<PAGE>
UNITED STATES
SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A-2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): December 22, 1995
(December 11, 1995)
RECYCLING INDUSTRIES, INC.
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Colorado 0-20179 84-1103445
-------- ------- ----------
(STATE OR OTHER (COMMISSION (I.R.S. EMPLOYER
JURISDICTION FILE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION)
384 Inverness Drive South, Suite 211
Englewood, Colorado 80112
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 790-7372
Not Applicable
- -------------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 11, 1995, Recycling Industries of Texas, Inc., a wholly-owned
subsidiary of the Registrant, acquired substantially all of the assets and the
business of Anglo Metal, Inc. d/b/a Anglo Iron & Metal ("Anglo"), a privately
held metals and paper recycler with operations in Brownsville, Harlingen,
McAllen and San Juan, Texas. Anglo's primary markets are southern Texas and
Mexico.
The assets acquired from Anglo consist of a heavy duty automobile shredder,
metal shearing equipment, balers, heavy equipment, tools and rolling stock used
in the business of recycling ferrous and non-ferrous metals and paper. The
Registrant also purchased from Anglo certain real property, buildings and
leasehold improvements used in the metal and paper recycling business.
The total purchase price for Anglo was $4,221,250 comprised of: $1,850,000
in cash; a $446,250 secured promissory note payable in 60 consecutive monthly
installments of $9,048.34; $1,000,000 pursuant to the terms of a Consulting
and Non-Compete Agreement with the president of Anglo, of which $250,000 was
paid at closing and the balance payable in 72 equal consecutive monthly
installments; and shares of the Registrant's common stock valued at $925,000.
Of the cash paid at the closing of the acquisition, $1,800,000 was obtained
through a saleleaseback transaction with Ally Capital Corporation,
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
$40,518 with a bargain purchase option at the end of the lease term. The
remaining $300,000 paid at closing was obtained from the operating cash reserves
and working capital of the Registrant.
The real property acquired from Anglo and the common stock component of the
purchase price are being placed in escrow to provide for the remediation of
environmental contamination, if any, related to the operations of Anglo prior to
the acquisition.
The Registrant will continue the metals and paper recycling operations of
Anglo.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
1. Audited financial statements of Anglo Metal, Inc. d/b/a Anglo
Iron & Metal.
-2-
<PAGE>
(b) PRO-FORMA FINANCIAL INFORMATION.
1. Pro-forma consolidated financial statements for Recycling
Industries, Inc. and subsidiaries.
2. Audited consolidated financial statements for Recycling
Industries, Inc. and subsidiaries.
(c) EXHIBITS
2.1 Asset Purchase Agreement dated December 1, 1995 by and among Recycling
Industries of Texas, Inc., Recycling Industries, Inc., Anglo Metal,
Inc. d/b/a Anglo Iron & Metal and Robert C. Rome.*
2.2 First Addendum dated December 11, 1995 to the Asset Purchase Agreement
dated December 1, 1995 by and among Recycling Industries of Texas,
Inc., Recycling Industries, Inc., Anglo Metal, Inc. d/b/a Anglo Iron &
Metal and Robert C. Rome.*
2.3 Inventory Purchase Agreement dated December 11, 1995 by and between
Recycling Industries of Texas, Inc, and Anglo Metal, Inc. d/b/a Anglo
Iron & Metal.*
2.4 Consulting and Non-Compete Agreement dated December 11, 1995 by and
between Recycling Industries of Texas, Inc. and Robert C. Rome.*
2.5 Real Estate Purchase Contract dated December 11, 1995 by and between
Recycling Industries of Texas, Inc. and Anglo Metal, Inc. d/b/a Anglo
Iron & Metal.*
2.6 Form of Proposed Remediation Escrow Agreement by and between Recycling
Industries of Texas, Inc., Recycling Industries, Inc., Anglo Metal,
Inc. d/b/a Anglo Iron & Metal.*
2.7 Escrow Agreement dated December 11, 1995 by and between Recycling
Industries of Texas, Inc., Recycling Industries, Inc., Anglo Metal,
Inc. d/b/a Anglo Iron & Metal, Robert C. Rome and Stewart Title of
Hidalgo County, Inc.*
2.8 Master Lease Agreement dated December 12, 1995 by and among Ally
Capital Corporation as lessor and Recycling Industries of Texas, Inc.
and Recycling Industries, Inc. as co-lessees.*
-3-
<PAGE>
2.9 Equipment Schedule to the Master Lease Agreement dated December 12,
1995 by and among Ally Capital Corporation as lessor and Recycling
Industries of Texas, Inc. and Recycling Industries, Inc. as
co-lessees.*
- ----------
* Incorporated by reference to the Registrant's Current Report on
Form 8-K reporting an event of December 11, 1995, Commission File
No. 0-20179;
-4-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECYCLING INDUSTRIES, INC.
Date: July 12, 1996 By /s/ Thomas J. Wiens
-----------------------------------
Thomas J. Wiens, Chairman and
Chief Executive Officer
-5-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Financial Statements:
Pro Forma Explanatory Headnote F-3
For the Year Ended September 30, 1995 (Unaudited)
Unaudited Pro Forma Consolidated Statement of Operations F-5
For the Three Months Ended December 31, 1995 (Unaudited)
Unaudited Pro Forma Consolidated Statement of Operations F-6
Notes to Pro Forma Consolidated Financial Statements F-7
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-9
Report of Independent Certified Public Accountants F-10
Financial Statements:
Consolidated Balance Sheets F-11
Consolidated Statements of Operations F-13
Consolidated Statement of Stockholders' Equity (Deficit) F-14
Consolidated Statements of Cash Flows F-15
Notes to Consolidated Financial Statements F-16
Report of Independent Certified Public Accountants on Supplemental
Schedules F-51
Report of Independent Certified Public Accountants on Supplemental
Schedules F-52
Schedule 1 - Condensed Financial Information of Registrant:
Balance Sheets F-53
Statements of Operations F-55
Statements of Cash Flows F-56
Notes to Condensed Financial Information of Registrant F-57
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
ANGLO METAL, INC., DBA ANGLO IRON & METAL
Report of Independent Certified Public Accountants F-58
Financial Statements:
Balance Sheets F-59
Statements of Operations F-61
Statement of Changes in Stockholders' Equity F-62
Statements of Cash Flows F-63
Notes to Financial Statements F-64
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
EXPLANATORY HEADNOTE
--------------------------------------------
INTRODUCTION
The following unaudited pro forma condensed consolidated financial statements
give effect to the acquisition by Recycling Industries, Inc. (the Company) of
the entity detailed below and are based on the estimates and assumptions set
forth herein and in the notes to such statements. This pro forma information
has been prepared utilizing the historical financial statements and notes
thereto, which are incorporated by reference herein. The pro forma financial
data does not purport to be indicative of the results which actually would
have been obtained had the acquisitions been effected on the dates indicated
or the results which may be obtained in the future.
The pro forma consolidated statement of operations for the year ended
September 30, 1995 includes the operating results of the Company for such
period and the operating results of Anglo for the 12 months ended December
31, 1995. The pro forma consolidated statement of operations for the three
months ended December 31, 1995 includes the operating results of the Company
and Anglo for such period. The operating results of Anglo for the three
months beginning October 1, 1995 and ending December 31, 1995 have been
included in the pro forma consolidated statement of operations for both the
year ended September 30, 1995 and the three months ended December 31, 1995.
ANGLO METAL, INC. DBA ANGLO IRON & METAL
On December 11, 1995, the Company acquired substantially all of the assets
and the business of Anglo Metal, Inc. dba Anglo Iron & Metal (Anglo). The
assets acquired from Anglo consisted of a heavy duty automotive shredder,
inventories, metals shearing equipment, balers, heavy equipment, tools and
rolling stock used in the business of recycling ferrous and non-ferrous
metals. The Company also purchased from Anglo certain real property,
buildings and leasehold improvements used in the business of recycling
ferrous and non-ferrous metals.
The purchase price for Anglo was $6,065,000 comprised of: $2,079,000 in
cash; a $1,865,000 note which is to be paid in ten equal monthly installments
of $186,500 beginning in February 1996; a $446,000 secured promissory note
payable in 60 consecutive monthly installments of $9,000; a $750,000
unsecured note payable in 72 equal consecutive monthly installments of
$10,400; and 227,693 shares of the Company's common stock (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,
collateralized by all of Anglo's machinery and equipment, accounts receivable
and inventories, which has been recorded as a capital lease. 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
lease contains numerous covenants for maintaining certain financial ratios
and earnings levels. The remaining $279,000 paid at closing was obtained from
the operating cash reserves and working capital of the Company.
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
EXPLANATORY HEADNOTE
--------------------------------------------
The purchase price for Anglo has been allocated as follows:
Equipment under capital 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
Notes payable (3,061,000)
Common Stock (925,000)
-----------
Cash paid at closing 2,079,000
Capital lease obligation (1,800,000)
-----------
Cash from operating capital $ 279,000
-----------
-----------
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
--------------------------------------------------------
<TABLE>
<CAPTION>
RECYCLING
INDUSTRIES, ANGLO ANGLO CONSOLIDATED
INC. IRON & METAL IRON & METAL PRO FORMA
SEPTEMBER 30, DECEMBER 31, PRO FORMA SEPTEMBER 30,
1995 1995 ADJUSTMENTS 1995
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $13,812,000 $15,116,000 $ - $28,928,000
Brokerage - 216,000 - 216,000
Other income 41,000 7,000 - 48,000
----------- ----------- --------- -----------
13,853,000 15,339,000 - 29,192,000
----------- ----------- --------- -----------
COST AND EXPENSES
Cost of sales 10,869,000 13,739,000 (198,000)(6) 24,422,000
- - 12,000 (3)
Cost of brokerage - 181,000 - 181,000
Management fees - - - -
Personnel 744,000 414,000 - 1,158,000
Professional services 527,000 66,000 - 593,000
Travel 39,000 - - 39,000
Occupancy 83,000 - - 83,000
Depreciation and
amortization 258,000 11,000 66,000 (3) 502,000
- - 167,000 (10)
Interest 407,000 133,000 91,000 (8) 631,000
Environmental
remediation costs - - - -
Bad debt expense 151,000 - - 151,000
Other general and
administrative 477,000 336,000 (328,000)(4) 485,000
----------- ----------- --------- -----------
13,555,000 14,880,000 (190,000) 28,245,000
----------- ----------- --------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES 298,000 459,000 190,000 947,000
INCOME TAXES (BENEFIT) (711,000) 140,000 (64,000)(7) (635,000)
----------- ----------- --------- -----------
INCOME FROM CONTINUING
OPERATIONS, NET OF
INCOME TAXES $ 1,009,000 $ 319,000 $ 254,000 $ 1,582,000
----------- ----------- --------- -----------
----------- ----------- --------- -----------
NET INCOME AFTER
EXTRAORDINARY ITEM
AND INCOME TAXES $ 1,815,000 $ 319,000 $ 254,000 $ 2,388,000
----------- ----------- --------- -----------
----------- ----------- --------- -----------
INCOME PER SHARE:
Income from continuing operations,
net of income taxes $ .17 $ .26
------------ ----------
------------ ----------
Net income after extraordinary item
and income taxes $ .30 $ .39
------------ ----------
------------ ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 6,099,694 6,247,748
------------ ----------
------------ ----------
</TABLE>
SEE ACCOMPANYING HEADNOTE AND NOTES TO
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
============================================
<TABLE>
RECYCLING
INDUSTRIES, ANGLO ANGLO CONSOLIDATED
INC. IRON & METAL IRON & METAL PRO FORMA
DECEMBER 31, DECEMBER 31, PRO FORMA DECEMBER 31,
1995 1995 ADJUSTMENTS 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $3,458,000 $3,346,000 $(539,000)(5) $6,265,000
Brokerage - - - -
Other income - 1,000 - 1,000
---------- ---------- --------- ----------
3,458,000 3,347,000 (539,000) 6,266,000
---------- ---------- --------- ----------
COST AND EXPENSES:
Cost of sales 3,415,000 2,895,000 4,000 (3) 5,646,000
(618,000)(5) -
Cost of brokerage - - (50,000)(6) -
Personnel 431,000 114,000 (22,000)(5) 523,000
Professional
services 143,000 30,000 - 173,000
Travel 17,000 - - 17,000
Occupancy 14,000 - - 14,000
Depreciation and
amortization 31,000 2,000 16,000 (3) 89,000
42,000 (10)
(2,000)(5)
Interest 96,000 57,000 (2,000)(5) 174,000
- - 23,000 (8)
Management fee - - - -
Other general and
administrative 120,000 140,000 - 156,000
(82,000)(4)
(22,000)(5) -
---------- ---------- --------- ----------
Total Costs
and Expenses 4,267,000 3,238,000 (713,000) 6,792,000
INCOME (LOSS)
BEFORE INCOME TAXES (809,000) 109,000 174,000 (526,000)
INCOME TAXES (BENEFIT) (441,000) 13,000 (13,000)(7) (441,000)
---------- ---------- --------- ----------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS, NET OF
INCOME TAXES $ (368,000) $ 96,000 $ 187,000 $ (85,000)
---------- ---------- --------- ----------
---------- ---------- --------- ----------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS, NET OF
INCOME TAXES PER
COMMON SHARE $ (.04) $ (.01)
---------- ----------
---------- ----------
Weighted average
number of common
shares outstanding 8,409,262 8,624,479
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING HEADNOTE AND NOTES TO
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 1 - PRO FORMA ADJUSTMENTS
The adjustments relating to the pro forma consolidated statements of
operations are computed assuming the acquisition of Anglo was consummated at
the beginning of the applicable periods presented. The adjustments relating
to the pro forma consolidated balance sheets are computed assuming the
acquisition of Anglo was consummated at September 30, 1995 for the September
30, 1995 balance sheet and December 31, 1995 for the December 31, 1995
balance sheet.
Although Anglo trade accounts receivable, trade accounts payable and accrued
expenses were not acquired, they have been included in the September 30, 1995
and December 31, 1995 pro forma balance sheets since the balances approximate
estimated period end balances and provide the reader with information
regarding estimated pro forma net working capital.
NOTE 2 - ACQUISITION OF SUBSIDIARY
To record the acquisition of equipment and intangibles for the issuance of
227,693 shares of common stock valued at $4.06 per share and the issuance of
notes payable. The acquisition of Anglo is recorded using the purchase
method.
NOTE 3 - ADDITIONAL DEPRECIATION AND AMORTIZATION
To record additional depreciation of property and equipment due to the
increased cost in the assets acquired. To record amortization of goodwill
using the straight line method over 20 years for Anglo.
NOTE 4 - NON-RECURRING EXPENSES
To remove non-recurring expenses paid to officers and stockholders for
salaries and benefits that will not be incurred in the future.
NOTE 5 - DUPLICATE TRANSACTIONS FOR ANGLO
To remove 20 days of operations for Anglo included in the operations of RII
for the three months ended December 31, 1995. The assets and liabilities of
Anglo are included in the RII consolidated balances at December 31, 1995.
NOTE 6 - NON-RECURRING REMEDIATION EXPENSES
To remove non-recurring equipment costs, outside labor costs, direct labor
costs and landfill costs incurred for remediation costs.
NOTE 7 - PROVISION FOR INCOME TAXES
To recognize utilization of net operating loss carryforward and record
alternative minimum income taxes.
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
============================================
NOTE 8 - INTEREST EXPENSE
To record interest expense for notes payable used to finance the acquisition
of Anglo.
NOTE 9 - WEIGHTED AVERAGE SHARES OUTSTANDING
On a pro forma basis, the 227,693 shares of Common Stock issued in the
acquisition of Anglo, 1,454,456 shares of RII common stock in private
placements, and 4,400,000 shares of RII common stock is to be sold in the
public offering are assumed to be outstanding for the entire period for all
periods presented.
NOTE 10 - NON-COMPETE AND CONSULTING AGREEMENT
To record amortization of the non-compete and consulting agreement with the
president of Anglo for a term of six years using the straight line method.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS
RECYCLING INDUSTRIES, INC.
DENVER, COLORADO
We have audited the accompanying consolidated balance sheet of Recycling
Industries, Inc. and subsidiaries as of September 30, 1995 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Recycling
Industries, Inc. and subsidiaries as of September 30, 1995 and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
DENVER, COLORADO
MAY 17, 1996
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
RECYCLING INDUSTRIES, INC.
DENVER, COLORADO
We have audited the accompanying consolidated balance sheet of Recycling
Industries, Inc. (formerly Environmental Recovery Systems, Inc.) and
subsidiaries as of September 30, 1994, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years in the
two-year period ended September 30, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
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 financial position of Recycling
Industries, Inc. and subsidiaries as of September 30, 1994, and the results of
their operations and their cash flows for each of the years in the two-year
period ended September 30, 1994, in conformity with generally accepted
accounting principles.
AJ.ROBBINS, PC.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
NOVEMBER 3, 1995
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-----------------------------
1995 1994 1995
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 184,000 $ 115,000 $ 67,000
Trade accounts receivable, pledged, less allowance for
doubtful accounts of $15,000, $25,000, and $10,000 1,026,000 898,000 1,010,000
Accounts receivable, related party 223,000 - 62,000
Inventories 497,000 243,000 1,963,000
Prepaid expenses 137,000 111,000 137,000
Other - 40,000 126,000
Deferred income taxes - - -
------------ ------------ ------------
Total Current Assets 2,067,000 1,407,000 3,365,000
NOTE RECEIVABLE, related party - 859,000 -
PROPERTY, PLANT AND EQUIPMENT, net 6,686,000 6,590,000 8,391,000
DEFERRED INCOME TAXES, net 800,000 - 1,241,000
OTHER ASSETS 744,000 762,000 3,786,000
------------ ------------ ------------
$ 10,297,000 $ 9,618,000 $ 16,783,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------- DECEMBER 31,
1995 1994 1995
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 61,000 $ 491,000 $ 47,000
Notes payable-related parties - 8,000 2,857,000
Trade accounts payable 655,000 906,000 795,000
Trade accounts payable-related parties 73,000 87,000 5,000
Professional services payable - 255,000 -
Accrued liabilities:
Interest 22,000 33,000 30,000
Interest-related party 8,000 11,000 -
Payroll and other 107,000 544,000 104,000
Income taxes payable 86,000 - 86,000
Due to related parties - 276,000 -
Due to factor, related party 197,000 461,000 327,000
Current portion of long-term debt 227,000 2,502,000 216,000
Current portion of long-term debt, related parties 218,000 8,000 441,000
Current portion of obligation under capital lease 37,000 - 324,000
------------ ------------ ------------
Total Current Liabilities 1,691,000 5,582,000 5,232,000
------------ ------------ ------------
DEFERRED GAIN - 751,000 -
------------ ------------ ------------
LONG-TERM DEBT:
Long-term debt, net of current portion 132,000 402,000 130,000
Long-term debt-related parties, net of current portion 1,979,000 117,000 2,917,000
Obligation under capital lease, net of current portion 41,000 - 1,493,000
------------ ------------ ------------
Total Long-Term Debt 2,152,000 519,000 4,540,000
------------ ------------ ------------
Total Liabilities 3,843,000 6,852,000 9,772,000
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares authorized:
Series A 13,000, 38,000 and 13,000 shares
issued and outstanding 1,312,000 3,612,000 1,312,000
Series B 300,000, 591,333 and -0- shares
issued and outstanding 450,000 887,000 -
Common stock, $.001 par value, 50,000,000 shares
authorized, 8,395,785, 3,005,704 and 8,635,478
shares issued and outstanding 8,000 3,000 8,000
Additional paid-in capital 13,120,000 8,269,000 14,495,000
Accrued salary payable in equity security - 246,000 -
Accumulated (deficit) (8,436,000) (10,251,000) (8,804,000)
------------ ------------ ------------
Total Stockholders' Equity 6,454,000 2,766,000 7,011,000
------------ ------------ ------------
$ 10,297,000 $ 9,618,000 $ 16,783,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
AND THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994 (UNAUDITED)
===========================================
<TABLE>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------- -----------------------
1995 1994 1993 1994 1993
----------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales $13,812,000 $4,812,000 $ - $3,458,000 $3,402,000
Other income 41,000 19,000 - - 15,000
----------- ---------- ----------- ---------- ----------
Total Revenues 13,853,000 4,831,000 - 3,458,000 3,417,000
----------- ---------- ----------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 9,156,000 3,516,000 - 3,415,000 2,455,000
Cost of sales, related
parties 1,713,000 594,000 - 431,000 146,000
Personnel 744,000 327,000 830,000 143,000 116,000
Professional services 527,000 553,000 432,000 17,000 7,000
Travel 39,000 60,000 43,000 14,000 41,000
Occupancy 83,000 50,000 60,000 31,000 68,000
Depreciation and
amortization 258,000 258,000 357,000 96,000 79,000
Interest 407,000 203,000 156,000 - -
Bad debt expense 151,000 25,000 - 120,000 145,000
Other general and
administrative 477,000 179,000 - - -
Abandonment of projects - 208,000 549,000 - -
Research and development - - 64,000 - -
----------- ---------- ----------- ---------- ----------
Total Costs and Expenses 13,555,000 5,973,000 2,491,000 4,267,000 3,057,000
----------- ---------- ----------- ---------- ----------
INCOME (LOSS) BEFORE EQUITY
IN NET (LOSS) OF JOINT
VENTURES, EQUITY INVESTEE
AND EXTRAORDINARY GAIN 298,000 (1,142,000) (2,491,000) (809,000) 360,000
EQUITY IN NET (LOSS) OF
JOINT VENTURES AND
EQUITY INVESTEE - - (467,000) - -
----------- ---------- ----------- ---------- ----------
INCOME (LOSS) BEFORE
EXTRAORDINARY GAIN 298,000 (1,142,000) (2,958,000) (809,000) 360,000
EXTRAORDINARY GAIN FROM
SETTLEMENT OF DEBTS 806,000 218,000 475,000 - 61,000
----------- ---------- ----------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES (BENEFIT) 1,104,000 (924,000) (2,483,000) (809,000) 421,000
(BENEFIT) FROM INCOME
TAXES (711,000) - - (441,000) -
----------- ---------- ----------- ---------- ----------
NET INCOME (LOSS) $ 1,815,000 $(924,000) $(2,483,000) $ (368,000) $ 421,000
----------- ---------- ----------- ---------- ----------
----------- ---------- ----------- ---------- ----------
PRIMARY INCOME (LOSS) PER
COMMON SHARE:
Before extraordinary
item $ .17 $ (.46) $ (1.24) $ (.04) $ .12
Extraordinary item .13 .09 .20 - .02
----------- ---------- ----------- ---------- ----------
PRIMARY NET INCOME (LOSS)
PER COMMON SHARE $ .30 $ (.37) $ (1.04) $ (.04) $ .14
----------- ---------- ----------- ---------- ----------
----------- ---------- ----------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 6,099,694 2,504,762 2,376,823 8,409,262 3,111,259
----------- ---------- ----------- ---------- ----------
----------- ---------- ----------- ---------- ----------
FULLY DILUTED INCOME (LOSS)
PER COMMON SHARE:
Before extraordinary
item $ .16 $ (.43) $ (1.24) $ (.04) $ .11
Extraordinary item .13 .08 .20 - .02
----------- ---------- ----------- ---------- ----------
FULLY DILUTED NET INCOME
(LOSS) PER COMMON SHARE: $ .29 $ (.35) $ (1.04) $ (.04) $ .13
----------- ---------- ----------- ---------- ----------
----------- ---------- ----------- ---------- ----------
Weighted average number
of common shares
outstanding 6,307,694 2,623,069 2,376,823 8,617,262 3,229,566
----------- ---------- ----------- ---------- ----------
----------- ---------- ----------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995
AND THE THREE MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
===========================================
<TABLE>
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
--------------------- ------------------ PAID-IN OPTION EQUITY ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL TO CEO 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
Option to CEO (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
bridge loans - - 17,351 - 16,000 - - - 16,000
Common stock issued
on exercise of
option to CEO - - 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
Common stock issued for
acquisition of Anglo
(unaudited) - - 227,693 - 925,000 - - - 925,000
Conversion of
preferred stock
series B
(unaudited) (300,000) (450,000) 12,000 - 450,000 - - - -
Net income for the
period (unaudited) - - - - - - - (368,000) (368,000)
-------- ----------- --------- ------ ----------- -------- -------- ----------- -----------
Balances, December 31,
1995 (unaudited) 13,000 $ 1,312,000 8,635,478 $8,000 $14,495,000 $ - $ - $(8,804,000) $ 7,011,000
-------- ----------- --------- ------ ----------- -------- -------- ----------- -----------
-------- ----------- --------- ------ ----------- -------- -------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
AND THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------- ----------------------------
1995 1994 1993 1995 1994
----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss) $ 1,815,000 $ (924,000) $(2,483,000) $ (368,000) $ 421,000
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 784,000 392,000 357,000 202,000 226,000
Equity in net loss of affiliates - - 467,000 - -
Extraordinary gain from settlement of debts (806,000) (218,000) (475,000) - (61,000)
Abandonment of projects - 208,000 549,000 - -
Contribution of services - - 120,000 - -
Issuance of stock for services 25,000 244,000 149,000 - -
Write-off acquisition costs - 72,000 - - -
Bad debt expense 151,000 25,000 - - -
Deferred income taxes (800,000) - - (441,000) -
Changes in assets and liabilities:
Trade accounts receivable (154,000) (923,000) - 16,000 (175,000)
Inventories (254,000) (243,000) - (133,000) 82,000
Prepaid expenses (26,000) (111,000) - - (11,000)
Other current assets 33,000 (40,000) 8,000 (16,000) 9,000
Accounts payable (290,000) 506,000 736,000 66,000 (180,000)
Accrued liabilities (451,000) 150,000 454,000 (68,000) 40,000
Income taxes payable 86,000 - - - -
----------- ----------- ----------- ----------- -----------
Net Cash Provided (Used)
by Operating Activities 113,000 (862,000) (118,000) (742,000) 351,000
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Additions to engineering plans - - (66,000) - -
Additions to equipment (472,000) (25,000) - (50,000) (40,000)
Receivables-related party - - 72,000 161,000 (68,000)
Sale of equipment - 48,000 - - -
Collections on note receivable - 41,000 - - -
Additions to acquisition costs and goodwill (103,000) (319,000) (112,000) (227,000) (74,000)
Non-compete agreement - - - (200,000) -
Advances (to) affiliate - - (398,000) - 100,000
Investment in equity investee - - (113,000) - -
Advances to related party (238,000) - - - -
Acquisition of Loef (113,000) - - - -
----------- ----------- ----------- ----------- -----------
Net Cash (Used) in Investing Activities (926,000) (255,000) (617,000) (316,000) (82,000)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from borrowings-related parties 321,000 632,000 676,000 - -
Proceeds from other borrowings - 434,000 99,000 1,409,000 150,000
Principal payments on borrowings (2,756,000) (199,000) (40,000) (367,000) (170,000)
Principal payments on borrowings-related parties (383,000) (152,000) - - (232,000)
Principal payments on capital lease (34,000) - - (132,000) -
Proceeds from factor 7,335,000 2,450,000 - 2,052,000 1,335,000
Payments to factor (7,599,000) (1,989,000) - (1,911,000) (1,329,000)
Proceeds from issuance of common stock 3,998,000 56,000 - - 25,000
Deferred offering costs - - - (110,000) -
----------- ----------- ----------- ----------- -----------
Net Cash Provided (Used) by
Financing Activities 882,000 1,232,000 735,000 941,000 (221,000)
----------- ----------- ----------- ----------- -----------
Increase in cash 69,000 115,000 - (117,000) 48,000
CASH, beginning of period 115,000 - - 184,000 115,000
----------- ----------- ----------- ----------- -----------
CASH, end of period $ 184,000 $ 115,000 $ - $ 67,000 $ 163,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See Note 21
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[A] GENERAL
Recycling Industries, Inc. (RII or the Company, formerly known as
Environmental Recovery Systems, Inc.) is a Colorado corporation formed
December 1988.
Prior to May, 1994, the Company was a development stage enterprise during
which period it completed the development of technology for recycling
municipal solid waste. While the Company has not obtained a permit nor
constructed or operated a facility utilizing this technology, it is pursuing
the license or sale of such technology. On May 10, 1994 the Company acquired
a subsidiary and began metals recycling operations (see Note 2[A]). All
revenues during 1995 and 1994 were generated by the recycling operations. On
June 27, 1995 the Company changed its name to Recycling Industries, Inc.
REVERSE STOCK SPLIT
Effective June 27, 1995, the Company completed a one-for-five reverse stock
split of its common stock, $.001 par value (Common Stock). All share and per
share amounts have been restated retroactively as a result of this reverse
split.
[B] ACCOUNTING POLICIES
CONSOLIDATION
The Company, its subsidiaries and joint ventures in which it exercises
control through majority ownership are consolidated, and all intercompany
accounts and transactions are eliminated. Joint ventures and investment in
equity investees are accounted for under the equity method of accounting,
whereby the Company recorded only its proportionate share of loss in the
joint ventures and equity investees. The Company currently has no active
joint venture projects.
Nevada Recycling, Inc. (NRI), acquired by the Company in May 1994 (see Note
2[A]), operates a metals recycling facility in Las Vegas, Nevada, serving the
Las Vegas market and steel mills located throughout the western United States.
Recycling Industries of Texas, Inc. d/b/a Anglo Iron & Metal (Anglo), formed
by the Company to acquire the assets of Anglo Metals, Inc. in December 1995
(see Note 2[C]), operates four metals recycling facilities in Brownsville,
Harlingen, McAllen and San Juan, Texas, serving steel mills and markets in
the Rio Grande Valley in southern Texas and northern Mexico.
<PAGE>
NOTE 1[B] - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recycling Industries of Missouri, Inc. d/b/a Mid-America Shredding
(Mid-America), formed by the Company to acquire the assets of Mid-America
Shredding, Inc. in April 1996 (see Note 22), operates a metals recycling
facility in Ste. Genevieve, Missouri, serving midwestern steel mills and
markets along the Mississippi River.
The acquisitions have been accounted for under the purchase method of
business combinations and, accordingly, the results of operations of the
acquired businesses are included in the Company's financial statements only
from the applicable date of acquisition.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements for
the three month periods ended December 31, 1995 and 1994 are presented on a
basis consistent with the audited annual financial statements and reflect all
adjustments, consisting only of normal recurring accruals, necessary for fair
presentation of the results of such periods. The results of operations for
the interim period ending December 31, 1995 are not necessarily indicative of
the results to be expected for the year ended September 30, 1996.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock Based
Compensation. FAS 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
FAS 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 FAS 123 will be implemented or its impact on the financial
statements. FAS 123 is effective for transactions entered into after
December 15, 1995.
ACQUISITIONS COSTS
The Company had capitalized acquisition costs of $61,000 and $164,000 at
September 30, 1995 and 1994, respectively, relating to active letters of
intent for potential acquisitions of operating metals recycling companies.
Acquisition costs are allocated to the net assets acquired if the acquisition
is successful, or are charged to operations if the negotiations are
discontinued. Acquisition costs of $72,000 were written off to operations
during 1994 for negotiations that were no longer active.
<PAGE>
NOTE 1[B] - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables exist due to
large balances with a few customers. At September 30, 1995 and 1994,
accounts receivable balances from significant customers were $699,000 and
$711,000, or 65% and 79%, respectively, of the total accounts receivable
balance. Ongoing credit evaluations of customers' financial condition are
performed and, generally, no collateral is required. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have
not exceeded management's expectations. Customers are located throughout the
western region of the United States and Mexico.
The Company maintains all cash in bank deposit accounts, which at times may
exceed federally insured limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, time deposits, accounts
payable, and accrued expenses approximate fair value because of the short
maturity of these items. The fair value of notes payable and amounts due to
factor was estimated based on market values for debt with similar terms.
Management believes that the fair value of that debt approximates its
carrying value.
INVENTORIES
Inventories consist primarily of ferrous and non-ferrous scrap metal.
Inventory costs include material, labor and plant overhead. Inventory is
stated at lower of average cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization expense is provided on a straight-line basis using estimated
useful lives of 7 to 15 years for equipment and 40 years for building and
improvements. Depreciation and amortization expense of property, plant and
equipment was $545,000, $147,000 and $12,000 for the periods ended September
30, 1995, 1994 and 1993, respectively. Maintenance and repairs are charged
to expense as incurred and expenditures for major improvements are
capitalized. When assets are retired or otherwise disposed of, the property
accounts are relieved of costs and accumulated depreciation and any resulting
gain or loss is credited or charged to operations.
<PAGE>
NOTE 1[B] - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED OFFERING COSTS
Costs incurred in connection with the Company's current anticipated public
offering are deferred and will be charged against stockholders' equity upon
the successful completion of the offering or charged to expense if the
offering is not consummated.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with research and development in relation to
work undertaken on new environmental technologies are charged to operations
in the year incurred. No research and development costs have been incurred
since 1993.
REVENUE RECOGNITION
Sales are recorded in the period of shipment.
NET INCOME (LOSS) PER COMMON SHARE
Primary net income (loss) per common share is computed based upon the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Fully diluted computations assume the
conversion of the convertible preferred stock.
Dilutive common equivalent shares consist of stock options and warrants. In
loss periods, dilutive common equivalent shares are excluded as the effect
would be anti-dilutive.
INCOME TAXES
Effective October 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), ACCOUNTING FOR INCOME TAXES. Under
this method, deferred income taxes are recorded to reflect the tax
consequences in future years of temporary differences between the tax basis
of assets and liabilities and their financial statement amounts at the end of
each reporting period. Valuation allowances will be established when
necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense represents the tax payable for the current
period and the change during the period in deferred tax assets and
liabilities. Deferred tax assets and liabilities have been netted to reflect
the tax impact of temporary differences. The adoption of FAS 109 did not
have a material effect on the Company's consolidated financial statements,
therefore, there was no cumulative effect of this change in accounting for
income taxes at October 1, 1992. There is also no effect on the loss for the
year ended September 30, 1993.
<PAGE>
NOTE 1[B] - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company had not recorded a deferred tax asset at September 30, 1994 and
1993 since it was more likely than not that the tax assets would not be
realized. At September 30, 1995 the Company has recorded a net deferred tax
asset of $800,000 primarily reflecting the benefit of net operating loss
carryforwards, which expire in varying amounts between 2002 and 2009.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
At September 30, 1995 the Company has federal income tax loss carryforwards
of approximately $6,900,000, which if not utilized to offset future taxable
income, expire in the years 2002 through 2009.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could
differ from those estimates and assumptions.
RECLASSIFICATIONS
Certain balances in the 1994 and 1993 financial statements have been
reclassified to conform to the 1995 presentation. The reclassifications had
no effect on financial condition or results of operations.
<PAGE>
NOTE 2 - ACQUISITIONS
[A] On May 10, 1994, the Company acquired 100% of the outstanding common stock
of NRI from Nevada Recycling Corporation (NRC) for 38,000 shares of the
Company's Series A convertible preferred stock, valued at $3,612,000. On that
date NRI became a wholly-owned subsidiary of the Company.
A summary of the assets purchased and liabilities assumed is as follows:
Land $ 1,340,000
Building 360,000
Machinery and equipment 5,025,000
Notes payable (3,113,000)
------------
Net Book Value of Assets Purchased $ 3,612,000
------------
------------
On December 30, 1994, the Company and NRC agreed to restructure the terms of the
acquisition of NRI as follows:
(1) NRC returned to the Company 25,000 of the 38,000 shares of Series A
convertible preferred stock (see Note 17).
(2) The Company purchased from NRC its contingent right (granted under the May
10, 1994 acquisition agreement, to reacquire the stock of NRI) for
$2,300,000 and warrants to purchase 20,000 shares of Common Stock for
$1.25 per share for a 10-year term. The $2,300,000 payment consists of a
$300,000 note paid on February 28, 1995 and a $2,000,000 note payable in
consecutive monthly installments commencing March 31, 1995 on the basis of
an eight-year amortization with interest at the rate of 10% per year, with
remaining principal due January 10, 1997.
(3) The Company restructured the purchase of land and buildings for a purchase
price of $2,060,000 payable $1,700,000 before February 28, 1995 with
interest of $19,000 per month, $20,000 plus accrued interest payable on
each of December 31, 1994, January 31, 1995 and February 28, 1995, and
$300,000 payable in monthly installments commencing March 31, 1995 on the
basis of an eight-year amortization period with interest at the rate of
10% per year, with remaining principal due January 10, 1997.
(4) The Company agreed to pay $637,052 of debts totaling $2,382,447 assumed on
the equipment purchased as part of the original NRI acquisition.
<PAGE>
NOTE 2 - ACQUISITIONS (CONTINUED)
All of the above obligations are collateralized by the assets of NRI.
As a result of the restructuring, the Company treated the $2,300,000 payment
obligation as indebtedness incurred to retire the 25,000 shares of preferred
stock. The acquisition of NRI resulted in goodwill of $195,000 which will be
amortized using the straight-line method over 20 years.
[B] On December 30, 1994, the Company acquired Metal Recovery, Inc. (MRI) whose
sole asset is an indirect 19.6% limited partnership interest in a currently
inactive partnership engaged in the business of scrap metal recovery (the
Partnership). The acquisition of MRI resulted in goodwill of $22,000 which is
being written off over 20 years using the straight line method. The Company
acquired MRI from its three stockholders (the ACI Principals), who also hold the
13,000 shares of the Company's Series A preferred stock acquired by the ACI
Principals from the stockholders of NRC in a separate transaction. The purchase
price for MRI included 120,000 shares of Common Stock and the right to
additional shares of Common Stock upon the satisfaction of certain conditions
which have not been met. The 120,000 shares of Common Stock and 13,000 shares
of Series A preferred stock are referred to as the ACI Equity Securities. The
Company has agreed to assist the ACI Principals in liquidating the ACI Equity
Securities for at least $2,400,000 prior to September 30, 1996 by purchasing or
arranging for the sale of these securities, or including the ACI Equity
Securities in a registration statement prior to September 30, 1996 (ACI Sale
Obligation).
In connection with the restructuring of the acquisition of NRI, discussed above,
the Company has transferred a portion of MRI's interest in the Partnership to
NRC, and the ACI Principals caused the Partnership to redeem this interest for
$1,170,000 in partial satisfaction of the Company's February 28, 1995 payment
obligations. This amount has been treated as a loan to the Company.
The ACI Principals have the right to reacquire the Company's interests in MRI
and NRI in exchange for the ACI Equity Securities (the ACI Option) if the
Company:
1) defaults under the terms of the installment note, under [A];
2) fails to meet the ACI Sale Obligation; or
3) if the Company defaults in its other obligations under the various
agreements related to the acquisition of MRI or the restructuring of
the acquisition of NRI, under [A].
In addition, until the Company meets the ACI Sale Obligation, the Company is
subject to certain restrictions on its ability to operate NRI and MRI.
<PAGE>
NOTE 2 - ACQUISITIONS (CONTINUED)
The unaudited pro forma summary financial statements which follow have been
prepared assuming that the exercise of the ACI Option occurred as of
September 30, 1995 for purposes of the pro forma balance sheet and that the
exercise of the ACI Option occurred for purposes of the pro forma statement
of operations. In addition to combining the historical results of operations of
the entities, the pro forma calculations include adjustments for the estimated
effect on the Company's historical results of operations of the write-off of
goodwill related to the acquisition of MRI.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 ,1995
ASSETS
RECYCLING PRO FORMA
INDUSTRIES, ACI PRO FORMA SEPTEMBER 30,
INC. OPTION ADJUSTMENT 1995
------------ ------------ ---------- ------------
(UNAUDITED)
Current Assets $ 2,067,000 $ (1,707,000) $ - $ 360,000
Other Assets 8,230,000 (7,475,000) (188,000) 567,000
------------ ------------ ---------- -----------
$ 10,297,000 $ (9,182,000) $ (188,000) $ 927,000
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
RECYCLING PRO FORMA
INDUSTRIES, ACI PRO FORMA SEPTEMBER 30,
INC. OPTION ADJUSTMENT 1995
------------ ------------ ---------- ------------
(UNAUDITED)
Current liabilities $ 1,691,000 $ (1,166,000) $ - $ 525,000
Long-term debt 2,152,000 (2,152,000) - -
Stockholders' equity
(deficit) 6,454,000 (5,864,000) (188,000) 402,000
------------ ------------ ---------- -----------
$ 10,297,000 $ (9,182,000) $ (188,000) $ 927,000
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
<PAGE>
NOTE 2 - ACQUISITIONS (CONTINUED)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
RECYCLING PRO FORMA
INDUSTRIES, ACI PRO FORMA SEPTEMBER 30,
INC. OPTION ADJUSTMENT 1995
------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 13,853,000 $ (13,847,000) $ - $ 6,000
Costs and expenses 13,555,000 (12,007,000) 168,000 1,716,000
------------- -------------- ------------ ------------
Income (loss) before
extraordinary gain 298,000 (1,840,000) (168,000) (1,710,000)
Extraordinary gain from
settlement of debts 806,000 - - 806,000
(Benefit) from income taxes (711,000) 711,000 - -
------------- -------------- ------------ ------------
Net income (loss) $ 1,815,000 $ (2,551,000) $ (168,000) $ (904,000)
------------- -------------- ------------ ------------
------------- -------------- ------------ ------------
(Loss) per common share:
Before extraordinary gain $ (.27)
Extraordinary gain .13
------------
Net (loss) per common share $ (.14)
------------
------------
</TABLE>
[C] On December 11, 1995, the Company acquired substantially all of the assets
and the business of Anglo Metal, Inc.dba Anglo Iron & Metal (Anglo). The assets
acquired from Anglo consisted of a heavy duty automotive shredder, inventories,
metal shearing equipment, balers, heavy equipment, tools and rolling stock used
in the business of recycling ferrous and non-ferrous metals. The Company also
purchased from Anglo certain real property, buildings and leasehold improvements
used in the metal recycling business.
The purchase price for Anglo was $6,065,000 comprised of: $2,079,000 in cash;
$1,865,000 note which is to be paid in ten monthly installments of $186,500
beginning in February 1996; 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 $10,400;
and 227,693 shares of 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,
collateralized by all of Anglo's machinery and equipment, accounts receivable
and inventories, which has been recorded as a capital lease.
<PAGE>
NOTE 2 - ACQUISITIONS (CONTINUED)
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 lease contained numerous covenants for maintaining certain financial ratios
and earnings levels (see Note 20). The remaining $279,000 paid at closing was
obtained from the operating cash reserves and working capital of the Company.
The Company signed a consulting and non-competition agreement with the president
of Anglo. The term of the non-compete portion is for six years and is valued at
$1,000,000 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 $5,000 per month.
RII also entered into a sublease agreement with Anglo for three yard facilities
for $2,500 a month through December 10, 2005.
The real property acquired from Anglo and the Common Stock issued by the Company
have been placed in escrow to provide for the remediation of environmental
contamination related to the operations of Anglo prior to the acquisition.
The purchase price of Anglo has been allocated as follows:
Equipment under capital lease $ 1,800,000
Contract to acquire 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
Notes payable (3,061,000)
Common Stock (925,000)
--------------
Cash paid at closing 2,079,000
Capital lease obligation (1,800,000)
--------------
Cash paid from operating capital $ 279,000
--------------
--------------
<PAGE>
NOTE 2 - ACQUISITIONS (CONTINUED)
The unaudited pro forma results of operations which follow assume that the
acquisition of NRI had occurred at the beginning of each period for 1994 and
1993. For the year ended September 30, 1995, the operations of NRI are included
in the consolidated balances of the Company. The unaudited pro forma results of
operations which follow also assume that the acquisition of Anglo had occurred
at the beginning of each period presented for September and December 1995.
<TABLE>
Three Months
Ended
Year Ended September 30, December 31,
--------------------------------------- ------------
1995 1994 1993 1995
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $29,192,000 $11,348,000 $ 9,781,000 $6,266,000
Income (loss)from continuing
operations, net of taxes $ 1,582,000 $ (857,000) $(2,807,000) $ (85,000)
Net income (loss) after extraordinary
items and income taxes $ 2,388,000 $ (639,000) $(2,332,000) $ (85,000)
Income (loss) from continuing
operations, net of taxes per
common share $ .26 $ (.34) $ (1.18) $ (.01)
Net income (loss) after extraordinary
items and income taxes per
common share $ .39 $ (.25) $ (.98) $ (.01)
</TABLE>
NOTE 3 - FORMER JOINT VENTURE
In 1993, the Company entered into a settlement with a former joint venture
partner in which the Company agreed to make a series of payments totaling
$622,000 by October 31, 1993. The Company subsequently defaulted on its payment
obligations. On June 30, 1994, the Company and certain related parties entered
into a master agreement providing for the settlement of all amounts owed to the
former joint venture partner. Pursuant to this agreement, the Company issued
145,000 shares of Common Stock for its outstanding principal and penalty
interest balance of $725,000. Such shares were issued in connection with the
548,376 shares of Common Stock issued in 1994 on the conversion of $1,351,000 in
liabilities (see Note 17).
NOTE 4 - ENGINEERING PLANS
The Company capitalizes all external direct costs associated with permitting and
plant facilities start-up which mainly include engineering, legal and consulting
fees, travel and other costs associated with developing projects and obtaining
permits. Internal costs associated with plant facilities start-up are expensed
as incurred. Capitalized project costs are being amortized over five years
using the straight-line method beginning with the earlier of the commencement of
plant operations or two years from the date the project begins accumulating
costs. During fiscal 1995, 1994 and 1993 the Company incurred amortization
costs of $217,000, $217,000 and $344,000, respectively.
<PAGE>
NOTE 4 - ENGINEERING PLANS (CONTINUED)
Capitalized engineering plans are those costs related to active projects and
potential plant site locations. At the time a permit application is infeasible,
based upon management's determination, all costs associated with the project
which are not transferable to other projects are charged to operations. During
1994 and 1993, $208,000 and $549,000, respectively, of project start-up costs
were written off because the permit applications were determined to be
infeasible.
NOTE 5 - FACTORING AGREEMENTS
On May 4, 1994, the Company entered into an agreement with an unrelated third
party whereby such third party agreed to purchase the Company's trade accounts
receivable at 80% of face amount and to collect payments on the purchased
receivables from the Company's customers. The Company was charged an
administrative fee equal to 1% of the face amount of the purchased receivables
and a monthly finance charge in the amount of 3% of the average daily
outstanding balance of all purchased receivables. The Company was required to
repurchase any receivables not collected from customers within 90 days.
On August 12, 1994, the Company entered into an agreement, which replaced the
above factoring agreement, with a partnership comprised of the stockholders of
NRC who are also preferred stockholders of the Company, whereby the partnership
agreed to purchase the Company's trade accounts receivable at 85% of face value.
Under the terms of the factoring agreement, the partnership is entitled to a
finance charge of 1.5% per month of the average daily outstanding balance. The
Company is required to repurchase any receivables not collected from customers
within 90 days. The original term of the agreement was for a period of 18
months and continues on a month-to-month basis thereafter unless terminated by
either party. Purchased receivables balances outstanding at September 30, 1995
and 1994 were $197,000 and $461,000, respectively. Accrued finance charges at
September 30, 1995 and 1994 were $8,000 and $11,000, respectively. Total
finance charges for the years ended September 30, 1995 and 1994, were $82,000
and $11,000, respectively.
NOTE 6 - INVENTORIES
Inventories which are pledged, consist of the following:
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------
1995 1994 1995
---------- ---------- ------------
(UNAUDITED)
Raw materials $ 350,000 $ 167,000 $1,258,000
Finished goods 147,000 76,000 705,000
---------- ---------- ----------
$ 497,000 $ 243,000 $1,963,000
---------- ---------- ----------
---------- ---------- ----------
<PAGE>
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (substantially all of which is pledged) consists
of the following:
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------
1995 1994 1995
---------- ---------- ------------
(UNAUDITED)
Land $1,640,000 $1,340,000 $1,640,000
Building and improvements 365,000 365,000 365,000
Heavy machinery and
equipment 1,472,000 1,432,000 1,472,000
Automotive shredder 3,161,000 3,103,000 3,177,000
Assets under capital lease 118,000 - 1,800,000
Transportation equipment 561,000 443,000 713,000
Office equipment 121,000 114,000 121,000
---------- ---------- ----------
Total 7,438,000 6,797,000 9,288,000
Less accumulated depreciation
and amortization (752,000) (207,000) (897,000)
---------- ---------- ----------
$6,686,000 $6,590,000 $8,391,000
---------- ---------- ----------
---------- ---------- ----------
<PAGE>
NOTE 8 - OTHER ASSETS
Other assets consist of the following:
SEPTEMBER 30, DECEMBER 31,
------------------ ------------
1995 1994 1995
-------- -------- ------------
(UNAUDITED)
Acquisition costs $ 61,000 $164,000 $ 28,000
Goodwill, net of accumulated
amortization of $29,000 and
$7,000 and $40,000
(see Note 2) 188,000 168,000 2,187,000
Investment in affiliate, at cost 277,000 - 277,000
Engineering plans, net of
accumulated amortization of
$899,000, $682,000 and $915,000 188,000 405,000 172,000
Non-compete agreement, net
of accumulated amortization
of $56,000 - - 986,000
Contract to acquire land - - 70,000
Patent rights 25,000 25,000 26,000
Other 5,000 - 40,000
-------- -------- ----------
$744,000 $762,000 $3,786,000
-------- -------- ----------
-------- -------- ----------
INVESTMENT IN AFFILIATE
Effective June 30, 1995 the Company acquired a 20% interest in The Loef Company,
Inc. (Loef), a ferrous and non-ferrous metals recycler. Under the terms of an
agreement with the 80% stockholder of Loef, the Company's interest will be
maintained at 20% if the Company pays $200,000 to the 80% stockholder before
June 30, 1996, otherwise the interest may be reduced to 15%.
Under the terms of the agreement, the Company paid certain expenses in
connection with the acquisition in the amount of $277,000 and extinguished
certain warrants (see Note 17). The acquisition of the Company's interest in
Loef was recorded using the cost method of accounting.
<PAGE>
NOTE 9 - NOTE RECEIVABLE, RELATED PARTY
On April 11, 1994 the Company sold its 25% ownership interest in a formerly
wholly-owned subsidiary to Caside Associates (CA), a stockholder of the Company,
in exchange for a $2,000,000 note receivable. At September 30, 1994, the sales
price was renegotiated to $900,000. The note requires 6% monthly interest only
payments for two years and principal repayments are due quarterly from 1996 to
1998.
The gain on the sale was recognized using the cost-recovery method since the
collection of the sales price was not reasonably assured. Under the cost-
recovery method, gain on the sale is postponed until all costs are recovered,
then all receipts are recognized as profit. As a result of the sale, a deferred
gain in the amount of $751,000 has been recorded. At September 30, 1994, no
gain has been recognized since all costs had not yet been recovered.
As of September 30, 1995, management determined that the note receivable from CA
was permanently impaired. Therefore, the Company recorded an allowance for the
total remaining unpaid balance of $874,000 and removed the deferred gain on the
sale, recognizing a bad debt expense of $123,000.
NOTE 10 - INCOME TAXES
Pursuant to the terms of its acquisition of MRI, the Company included a
$3,500,000 capital gain realized prior to such acquisition on its consolidated
1994 tax return and utilized a portion of its net operating loss carryforward
generated in prior years to offset the capital gain. Management believes its
position has merit based on its interpretation of the Internal Revenue Code and
an opinion by its tax counsel. However, the Company has not obtained a prior
ruling from the Internal Revenue Service (IRS) and has no assurances that the
IRS will concur with its interpretation. If the IRS were to successfully
challenge the position taken on this issue, the Company could be required to pay
approximately $1,200,000 in additional income taxes plus penalties and interest
and the $3,500,000 net operating loss utilized on its consolidated 1994 tax
return would be available to offset future taxable income generated by the
Company.
During fiscal year 1995, management determined that the net operating loss
generated from prior years in the amount of $6,900,000 was more likely than not
to be used in the near future due to taxable income generated by NRI, Anglo and
Mid- America. Therefore, a net deferred tax asset of $800,000 has been recorded
as of September 30, 1995. During 1995, net operating losses in the amount of
$3,700,000 were utilized to reduce taxable income. However, alternative minimum
tax of approximately $86,000 was payable for 1995 because of the 90% alternative
net operating loss limitation. Net operating loss carryforwards available for
future use through the year 2009 are $6,900,000 at September 30, 1995.
<PAGE>
NOTE 10 - INCOME TAXES (CONTINUED)
The components of deferred tax assets and (liabilities) are as follows:
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------
1995 1994 1995
---------- ----------- -----------
(UNAUDITED)
Total deferred tax assets $1,021,000 $ 2,293,000 $1,241,000
Less valuation allowance (221,000) (2,293,000) -
---------- ----------- ----------
800,000 - 1,241,000
Total deferred tax (liabilities) - - -
---------- ----------- ----------
Net deferred tax asset $ 800,000 $ - $1,241,000
---------- ----------- ----------
---------- ----------- ----------
The tax effects of temporary differences and net operating loss carryforwards
that give rise to deferred tax assets and (liabilities) are as follows:
SEPTEMBER 30, DECEMBER 31,
------------------------- ------------
1995 1994 1995
----------- ----------- ------------
(UNAUDITED)
Temporary differences:
Property and equipment $(1,743,000) $(1,674,000) $(1,770,000)
Valuation allowance (221,000) (2,293,000) -
Research and development costs 78,000 78,000 78,000
Engineering plans 306,000 232,000 311,000
Goodwill 10,000 - (56,000)
Allowance for doubtful accounts 3,000 9,000 3,000
Net operating loss carryforwards 2,367,000 3,648,000 2,675,000
----------- ----------- -----------
$ 800,000 $ - $ 1,241,000
----------- ----------- -----------
----------- ----------- -----------
<PAGE>
NOTE 10 - INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following:
SEPTEMBER 30, DECEMBER 31,
------------------------- ---------------------
1995 1994 1995 1994
----------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
Current $ 89,000 $ - $ - $ -
Deferred (800,000) - (441,000) -
--------- ---------- --------- ---------
$(711,000) $ - $(441,000) $ -
--------- ---------- --------- ---------
--------- ---------- --------- ---------
The components of deferred income tax (benefit) expense are as follows:
SEPTEMBER 30, DECEMBER 31,
------------------------- ---------------------
1995 1994 1995 1994
----------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
Bad debt expense $ 6,000 $ (8,000) $ - $ -
Depreciation expense 69,000 1,674,000 27,000 17,000
Engineering costs (74,000) (145,000) (5,000) (17,000)
Goodwill amortization (10,000) - 65,000 -
Accrued salaries - officers - 20,000 - -
Net operating loss
carryforward 1,281,000 (482,000) (307,000) 404,000
Valuation allowance (2,072,000) (1,059,000) (221,000) (404,000)
----------- ----------- --------- ---------
$ (800,000) $ - $(441,000) $ -
----------- ----------- --------- ---------
----------- ----------- --------- ---------
<PAGE>
NOTE 10 - INCOME TAXES (CONTINUED)
Following is a reconciliation of the amount of income tax (benefit) expense that
would result from applying the statutory federal income tax rates to pre-tax
income and the reported amount of income tax expense:
SEPTEMBER 30, DECEMBER 31,
----------------------- ---------------------
1995 1994 1995 1994
----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Tax expense (benefit) at
federal statutory rates $ 374,000 $(314,000) $(314,000) $ (786,000)
Capital gains - MRI 1,190,000 - - 1,190,000
Change in valuation allowance (2,072,000) 480,000 - -
Other (203,000) (166,000) 314,000 (404,000)
----------- --------- --------- ----------
$ (711,000) $ - $ - $ -
----------- --------- --------- ----------
----------- --------- --------- ----------
NOTE 11 - ECONOMIC DEPENDENCY
The Company is economically dependent on major customers for annual sales. Such
customers comprised the following percentages of revenues:
SEPTEMBER 30, DECEMBER 31,
----------------- ----------------------
1995 1994 1995 1994
----- ----- ---------- ----------
(UNAUDITED) (UNAUDITED)
Customer A 37.9% 29.9% 35.0% 30.0%
Customer B 16.2% 19.7% 15.0% 18.0%
Customer C 10.8% 18.7% 11.0% 16.0%
<PAGE>
NOTE 12 - NOTES PAYABLE
Notes payable outstanding at September 30, 1995 and 1994 consisted of:
<TABLE>
SEPTEMBER 30, DECEMBER 31,
------------------ ------------
1995 1994 1995
------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Notes to entity, interest at prime (7.75% at
September 30, 1994), for which the Company
is not accruing interest (approximately $160,000
at September 30, 1995). The Company has received
no requests for payment since December 1989
and has recorded an allowance against the note
payable balance and recognized a $300,000 gain
on extinguishment of debt (see Note 18). $ - $300,000 $ -
Note to individuals, interest at 18%, with
principal due various dates through January
1994 with certain notes cosigned by an officer
and director of the Company, unsecured. 43,000 65,000 29,000
Note to an engineering firm, interest at 12%.
The note was discharged in 1995 pursuant to
a negotiated settlement (see Note 18). - 46,000 -
Note to an individual, interest at prime plus 1%
(9.5% at September 30, 1994) with principal and
all unpaid accrued interest due in January 1993.
Unsecured. The note was paid in 1995. - 50,000 -
Note to a law firm, interest at 10% to 12%, 18,000 30,000 18,000
principal and interest paid March 1996. ------- -------- -------
$61,000 $491,000 $47,000
------- -------- -------
------- -------- -------
</TABLE>
<PAGE>
NOTE 13 - NOTES PAYABLE - RELATED PARTIES
During the year ended September 30, 1993, First Dominion Holdings, Inc. (FD), a
corporation wholly-owned by the Company's chief executive officer/majority
stockholder, advanced the Company $676,000 for working capital purposes. The
advance was non-interest bearing and due on demand. During the year ended
September 30, 1994, there were advances and repayments on the note and $887,000
of the balance was converted to 591,333 shares of Series B preferred stock (see
Note 17). At September 30, 1994 the balance on the note was $8,000. During
1995 the note was paid.
The remaining balance of related parties notes payable consists of an original
obligation of $1,865,000 related to the Anglo inventory acquisition and $450,000
of bridge loans. In December 1995 and January 1996, the Company borrowed
$1,575,000 of bridge financing represented by the notes payable - related
parties with interest at 10% per annum. Proceeds from the loans were used to
finance the Anglo acquisition and general corporate expenses. In January 1996,
principal of $1,125,000 and accrued interest of $13,000 were converted into
323,523 shares of Common Stock. In connection with the bridge financing, the
lenders were issued warrants to purchase a total of 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
underlying Common Stock. Principal and interest related to the bridge loans,
which were not converted into Common Stock, are due in December, 1996 and
January, 1997. If the Company defaults on repayment of the loans, the notes
are convertible to Common Stock at a conversion price of the lesser of $2.00 or
50% of the average closing price for the last 30 days after the default. First
Equity Capital Securities, Inc. received a finders fee of $79,000 in connection
with the bridge loans.
<PAGE>
NOTE 14 - LONG-TERM DEBT
<TABLE>
SEPTEMBER 30,
----------------------------- DECEMBER 31,
1995 1994 1995
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to former owners of NRC,
interest at varying amounts with monthly
payments of $38,732; due through February
2003; collateralized by the assets of the
Company. Notes were paid as part of the
restructure of NRI (see Note 2). $ - $ 2,429,000 $ -
Notes payable to financial institution; principal
and interest at the prime rate plus 2%,
respectively; due on demand; if no demand is
made, then in monthly payments of $12,190
through 1997; collateralized by equipment. 122,000 252,000 98,000
Notes payable to financing company; principal
and interest at 7.5%; due October 1997;
monthly payments of $2,418; collateralized by
equipment. 54,000 81,000 50,000
Note to a group of investors; at 5%; principal
and interest due December 31, 1995; unsecured. 125,000 125,000 125,000
Other obligations, principally payable in monthly
installments including interest at 9.5% to 18%,
collateralized by various equipment. 58,000 17,000 73,000
------------ ------------ ----------
359,000 2,904,000 346,000
Less current portion 227,000 2,502,000 216,000
------------ ------------ ----------
Long-Term Debt $ 132,000 $ 402,000 $ 130,000
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
<PAGE>
NOTE 14 - LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows for the periods ending:
SEPTEMBER 30, DECEMBER 31,
1995 1995
------------- ------------
(UNAUDITED)
1996 $ 227,000 $ 216,000
1997 88,000 88,000
1998 25,000 17,000
1999 12,000 16,000
2000 7,000 9,000
Thereafter - -
----------- ----------
$ 359,000 $ 346,000
----------- ----------
----------- ----------
NOTE 15 - LONG-TERM DEBT - RELATED PARTY
<TABLE>
SEPTEMBER 30,
---------------------- DECEMBER 31,
1995 1994 1995
------------ -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
$2,000,000 note payable to NRC with 22
monthly payments of principal and interest at
10%; due January 1997; monthly payments
of $30,000 and one balloon payment in
January 1997 of $1,671,000; collateralized
by stock, property and equipment. $ 1,902,000 $ - $ 1,872,000
$446,000 note payable to Anglo Metal, Inc.;
monthly payments of principal and interest at
8% of $9,000; due December 2000;
collateralized by real property and buildings. - - 446,000
$750,000 note payable to officer of Anglo
Metal, Inc.; monthly payments of principal and
interest at 9% of $70,000; due December 2001. - - 750,000
</TABLE>
<PAGE>
NOTE 15 - LONG-TERM DEBT - RELATED PARTY (CONTINUED)
<TABLE>
SEPTEMBER 30,
------------------------- DECEMBER 31,
1995 1994 1995
------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Other notes due to related parties with
interest at 8.5% to 12%. 295,000 125,000 290,000
------------- ----------- ------------
2,197,000 125,000 3,358,000
Less current portion 218,000 8,000 441,000
------------- ----------- ------------
Long-Term Debt, Related Party $ 1,979,000 $ 117,000 $ 2,917,000
------------- ----------- ------------
------------- ----------- ------------
</TABLE>
Maturities of long-term debt-related parties are as follows for the periods
ending:
<TABLE>
SEPTEMBER 30, DECEMBER 31,
------------ ------------
1995 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
1996 $ 218,000 $ 318,000
1997 1,979,000 2,010,000
1998 - 109,000
1999 - 154,000
2000 - 273,000
2001 - 494,000
2002 - -
----------- ------------
$ 2,197,000 $ 3,358,000
----------- ------------
----------- ------------
</TABLE>
Under the terms of the $2,000,000 note payable to NRC the Company is required 1)
to maintain adequate insurance coverage for its facilities, equipment and
operations; 2) to maintain certain financial ratios; 3) to conduct the business
of NRI substantially as conducted in December 1994; and 4) to obtain prior
approval of NRC prior to incurring additional debt in excess of predetermined
amounts.
<PAGE>
NOTE 16 - RELATED PARTY TRANSACTIONS
In addition to transactions with related parties discussed throughout the notes
to the financial statements, the following related party transactions have taken
place.
During 1993, a former subsidiary of the Company incurred legal fees of $60,000
to an attorney who is a stockholder of the Company.
During 1995 and 1994, the Company purchased raw materials from related entities
in the amounts of $1,713,000 and $594,000, respectively. The purchase price of
the raw materials approximates the cost paid to other large bulk suppliers to
the Company.
NOTE 17 - STOCKHOLDERS' EQUITY
NON-QUALIFIED STOCK OPTIONS AND WARRANTS
The Company has outstanding options and warrants to acquire an aggregate of
5,658,946 shares of the Company's Common Stock, substantially all of which have
exercise prices ranging from $.90 to $7.50 per share.
STOCK OPTIONS
During 1992, the Company's Board of Directors adopted an incentive stock option
plan and a non-qualified stock option plan, which were both subsequently
approved by the stockholders. The stock option plans provide for 200,000 and
50,000 shares, respectively, to be reserved. Options under the non-qualified
stock option plan may be issued at such prices and at such terms as determined
by the Board of Directors. Currently, 32,000 options have been issued under the
incentive stock option plan and are exercisable at $2.50 to $6.25 per share.
1995 STOCK OPTION PLAN
The 1995 Plan provides for the grant of stock options to employees, officers and
employee directors of the Company. An aggregate of 2,000,000 shares of Common
Stock are authorized for issuance under the 1995 Plan. Concurrently with the
adoption of the 1995 Plan by the Board of Directors on December 27, 1995,
options to acquire 750,000 shares of Common Stock at an exercise price of $2.87
per share were granted to certain officers of the Company. These options and
the 1995 Plan are subject to approval by the Company's shareholders at the 1996
annual meeting of shareholders. The 1995 Plan terminates on December 27, 2006.
Options granted under the 1995 Plan must have an exercise price of not less than
80% of the fair market value of the Common Stock on the date of grant, and their
term may not exceed ten years.
<PAGE>
NOTE 17 - STOCKHOLDERS' EQUITY (CONTINUED)
DIRECTOR STOCK OPTION PLAN
The Director Plan provides for the grant of stock options to existing and future
Independent Directors of the Company. Three individuals who were serving as
Independent Directors on December 27, 1995, each received an initial grant of
5,000 options (for a total of 15,000 options granted) under the Director Plan
having an exercise price of $2.87 per share, the fair market value per share of
the Common Stock on that date. These options and the Director Plan are subject
to approval by the Company's shareholders at the 1996 annual meeting of
shareholders. The Director Plan terminates on December 27, 2006. Options
granted under the Director Plan will be exercisable commencing six months after
the date of grant and continuing for five years from the date of grant.
COMMON STOCK
On June 1, 1993, the Company's Board of Directors adopted a Consulting and
Services Compensation Plan (Plan). The Plan provides for 60,000 shares of
Common Stock to be reserved which were contained in a registration statement
filed during June 1993. Under the terms of the Plan, stock options may be
granted in lieu of Common Stock under such terms as determined by the Company's
Board of Directors. At September 30, 1994 and 1993, 39,600 and 20,000 shares of
registered Common Stock were issued under the plan for $242,000 and $149,000 for
professional services, respectively.
On January 1, 1994, the Company's Board of Directors adopted a Consulting
Agreement (Agreement). The Agreement provides for 150,000 shares of Common
Stock to be issued for cash and/or services which were contained in a
registration statement filed during June of 1994. During 1994, 30,000 shares of
registered Common Stock were issued for $56,250 in professional services
provided under the Agreement.
During 1994, $1,351,000 of liabilities were converted to 548,376 shares of
Common Stock.
PREFERRED STOCK CONVERSION
On November 9, 1995, 300,000 shares of Series B preferred stock were converted
into 12,000 shares of Common Stock.
During 1993, the chief executive officer/majority stockholder of the Company
converted accrued salary in the amount of $120,000 to additional paid-in
capital. During 1994, the chief executive officer/majority stockholder of the
Company converted accrued salary in the amount of $246,000 to an equity security
payable in the future at a price per share to be determined at the time of
issuance. During 1995, the equity security was converted as partial
compensation for the "W" Right.
<PAGE>
NOTE 17 - STOCKHOLDERS' EQUITY (CONTINUED)
PRIVATE PLACEMENT OFFERING DATED FEBRUARY 1, 1995 (FEBRUARY 1995 PRIVATE
PLACEMENT)
As of April 17, 1995, the closing date of the February Private Placement, the
Company received $1,984,000 (net of offering costs of approximately $218,000)
from the sale of 1,946,400 shares of Common Stock and warrants (Series G
Warrants) to acquire up to 1,236,878 shares of Common Stock, including $450,000
in bridge loans (including accrued interest) that were converted into units
offered under the February Private Placement.
The Series G Warrants are exercisable from the date of their issuance through
the three years from the effective date of the Company's initial registration
statement at $7.50 per share. Under certain conditions as set forth in the
warrant agreement, the Company may redeem the Series G Warrants prior to their
expiration, at a redemption price of $.25 per Series G Warrant upon not less
than 30 days prior written notice to the warrant holders.
In connection with the offering, the Company issued to the placement agent
139,828 warrants (placement agent warrants) to purchase two shares of Common
Stock and one Series H Warrant, which are exercisable for a three year period
commencing one year from the date of issuance, at an exercise price of $1.80.
Upon exercise of the placement agent warrants, the Company will issue up to
139,828 Series H Warrants each to purchase one share of Common Stock at an
exercised price of $7.50 per share. The Series H Warrants are exercisable for a
three year period commencing one year from the date of issuance and are not
redeemable by the Company.
PRIVATE PLACEMENT OFFERING DATED MAY 24, 1995 (MAY 1995 PRIVATE PLACEMENT)
As of July 31, 1995, the closing date of the May Private Placement, the Company
received $1,248,000 (net of offering costs of approximately $372,000) from the
sale of 1,800,000 shares of Common Stock and warrants (Series G Warrants) to
acquire up to 900,000 shares of Common Stock. The Series G Warrants are
exercisable from the date of their issuance through the three years from the
effective date of the Company's initial registration statement at $7.50 per
share. Under certain conditions as set forth in the warrant agreement, the
Company may redeem the Series G Warrants prior to their expiration, at a
redemption price of $.25 per Series G Warrant upon not less than 30 days' prior
written notice to the warrant holders.
<PAGE>
NOTE 17 - STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the offering, the Company issued to the placement agent
73,560 warrants (placement agent warrants) to purchase two shares of Common
Stock and one Series H Warrant, which are exercisable for a three year period
commencing one year from the date of issuance, at an exercise price of $1.80.
Upon exercise of the placement agent warrants, the Company will issue up to
73,560 Series H Warrants each to purchase one share of Common Stock at an
exercised price of $7.50 per share. The Series H Warrants are exercisable for a
three year period commencing one year from the date of issuance and are not
redeemable by the Company.
The Company has issued 2,136,878 Series G Warrants to date. No warrants have
been exercised to date.
PRIVATE PLACEMENT OFFERING DATED JANUARY 31, 1996 (JANUARY 1996 PRIVATE
PLACEMENT)
As of January 31, 1996, the closing date of the January Private Placement, the
Company received $2,228,000 (net of offering costs of approximately $633,000)
from the sales of 1,040,636 shares of Common Stock and warrants (Series J
Warrants) to acquire up to 682,078 shares of Common Stock, in addition
$1,138,000 in bridge loans (including accrued interest) were converted into
units offered under the January 31, 1996 Private Placement (see Note 13).
The Series J warrants are exercisable for a three-year period commencing on the
effectiveness of a registration statement covering the shares received upon
their exercise. The exercise price of the Series J warrants will be reduced to
$5.40 per share in the event that the Company fails to repurchase certain shares
of Common Stock by May 31, 1996 and will reduce by $.35 per share for each month
subsequent to September 1996 (June 1996 in the event such stock purchase is not
effected by May 31) in which a registration statement covering the shares
issuable upon exercise of the Series J Warrants is not effective.
In connection with the offering, the Company issued to the placement agent
65,445 warrants (placement agent warrants) to purchase two shares of Common
Stock and one Series H Warrant, which are exercisable for a three year period
commencing one year from the date of issuance, at an exercise price of $2.75.
Upon exercise of the placement agent warrants, the Company will issue up to
65,445 Series H Warrants each to purchase one share of Common Stock at an
exercised price of $7.50 per share. The Series H Warrants are exercisable for a
three year period commencing one year from the date of issuance and are not
redeemable by the Company.
<PAGE>
NOTE 17 - STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK
Series A - The Company issued 13,000 shares, as restructured, of Series A
preferred stock in connection with the acquisition of NRI. Series A preferred
stock is without par value, is non-voting and has no liquidation preferences
with respect to any other class or series of the Company's common or preferred
stock. In addition, the holders of Series A preferred stock shall be entitled
to dividends on the same basis as holders of the Company's Common Stock. They
are convertible into Common Stock at a price per share on the date the Company
files a registration statement so that conversion of the 13,000 shares will
equal $1,040,000 (see Note 2[A]).
SERIES B - On March 31, 1994, the Company owed FD $887,000. On that date the
Company issued 591,333 shares of Series B preferred stock, no par value, in
exchange for that debt at $1.50 per share. The shares have voting rights under
limited conditions, are redeemable at $1.50 per share at the option of the
Company, and are convertible into Common Stock at one share of Common Stock for
each five shares of preferred stock.
On January 25, 1995, the Company exchanged 291,333 shares of Series B preferred
stock as partial consideration for the "W" right and on November 9, 1995, the
remaining 300,000 shares were converted into 12,000 shares of Common Stock.
W RIGHT
On January 25, 1995, the Company conditionally granted to the chief executive
officer/majority stockholder the right ("W" Right) to acquire shares of Common
Stock valued at $1,187,500 in exchange for: 1) the purchase of MSW technology
owned by FD and the chief executive officer/majority stockholder; 2) 291,333
Series B preferred shares owned by FD; and 3) the forgiveness of $1,187,500 of
accrued salary, royalties and other amounts due to the chief executive
officer/majority stockholder of which $246,000 was recorded as accrued salary
payable in equity security as of September 30, 1994. On August 8, 1995, the
officer/majority stockholder exercised that "W" Right and was issued 1,319,445
shares of Common Stock.
NOTE 18 - EXTRAORDINARY ITEMS
The Company owed $510,000 for professional services to a law firm. The Company
extinguished $475,000 of the debt in 1993 for $5,000 cash and a $30,000
promissory note. During 1993, the extinguishment of $475,000 has been recorded
as an extraordinary gain.
During 1994, the Company extinguished $347,000 of debt for $17,000 cash and
$112,000 in notes payable thereby recognizing an extraordinary gain of $218,000.
<PAGE>
NOTE 18 - EXTRAORDINARY ITEMS (CONTINUED)
During 1995, the Company extinguished $896,000 of debt for $90,000 cash thereby
recognizing an extraordinary gain of $806,000.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL LIABILITIES
In connection with the recycling and processing of ferrous and non-ferrous
metals, the Company may come in contact with "hazardous materials" as that term
is defined under various environmental laws. Although the Company screens for
"hazardous materials" in its raw materials, certain items processed may
inadvertently contain such materials, which could result in contamination of the
waste by-products and premises. At this time the Company believes that it is in
substantial compliance with all applicable environmental laws. Due to the
nature of the Company's operations, changes in the environmental laws or
inadvertent improper disposal of a hazardous material may result in a violation
of such laws subjecting the Company to fines and responsibility for costs
attributable to remediation.
LONG-TERM DEBT
In conjunction with the acquisition of MRI, previously discussed in Note 2[B],
the Company executed a promissory note on February 28, 1995 in the amount of
$1,200,000 payable to MRI, bearing interest at 8%, due February 28, 1998.
Accrued interest is payable on March 31, 1995, and on June 30, September 30,
December 31, and March 31 of each calendar year thereafter through maturity.
Under the terms of the note payable, the Company was required to transfer
$1,150,000 of the proceeds from the note payable to NRI and is prohibited from
obtaining any repayment from NRI until the ACI Option expires unexercised. If
the ACI Option is exercised, the note payable will no longer be due to MRI.
INSURANCE
The Company partially self insures for casualty losses on property, plant and
equipment at its NRI subsidiary.
<PAGE>
NOTE 20 - LEASES
OPERATING LEASES
On June 8, 1995, the Company entered into an operating lease agreement for
office space. The term of the lease is through June 2000, with monthly rent
expense beginning at $1,800 and increasing to $3,900 per month.
During December 1995, the Company entered into lease agreements for yard
facilities. The agreement with Anglo requires payments of $2,500 per month
through December 2005 (see Note 2[C]) and the other agreement requires annual
rent of $16,000 payable quarterly through December 2000.
Future minimum lease payments are as follows for the periods ending:
SEPTEMBER 30, DECEMBER 31,
1995 1995
------------- ------------
(UNAUDITED)
1996 $ 44,000 $ 74,000
1997 45,000 75,000
1998 45,000 75,000
1999 46,000 76,000
2000 35,000 65,000
Thereafter - 150,000
-------- --------
$215,000 $515,000
-------- --------
-------- --------
<PAGE>
NOTE 20 - LEASES (CONTINUED)
Rent expense for the years ended September 30, 1995, 1994 and 1993 was
approximately $47,000, $48,000 and $48,000, respectively.
CAPITAL LEASES
NRI leases certain equipment under a capital lease obligation through
November 1997. The obligation under the capital lease has been recorded in
the accompanying financial statements at the present value of future minimum
lease payments, discounted at an interest rate of 10.5%.
The Company leases the equipment acquired from Anglo under a capital lease
obligation (see Note 2[C]). In connection with the lease agreement, the
Company issued a warrant to the leasing company to acquire 53,600 shares of
the Company's Common Stock at $5.00 per share exercisable over a period of
three years from the date of issuance. At March 31, 1996, the Company was in
violation with certain covenants under the capital lease obligation. The
lessor has granted the Company a waiver of lease covenant violations through
April 1, 1997 and the Company anticipates negotiating with the lessor to
amend the lease agreement to revise the provisions for which the Company is
not in compliance.
The capitalized cost, accumulated depreciation, and depreciation expense
relating to this equipment was as follows for the periods ended:
SEPTEMBER 30, DECEMBER 31,
1995 1995
------------- ------------
(UNAUDITED)
Capitalized cost $118,000 $1,918,000
Accumulated depreciation (6,000) (21,000)
-------- ----------
$112,000 $1,897,000
-------- ----------
-------- ----------
Depreciation expense $ 6,000 $ 9,000
-------- ----------
-------- ----------
<PAGE>
NOTE 20 - LEASES (CONTINUED)
The future minimum lease payments under the capital lease and net present value
of future minimum lease payments are as follows for the periods ending:
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
1996 $ 44,000 $ 483,000
1997 41,000 527,000
1998 6,000 492,000
1999 - 486,000
2000 - 486,000
----------- ------------
Total future minimum payments 91,000 2,474,000
Amount representing interest (13,000) (657,000)
----------- ------------
Present value of future minimum lease payments 78,000 1,817,000
Less current portion (37,000) (324,000)
----------- ------------
$ 41,000 $ 1,493,000
----------- ------------
----------- ------------
<PAGE>
NOTE 21 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR
NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------------- --------------------------
1995 1994 1995 1994
----------- ------------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash paid for interest $ 407,000 $ - $ 96,000 $ 79,000
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Stock issued for conversion
of bridge financing $ 150,000 $ - $ - $ 150,000
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Acquisition of subsidiaries
for stock $ - $ 6,725,000 $ 925,000 $ 1,200,000
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Purchase of equipment for
notes payable $ 56,000 $ 5,000 $ - $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Sale of 25% interest in
subsidiary for note
receivable $ - $ 900,000 $ - $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Reversal of deferred gain
on sale of subsidiary $ 751,000 $ - $ - $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Common stock issued for
relief of debt $ - $ 1,351,000 $ - $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Preferred stock issued for
extinguishment
of debt $ - $ 887,000 $ - $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Conversion of accrued
salary to equity $ - $ 246,000 $ - $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Restructure of preferred
stock to debt $ 2,300,000 $ - $ - $ 2,300,000
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Issuance of common
stock to chief executive
officer $ 437,000 $ - $ - $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
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 $ - $ - $ 1,865,000 $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Capital lease obligation
incurred to finance
Anglo acquisition $ - $ - $ 1,800,000 $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Intangible acquired for a
note payable $ - $ - $ 750,000 $ -
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
</TABLE>
<PAGE>
NOTE 22 - SUBSEQUENT EVENTS
PRIVATE PLACEMENT
On April 8, 1996 the Company completed a private placement. The Company
received $228,000 (net of offering costs of $20,000) from the sale of 90,000
shares of Common Stock and warrants (Series J Warrants) to acquire up to 45,000
shares of Common Stock at $7.50 per share. The Series J Warrants are
exercisable for a three-year period commencing on the effectiveness of a
registration statement covering the shares received upon their exercise. The
exercise price of the Series J Warrants will be reduced to $5.40 per share in
the event that the Company fails to repurchase certain shares of Common Stock by
May 31, 1996 and will reduce by $.35 per share for each month subsequent to
September 1996 (June 1996 in the event such stock purchase is not effected by
May 31) in which a registration statement covering the shares issuable upon
exercise of the Series J warrants is not effective.
In connection with the offering, the Company issued to the placement agent 4,500
warrants (placement agent warrants) to purchase two shares of Common Stock and
one Series H Warrant, which are exercisable for a three year period commencing
one year from the date of issuance, at an exercise price of $2.75. Upon
exercise of the placement agent warrants, the Company will issue up to 4,500
Series H Warrants each to purchase one share of Common Stock at an exercised
price of $7.50 per share. The Series H Warrants are exercisable for a three
year period commencing one year from the date of issuance and are not redeemable
by the Company.
ACQUISITION OF MID-AMERICA
On April 15, 1996, the Company acquired substantially all of the assets
(excluding cash and accounts receivable) of Mid-America Shredding, Inc. The
assets acquired consist of real property, buildings, a heavy duty automotive
shredder mill, a wire chopping plant and heavy equipment and tools used in the
business of recycling ferrous and non-ferrous metals. The purchase price
totaled $1,925,000, settled through the assumption of outstanding bank debt of
$1,210,000, $660,000 cash paid at closing and a $55,000 note, payable over eight
months. The purchase price is allocated as follows:
Inventories $ 55,000
Land 310,000
Buildings and improvements 560,000
Machinery and equipment 1,000,000
------------
Total $ 1,925,000
------------
------------
<PAGE>
NOTE 22 - SUBSEQUENT EVENTS (CONTINUED)
AGREEMENT TO ACQUIRE WEISSMAN
In April 1996, the Company reached agreement for the purchase of the stock of
Weissman Iron and Metal for cash of $12,400,000, subject to adjustment at
closing. Weissman operates in the business of recycling ferrous and non-ferrous
metals in and around Waterloo, Iowa. The purchase price is anticipated to be
funded through a combination of a public offering of the Company's securities
and bank debt.
PROPOSED FINANCING AGREEMENT
In April 1996, the Company entered into a letter of intent for a $10,000,00 to
$11,000,000 financing agreement. Advances would be subject to certain asset
eligibility computations and interest would be at the Bank of America Reference
Rate plus 2% except for the over advance facility which would be plus 3%. The
agreement would be collateralized by a first security interest on all of the
Company's assets. Closing of the financing agreement is conditional upon
completion of the lender due diligence including, among other things,
appraisals, documentations and certain financial requirements.
PROPOSED PUBLIC OFFERING
On March 27, 1996, the Company entered into a letter of intent with an
underwriter to sell 4,400,000 shares of the Company's Common Stock in a public
offering. Upon a registration statement being declared effective, the 4,400,000
shares would be sold along with 492,448 shares which would also be sold by
certain security holders.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON THE SUPPLEMENTAL SCHEDULES
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
RECYCLING INDUSTRIES, INC.
DENVER, COLORADO
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements, taken as whole. The schedule to the
consolidated financial statements referred to in the accompanying index are
presented for the purpose of additional analysis and are not a required part of
the basic financial statements. Such information for the year ended
September 30, 1995 has been subjected to the auditing procedures applied in the
audit of the basic consolidated financial statements. In our opinion, such
information for the year ended September 30, 1995 is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
BDO SEIDMAN, LLP
DENVER, COLORADO
MAY 17, 1996
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON THE SUPPLEMENTAL SCHEDULES
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
RECYCLING INDUSTRIES, INC.
DENVER, COLORADO
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements, taken as whole. The schedule to the
consolidated financial statements referred to in the accompanying index are
presented for the purpose of additional analysis and are not a required part of
the basic financial statements. Such information for the year ended
September 30, 1994 has been subjected to the auditing procedures applied in the
audit of the basic consolidated financial statements. In our opinion, such
information for the year ended September 30, 1994 is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
AJ. ROBBINS, PC.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
NOVEMBER 3, 1995
<PAGE>
RECYCLING INDUSTRIES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
ASSETS
1995 1994
------------ ------------
CURRENT ASSETS:
Cash $ 126,000 $ 77,000
Prepaid expenses 8,000 28,000
Accounts receivable-related party 219,000 -
------------ ------------
Total Current Assets 353,000 105,000
Investment in subsidiaries 5,012,000 3,612,000
Advances to NRI 1,532,000 -
Property, plant and equipment,
net of accumulated depreciation
of $11,000 and $72,000 11,000 18,000
Note receivable, related party - 859,000
Engineering plans, net of accumulated
amortization of $1,107,000 and $890,000 188,000 405,000
Deferred tax asset 800,000
Investment, at cost 277,000 -
Acquisition costs 61,000 164,000
Goodwill, net of accumulated amortization of
$29,000 and $7,000 188,000 168,000
Other assets 30,000 25,000
------------ ------------
Total Assets $ 8,452,000 $ 5,356,000
------------ ------------
------------ ------------
THE "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF RECYCLING INDUSTRIES, INC.
AND SUBSIDIARIES" ARE AN INTEGRAL PART OF THESE STATEMENTS
SEE ACCOMPANYING NOTES TO CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
<PAGE>
RECYCLING INDUSTRIES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 61,000 $ 380,000
Note payable, related party - 8,000
Trade accounts payable 260,000 551,000
Professional services payable - 255,000
Accrued expenses 64,000 513,000
Income taxes payable 86,000 -
Current portion of long term debt 125,000 -
Current portion of long term debt, related party 182,000 -
------------- -------------
Total Current Liabilities 778,000 1,707,000
DEFERRED GAIN - 751,000
LONG-TERM DEBT:
Long-term debt, net of current portion - 125,000
Long-term debt, related party, net of current portion 2,920,000 -
------------- -------------
Total Liabilities 3,698,000 2,583,000
------------- -------------
Preferred stock 1,762,000 4,499,000
Common stock 8,000 3,000
Additional paid-in capital 13,120,000 8,269,000
Accrued salary payable in equity security - 246,000
Accumulated (deficit) (10,136,000) (10,044,000)
------------- -------------
Total Stockholders' Equity 4,754,000 2,973,000
------------- -------------
$ 8,452,000 $ 5,556,000
------------- -------------
------------- -------------
</TABLE>
THE "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF RECYCLING INDUSTRIES, INC.
AND SUBSIDIARIES" ARE AN INTEGRAL PART OF THESE STATEMENTS
SEE ACCOMPANYING NOTES TO CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
<PAGE>
RECYCLING INDUSTRIES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
1995 1994
------------ ------------
REVENUES:
Sales $ 37,000 $ -
Interest income 35,000 19,000
------------ ------------
72,000 19,000
------------ ------------
COSTS AND EXPENSES:
Cost of sales 29,000 -
Personnel 312,000 204,000
Professional services 485,000 604,000
Travel 27,000 60,000
Occupancy 51,000 47,000
Other general and administrative 140,000 40,000
Depreciation and amortization 251,000 229,000
Bad debt expense 123,000 -
Interest 196,000 34,000
------------ ------------
1,614,000 1,218,000
------------ ------------
(LOSS) BEFORE EXTRAORDINARY GAIN (1,542,000) (1,199,000)
EXTRAORDINARY GAIN FROM SETTLEMENT OF DEBTS 739,000 218,000
------------ ------------
(LOSS) BEFORE INCOME TAXES (803,000) (981,000)
(BENEFIT) FROM INCOME TAXES (711,000) -
------------ ------------
NET (LOSS) $ (92,000) $ (981,000)
------------ ------------
------------ ------------
THE "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF RECYCLING INDUSTRIES, INC.
AND SUBSIDIARIES" ARE AN INTEGRAL PART OF THESE STATEMENTS
SEE ACCOMPANYING NOTES TO CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
<PAGE>
RECYCLING INDUSTRIES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
=================================
1995 1994
----------- ---------
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net (loss) $ (92,000) $(981,000)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 246,000 230,000
Extraordinary gain from extinguishment of debt (806,000) (218,000)
Deferred income taxes (800,000) -
Write-off acquisition costs - 15,000
Bad debt expense 123,000 -
Issuance of stock for services 25,000 244,000
Changes in assets and liabilities:
Accounts receivable-related parties - (40,000)
Prepaid expenses 20,000 -
Advances to subsidiaries (632,000) -
Other assets (5,000) -
Accounts payable (316,000) 479,000
Accrued liabilities (103,000) (27,000)
Income taxes payable 86,000 -
----------- ---------
Net Cash (Used) in Operating Activities (2,254,000) (298,000)
----------- ---------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Collections on note receivable - 41,000
Additions to acquisition costs and goodwill (103,000) (263,000)
Acquisition of Loef (113,000) -
Advances to related parties (234,000) -
----------- ---------
Net Cash (Used) in Investing Activities (450,000) (222,000)
----------- ---------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from borrowings 150,000 323,000
Proceeds from borrowings-related parties - 356,000
Principal payments on borrowings-related parties (106,000) (137,000)
Proceeds from issuance of common stock 2,798,000 55,000
Principal payments on borrowings (89,000) -
----------- ---------
Net Cash Provided by Financing Activities 2,753,000 597,000
----------- ---------
Increase in Cash 49,000 77,000
CASH, beginning of period 77,000 -
----------- ---------
CASH, end of period $ 126,000 $ 77,000
----------- ---------
----------- ---------
THE "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF RECYCLING INDUSTRIES, INC.
AND SUBSIDIARIES" ARE AN INTEGRAL PART OF THESE STATEMENTS
SEE ACCOMPANYING NOTES TO CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
<PAGE>
RECYCLING INDUSTRIES, INC.
SCHEDULE I
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
=================================
NOTE 1 - BASIS OF PRESENTATION
Pursuant to the rules and regulations of the Securities and Exchange Commission,
the Condensed Financial Statements of the Registrant do not include all of the
information and notes normally included with financial statements prepared in
accordance with generally accepted accounting principles. It is, therefore,
suggested that these Condensed Financial Statements be read in conjunction with
the Consolidated Financial Statements and Notes thereto included in the
Registrant's Annual Report as referenced in Form 10-K. Part II, Item 8.
NOTE 2 - LONG-TERM DEBT
The components of long-term debt are as follows at September 30, 1995 and 1994:
5% note due December 1, 1995 $ 125,000
----------
----------
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
ANGLO METAL, INC.
HARLINGEN, TEXAS
We have audited the accompanying balance sheets of Anglo Metal, Inc. dba Anglo
Iron & Metal, as of December 31, 1995 and 1994 and the related statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the three year period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits 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
misstatements. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Anglo Metal, Inc. dba Anglo
Iron & Metal, as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
AJ. ROBBINS, PC.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
MARCH 22, 1996
<PAGE>
ANGLO METAL, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
=================================
ASSETS
1995 1994
---------- ----------
CURRENT ASSETS:
Cash $ - $ 146,000
Trade accounts receivable, pledged 641,000 660,000
Other receivables, related parties 70,000 75,000
Inventories 1,437,000 1,041,000
Prepaid expenses 56,000 52,000
---------- ----------
Total Current Assets 2,204,000 1,974,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization
of $703,000 and $614,000 1,300,000 1,332,000
---------- ----------
OTHER ASSETS:
Cash surrender value life insurance 116,000 111,000
Other 16,000 -
---------- ----------
Total Other Assets 132,000 111,000
---------- ----------
$3,636,000 $3,417,000
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
ANGLO METAL, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1995 AND 1994
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
---------- ----------
CURRENT LIABILITIES:
Bank overdraft $ 218,000 $ -
Trade accounts payable 373,000 638,000
Line of credit, bank - 839,000
Accrued liabilities 34,000 53,000
Income taxes payable 140,000 -
Environmental cleanup liabilities 1,194,000 1,194,000
Due to Recycling Industries, Inc. 1,588,000 -
Current portion of long-term debt - 8,000
Current portion of capital lease - 64,000
---------- ----------
Total Current Liabilities 3,547,000 2,796,000
LONG-TERM DEBT:
Long-term debt, less current portion - 226,000
Capital lease, less current portion - 46,000
---------- ----------
Total Long-Term Debt - 272,000
---------- ----------
Total Liabilities 3,547,000 3,068,000
---------- ----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 1,000,000
shares authorized; 50,000 shares issued
and outstanding 50,000 50,000
Retained earnings 39,000 299,000
---------- ----------
89,000 349,000
---------- ----------
Total Stockholders' Equity $3,636,000 $3,417,000
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
ANGLO METAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
======================================================
1995 1994 1993
----------- ----------- -----------
REVENUES:
Sales $15,116,000 $12,128,000 $10,189,000
Brokerage 216,000 700,000 352,000
Other 7,000 38,000 20,000
----------- ----------- -----------
Total Revenues 15,339,000 12,866,000 10,561,000
----------- ----------- -----------
COST OF SALES AND EXPENSES:
Cost of sales 13,739,000 11,398,000 9,698,000
Cost of brokerage 181,000 600,000 324,000
Environmental cleanup costs - - 729,000
Personnel 414,000 346,000 422,000
Professional services 66,000 32,000 31,000
Depreciation and amortization 11,000 11,000 10,000
Interest 133,000 102,000 56,000
Other general and administrative 336,000 205,000 156,000
----------- ----------- -----------
Total Cost of Sales
and Expenses 14,880,000 12,694,000 11,426,000
----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES 459,000 172,000 (865,000)
PROVISION FOR INCOME TAXES 140,000 - -
NET INCOME (LOSS) $ 319,000 $ 172,000 $ (865,000)
----------- ----------- -----------
----------- ----------- -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
ANGLO METAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
======================================================
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
------- --------- ---------- ----------
Balance, December 31, 1992 50,000 $ 50,000 $1,290,000 $1,340,000
------ --------- ---------- ----------
Net (loss) (865,000) (865,000)
Dividends paid (97,000) (97,000)
------ --------- ---------- ----------
Balance, December 31, 1993 50,000 50,000 328,000 378,000
------ --------- ---------- ----------
Net income 172,000 172,000
Dividends paid (201,000) (201,000)
------ --------- ---------- ----------
Balance, December 31, 1994 50,000 50,000 299,000 349,000
------ --------- ---------- ----------
Net income 319,000 319,000
Dividends paid (579,000) (579,000)
------ --------- ---------- ----------
Balance, December 31, 1995 50,000 $ 50,000 $ 39,000 $ 89,000
------ --------- ---------- ----------
------ --------- ---------- ----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
ANGLO METAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
======================================================
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss) $ 319,000 $ 172,000 $(865,000)
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 105,000 113,000 100,000
Changes in:
Trade accounts receivable 19,000 (335,000) 224,000
Other receivables, related parties 5,000 5,000 (24,000)
Inventories (396,000) (135,000) 92,000
Prepaid expenses (4,000) (24,000) 38,000
Bank overdraft 218,000 - (6,000)
Trade accounts payable (265,000) 73,000 (67,000)
Accrued liabilities 7,000 (32,000) (111,000)
Income taxes payable 140,000 - -
Environmental cleanup liabilities - - 729,000
--------- ---------- ---------
Net Cash Provided (Used) by
Operating Activities 148,000 (163,000) 110,000
--------- ---------- ---------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of property and equipment (56,000) (162,000) (168,000)
Proceeds from sale of equipment - 2,000 -
Increase in deposits (16,000) - -
Increase in cash surrender value
life insurance (5,000) (8,000) (41,000)
--------- ---------- ---------
Net Cash (Used) by
Investing Activities (77,000) (168,000) (209,000)
--------- ---------- ---------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Issuance of long-term debt 247,000 - -
Payments on long-term debt (36,000) (8,000) (3,000)
Advances on line of credit 250,000 1,452,000 637,000
Repayment on line of credit (49,000) (867,000) (712,000)
Payments on capital lease obligation (50,000) (58,000) (40,000)
Dividends paid (579,000) (201,000) 330,000
--------- ---------- ---------
Net Cash Provided (Used) by
Financing Activities (217,000) 318,000 212,000
--------- ---------- ---------
NET INCREASE (DECREASE) IN CASH (146,000) (13,000) 113,000
CASH, beginning of year 146,000 159,000 46,000
--------- ---------- ---------
CASH, end of year $ - $ 146,000 $ 159,000
--------- ---------- ---------
--------- ---------- ---------
CASH PAID FOR INTEREST $ 48,000 $ 102,000 $ 56,000
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
See Note 13
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACTIVITY
Anglo Metal, Inc. dba Anglo Iron & Metal (Anglo) was incorporated in the State
of Texas in December 1985. Anglo operates in the metals recycling industry
(purchasing, processing, selling and brokering ferrous and non-ferrous metals)
with its operations located in southern Texas. Anglo operates one of 12 heavy
duty automotive shredders located in Texas. Processed scrap is sold to steel
mill customers and other metals processors throughout the southern region of the
United States and northern Mexico.
SALE OF ANGLO
On December 11, 1995, Anglo sold to Recycling Industries, Inc. (RII)
substantially all of the assets and the business of Anglo.
The assets sold consisted of a heavy duty automotive shredder, inventories,
metal shearing equipment, balers, heavy equipment, tools and rolling stock used
in the business of recycling ferrous and non-ferrous metals. Certain real
property, buildings and leasehold improvements used in the metals recycling
business were also sold.
The sales price for Anglo was $6,065,000 comprised of: $2,079,000 in cash;
$1,865,000 note which is to be paid in ten equal monthly installments of
$186,500 over ten months beginning in February 1996; 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 received at the closing of the sale, $1,800,000 was obtained through
a sale-leaseback transaction with Ally Capital Corporation, collateralized by
all of the machinery and equipment sold, accounts receivable and inventory,
which has been recorded as a capital lease. 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 lease contains numerous
covenants for maintaining certain financial ratios and earnings levels. The
remaining $279,000 paid at closing was obtained from the operating cash reserves
and working capital of RII.
RII signed a consulting and non-competition agreement with the president of
Anglo. The term of the noncompete portion is for a term of six years and is
valued at $1,000,000 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 $5,000 per month.
The real property sold and the common stock given by RII have been placed in
escrow to provide for the remediation of environmental contamination related to
the operations of Anglo prior to the acquisition.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The purchase price has been allocated as follows:
Equipment under capital lease $ 1,800,000
Contract to acquire 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
-----------
-----------
Notes payable (3,061,000)
RII common stock (925,000)
Cash paid at closing 2,079,000
Capital lease obligation (1,800,000)
-----------
Cash from operating capital $ 279,000
-----------
-----------
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables exist due to
large balances with a few customers. At December 31, 1995 and 1994, accounts
receivable balances for three major customers were $336,476 and $320,335, or 54%
and 49%, respectively, of the total accounts receivable balance. Ongoing credit
evaluations of customers' financial condition are performed and, generally, no
collateral is required. Anglo does not maintain reserves for potential credit
losses since such past losses, in the aggregate, have not been significant;
therefore, the allowance for doubtful accounts receivable is zero at December
31, 1995 and 1994. Customers are located throughout the Southern region of the
United States and Mexico.
INVENTORIES
Inventories consist primarily of ferrous and non-ferrous scrap metal. Inventory
costs include material, labor and plant overhead. Inventory is stated at lower
of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization expense is provided on a straight-line basis using estimated useful
lives of 5 to 20 years for equipment and 40 years for building and improvements.
Depreciation and amortization expense of property, plant and equipment was
$105,000, $113,000 and $100,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Maintenance and repairs are charged to expense as incurred
and expenditures for major improvements are capitalized. When assets are
retired or otherwise disposed of, the property accounts are relieved of costs
and accumulated depreciation and any resulting gain or loss is credited or
charged to operations.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are capitalized if
costs improve Anglo's property as compared to the condition of the property when
originally constructed or acquired or if the costs prevent environmental
contamination from future operations. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded when
environmental assessments are made or remedial efforts are probable and the cost
can be reasonably estimated.
These amounts are generally accrued upon the completion of feasibility studies
or the settlement of claims, but in no event later than Anglo's commitment to a
plan of action.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL STATEMENTS
The carrying amounts of cash, accounts receivable, accounts payable, and accrued
expenses approximate fair value because of the short maturity of these items.
The fair value of notes payable was estimated based on market values for debt
with similar terms. Management believes that the fair value of that debt
approximates its carrying value.
INCOME TAXES
Anglo and its stockholders have elected under the Internal Revenue Code to be an
S-corporation for tax purposes. In lieu of corporate income taxes, the
stockholders of an S-corporation are taxed on their proportionate share of its
taxable income. Accordingly, no provision or liability for federal income taxes
has been included in these financial statements for Anglo for 1994 and 1993. On
January 1, 1995, Anglo terminated its S-corporation election.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1995, Anglo adopted Statement of Financial Accounting
Standards No. 109 (FAS 109), Accounting for Income Taxes. Under this method,
deferred income taxes are recorded to reflect the tax consequences in future
years of temporary differences between the tax basis of the assets and
liabilities and their financial statement amounts at the end of each reporting
period. Valuation allowances will be established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is the tax payable for the current period and the change during the period in
deferred tax assets and liabilities. Deferred tax assets and liabilities have
been netted to reflect the tax impact of temporary differences. The adoption of
FAS 109 and termination of the S-corporation election resulted in recognition of
a net deferred tax asset of $250,000. Anglo has not recorded a deferred tax
asset at January 1, 1995 or December 31, 1995 since it was more likely than not
that the tax assets would not be realized. Therefore, the adoption of FAS 109
and the termination of the S-corporation election did not have a material effect
on Anglo's financial statements and there was no cumulative effect of this
change in accounting for income taxes at January 1, 1995. There is also no
effect on net income for the year ended December 31, 1995.
CASH
For purposes of reporting cash flows, Anglo considers all funds with original
maturities of three months or less to be cash equivalents.
NOTE 2 - INVENTORIES
Inventories, pledged, consist of the following at:
DECEMBER 31,
---------------------------
1995 1994
------------ ------------
Raw materials $ 766,000 $ 866,000
Finished goods 671,000 175,000
------------ ------------
$ 1,437,000 $ 1,041,000
------------ ------------
------------ ------------
Included in inventory are $50,000 and $10,000 of indirect costs at December 31,
1995 and 1994, respectively.
<PAGE>
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, pledged, consists of the following at:
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
Land $ 10,000 $ 10,000
Building and improvements 109,000 109,000
Heavy machinery and equipment 1,762,000 1,482,000
Transportation equipment 99,000 115,000
Asset under capital lease obligation - 208,000
Office equipment 23,000 22,000
----------- -----------
Total 2,003,000 1,946,000
Less accumulated depreciation
and amortization (703,000) (614,000)
----------- -----------
Net $ 1,300,000 $ 1,332,000
----------- -----------
----------- -----------
NOTE 4 - CASH SURRENDER VALUE LIFE INSURANCE
Anglo is the beneficiary of a life insurance policy on the President of Anglo.
The face amount of the policy is $1,800,000. Anglo's cash surrender value was
$116,000 and $111,000 at December 31, 1995 and 1994, respectively. The policy
is collateral for bank debt.
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consists primarily of accrued salaries and related expenses at
December 31, 1995 and 1994.
<PAGE>
NOTE 6 - LINE OF CREDIT
Anglo has a revolving line of credit with a bank for a maximum of $250,000 with
interest at prime plus 1% (10% at December 31, 1995) collateralized by
equipment, inventory, accounts receivable, officer life insurance policy and
stockholder and officer personal guarantees. The balance was zero at December
1995 (see Note 8).
NOTE 7- LONG-TERM DEBT
Long-term debt consists of the following at:
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
Note payable to individual with original
principal of $245,000 and interest at 10%
per annum; monthly principal and interest
payments of $2,600; collateralized by a
$1,800,000 key man life insurance policy;
paid December 1995 (see Note 8). $ - $ 222,000
----------- -----------
Note payable to bank with original principal
amount of $17,200 and interest at 11% per
annum; monthly principal and interest payments
of $800; collateralized by equipment; paid
December 1995 (see Note 8). - 12,000
----------- -----------
- 234,000
----------- -----------
Less current portion - 8,000
----------- -----------
$ - $ 226,000
----------- -----------
----------- -----------
NOTE 8 - DEBT RESTRUCTURE
In connection with the sale of Anglo to RII, certain debt of Anglo was paid by
RII prior to December 31, 1995 and has been recorded in the financial statements
as advances from RII, a current liability. The following is a summary of the
debt restructure.
In December 1995, RII entered into an agreement with an unrelated entity (BAF)
whereby BAF advances 80% of the purchased trade accounts receivable and collects
payments on purchased receivables from Anglo's customers. BAF charges RII an
administrative fee equal to 1% of the face amount of the purchased receivables
and a monthly finance charge in the amount of 10% of the average daily
outstanding balance of all purchased receivables. RII is required to repurchase
any receivables not collected from customers within 90 days. The balance at
December 31, 1995 was $11,000.
<PAGE>
NOTE 8 - DEBT RESTRUCTURE (CONTINUED)
On December 13, 1995, RII entered into a capital lease with Ally Capital
Corporation for $1,800,000 of equipment acquired from Anglo (see Note 1). The
proceeds were used to pay off debt in the amount of $1,256,000 and capital lease
obligations of $60,000. The remaining balance of $484,000 was used to reduce a
$750,000 note payable that was guaranteed by Anglo.
NOTE 9 - INCOME TAXES
The tax effects of temporary differences and net operating loss carryforwards
that give rise to deferred tax assets and (liabilities) at December 31, 1995 are
as follows:
Temporary differences:
Property and equipment $ (220,000)
Accrued environmental liabilities 362,000
Inventories 68,000
Valuation allowance (210,000)
-----------
$ -
-----------
-----------
The provision for income taxes consists of the following at December 31, 1995:
Current $140,000
Deferred -
--------
$140,000
--------
--------
The components of deferred income tax (benefit) expenses are as follows as of
December 31, 1995:
Depreciation and amortization $ 40,000
Valuation allowance (40,000)
---------
$ -
---------
---------
<PAGE>
NOTE 9 - INCOME TAXES (CONTINUED)
Following is a reconciliation of the amount of income tax (benefit) expense that
would result from applying the statutory federal income tax rates to pre-tax
income the reported amount of income tax expense for the year ended December 31,
1995:
Tax expense (benefit) at federal statutory rates $ 170,000
Increase (decrease) resulting from:
Nondeductible items 8,000
Depreciation and amortization (40,000)
Other 2,000
------------
$ 140,000
------------
------------
NOTE 10 - ECONOMIC DEPENDENCY
The Company is economically dependent on major customers for annual sales as
follows:
1995 1994 1993
Customer A 26% 25% 34%
Customer B 18% 10% - %
Customer C 10% - % - %
Customer D 12% - % 12%
Customer E - % - % 11%
Customer F - % 12% - %
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LOAN GUARANTEE
Anglo is guarantor of a note payable for its stockholders to a bank with an
original principal of $750,000; interest at 10.5% per annum; monthly principal
and interest payments of $8,000. The note is collateralized by equipment,
personal guarantees of Anglo stockholders and president, and assignment of key
man life insurance policy; due December 1988. The note balance is $207,000 and
$717,000 at December 31, 1995 and 1994. Of the cash received at closing,
$484,000 was paid directly to the note holder by RII (see Note 8). RII is not a
guarantor for the remaining outstanding principal.
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
Anglo Metal, Inc. and Anglo Iron & Metal are defendants in a lawsuit by the
State of Texas and Houston Lighting & Power, and Central Power & Light for
$924,000. Anglo is vigorously defending the case. A liability of $465,000 has
been recorded in the financial statements of Anglo. Under the terms of the
purchase agreement, RII shall not assume any liabilities of Anglo arising on or
before the closing date with respect to any action, event or occurrence.
Anglo is also a party to a number of lawsuits arising in the normal course of
business. In the opinion of management, the resolution of these matters will
not have a material adverse effect on Anglo's financial position.
ENVIRONMENTAL LIABILITIES
Anglo is a party to proceedings before state and federal regulatory agencies
relating to environmental remediation issues. The assessment of the required
response and remedial costs associated with the cleanup is extremely complex.
Among the variables that management must assess are imprecise engineering
estimates, continually evolving governmental standards, potential recoveries
from insurance coverage and laws which impose joint and several liability.
During January 1993, Environmental Protection Agency (EPA) conducted an on site
investigation and discovered a violation of the Toxic Substance Control Act,
concerning illegal disposal of Poly Chlorinated Biphenyl (PCB) containing
capacitors. Anglo was assessed a $129,000 penalty and was ordered to remediate
the site and dispose of contaminated soil in accordance with EPA standards. The
initial engineering estimates for remediation and soil disposal are within the
range of $200,000 to $600,000. A liability for $729,000 has been recorded in
the Anglo financial statements. Under the terms of the acquisition of Anglo by
RII, the stock component of the purchase price has been escrowed for remediation
costs.
LEASES
Anglo leases facilities under non-cancelable operating lease through 2005. The
monthly lease payments are $4,000 per month for the term of the lease. Total
rental expense for each of the three years 1995, 1994 and 1993 was $47,000.
Anglo also leased equipment under a capital lease for $208,000 which was paid in
December 1995.
Future minimum lease payments are as follows at December 31,:
1996 $ 30,000
1997 30,000
1998 30,000
1999 30,000
2000 30,000
Thereafter 150,000
$300,000
NOTE 12 - RELATED PARTY TRANSACTIONS
In addition to transactions with related parties discussed throughout the notes
to the financial statements, the following related party transactions have taken
place.
Accounts receivable from related parties consist of advances made to one of the
officers of Anglo and to one of the stockholders. These advances are non-
interest bearing. The officer's balance was $59,000 and $64,000 for 1995 and
1994, respectively, and the stockholder's balance was $11,000 at the end of 1995
and 1994.
NOTE 13 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NON-
CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1995, the long term debt of $1,256,000 and
the capital lease of $60,000 were paid by RII.
During the year ended December 31, 1995, a capital lease in the amount of
$208,000 was entered into for the acquisition of equipment.
During the year ended December 31, 1995, $17,000 of equipment was acquired with
a note.
During the year ended December 31, 1995, $807,000 of the line of credit balance
was refinanced to a long-term installment note payable.
