<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1996
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20179
RECYCLING INDUSTRIES, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1103445
------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
384 INVERNESS DRIVE SOUTH, SUITE 211
ENGLEWOOD, COLORADO 80112
- ------------------------------------------------ ----------
(Mailing Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (303) 790-7372
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK,
$.001 PAR VALUE
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock as of the close of the period covered by this Report.
NUMBER OF SHARES OUTSTANDING AS OF
CLASS MARCH 31, 1996
----------------------------- ----------------------------------
Common Stock, $.001 Par Value 10,055,193
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS*
Consolidated Balance Sheets - March 31, 1996 (Unaudited)
and September 30, 1995 1-2
Consolidated Statements of Operations (Unaudited) for the
three months and six months ended March 31, 1996 and 1995 3
Consolidated Statement of Stockholders' Equity
through March 31, 1996 (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) for the six
months ended March 31, 1996 and 1995 5
Notes to the Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-14
PART II -- OTHER INFORMATION
Items 1 through 6 15
Signatures 16
* The accompanying interim financial statements have not been audited by
an independent certified public accountant, and are so noted as
"Unaudited" where applicable. Only those statements corresponding to a
fiscal year-end (September 30) are audited.
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND SEPTEMBER 30, 1995
ASSETS
(Substantially Pledged)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $1,240,000 $ 184,000
Trade accounts receivable, less allowance
for doubtful accounts of $10,000 and
$15,000 respectively 2,149,000 1,026,000
Accounts receivable, related party 95,000 223,000
Inventories 2,076,000 497,000
Prepaid expenses 353,000 137,000
Other Current Assets 216,000 -
----------- -----------
Total Current Assets 6,129,000 2,067,000
ENGINEERING PLANS, net of accumulated
amortization of $930,000 and $899,000
respectively 157,000 188,000
PROPERTY, PLANT AND EQUIPMENT, net 8,421,000 6,686,000
DEFERRED INCOME TAXES 1,241,000 800,000
GOODWILL, net 2,560,000 188,000
NON COMPETITION AGREEMENT, net 944,000 -
OTHER ASSETS 486,000 368,000
----------- -----------
TOTAL ASSETS $19,938,000 $10,297,000
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND SEPTEMBER 30, 1995
MARCH 31, 1996 SEPTEMBER 30, 1995
-------------- ------------------
(UNAUDITED)
CURRENT LIABILITIES:
Notes payable $ - $ 61,000
Notes payable - related parties 1,927,000 -
Trade accounts payable 1,235,000 655,000
Trade accounts payable - related parties 140,000 73,000
Accrued liabilities:
Interest 13,000 22,000
Interest - related party 17,000 8,000
Payroll and other 267,000 107,000
Income taxes payable 86,000 86,000
Due to factor, related party 137,000 197,000
Current portion of long-term debt 94,000 227,000
Current portion of long-term debt,
related parties 2,294,000 218,000
Current portion of obligation
under capital lease 314,000 37,000
----------- ----------
Total Current Liabilities $ 6,524,000 1,691,000
----------- ----------
LONG-TERM DEBT:
Long-term debt, net current portion 124,000 132,000
Long-term debt - related parties, net
of current portion 945,000 1,979,000
Obligation under capital lease, net
of current portion 1,452,000 41,000
----------- ----------
Total Long-term Debt 2,521,000 2,152,000
----------- ----------
Total Liabilities 9,045,000 3,843,000
----------- ----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock no par value, 10,000,000
shares authorized
Series A 13,000 (unaudited) shares
issued and outstanding 1,312,000 1,312,000
Series B -0- shares and 300,000
shares issued and outstanding - 450,000
Common Stock ($.001 par value,
50,000,000 shares authorized,
10,055,193 (unaudited) and
8,395,785 shares issued and
outstanding, respectively 10,000 8,000
Additional paid in capital 17,909,000 13,120,000
Accumulated (deficit) (8,338,000) (8,436,000)
------------ -----------
Total Stockholders' Equity 10,893,000 6,454,000
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,938,000 $10,297,000
------------ -----------
------------ -----------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
RECYCLING INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ------------------------
1996 1995 1996 1995
--------- -------- -------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES:
Sales $ 7,275,000 $3,688,000 $10,735,000 $ 7,090,000
Other income 29,000 12,000 28,000 27,000
----------- ---------- ----------- -----------
Total revenue 7,304,000 3,700,000 10,763,000 7,117,000
COST OF SALES 5,936,000 2,668,000 9,352,000 4,993,000
----------- ---------- ----------- -----------
GROSS PROFIT 1,368,000 1,032,000 1,411,000 2,124,000
SELLING & ADMINISTRATIVE
EXPENSE 799,000 588,000 1,553,000 1,241,000
----------- ---------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS 569,000 444,000 (142,000) 883,000
INTEREST EXPENSE 147,000 119,000 245,000 198,000
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES & EXTRAORDINARY
GAINS 422,000 325,000 (387,000) 685,000
INCOME TAX EXPENSE (BENEFIT) 4,000 - (437,000) -
----------- ---------- ----------- -----------
INCOME BEFORE EXTRAORDINARY
GAINS 418,000 325,000 50,000 685,000
EXTRAORDINARY GAIN FROM
SETTLEMENT OF DEBT 48,000 161,000 48,000 222,000
----------- ---------- ----------- -----------
NET INCOME $ 466,000 $ 486,000 $ 98,000 $ 907,000
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
NET INCOME PER SHARE
Before Extraordinary Gain $ .05 $ .09 $ .01 $ .20
Extraordinary Gain - .04 - .06
----------- ---------- ----------- -----------
NET INCOME PER SHARE $ .05 $ .13 $ .01 $ .26
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING 10,266,844 3,879,354 9,789,924 3,495,306
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
SEE ACCOMPANYING NOTES TO THE CONSOLIDTATED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
----------------- -------------- PAID-IN "W" EQUITY ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTION SECURITY (DEFICIT) TOTAL
------ ------ ------ ------ ------- ------ -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30,
1992 - $ - 2,367,728 $ 3,000 $ 5,905,000 $ - $ - $ (6,844,000) $ (936,000)
Common stock issued for
services - - 20,000 - 149,000 - - - 149,000
Contribution of services - - - - 120,000 - - - 120,000
Dilution of predecessor
cost adjustment property
option - - - - 444,000 - - - 444,000
Net (loss) - - - - - - - (2,483,000) (2,483,000)
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
Balances, September 30,
1993 - - 2,387,728 3,000 6,618,000 - - (9,327,000) (2,706,000)
Preferred stock issued
for debt 591,333 887,000 - - - - - - 887,000
Preferred stock issued
for acquisition of NRI 38,000 3,612,000 - - - - - - 3,612,000
Common stock issued for
cash - - 30,000 - 56,000 - - - 56,000
Common stock issued for
services - - 39,600 - 242,000 - - - 242,000
Common stock issued for
debt - - 548,376 - 1,351,000 - - - 1,351,000
Contribution to capital - - - - 2,000 - - - 2,000
Conversion of accrued
salary - - - - - - 246,000 - 246,000
Net (loss) - - - - - - - (924,000) (924,000)
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
Balances, September 30,
1994 629,333 4,499,000 3,005,704 3,000 8,269,000 - 246,000 (10,251,000) 2,766,000
Redemption of preferred
stock Series A (25,000) (2,300,000) - - - - - - (2,300,000)
Redemption of preferred
stock Series B and other
equity for "W" Option (291,333) (437,000) - - - 683,000 (246,000) - -
Common stock issued
for acquisition of MRI - - 120,000 - 1,200,000 - - - 1,200,000
Common stock issued
during private offering,
net of offering costs
of $590,000 - - 3,746,400 4,000 2,778,000 - - - 2,782,000
Common stock issued to
retire debt - - 166,666 - 150,000 - - - 150,000
Common stock issued for
renegotiation of payment
terms for a stockholder
loan - - 10,000 - - - - - -
Common stock issued for
services - - 10,000 - 25,000 - - - 25,000
Common stock issued for
interest on bridgeloans - - 17,351 - 16,000 - - - 16,000
Common stock issued for
"W" option - - 1,319,445 1,000 682,000 (683,000) - - -
Common stock rounding
due to stock split - - 219 - - - - - -
Net income - - - - - - - 1,815,000 1,815,000
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
Balances, September 30,
1995 313,000 1,762,000 8,395,785 8,000 13,120,000 - - (8,436,000) 6,454,000
UNAUDITED
- ---------
Common stock issued for
acquisition of Angio - - 227,693 - 925,000 - - - 925,000
Conversion of preferred
stock series B (300,000) (450,000) 12,000 - 450,000 - - - -
Common stock issued
during private offering,
net of offering costs of
$633,000 - - 1,040,636 1,000 2,227,000 - - - 2,228,000
Conversion of bridge
loans - - 323,523 1,000 1,137,000 - - - 1,138,000
Common stock issued for
cash - - 55,556 - 50,000 - - - 50,000
Net income (Unaudited) - - - - - - - 98,000 98,000
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
Balances, March 31, 1996
(Unaudited) 13,000 $ 1,312,000 10,055,193 $10,000 $17,909,000 $ - $ - $ (8,338,000) $10,893,000
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
4
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED:
-------------------------------
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss) $ 98,000 $ 907,000
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 479,000 454,000
Extraordinary gain from settlement
of debts - (222,000)
Deferred income taxes (441,000) -
Changes in Assets and Liabilities:
Trade accounts receivable (1,123,000) (252,000)
Inventories (213,000) 52,000
Prepaid expenses (91,000) (74,000)
Other current assets (216,000) 32,000
Accounts payable 647,000 (6,000)
Accrued liabilities 160,000 (62,000)
----------- ------------
Net Cash Provided (Used) in
Operating Activities (700,000) 829,000
----------- ------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Additions to equipment (302,000) (406,000)
Receivables - related party 128,000 (81,000)
Non competition agreement (200,000) -
Changes to acquisition costs and
goodwill (604,000) 23,000
Advances (to) related party and other (48,000) -
----------- ------------
Net Cash Provided (Used) in
Investing Activities (1,026,000) (464,000)
----------- ------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from borrowings - related
parties 1,593,000 -
Proceeds from other borrowings 20,000 -
Principal payments on borrowings (401,000) (2,298,000)
Principal payments on borrowings -
related parties (411,000) (281,000)
Principal payments on capital lease (112,000) -
Deferred offering costs (125,000) (314,000)
Proceeds from factor - related party 3,934,000 3,364,000
Payments to factor - related party (3,994,000) (3,494,000)
Proceeds from issuance of common stock 2,278,000 2,782,000
----------- ------------
Net Cash Provided (Used) in
Financing Activities 2,782,000 (241,000)
----------- ------------
Increase (decrease) in Cash 1,056,000 124,000
CASH, Beginning 184,000 115,000
----------- ------------
CASH, Ending $ 1,240,000 $ 239,000
----------- ------------
----------- ------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL INFORMATION:
I. The Financial Statements included herein have been prepared by the
Company without audit, except the September 30, 1995 Balance Sheet which
was audited. The Statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission and reflect
all adjustments, consisting of only normal recurring accruals which
are, in the opinion of management, necessary for a fair statement of
the results of operations for the periods shown. These statements do
not include all information required by Generally Accepted Accounting
Principles to be included in a full set of financial statements. These
financial statements should be read in conjunction with the Financial
Statements and notes thereto included in the Company's latest report on
Form 10-K, dated September 30, 1995.
II. On September 13, 1995, the Common Stock of the Company was approved for
listing on the Nasdaq SmallCap Market under the trading symbol "RECY".
III. On December 11, 1995, Recycling Industries, Inc. (RII or the Company)
acquired substantially all of the assets and the business of Anglo
Metal, Inc. d/b/a Anglo Iron & Metal ("Anglo").
The assets acquired from Anglo consist of a heavy duty automotive
shredder, metal shearing equipment, balers, heavy equipment, tools and
rolling stock used in the business of recycling ferrous and non-ferrous
metals. RII also purchased from Anglo certain real property, buildings
and leasehold improvements used in the metal recycling business.
The purchase price for Anglo was $4,200,000 comprised of
$2,079,000 in cash; a $446,000 secured promissory note payable in 60
consecutive monthly installments of $9,000 including interest; a
$750,000 unsecured note payable in 72 equal, consecutive monthly
installments of $10,000 including interest and 227,693 shares of RII
Common Stock valued at $925,000.
Of the cash paid at the closing of the acquisition, $1,800,000 was
obtained through a sale-leaseback transaction with Ally Capital
Corporation (Ally), collateralized by all of the machinery and
equipment acquired from Anglo. The terms of the sale-leaseback provide
for 60 consecutive monthly lease payments of $41,000 with a bargain
purchase option at the end of the lease term. The remaining $279,000
paid at closing was obtained from the operating cash reserves and
working capital of RII.
RII also entered into an agreement to purchase the ferrous and
non-ferrous inventory from Anglo valued at $1,365,000 for approximately
$1,865,000 which is to be paid in eight equal monthly installments of
$233,000 beginning in February 1996.
RII signed a consulting and non-competition agreement with the
president of Anglo. The term of the noncompete portion is six years and
is valued at $1 million which will be amortized over the term of the
agreement using the straight line method. The consulting portion is
for a term of six months and is payable at $5,000 per month.
6
<PAGE>
The real property acquired from Anglo and the common stock component
of the purchase price have been placed in escrow to provide for the
remediation of environmental contamination, if any, related to the
operations of Anglo prior to the acquisition.
The purchase price has been allocated as follows:
Equipment under lease $ 1,800,000
Contract to purchase land and buildings 70,000
Covenant not to compete 1,000,000
Inventories 1,365,000
Purchase price in excess of net assets
acquired 1,830,000
------------
Total purchase price $ 6,065,000
Capital lease obligation (1,800,000)
Note payable, land (446,000)
Note payable, covenant not to compete (750,000)
Note payable, inventory (1,865,000)
RII common stock (925,000)
------------
Cash paid at closing $ 279,000
------------
------------
Prior to acquiring Anglo, the Company commissioned extensive
environmental studies on the Anglo sites. These environmental
investigations resulted in a determination that certain isolated
areas of the facilities may contain environmental contaminates. As
a result, the Company established an Environmental Escrow to cover
the cost of potential clean up of these areas. Additionally, during
the Escrow Period, the Company shall engage an environmental
engineer to determine the level of contamination on the real
property. The location of any contamination shall be identified by
a survey and the legal description of the real property shall be
revised to provide that the Company will not purchase any
contaminated portion of the real property.
If prior to the termination of the Escrow Period, the location of
the contamination cannot be determined or if the Company determines
that there is extensive contamination of the real property, all
documents held in escrow shall be cancelled and the Company shall
enter into a lease agreement for the real property, which lease
shall be retroactive to the Closing Date. The lease payments under
such lease agreement shall be equal to those that would otherwise
have been due under the Secured Promissory Note. Due to the Escrow
Agreement, the real property has been recorded as an intangible
asset, Contract to Acquire Land.
IV. On January 17, 1996, the Company borrowed $1,575,000 in bridge
financing, which indebtedness is bearing interest at 10% per annum,
with principal and accrued interest due December 13, 1996, or upon the
Company receiving gross proceeds of $3 million or more through the sale
of its securities prior to that date. The Company also issued warrants
to purchase up to 359,250 shares of common stock at $1.50 per share,
exercisable through the end of a three-year period commencing on the
effective date of a registration statement covering the shares issuable
upon their exercise. The proceeds from this bridge financing were used
to complete the acquisition of Anglo, discussed above, and for general
working capital purposes. Upon consummation of the Offering, the
holders of the warrants issued in connection with the bridge financing
have tentatively agreed to exchange their warrants for 316,140 shares
of common stock representing an effective exercise price of $.60 per
share, and have tentatively agreed not to sell such shares of common
stock for a period of one year from the closing of the Offering. The
Company has also agreed to register the shares of Common Stock received
upon such exchange within 120 days from the closing of the Offering.
The net proceeds from the bridge loans were used for working capital
purposes and in connection with the Company's acquisition of Anglo.
7
<PAGE>
V. On January 31, 1996 and April 8, 1996, the Company completed a Private
Placement of an aggregate of 1,454,156 shares of Common Stock at $2.75
per share and issued warrants to purchase up to 727,078 shares of
Common Stock at $7.50 per share. Of the $3,998,934 raised, $1,137,000
was raised through the conversion of the bridge financing indebtedness
discussed above. The remaining $438,000 principal of the bridge
indebtedness plus accrued interest will be repaid from the proceeds of
the proposed public offering, discussed in Note VII below. The
proceeds from these private placements were used to complete the
acquisition of Mid-America Shredding, Inc., discussed in Note VI below
and for general working capital purposes.
VI. On April 15, 1996, the Company acquired substantially all of the
assets of Mid-America Shredding, Inc., a metals recycler located in
Ste. Genevieve, Missouri ("Mid-America"). The purchase price for
Mid-America was approximately $1,850,000 comprised of $640,000 cash
and the assumption of $1,200,000 of secured debt plus accrued
interest. The assumed debt bears interest at prime plus 1-1/2% and is
payable in monthly installments of $10,000 plus accrued interest
through October 1, 1996, and $20,000 per month plus accrued interest
until maturity on May 1, 2000.
VII. The Company has entered into a Letter of Intent with certain parties
with respect to a public offering of the Company's securities (the
"Proposed Public Offering"). The Company anticipates that amount of
the offering will be up to $25 million.
In connection with the Offering, the Company has agreed with the
holders of its outstanding Series G Warrants to purchase the following
percentages of the shares of Common Stock acquired by them in the
Company's February 1995 and May 1995 Private Placements (the "Series G
Shares): (i) if the Company receives gross proceeds of between
$4 million and $5 million from the Proposed Public Offering,
the Company will purchase 5% of the Series G Shares; (ii) if the
Company receives gross proceeds of more than $5 million and less than
$15 million from the Proposed Public Offering, the Company will
purchase 5% of the Series G Shares plus an additional 2.83% of the
Series G Shares for each additional $1 million in gross proceeds
received by the Company (or any portion thereof on a pro-rata basis)
in excess of $5 million, and (iii) if the Company receives gross
proceeds of more than $15 million from the Proposed Public Offering,
the Company will purchase 33.3% of the Series G Shares plus additional
shares at the Company's option. There are 4,273,756 Series G Shares
subject to purchase by the Company.
VIII. The Company has identified several companies whose size and operations
are similar to NRI and Anglo as possible acquisition targets and has
held preliminary discussions and has entered into non-binding letters
of intent with certain of these companies. The consummation of any of
these acquisitions is subject to a number of material contingencies,
including negotiation of definitive acquisition terms, obtaining
sufficient financing to complete the acquisition and completion of the
Company's due diligence related to the acquisition. The Company
proposes to fund these acquisitions through one or a combination of the
following: (i) the proceeds of the proposed public offering; (ii)
issuing common stock or convertible securities of the Company; (iii)
issuing subordinated debt instruments; (iv) through asset based lending
arrangements; or (v) through seller financing arrangements.
IX. For presentation purposes, the Consolidated Statement of Operations
for the three and six months ended March 1996 and 1995, has been
revised to reflect a more appropriate presentation than the Consolidated
Statement of Operations provided in the September 30, 1995 10-K. This
reclassification had no effect on financial condition or results of
operation.
8
<PAGE>
X. Inventories consist of the following at:
MARCH 31, 1996 SEPTEMBER 30, 1995
-------------- ------------------
(UNAUDITED)
Raw materials $1,768,000 $ 350,000
Finished goods 308,000 147,000
---------- ----------
$2,076,000 $ 497,000
---------- ----------
---------- ----------
XI. Property, plant and equipment consists of the following at:
MARCH 31, 1996 SEPTEMBER 30, 1995
-------------- ------------------
Land $1,712,000 $1,640,000
Building and improvements 369,000 365,000
Heavy machinery and equipment 1,551,000 1,472,000
Automotive shredder 3,180,000 3,161,000
Transportation equipment 798,000 679,000
Office equipment 131,000 121,000
Assets under capital lease 1,800,000 ----------
----------- ----------
Total 9,541,000 7,438,000
Less accumulated depreciation
and amortization 1,120,000 752,000
----------- ----------
Total $8,421,000 $6,686,000
----------- ----------
----------- ----------
XII. Other assets consist of the following at:
MARCH 31, 1996 SEPTEMBER 30, 1995
-------------- ------------------
Goodwill, net of accumulated $2,560,000 $ 188,000
amortization of $24,000 and
$0
Non-compete agreement,
net of accumulated
amortization of $56,000 944,000 -
Other assets 486,000 368,000
----------- ----------
$3,990,000 $ 556,000
----------- ----------
----------- ----------
XIII. During the quarter ended March 31, 1996, management
determined that the net operating loss generated from
prior years, in the amount of $1,200,000 is more likely
than not to be used in the near future due to taxable income
estimated to be generated by Anglo. Therefore a net
deferred tax asset of $441,000 has been recorded. Net
operating loss carryovers available for future use through
the year 2010 are approximately $8,200,000.
9
<PAGE>
XIV. Supplemental information to the statement of cash flow for non-cash
investing and financing activities:
SIX MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
---------- ---------
(UNAUDITED) (UNAUDITED)
Cash paid for interest $ 194,000 $ -
---------- ----------
---------- ----------
Stock issued for coversion
of bridge financing $1,137,000 $ 150,000
---------- ----------
---------- ----------
Acquisition of subsidiaries
for stock $ 925,000 $ -
---------- ----------
---------- ----------
Purchase of equipment for
notes payable $ 25,000 $ 35,000
---------- ----------
---------- ----------
Restructure of preferred
stock to debt $ - $2,300,000
---------- ----------
---------- ----------
Acquisition of equipment
under capital lease $ - $ 113,000
---------- ----------
---------- ----------
Contract to acquire land
and building acquired
for note payable $ 446,000 $ -
---------- ----------
---------- ----------
Acquisition of Anglo
inventory for note payable $1,366,000 $ -
---------- ----------
---------- ----------
Capital lease obligation
incurred to finance Anglo
acquisition $1,800,000 $ -
---------- ----------
---------- ----------
Intangible acquired for a
note payable $ 750,000 $ -
---------- ----------
---------- ----------
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto included elsewhere
herein.
OVERVIEW
The Company is a full-service metals recycler engaged in the collection and
processing of various ferrous and non-ferrous metals for resale to domestic and
foreign steel producers and other metals producers and processors. Prior to May
1994, the Company was a development stage enterprise engaged in the development
of the technology related to the recycling of municipal solid waste (the "MSW
Technology"). Although the Company owns this technology, the Company is no
longer actively engaged in its development.
The Company's current operations commenced in May 1994 with the acquisition
of its Nevada metals recycling facility. Since that time, the Company has
experienced significant growth from the acquisition of other metals recycling
facilities. On June 30, 1995, the Company acquired a 20% interest in a metals
recycling facility located in Georgia. On December 11, 1995, the Company
acquired its four southern Texas facilities. These acquisitions, except for the
20% ownership interest in the Georgia facility, are accounted for under the
purchase method for business combinations and, accordingly, the results of
operations for such acquired businesses are included in the Company's financial
statements only from the applicable date of acquisition. As a result, the
Company's historical results of operations for the period presented are not
directly comparable.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
REVENUES. For the three months ended March 31, 1996, revenues increased
by 97.4% to $7.3 million compared to $3.7 million for the same period the
previous year. This increase was the result of the acquisition of the
Company's southern Texas facilities on December 11, 1995. The operations of
the southern Texas facilities generated $3.9 million of revenues for the
three months ended March 31, 1996. Sales for the Nevada facility declined
slightly from $3.7 million to $3.4 million, a decrease of 8.3%.
Ferrous scrap revenues were $5.1 million for the three months ended March
31, 1996, an increase of $3.3 million or 181.1% over the same period in 1995.
Total tons shipped increased from 14,800 tons in 1995 to 38,300 tons in 1996.
The average selling price rose by approximately $2.40 per ton to $124 per
ton. Non-ferrous scrap revenues rose approximately $612,000 or 40.7%,
reflecting the southern Texas facilities sales which was partially offset by
a decrease in average non-ferrous selling prices from $.65 to $.48 per pound.
Total shipments for non-ferrous materials increased 2.0 million pounds to a
total of 4.3 million pounds. Paper sales decreased approximately $280,000,
or 72.5% for the three months ended March 31, 1996 as average sales prices
and volumes declined relative to the comparable period in 1995.
COST OF SALES. The overall cost of sales increased $3.3 million to $5.9
million for the three months ended March 31, 1996, compared to $2.6 million for
the three months ended March 31, 1995, and increased as a percentage of revenues
to 81.3% from 72.1%. This increase in cost of sales was primarily due to
increased raw material and production costs incurred from the acquisition of the
Company's southern Texas facilities which had cost of sales of $3.0 million. In
addition, increases in material and direct production costs at the company's
Nevada facility amounted to $300,000. Overall, gross profit improved by$336,000
for the three months ended March 31, 1996 to a level of $1.4 million compared to
$1.0 million for the three months ended March 31, 1995.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expenses
increased to $799,000 or 10.9% of revenue, for the three months ended March 31,
1996, from $588,000 or 15.9% of revenues, for the three months ended March 31,
1995. This increase resulted from additional expenses associated with acquired
operations and expenses incurred in connection with the Company's increase in
personnel in anticipation of additional acquisitions. Specifically, personnel
costs increased by $331,000 to a level of $448,000 during the period.
INTEREST EXPENSE. Interest expense was $147,000 for the three months ended
March 31, 1996, compared to $119,000 for the three months ended March 31, 1995.
Interest expense increased primarily due to higher average interest rates on the
Company's debt as well as additional debt incurred to finance the purchase of
the southern Texas facilities in December 1995.
EXTRAORDINARY ITEM. Extraordinary gains net of applicable income tax of
$48,000 were recognized during the three months ended March 31, 1996,
primarily related to settlements of debts incurred by the company during
its development stage. A similar gain of $161,000 was recognized from the
settlement of debts during the three months ended March 31, 1995.
PROVISION FOR INCOME TAXES. A provision for income taxes of $4,000 was recorded
during the three months ended March 31, 1996, as compared with no provision for
the comparable period the previous year.
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NET INCOME. For the three months ended March 31, 1996, the Company had a net
income of $466,000, or $.05 per share, compared to a net income of $486,000, or
$.13 per share, for the three months ended March 31, 1995.
SIX MONTHS ENDED MARCH 31, 1996 AND 1995
The results of operations for the six months ended March 31, 1996 were
impacted by a number of factors, including delays in processed scrap
shipments and lower gross margins at the Company's Nevada facility. In
addition, profitability was negatively affected by transition expenses
incurred in conjunction with the acquisition of its southern Texas facilities
on December 11, 1995.
REVENUES. Revenues increased by 51.2% to $10.8 million for the six months
ended March 31, 1996 compared to $7.1 million for the same period for the
previous year primarily due to the acquisition of the Company's southern
Texas facilities on December 11, 1995. The operations of the southern Texas
facilities provided an additional $4.4 million of revenues, which were
offset by a $700,000 decrease in revenues from the operations of the Nevada
facility. The main factors responsible for the decline in revenues at the
Nevada facility were a decrease in paper sales of $467,000 and a decrease in
non-ferrous scrap revenues of $648,000 which was offset by an increase in
ferrous revenues of $421,000.
For the six months ended March 31, 1996, ferrous scrap revenues increased
$3.7 million, or 109.0%, as shipments increased approximately 26,600 tons to
55,500 tons and the average selling price rose approximately $5 per ton to
$123 per ton. Non-ferrous scrap revenues increased approximately $412,000, or
14.0%, reflecting a 2.1 million pound increase in non-ferrous shipments to
6.7 million pounds which was offset by a $.13 per pound decrease in average
non-ferrous selling prices to $.50 per pound. Paper sales decreased
approximately $467,000, or 66.5%, for the six months ended March 31, 1996 as
average sales prices and volumes declined relative to the comparable period
of 1995.
COST OF SALES. The overall cost of sales increased $4.4 million or 57.3%,
to $9.4 million for the six months ended March 31, 1996 compared to $5.0
million for the six months ended March 31, 1995, and increased as a
percentage of revenues to 87.0% from 70.2%. This increase in cost of sales
was primarily due to decreases in ferrous and non-ferrous sales prices at the
Company's Nevada facility, without corresponding declines in raw material and
direct production costs. In addition, increased raw material costs incurred
upon the acquisition of the Company's southern Texas facilities combined with
shipping delays at the facilities further increased costs of sales. As a
result, gross profit decreased to $1.4 million for the six months ended March
31, 1996 compared with $2.1 million for the six months ended March 31, 1995.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased to $1.6 million, or 14.4% of revenues, for the six months ended
March 31, 1996 from $1.2 million, or 17.4% of revenues, for the six months
ended March 31, 1995. This increase resulted from additional expenses
associated with acquired operations and expenses incurred in connection with
the Company's increase in personnel in anticipation of additional
acquisitions. Specifically, $205,000 of the increase was attributable to
compensation paid upon consummation of the acquisition of the Company's
southern Texas facilities.
INTEREST EXPENSE. Interest expense was $245,000 for the six months ended
March 31, 1996 compared to $198,000 for the six months ended March 31, 1995.
Interest expense increased primarily due to higher average interest rates on
the Company's debt as well as additional debt incurred to finance the purchase
of the southern Texas facilities in December 1995.
EXTRAORDINARY ITEM. An extraordinary gain was recognized during the six
months ended March 31, 1996 of approximately $48,000. For the six months
ended March 31, 1995 an extraordinary gain of $222,000 was recognized. Both
gains resulted from the settlement of debts primarily related to services
provided to the Company during its development stage.
BENEFIT FROM INCOME TAXES. For the six months ended March 31, 1996, the
Company recorded an increase to its net deferred tax asset of $441,000 for a
total of $1.2 million and a benefit from deferred income taxes of $441,000.
During the six months ended March 31, 1996, management determined that the
net operating loss carryforward was more likely than not to be used in the
near future due to the future taxable income to be generated by the Company's
southern Texas facilities acquired on December 11, 1995. For the six months
ended March 31, 1996 the operating loss generated an increase to the net
operating loss carryforward in the amount of $387,000 for a total of
approximately $8.2 million available through 2010. No benefit from deferred
income taxes was recognized for the six months ended March 31, 1995.
NET INCOME. For the six months ended March 31, 1996, the Company had net
income of $98,000, or $.01 per share, compared to net income of $907,000, or
$.26 per share, for the six months ended March 31, 1995.
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LIQUIDITY AND CAPITAL RESOURCES
As the Company's business has grown, overall cash requirements for
internal growth and acquisitions have been met through a combination of
private placements of debt and equity securities, equipment and receivables
financing and cash flow from operations. From inception through March 31,
1996, the Company raised $2.5 million through the sale of securities issued
by subsidiary companies and $10.9 million through the sale of stock in the
Company. Through March 1995, the Company was also funded in part by $887,000
of borrowings from First Dominion Holdings, Inc., a company controlled by the
Company's Chairman and Chief Executive Officer ("First Dominion"), all of
which has been repaid. At March 31, 1996, the Company had $7.3 million of
debt outstanding, of which $4.8 million is due in the next twelve months.
Prior to the acquisition of its Nevada facility, the Company generated
operating losses and negative operating cash flow. As a result, the Company
experienced significant shortages of working capital to fund its day-to-day
operations. The shortages of working capital and insufficient cash flow from
time to time prevented the Company from making payments necessary to meet its
obligations. As a result, the Company has been subject to legal claims for
collection of past due amounts, the majority of which arose from services
performed for the Company during its development stage. During the year ended
September 30, 1994, the Company was successful in settling a number of these
legal claims. The Company subsequently negotiated with all of its remaining
vendors and all outstanding claims were settled as of September 30, 1995.
On May 11, 1994, the Company acquired its Nevada facility by purchasing all
of the outstanding common stock of Nevada Recycling, Inc. ("NRI"). As
restructured, the purchase price for the Nevada facility consisted of debt of
$5.0 million and the issuance of 13,000 shares of the Company's Series A
Convertible Preferred Stock valued at $1.3 million. In addition, the Company
issued to the sellers a warrant to acquire up to 20,000 shares of Common Stock
at an exercise price of $1.25 per share.
On June 30, 1995, the Company acquired its 20% interest in a Georgia metals
recycling facility through its investment in the Loef Company ("Loef"). This
investment has been valued at $277,000, the amount of costs incurred by the
Company in pursuing its acquisition of Loef. The Company's ownership interest
in Loef may be reduced to 15% if the Company fails to invest an additional
$200,000 in Loef by June 30, 1996.
On December 11, 1995, the Company acquired its southern Texas facilities
by acquiring substantially all of the assets of Anglo Metals, Inc., d/b/a
Anglo Iron & Metal, for $4.2 million. The purchase price was paid as
follows: (i) $279,000 cash; (ii) $1.8 million of secured equipment financing
bearing interest at approximately 12% and payable in 60 consecutive monthly
installments of $41,000; (iii) a $446,000 secured promissory note bearing
interest at 8% and payable in 60 consecutive monthly installments of $9,000;
(iv) a $750,000 unsecured promissory note and non-compete agreement payable
in 72 consecutive monthly installments of $10,416 and (v) 227,693 shares of
the Company's Common Stock valued at $925,000. In addition, the Company
acquired $1.9 million of ferrous and non-ferrous inventory which is to be
paid in eight equal monthly installments of $233,000 beginning in February 1996.
For the six months ended March 31, 1996, net cash used by operations was
$700,000. This use of cash was primarily the result of the net income of
$98,000 and the depreciation and amortization of $479,000 less the change of
deferred income tax of $441,000. In addition, increases in accounts receivable,
inventory, prepaid expenses, and the current assets amount to $1,643,000 offset
by an increase in accounts payable and accrued liabilities of $807,000.
Inventories and accounts receivable increased primarily because of the
acquisition of the Company's southern Texas facilities on December 11, 1995.
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For the six months ended March 31, 1996, the Company used net cash in
investing activities of $1,026,000 compared to $464,000 for the six months
ended March 31, 1995. This increase reflects $302,000 in additions to
equipment, $200,000 paid in connection with the purchase of the southern Texas
facilities in December 1995, and $604,000 paid for acquisition costs and
goodwill.
The Company had a positive net worth of approximately $10.9 million as of
March 31, 1996, compared to $6.5 million at September 30, 1995. This
improvement in net worth is due to the issuance of common stock during the
quarter ended March 31, 1996, which raised $2.3 million, the conversion of $1.1
million of bridge loan debt to equity, and the issuance of $925,000 of common
stock for the acquisition of the southern Texas facilities.
Working capital as of March 31, 1996 was a negative $395,000 as compared
with a positive working capital of $376,000 as of March 31, 1995. Certain of
the debt used to finance the acquisitions are coming due within the next year.
This included $1.8 million of notes payable for the Nevada acquisition and $1.5
million of notes payable for the purchase of inventory for the southern Texas
facilities.
The planned capital expenditures over the next 12 to 24 months for the
Company's existing facilities are estimated to be $2.0 million. Included in
this amount are capital improvements for the Company's shredders and materials
handling equipment designed to increase capacity and improve operating
efficiencies.
INFLATION AND PREVAILING ECONOMIC CONDITIONS. To date, inflation has not had a
significant impact on the Company's operations. The Company believes it should
be able to implement price increases sufficient to offset most raw material cost
increases resulting from inflation, although there may be some lag time between
the purchase cost and sales price increases and competitive factors may require
the Company to absorb at least a portion of these cost increases. Management
believes that a sustained economic slowdown would negatively impact the
operations and financial performance of the Company.
SEASONALITY. The Company believes that its operations could be adversely
affected by protracted periods of inclement weather which could reduce the
volume of material processed at its facilities. In addition, periodic
maintenance shutdowns by the Company's customers could temporarily have an
adverse impact on the Company's operations.
NEW ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board has
recently issued SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets" and SFAS No. 123, "Accounting for Stock Based Compensation". SFAS No.
121 requires that long-lived assets and certain unidentifiable intangibles be
reported at the lower of the carrying amount or their estimated recoverable
amount. The adoption of SFAS NO. 121 by the Company is not expected to have a
material impact on the Company's financial statements. SFAS No. 123 encourages
the accounting for stock-based employee compensation programs to be reported
within the financial statements on a fair value based method. If the fair value
based method is not adopted, then SFAS No. 123 requires pro forma disclosure of
net income and earnings per share as if the fair value based method had been
adopted. The Company has not yet determined how SFAS No. 123 will be
implemented or its impact on the financial statements. Both SFAS No. 121 and
SFAS No. 123 are effective for fiscal years beginning after December 15, 1995.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation and is not
aware of any threatened litigation that could have a material adverse effect on
the Company's business, operating results or financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
None
REPORTS ON FORM 8-K:
An 8-K dated March 30, 1996, describing the appointment on March 25, 1996
of BDO Seidmen, LLP as the Company's principal independent public
accountants, as amended on form 8-K/A on April 12, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: May 23, 1996 By: /s/ THOMAS J. WIENS
------------------------------------
Thomas J. Wiens, President &
Chief Executive Officer
Date: May 23, 1996 By: /s/ JEROME B. MISUKANIS
------------------------------------
Jerome B. Misukanis, Chief
Financial Officer
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