and payable
on the earlier of (a) the payment of the remaining unpaid principal balance
of the Advances and (b) the last day of the Term. The Term Advances may be
prepaid in whole or part prior to maturity without penalty or premium. Any
prepayment shall be applied to principal installments owed in respect of the
Term Advances in reverse order of due dates.
2.9 The Eligible Machinery and Equipment shall, at all times, have an
appraised forced liquidation value of not less than 135% of the outstanding
principal balance of the Term Advances. Fidelity may, from time to time,
have the Eligible Machinery and Equipment appraised by an appraiser selected
by Fidelity, and the Companies shall pay the costs of any such appraisal. If
any such appraisal indicates that the forced liquidation value of the
Eligible Machinery and Equipment is less than 135% of the outstanding
principal balance of the Term Advances, the Companies shall, at Fidelity's
option, either (a) grant a security interest to Fidelity in additional
collateral satisfactory to Fidelity having a force liquidation value, which
together with the forced liquidation value of the Eligible Machinery and
Equipment, equals or exceeds 135% of the outstanding principal balance of the
Term Advances or (b) immediately pay down the outstanding principal balance
of the Term Advances, plus all accrued interest on the amount prepaid, to an
amount equal to 135% of the forced liquidation value of the Eligible
Machinery and Equipment.
2.10 The aggregate unpaid principal balance of all Advances and the
Term Advances shall bear interest at the Contract Rate in effect from time to
time. Except as provided in Section 2.5 and Section 2.8, all accrued but
unpaid interest thereon shall be due and payable by the Companies to Fidelity
on the last day of each calendar month.
2.11 The Companies shall pay to Fidelity monthly facility fee in the
amount of $7,083.33 per month, due and payable on the first day of each
calendar month, commencing with March 1, 1999, and ending with November 1,
1999, and (b) an annual facility fee in the amount of 1.00% of the Facility
Limit, payable on each November 6 during the Term, commencing with November
6, 1999. The Companies hereby authorize Fidelity, at its sole discretion, to
deduct any facility fee from any Advance or the Term Advance hereunder.
2.12 Subject to the limitations set forth in Section 2.17, the
Companies shall pay to Fidelity a minimum usage fee (in this section called
the "Minimum Usage Fee") for each calendar month (or fraction thereof, on a
prorated basis) during the Term in an amount equal to the difference (if
positive) between (a) the aggregate income Fidelity would earn during such
calendar month (or fraction thereof, on a prorated basis) pursuant to Section
2.10 (excluding any income earned on any Term Advance) if the aggregate
principal amount of all Advances outstanding and owing by the Companies is
$1,000,000 MINUS (b) the aggregate income earned by Fidelity during such
calendar month (or fraction thereof, on a prorated basis) pursuant to Section
2.10 (excluding any income earned on any Term Advance) . The Minimum Usage
Fee for each calendar month shall be due and payable on the first day of the
next calendar month.
2.13 In addition to, and not in lieu of, any termination fee required by
Section 11.4, the Companies shall pay to Fidelity a liquidation fee (in this
section called the "Liquidation Fee") in the amount of 5.00% of the face amount
of each Eligible Account included in the Borrowing Base that is outstanding at
any time during the Liquidation Period (as defined below). The Liquidation Fee
shall be payable on the earlier to occur of (i) the date on which Fidelity
collects the applicable Eligible Account and (ii) the ninetieth day after the
invoice date of the applicable Eligible Account. For purposes of this section,
the term "Liquidation Period" means a period beginning on the earliest of (i)
the date of commencement against or by either Company of any voluntary or
involuntary case under the federal Bankruptcy Code, (ii) the date of any general
assignment by either Company for the benefit of its creditors; (iii) the date of
any appointment or taking possession by a receiver, liquidator, assignee,
custodian or similar official of all or a substantial part of either Company's
assets, or (iv) the date of the cessation of business of
<PAGE>
either Company (other than in connection with the sale of substantially all
of the assets of either Company, provided that Fidelity consented in writing
to such sale prior thereto), and ending on the date on which Fidelity has
actually received all fees, costs, expenses and other amounts owing to it
hereunder.
2.14 The Companies shall pay to Fidelity a fee of $10,000 plus
out-of-pocket expenses to cover the charges of Fidelity's counsel for the
negotiation, preparation, execution and delivery of the Transaction
Documents. Such fee shall be due and payable as follows: $2,500 on each of
February 1, March 1, April 1 and May 1, 1999. In addition, the Companies
shall pay or reimburse Fidelity upon demand for (a) all other costs and
expenses incurred by Fidelity in connection with its due diligence review of
the Companies and the closing of the transactions contemplated hereby, and
(b) all reasonable attorney's fees, court costs and other expenses incurred
by Fidelity (whether or not litigation is commenced or judgment issued, and
if litigation is commenced whether at trial or any appellate level) in
connection with the enforcement by Fidelity of this Agreement or any other
Transaction Document, the protection or enforcement of Fidelity's interest in
the Collateral, the collection by Fidelity of the Collateral, or the
representation of Fidelity in connection with any bankruptcy case or
insolvency proceeding involving either Company, the Collateral, or any
Account Debtor, including, without limitation, any representation involving
relief from a stay motion, a cash collateral dispute, an assumption or
rejection motion or a dispute concerning any proposed disclosure statement
and plan proposed in any such proceeding.
2.15 Fidelity shall be entitled to collect upon demand its normal and
customary charges for the following routine services provided or obtained in
the course of performing its functions with respect to the Collateral:
appraisals, lock box charges, credit reports, wire transfers, overnight mail
delivery, and UCC, judgment, litigation and tax lien searches and filings.
2.16 All interest, fees and other amounts due to Fidelity pursuant to
this Section 2 shall be payable on demand, and may, in Fidelity's sole
discretion, be deducted from any Advance or Term Advance or paid from the
Cash Collateral.
2.17 Subject to the limitations contained in Section 2.18, the
Companies shall pay to Fidelity, as supplemental interest, an annual fee of
$50,000. Such annual fees shall be fully-earned on the date hereof, shall be
due and payable, in arrears, on each May 5, commencing with May 5, 2000,
during the Term and on the last day of the Term, and shall not be subject to
proration for any partial year during the Term. The Companies hereby
authorize Fidelity, at its sole discretion, to deduct any such fee from any
Advance or the Term Advance hereunder.
2.18 As provided in Section 11.10, it is the intention and agreement
of the Company and Fidelity that all matters or issues relating to usury or
the maximum charges allowable by law for the use, detention or forbearance
of money be governed by the laws of the State of Georgia. The parties hereto
intend to contract in strict compliance with applicable usury law from time
to time in effect. In furtherance thereof, the parties hereto stipulate and
agree that none of the terms and provisions contained in this Agreement or
any other Transaction Document or Guarantor Document shall ever be construed
to create a contract to pay, for the use, forbearance or detention of money,
interest in excess of the maximum amount of interest permitted to be charged
by applicable law from time to time in effect. None of the Companies, any
present or future guarantor or any other Person hereafter becoming liable for
the payment of the Obligations, shall ever be liable for unearned interest
thereon or shall ever be required to pay interest thereon in excess of the
maximum amount that may be lawfully charged under applicable law from time to
time in effect, and the provisions of this paragraph shall control over all
other provisions of the Transaction Documents and Guarantor Documents which
may be in conflict therewith. If any indebtedness or obligation owed by the
Companies under any Transaction Document is prepaid or accelerated and as a
result any amounts held to constitute interest are determined to be in excess
of the legal maximum, or Fidelity shall otherwise collect moneys which are
determined to constitute interest which would otherwise increase the interest
on all or any part of such obligations to an amounts in excess of that
permitted to be charged by applicable law then in effect, then all such sums
determined to constitute interest in excess of such legal limit shall,
without penalty, be promptly applied to reduce the then outstanding principal
of the related indebtedness or obligations or, at Fidelity's option returned
to the Companies or the other payor thereof upon such determination. In
determining whether or not any amount paid or payable, under any
circumstance, exceeds the maximum amount permitted under applicable law,
Fidelity and the Companies shall to the greatest extent permitted under
applicable law, characterize any non-principal payment as an
<PAGE>
expense, fee or premium rather than as interest, and amortize, prorate,
allocate and spread the total amount of interest throughout the entire
contemplated term of this Agreement in accordance with the amounts
outstanding from time to time hereunder and the Maximum Rate from time to
time in effect under applicable law in order to lawfully charge the maximum
amount of interest permitted under applicable law. If at any time the rate at
which interest is payable hereunder exceeds the Maximum Rate, the amount
outstanding hereunder shall bear interest at the Maximum Rate only, but shall
continue to bear interest at the Maximum Rate until such time as the total
amount of interest accrued hereunder equals (but does not exceed) the total
amount of interest which would have accrued hereunder had there been no
Maximum Rate applicable hereto. As used in this paragraph, (i) the term
"applicable law" means the laws of the State of Georgia or the laws of the
United States of America, whichever laws allow the greater interest, as such
laws now exist or may be changed or amended or come into effect in the
future, and (ii) the term "MAXIMUM RATE" means, at the time of determination,
the maximum rate of interest which, under applicable law, may then be charged
hereunder.
SECTION 3. CONDITIONS PRECEDENT.
3.1 This Agreement shall not become effective, and Fidelity shall not
be obligated to make any Advance or Term Advance hereunder (including the
first), until it shall have received the following documents, duly executed
in form and substance satisfactory to Fidelity and its counsel:
(a) confirmation of the general continuing guarantees of the
Obligations executed by Waste Recovery-Illinois, L.L.C. and Domino
Salvage, Tire Division, Inc., respectively;
(b) certificates executed by the President and the Secretary of each
Company certifying (i) the names and signatures of the officers of
such Company authorized to execute Transaction Documents, (ii) the
resolutions duly adopted by the Board of Directors of such Company
authorizing the execution of the Transaction Documents to which
such Company is a party, and (iii) correctness and completeness of
the copy of the bylaws or partnership agreement, as applicable, of
such Company attached thereto;
(c) a certificate executed by the President and the Chief Financial
Officer/Treasurer of each Company certifying the satisfaction of
the conditions set forth in this Section 3;
(d) certificates regarding the due formation, valid existence and good
standing of each Company (or each partner thereof, in the case of
the Partnership) in the state of its organization issued by the
appropriate governmental authorities in such jurisdiction;
(e) a landlord agreement with Southern Metal Finishing Company, Inc.
whereby it subordinates any security interest that it may have in
the Collateral to Fidelity's security interest therein;
(f) a favorable opinion of counsel for the Companies and each guarantor
of the Obligations covering such matters as Fidelity may reasonably
request;
(g) endorsements naming Fidelity as an additional insured or loss
payee, as appropriate, on all liability insurance and all property
insurance policies of each Company;
(h) an appraisal of WRI's Eligible Machinery and Equipment located at
the Atlanta Facility performed by an appraiser selected by Fidelity
in its sole and absolute discretion showing that the forced
liquidation value of such Eligible Machinery and Equipment is at
least $423,600; and
(i) a release executed by The Bank of New York (as trustee for the
Development Authority of Fulton County, Georgia) releasing any
liens or security interest that it may have in the assets and
properties of WRI;
<PAGE>
(j) a mortgage agreement with Tire Lending Associates subordinating any
interest that Tire Lending Associates may have in the Collateral to
Fidelity's security interest therein; and
(k) an estoppel letter from Waste Management regarding collection
efforts to collect its agreed judgment against WRI.
3.2 Fidelity shall not be obligated to make any Advance or Term
Advance hereunder (including the first), unless: (i) all representations and
warranties made by the Company in the Transaction Documents are true on and
as of the date of such Advance or Term Advance as if such representations and
warranties had been made as of the date of such Advance or Term Advance, (ii)
each Company has performed and complied with all agreements and conditions
required in the Transaction Documents to be performed or complied with by it
on or prior to the date of such Advance or Term Advance, (iii) no Event of
Default or any event or circumstance that, with the passage of time, the
giving of notice or both, would become an Event of Default shall have
occurred, (iv) such Advance or Term Advance shall not be prohibited by any
law or any regulation or any order of any court or governmental agency or
authority, (v) none of either Company or any guarantor shall have repudiated
or made any anticipatory breach of any of its obligations under any
Transaction Document, and (vi) Fidelity shall not have disapproved such
Advance or Term Advance in whole or in part.
3.3 Fidelity shall not be obligated to make the first Advance or the
New Term Advance hereunder, unless, or contemporaneously therewith, WRI shall
have sold its Portland, Oregon facility at a cash price of at least $750,000.
SECTION 4. THE COMPANIES' REPRESENTATIONS AND WARRANTIES. Each
Company represents and warrants to Fidelity on the date hereof, and shall be
deemed to represent and warrant to Fidelity on each date on which an Advance
or a Term Advance is made to either Company hereunder, that:
4.1 Each Company is duly organized, validly existing and in good
standing under the laws of the state of its organization, with all requisite
power and authority to execute, deliver and perform its obligations under
this Agreement and the other Transaction Documents to which it is a party and
to conduct its business as presently conducted. Each of WRI and each partner
of the Partnership is duly qualified and authorized to do business as a
foreign corporation and is in good standing in all states in which such
qualification and good standing are necessary or desirable for the conduct by
such Person of its business or the performance by such Person of its
obligations hereunder. The execution, delivery and performance by each
Company of this Agreement and the other Transaction Documents to which it is
a party do not and will not constitute (a) a violation of any applicable law
or such Company's articles or certificate of incorporation or bylaws or other
constituent documents, as applicable, or (b) a material breach of any other
document, agreement or instrument to which either Company is a party or by
which either Company is bound. This Agreement and the other Transaction
Documents to which either Company is a party have been duly authorized,
executed and delivered by such Company, and are legal, valid and binding
obligations of such Company enforceable against such Company in accordance
with their terms. No consent of, approval by, registration or filing with or
authorization from any governmental authority or agency is required in
connection with the execution, delivery or performance by either Company of
this Agreement or the other Transaction Documents to which it is a party.
4.2 Except as described on Schedule 4.2 attached hereto, none of the
Collateral is subject to any lien, encumbrance, security interest or other
claim of any kind or nature, neither Company has transferred, sold, pledged
or given a security interest in any of its Accounts, Inventory, machinery or
equipment to anyone other than Fidelity, and there are no financing
statements on file in any public office governing any property of either
Company of any kind, real or personal, in which such Company is named in or
has signed as the debtor.
4.3 Except as described on Schedule 4.2 attached hereto, each Company
is the sole owner and holder of, and has good and marketable title to, all
Collateral purported to be owned by it. This Agreement creates a valid
security interest in the Collateral in favor of Fidelity, and, except as
described in Schedule 4.2 attached hereto, such security interest is a
perfected, first-priority security interest in the Collateral superior to the
rights of any other Persons therein.
<PAGE>
4.4 The amount of each Eligible Account of each Company is due and
owing to such Company and represents an accurate statement of a bona fide
sale, delivery and acceptance of Inventory or performance of service by such
Company to or for an Account Debtor. The terms for payment of the Eligible
Accounts are 30 days from date of invoice and the payment of the Eligible
Accounts is not contingent upon the fulfillment by each Company of any
further performance of any nature whatsoever. There are no set-offs,
allowances, discounts, deductions, counterclaims against the Eligible
Accounts or any claims by Account Debtors, of any kind whatsoever, valid or
invalid, that have been or may be asserted as a basis for refusing to pay an
Eligible Account, in whole or in part, either at the time it is accepted by
Fidelity for inclusion in any Borrowing Base or prior to the date it is to be
paid. To the best of each Company's knowledge, each Account Debtor's business
is solvent. Each Company has served or caused to be served any and all
preliminary notices required by law to perfect or enforce any mechanic's lien
or stop notice or bonded stop notice for the Eligible Accounts of such
Company and the information contained in those notices is true and correct to
the best of such Company's knowledge.
4.5 The addresses set forth in the perfection certificates delivered
by each Company to Fidelity in connection herewith are, and for at least the
last six months have been, the mailing addresses, the chief executive office,
the principal place of business, the offices where all of the books and
records concerning the Eligible Accounts are maintained and the location of
all Collateral of the Companies. The Companies do not transact business, nor
have they transacted business during the past five years, under any trade,
fictitious or assumed name other than those set forth under each Company's
signature hereon. During the past five years, neither Company has been a
party to a merger or consolidation and has not acquired all or substantially
all of the assets of any Person except as described on Schedule 4.5 attached
hereto.
4.6 Except as described on Schedule 4.6 attached hereto, each Company
has filed all tax reports and returns required to be filed by it and has paid
all federal, state and local taxes and governmental charges imposed upon such
Company.
4.7 Each Company is in compliance with ERISA, and is not required to
contribute to any "multiemployer plan" as defined in Section 4001 of ERISA.
Each Company has conducted its business in compliance with all applicable
laws, including but not limited to, applicable Environmental Laws, and
maintains and is in compliance with all licenses and permits required under
any such laws to conduct its business and perform its obligations hereunder.
Neither Company has any known material contingent liability under any
Environmental Law.
4.8 At least 70% of the revenues of each Company are derived from
tipping or tire disposal fees and not from the sale of tire-derived fuel.
4.9 The application made by the Companies to Fidelity in connection
with this Agreement and the statements made therein and in any materials
furnished in connection therewith are true and correct as of the date hereof.
All financial statements furnished by the Companies to Fidelity in connection
with such application or hereunder have been prepared in accordance with GAAP
and fairly present the financial condition and results of operations of the
Companies as of the dates and for the periods indicated therein.
4.10 There is no fact which the Companies have not disclosed to
Fidelity in writing which could materially adversely affect the properties,
business or financial condition of the Companies or any of the Collateral, or
which it is necessary to disclose in order to keep the foregoing
representations and warranties from being misleading.
SECTION 5. COVENANTS OF THE COMPANIES. From the date hereof and
until the payment and performance in full of all of the Obligations, each
Company covenants with Fidelity that:
5.1 Each Company shall preserve and maintain its corporate existence,
good standing and authority to transact business in all jurisdictions where
necessary for the proper conduct of its business, and shall maintain all of
its properties, rights, privileges and franchises necessary or desirable in
the normal conduct of its business.
<PAGE>
5.2 Each Company shall permit Fidelity and its representatives,
including any appraisers, auditors and accountants selected by Fidelity, to
inspect any of the Collateral at any time during normal business hours. In
addition, Fidelity shall have the right, from time to time, to audit each
Company's books and records during normal business hours. The Companies shall
pay all costs associated with any such audits at the rate of $700 per day per
auditor plus reasonable out-of-pocket expenses.
5.3 Each Company shall maintain its books and records in accordance
with GAAP. Each Company shall furnish Fidelity, upon request, such
information and statements as Fidelity shall request from time to time
regarding each Company's business affairs, financial condition and results of
its operations. Without limiting the generality of the foregoing, each
Company shall provide Fidelity, (i) on or prior to the 45th day after each
month, unaudited financial statements with respect to such month, (ii) on or
prior to the 60th day after each month, unaudited consolidated and
consolidating financial statements with respect to such month, and (iii),
within 90 days after the end of each of each Company's fiscal years, audited
annual consolidated and consolidating financial statements, together with
such certificates relating to the foregoing as Fidelity may request
including, without limitation, a monthly certificate from the president and
chief financial officer of each Company stating whether any Events of Default
have occurred and stating in detail the nature thereof. Each Company shall
provide Fidelity a Borrowing Base Certificate, appropriately completed and
with all attachments, at any time that Fidelity shall request and on or
before the last day of any calendar week in which such Company does not
request an Advance. In addition, each Company shall furnish to Fidelity upon
request a current listing of all open and unpaid accounts payable and
accounts receivable, names, addresses and contact persons for Account
Debtors, and such other items of information that Fidelity may deem necessary
or appropriate from time to time. Each Company immediately shall notify
Fidelity in writing upon becoming aware of the existence of any condition or
circumstance that constitutes an Event of Default or that would, with the
giving of notice, the passage of time or both, constitute an Event of
Default. Any such written notice shall specify the nature of such condition
or circumstance, the period of the existence thereof and the action that each
Company proposes to take with respect thereto. Each Company, shall, within
two business days after the filing or delivery thereof, deliver to Fidelity a
copy of any report, statement or other filing made with the Securities
Exchange Commission or provided to its stockholders generally.
5.4 Each Company promptly shall notify Fidelity of any attachment or
any other legal process levied against such Company and any action, suit,
proceeding or other similar claim initiated against such Company.
5.5 Each Company shall keep and maintain adequate insurance by
insurers acceptable to Fidelity with respect to its business and all
Collateral. Such insurance shall cover loss, damages and liability of amounts
not less than reasonably requested by Fidelity and shall include, at a
minimum, business interruption insurance, insurance for workers compensation,
general premises liability, fire, casualty, theft and all risk. Each Company
shall cause Fidelity to be an additional insured and loss payee under all
policies of insurance covering any of the Collateral, to the extent of
Fidelity's interest. The Companies shall deliver copies of each insurance
policy to Fidelity upon request.
5.6 The Companies shall file all tax reports and returns required to
be filed by them in the manner and at the times required by applicable law,
and shall pay all federal, state and local taxes and charges imposed upon the
Companies when due (subject to any valid extension).
5.7 Each Company shall comply with ERISA and shall not become
required to contribute to any "multiemployee plan" as defined in Section 4001
of ERISA. Each Company shall conduct its business in compliance with all
applicable laws, and shall maintain and comply with all licenses and permits
required under any such laws to conduct its business and perform its
obligations hereunder. Without limiting the generality of the foregoing, each
Company shall comply with all Environmental Laws now or hereafter applicable
to such Company and shall obtain, at or prior to the time required by
applicable Environmental Laws, all environmental, health and safety permits,
licenses and other authorizations necessary for its operations. Each Company
promptly shall furnish to Fidelity all written notices of violation,
complaints, penalty assessments, suits or other proceedings received by such
Company with respect to any alleged violation of or non-compliance with any
Environmental Laws.
<PAGE>
5.8 WRI shall not incur Capital Expenditures in excess of $500,000 in
the aggregate during any fiscal year, excluding any such Capital Expenditures
funded with the proceeds of any casualty or loss insurance.
5.9 WRI shall maintain a Tangible Net Worth of not less than the
Tangible Net Worth Requirement at all times.
5.10 WRI shall maintain a Debt Service Coverage Ratio of not less than
the DCR Requirement at all times on and after March 31, 1999.
5.11 WRI's Net Profit for each fiscal year of WRI shall equal or
exceed negative $1,000,000 for calendar year 1999 and $240,000 for each
calendar year thereafter. WRI's Net Profit shall not be negative for any
four or more consecutive calendar months beginning with March 1999.
5.12 WRI shall maintain Working Capital of not less than the Working
Capital Requirement at all times.
5.13 Neither Company shall grant, create or allow to exist any
security interest, lien or other encumbrance on any of the Collateral other
than (a) the lien and security interest granted to Fidelity herein, (b) the
security interests, liens or other encumbrances described on Schedule 4.2
attached hereto and any liens and security interests granted to holders of
Debt refinancing any Debt secured by such security interests, liens or other
encumbrances to the extent permitted by Section 5.13(c), (c) purchase money
liens or security interests granted to secure Debt not exceeding $500,000 in
the aggregate per fiscal year of the Companies, including, without
limitation, Debt incurred to finance Capital Expenditures, and (d) liens and
security interests securing Debt permitted under Section 5.13(c), and neither
Company shall execute any financing statement in favor of any Person other
than Fidelity, the Persons described on Schedule 4.2 attached hereto and any
Person to whom a purchase money lien or security interest or other lien or
security interest permitted above has been granted. Neither Company shall
change its mailing address, chief executive office, principal place of
business or place where such records are maintained, open any new place of
business, close any existing place of business or change the location of any
of the Collateral or transact business under any trade, fictitious or assumed
name other than those set forth under such Company's signature hereon without
providing at least 30 days' prior written notice thereof to Fidelity.
5.14 Neither Company shall accept any returns or grant any allowance
or credit (other than those returns, allowances and credits accepted or
granted in the ordinary course of such Company's business) to any Account
Debtor without notice to and the prior written approval of Fidelity. The
Companies shall provide to Fidelity for each Account Debtor on Eligible
Accounts a weekly report, in form and substance satisfactory to Fidelity,
itemizing all such returns and allowances made during the previous week with
respect to such Eligible Accounts.
5.15 Neither Company shall incur, directly, or indirectly, any Debt
for borrowed money or otherwise under any promissory note, bond, indenture or
similar instrument, or in connection with the obligations of any Person
(whether by guaranty, suretyship, purchase or repurchase agreement or
agreement to make investments or otherwise), other than (a) Debt incurred in
favor of Fidelity, (b) Debt secured by purchase money liens or security
interests permitted by Section 5.13, (c) Debt incurred to refinance any other
Debt then existing and permitted hereunder to the extent that such Debt does
not exceed the amount of Debt refinanced and such Debt is secured only by the
properties and assets that secured the Debt refinanced, (d) Debt incurred in
the normal and ordinary course of the Company's business, or (e) third-party
"mezzanine" Debt incurred by either Company on or before December 31, 1999 in
an aggregate principal amount not to exceed $13,500,000 which Debt is
subordinated to the Obligations, in form and substance satisfactory to
Fidelity.
5.16 Neither Company shall use any of the funds paid to such Company
hereunder directly or indirectly for personal, family, household or
agricultural purposes.
<PAGE>
5.17 Except in connection with any transaction permitted under Section
5.15, neither Company shall directly or indirectly become liable in
connection with the Debt of any Person, whether by guarantee, surety,
endorsement (other than endorsement of negotiable instruments for collection
in the ordinary course of business), agreement to purchase or repurchase,
agreement to make investments, agreement to provide funds or maintain working
capital, or any agreement to assure a creditor against loss, other than in
favor of Fidelity.
5.18 Neither Company shall discontinue, or make any material change
in, its business as currently established, or enter any new or different line
of business not directly related to such Company's existing line of business.
5.19 Neither Company shall declare, pay or issue any dividends or
other distributions in respect of its capital stock or distribute, reserve,
secure, or otherwise make or commit distributions on account of its capital
stock, or make any payment on account of the purchase, redemption or other
acquisition or retirement of any shares of its capital stock.
5.20 Neither Company shall make any loans or advances in excess of
$25,000 outstanding in the aggregate at any one time to or for the benefit of
any officer, director, shareholder or Affiliate of such Company; provided,
however, that either Company may make advances for routine expense allowances
to its officers and directors in the ordinary course of business. Neither
Company shall make any payment on any obligation owing to any officer,
director, shareholder or Affiliate of such Company.
5.21 Without the prior written consent of Fidelity, neither Company
shall purchase or otherwise acquire assets at a price of more than $50,000 in
the aggregate during any calendar year from any Person outside the ordinary
course of business of such Company.
5.22 Without the prior written consent of Fidelity, neither Company
shall invest in or otherwise purchase or acquire the securities of any Person
at a price of more than $50,000 in the aggregate during any calendar year.
5.23 Without the prior written consent of Fidelity, neither Company
shall dispose of any of its assets other than the sale of Inventory in the
ordinary course of business, and neither Company shall dissolve or liquidate
or become a party to any merger or consolidation with any Person.
5.24 The Companies (a) shall keep and maintain their furniture,
fixtures machinery and equipment in good operating condition and repair
(normal wear and tear excepted), (b) shall make all necessary repairs thereto
so that the value and operating efficiency thereof shall at all times be
maintained and preserved, and (c) shall not remove any furniture, fixtures
machinery or equipment that is now or hereafter located at WRI's Baytown
Facility or Atlanta Facility (including, without limitation, the furniture,
fixtures machinery and equipment listed or described on Schedule 6A attached
hereto) from such facility, except (x) in the ordinary cause of business and
then only upon 30 days' advance written notice to Fidelity or (y) with the
prior written consent of Fidelity. The Companies shall notify Fidelity
immediately in writing of any material loss or damage to any item of its
furniture, fixtures, machinery and equipment.
5.25 If either Company now owns or hereafter acquires any vehicles,
aircraft, watercraft or other machinery and equipment for which a certificate
of title has been issued or applied for, such Company immediately shall
deliver to Fidelity, properly endorsed, each certificate of title or
application for title or other evidence of ownership for each such item of
machinery and equipment. Each Company shall take all actions necessary to
have Fidelity's security interest properly recorded on each such certificate
of title and shall take all other actions necessary to perfect Fidelity's
security interest in all such assets now or hereafter acquired by such
Company.
5.26 The Trademark Security Agreements hereby are ratified and
confirmed, and WRI agrees that any reference therein to the "Loan Agreement"
shall be and mean a reference to this Agreement.
<PAGE>
SECTION 6. COLLATERAL. In order to secure the payment and
performance of all Obligations, each Company hereby grants to Fidelity a
security interest in and lien upon all of such Company's right, title and
interest in and to (a) all Accounts, contract rights and general intangibles,
receivables and claims, whether now or hereafter arising, all guaranties and
security therefor and all of such Company's right title and interest in the
goods purchased and represented thereby, if any, including all of such
Company's rights in and to returned goods and rights of stoppage in transit,
replevin and reclamation as unpaid vendor; (b) all Inventory, and all
accessions thereto and products thereof and documents therefor; (c) all
furniture, fixtures, equipment and machinery located at WRI's Baytown
Facility or Atlanta Facility (including, without limitation, all furniture,
fixtures, equipment and machinery listed or described on Schedule 6A attached
hereto), whether now or hereafter existing, and whether now or hereafter
removed from WRI's Baytown Facility or Atlanta Facility, and all parts
thereof, accessions thereto, and replacements therefor and all documents and
general intangibles covering or relating thereto; (d) all trademarks, rights
and interests protectable as trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles,
service marks, logos and any other designs or sources of business identifies,
indicia of origin or similar devices, all registrations with respect thereto,
including, without limitation, those listed or described on Schedule 6B
attached hereto, all applications with respect to the foregoing, and all
extensions and renewals with respect to any of the foregoing, together with
all of the goodwill associated therewith, in each case whether now or
hereafter existing, and all rights and interest associated with the foregoing
including any licenses, license rights and royalties and all rights by
opposition or cancellation proceedings or otherwise to sue for past, present
and future infringements of such rights; (e) all books and records pertaining
to the foregoing, including but not limited to computer programs, data,
certificates, records, circulation lists, subscriber lists, advertiser lists,
supplier lists, customer lists, customer and supplier contracts, sales
orders, and purchasing records; and (f) all proceeds of the foregoing
(collectively, the "Collateral"). Each Company agrees to comply with all
appropriate laws in order and to take all actions necessary or desirable in
Fidelity's judgment to perfect Fidelity's security interest in and to the
Collateral, to execute any financing statement or additional documents as
Fidelity may request and to deliver to Fidelity a list of all locations of
its Inventory, equipment and machinery and landlord and or mortgagee lien
waivers with respect to each site where Inventory, equipment or machinery is
located and which is either leased by such Company or has been mortgaged by
such Company, upon request by Fidelity.
SECTION 7. COLLECTION. Each invoice representing an Account shall
state on its face that amounts payable thereunder are payable only at the
Remittance Address. Fidelity shall have the right at any time, either before
or after the occurrence of an Event of Default and without notice to any
Company, to notify any or all Account Debtors on the Collateral of the
assignment of the Collateral to Fidelity and to direct such Account Debtors
to make payment of all amounts due or to become due to any Company directly
to Fidelity, and to the extent permitted by law, to enforce collection of any
Collateral and to adjust, settle or compromise the amount or payment thereof.
So long as no Event of Default or event that, with the passage of time, the
giving of notice or both, would become an Event of Default has occurred and
is continuing, all collections of Collateral of any Company received by
Fidelity shall be applied by Fidelity to the payment of the outstanding
Advances of such Company, whether or not then due, then to any interest due
on any Advances or Term Advance to such Company and any other fees or charges
due hereunder and allocable or attributable directly to such Company, then to
such Company's Proportionate Share of all other Obligations then due and any
remaining funds shall be delivered to such Company. Upon the occurrence of an
Event of Default or an event that, with the passage of time, the giving of
notice or both, would become an Event of Default, any such remaining funds
may be applied to any of the Obligations of the Companies, whether or not
then due, or held by Fidelity as cash collateral ("Cash Collateral") until
all Obligations have been paid in full and Fidelity has no further obligation
to advance funds to the Companies. All amounts and proceeds (including
instruments and writings) received by any Company in respect of the
Collateral shall be received in trust for the benefit of Fidelity hereunder,
shall be segregated from other funds of such Company and shall be immediately
paid over to Fidelity in the same form as received (with any necessary
endorsement) to be applied in the same manner as payments received directly
by Fidelity.
SECTION 8. POWER OF ATTORNEY. Each Company grants to Fidelity an
irrevocable power of attorney coupled with an interest authorizing and
permitting Fidelity, at its option, with or without notice to such Company,
to do any or all of the following: (a) endorse the name of such Company on
any checks or other evidences of payment whatsoever that may come into the
possession of Fidelity regarding Collateral, including checks received by
Fidelity pursuant to Section 7 hereof; (b) receive, open and forward any mail
addressed to such Company and received at the Remittance Address; (c) pay,
settle, compromise, prosecute or defend any action, claim, conditional waiver
and release,
<PAGE>
or proceeding relating to Collateral; (d) upon the occurrence of an Event of
Default, notify, in the name of such Company, the U.S. Post Office to change
the address for delivery of mail addressed to such Company to such address as
Fidelity may designate (provided that Fidelity shall turn over to such
Company all such mail not relating to Collateral); and (e) execute and file
on behalf of such Company any financing statement, amendment thereto or
continuation thereof (i) deemed necessary or appropriate by Fidelity to
protect Fidelity's interest in and to the Collateral or (ii) required or
permitted under any provision of this Agreement. The authority granted to
Fidelity herein is irrevocable until this Agreement is terminated and all
amounts due to Fidelity hereunder have been paid in full. Each Company
acknowledges that Fidelity may verify or confirm the Eligible Accounts from
time to time, by among other means, contacting the related Account Debtors,
and each Company consents to such verification and confirmation.
SECTION 9. DEFAULT. An event of default ("Event of Default") shall
be deemed to have occurred hereunder, Fidelity shall have no further
obligation to make any further Advances or Term Advance and may immediately
exercise its rights and remedies with respect to the Collateral under this
Agreement, the UCC and applicable law, upon the happening of one or more of
the following:
(a) Either Company shall fail to pay on demand or otherwise as and
when required or due any amount required to be paid or owed by such Company
to Fidelity, whether hereunder or otherwise.
(b) Either Company shall breach any covenant or agreement made herein
or in any other Transaction Document (other than those covered by clause (a)
above) and the same shall not be cured to Fidelity's satisfaction within 15
days after the earlier of (i) the date on which such Company first has
knowledge that such covenant or agreement has been breached or (ii) the date
on which Fidelity notifies such Company that such covenant or agreement has
been breached.
(c) Any warranty or representation made herein or in any other
Transaction Document shall be untrue in any material respect when made or any
report, certificate, schedule, financial statement, profit and loss statement
or other statement furnished by either Company, or by any other Person on
behalf of either Company, to Fidelity is not true and correct in all material
respects when furnished.
(d) There shall be commenced by or against the Company any voluntary
or involuntary case under the federal Bankruptcy Code, or either Company
shall make an assignment for the benefit of its creditors, or of a receiver
or custodian shall be appointed for either Company for a substantial portion
of its assets.
(e) Either Company shall become insolvent in that its debts are
greater than the fair value of its assets, or either Company is generally not
paying its debts as they become due.
(f) Any involuntary lien, garnishment, attachment or the like in
excess of $25,000 shall be issued against or shall attach to the Collateral
and the same is not within 10 days (i) released or (ii) bonded or insured to
the satisfaction of Fidelity.
(g) An event or circumstance shall have occurred which Fidelity
believes has or may result in a material adverse change in either Company's
financial condition, business or operations or the value of the Collateral.
(h) Either Company shall have a federal or state tax lien filed
against any of its properties, or shall fail to pay any federal or state tax
when due, or shall fail to file any federal or state tax form or report as
and when due (subject to any valid extension).
(i) Either (i) any "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) in excess of
$25,000 exists with respect to any ERISA Plan, or (ii) any Termination Event
occurs with respect to any ERISA Plan and the then current value of such
ERISA Plan's benefit liabilities exceeds the then current value of such ERISA
Plan's assets available for the payment of such benefit liabilities by more
than $25,000.
<PAGE>
(j) Either Company suffers the entry against it of a final judgment
for the payment of money in excess of $25,000, and either (i) such judgment
is not paid in full within 30 days after the entry of such judgment or (ii)
such judgement is not bonded or insured to the satisfaction of Fidelity.
(k) Fidelity shall believe that the prospect for payment or
performance of the Obligations has become impaired.
(l) Any guarantor of the Obligations shall repudiate his, her or its
obligations in respect of such guaranty.
(m) Tom Earnshaw or Crandall Connors shall cease to be a member of
the Board of Directors of WRI, or more than one-half of the Board of
Directors of WRI shall be replaced, retire or resign during any 12-month
period.
(n) An "Event of Default" shall have occurred under any of the
Transaction Documents.
(o) (i) An "event of default" shall have occurred under any
agreement, document or instrument evidencing Debt exceeding $50,000 of either
Company and such "event of default" is not waived by the holder of such Debt
or otherwise cured by such Company within the "cure period", if any, provided
for in such agreement, document or instrument for such "event of default", or
(ii) any Debt exceeding $50,000 of either Company is accelerated or called
for payment prior to the due date thereof.
Upon the occurrence of an Event of Default described in subsection (d) of
this section, all of the Obligations owing by the Companies to Fidelity under
any of the Transaction Documents shall thereupon be immediately due and
payable, without demand, presentment, notice of demand or of dishonor and
nonpayment, or any other notice or declaration of any kind, all of which are
hereby expressly waived by the Companies. During the continuation of any
other Event of Default, Fidelity, at any time and from time to time, may
declare any or all of the Obligations owing by the Companies to Fidelity
under any of the Transaction Documents immediately due and payable, all
without notice, demand, presentment, notice of demand or of dishonor and
nonpayment, or any notice or declaration of any kind, all of which are hereby
expressly waived by the Companies. After any such acceleration (whether
automatic or due to declaration by Fidelity), any obligation of Fidelity to
make any further Advances, Term Advance or loans of any kind under this
Agreement or any other agreement with the Companies shall terminate.
The enumeration of Events of Default shall not impair the nature of the
Obligations as demand obligations, at all times payable upon demand pursuant
hereto. All Advances and the Term Advance hereunder are subject to approval
by Fidelity in its sole discretion, and may be declined in whole or in part,
without prior notice to the Companies, whether or not an Event of Default may
then be in existence.
SECTION 10. REMEDIES AND APPLICATION OF PROCEEDS.
10.1 In addition to, and without limitation of, the foregoing
provisions of this Agreement, if an Event of Default shall have occurred and
be continuing, Fidelity may from time to time in its discretion, without
limitation and without notice except as expressly herein: (a) exercise in
respect of the Collateral, in addition to other rights and remedies provided
for herein, under the other Transaction Documents or otherwise available to
it, all the rights and remedies of a secured party on default under the UCC
(whether or not the UCC applies to the affected Collateral); (b) require any
Company to, and each Company hereby agrees that it will at its expense,
assemble all or part of the Collateral as directed by Fidelity and make it
available to Fidelity at a place to be designated by Fidelity that is
reasonably convenient to both parties; (c) reduce its claim to judgment or
foreclose or otherwise enforce, in whole or in part, the security interest
created hereby by any available judicial procedure; (d) dispose of, at its
office, on the premises or any Company or elsewhere, all or any part of the
Collateral, as a unit or in parcels, by public or private proceedings; (e)
buy the Collateral, or any part thereof, at any public sale, or at any
private sale if the Collateral is of a type customarily sold in a recognized
market or is of a type that is the subject to widely distributed standard
price quotations; (f) apply by appropriate judicial proceedings for
appointment of a receiver for the Collateral, or any part thereof, and each
Company hereby consents to any such appointment; and (g) at its discretion,
retain the Collateral in satisfaction of
<PAGE>
the Obligations whenever the circumstances are such that Fidelity is entitled
to do so under the UCC or otherwise. Each Company agrees that, to the extent
notice of sale shall be required by law, at least five business days' notice
to such Company of the time and place of any public sale of the Collateral or
the time after which any private sale of the Collateral is to be made shall
constitute reasonable notification. Fidelity shall not be obligated to make
any sale of Collateral regardless of whether any notice of sale has been
given. Fidelity may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned.
10.2 If any Event of Default shall have occurred and be continuing,
Fidelity may in its discretion apply any Cash Collateral, and any cash
proceeds received by Fidelity in respect of any sale of, collection from, or
other realization upon all or any part of the Collateral, to any or all of
the following in such order as Fidelity may elect: (a) the repayment of all
or any portion of the Obligations; (b) the repayment of reasonable costs and
expenses, including reasonable attorneys' fees and legal expenses, incurred
by Fidelity in connection with (i) the administration of this Agreement, (ii)
the custody, preservation, use or operation of, or the sale of, collection
from, or other realization upon, any Collateral, (iii) the exercise or
enforcement of any of the rights of Fidelity hereunder, or (iv) the failure
of any Company to perform or observe any of the provisions hereof; (c) the
payment or other satisfaction of any liens and other encumbrances upon any of
the Collateral; (d) the reimbursement of Fidelity for the amount of any
obligations of any Company paid or discharged by Fidelity, and of any
expenses of Fidelity payable by any Company hereunder or under the other
Transaction Documents; (e) by holding the same as Collateral; (f) the payment
of any other amounts required by applicable law (including, without
limitation, Part 5 of Article 9 of the UCC or any successor or similar
applicable statutory provision); and (g) by delivery to such Company or to
whomsoever shall be lawfully entitled to receive the same or as a court of
competent jurisdiction shall direct.
Section 11. MISCELLANEOUS.
11.1 In the event that either Company commits any act or omission that
prevents or unreasonably interferes with (a) Fidelity's exercise of the
rights and privileges arising under the power of attorney granted in Section
8 of this Agreement or (b) Fidelity's perfection of or levy upon the security
interest granted in the Collateral, including any seizure of any Collateral,
such Company acknowledges that such conduct will cause immediate, severe,
incalculable and irreparable harm and injury, and agrees that such conduct
shall constitute sufficient grounds to entitle Fidelity to an injunction,
writ of possession, or other applicable relief in equity, and to make such
application for such relief in any court of competent jurisdiction, without
any prior notice to such Company.
11.2 All rights, remedies and powers granted to Fidelity in this
Agreement, or in any other instrument or agreement given by either Company to
Fidelity or otherwise available to Fidelity in equity or at law, are cumulative
and may be exercised singularly or concurrently with such other rights as
Fidelity may have. These rights may be exercised from time to time as to all or
any part of the Collateral as Fidelity in its discretion may determine. No
waiver by Fidelity of its rights and remedies shall be effective unless the
waiver is in writing and signed by Fidelity. A waiver by Fidelity of a right or
remedy under this Agreement or any other Transaction Document on one occasion
shall not be deemed to be a waiver of such right or remedy on any subsequent
occasion. An Advance or Term Advance by Fidelity during the continuation of an
Event of Default shall not obligate Fidelity to make any further Advances or
Term Advances during the continuation of such Event of Default.
11.3 Any notice or communication with respect to this Agreement or any
other Transaction Document shall be given in writing, sent by (i) personal
delivery, (ii) expedited delivery service with proof of delivery, (iii)
United States mail, postage prepaid, registered or certified mail, or (iv)
prepaid telegram, telex or telecopy, addressed to each party hereto at its
address set forth below its signature hereon or to such other address or to
the attention of such other Person as hereafter shall be designated in
writing by the applicable party sent in accordance herewith. Any such notice
or communication shall be deemed to have been given either at the time of
personal delivery or, in the case of delivery service or mail, as of the date
of first attempted delivery at the address and in the manner provided herein,
or in the case of telegram, telex or telecopy, upon receipt. The Companies
hereby agree that Fidelity may publicize the transaction contemplated by this
Agreement in newspapers, trade and similar publications including, without
limitation, the publication of a "tombstone".
<PAGE>
11.4 (a) The term of this Agreement shall be for a period
beginning on the date hereof and ending on May 5, 2002 (the original term and
any extension thereof are herein called the "Term") and from year to year
thereafter unless either party hereto gives notice to the other party hereto
not more than 90 days or less than 60 days prior to the end of the Term;
provided, however, that Fidelity may terminate this Agreement at any time
effective immediately upon the occurrence of an Event of Default. The
Companies acknowledge that, except as provided in Section 11.4(b), they shall
have no right to terminate this Agreement prior to the end of the Term, that
termination of this Agreement at any time prior to the end of the Term would
result in the loss by Fidelity of benefits under this Agreement and that the
damages incurred by Fidelity as a result of such termination would be
difficult and impractical to ascertain. Therefore, except as provided in
Section 11.4(b), in the event this Agreement is terminated for any reason on
or prior to November 5, 1999, the Companies shall pay to Fidelity an early
termination fee in the amount of 5.00% of the Facility Limit; if this
Agreement is terminated for any reason after November 5, 1999, but on or
prior to November 5, 2000, the Companies shall pay to Fidelity an early
termination fee in the amount of 2.00% of the Facility Limit; and if this
Agreement is terminated for any reason during the remainder of the Term, the
Companies shall pay to Fidelity an early termination fee in the amount of
1.00% of the Facility Limit; in each case, to the maximum extent permitted by
applicable law. Any termination of this Agreement shall not affect
Fidelity's security interest in the Collateral, and this Agreement shall
continue to be effective, until all transactions entered into and obligations
incurred hereunder have been completed and satisfied in full. Neither
Company shall be entitled to terminate this Agreement as to itself only.
(b) If the Companies pay the Obligations in full after the
third year of the Term with the proceeds of a credit facility provided to the
Companies by a bank, the Companies may terminate this Agreement in connection
therewith without the payment of any early termination fee. The Companies
acceptance of any such credit facility by the Company shall, however, be
subject to the terms of Section 11.5. In addition, if the Companies pay the
Obligations in full after the second year of the Term solely with the
proceeds of the issuance and sale of shares of the capital stock of WRI or
funds generated from the operations of the Companies and not constituting
proceeds of indebtedness for money borrowed, the Companies may terminate this
Agreement in connection therewith without the payment of any early
termination fee.
11.5 Each Company hereby agrees that in the event such Company
receives an offer either during or at the end of the Term from a third party
to provide financing or factoring to such Company, which offer the Company
intends to accept, it shall require the offeror to reduce such offer to a
written commitment (the "new commitment"). In addition, such Company will
(a) notify Fidelity in writing of the identity of the offeror and the
complete terms of the new commitment and (b) if, within 30 days after
Fidelity's receipt of such notice and a signed copy of the new commitment,
Fidelity elects, in its sole discretion, to offer to terminate this Agreement
in accordance with Section 11.4 and match the new commitment, accept
Fidelity's offer.
11.6 Each and every provision, condition, covenant and representation
contained in this Agreement is, and shall be construed, to be a separate and
independent covenant and agreement. If any term or provision of this
Agreement shall to any extent be invalid or unenforceable, the remainder of
the Agreement shall not be affected thereby.
11.7 The Companies agree to indemnify, hold harmless and defend all
Indemnified Persons from and against any and all Indemnified Claims other
than those arising out of the gross negligence or willful misconduct of the
applicable Indemnified Person. THE FOREGOING INDEMNIFICATION SHALL APPLY
WHETHER OR NOT SUCH INDEMNIFIED CLAIMS ARE IN ANY WAY OR TO ANY EXTENT OWED,
IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE
CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY
INDEMNIFIED PERSON. Upon notification and demand, the Companies agree to
provide defense of any Indemnified Claim and to pay all costs and expenses of
counsel selected by any Indemnified Person in respect thereof. Any
Indemnified Person against whom any Indemnified Claim may be asserted
reserves the right to settle or compromise any such Indemnified Claim as such
Indemnified Person may determine in its sole discretion, and the obligations
of such Indemnified Person, if any, pursuant to any such settlement or
compromise shall be deemed included within the
<PAGE>
Indemnified Claims. Except as specifically provided in this section, the
Companies waive all notices from any Indemnified Person. The provisions of
this Section 11.7 shall survive the termination of this Agreement.
11.8 All grants, covenants and agreements contained in this Agreement
shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that the Companies may
not delegate or assign any of their duties or obligations under this
Agreement without the prior written consent of Fidelity. FIDELITY RESERVES
THE RIGHT TO ASSIGN ITS RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT IN WHOLE
OR IN PART TO ANY PERSON OR ENTITY. Without limiting the generality of the
foregoing, Fidelity may from time to time grant participations in all or any
part of the Obligations to any Person on such terms and conditions as may be
determined by Fidelity in its sole and absolute discretion, provided that the
grant of such participation shall not relieve Fidelity of its obligations
hereunder nor create any additional obligation of the Companies.
11.9 Any action permitted or provided to be taken or omitted by
Fidelity hereunder may be taken or omitted, as the case may be, by Fidelity
in its sole and absolute discretion, and any consent or waiver required of
Fidelity or determination to be made by Fidelity hereunder may be given,
withheld or made, as the case may be, by Fidelity in its sole and absolute
discretion.
11.10 ALL OBLIGATIONS HEREUNDER ARE THE JOINT AND SEVERAL OBLIGATION OF
ALL COMPANIES. ALL OBLIGATIONS AND INDEBTEDNESS NOW OR HEREAFTER OWING TO
FIDELITY BY THE COMPANIES JOINTLY AND SEVERALLY OR BY ANY COMPANY
INDIVIDUALLY SHALL BE SECURED BY ALL OF THE COLLATERAL, AND FIDELITY MAY HOLD
AND APPLY AND REAPPLY ALL MONIES, PROPERTY AND OTHER COLLATERAL OF ANY
COMPANY IN PAYMENT OF ANY INDEBTEDNESS, LIABILITIES OR OBLIGATIONS OF ANY OF
THE COMPANIES UNDER THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT. NO
COMPANY SHALL HAVE, AND EACH COMPANY EXPRESSLY WAIVES, ANY, RIGHTS OF
SUBROGATION, REIMBURSEMENT, INDEMNITY, EXONERATION, CONTRIBUTION OR ANY
SIMILAR CLAIM OR AGAINST ANY OTHER COMPANY OR ANY OTHER PERSON DIRECTLY OR
CONTINGENTLY LIABLE FOR THE OBLIGATIONS OR AGAINST OR WITH RESPECT TO ANY
OTHER COMPANY'S PROPERTY (INCLUDING, WITHOUT LIMITATION, ALL OF SUCH
COMPANY'S PROPERTY WHICH SERVES AS COLLATERAL FOR ITS OBLIGATIONS TO
FIDELITY). IN ADDITION, EACH COMPANY WAIVES ANY RIGHT TO ENFORCE ANY REMEDY
WHICH FIDELITY NOW HAS OR MAY HEREAFTER HAVE AGAINST ANY OTHER COMPANY.
NOTWITHSTANDING THE FOREGOING OR ANY OTHER PROVISION OF THIS AGREEMENT, IT IS
UNDERSTOOD AND AGREED THAT NO COMPANY SHALL BE LIABLE HEREUNDER FOR ANY
PORTION OF THE OBLIGATIONS IN EXCESS OF SUCH COMPANY'S "MAXIMUM LIABILITY
AMOUNT." AS USED HEREIN, THE TERM "MAXIMUM LIABILITY AMOUNT" SHALL MEAN,
WITH RESPECT TO ANY COMPANY, THE LESSER OF (a) THE AMOUNT OF THE OBLIGATIONS
OR (b) THE SUM OF (i) THE OUTSTANDING PRINCIPAL BALANCE OF THE ADVANCES TO
SUCH COMPANY HEREUNDER, ACCRUED AND UNPAID INTEREST THEREON, ANY OTHER FEES
AND CHARGES HEREUNDER ALLOCABLE OR ATTRIBUTABLE DIRECTLY TO SUCH COMPANY AND
SUCH COMPANY'S PROPORTIONATE SHARE OF ANY OTHER FEES AND CHARGES HEREUNDER
AND (ii) THE MAXIMUM ADDITIONAL AMOUNT THAT WOULD NOT RESULT IN SUCH
COMPANY'S LIABILITY HEREUNDER CONSTITUTING A FRAUDULENT TRANSFER OR
CONVEYANCE UNDER APPLICABLE STATE OR FEDERAL LAW AS DETERMINED BY A COURT OF
COMPETENT JURISDICTION.
11.11 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO THE
RULES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT ALL
MATTERS OR ISSUES PERTAINING TO USURY OR THE MAXIMUM ALLOWABLE CHARGE UNDER
LAW FOR THE USE, DETENTION OR FORBEARANCE OF MONEY SHALL BE GOVERNED BY THE
LAWS OF THE STATE OF CALIFORNIA. EACH COMPANY HEREBY IRREVOCABLY SUBMITS
ITSELF TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED
IN
<PAGE>
DALLAS COUNTY, TEXAS AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE
MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT, ANY
BORROWING HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN FIDELITY AND EACH
COMPANY BY ANY MEANS ALLOWED UNDER STATE OR FEDERAL LAW. ANY LEGAL PROCEEDING
ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT, ANY BORROWING
HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN FIDELITY AND EACH COMPANY SHALL
BE BROUGHT AND LITIGATED EXCLUSIVELY IN ANY ONE OF THE STATE OR FEDERAL
COURTS LOCATED IN DALLAS COUNTY, TEXAS HAVING JURISDICTION. THE PARTIES
HERETO HEREBY WAIVE AND AGREE NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE
OR OTHERWISE, THAT ANY SUCH PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR
THAT THE VENUE THEREOF IS IMPROPER.
11.12 EACH OF EACH COMPANY AND FIDELITY HEREBY (A) IRREVOCABLY WAIVES,
TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH; (B) IRREVOCABLY WAIVES, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL
DAMAGES; (C) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT
OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR
IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS
PARAGRAPH.
11.13 This Agreement restates and amends the Loan and Security
Agreement, dated November 6, 1998, between WRI and Fidelity (as the same may
have heretofore been amended or modified, the "Original Agreement"), in its
entirety effective as of the date hereof, and all of the terms and provisions
hereof shall supersede the terms and provisions thereof; provided that all
indebtedness and obligations of WRI to Fidelity under the Original Agreement
are renewed and extended hereby and all liens, security interests,
assignments, superior titles, rights, remedies, powers, equities and
priorities (the "Liens") created by the Original Agreement are renewed and
extended hereby and shall continue in full force and effect to secure the
Obligations. By this Agreement, the Liens are hereby ratified and confirmed
as valid, subsisting and continuing to secure the Obligations.
11.14 THIS AGREEMENT AND THE DOCUMENTS DESCRIBED HEREIN AND DELIVERED
IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT OF 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. NO MODIFICATION OR AMENDMENT OF OR SUPPLEMENT TO THIS AGREEMENT OR
TO ANY SUCH DOCUMENTS SHALL BE VALID OR EFFECTIVE UNLESS THE SAME IS IN
WRITING AND SIGNED BY THE PARTY AGAINST WHOM IT IS SOUGHT TO BE ENFORCED.
<PAGE>
The undersigned have entered into this Agreement as of the date first
written above.
FIDELITY FUNDING, INC., WASTE RECOVERY, INC.,
a Texas corporation a Texas corporation
By: /s/ MICHAEL D. HADDAD By: /s/ THOMAS L. EARNSHAW
---------------------------- ----------------------------
Name: Michael D. Haddad Name: Thomas L. Earnshaw
Title: President Title: President
MAILING ADDRESS: MAILING ADDRESS:
12770 Merit Drive, Suite 600 309 S. Pearl Expressway
Dallas, Texas 75251 Dallas, Texas 75201
STREET ADDRESS: STREET ADDRESS:
12770 Merit Drive, Suit 600 309 S. Pearl Expressway
Dallas, Texas 75251 Dallas, Texas 75201
TRADE, FICTITIOUS AND ASSUMED NAMES USED:
None.
WASTE RECOVERY - ILLINOIS PARTNERSHIP,
an Illinois general partnership
BY: WASTE RECOVERY, INC.,
Manager
By: /s/ THOMAS L. EARNSHAW
----------------------------
Thomas L. Earnshaw,
Authorized Representative
MAILING ADDRESS: 309 S. Pearl Expressway
Dallas, Texas 75201
STREET ADDRESS: 309 S. Pearl Expressway
Dallas, Texas 75201
TRADE, FICTITIOUS AND ASSUMED NAMES USED:
None.
<PAGE>
CONSENT AND AGREEMENT
Each of the undersigned hereby consents to the provisions of this
Amendment and the transactions contemplated therein and hereby ratifies and
confirms the general continuing guaranty dated as of November 6, 1998, made
by it for the benefit of Fidelity relating to WRI, and agrees that its
obligations and covenants thereunder are unimpaired hereby and shall remain
in full force and effect and that the "Obligations" covered by such guaranty
shall cover all Obligations of both Companies to Fidelity.
DOMINO SALVAGE, TIRE LENDING, INC.
By: /s/ THOMAS L. EARNSHAW
----------------------------
Thomas L. Earnshaw,
Authorized Representative
WASTE RECOVERY - ILLINOIS, L.L.C.
By: /s/ THOMAS L. EARNSHAW
----------------------------
Thomas L. Earnshaw,
Authorized Representative
<PAGE>
EXHIBIT A
FORM OF BORROWING BASE CERTIFICATE
Date:_________________________
Report #:_____________________
- -------------------------------------------------------------------------------
COLLATERAL ACCOUNTS RECEIVABLE
- -------------------------------------------------------------------------------
1. Gross Collateral as of last report # _____________
Dated:__________________ (line 6 from prior report)
- --------------------------------------------------------------------------------
2. ADD sales additions per attached
- --------------------------------------------------------------------------------
3. ADD debit memos, other adjustments per attached
- --------------------------------------------------------------------------------
4. LESS cash collections (received by Fidelity since prior report)
- --------------------------------------------------------------------------------
5. LESS discounts, CMs, other adjustments per attached
- --------------------------------------------------------------------------------
6. GROSS COLLATERAL PER THIS REPORT
- --------------------------------------------------------------------------------
7. Ineligible A/R
- --------------------------------------------------------------------------------
a. Past due (over 90 days from invoice).
-------------------------------
b. Credit (over 30 days from invoice)
-------------------------------
c. Cross Aging 25%
-------------------------------
d. COD Sales
-------------------------------
e. Foreign
-------------------------------
f. Interco., Contra Accounts
-------------------------------
g. Unreconciled A/R Overage
-------------------------------
h. Other
- --------------------------------------------------------------------------------
8. TOTAL INELIGIBLE PER
THIS REPORT (sum of 7a Through h)
- --------------------------------------------------------------------------------
9. NET ELIGIBLE COLLATERAL (line 6 minus 8)
- --------------------------------------------------------------------------------
10. Advance Rate 80%
- --------------------------------------------------------------------------------
11. A/R Availability (line 9 times 10)
- --------------------------------------------------------------------------------
12. Borrowing Base: $___________ = lesser of Collateral Availability or
Facility Limit less Advances to other Company
- --------------------------------------------------------------------------------
13. LESS Special Reserve
- --------------------------------------------------------------------------------
14. NET AVAILABILITY BEFORE LOAN BALANCE
(line 12 minus 13)
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
LOAN
- --------------------------------------------------------------------------------
15. Loan balance per last report (line 21 from prior report)
- --------------------------------------------------------------------------------
16. LESS payments from collections (same as line 4)
- --------------------------------------------------------------------------------
17. BALANCE per Fidelity report prior to new activity
- --------------------------------------------------------------------------------
18. LESS additional payments (other than collections)
- --------------------------------------------------------------------------------
19. ADD loan adjustments: specify ______________ (Interest, Fees, NSF, etc.)
- --------------------------------------------------------------------------------
20. ADD Advance requested per this report
- --------------------------------------------------------------------------------
21. NEW LOAN BALANCE (not to exceed line 14)
- --------------------------------------------------------------------------------
22. EXCESS AVAILABILITY (line 14 minus 21)
- --------------------------------------------------------------------------------
The undersigned hereby certifies to Fidelity Funding, Inc.
("Fidelity") that:
1. He is the duly elected, qualified, and acting _____________ of
____________________ (the "Company"), is familiar with the facts herein
certified and is duly authorized to certify such facts and make and deliver
this Borrowing Base Certificate for and on behalf of the Company pursuant to
that certain First Amended and Restated Loan and Security Agreement (as from
time to time supplemented or amended, the "Agreement") dated as of February
1, 1999, between Waste Recovery, Inc., Waste Recovery - Illinois Partnership
and Fidelity.
2. All representations and warranties made by the Company in the
Agreement or any other instrument, document, certificate or other agreement
executed in connection therewith (collectively, the "Transaction Documents")
delivered on or before the date hereof are true on and as of the date hereof
as if such representations and warranties had been made as of the date hereof.
3. No Event of Default or any event that, with the giving of
notice, the passage of time or both, would constitute an Event of Default has
occurred and is existing.
4. The Company has performed and complied with all agreements and
conditions required in the Transaction Documents to be performed or complied
with by it on or prior to the funding of the Advance requested hereby.
5. After Fidelity makes the Advance requested hereby, the
aggregate amount of all outstanding Advances to the Company will not exceed
the Company's Borrowing Base and all outstanding Advances to both Waste
Recovery, Inc. and Waste Recovery - Illinois Partnership will not exceed the
Facility Limit.
6. All information contained in this Borrowing Base Certificate is
true, correct and complete.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to them in the Agreement.
IN WITNESS WHEREOF, this instrument is executed by the undersigned as
of ________, 199__.
COMPANY NAME: __________________
By: _______________________
Name: _______________________
Title: ______________________
<PAGE>
EXHIBIT 21.1
WASTE RECOVERY, INC.
SUBSIDIARIES OF THE REGISTRANT
Domino Salvage, Tire Division, Inc. (incorporated in Pennsylvania)
Waste Recovery - Illinois, L.L.C. (an Illinois limited liability company), a
subsidiary of Domino Salvage, Tire Division, Inc. and the Registrant
<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 April 14, 1999 appearing on page F-1 of this Form 10-K.
GRANT THORNTON LLP
Dallas, Texas
November 9, 1999
<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
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 69,594
<SECURITIES> 0
<RECEIVABLES> 1,889,440
<ALLOWANCES> (135,435)
<INVENTORY> 16,398
<CURRENT-ASSETS> 2,826,730
<PP&E> 23,291,611
<DEPRECIATION> (11,113,546)
<TOTAL-ASSETS> 18,203,911
<CURRENT-LIABILITIES> 7,737,761
<BONDS> 6,415,000
0
203,580
<COMMON> 407,800
<OTHER-SE> 18,604,904
<TOTAL-LIABILITY-AND-EQUITY> 18,203,911
<SALES> 0
<TOTAL-REVENUES> 22,327,718
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (982,348)
<INCOME-PRETAX> (6,090,480)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,090,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,090,480)
<EPS-BASIC> (.37)
<EPS-DILUTED> 0
</TABLE>
