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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER. 0-20179
RECYCLING INDUSTRIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
COLORADO
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(State or Other Jurisdiction of Incorporation or Organization)
84-1103445
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(I.R.S. Employer Identification Number)
384 INVERNESS DRIVE SOUTH, SUITE 211
ENGLEWOOD, CO 80112
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(Mailing Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (303) 790-7372
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and, (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No
--- --- --- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B, and no disclosure will be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $16,899,106. This calculation is based upon
the average bid and asked prices of the stock on December 31, 1995 of $3.25, and
the number of shares held by non-affiliates, which was 5,199,725 shares on
December 31, 1995.
The number of shares of the Registrant's $.001 par value common stock that was
outstanding as of December 31, 1995 was 8,635,478.
Documents Incorporated by Reference : None
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TABLE OF CONTENTS
PART I PAGE
Item 1. Business 3
Item 2. Description of Property 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a
Vote of Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 25
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
Item 8. Financial Statements and
Supplementary Data -- Independent
Auditor's Report Fl thru F47
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the
Registrant 40
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management 43
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and 47
Reports on Form 8-K
Signature 52
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PART I
Item I - Business
Recycling Industries, Inc. ("RII" or the "Company"), headquartered in
Englewood, Colorado, is a recycling and environmental technology company,
focusing on three areas: (i) the operation of companies involved in the metal
and paper recycling industries ("Metals Recycling"); (ii) the development and
utilization of technology for the recycling and composting of municipal solid
waste (the "MSW Technology"); and (iii) research and development related to new
technologies that complement the Metals Recycling operations and the MSW
Technology ("Developmental Technology"). Each of these areas of business are
discussed below.
METALS RECYCLING
The Company, through its wholly-owned subsidiary, Nevada Recycling,
Inc. ("NRI") and its 20% ownership in The Loef Company ("Loef"), is a fully
integrated metals and, to a lesser extent, paper recycler. In addition, the
Company is actively pursuing additional acquisitions in the metals recycling
industry. Metals recyclers purchase ferrous and non-ferrous scrap metal from a
variety of sources, sort the purchased scrap according to the grade and quality
of the metal, process the scrap by shredding or other methods to reduce and sell
the processed scrap metal ("prepared scrap") to its customers. The metals
recycling industry utilizes established non-patented technology for processing
scrap materials and is not subject to significant seasonal fluctuations.
On December 11, 1995, the Company's wholly-owned subsidiary, Recycling
Industries of Texas, Inc. ("RITI") acquired substantially all of the assets of
Anglo Metal, Inc. d/b/a Anglo Iron & Metal, a metals recycler with operations in
Brownsville, Harlingen, McAllen and San Juan, Texas. RITI's principal markets
are the southern United States and Northern Mexico. See "Acquisition of Anglo
Iron & Metal."
SHREDDING OPERATIONS
The most significant portion of the metals recycling business involves
the operation of heavy-duty automotive shredders which are capable of shredding
an entire automobile into fist-sized pieces of metal within 45 seconds (the
"Shredder"). There are approximately 180 shredders in operation throughout the
United States. Through the operation of the shredder, ferrous and non-ferrous
items such as automobiles, appliances and vending machines are shredded into
various size pieces according to the customer specifications and market demand.
After shredding, the processed scrap is separated into ferrous and non-ferrous
metals and non-metallic items. The ferrous prepared scrap is sold to regional
steel mini-mills. The non-ferrous prepared scrap is recovered as a mixture of
aluminum, zinc die-cast, stainless steel and copper and is sold to processors
who separate the mixture into constituent metals for resale. The non-metallic
portion of the shredded materials ("Auto Shredder Residue") is either disposed
off site or as daily cover at a local landfill. The Company currently is
developing technology to turn Auto Shredder Residue into saleable products. See
"Developmental Technology."
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Non-Shredder Operations
Many non-ferrous metals, such as copper, brass, aluminum, stainless
steel, lead batteries, zinc die-cast, insulated wire (aluminum and copper) and
specialty items are received in a form that is not capable of being processed
through the shredder. Instead, these items are prepared for resale through a
variety of methods including sorting, shearing, torching, baling and wire
stripping. Some items require a combination of these processes whereas others
require only one technique. Prepared non-ferrous items are either sold in their
separated form or baled into low density bales in accordance with the customers
specifications.
Certain purchased ferrous scrap items are too large or heavy to
introduce into the shredder. These items are prepared by either torching or
shearing into smaller sized pieces according to customer specifications. The
torching is accomplished with trained personnel utilizing underground piped
oxygen and acetylene to the torching stations. The hand torching requires
extensive training in safety and cutting techniques in order to maintain
efficient production rates and a safe environment. Certain of these items are
more efficiently prepared by shearing, generally into pieces with a maximum
dimension of 18 inches wide by 36 inches long in accordance with customer
specifications.
THE FERROUS SCRAP MARKET
Prepared ferrous materials are the primary feed material for electric
arc furnaces ("EAF's") utilized by most of the "mini-mill" steel producers in
the United States, such as Nucor and Birmingham Steel Corp. All prepared ferrous
materials are handled at the Company's facilities by electromagnets. Prepared
ferrous materials are shipped by rail or truck to the customer. Currently the
Company ships approximately 30% of the ferrous materials by truck and the
balance is shipped by railroad car.
The price for prepared ferrous scrap has increased significantly in
the past several years from $80 per ton in 1992 to over $140 per ton during
1995. This increased price is due to the sharp increase in the number of EAF
operations which require the high grade prepared steel scrap sold by the Company
as their primary source of raw material. Forecasters predict a significant
number of new domestic EAF's being built in the near future, further increasing
the demand for prepared steel scrap.
Due to the historically low prices for prepared steel scrap, EAF mini-
mills have traditionally enjoyed a production cost advantage over integrated
steel producers operating blast furnaces whose primary raw material is coke and
pig iron. The increases in prepared scrap prices have, however, eroded much of
the EAF's production cost advantage. As a result, many EAF operators are
looking toward alternatives to prepared steel scrap, such as pre-reduced iron
pellets. Industry forecasts, however, predict rising demand for prepared steel
scrap over the next several years and possible prepared scrap shortages. Any
decrease in domestic steel production, however, may have an adverse impact on
the market price for prepared steel scrap.
For the year ended September 30, 1995, three of the Company's
customers accounted for approximately 25%, 21% and 19% of the Company's
revenues. The loss of any one of these customers could have a material adverse
effect on the Company's business.
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THE NON-FERROUS SCRAP MARKET
The non-ferrous scrap market is more diverse than the ferrous market.
The much higher intrinsic values of the non-ferrous metals allow the material to
be freighted over long distances, both domestically and internationally, thereby
creating a worldwide market for non-ferrous scrap. The primary consumers of
non-ferrous metals are either domestic secondary smelters or foreign secondary
smelters. The non-ferrous category comprises items such as copper, aluminum,
brass, stainless steel, high temperature alloys and other exotic metals. The
Company primarily processes copper, aluminum, brass and stainless steel non-
ferrous scrap.
Prices on the non-ferrous scrap markets change daily because of the
ability to hedge any purchase or sale on the Comex or London Metal Exchange.
These two spot and futures markets set the pricing each day for the range of
prices for each type of non-ferrous metal. Some purchases and sales are made on
a formula basis utilizing these markets, e.g., Comex Spot Wirebar - $.32/lb to
sell a copper grade of material. However, the Company does not participate in
the non-ferrous futures markets and, instead, sells its non-ferrous processed
scrap at the spot price.
All sales of materials to domestic or foreign smelters require at
least truckload quantities (40,000 lbs) of a single grade. The trading at these
quantities allows the owner of material to test both the foreign and domestic
markets. The next level of marketing is in "mixed load" quantities of the same
material but different grades, e.g., 40,000 lbs of aluminum consisting of
extrusions, sheet, cast and mlc clips. A load such as this will be of interest
to some selected domestic aluminum smelters and to many domestic non-ferrous
broker/dealers. The foreign market does not buy the "mixed load." The next
level of marketing is the "mixed load" of dissimilar metals, e.g., 15,000 lbs of
copper, 10,000 lbs of aluminum and 15,000 lbs of brass. The only market for
this type of load is the domestic non-ferrous broker/dealer. The function of
the broker/dealer is to consolidate the mixed loads into straight loads, by
grade, and market them to the highest bidder. The Company is marketing all
three load types described above. The Company, however, is increasing its
ability to process high volumes of non-ferrous materials in order to achieve
higher sales in single grade category.
The prices for non-ferrous metals have increased significantly since
the low point 1990. Aluminum prices more than doubled to nearly $1.50/lb during
1994 for prime grades but receded to $.75 to S.80/lb for the prime grades.
Copper also increased to $1.25 to $1.35/lb for #1 copper scrap and have
maintained that level. All brass prices have increased due to the rise in
copper, zinc and tin values. The outlook is for prices to remain steady or
increase based on the domestic and foreign economies growing at normal rates.
The foreign demand for metals has increased lately due to the growth and
recovery of Pacific Rim economies.
The only substitute for scrap non-ferrous materials is virgin material
from ore. Generally, high demand for finished non-ferrous metals results in an
increased and sustained demand for non-ferrous scrap due to the high cost and
long-lead time necessary to construct new non-ferrous smelting capacity.
Generally, non-ferrous scrap trades at prices competitive with materials made
from ore and, during times of high demand, non-ferrous scrap will trade at a
premium due to the significant savings in power, pollutants and labor in
utilizing non-ferrous scrap as raw material compared to virgin material from
ore.
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SOURCE AND AVAILABILITY OF RAW MATERIALS
Raw scrap metal is purchased by the ton from local sources, including
industrial plants, auto wreckers, demolition sites, military bases and
individual collectors. Typically the Company's raw materials are acquired in
the form of industrial waste steel, automobiles, structural steel from
demolition sites, appliances and other goods fabricated from steel and other
metals. The radius of the Company's supply area is approximately 100 miles from
each facility. The Company operates its own fleet of heavy trucks which collect
most of the purchased scrap materials from industrial sources and auto wreckers.
Industrial and governmental sources of supply are pursuant to long
term contracts obtained through competitive bidding. Retail sources of supply
are paid spot prices for their obsolete items at the Company's facilities. The
Company employs a full time buyer at NRI to manage existing and secure new
industrial and governmental supply accounts.
The availability of raw materials is dependent upon the local economy,
the level of demolition activity and the ability to secure long-term supply
contracts with local industrial and governmental sources and automobile
wreckers. The Company has established relationships with each of these sources
of supply.
In purchasing raw materials, the Company inspects and rejects items
that are or contain hazardous materials, such as PCB's and automobile batteries,
although there can be no assurance that all hazardous materials contained in the
Company's raw materials will be discovered and rejected upon inspection.
PAPER OPERATIONS AND MARKET
The Company's paper recycling operations primarily acquire waste paper
products through industrial accounts where roll-off boxes are placed to collect
waste materials. The primary grades of waste paper include corrugated
cardboard, newspaper, blank newspaper, hard white, white ledger, computer paper
and rolls. The Company sorts waste paper products by grade and removes all "off
grade" material and foreign materials. The sorted product is weighed and tagged
and sold to domestic paper mills and some foreign paper brokers. Waste paper
products are primarily shipped by truck to their destination.
DEVELOPMENTAL TECHNOLOGY
The Company is involved in the research and development of
supplemental and complementary technologies which may derive benefit from, or
feed into, its existing operations and recycling technology. Development of
such technologies can give the Company increased profits by creating uses for
recyclable components end-products, and materials that are generally considered
to be waste products.
ASR TECHNOLOGY
The Company is pursuing the development of technology for the
conversion of Auto Shredder Residue ("ASR") to a marketable product. A
laboratory scale plant has been constructed and marketable products have been
produced. This process has not yet been applied to commercial scale production
pending further refinement and process engineering of the procedure, location of
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an appropriate site for development and research and development financing. The
Company currently is seeking industry partners to assist in providing the
estimated $800,000 to build a demonstration scale plant to prove the viability
of the ASR technology. The Company also is exploring the possibility of setting
up a separate research and development corporation or partnership in which to
raise outside equity for this development of ASR technology. As financing
becomes available, the Company is continuing the development of new technologies
related to new ways to make products out of waste materials.
MSW TECHNOLOGY
The Company's patented MSW Technology uses mechanical, manual and
natural organic processes to convert municipal solid waste ("MSW") and treated
sewage sludge into recyclable materials and compost. This entire process is
designed to occur within an enclosed facility, utilizing a "no burn" process,
which the Company believes to be more environmentally sound than either
landfilling or incineration of non-hazardous waste. The Company licenses the
MSW Technology from FDH who received its first patents for the recycling and
composting of MSW in 1989. Since that time, FDH has three major patents and has
nearly 200 different patent claims for recycling. The patent lives extend
through the year 2010.
The Company holds the exclusive license on proprietary technologies
for the separation of a waste stream into its recyclable components, manufacture
of new products using composite materials involving primarily recycled plastic
and paper, and the conversion of waste materials into new products. Certain of
these technologies are being developed by the Company and are further discussed
above under "Developmental Technology."
Since 1993 the Company has been unable to expend significant amounts
toward permitting or construction of an operating MSW facility. The Company,
however, continues to be interested in securing locations to construct a MSW
facility utilizing the MSW Technology. Current projections indicate that the
cost of constructing an operating MSW facility ranges from $15 million to $35
million, depending upon certain factors including land cost, rated plant
capacity required to meet waste stream recycling needs, and other site-specific
factors.
To raise the necessary financing to construct and operate a MSW
facility, the Company is seeking joint venture partners and negotiating
licensing agreements with various entities for implementation of the MSW
Technology in the United States and internationally. Pursuant to these efforts,
in March 1995, the Company entered into an irrevocable non-exclusive licensing
agreement with ERSS to permit use of the MSW Technology and sublicensing of the
MSW Technology as it relates to the operation of a facility utilizing the MSW
Technology in the Caribbean. Under the terms of the license agreement, the
Company is to receive a license fee of $250,000 for each operational facility
utilizing the MSW Technology and a royalty of 1.5% of the after tax earnings of
each such facility. In April 1994, the Company sold its remaining ownership
interest in ERSS, in a transaction unrelated to the MSW Technology license
agreement discussed above. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Sale of Interest in Operating
Company."
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ACQUISITIONS
The Company's growth is dependent upon future acquisitions in the metals
recycling industry. The first of these acquisitions, the purchase of NRI, was
completed in May 1994 and restructured in December 1994. See "Restructuring of
the Acquisition of Nevada Recycling, Inc.," below. In December 1994, in
connection with the restructuring of the NRI acquisition, the Company acquired
Metal Recovery, Inc. ("MRI") which is through a limited partnership interest, is
pursuing metals recycling opportunities in the Middle East and Africa. See
"Acquisition of Metal Recovery, Inc.," below. In June 1995, the Company
acquired a 20% interest in The Loef Company ("Loef") a metals recycler located
in Athens, Georgia. See "Acquisition of a 20% Interest in The Loef Company,"
below. In December 1995, the Company acquired substantially all of the assets
and the business of Anglo Metal, Inc. d/b/a Anglo Iron & Metal, a metal recycler
with operations in Brownsville, Harlingen, McAllen and San Juan, Texas. See
"Acquisition of Anglo Iron & Metal."
RESTRUCTURING OF THE ACQUISITION OF NEVADA RECYCLING, INC.
On May 10, 1994, the Company acquired all of the outstanding common
stock of NRI (the "NRI Acquisition"), a wholly-owned subsidiary of Nevada
Recycling Corporation ("Nevada Recycling"), an unrelated entity. Pursuant to
various agreements (the "Restructuring Agreements"), the terms of the NRI
Acquisition were substantially revised on December 30, 1994 (the
"Restructuring").
At the time of the NRI Acquisition in May 1994, the Company believed that
it was an attractive investment opportunity and, as such, would be able to
arrange for the satisfaction of certain conditions giving Nevada Recycling the
right to reacquire NRI (the "Reacquisition Conditions") on or before December
27, 1994. To satisfy the Reacquisition Conditions, the Company began seeking
additional equity investors and took the following additional actions: (i) the
Company completed the acquisition of Metal Recovery, Inc., discussed below,
which would provide approximately $1,200,000 of the funds necessary to meet the
Reacquisition Conditions; (ii) the Company was negotiating the final terms of a
private placement of its securities in order to provide the balance of the funds
necessary to meet the Reacquisition Conditions (not provided through the
acquisition of MRI); and (iii) the Company began taking steps to improve its
operating cash flow. By December 27, 1994, however, the negotiations for the
Company's private placement had not been completed.
Because of the substantial steps, described above, that had been taken
to satisfy the Reacquisition Conditions, on December 30, 1994 Nevada Recycling
agreed to restructure the terms of the NRI Acquisition (the "Restructuring").
The Restructuring Agreements provide for the satisfaction of the Reacquisition
Conditions and for the termination, amendment, and restructuring of certain
terms of the Acquisition and the Initial Land Contract. Under the Restructuring
Agreements, in exchange for Nevada Recycling's returning to the Company 25,000
Series A Shares and waiving the Reacquisition Right, the Company agreed to pay
Nevada Recycling $2,300,000, evidenced by a $300,000 promissory note due,
without interest, on February 28, 1995 (the "$300,000 Note") and a $2,000,000
installment note bearing interest at 10% per annum, payable in 22 consecutive
monthly payments of principal and interest commencing on March 31, 1995, with
the remaining principal balance of $1,675,722 due on January 10, 1997 (the
"Installment Note"). Repayment of both the $300,000 Note and the Installment
Note is unconditionally guaranteed by
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the Company and NRI. The Company also agreed to pay $637,052 of the Assumed
Debt on or before February 28, 1995.
The Restructuring Agreements also amended the Initial Land Contract.
Under the revised Real Estate Installment Sales Agreement (the "Revised Land
Contract"), the Company agreed to pay Nevada Recycling $2,060,000 for the real
property used by NRI, $20,000, plus accrued interest, of which was paid on
December 31, 1994, January 31, 1995 and February 28, 1995, along with an
additional $1,700,000 paid on February 28, 1995. The balance of $300,000 is
payable in 22 consecutive monthly payments of principal and interest commencing
on March 31, 1995, with interest at 10% per annum, with the remaining principal
balance of $250,672 due on January 10, 1997. As of the date hereof, the Company
has made all payments required under the Revised Land Contract.
As further inducement to Nevada Recycling to enter into the
Restructuring Agreements, the Company issued to Nevada Recycling a warrant to
acquire 20,000 shares of the Common Stock for $1.25 per share, exercisable until
December 31, 2004 (the "NRC Warrant").
Upon the Company's payment of (1) the $300,000 Note in full, (2)
$1,700,000 of the amount due under the Revised Land Contract, and (3) $637,052
of the Assumed Debt (collectively, the "February 28, 1995 Obligations"), Nevada
Recycling satisfied all remaining obligations under the Equipment Debt and the
Assumed Debt such that the real property and equipment of NRI is free and clear
of all liens and encumbrances related to the Equipment Debt, the Assumed Debt,
and any cross-collateralization obligations of Nevada Recycling unrelated to the
assets or operations of NRI. The real property and equipment of NRI would
continue to be encumbered by the Installment Note and the Revised Land Contract.
See - "Transactions Occurring on February 28, 1995 Related to the NRI
Acquisition and the MRI Acquisition."
As part of the Restructuring Agreements, the Company granted to Nevada
Recycling the option to repurchase NRI and the real property subject to the
Revised Land Contract (the "Repurchase Right") if, on or before February 28,
1995, the Company failed to satisfy the February 28, 1995 Obligations. The
Repurchase Right was also exercisable upon breach of certain covenants of the
Restructuring Agreements and immediately, without notice, upon an event of
insolvency. On December 30, 1994, the Company believed it would be able to
fully satisfy the February 28, 1995 Obligations due to the completion of the
Metal Recovery Acquisition, which would provide approximately $1,200,000 of the
funds necessary to meet these obligations, and through the completion of the
Private Placement, the final terms of which were being negotiated as of December
27, 1994. As discussed below under "Transactions Occurring on February 28,
1995, Related to the NRI Acquisition and the MRI Acquisition".
ACQUISITION OF METAL RECOVERY, INC.
As of December 30, 1994, the Company acquired Metal Recovery, Inc.
("MRI"), a privately held Delaware corporation, whose sole asset was a 99%
limited partnership interest in Sierra Holdings, L.P., a Delaware limited
partnership ("Sierra Holdings"). Sierra Holdings is a holding partnership which
owned a 19.6% limited partnership interest in Military Scrap, LP. ("Military
Scrap"), a Delaware limited partnership formed to engage in ferrous and non-
ferrous scrap metal recovery from military equipment and hardware in the Middle
East and on the African Continent, excluding the Republic of South Africa. As a
result of the dissolution of Sierra Holdings on February 28, 1995 and other
related transactions discussed below, as of the date hereof, MRI directly
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owns a 12% limited partnership in Military Scrap. MRI does not anticipate
receiving any cash distributions from Military Scrap until such time as its
proposed business generates profits, of which there can be no assurance. As of
the date hereof, Military Scrap has not engaged in any operations and is in the
process of locating and identifying supplies of ferrous and non-ferrous scrap
metal and military hardware for use in its proposed business. Accordingly,
Military Scrap's proposed operations have not generated any profits. In
addition to its proposed business, Military Scrap holds an investment in an
operating company; however, MRI is not entitled to any of the income from that
investment.
The Company acquired MRI from MRI's three individual shareholders,
Ralph Paglieri, Scott Fischer and Peter Lukesch (the "ACI Principals") who own
the 1% general partnership interest in Sierra Holdings and control Sierra
Holdings, Inc., the general partner of Sierra Holdings and ACI Recovery, Inc.,
the general partner of Military Scrap ("ACI"). The terms of the MRI acquisition
were determined through arm's length negotiations with the ACI Principals.
Prior to February 28, 1995, the ACI Principals, ACI, MRI, Sierra Holdings and
Military Scrap were unaffiliated with the Company or any of its subsidiaries.
On February 28, 1995, Ralph Paglieri was appointed to the Board of Directors of
NR Holdings, NRI and MRI.
The purchase price for MRI included 120,000 shares of the Company's
restricted Common Stock valued at $1,200,000, the amount of funds provided
through MRI in satisfaction of the February 28, 1995 Obligations ($1,170,000),
discussed below, and for working capital purposes ($30,000), and additional
shares of Common Stock issuable under certain circumstances based upon the value
of cash distributions, if any, received from Military Scrap (the "Contingency
Share Obligation") (collectively, the "RI Equity Securities"). The Company has
reserved 800,000 shares of its common stock for issuance pursuant to the
Contingency Share Obligation. The Company (through its chairman, Thomas J.
Wiens) has agreed to assist the ACI Principals in liquidating the 120,000 shares
of restricted Common Stock and 13,000 shares of the Company's Series A
Convertible Preferred Stock (collectively the "ACI Shares") for at least $2.4
million on or before September 30, 1996 (the "RI Securities Sale Obligation").
The ACI Principals acquired the 13,000 Series A Shares directly from Nevada
Recycling, in a private transaction not involving the Company.
The RI Securities Sale Obligation requires the Company's Chairman and
Chief Executive Officer to arrange for the sale of the ACI Shares to a third
party, such that the ACI Principals will receive $2.4 million, net of any
selling expenses, by September 30, 1996. This obligation is assignable by the
Company's Chairman and Chief Executive Officer to the Company. Such a sale may
be effected by including the ACI Shares in a registration statement filed under
the Securities Act.
In connection with the providing funds to satisfy a portion of the
February 28, 1995 obligation, at the request of Nevada Recycling and the ACI
Principals under the terms of the Restructuring Agreements, on February 28, 1995
the Company transferred 7.4% of MRI's net 19.4% interest in Military Scrap to
Nevada Recycling, and the ACI Principals caused Military Scrap to redeem this
interest for $1,170,000 in partial satisfaction of the February 28, 1995
Obligations. As discussed below under "Transactions Occurring on February 28,
1995 Related to the NRI Acquisition and the MRI Acquisition" the balance of the
February 28, 1995 Obligations were funded through the Private Placement and
through the operating cash flow of NRI.
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TRANSACTIONS OCCURRING ON FEBRUARY 28, 1995 RELATED TO THE NRI ACQUISITION AND
THE MRI ACQUISITION
On February 28, 1995, the Company satisfied in full the February 28,
1995 Obligations. Of the $2,637,053 required, $1,170,000 came from the
Company's acquisition of MRI; $1,018,216 from the initial closing of the private
placement of the Company's securities which occurred on February 28, 1995 (the
"Private Placement"); and the balance of $448,837 from the operating cash flow
of NRI.
Upon satisfaction of the February 28, 1995 Obligations, the NRI
Repurchase Right terminated unexercised and Nevada Recycling satisfied all
remaining obligations under the Equipment Debt and the Assumed Debt such that
the real property and equipment of NRI became free and clear of all liens and
encumbrances related to the Equipment Debt, the Assumed Debt and any cross-
collateralization obligations of Nevada Recycling unrelated to the assets or
operations of NRI.
In connection with the Restructuring, and at the request of Nevada
Recycling and the ACI Principals under the terms of the NRI Restructuring, on
February 28, 1995 the Company transferred 7.4% of MRI's net 19.4% interest in
Military Scrap to Nevada Recycling, and the ACI Principals caused Military Scrap
to redeem this interest for $1,170,000 in partial satisfaction of the February
28, 1995 Obligations.
For purposes of securing the $1,170,000 redemption amount, plus the
additional $30,000 advanced to the Company prior to February 28, 1995, under
the terms of the ACI Option, discussed below, this amount will be treated as a
loan from Sierra Holdings to the Company (the "Sierra Loan"). See "Sierra
Loan," below.
SIERRA LOAN
In a transaction that has no impact on the Company from a consolidated
basis, at the request of the ACI Principals to provide security for the
$1,170,000 redemption amount, discussed above, plus the additional $30,000
advanced to the Company prior to February 28, 1995, this entire amount
($1,200,000) is treated as a loan from Sierra Holdings to the Company (the
"Sierra Loan"). The Sierra Loan bears interest at 8% per annum with quarterly
interest only payments commencing on March 31, 1995 and continuing until
maturity. The principal balance of the Sierra Note is due on February 28, 1998.
Upon exercise of the ACI Option, discussed below, the ACI Principals have agreed
to immediately cancel the Sierra Loan. On February 28, 1995, Sierra Holdings
was terminated by agreement between its limited and general partners. Under the
terms of the termination agreement, the Sierra Loan and a 12% interest in
Military Scrap were distributed to MRI. The remaining .2% interest in Military
Scrap was distributed to Sierra Holdings, Inc., the general partner of Sierra
Holdings.
Because MRI is a wholly-owned subsidiary of the Company, the Sierra Loan
(distributed to MRI upon termination of Sierra Holdings) has no impact on, and
is not reflected in, the Company's consolidated financial statements and
interest payments under the Sierra Loan will not have an impact on the Company's
consolidated cash flow.
-11-
<PAGE>
OPTION TO ACQUIRE ALL OF THE STOCK OF NRI AND MRI
By providing the $1,170,000 in partial satisfaction of the February
28, 1995 Obligations, as discussed above, the ACI Principals have the option of
exchanging the RI Equity Securities and the Series A Shares for all of the
Company's assets (the "ACI Option"), if the Company: (i) defaults under the
terms of the Installment Note, (ii) fails to meet the RI Securities Sale
Obligation, (iii) defaults in its other obligations under the various agreements
related to the acquisition of MRI or the Restructuring. (collectively the
"Triggering Events"). The ACI Option is exercisable upon delivery of the RI
Equity Securities and the 13,000 Series A Shares. In addition, until the
Company meets the RI Securities Sale Obligation, the Company is subject to the
Operating Restrictions discussed below.
As discussed above under "Restructuring of the Acquisition of Nevada
Recycling, Inc.," the Installment Note is secured by all of the assets of NRI,
which, as of the date hereof, represent the Company's primary source of cash
flow. Through the sale of MRI, the ACI Principals have invested $1.2 million in
the Company which, as discussed above, was used to satisfy certain of the
February 28, 1995 obligations due to Nevada Recycling. To provide the ACI
Principals with some security on their investment, a Triggering Event for the
ACI Option is an event of default under the Installment Note. The rights of the
ACI Principals and Nevada Recycling upon the simultaneous default under the
Installment Note and exercise of the ACI Option are the subject of a separate
agreement between the ACI Principals and Nevada Recycling, to which the Company
is not a party and has no knowledge of its terms. The Company has, however,
received a waiver from the ACI Principals and Nevada Recycling that performance
of its obligations under the various agreements related to the NRI and MRI
Acquisitions and the NRI Restructuring is not an event of default thereunder or
a Triggering Event under the ACI Option.
The terms of the ACI Option were determined through arm's length
negotiations with the ACI Principals. Because the acquisition of MRI and the
related granting of the ACI Option resulted in the Company receiving $1,170,000
to satisfy the February 28, 1995 Obligations, thereby terminating the
Reacquisition Right of Nevada Recycling, the Board of Directors believes that
these transactions were in the best interests of the Company's shareholders. If
the Company had not entered into the NRI Acquisition, the NRI Restructuring or
the MRI Acquisition, the Company would still be in the development stage and
would have a negative net worth.
IMPACT OF THE EXERCISE OF THE ACI OPTION
If the ACI Option is exercised due to the occurrence of a Triggering
Event, the Company will no longer own any shares in NRI or MRI. As of the date
of this report, these shares constitute substantially all of the assets of the
Company and NRI has been the sole source of the Company's revenues and operating
cash flow. Accordingly, exercise of the ACI Option will have a substantial
adverse impact on the Company's operations and may adversely impact the market
price of the Company's common stock.
As of September 30, 1995, assuming that the ACI Option could have been
and was exercised, the Company would have received its own equity securities
valued at $2,512,000 (comprised of 120,000 shares of restricted common stock
valued at $1.2 million and 13,000 Series A Shares valued at $1,312,000) and
would have transferred to the ACI Principals all of the common stock of NRI and
MRI with a net value, based upon the combined net worth of MRI and NRI at
September 30, 1995,
-12-
<PAGE>
of $9,370,000. The detailed financial impact of the exercise of the ACI Option
is reflected in the Unaudited Pro-Forma Consolidated Financial Information
provided below.
The Company is taking the following steps to prevent the occurrence of
the Triggering Events: (i) the Company actively monitors its operations for
compliance with the Operating Restrictions and the other terms of the various
agreements related to the acquisition of MRI or the Restructuring Agreements;
(ii) the Company is managing the cash flow of NRI which currently is sufficient
to meet the principal and interest payments under the terms of the Installment
Note; and (iii) the Company and its Chairman are actively seeking persons to
assist them in the satisfaction of the RI Securities Sale Obligation. In
addition, the Company increased the market price of its Common Stock through a
five-for-one reverse stock split, effective June 27, 1995. A variety of events
outside of the Company's control, including adverse changes in the market for
scrap metal and decreases in the market price of the Company's common stock, may
result in the Company being unable to prevent the occurrence of a Triggering
Event.
The unaudited pro forma information set forth on the following pages
is presented to show the estimated effect of the exercise of the ACI Option as
if it had been consummated on September 30, 1995 for balance sheet presentation
purposes and October 1, 1994 for income statement presentation purposes, subject
to the assumptions and adjustments in the explanatory notes to the unaudited pro
forma consolidated financial information.
-13-
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
EXPLANATORY HEADNOTE
A) On December 30, 1994 Recycling Industries, Inc. (the Company or RII) agreed
to restructure the terms of the acquisition of Nevada Recycling, Inc. (NRI) as
follows:
1) NRC has returned to RII 25,000 of the 38,000 series A convertible
preferred stock.
2) The Company has purchased from NRC its remaining right to
reacquire all of the stock of NRI for $2,300,000 and the Company
issued to NRC warrants to purchase 20,000 shares of the Company's
common stock for $1.25 for a 10-year term. The $2,300,000 is
payable by a $300,000 note due on February 28, 1995 without
interest 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,
remaining principal due January 10, 1997.
3) The Company has restructured the purchase of Land and Building
for a purchase price of $2,060,000 payable $1,700,000 before
February 28, 1995 with interest of $18,731 per month, $20,000
plus accrued interest payable December 31, 1994, January 31, 1995
and February 28, 1995, and $360,000 payable in consecutive
monthly installments commencing March 31, 1995 on the basis of an
eight-year amortization period with interest at the rate of 10%
per year, remaining principal due January 10, 1997.
4) The Company has agreed to pay $637,052 of debts totaling
$2,382,447 assumed on the equipment purchased as part of the
original NRI acquisition.
On February 28, 1995 the Company satisfied the above obligations totaling
$2,637,000.
As a result of the restructuring agreement the Company will treat the debt of
$2,300,000 as a debt to retire the 25,000 shares of preferred stock.
B) On December 30, 1994 RII acquired Metal Recovery, Inc. (MRI), a privately-
held Delaware corporation whose sole asset is a 99% limited partnership interest
in Sierra Holdings, LP. (Sierra Holdings), a Delaware limited partnership.
Sierra Holdings is a holding partnership which owns a 19.6% limited partnership
interest in Military Scrap, LP. (Military Scrap), a Delaware limited partnership
engaged in the business of scrap metal recovery. RII acquired MRI from MRI's
three stockholders, who also own the remaining limited partnership interests and
control the general partners of Sierra Holdings and Military Scrap (the ACI
Principals). The purchase price for MRI included 120,000 shares of restricted
RII common stock and the right to additional shares of RII common stock
(contingency shares). The contingency shares are to be issued on a pro rata
basis of $1.00 worth of RII common stock for each $1.00 of cash distributions
received by MRI from MS in excess of tax distributions made in amounts
sufficient to pay taxes at the highest U.S. marginal corporate income tax rates
until such time as the aggregate received by MRI equals or exceeds $2 million.
-14-
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
EXPLANATORY HEADNOTE (CONTINUED)
The 120,000 shares and 13,000 shares of Series A convertible preferred shares
previously issued by RII, under (A) above, are called "RII Equity Securities".
RII has agreed to assist the ACI Principals in liquidating the RII Equity
Securities for at least $2,400,000 prior to September 30, 1996 by purchasing or
arranging for the sale of these restricted securities, or can include the RII
Equity Securities in a registration statement which must be sold prior to
September 30, 1996, (RII Securities Sale Obligation).
The unaudited consolidated financial statements as of September 30, 1995
includes the restructure of the NRI acquisition and the acquisition of MRI.
C) In connection with the Restructuring of the Acquisition of NRI, discussed
above, RII has transferred 7.4% of MRI's interest in Military Scrap to NRC.
Military Scrap has redeemed this interest for $1,170,000 ($1,200,000 less
$30,000 previously advanced) in partial satisfaction of the February 28, 1995
obligations.
D) In addition, RII and the ACI Principals entered into an option agreement
(ACI Option) granting the ACI Principals the option to exchange the RII Equity
Securities, as described under B above, for the right to reacquire MRI and
acquire RII's wholly-owned subsidiary, NRI if RII:
1) defaults under the terms of the installment note, under (A);
2) fails to meet the RII Securities Sale Obligation; or
3) if RII 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).
The ACI Option is exercisable upon delivery of the RII Equity Securities. In
addition, until RII meets the RII Securities Sale Obligation, RII is subject to
substantial restrictions on its ability to operate NRI and MRI.
Notes 1 through 3 to the unaudited pro forma consolidated financial statements
describe in further detail the terms of the retirement of the February 28, 1995
obligations and the exercise of the ACI option and related adjustments.
Following are the unaudited pro forma consolidated balance sheet and statements
of operations.
-15-
<PAGE>
RECYCLING INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,1995
<TABLE>
<CAPTION>
ASSETS
------
(Substantially Pledged)
ACI Option
-----------------------------------
MRI NRI Pro Forma Pro Forma
September 30,1995 Adjustments Adjustments Adjustments September 30,1995
----------------- ----------- ----------- ----------- -----------------
(Unaudited) (Unaudited)
(2) (2) (3)
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 184,000 $ - $ (58,000) $ - $ 126,000
Trade accounts receivable, net 1,026,000 - (1,026,000) - -
Accounts receivable-related party 223,000 - - - 223,000
Inventories 497,000 - (497.000) - -
Prepaid expenses 137,000 - (126,000) - 11,000
Other - - - - -
------------ -------- ------------ ---------- ------------
Total Current Assets 2,067,000 - (1,707,000) - 360,000
NOTES RECEIVABLE, related party - - - - -
INVESTMENT, at cost 277,000 - - - 277,000
PLANT, PROPERTY AND EQUIPMENT, net 6,686,000 - (6,675,000) - 11,000
ENGINEERING PLANS, net 188,000 - - - 188,000
GOODWILL, net 188,000 - - (188,000) -
DEFERRED INCOME TAXES, net 800,000 - (800,000) - -
OTHER ASSETS 91,000 - - - 91,000
------------ -------- ------------ ---------- ------------
$ 10,297,000 $ - $ (9,182,000) $(188,000) $ 927,000
------------ -------- ------------- ---------- ------------
------------ -------- ------------- ---------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
-16-
<PAGE>
RECYCLING INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (Continued)
SEPTEMBER 30,1995 -
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
ACI Option
---------------------------------
MRI NRI Pro Forma Pro Forma
September 30, 1995 Adjustments Adjustments Adjustments September 30,1995
------------------ ----------- ------------- ----------- -----------------
(Unaudited) (Unaudited)
(2) (2) (3)
<S> <C> <C> <C> <C> <C>
CURRENT LABILITIES:
Notes payable $ 61,000 $ - $ - $ - 61,000
Trade accounts payable 655,000 - (453,000) - 202,000
Trade accounts payable-
related party 73,000 - - - 73,000
Accrued liabilities:
Interest 30,000 - (81,000) - 22,000
Payroll and other 107,000 - (65,000) - 42,000
Income taxes payable 86,000 - (86,000) - -
Current portion of long-term debt-
related party 218,000 - (218,000) - -
Due to factor, related party 197,000 - (197,000) - -
Current portion of long-
term debt 227,000 - (102,000) - 125,000
Current portion of obligation under
capital lease 37,000 - (37,000) - -
------------- ----------- ------------ --------- ------------
Total Current Liabilities 1,691,000 - (1,166,000) - 525,000
LONG-TERM DEBT:
Long-Term debt,
not of current portion 132,000 1,200,000 (1,332,000) - -
Long-term debt-related parties,
net of current portion 1,979,000 - (1,979,000) - -
Obligation under capital lease,
net current portion 41,000 - (41,000) - -
------------- ----------- ------------ --------- ------------
Total Liabilities 3,843,000 1,200,000 (4,518,000) - 525,000
------------- ----------- ------------ --------- ----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, no par value,
10,000,000 shares authorized;
Series A 13,000 shares issued and
outstanding; 1,312,000 - (1,312,000) - -
Series B 300,000 shares issued and
outstanding 450,000 - - - 450,000
Common stock, $.001 par value,
50,000,000 shares authorized,
8,395,785 issued and outstanding 8,000 - - - 8,000
Additional paid-in capital 13,120,000 (1,200,000) - - 11,920,000
Accrued salary payable in equity
security - - - - -
Accumulated (deficit) (8,436,000) - (3,352,000) (188,000) (11,976,000)
------------- ----------- ------------ --------- ------------
Total Stockholders' Equity 6,454,000 (1,200,000) (4,664,000) (188,000) 402,000
------------- ----------- ------------ --------- ------------
$ 10,297.000 $ - $(9,182,000) (188,000) $ 927,000
------------- ----------- ------------ --------- ------------
------------- ----------- ------------ --------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
-17-
<PAGE>
RECYCLING INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
-------------------------------------------
<TABLE>
<CAPTION>
ACI Option
---------------------------------
MRI NRI Pro Forma Pro Forma
September 30, 1995 Adjustments Adjustments Adjustments September 30,1995
------------------ ----------- ----------- ----------- -----------------
(Unaudited) (Unaudited)
(2) (2) (3)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales $ 13,812,000 $ - $(13,775,000) $ - $ 37,000
Interest income 35,000 - - - 35,000
Other income 6,000 - (6,000) - -
------------- --------- ------------ --------- -----------
Total Revenues 13,853,000 - (13,781,000) - 72,000
------------- --------- ------------ --------- -----------
COSTS AND EXPENSES:
Cost of sales 10,869,000 - (10,840,000) - 29,000
Personnel costs 744,000 - (432,000) - 312,000
Professional services 527,000 - (42,000) - 485,000
Travel 39,000 - (12,000) - 27,000
Occupancy 83,000 - (32,000) - 51,000
Depreciation and amortization 258,000 - (7,000) - 251,000
Interest 407,000 - (211,000) - 196,000
Other general and administrative 477,000 - (337,000) - 140,000
Bad debt expense 151,000 - 541,000 - 692,000
------------- --------- ------------ --------- -----------
Total Costs and Expenses 13,555,000 - (11,372,000) - 2,183,000
------------- --------- ------------ --------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 298,000 - (2,409.000) - (2,111,000)
Extraordinary gain from settlement
of debt 806,000 - - - 806,000
------------- --------- ------------ --------- -----------
NET INCOME (LOSS) BEFORE
(BENEFIT) FROM INCOME TAXES 1,104,000 - (2,409,000) - (1,305,000)
(BENEFIT) FROM INCOME TAXES (711,000) - 711,000 - -
------------- --------- ------------ --------- -----------
NET INCOME (LOSS) $ 1,815,000 $ - $ (3,120,000) - $(1,305,000)
------------- --------- ------------ --------- -----------
------------- --------- ------------ --------- -----------
INCOME (LOSS) PER COMMON SHARE:
Before extraordinary item .16 $ (.34)
Extraordinary item .13 .13
------------- -----------
NET INCOME (LOSS) PER
COMMON SHARE $.29 $ (.21)
------------- -----------
------------- -----------
Weighted Average Number of
Common Shares Outstanding 6,240,494 6,120,494
------------- -----------
------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THE PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
-18-
<PAGE>
RECYCLING INDUSTRIES, INC.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
NOTE 1 - PRO FORMA ADJUSTMENTS
The adjustments relating to the pro forma consolidated statements of operations
are recorded assuming the exercise of the ACI Option was consummated at the
beginning of the applicable periods presented. The adjustments relating to the
pro forma consolidated balance sheet are recorded assuming the exercise of the
ACI Option was consummated at the balance sheet date.
NOTE 2 - To record the exercise of the ACI Option whereby RII is required to
transfer its 100% interest in MRI and NRI to the ACI Principals, as discussed
under D in the explanatory headnote. Revenues and expenses presented for MRI
and NRI, the operations disposed of under the exercise of the ACI Option, are
the revenues and expenses relating to the operations of MRI and NRI for the
periods presented, respectively. Expenses presented net of the pro forma
adjustment for the exercise of the ACI Option are the expenses relating to the
operations of RII for the periods presented.
NOTE 3 - To write off unamortized goodwill related to the NRI acquisition.
There was not unamortized goodwill related to the MRI acquisition. Acquisition
costs represent accounting and legal expenses incurred by RII for projects under
negotiation unrelated to the MRI and NRI acquisitions.
-19-
<PAGE>
RESTRICTIONS ON THE OPERATIONS OF NRI AND MRI
Under the terms of the NRI Acquisition, the NRI Restructuring and the ACI
Option, the operations of NRI and MRI are subject to the following restrictions:
1. Until the Installment Note is paid in full, the consolidated net worth
of NRI may not decrease by more than $200,000 from its net worth at February 28,
1995;
2. The Company may not make any fundamental changes in the capitalization
or operations of NRI or MRI;
3. The Company may not transfer or dispose of a substantial part of NRI
or MRI's assets;
4. The Company may not permit NRI to create any additional indebtedness,
except secured obligations to acquire property or equipment that does not exceed
$500,000;
5. The Company may not change the name of NRI or MRI or NR Holdings,
unless 30 days prior written notice of such change is given to Nevada Recycling;
and
6. The Company may not permit NRI to enter into any transaction, other
than the purchase of inventory, which commits the expenditure of greater than
$50,000 or binds NRI for a period of greater than 12 months.
ACQUISITION OF A 20% INTEREST IN THE LOEF COMPANY
On June 30, 1995, the Company acquired a 30% interest in Recycling Holding
Company, Inc., a company formed to acquire 100% of the outstanding common stock
of The Loef Company, ("Loef") a metals recycling company located in Athens,
Georgia whose operations are similar to those of NRI. Immediately after the
closing of the Loef acquisition, the Company's ownership interest in the
acquisition entity was reduced to 20% in exchange for the cancellation of
certain warrants previously issued to NCO III. The remaining 80% interest is
owned by NCO Investors III, L.P., an entity not affiliated with the Company and
who is a Selling Securityholder a future offering ("NCO III").
The Company has valued its interest in Loef at $277,000, the amount of
certain expenses, primarily legal fees and other costs, incurred by the Company
in connection with the acquisition.
The Company's ownership interest in the Loef acquisition entity may be
reduced to 15% if the Company fails to pay $200,000 to Recycling Holdings, Inc.
on or before June 30, 1996.
ACQUISITION OF ANGLO IRON & METAL
On December 11, 1995, RITI 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.
-20-
<PAGE>
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
Company 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 with the balance payable in 72 equal consecutive monthly installments;
and shares of the Company's 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, recorded as
a capital lease and 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 Company.
The real property acquired from Anglo and the common stock component of the
purchase price have been placed in escrow to provide for the remediation of
environmental contamination, if any, related to the operations of Anglo prior to
the acquisition.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company is involved in the recycling and processing of non-hazardous
wastes, including ferrous and non-ferrous metals. In conducting these
operations, the Company, on occasion, may handle and dispose of "hazardous
materials" as that term is defined under various environmental laws, including
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the Toxic Substance Control Act, the Resource Conservation and
Recovery Act, the Clean Air Act and the Clean Water Act (collectively the
"Environmental Laws"). The materials are contained in the unprocessed items,
such as automobiles, light fixtures, construction debris, industrial machinery
and other items manufactured or fabricated primarily out of ferrous or non-
ferrous metals that are acquired and processed by the Company through its
shredder operations (the "Feed Stream"). While the Company screens the Feed
Stream for hazardous materials, refusing to accept and returning such materials
to its suppliers, certain items processed through the shredder may inadvertently
contain hazardous materials. As a result, the waste by-product of shredder
operations may contain hazardous materials. In addition, the premises upon
which shredder operations are conducted may become contaminated by hazardous
materials through inadvertent spillage or improper disposal. The Company,
however, believes that such contamination is unlikely.
The facilities and equipment of the Company meet the requirements of all
applicable environmental laws and regulations. There are no capital
expenditures planned for new environmental control equipment, although changes
in environmental laws would require such expenditures in the future. The
facilities and equipment of the Company are adequately maintained in accordance
with all applicable environmental laws and regulations.
In connection with the NRI Acquisition and the acquisition of Anglo Iron &
Metal, their facilities were tested and evaluated under EPA Phase I and Phase II
rules and, except as discussed
-21-
<PAGE>
below, found to be in compliance with all environmental laws and regulations.
Since the completion of the acquisition, there has been no reportable
contamination at NRI or any RITI facility.
The Phase I and Phase II environmental evaluations performed in connection
with the acquisition of the assets of Anglo Iron & Metal indicated that the real
property owned and leased by it for use in its operations may be contaminated.
To allow sufficient time for further evaluation and the completion of any
necessary remediation, the Company has not purchased the real property used by
Anglo Iron & Metal and is only subleasing those portions of the real property
leased by Anglo Iron & Metal which are free of contamination, as indicated by
the environmental studies performed prior to closing. The Company will only
purchase the real property and lease the remaining portions of the leased
properties upon completion of environmental studies indicating no reportable
contamination or remediation of discovered contamination, if any.
Loef, a company in which the Company has a 20% investment, is a potentially
responsible party with respect to two superfund sites. The Loef acquisition
agreements provide for the former owners of Loef will indemnify the purchasers
of Loef to the extent such liabilities exceed $375,000 and, in the aggregate
with all other matters indemnified against, do not exceed $1,000,000. In
addition, the real property upon which the Loef facilities are located has been
contaminated with certain hazardous materials. The former owners of Loef have
agreed to pay for the remediation of such contamination to the extent costs of
such remediation exceed $125,000 and do not exceed $400,000.
EMPLOYEES
The Company employs approximately 190 full time employees the majority of
whom are employed by the Company's subsidiaries NRI and Anglo.
-22-
<PAGE>
ITEM 2 - DESTRUCTION OF PROPERTY
The NRI plant facility is approximately 13 acres located in north Las
Vegas, Nevada. Located on the property are a warehouse, office and maintenance
buildings. The NRI facility has approximately 30% of the processing and
unloading area paved for customer access.
The facilities at NRI are sufficient to process all grades of ferrous
metals, non-ferrous metals, and paper products. The ferrous facilities have a
single work shift capacity of up to 8,000 net tons of finished product per
month. The non-ferrous facilities have a single work shift capacity of
approximately 500 net tons per month. The paper processing facilities have a
single work shift capacity of up to 1,500 net tons per month. The current
capacity utilization is approximately as follows:
a. Ferrous facilities - 65%
b. Non-ferrous facilities - 60%
c. Paper facilities - 50%
Anglo has four locations each of which are located near the border of
Southern Texas and Northern Mexico in the Rio Grande Valley. All four yards are
general retail buying and producing scrap yards. The San Juan yard is located
east of San Juan, Texas on Business 83 on approximately 7.2 acres that is
serviced directly by rail on its west side. It has a 5,200 square foot
warehouse that contains a two story office, a 1,500 square foot new steel
warehouse, a new 500 square foot steel sales office, and a covered mechanic's
shop work area. The Harlingen yard sets on approximately 6 acres of land
located just west of Harlingen, Texas adjacent to expressway 83. It is serviced
by rail on the southeast side of the property. Anglo's automobile and appliance
shredder is located at this yard. This yard has a 10 X 30 office, 8,400 square
foot warehouse, and a 5,600 square foot office/warehouse. The Brownsville yard
sets on 6.66 acres located at the Port of Brownsville. This yard has a 500
square foot office building and a 1000 square foot new steel & non-ferrous
warehouse. The McAllen yard is located on the west side of downtown in McAllen,
Texas on a lot that is just over an acre in size at the corner of Business 83
and 21st Street.
The Company leases approximately 3,350 square feet of office space in
Englewood, Colorado as its corporate office. The Company's lease expires on
June 30, 2000. Terms of the lease call for the Company to pay a base rent, plus
additional pro rata occupancy costs such as building operating costs, taxes,
etc. Average total rents for the remaining term of the lease will be $13.50 per
square foot per year.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not party to outstanding litigation matters arising in the
ordinary course of business. To date, the Company has not been involved in any
judicial or administrative proceedings involving federal, state, or local
agencies or been subject to any fine for violation of any environmental law.
-23-
<PAGE>
On October 25, 1995, the Company settled a contract claim brought in the
Connecticut federal district court by an individual who asserted a 10% interest
in the net revenues of one of the Company's subsidiaries since March 1995. The
Company, in exchange for redemption of certain shares of the Company held by
this individual, agreed to pay $150,000, provided $100,000 is paid by January
31, 1996, $25,000 by April 15, 1996 and $25,000 by July 15, 1996. If payments
under the settlement are not timely made, the amount of the settlement may
increase to $225,000. The Company settled the matter without an admission of
liability and an express denial of wrongdoing. The settlement was made on a
basis substantially below the potential liability to the Company and removes a
substantial impediment to its future operations if the claim were successful.
Also, settlement eliminates all pending litigation against the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No such matters were required to be submitted to a vote during the fourth
fiscal quarter ended September 30, 1995.
-24-
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq SmallCap market
on September 19, 1995, under the trading symbol "RECY." In addition, the Common
Stock has been trading on the Boston Stock Exchange since July 6, 1995 under the
trading symbol "RCY." As the Company has only recently been listed on these
markets, there is not sufficient trading history to provide a table indicating
the high and low closing prices for any meaningful period of time. As of
December 31, 1995, the closing bid price of the Common Stock on the Nasdaq
SmallCap Market was $3.25 per share. Prior to its approval for listing on the
Nasdaq SmallCap Market and the Boston Stock Exchange, the Common Stock was
quoted on the National Association of Securities Dealers on the OTC Bulletin
Board (the "OTCBB") under the symbol "RECY".
The majority of the Company's shares are held by management and affiliates,
and are subject to restriction. The number of unrestricted shares of Company
stock is relatively low in relation to total number of shares issued, and
therefore trading in the Company's securities is limited. The quotations
provided below are the high and low bid for the quarters indicated as reported
on the OTCBB and have been adjusted to reflect the Company's one-for-five
reverse stock split effective June 27, 1995:
Common Stock
------------
Quarter Ended: High Low
-------------- ---- ---
December 31, 1993 $11.25 $5.00
March 31, 1994 21.90 5.50
June 30, 1994 16.90 11.25
September 30, 1994 8.15 6.90
December 31, 1994 3.40 2.80
March 31, 1995 4.20 3.60
June 30, 1995 5.00 4.50
September 30, 1995 4.62 4.44
The Company had 661 shareholders of record as of December 31, 1995. No
cash dividends have been declared or paid on the Company's common stock, and
none are anticipated in the near future.
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth the Selected Consolidated Financial Data for
the Company for each of the five years ended September 30, 1995, and is based on
the audited Consolidated Financial Statements of the Company and its
subsidiaries. Such data should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto incorporated into, this
report in Item 8 and Management's Discussion and Analysis of Financial Condition
and Results of Operations. Due to a change in the Company's equity percentage
ownership in ERS Somerset from
-25-
<PAGE>
75% to 25% during fiscal year-end 1993 and the resulting change in status in
reporting entity from consolidated basis to cost method, all financial
statements, prior to 1993 have been restated. The earnings per share numbers
set forth below have been adjusted to reflect the Company's one-for-five reverse
stock split effective June 27, 1995.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
---------------------------
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Sales $ 13,812,000 $ 4,812,000 $ - $ - $ -
Other 41,000 19,000 - - -
------------- ----------- ----------- ----------- -----------
Total Revenue 13,853,000 4,831,000 - - -
Cost of Sales and Expenses 13,555,000 5,973,000 2,491,000 3,065,000 852,000
Inc (Loss) Before Extraordinary
Gain 298,000 (1,142,000) (2,958,000) (3,527.000) (1,691,000)
Extraordinary Gain 806,000 218,000 475,000 2,380,000 424,000
(Benefit) from Income Taxes (711,000) - - - -
Net Income (Loss) 1,815,000 (924,000) (2,483,000) (1,147,000) (1,267,000)
Net Income (Loss) per Common
Share .30 (.37) (1.04) (.56) (.70)
- --------------------------------------------------------------------------------------------------------------
BALANCE SHEET:
Working Capital (Deficit) $ 376,000 $(4,175,000) $(3,853,000) $(2,721,000) $(2,919,000)
Total Assets 10,297,000 9,618,000 1,147,000 1,865,000 2,728,000
Engineering Plans 188,000 405,000 831,000 1,658,000 2,235,000
Total Liabilities 3,843,000 6,852,000 3,853,000 2,801,000 7,080,000
Stockholders' Equity (Deficit) 6,454,000 2,766,000 (2,706,000) (936,000) (4,652,000)
</TABLE>
From August 1987 to May 1992 the Company was a private company engaged in
the development and commercialization of the MSW Technology. In May 1992 the
Company became a public company through a reverse merger with a public shell,
Alfa Industries, Inc. (Alfa). For comparative purposes, the table above for
fiscal years 1991 through 1993, reflects activity from the Company's efforts to
develop the MSW and other technologies. At September 30, 1994, the financial
information reflects five months of operational results from NRI. At September
30, 1995, the financial information reflects 12 months of consolidated
information including the operations of NRI and the activities of the Company to
acquire other businesses in the metals recycling field.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-26-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included elsewhere
herein.
OVERVIEW
The Company is a full-service metals recycler primarily engaged in the
collection and processing of various ferrous and non-ferrous metals for resale
to domestic and foreign steel producers and other metal producers and
processors. Prior to May 1994, the Company was a development stage enterprise
engaged in the development of the MSW Technology.
The Company's current operations commenced in May 1994 with the acquisition of
NRI. Since that time, the Company has experienced significant growth from the
acquisition of other metals recycling facilities. On June 30, 1995, the Company
acquired a 20% interest in a metals recycling facility located in Georgia.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
The results of operations for the years ended September 30, 1995, 1994 and 1993
have been driven primarily by the Company's acquisition activity. Prior to the
company's acquisition of its Nevada facility in May 1994, the Company was a
development stage enterprise without revenues. Consequently, the results of
operations for fiscal year 1993 do not reflect comparable revenues and cost of
sales relative to the results of operations for the fiscal years ended September
30, 1995 and 1994. Subsequent to the acquisition of the Nevada facility in
fiscal 1994, the results of operations reflect the implementation of the
Company's current metals recycling acquisition and operation strategy.
REVENUES. For the year ended September 30, 1995, the Company had revenues of
$13.9 million compared to $4.8 million for the year ended September 30, 1994,
which reflected only five months of operations of the Nevada facility. For the
year ended September 30, 1995, the increase in revenues was due primarily to the
inclusion of a full year's results of operations of the Nevada facility, as well
as generally higher demand and market prices for scrap metal. There were no
revenues generated by the Company for the year ended September 30, 1993, as the
Company was unsuccessful in permitting a facility utilizing the MSW Technology.
Revenues per month for ferrous scrap for the year ended September 30, 1995
increased to $572,000, compared to $494,000 for the year ended September 30,
1994 as a result of general increases in the market prices and demand for
processed ferrous scrap combined with increased sales volume. For the year
ended September 30, 1995, the average sales price per ton of prepared ferrous
scrap was $120, a 20.0% increase compared to $100 per ton for the year ended
September 30, 1994. Non-ferrous revenues increased to $471,000 per month for
the year ended September 30, 1995 from $373,000 per month for the year ended
September 30, 1994.
This increase was primarily due to price increases for non-ferrous scrap,
such as copper and aluminum, which contributed to higher monthly revenues.
For the year ended September 30,
-27-
<PAGE>
1995, the average sales price for non-ferrous scrap was $.64 per pound,
representing a 25.5% increase compared to $.51 per pound for the year ended
September 30, 1994. The Company had no revenues for the year ended September
30, 1993.
COST OF SALES. For the year ended September 30, 1995, the Company incurred cost
of sales of $10.9 million compared to $4.1 million for the year ended September
30, 1994. The increased cost of sales for the year ended September 30, 1995 was
due to the full year of operations of the Nevada facility compared to the five
months of operations for the year ended September 30, 1994. Cost of sales
decreased to 78.5% of revenues for the year ended September 30, 1995 from 85.1%
of revenues for the year ended September 30, 1994. This decrease in cost of
sales as a percentage of revenues was caused by an increase in the sales price
of ferrous and non-ferrous scrap as well as by the substantial increases in
paper selling prices without proportional increases in the Company's raw scrap
and paper acquisition costs. The Company's increased production volume in 1995
also contributed to improved gross margins, as fixed production costs were
spread over a larger volume of processed scrap. As a result of these factors,
gross profit increased to $3.0 million for the year ended September 30, 1995
from $721,000 for the year ended September 30, 1994. The Company had no cost of
sales for the year ended September 30, 1993.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses were
$2.3 million, or 16.5% of revenues, for the year ended September 30, 1995
compared to $1.7 million, or 34.4% of revenues, for the year ended September 30,
1994, primarily due to the purchase of the Nevada facility in May 1994 and other
acquisition and financing activities. The largest component of the increase was
salary and related expenses, which rose $417,000 due to increased staffing at
the corporate level and to the additional seven months of personnel costs at the
Nevada facility . Selling and administrative expenses for the year ended
September 30, 1993 was $2.3 million, primarily related to the development of the
MSW Technology.
INTEREST EXPENSE. For the year ended September 30, 1995, the Company had
interest expense of $407,000 compared to $203,000 for the year ended September
30, 1994. This increase was caused by a full year of interest expense in fiscal
1995 related to debt incurred in conjunction with the acquisition of the Nevada
facility. The increase in interest expense to $203,000 for the year ended
September 30, 1994 from $156,000 for the year ended September 30, 1993 was due
to additional debt incurred by the Company in connection with the acquisition of
the Nevada facility in May 1994.
BENEFIT FROM INCOME TAXES. The Company has generated a net operating loss
carryforward due to operating losses incurred prior to fiscal 1995. During
fiscal 1995, management determined that the net operating loss carryforward was
more likely than not to be used in the near future due to taxable income to be
generated by the Company's Nevada facility. Therefore, a net deferred tax asset
of $800,000, net of a $221,000 valuation allowance, and a benefit from income
taxes of $711,000 was recorded which correspondingly increased income for the
period. No benefit from deferred income taxes was recognized for the years
ended September 30, 1994 or 1993.
INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF INCOME TAXES. For the year
ended September 30, 1995, the Company had income from continuing operations, net
of income taxes of approximately $1.0 million, or $.17 per share, compared to
losses of $1.1 million, or $.46 per share, and $3.0 million, or $1.24 per share,
for the years ended September 30, 1994 and 1993, respectively. This significant
increase in profit is the result of the Company's acquisition of its Nevada
facility in May 1994.
-28-
<PAGE>
NET INCOME. For the year ended September 30, 1995, the Company generated net
income of $1.8 million, or $.30 per share per share, compared to a net loss of
$924,000, or $.37 per share, for the year ended September 30, 1994, and loss of
$2.5 million, or $1.04 per share for the year ended September 30, 1993.
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business has grown, overall cash requirements for internal
growth and acquisitions have been met through a combination of private
placements of debt and equity securities, equipment and receivables financing
and cash flow from operations. Since commencement of its metals recycling
operations in May 1994, the Company has raised net cash proceeds of $2.8 million
through the sale of its equity securities. Through March 1995, the Company was
also funded in part by $887,000 of borrowings from First Dominion Holdings,
Inc., a company controlled by the Company's Chairman and Chief Executive Officer
("First Dominion"), all of which has been repaid. At September 30, 1995, the
Company had $2.9 million of debt outstanding, of which $740,000 is due in the
next 12 months.
Prior to the acquisition of its Nevada facility, the Company generated operating
losses and negative operating cash flow. As a result, the Company experienced
significant shortages of working capital to fund its day to day operations. The
shortages of working capital and insufficient cash flow prevented the company
from making payments necessary to meet its obligations. As a result, the
Company has been subject to legal claims for collection of past due amounts, the
majority of which arose from services performed for the Company during its
development stage. During the year ended September 30, 1994, the Company was
successful in settling a number of these legal claims. The Company subsequently
negotiated with all of its remaining vendors and all outstanding claims were
settled as of September 30, 1995.
On May 11, 1994, the Company acquired its Nevada facility by purchasing all of
the outstanding common stock of Nevada Recycling, Inc. As restructured, the
purchase price for the Nevada facility consisted of debt of $5.0 million and the
issuance of 13,000 shares of the Company's Series A Convertible Preferred Stock
valued at $1.3 million. In addition, the Company issued to the sellers a
warrant to acquire 20,000 shares of Common Stock at an exercise price of $1.25
per share.
On June 30, 1995, the Company acquired a 20% interest in a Georgia metals
recycling facility through its investment in The Loef Company ("Loef"). This
investment has been valued at $277,000, the amount of costs incurred by the
Company in pursuing its acquisition of Loef. The Company's ownership interest
in Loef will be reduced to 15% if the Company does not invest an additional
$200,000 in Loef by June 30, 1996. At this time, the Company has not determined
whether to make this payment nor has it negotiated an extension of this
deadline.
On December 11, 1995, the Company acquired its southern Texas facilities by
acquiring substantially all of the assets of Anglo Metals, Inc., d/b/a/ Anglo
Iron & Metal, for $6.1 million. The purchase price was paid as follows: (i)
$2.1 million in cash; (ii) $1.9 million note which is to be paid in ten
monthly installments of $186,500 beginning in February 1996; (iii) a $446,000
secured promissory note bearing interest at 8% and payable in 60 monthly
installments of $9,000; (iv) a $750,000 unsecured promissory note and
non-compete agreement payable in 72 consecutive installments of $10,416; and
(v) 227,693 shares of Common Stock, valued at $925,000.
-29-
<PAGE>
On April 15, 1996, the Company acquired its Missouri facility by acquiring
substantially all of the assets of Mid-America Shredding, Inc., d/b/a/
Mid-America Shredding, for $1.9 million. The purchase consideration
consisted of cash of $660,000 and assumed debt of $1.2 million.
Cash provided by operations was $113,000 for the year ended September 30, 1995
compared to cash used by operations of $862,000 for the year ended September 30,
1994. Net income of $1.8 million plus depreciation and amortization of $784,000
were the primary sources of cash from operations. Major uses of this cash
included increases in accounts receivable and inventories and reductions in
accounts payable and other accrued liabilities.
For the year ended September 30, 1995, the Company used net cash in investing
activities of $926,000 compared to net cash used in investing activities of
$255,000 for the year ended September 30, 1994. The company had capital
expenditures of $472,000 for the year ended September 30, 1995 for the purchase
of equipment and property to increase production capacity compared to $25,000
for additions to equipment for the year ended September 30, 1994. The Company
also expended $238,000 during the year ended September 30, 1995 as advances
against future compensation payable to the Company's Chief Executive Officer.
The Company had a positive net worth of approximately $6.5 million at September
30, 1995, compared to $2.8 million at September 30, 1994. This improvement in
net worth is primarily due to issuance of $2.8 million (net) of Common Stock
during the year ended September 30, 1995 and the net income of $1.8 million for
the year.
Working capital was $376,000 at September 30, 1995. As of September 30, 1994,
the Company had a working capital deficit of $4.2 million. The improvements in
working capital from fiscal 1994 to fiscal 1995 reflects the increase in cash
provided by a full year in operations of the Nevada facility, the restructuring
of long-term debt and the additional equity raised from the issuance of Common
Stock during fiscal 1995.
INFLATION AND PREVAILING ECONOMIC CONDITIONS
To date, inflation has not had a significant impact on the Company's operations.
The Company believes it should be able to implement price increases sufficient
to offset most raw material cost increases resulting from inflation, although
there may be some delay between raw material cost increases and sales price
increases and competitive factors may require the Company to absorb at least a
portion of these cost increases. Management believes that a sustained ecomonic
slowdown would negatively impact the operations and financial performance of the
Company.
SEASONALITY
The Company believes that its operations can be adversely affected by protracted
periods of inclement weather which could reduce the volume of material processed
at its facilities. In addition, periodic maintenance shutdowns by the Company's
larger customers may have a temporary adverse impact on the Company's
operations.
-30-
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued SFAS No. 123
"Accounting for Stock Based Compensation." SFAS No. 123 encourages the
accounting for stock-based employee compensation programs to be reported within
the financial statements on a fair value-based method. If the fair value-based
method is not adopted, then SFAS No. 123 requires pro forma disclosure of net
income and earnings per share as if the fair value-based method had been
adopted. The Company has not yet determined how SFAS No. 123 will be
implemented or its impact on the financial statements. SFAS No. 123 is
effective for transactions entered into after December 15, 1995.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(See Independent Auditor's Report, beginning on next page)
-31-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Report of Independent Certified Public Accountants F-3
Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity (Deficit) F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9
Report of Independent Certified Public Accountants on
Supplemental Schedules F-42
Report of Independent Certified Public Accountants on
Supplemental Schedules F-43
Schedule 1 - Condensed Financial Information of Registrant:
Balance Sheets F-44
Statements of Operations F-46
Statements of Cash Flows F-47
Notes to Condensed Financial Information of Registrant F-48
F-1
<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
F-2
<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
F-3
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------------------------------------
----------------------------------------
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1995 1994
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 184,000 $ 115,000
Trade accounts receivable, pledged, less allowance for
doubtful accounts of $15,000 and $25,000 1,026,000 898,000
Accounts receivable, related party 223,000 -
Inventories 497,000 243,000
Prepaid expenses 137,000 111,000
Other - 40,000
Deferred income taxes - -
------------- -------------
Total Current Assets 2,067,000 1,407,000
NOTE RECEIVABLE, related party - 859,000
PROPERTY, PLANT AND EQUIPMENT, net 6,686,000 6,590,000
DEFERRED INCOME TAXES, net 800,000 -
OTHER ASSETS 744,000 762,000
------------- -------------
$ 10,297,000 $ 9,618,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
--------------------------------------
--------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1995 1994
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 61,000 $ 491,000
Notes payable-related parties - 8,000
Trade accounts payable 655,000 906,000
Trade accounts payable-related parties 73,000 87,000
Professional services payable - 255,000
Accrued liabilities:
Interest 22,000 33,000
Interest-related party 8,000 11,000
Payroll and other 107,000 544,000
Income taxes payable 86,000 -
Due to related parties - 276,000
Due to factor, related party 197,000 461,000
Current portion of long-term debt 227,000 2,502,000
Current portion of long-term debt, related parties 218,000 8,000
Current portion of obligation under capital lease 37,000 -
------------- -------------
Total Current Liabilities 1,691,000 5,582,000
------------- -------------
DEFERRED GAIN - 751,000
------------- -------------
LONG-TERM DEBT:
Long-term debt, net of current portion 132,000 402,000
Long-term debt-related parties, net of current portion 1,979,000 117,000
Obligation under capital lease, net of current portion 41,000 -
------------- -------------
Total Long-Term Debt 2,152,000 519,000
------------- -------------
Total Liabilities 3,843,000 6,852,000
------------- -------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares authorized:
Series A 13,000 and 38,000 shares
issued and outstanding 1,312,000 3,612,000
Series B 300,000 and 591,333 shares
issued and outstanding 450,000 887,000
Common stock, $.001 par value, 50,000,000 shares
authorized, 8,395,785 and 3,005,704
shares issued and outstanding 8,000 3,000
Additional paid-in capital 13,120,000 8,269,000
Accrued salary payable in equity security - 246,000
Accumulated (deficit) (8,436,000) (10,251,000)
------------- -------------
Total Stockholders' Equity 6,454,000 2,766,000
------------- -------------
$ 10,297,000 $ 9,618,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
------------------------------------------
------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Sales $ 13,812,000 $ 4,812,000 $ -
Other income 41,000 19,000 -
------------- ------------- -------------
Total Revenues 13,853,000 4,831,000 -
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales 9,156,000 3,516,000 -
Cost of sales, related parties 1,713,000 594,000 -
Personnel 744,000 327,000 830,000
Professional services 527,000 553,000 432,000
Travel 39,000 60,000 43,000
Occupancy 83,000 50,000 60,000
Depreciation and amortization 258,000 258,000 357,000
Interest 407,000 203,000 156,000
Bad debt expense 151,000 25,000 -
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
------------- ------------- -------------
INCOME (LOSS) BEFORE EQUITY IN
NET (LOSS) OF JOINT VENTURES,
EQUITY INVESTEE AND
EXTRAORDINARY GAIN 298,000 (1,142,000) (2,491,000)
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)
EXTRAORDINARY GAIN FROM
SETTLEMENT OF DEBTS 806,000 218,000 475,000
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME
TAXES (BENEFIT) 1,104,000 (924,000) (2,483,000)
(BENEFIT) FROM INCOME TAXES (711,000) - -
------------- ------------- -------------
NET INCOME (LOSS) $ 1,815,000 $ (924,000) $ (2,483,000)
------------- ------------- -------------
------------- ------------- -------------
PRIMARY INCOME (LOSS) PER
COMMON SHARE:
Before extraordinary item $ .17 $ (.46) $ (1.24)
Extraordinary item .13 .09 .20
------------- ------------- -------------
PRIMARY NET INCOME (LOSS) PER
COMMON SHARE $ .30 $ (.37) $ (1.04)
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 6,099,694 2,504,762 2,376,823
------------- ------------- -------------
------------- ------------- -------------
FULLY DILUTED INCOME (LOSS)
PER COMMON SHARE:
Before extraordinary item $ .16 $ (.43) $ (1.24)
Extraordinary item .13 .08 .20
------------- ------------- -------------
FULLY DILUTED NET INCOME (LOSS)
PER COMMON SHARE: $ .29 $ (.35) $ (1.04)
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common
shares outstanding 6,307,694 $ 2,623,069 2,376,823
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
--------------------------------------------------
--------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------------- ----------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances, September 30, 1992 - $ - 2,367,728 $ 3,000 $ 5,905,000
Common stock issued
for services - - 20,000 - 149,000
Contribution of services - - - - 120,000
Dilution of predecessor cost
adjustment property option - - - - 444,000
Net (loss) - - - - -
------------- ------------- ------------- ------------- -------------
Balances, September 30, 1993 - - 2,387,728 3,000 6,618,000
Preferred stock issued for debt 591,333 887,000 - - -
Preferred stock issued for
acquisition of NRI 38,000 3,612,000 - - -
Common stock issued for cash - - 30,000 - 56,000
Common stock issued
for services - - 39,600 - 242,000
Common stock issued for debt - - 548,376 - 1,351,000
Contribution to capital - - - - 2,000
Conversion of accrued salary - - - - -
Net (loss) - - - - -
------------- ------------- ------------- ------------- -------------
Balances, September 30, 1994 629,333 4,499,000 3,005,704 3,000 8,269,000
Redemption of preferred stock
Series A (25,000) (2,300,000) - - -
Redemption of preferred stock
Series B and other equity for
Option to CEO (291,333) (437,000) - - -
Common stock issued for
acquisition of MRI - - 120,000 - 1,200,000
Common stock issued during
private offering, net of offering
costs of $590,000 - - 3,746,400 4,000 2,778,000
Common stock issued to
retire debt - - 166,666 - 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
Common stock issued for
interest on bridge loans - - 17,351 - 16,000
Common stock issued on
exercise of option to CEO - - 1,319,445 1,000 682,000
Common stock rounding due
to stock split - - 219 - -
Net income - - - - -
------------- ------------- ------------- ------------- -------------
Balances, September 30, 1995 313,000 $ 1,762,000 8,395,785 $ 8,000 $ 13,120,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
<CAPTION>
OTHER
OPTION EQUITY ACCUMULATED
TO CEO SECURITY (DEFICIT) TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances, September 30, 1992 $ - $ - $ (6,844,000) $ (936,000)
Common stock issued
for services - - - 149,000
Contribution of services - - - 120,000
Dilution of predecessor cost
adjustment property option - - - 444,000
Net (loss) - - (2,483,000) (2,483,000)
------------- ------------- ------------- -------------
Balances, September 30, 1993 - - (9,327,000) (2,706,000)
Preferred stock issued for debt - - - 887,000
Preferred stock issued for
acquisition of NRI - - - 3,612,000
Common stock issued for cash - - - 56,000
Common stock issued
for services - - - 242,000
Common stock issued for debt - - - 1,351,000
Contribution to capital - - - 2,000
Conversion of accrued salary - 246,000 - 246,000
Net (loss) - - (924,000) (924,000)
------------- ------------- ------------- -------------
Balances, September 30, 1994 - 246,000 (10,251,000) 2,766,000
Redemption of preferred stock
Series A - - - (2,300,000)
Redemption of preferred stock
Series B and other equity for
Option to CEO 683,000 (246,000) - -
Common stock issued for
acquisition of MRI - - - 1,200,000
Common stock issued during
private offering, net of offering
costs of $590,000 - - - 2,782,000
Common stock issued to
retire debt - - - 150,000
Common stock issued for
renegotiation of payment terms
for a stockholder loan - - - -
Common stock issued
for services - - - 25,000
Common stock issued for
interest on bridge loans - - - 16,000
Common stock issued on
exercise of option to CEO (683,000) - - -
Common stock rounding due
to stock split - - - -
Net income - - 1,815,000 1,815,000
------------- ------------- ------------- -------------
Balances, September 30, 1995 $ - $ - $ (8,436,000) $ 6,454,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
--------------------------------------------------
--------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss) $ 1,815,000 $ (924,000) $ (2,483,000)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 784,000 392,000 357,000
Equity in net loss of affiliates - - 467,000
Extraordinary gain from settlement of debts (806,000) (218,000) (475,000)
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) - -
Changes in assets and liabilities:
Trade accounts receivable (154,000) (923,000) -
Inventories (254,000) (243,000) -
Prepaid expenses (26,000) (111,000) -
Other current assets 33,000 (40,000) 8,000
Accounts payable (290,000) 506,000 736,000
Accrued liabilities (451,000) 150,000 454,000
Income taxes payable 86,000 - -
------------- ------------- -------------
Net Cash Provided (Used)
by Operating Activities 113,000 (862,000) (118,000)
------------- ------------- -------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Additions to engineering plans - - (66,000)
Additions to equipment (472,000) (25,000) -
Receivables-related party - - 72,000
Sale of equipment - 48,000 -
Collections on note receivable - 41,000 -
Additions to acquisition costs and goodwill (103,000) (319,000) (112,000)
Advances (to) affiliate - (398,000) -
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)
------------- ------------- -------------
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
Principal payments on borrowings (2,756,000) (199,000) (40,000)
Principal payments on borrowings-related parties (383,000) (152,000) -
Principal payments on capital lease (34,000) - -
Proceeds from factor 7,335,000 2,450,000 -
Payments to factor (7,599,000) (1,989,000) -
Proceeds from issuance of common stock 3,998,000 56,000 -
------------- ------------- -------------
Net Cash Provided (Used) by
Financing Activities 882,000 1,232,000 735,000
------------- ------------- -------------
Increase in cash 69,000 115,000 -
CASH, beginning of period 115,000 - -
------------- ------------- -------------
CASH, end of period $ 184,000 $ 115,000 $ -
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Note 21
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
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.
F-9
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
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.
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.
ACQUISITION 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.
CONCENTRATIONS 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. There were no significant sales in Mexico
prior to the acquisition of Anglo.
The Company maintains all cash in bank deposit accounts, which at times may
exceed federally insured limits.
F-10
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
NOTE 1[B] - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-11
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
NOTE 1[B] - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-12
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
NOTE 1[B] - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 to $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.
F-13
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
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.
F-14
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
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
<TABLE>
<CAPTION>
ASSETS
RECYCLING PRO FORMA
INDUSTRIES, ACI PRO FORMA SEPTEMBER 30,
INC. OPTION ADJUSTMENT 1995
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
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
--------------- ---------------- -------------- --------------
--------------- ---------------- -------------- --------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
RECYCLING PRO FORMA
INDUSTRIES, ACI PRO FORMA SEPTEMBER 30,
INC. OPTION ADJUSTMENT 1995
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
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
--------------- ---------------- -------------- --------------
--------------- ---------------- -------------- --------------
</TABLE>
F-15
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
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
--------------- ---------------- -------------- --------------
<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>
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.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
Revenues $ 11,348,000 $ 9,781,000
Income (loss)from continuing operations,
net of taxes $ (857,000) $ (2,807,000)
Net income (loss) after extraordinary items
and income taxes $ (639,000) $ (2,332,000)
Income (loss) from continuing
operations, net of taxes per common share $ (.34) $ (1.18)
Net income (loss) after extraordinary
items and income taxes per common share $ (.25) $ (.98)
</TABLE>
F-16
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
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.
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.
F-17
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------
---------------------------------------
NOTE 6 - INVENTORIES
Inventories which are pledged, consist of the following:
SEPTEMBER 30,
---------------------------
1995 1994
------------ ------------
Raw materials $ 350,000 $ 167,000
Finished goods 147,000 76,000
------------ ------------
$ 497,000 $ 243,000
------------ ------------
------------ ------------
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (substantially all of which is pledged) consists
of the following:
SEPTEMBER 30,
----------------------------
1995 1994
------------ ------------
Land $ 1,640,000 $ 1,340,000
Building and improvements 365,000 365,000
Heavy machinery and
equipment 1,472,000 1,432,000
Automotive shredder 3,161,000 3,103,000
Assets under capital lease 118,000 -
Transportation equipment 561,000 443,000
Office equipment 121,000 114,000
------------ ------------
Total 7,438,000 6,797,000
Less accumulated depreciation
and amortization (752,000) (207,000)
------------ ------------
$ 6,686,000 $ 6,590,000
------------ ------------
------------ ------------
F-18
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
NOTE 8 - OTHER ASSETS
Other assets consist of the following:
SEPTEMBER 30,
----------------------------
1995 1994
------------ ------------
Acquisition costs $ 61,000 $ 164,000
Goodwill, net of accumulated
amortization of $29,000 and
$7,000 and $40,000
(see Note 2) 188,000 168,000
Investment in affiliate, at cost 277,000 -
Engineering plans, net of
accumulated amortization of
$899,000, $682,000 and $930,000 188,000 405,000
Patent rights 25,000 25,000
Other 5,000 -
------------ ------------
$ 744,000 $ 762,000
------------ ------------
------------ ------------
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.
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.
F-19
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
NOTE 9 - NOTE RECEIVABLE, RELATED PARTY (CONTINUED)
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.
F-20
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------
--------------------------------------
NOTE 10 - INCOME TAXES (CONTINUED)
The components of deferred tax assets and (liabilities) are as
follows:
SEPTEMBER 30,
--------------------------------
1995 1994
------------- -------------
Total deferred tax assets $ 1,021,000 $ 2,293,000
Less valuation allowance (221,000) (2,293,000)
------------- -------------
800,000 -
Total deferred tax (liabilities) - -
------------- -------------
Net deferred tax asset $ 800,000 $ -
------------- -------------
------------- -------------
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,
--------------------------------
1995 1994
------------- -------------
Temporary differences:
Property and equipment $ (1,743,000) $ (1,674,000)
Valuation allowance (221,000) (2,293,000)
Research and development costs 78,000 78,000
Engineering plans 306,000 232,000
Goodwill 10,000 -
Allowance for doubtful accounts 3,000 9,000
Net operating loss carryforwards 2,367,000 3,648,000
------------- -------------
$ 800,000 $ -
------------- -------------
------------- -------------
F-21
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------
------------------------------------
NOTE 10 - INCOME TAXES (CONTINUED)
The (benefit) for income taxes consists of the following:
SEPTEMBER 30,
--------------------------------
1995 1994
------------- -------------
Current $ 89,000 $ -
Deferred (800,000) -
------------- -------------
$ (711,000) $ -
------------- -------------
------------- -------------
The components of deferred income tax (benefit) expense are as follows:
SEPTEMBER 30,
--------------------------------
1995 1994
------------- -------------
Bad debt expense $ 6,000 $ (8,000)
Depreciation expense 69,000 1,674,000
Engineering costs (74,000) (145,000)
Goodwill amortization (10,000) -
Accrued salaries - officers - 20,000
Net operating loss carryforward 1,281,000 (482,000)
Valuation allowance (2,072,000) (1,059,000)
------------- -------------
$ (800,000) $ -
------------- -------------
------------- -------------
F-22
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
----------------------------------
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,
--------------------------------
1995 1994
------------- -------------
Tax expense (benefit) at
federal statutory rates $ 374,000 $ (314,000)
Capital gains - MRI 1,190,000 -
Change in valuation allowance (2,072,000) 480,000
Other (203,000) (166,000)
------------- -------------
$ (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,
--------------------------------
1995 1994
------------- -------------
Customer A 37.9% 29.9%
Customer B 16.2% 19.7%
Customer C 10.8% 18.7%
F-23
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------
-----------------------------------
NOTE 12 - NOTES PAYABLE
Notes payable outstanding at September 30, 1995 and 1994 consisted of:
SEPTEMBER 30,
--------------------------------
1995 1994
------------- -------------
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
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
principal and interest paid March 1996. ------------- -------------
$ 61,000 $ 491,000
------------- -------------
------------- -------------
F-24
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
---------------------------------
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.
F-25
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
---------------------------------
NOTE 14 - LONG-TERM DEBT
SEPTEMBER 30,
--------------------------------
1995 1994
------------- -------------
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
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
Note to a group of investors; at 5%; principal
and interest due December 31, 1995; unsecured. 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
------------- -------------
359,000 2,904,000
Less current portion 227,000 2,502,000
------------- -------------
Long-Term Debt $ 132,000 $ 402,000
------------- -------------
------------- -------------
F-26
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
---------------------------------
NOTE 14 - LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows for the periods ending:
SEPTEMBER 30,
1995
-------------
1996 $ 227,000
1997 88,000
1998 25,000
1999 12,000
2000 7,000
Thereafter -
-------------
$ 359,000
-------------
-------------
NOTE 15 - LONG-TERM DEBT - RELATED PARTY
SEPTEMBER 30,
--------------------------------
1995 1994
------------- -------------
$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 $ -
Other notes due to related parties with
interest at 8.5% to 12%. 295,000 125,000
------------- -------------
2,197,000 125,000
Less current portion 218,000 8,000
------------- -------------
Long-Term Debt, Related Party $ 1,979,000 $ 117,000
------------- -------------
------------- -------------
F-27
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
---------------------------------
NOTE 15 - LONG-TERM DEBT - RELATED PARTY (CONTINUED)
Maturities of long-term debt-related parties are as follows for the periods
ending:
SEPTEMBER 30,
-------------
1995
-------------
1996 $ 218,000
1997 1,979,000
-------------
$ 2,197,000
-------------
-------------
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.
F-28
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
---------------------------------
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.
F-29
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
---------------------------------
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.
F-30
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
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.
F-31
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
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.
F-32
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
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.
During 1995, the Company extinguished $896,000 of debt for $90,000 cash thereby
recognizing an extraordinary gain of $806,000.
F-33
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
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.
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.
F-34
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
NOTE 20 - LEASES (CONTINUED)
Future minimum lease payments are as follows for the periods ending:
SEPTEMBER 30,
1995
-------------
1996 $ 44,000
1997 45,000
1998 45,000
1999 46,000
2000 35,000
-------------
$ 215,000
-------------
-------------
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,
1995
-------------
Capitalized cost $ 118,000
Accumulated depreciation (6,000)
-------------
$ 112,000
-------------
-------------
Depreciation expense $ 6,000
-------------
-------------
F-35
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
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,
1995
-------------
1996 $ 44,000
1997 41,000
1998 6,000
Total future minimum payments 91,000
Amount representing interest (13,000)
-------------
Present value of future minimum lease payments 78,000
Less current portion (37,000)
-------------
$ 41,000
-------------
-------------
F-36
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
NOTE 21 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR
NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------
1995 1994
-------------- -------------
<S> <C> <C>
Cash paid for interest $ 407,000 $ -
-------------- -------------
-------------- -------------
Stock issued for conversion of bridge financing $ 150,000 $ -
-------------- -------------
-------------- -------------
Acquisition of subsidiaries for stock $ - $ 6,725,000
-------------- -------------
-------------- -------------
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 $ -
-------------- -------------
-------------- -------------
Issuance of common stock to chief executive
officer $ 437,000 $ -
-------------- -------------
-------------- -------------
Acquisition of equipment under capital lease $ 113,000 $ -
-------------- -------------
-------------- -------------
</TABLE>
F-37
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
NOTE 22 - SUBSEQUENT EVENTS
ACQUISITION OF ANGLO
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.
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.
F-38
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
NOTE 22 - SUBSEQUENT EVENTS (CONTINUED)
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
--------------
--------------
The unaudited proforma 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 the period presented for 1995.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 29,192,000 $ 11,348,000 $ 9,781,000
Income (loss) from continuing operations,
net of taxes $ 1,582,000 $ (857,000) $ (2,807,000)
Net income (loss) after extraordinary items
and income taxes $ 2,388,000 $ (639,000) $ (2,332,000)
Income (loss) from continuing operations,
net of taxes per common share $ .26 $ (.34) $ (1.18)
Net income (loss) after extraordinary items
and income taxes per common share $ .39 $ (.25) $ (.98)
</TABLE>
F-39
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------
-------------------------------------
NOTE 22 - SUBSEQUENT EVENTS (CONTINUED)
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
-----------
F-40
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------
------------------------------------
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.
NOTES PAYABLE - RELATED PARTIES
In December 1995 and January 1996, the Company borrowed $1,575,000 of bridge
financing 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.
F-41
<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
F-42
<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
F-43
<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
F-44
<PAGE>
RECYCLING INDUSTRIES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
----------------------------------------------------------
----------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
------------ ------------
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
------------ ------------
------------ ------------
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
F-45
<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
F-46
<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
F-47
<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
-------------
-------------
F-48
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the officers and directors of the Company, their
respective positions and titles, and their ages.
NAME POSITION(S) AGE
- ---- ----------- ---
Thomas J. Wiens Chairman, Chief Executive 43
Officer, President, Treasurer
Michael I. Price Director, Chief Operating Officer 54
Jerome B. Misukanis Director 53
Graydon H. Neher Director 46
Barry D. Plost Director 49
Peter J. Gelin Controller 38
Each director is elected to hold office until the next annual meeting of
stockholders, or until his successor is elected and qualified. All directors
serve without remuneration. Officers serve at the discretion of the Board of
Directors.
-32-
<PAGE>
THOMAS J. WIENS has held the positions listed above with the Company since
its inception in 1987. Prior to founding RII, Mr. Wiens was involved in a
number of entrepreneurial pursuits and has nearly 10 years experience in the
recycling business and has held the position of Chairman and Chief Executive
Officer since founding the Company. Prior to 1987, Mr Wiens was engaged in a
broad range of entrepreneurial activities including banking, insurance, retail,
agriculture and communications. Mr. Wiens is active in and serves on the board
of directors of several not-for-profit Christian organizations. Mr. Wiens was
the Republican nominee for United States Congress from the 3rd District of
Colorado in 1982 and was the Republican nominee for State Treasurer of Colorado
in 1978 at the age of 26. He holds a BA from the School of Government and
Public Administration at the American University in Washington, D.C. and a MDIV
from Yale University.
MICHAEL I. PRICE joined the Company in March 1994 as Chief Operating
Officer, Director and President of the Metals Division. Mr. Price has held
several executive-level positions in his 25 years in the metals recycling
industry. From 1992 to 1994 he was President of Recovermat Technologies,
Inc., in Washington, D.C. As co-inventor of a new product, he managed the
start up of a company to market this innovative solid waste technology. From
1989 to 1992 Mr. Price was Vice President and General Manager of Joseph Smith
& Sons, Inc., a metals recycling company with annual sales of $26 million.
Prior to that he served as Vice President of Operations of The David J.
Joseph Company, Inc., and managed fourteen metal recycling facilities
throughout the United States. From 1979 to 1982 he served the Company as its
Regional Director of Operations and managed five metal recycling plants
throughout the country. From 1976 to 1979 Mr. Price was the General Manager
of Commercial Metals Company's Houston Region. From 1967 to 1976 he served
in various capacities for Luria Brothers and Company, Inc. in Cincinnati,
Ohio; 1971-1976 Assistant Vice President of Operations; 1969-1971 Assistant
to Vice President of Operations; 1967-1968 Planning Manager. Mr. Price was
with the General Motors Corporation Inland Manufacturing Division in Dayton,
Ohio from 1964 to 1967 as Senior Production Engineer, 1966-1967; Process
Engineer, 1965-1966; and Junior Methods Engineer, 1964-65. He received a
BSIE in 1964 from General Motors Institute in 1964, and completed Management
Training programs at Indiana University in 1984 and 1982. Mr. Price serves
on the Board of Directors of Eastern Railway Supply.
JEROME B. MISUKANIS was elected to the Board of Directors in March 1994.
Since 1991 Mr. Misukanis has been the owner and Principal of Misukanis and
Dodge, P.A., CPA, a public accounting firm practicing in the areas of audit, tax
planning and a broad range of expert financial advice to businesses and
individuals. From 1990 to 1991 he served as Vice President and Chief Financial
Officer of Reuter, Inc., a developer and operator of resource recovery
facilities and manufacturer of computer disk drives and various plastic
products. From 1984 to 1990 Mr. Misukanis was founder, Chairman and Chief
Executive Officer of Preferable Fuels & Systems and Reuter Resource Recovery,
Inc. a market developer and consulting firm in the resource recovery, recycling
and composting of municipal solid waste. From 1980 to 1984 he served as Senior
Vice President of Finance and Administration of Satellite Industries, Inc. a
manufacturer and marketeer of portable waste facilities and modular buildings.
From 1978 to 1980 he was Vice President of Information Dialogues, Inc., a public
company involved in the sale and manufacture of computer terminals. From 1975
to 1978 Mr. Misukanis was Owner and Principal of Misukanis & Company CPA, a
public accounting company. Mr. Misukanis received a BA in accounting from the
University of St. Thomas in 1964 and graduated from the Harvard Business
School's Executive Management Program in 1981. He attended William Mitchell
College of Law from 1968 to 1969. Mr. Misukanis is a member of the American
Institute of Certified Public Accountants and the Minnesota Society of Certified
Public Accountants.
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<PAGE>
GRAYDON H. NEHER was elected to the Board of Directors on June 27, 1995.
Since 1980, Mr. Neher has been a director and president of Chemco, Inc., a
privately held oil and gas company. From 1981 to 1991, he was the president of
Yosemite Resources, Inc. a privately held oil and gas drilling syndication
company. Mr. Neher currently serves as a director of Compa Food Ministry, a
non-profit organization established to provide food to church and inner city
agency food banks. Mr. Neher holds a Bachelors degree in financial
administration from the University of Puget Sound.
BARRY D. PLOST was elected to the Board of Directors November of 1995. Mr.
Plost has more than 25 years experience in the motor carrier transportation
industry, including president, chief executive officer and chief operating
officer of publicly held companies. Mr. Plost is current working with David
Barrett, Inc. a management consulting firm specializing in transportation and
distribution. Prior to that, Mr. Plost from 1991 to 1994 was president and
chief executive officer of Country Wide Transport Services, Inc. From 1979 to
1991, Mr. Plost held various executive positions with Freymiller Trucking, Inc.
one of the largest temperature controlled truckload carriers in the United
States. Mr. Plost holds a Bachelors degree in liberal arts from the University
of Illinois and a MBA degree from Loyola University at Chicago.
PETER J. GELIN the Corporate Controller for RII, has served the Company
since November of 1989 and is responsible for financial analysis, accounting
management and operations support to the corporate officers. Mr. Gelin's
financial and accounting background has been developed through work experience
and participation with senior management teams for over fifteen years in both
private and public companies. Mr. Gelin holds a Bachelors degree in business
finance from the University of Colorado at Boulder and a masters degree in
Business Administration in finance from Regis University.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires the officers and
directors of RII and persons who own more than ten percent of a registered class
of the Company's securities (collectively, Reporting Persons), to file reports
of ownership and changes in ownership on Forms 3, 4, and with the Securities and
Exchange Commission (SEC). Reporting Persons are required by SEC regulation to
furnish RII with copies of all Forms 3, 4, and 5 filed.
Based solely upon a review of the copies of such forms it has received and
representations from the Reporting Persons; RII believes all Reporting Persons
have compiled with the applicable filing requirements, except as follows: (1)
during fiscal 1995, Peter J. Gelin, Controller of RII, inadvertently failed to
file a Form 4 reporting an acquisition of stock options in May 1995; and (2)
Barry D. Plost, director of RII, inadvertently failed to file a Form 3 reporting
his election to the RII board of directors in November 1995.
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<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid to the
current executive officers listed in Item 10 above for each of the last three
fiscal years.
Annual Compensation
----------------------------------
Accrued
Name/Principal Position Year Salary Salary Advances All Other
- -------------------------------------------------------------------------------
Thomas J. Wiens, CEO (1)
1995 $ 60,000 $ -0- $ 205,000 $ 15,000
1994 -0- 147,000 -0- -0-
1993 -0- 160,000 -0- -0-
Michael I. Price, COO (2)
1995 $210,000(2) $ -0- $ 13,000 $ 15,000
1994 -0- 112,000(2) -0- -0-
1993 -0- -0- -0- -0-
(1) At September 30, 1994 Mr. Wiens agreed to convert $246,000 of accrued
salary to an equity security payable in the future. At September 30, 1993
$120,000 of accrued salary was converted to additional paid in capital as
contribution of services. At September 30, 1995, At December 31, 1995, the
Company converted $205,000 to salary expense
(2) The accrued amount at September 30, 1994, of $112,100 was paid to Mr. Price
by September 30, 1995.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1995, the Company had only one class of outstanding
voting securities, its Common Stock, $.001 par value. The following table sets
forth information as of December 31, 1995, with respect to the beneficial
ownership of the Common Stock for all persons who own more than five percent of
the Common Stock. The following shareholders have sole voting and investment
power with respect to the shares, unless it has been indicated otherwise:
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent
- -------------------------------------------------------------------------------
Common Stock Thomas J. Wiens 2,828,003 (1) 32.7%
384 Inverness Drive South
Suite 211
Englewood, CO 80112
Common Stock Caside Associates 1,183,750 (2) 13.2%
373 North Main St.
Fall River, MA 02720
Common Stock Stanley Becker 913,475 (3) 10.6%
55 East End Avenue, #7A
New York, New York 10028
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<PAGE>
Common Stock J.E. McConnaughy, Jr. 739,800 (4) 8.6%
c/o JEMC Corporation
1011 High Ridge Road
Stamford, Connecticut 06905
Common Stock Samuel Benjamin 673,200 (5) 7.8%
2763 Roscomare Road
Los Angeles, California 90077
________________
(1) Includes 1,664 shares owned by Real Heroes, Inc., a non-profit
corporation controlled by Thomas J. Wiens, and 227,414 shares owned by
First Dominion Holdings, Inc., a corporation controlled by Thomas J.
Wiens.
(2) Includes 360,000 shares underlying a stock option and 216,000 shares
underlying common stock purchase warrants. The beneficial owners of the
shares held by Caside Associates are John Silvia Jr., Louis G. Carreiro,
Joseph L. Vinagro, Ronald Rapoza, Dwight D. Silvia, Louis Goncalo,
Patricia Mello, Ilene Hayes and Recycling Associates Trust.
(3) Includes 318,159 shares underlying common stock purchase warrants.
(4) Includes 246,000 shares underlying common stock purchase warrants.
(5) Includes 224,400 shares underlying common stock purchase warrants.
The following tables sets forth information as of December 31, 1995,
with respect to the ownership of the Common Stock by each director or
nominee for director and all directors, nominees and officers of the Company
as a group. The following shareholders have sole voting and investment power
with respect to the shares, unless it has been indicated otherwise:
Name of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------------------------------------------------------------------------
Common Stock Thomas J. Wiens 2,828,003 (1) 32.7%
Common Stock All directors and 3,064,003 (2) 35.5%
Officers as a Group
________________
(1) Includes 1,664 shares owned by Real Heroes, Inc., a non-profit
corporation controlled by Thomas J. Wiens, and 227,414 shares owned by
First Dominion Holdings, Inc., a corporation controlled by Thomas J.
Wiens.
(2) Includes 150,000 shares pursuant to stock option agreements to one
officer of the Company, 26,000 shares pursuant to stock option
agreements to one officer of the Company and 18,000 shares pursuant to
warrants held by two directors of the Company.
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<PAGE>
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
The Company previously entered into exclusive perpetual license
agreements related to the MSW Technology with FDH. Under the original terms
of the license agreements, the Company was to pay FDH license fees and
royalties, provided that the Company had raised additional equity and had
constructed operational facilities utilizing the MSW Technology. The license
fee was comprised of the following: (1) $250,000 upon the Company raising
$2,000,000 in capital; (2) $240,000 payable in twelve consecutive monthly
installments of $20,000 each commencing 10 days after the Company raises
$2,000,000 in capital and (3) a continuing royalty of $1.00 per ton of waste
material processed utilizing the MSW technology. In connection with the
granting to Mr. Wiens of the right to acquire $1,187,500 worth of Common
Stock, (the "Wiens Right"), discussed below, the terms of this license were
substantially modified to provide that no royalties or license fees are, or
will be, due to FDH.
On July 15, 1994, the Company issued to Caside Associates, a
significant shareholder of the Company, an option to acquire 360,000 shares of
common stock at an exercise price of $2.50 per share. On January 25, 1995,
the exercise price of this option was reduced to $.90 per share. In addition,
on January 25, 1995, the Company issued to Caside Associates warrants to
acquire up to 180,000 shares of common stock at an exercise price of $7.50
per share.
On January 25, 1995, the Company granted to Michael I. Price, Chief
Operating Officer and a Director of the Company, and Jerome Misukanis, a
Director of the Company, options to purchase up to 150,000 and 12,000,
respectively, shares of restricted Common Stock in exchange for consideration
of $5.00 at each exercise of the option. To reflect the current performance
of the Company, on August 3, 1995, these options were amended to revise the
exercise price to $.90 per share. These options are only exercisable upon
satisfaction of the following conditions: (i) the Company has reported in its
periodic filings with the Securities and Exchange Commission annualized
revenues in excess of $15,000,000 and, in the same filing, has reported net
income from operations; (ii) the Common Stock is listed for trading in the
American Stock Exchange, the New York Stock Exchange or the NASDAQ system. As
of the date of this Prospectus, these options are not exercisable.
During the latest two fiscal years ended September 30, 1995 the Company
continued to fund operations through bridge loans from FDH. During fiscal
year 1994, $887,000 of this loan amount was converted to 591,333 shares of
preferred stock at the request of FDH. On January 25, 1995, 291,333 of these
shares were returned to the Company in connection with the granting of the
Wiens' Right, discussed below.
INDEBTEDNESS OF MANAGEMENT
At September 30, 1994 Thomas J. Wiens, Chairman and CEO of the Company
agreed to convert $246,000 of accrued salary to an equity security. On
January 25, 1995, the equity security took the form of the Wiens' Right,
discussed below.
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<PAGE>
At September 30, 1994, Michael I. Price, Chief Operating Officer of the
Company had accrued salary of approximately $112,000 and a stock option
exercisable upon the satisfaction of certain performance conditions.
THE WIENS' RIGHT
On January 25, 1995, in connection with the purchase of technology
related to the Company for $750,000 and in exchange for the return to the
Company of 291,333 Series B Shares owned by FDH and the forgiveness of $750,000
of accrued salary, royalties and other amounts due from the Company to Thomas
J. Wiens ("Wiens") and FDH, the Company conditionally granted to Wiens the
right to acquire a number of shares of Common Stock valued at $1,187,500
computed at a price equal to 50% of the fair market value of the Common Stock
on the day the Company filed a report on Form 10-Q or Form 10-K with the
Securities and Exchange Commission reporting year-to-date gross revenues in
excess of certain amounts (the "Determination Date"), but not more than $.90
per share. The Wiens' Right grant was conditioned upon the occurrence of the
final closing of the February Private Placement which occurred on April 17,
1995.
The Wiens' Right was granted as a means by which the Company could
acquire certain patented technology, satisfy certain amounts due to Mr. Wiens
and to provide an incentive to Mr. Wiens to improve the financial performance
of the Company. On January 25, 1995, the date on which the Wiens' Right was
granted, the market price based on the closing bid of the Company's common
stock was $2.65 and the Company was conducting a private placement of its
securities in which the Common Stock was being sold to unaffiliated persons at
an effective price of $.90 per share.
The Company met the gross revenue requirement on August 8, 1995 upon
filing of its Form 10-Q for the quarter ended June 30, 1995. At that time,
Mr. Wiens exercised his right acquired 1,319,445 shares of Common Stock at an
acquisition price of $.90 per share.
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<PAGE>
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets as of September 30, 1995 and 1994.
Consolidated Statements of Income for the years ended September 30,
1995, 1994 and 1993.
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the years ended September 30,
1995, 1994 and 1993.
Notes to Consolidated Statements
Financial Statement Schedules
Exhibits:
Amended and Restated Articles of Incorporation. Incorporated by
reference to Exhibit 3(i).1 to the Company's Registration Statement on
Form S-1, Registration No. 33-97654 (the "Form S-1").
Bylaws. Incorporated by reference to Exhibit 3(ii).1 to the Form S-1.
Certificate of Designations, Rights and Preferences for the Series A
Convertible Preferred Stock of Recycling Industries, Inc. with Amendment
Incorporated by reference to Exhibit 4.1 to the Form S-1.
Agreements Related to the Acquisition of Nevada Recycling, Inc.:
Bill of Sale and Assumption Agreement dated April 30, 1995 between
Nevada Recycling Corporation and Nevada Recycling Inc., incorporated
by reference to Exhibit (d)(1) to the Company's Current Report on
Form 8-K filed May 12, 1994, reporting an event of May 10, 1994,
Commission file No. 0-20179.
Real Estate Installment Sale Agreement dated May 10, 1994 by and
between Recycling Industries, Inc. and Nevada Recycling Corporation,
incorporated by reference to Exhibit (d)(2) to the Company's Current
Report on Form 8-K filed May 12, 1994, reporting an event of May 10,
1994, Commission file No. 0-20179.
Stock Exchange Agreement dated May 10, 1994 between Recycling
Industries, Inc.
-39-
<PAGE>
and Nevada Recycling Corporation, incorporated by reference to
Exhibit (d)(3) to the Company's Current Report on Form 8-K filed
May 12, 1994, reporting an event of May 10, 1994, Commission file
No. 0-20179.
Sale and Security Agreement dated May 10, 1994 by and among Recycling
Industries, Inc. and Nevada Recycling Corporation, incorporated by
reference to Exhibit (d)(4) to the Company's Current Report on Form 8-K
filed May 12, 1994, reporting an event of May 10, 1994, Commission
file No. 0-20179.
Agreements related to the Restructuring of the Acquisition of Nevada
Recycling, Inc.:
Termination, Restructuring and Purchase Agreement, effective
December 30, 1994, between Recycling Industries, Inc., NR Holdings,
Inc., Nevada Recycling Inc. and Nevada Recycling Corporation,
incorporated by reference to Exhibit (c)(2) to the Company's Current
Report on Form 8-K reporting an event of December 30, 1994, as
amended April 3, 1995 on Form 8-K/A, as further amended May 1, 1995
on Form 8-K/A-2 and as further amended June 5, 1995 on Form 8-K/A-3,
Commission File No. 0-20179.
Purchase Agreement, dated December 30, 1994, between NR Holdings,
Inc. and Nevada Recycling Corporation, incorporated by reference to
Exhibit (c)(3) to the Company's Current Report on Form 8-K reporting
an event of December 30, 1994, as amended April 3, 1995 on Form 8-K/A,
as further amended May 1, 1995 on Form 8-K/A-2 and as further amended
June 5, 1995 on Form 8-K/A-3, Commission File No. 0-20179.
Real Estate Installment Sale Agreement, dated December 30, 1994,
between NR Holdings, Inc. and Nevada Recycling corporation,
incorporated by reference to Exhibit (c)(4) to the Company's
Current Report on Form 8-K reporting an event of December 30, 1994,
as amended April 3, 1995 on Form 8-K/A, as further amended May 1,
1995 on Form 8-K/A-2 and as further amended June 5, 1995 on Form
8-K/A-3, Commission File No. 0-20179.
Security and Option Agreement, effective December 30, 1994, between
Recycling Industries, Inc., NR Holdings, Inc., Nevada Recycling,
Inc. and Nevada Recycling Corporation, incorporated by reference to
Exhibit (c)(5) to the Company's Current Report on Form 8-K reporting
an event of December 30, 1994, as amended April 3, 1995 on Form 8-K/A,
as further amended May 1, 1995 on Form 8-K/A-2 and as further amended
June 5, 1995 on Form 8-K/A-3, Commission File No. 0-20179.
$2,000,000 Promissory Note; December 30, 1994, from NR Holdings, Inc.
to Nevada Recycling Corporation, incorporated by reference to
Exhibit (c)(6) to the Company's Current Report on Form 8-K reporting
an event of December 30, 1994, as amended April 3, 1995 on Form 8-K/A,
as further amended May 1, 1995 on Form 8-K/A-2 and as further amended
June 5, 1995 on Form 8-K/A-3, Commission File No. 0-20179.
$300,000 Promissory Note; December 30, 1994, from NR Holdings, Inc.
to Nevada Recycling Corporation, incorporated by reference to
Exhibit (c)(7) to the Company's
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<PAGE>
Current Report on Form 8-K reporting an event of December 30, 1994,
as amended April 3, 1995 on Form 8-K/A, as further amended May 1,
1995 on Form 8-K/A-2 and as further amended June 5, 1995 on Form
8-K/A-3, Commission File No. 0-20179.
ERS Corporate Guaranty, dated December 30, 1994, by Recycling
Industries, Inc., incorporated by reference to Exhibit (c)(8) to
the Company's Current Report on Form 8-K reporting an event of
December 30, 1994, as amended April 3, 1995 on Form 8-K/A, as
further amended May 1, 1995 on Form 8-K/A-2 and as further amended
June 5, 1995 on Form 8-K/A-3, Commission File No. 0-20179.
NRI Corporate Guaranty, dated December 30, 1994, by Nevada
Recycling, Inc., incorporated by reference to Exhibit (c)(9) to the
Company's Current Report on Form 8-K reporting an event of December
30, 1994, as amended April 3, 1995, on Form 8-K/A, as further
amended May 1, 1995 on Form 8-K/A-2 and as further amended June 5,
1995 on Form 8-K/A-3, Commission File No. 0-29179.
Subscription to Shares of NR Holdings, Inc., dated December 30, 1994,
for 100 Shares of Common Stock, incorporated by reference to
Exhibit (c)(10) to the Company's Current Report on Form 8-K reporting
an event of December 30, 1994, as amended April 3, 1995 on Form 8-K/A,
as further amended May 1, 1995 on Form 8-K/A-2 and as further amended
June 5, 1995 on Form 8-K/A-3, Commission File No. 0-20179
Agreements Related to the Acquisition of Metal Recovery, Inc., each incorporated
by reference to Exhibit (c)(1) to the Company's Current Report on Form 8-K
reporting an event of December 30, 1994, as amended April 3, 1995 on Form 8-K/A,
as further amended May 1, 1995 on Form 8-K/A-2, and as further amended June 5,
1995, on Form 8-K/A-3, Commission file No. 0-20179.:
Memorandum of Understanding dated January 18, 1995 between
Recycling Industries, Inc., the ACI Principals, Sierra Holdings
Limited Partnership, Military Scrap, L.P. and Thomas J. Wiens.
ACI Option Agreement dated February 28, 1995 by and between
Recycling Industries, Inc., Ralph Paglieri, Peter Lukesch and Scott
Fischer.
Option Agreement by and between Thomas J. Wiens, Ralph Paglieri,
Peter Lukesch and Scott Fischer.
Pledge and Hypothecation Agreement by and among Recycling
Industries, Inc., Nevada Recycling Corporation, Ralph Paglieri,
Peter Lukesch and Scott Fischer.
Warrant Solicitation Agreement between First Equity Capital
Securities, Inc. and Recycling Industries, Inc.
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<PAGE>
Agreements related to the Acquisition of Anglo Iron & Metal:
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, incorporated by reference to
the Company's current report on Form 8-K reporting an event of December 11,
1995, Commission File No. 0-20179.
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, incorporated by reference to the Company's current report
on Form 8-K reporting an event of December 11, 1995, Commission File No. 0-
20179.
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, incorporated by reference to the Company's current report on form
8-K reporting an event of December 11, 1995, Commission File No. 0-20179.
Consulting and Non-Compete Agreement dated December 11, 1995 by and between
Recycling Industries of Texas, Inc. and Robert C. Rome, incorporated by
reference to the Company's current report on Form 8-K reporting an event of
December 11, 1995, Commission File No. 0-20179.
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, incorporated by reference to the Company's current report on Form
8-K reporting an event of December 11, 1995, Commission File No. 0-20179.
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, incorporated by reference to the Company's
current report on Form 8-K reporting an event of December 11, 1995,
Commission File No. 0-20179.
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., incorporated by reference to the Company's current report on
Form 8-K reporting an event of December 11, 1995, Commission File No. 0-
20179.
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 Company's
current report on Form 8-K reporting an event of December 11, 1995,
Commission File No. 0-20179.
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.
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<PAGE>
and Recycling Industries, Inc. as co-lessees, incorporated by
reference to the Company's current report on Form 8-K reporting an
event of December 11, 1995, Commission File No. 0-20179.
Agreements Related to the Proposed Public Offering:
Form of Offer given to all holders of the Company's Series C and
Series E Warrants.*
Form of Series G Warrant Agreement.*
Form of Series G Registration Rights Agreement.*
List of the subsidiaries of Recycling Industries, Inc. Incorporated by
reference to Exhibit 21.1 to the Form S-1.
Reports on Form 8-K:
An 8-K dated December 22, 1995, describing the December 11, 1995
acquisition by Recycling Industries of Texas, Inc., a wholly owned
subsidiary of the Company, of substantially all the assets of and the
business of Anglo Metal, Inc. (d/b/a Anglo Iron & Metal, a privately held
metals and paper recycler with operations in Brownsville, Harlingen,
McAllen and San Juan Texas.
*Previously Filed.
-43-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RECYCLING INDUSTRIES, INC.
Date: July 12, 1996 By: /s/ Thomas J. Wiens
-----------------------------------------
Thomas J. Wiens, Chairman and CEO
-44-
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<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<CASH> 184,000
<SECURITIES> 0
<RECEIVABLES> 1,041,000
<ALLOWANCES> (15,000)
<INVENTORY> 497,000
<CURRENT-ASSETS> 1,681,000
<PP&E> 7,231,000
<DEPRECIATION> (545,000)
<TOTAL-ASSETS> 10,297,000
<CURRENT-LIABILITIES> 1,691,000
<BONDS> 0
0
1,762,000
<COMMON> 8,000
<OTHER-SE> 4,684,000
<TOTAL-LIABILITY-AND-EQUITY> 10,297,000
<SALES> 13,812,000
<TOTAL-REVENUES> 13,853,000
<CGS> 10,869,000
<TOTAL-COSTS> 13,555,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 407,000
<INCOME-PRETAX> 298,000
<INCOME-TAX> 711,000
<INCOME-CONTINUING> 1,009,000
<DISCONTINUED> 0
<EXTRAORDINARY> 806,000
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