<PAGE>
As filed with the Securities and Exchange Commission on July 18, 1996
================================================================================
Registration No. 333-4574
=========================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
_______________________
RECYCLING INDUSTRIES, INC.
(Exact name of Registrant specified in charter)
COLORADO 5093
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
384 INVERNESS DRIVE SOUTH,
SUITE 211
ENGLEWOOD, COLORADO 80112
84-1103445 (303) 790-7372
(I.R.S. Employer Identification No.) (Address, including zip code, and
telephone number, including area code, of
Registrant's principal executive offices)
THOMAS J. WIENS, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
384 INVERNESS DRIVE SOUTH, SUITE 211
ENGLEWOOD, COLORADO 80112
(303) 790-7372
(Name, address and telephone number,including area code,
of agent for service)
Copies of communication, including all communication sent to the agent for
service, should be sent to:
<TABLE>
<CAPTION>
<S> <C>
RAYMOND L. FRIEDLOB, ESQ. NORMAN BROWNSTEIN, ESQ.
GERALD RASKIN, ESQ. JOHN R. GARRETT, ESQ.
JOHN W. KELLOGG, ESQ. DAVID M. BROWN, ESQ.
FRIEDLOB SANDERSON RASKIN PAULSON & TOURTILLOTT, LLC BROWNSTEIN HYATT FARBER & STRICKLAND, P.C.
1400 GLENARM PLACE, SUITE 300 410 SEVENTEENTH STREET, SUITE 2200
DENVER, COLORADO 80202 DENVER, COLORADO 80202
(303) 571-1400 (303) 534-6335
</TABLE>
____________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
___________________
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [_]
<PAGE>
RECYCLING INDUSTRIES, INC.
Cross Reference Sheet pursuant to Item 501 of Regulation S-K showing the
location in the Prospectus of information required by Items 1 through 12, Part I
of Form S-1.
<TABLE>
<CAPTION>
Form S-1
Item Number Information Required Location in Prospectus
- ----------- -------------------- ----------------------
<S> <C> <C>
1 Forepart of the Facing Page of Registration
Registration Statement and Statement; Outside Front Page of
Outside Front Cover Page Prospectus
of Prospectus
2 Inside Front and Outside Inside Front and Outside Back Cover
Back Cover Pages of Pages of Prospectus
Prospectus
3 Summary Information, Risk Prospectus Summary; Risk Factors;
Factors and Ratio of Prospectus Summary - Summary
Earnings to Fixed Charges Financial Information
4 Use of Proceeds Prospectus Summary; Use of Proceeds
5 Determination of Offering Not Applicable
Price
6 Dilution Dilution
7 Selling Securityholders Selling Securityholders
8 Plan of Distribution Cover Page; Underwriting
9 Description of Securities Prospectus Summary; Description of
to be Registered Capital Stock
10 Interests of Named Experts Not Applicable
and Counsel
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form S-1
Item Number Information Required Location in Prospectus
- ----------- -------------------- ----------------------
<S> <C> <C>
11 Information with Respect Business - Industry Overview,
to the Registrant Strategy, Operations, Transportation,
Competition, Employees, Properties,
Legal Proceedings, Environmental
Matters, Recent Developments; Price
Range of the Common Stock; Dividend
Policy; Selected Financial
Information; Management's Discussion
and Analysis of Financial Condition
and Results of Operations; Management
- Executive Officers and Directors,
Executive Compensation, Principal
Shareholders; Certain Transactions.
12 Disclosure of Commission Not Applicable
Position on
Indemnification for
Securities Act Liabilities
</TABLE>
<PAGE>
PROSPECTUS
4,400,000 SHARES
[LOGO OF RECYCLING INDUSTRIES, INC. APPEARS HERE]
RECYCLING INDUSTRIES, INC.
COMMON STOCK
Of the 4,400,000 shares of Common Stock, par value $.001 per share ("Common
Stock"), offered hereby (the "Offering"), 3,994,652 are being sold by Recycling
Industries, Inc. (the "Company") and 405,348 are being sold by certain
securityholders of the Company (the "Selling Securityholders"). The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Securityholders.
The Company's Common Stock has been approved for trading on the Nasdaq National
Market as of July 18, 1996 under the symbol "RECY." On July 17, 1996, the
closing sale price of the Common Stock, as reported on the Nasdaq SmallCap
Market, was $4.375 per share. See "Price Range of the Common Stock."
----------------
SEE "RISK FACTORS" COMMENCING ON PAGE EIGHT FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
PROCEEDS TO
PRICE TO THE UNDERWRITING PROCEEDS TO THE SELLING
PUBLIC DISCOUNTS(1) COMPANY(2) SECURITYHOLDERS(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......... $4.125 $.289 $3.836 $3.836
- --------------------------------------------------------------------------------
Total(3)........... $18,150,000 $1,271,600 $15,323,485 $1,554,915
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Does not include a 1 1/2% non-accountable expense allowance payable to
Prime Charter Ltd. (the "Representative") on behalf of the Underwriters and
warrants to purchase 315,000 shares of Common Stock issuable to the
Representative (the "Underwriter Warrants"). The Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses, estimated at $935,000, including the non-
accountable expense allowance of $247,169 payable by the Company.
(3) The Company and its Chief Executive Officer have granted to the
Underwriters an option, exercisable within 30 days of the date of this
Prospectus, to purchase up to an aggregate of 660,000 additional shares of
Common Stock on the same terms as set forth above, solely to cover over-
allotments. See "Selling Securityholders" and "Underwriting."
----------------
The Shares of Common Stock are offered by the Underwriters, subject to
prior sale when, as and if accepted by them and subject to certain conditions,
the right to withdraw, cancel, modify or reject any order in whole or part, and
subject to approval of certain legal matters by counsel. It is expected that
delivery of the Common Stock will be made on or about July 23, 1996.
----------------
Prime Charter Ltd.
The date of this Prospectus is July 18, 1996
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549; at the Commission's New York Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048; and at the
Commission's Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Company files
its reports, proxy statements and certain other information with the
Commission electronically through the EDGAR System. Information filed via
EDGAR may be obtained at the Web site maintained by the Commission at
http://www. sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the Common Stock offered hereby
of which this Prospectus constitutes a part. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock, reference is hereby made to such Registration
Statement, exhibits and schedules. Any statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete, and reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, each such statement being qualified in all respects by such
reference.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP OR NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS AND SELLING GROUP MEMBERS,
IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ SMALLCAP OR NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER
THE EXCHANGE ACT. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Concurrently with the closing of the
Offering made by this Prospectus, the Company will acquire Weissman Industries,
Inc. ("Weissman"), a metals recycler based in Waterloo, Iowa, for a purchase
price of $12.4 million (including $1.5 million payable in Common Stock) in a
separate transaction (the "Acquisition"). Unless otherwise indicated, all
references to the "Company" in this Prospectus include Weissman and all
financial information and other data in this Prospectus have been adjusted to
give pro forma effect to the Acquisition. Except as otherwise indicated, the
information contained in this Prospectus assumes that neither the Underwriters'
over-allotment option nor the Underwriter Warrants are exercised.
THE COMPANY
Recycling Industries, Inc. 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 metals
producers and processors. The Company operates six metals recycling facilities
in Las Vegas, Nevada ("NRI"); Brownsville, Harlingen, McAllen and San Juan,
Texas ("Anglo Iron & Metal"); and Ste. Genevieve, Missouri ("Mid-America
Shredding") and, upon consummation of the Acquisition, will operate a seventh
facility in Waterloo, Iowa. In addition, the Company owns a minority interest
in a metals recycler in Athens, Georgia. The Company commenced its metals
recycling operations in May 1994 and, upon consummation of the Acquisition,
will have increased its revenues from $1.7 million for the quarter ended June
30, 1994 to pro forma revenues of $12.8 million for the quarter ended March 31,
1996. Over the same period, the Company's metals shredding capacity increased
over 300% and its total metals processing capacity increased over 325%.
The largest portion of the Company's operations involves the collection,
processing and sale of ferrous scrap, the primary raw material for mini-mill
steel producers who utilize electric arc furnace ("EAF") technology. The
increase in domestic EAF production from 14.9 million net tons (11.0% of total
domestic steel production) in 1966 to 40.6 million net tons (39.4% of total
domestic steel production) in 1995 has resulted in strong demand and prices for
processed ferrous scrap. According to industry reports, the anticipated
continuing increase in EAF production to an estimated 50.0 million net tons by
the year 2000 may cause ferrous scrap shortages, resulting in further increases
in processed ferrous scrap prices.
The Company is also engaged in the processing of non-ferrous materials such
as copper, aluminum and brass, which are sold to secondary smelters and other
non-ferrous metals processors. The Company's non-ferrous operations complement
its ferrous operations, as most unprocessed scrap contains ferrous and non-
ferrous components which require separation in preparation for resale. The
lower cost of producing non-ferrous metals from scrap relative to the cost of
primary smelting has resulted in strong demand for processed non-ferrous scrap.
The Company's objective is to become one of the largest metals recyclers in
North America through targeted acquisitions of independent metals recyclers.
The Company seeks to capitalize on the opportunity presented by the growing
demand for processed ferrous scrap, the expanding markets created by the rapid
proliferation of new EAF operations and the availability of metals recycling
facilities. By pursuing a consolidation strategy within the metals recycling
industry, the Company believes that it can significantly enhance the
competitive position and profitability of the operations that it acquires
through improved managerial and financial resources. The Company also believes
that geographic diversity will reduce its vulnerability to the dynamics of any
particular local or regional market. Furthermore, as EAF capacity and demand
for processed ferrous scrap continue to increase, the Company believes that
multi-regional and national EAF operators such as
3
<PAGE>
Nucor Corporation, Birmingham Steel Corporation and North Star Steel Co. will
increasingly rely on suppliers who can provide a dependable quantity and
quality of processed scrap as well as a high degree of service. The Company
believes that it is the only metals recycler pursuing a consolidation strategy
on a national basis and therefore will be in an ideal position to become a
preferred supplier to major EAF operators.
The Company estimates that the total revenues generated in the metals
recycling markets in 1995 were approximately $19.1 billion, comprised of $8.9
billion attributable to ferrous metals and $10.2 billion attributable to non-
ferrous metals. The Company believes that there are over 3,000 independent
metals recyclers in North America. Based upon reports published by the
Institute for Scrap Recycling Industries ("ISRI"), approximately 200 of these
independent metals recyclers operate heavy-duty automotive shredders, which
constitute the primary equipment used in processing large volumes of ferrous
and non-ferrous scrap for sale to steel and other metals producers. Because of
the highly fragmented nature of the industry, the Company believes that no
single metals recycler has a significant share of the national processed scrap
market, although certain recyclers may have a dominant share of their local or
regional market. Similar to the ongoing consolidation within the municipal
solid waste industry, the metals recycling industry has recently begun to
experience local market consolidation due to: (i) increasing capital
requirements caused by more stringent environmental and governmental
regulations, and (ii) the exit of aging independent recyclers who desire to
sell closely-held businesses in the absence of a successor owner or operator.
In implementing its acquisition strategy, the Company seeks to identify
potential acquisition targets with:
. dominant or strategic positions in local or regional markets;
. excess or underutilized capacity;
. the ability to supply an existing or planned metals production facility,
such as an EAF;
. access to rail, water or interstate highway transportation systems; and
. either operational shredding equipment, the ability to supply the
Company's existing shredding equipment or adequate facilities to permit
the installation of such equipment.
By continuing to acquire facilities that meet these criteria, the Company
believes it can achieve rapid growth and expansion of its customer base.
An essential component of the Company's acquisition strategy is improving the
operating efficiency, output and capacity of each acquired facility by
targeting three phases of the Company's operations: (i) the purchase of raw
scrap; (ii) the processing of raw scrap into saleable product; and (iii) the
sale of processed scrap. Each acquired facility is integrated into the
Company's operations through a comprehensive program that targets these
operating phases through the installation of management and financial reporting
systems, the implementation of expanded purchasing and marketing programs, the
centralization of operating functions to achieve economies of scale, selective
reductions in personnel and improved inventory and other financial controls.
Where necessary, the Company implements a capital improvements program to
repair or replace outdated and inefficient equipment and to improve the
facility's scrap processing operations and processed scrap output. Through
these programs, the Company has realized significant improvements in operating
results.
Of the Company's pro forma revenues for the six months ended March 31, 1996,
approximately 59% was attributable to sales of ferrous scrap, 40% was
attributable to sales of non-ferrous scrap, and the balance was primarily
attributable to paper and plastic recycling and retail finished steel sales
conducted at certain of the Company's facilities.
The Company's executive offices are located at 384 Inverness Drive South,
Suite 211, Englewood, Colorado 80112, and its telephone number is 303-790-7372.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Outstanding before the
Offering.......................... 10,326,697 shares(1)
Common Stock Offered by the
Company........................... 3,994,652 shares
Common Stock Offered by the Selling
Securityholders................... 405,348 shares
Common Stock to be Outstanding
after the Offering................ 13,549,101 shares(1)(2)(3)
Use of Proceeds.................... To pay a portion of the purchase price in
connection with the Acquisition, to
repurchase 1,500,585 outstanding shares of
the Company's Common Stock, to redeem the
Company's Series A Convertible Preferred
Stock, and for general corporate purposes.
Nasdaq National Market Symbol...... RECY
</TABLE>
- --------
(1) Does not include Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants or: (i) 4,184,693 shares issuable upon exercise of
currently outstanding warrants; (ii) 1,283,440 shares issuable upon
exercise of currently outstanding options; (iii) 252,121 shares issuable
upon the conversion of the Company's Series A Convertible Preferred Stock
which will be redeemed upon consummation of the Offering; and (iv) shares
reserved for additional options to be granted under the Company's stock
option plans. See "Use of Proceeds," "Description of Capital Stock," and
"Shares Eligible for Future Sale."
(2) Has been reduced to reflect the repurchase by the Company of 1,500,585
shares of Common Stock upon consummation of the Offering. See "Use of
Proceeds."
(3) Includes 363,637 shares issuable pursuant to the Acquisition and 364,700
shares issuable in exchange for certain outstanding warrants concurrently
with completion of the Offering. See "Description of Capital Stock--
Warrants."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following information presents, for the periods and dates indicated,
summary consolidated financial information of the Company. This information
should be read in conjunction with "Capitalization," "Selected Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Company's historical and pro forma financial
statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
---------------------------------------- -----------------------------
PRO FORMA(2) PRO FORMA(2)
1993 1994 1995 1995 1995 1996 1996
------------------ ------- ------------ ------ ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................................. $ -0- $ 4,831 $13,853 $52,222 $7,117 $10,763 $25,124
Cost of sales........................................ -0- 4,110 10,869 43,213 5,323 9,352 20,985
-------- ------- ------- ------- ------ ------- -------
Gross profit......................................... -0- 721 2,984 9,009 1,794 1,411 4,139
Selling and administrative expenses.................. 2,335 1,660 2,279 4,016 911 1,553 2,213
Loss from joint ventures and equity investee......... 467 -0- -0- -0- -0- -0- -0-
-------- ------- ------- ------- ------ ------- -------
Income (loss) from operations........................ (2,802) (939) 705 4,993 883 (142) 1,926
Interest expense..................................... (156) (203) (407) (1,354) (198) (245) (666)
-------- ------- ------- ------- ------ ------- -------
Income (loss) before income taxes.................... (2,958) (1,142) 298 3,639 685 (387) 1,260
Income tax provision (benefit)....................... -0- -0- (711) (338) -0- (437) 115
-------- ------- ------- ------- ------ ------- -------
Income (loss) from continuing operations, net of
income taxes......................................... $ (2,958) $(1,142) $ 1,009 $ 3,977 $ 685 $ 50 $ 1,145
======== ======= ======= ======= ====== ======= =======
Net income (loss) after extraordinary item and
income taxes........................................ $ (2,483) $ (924) $ 1,815 $ 4,783 $ 907 $ 98 $ 1,193
======== ======= ======= ======= ====== ======= =======
Net income (loss) per share.......................... $ (1.04) $ (0.37) $ 0.30 $ 0.71 $ 0.26 $ 0.01 $ 0.12
======== ======= ======= ======= ====== ======= =======
Weighted average shares outstanding.................. 2,377 2,505 6,100 6,691 3,495 9,774 10,227
======== ======= ======= ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)(3)
------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....... $ 105 $ 725
Property and
equipment............ 8,421 20,191
Total assets.......... 19,938 35,391
Total liabilities..... 9,045 16,670
Stockholders' equity.. 10,893 18,721
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
--------------------------------------------- ------------------------------------
PRO FORMA(2) PRO FORMA(2)
1993 1994 1995 1995 1995 1996(4) 1996
------- ---------- ---------- ------------ ---------- ---------- ------------
(IN THOUSANDS, EXCEPT SELLING PRICES)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND OTHER
DATA:
Shipments:
Ferrous (tons)......... -0- 24,600 57,100 228,500 28,900 55,500 121,500
Non-ferrous (pounds)... -0- 3,676,300 8,805,600 33,729,071 4,686,000 6,739,000 17,100,000
Average Selling Price
(5):
Ferrous (per ton)...... $ NA $ 100 $ 120 $ 135 $ 118 $ 123 $ 123
Net cash flow from:
Operating activities... $ (118) $ (862) $ 113 NA $ 908 $ (748) NA
Investing activities... (617) (255) (926) NA (543) (978) NA
Financing activities... 735 1,232 882 NA (241) 2,782 NA
EBITDA(6).............. $(2,445) $ (547) $ 1,489 $ 6,308 $ 1,337 $ 337 $ 2,869
</TABLE>
- --------
(1) Prior to May 1994, the Company was engaged in the development of technology
related to the recycling of municipal solid waste. For comparative
purposes, financial data prior to fiscal 1994 reflects the Company's
efforts to develop such technology. The Company's current metals recycling
operations commenced in May 1994 with the acquisition of NRI. The financial
information for fiscal 1994 reflects five months of operating results of
NRI. The financial information for fiscal 1995 reflects 12 months of
operating results of NRI and reflects the efforts of the Company to acquire
other metals recycling facilities.
(2) The pro forma data gives effect to the acquisitions of Anglo Iron & Metal
(December 1995), Mid-America Shredding (April 1996) and Weissman (upon
consummation of the Offering) as if each had occurred at the beginning of
the periods presented. In addition, the pro forma information is based upon
available information and certain assumptions and adjustments. See the
notes to the pro forma financial statements.
(3) Gives effect to the consummation of the Offering at the Offering Price and
the application of the net proceeds therefrom as described in "Use of
Proceeds."
(4) The operating results for the six month period ended March 31, 1996 are not
comparable to those of the corresponding period ended March 31, 1995 due to
the acquisition of Anglo Iron & Metal that occurred in December 1995.
(5) Average selling price for non-ferrous scrap is not meaningful as there are
significant differences in the price per pound of the various component
non-ferrous metals (e.g., aluminum, copper, brass) produced by the Company.
(6) EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization")
represents operating income plus depreciation and amortization. The Company
has included EBITDA (which is not a measure of financial performance under
generally accepted accounting principles) because it understands such data
is used by certain investors to determine the Company's ability to service
its indebtedness. EBITDA is not a substitute for income from continuing
operations, net income or cash flows presentation under generally accepted
accounting principles.
7
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following Risk Factors,
as well as the other information set forth in this Prospectus, before making
an investment in the Common Stock.
LIMITED COMBINED OPERATING HISTORY
The Company commenced its metals recycling operations upon the acquisition
of its Nevada facility in May 1994. Prior to May 1994, the Company generated
operating losses and negative cash flow as a development stage enterprise
pursuing the development of technology to recycle municipal solid waste (the
"MSW Technology"). Since May 1994, the Company has acquired metals recycling
facilities in southern Texas and Missouri and a minority interest in a metals
recycling company in Georgia. See "Business." The Company has entered into an
agreement to acquire an additional metals recycling facility, Weissman,
concurrently with the closing of the Offering. The Company has only a limited
combined operating history for its current facilities and the Company's pro
forma results of operations are not necessarily indicative of actual results.
There can be no assurance that the Company's existing operations, or those of
Weissman to be acquired in the Acquisition, will generate sufficient cash flow
to fund the future operations of the Company.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company's objective is to increase its revenues and earnings and expand
the markets it serves through the acquisition of additional metals recycling
facilities. There can be no assurance that the Company will be able to
identify, acquire or profitably manage additional facilities or successfully
integrate their operations without substantial costs, delays or other
unanticipated problems. There can be no assurance that Weissman or other
acquired companies will achieve sales and profitability that justify the
Company's investment. Acquisitions involve a number of risks, which may
include: adverse short-term effects on the Company's reported operating
results and cash flows; diversion of management's attention; dependence on
retaining, hiring and training key personnel; risks associated with
environmental or legal liabilities; and the effects of amortization of
acquired intangible assets, such as goodwill. Some of these risks could have a
material adverse effect on the Company's operations and financial performance.
As the Company continues to expand, the Company will be required to supplement
its current management team in order to effectively manage the acquired
entities and successfully implement its acquisition and operating strategies.
See "Business--Strategy" and "Management."
CAPITAL REQUIREMENTS AND LIMITED WORKING CAPITAL
A substantial portion of the net proceeds of the Offering will be used to
pay a portion of the purchase price in connection with the Acquisition, to
repurchase certain outstanding shares of Common Stock and to redeem the
Company's Series A Convertible Preferred Stock. The Company will have limited
proceeds remaining after such applications and will require additional debt or
equity financing in order to continue implementing its acquisition strategy.
There can be no assurance that the Company will be able to obtain such
financing on terms the Company deems acceptable. If the Company does not have
sufficient cash resources or if the Company is unable to use its capital stock
as consideration for acquisitions, the Company may be unable to continue to
pursue its acquisition strategy. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business--Strategy."
MARKET CONSIDERATIONS
Sales prices for prepared scrap metal are cyclical in nature and are subject
to local, national and international economic conditions. While recent
increases in demand have resulted in strong sales prices for prepared ferrous
scrap, the Company's operating results are dependent upon the strength of the
national economy and, in particular, the domestic steel industry. A future
downturn in the economy or in steel production could adversely affect the
performance of the Company. The demand for processed ferrous and non-ferrous
scrap is subject to
8
<PAGE>
general economic, industry and market-specific conditions beyond the Company's
control which may result in periodic fluctuations in the sales prices of the
Company's products. Although the Company seeks to maintain its operating
margins by adjusting the purchase price for raw ferrous scrap in response to
changing sales prices for prepared ferrous scrap, its ability to maintain
these margins during periods of falling prices may be limited by the adverse
impact of lower prices on the available supply of raw ferrous scrap. The
Company is unable to hedge against changes in ferrous scrap prices and
attempts to minimize this risk by maintaining low inventory levels of raw and
processed scrap and by establishing firm prices with its larger customers at
the beginning of each month.
DEPENDENCE ON KEY CUSTOMERS
Each of the Company's facilities is economically dependent on a small number
of significant customers. Three of the Company's customers accounted for
approximately 48.2% of the Company's pro forma revenues (17.7%, 17.7% and
12.8%, respectively) for the three month period ended March 31, 1996. The loss
of any one of these customers would have a material adverse effect on the
Company's business.
COMPETITION
The metals recycling business is highly competitive and subject to
significant changes in market conditions. Certain of the Company's competitors
have substantially greater financial, marketing and other resources. There can
be no assurance that the Company will be able to obtain its desired market
share or compete effectively in its markets.
ENVIRONMENTAL MATTERS
Compliance with state and federal environmental laws is a significant factor
in the metals recycling industry. Certain raw materials handled, processed and
disposed of in the metals recycling industry, such as automobiles and
appliances, may contain substances which are subject to a variety of federal,
state and local governmental regulations concerning the discharge of hazardous
materials into the environment. The Company has adopted standards and policies
for accepting raw materials designed to ensure compliance with applicable
environmental regulations. The Company's management does not believe that the
costs associated with environmental compliance will have a material adverse
impact on the Company. See "Business--Environmental Matters."
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on a limited number of key personnel,
including the Company's Chairman and Chief Executive Officer, Thomas J. Wiens,
and its President and Chief Operating Officer, Michael I. Price. The Company
has not entered into employment agreements with either of such officers but
has obtained key-man life insurance policies in the amount of $500,000 for Mr.
Wiens and $1,000,000 for Mr. Price. See "Management."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in net tangible book value per share. As of March 31,
1996, the net tangible book value per share of the Common Stock was $.56.
After giving effect to the sale of Common Stock offered by this Prospectus,
the deduction of underwriting discounts and the estimated expenses of the
Offering and giving effect to: (i) the Acquisition, including the issuance of
363,637 shares of Common Stock in connection therewith; (ii) the anticipated
use of proceeds of the Offering; and (iii) the issuance of 364,700 shares of
Common Stock in exchange for certain outstanding warrants, the adjusted net
tangible book value of the Company at March 31, 1996 would have been $1.00 per
share. This represents an immediate increase in net tangible book value per
share of $.44 to the Company's present shareholders and an immediate dilution
of $3.125 per share to purchasers in the Offering. See "Dilution."
9
<PAGE>
CONTROL BY PRINCIPAL SHAREHOLDER AND ANTI-TAKEOVER PROVISIONS
As of the date of this Prospectus, Thomas J. Wiens, the Company's Chairman
and Chief Executive Officer, beneficially owns 2,814,003 shares of the
Company's Common Stock, representing approximately 27.3% of the issued and
outstanding shares. Following consummation of the Offering, assuming no
exercise of the Underwriters' over-allotment option, Mr. Wiens will
beneficially own approximately 20.8% of the outstanding Common Stock.
The Company's Amended and Restated Articles of Incorporation contain certain
provisions which may inhibit a change of control of the Company. These include
scaled voting provisions that, upon a determination by the Company's Board of
Directors, may limit the voting rights of holders of more than 10% of the
Company's outstanding Common Stock. These provisions may discourage a party
from making a tender offer or otherwise attempting to take control of the
Company. As of the date of this Prospectus, the Company's Board of Directors
has not implemented the scaled voting provisions. The Company's Board of
Directors has adopted an amendment to the Amended and Restated Articles of
Incorporation to be voted upon at the Company's next annual meeting of
shareholders to eliminate these provisions. See "Description of Capital
Stock--Anti-Takeover Provisions." The Company's Amended and Restated Articles
of Incorporation also authorize the issuance of 10,000,000 shares of preferred
stock, the terms of which are to be determined by the Board of Directors at
the time of issuance. The ability to issue preferred stock could be used by
the Board as a means for resisting a change of control of the Company and may
be considered an "anti-takeover" device. As of the date of this Prospectus,
the Company has 13,000 shares of Series A Convertible Preferred Stock issued
and outstanding, all of which are being redeemed upon consummation of the
Offering. The Company may authorize additional series of preferred stock to
issue as consideration for future acquisitions but has no commitment to do so
at this time. See "Use of Proceeds" and "Description of Capital Stock--
Preferred Stock."
RISK OF SUBSTANTIAL FUTURE DILUTION
The Company has outstanding options and warrants to acquire an aggregate of
5,468,133 shares of the Company's Common Stock, substantially all of which
have exercise prices ranging from $.90 to $7.50 per share and expire during
fiscal years 1998 through 2000. See "Description of Capital Stock--Warrants
and Options; "Management--Stock Option Plans." Warrants to purchase 426,776
shares of Common Stock at $.90 per share are to be exchanged for 364,700
shares of Common Stock upon consummation of the Offering, representing an
effective exercise price of $.60 per share. The effective exercise price of
these warrants for purposes of their exchange was determined through arm's
length negotiations between the Company and the representative of the holders
of these warrants. Of the remaining outstanding options and warrants, options
and warrants to acquire an aggregate of 1,602,530 shares of Common Stock have
exercise prices below the Offering Price. In addition, warrants to purchase an
aggregate of 3,318,489 shares of Common Stock have adjustment provisions
providing for reduction of their exercise prices in the event that the Company
fails to register such shares under the Securities Act within specified time
frames. The exercise of such options and warrants could have a substantial
dilutive effect upon the purchasers of shares of Common Stock offered by this
Prospectus. See "Description of Capital Stock--Warrants" and "Shares Eligible
For Future Sale--Registration Rights."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately 3.0
million shares of Common Stock outstanding that will be eligible for sale
pursuant to Rule 144 under the Securities Act. In addition, holders of a total
of 5,365,013 shares of Common Stock and warrants to purchase an additional
3,308,252 shares of Common Stock will have the right to require the Company to
register such shares of Common Stock under the Securities Act on or before
September 30, 1996. The utilization of Rule 144 and the exercise of
registration rights by the holders of these shares will increase substantially
the number of shares available for sale in the public markets and may have an
adverse impact on the market price of the Common Stock. See "Shares Eligible
for Future Sale."
10
<PAGE>
USE OF PROCEEDS
The estimated net proceeds to the Company from the sale of the shares of
Common Stock offered hereby, after deducting underwriting discounts and other
offering expenses (estimated to be approximately $2.1 million), are
approximately $14.4 million. Of this amount, $5.2 million will be used to pay
a portion of the cash purchase price in connection with the Acquisition; $5.7
million will be used to repurchase 1,380,585 shares of the Company's Common
Stock for $4.10 per share, including a $.10 per share solicitation fee payable
to First Equity Capital Securities, Inc. (see "Business--Recent
Developments"); and $2.4 million will be used to redeem all of the Company's
outstanding Series A Convertible Preferred Stock and 120,000 shares of Common
Stock issued in connection with the acquisition of its Nevada facility. See
"Business--Recent Developments." The remaining proceeds of approximately $1.1
million will be used for general corporate purposes. Pending such uses, the
net proceeds will be invested in short-term, interest bearing, investment
grade securities.
The Company expects to finance the balance of the $10.9 million cash portion
of the purchase price for Weissman with $2.2 million of revolving credit
borrowings and $3.5 million of long-term debt obtained from a lending
institution. The Company has executed a letter of intent for such additional
debt financing. See "Business--Recent Developments." If for any reason such
debt financing is not available at the closing of the Acquisition, the Company
may be unable to effect the Acquisition.
11
<PAGE>
PRICE RANGE OF THE COMMON STOCK
The Common Stock has been listed on the Nasdaq SmallCap Market System and
has been approved for listing on the Nasdaq National Market System as of July
18, 1996 under the symbol "RECY". Prior to its approval for listing on the
Nasdaq SmallCap Market, the Common Stock was quoted on the National
Association of Securities Dealers 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 on resale. The number of unrestricted shares of
Common Stock is relatively low in relation to the total number of shares
issued and, therefore, trading in the Common Stock is limited. As a result,
the Company believes that historical market quotations for the Common Stock
are not a reliable indicator of value. The quotations provided below are the
high and low reported sales prices for the quarters indicated as reported on
the OTCBB and the Nasdaq SmallCap Market and have been adjusted to reflect the
Company's one-for-five reverse stock split effective June 27, 1995.
<TABLE>
<CAPTION>
COMMON STOCK
------------
HIGH LOW
------ -----
<S> <C> <C>
Fiscal 1994:
First Quarter................................................ $13.75 $6.25
Second Quarter............................................... 18.13 4.38
Third Quarter................................................ 18.75 7.50
Fourth Quarter............................................... 10.00 5.00
Fiscal 1995:
First Quarter................................................ $ 8.13 $2.00
Second Quarter............................................... 4.20 2.20
Third Quarter................................................ 5.63 2.50
Fourth Quarter............................................... 5.38 3.88
Fiscal 1996:
First Quarter................................................ $ 4.88 $2.88
Second Quarter............................................... 7.00 3.50
Third Quarter ............................................... 5.63 4.25
Fourth Quarter (through July 17, 1996)....................... 5.13 4.13
</TABLE>
The last reported sale price of the Common Stock as quoted on the Nasdaq
SmallCap Market System on July 17, 1996 was $4.375 per share. As of June 30,
1996, there were 736 record holders of Common Stock. Based upon the
information available to it, the Company believes there are approximately
1,200 beneficial owners of its Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and has no
present intention to pay any cash dividends on its Common Stock for the
foreseeable future. Instead, the Company intends to retain its earnings, if
any, to support the growth and future development of its business and for
general corporate purposes. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to the payment of
dividends and other factors that the Board of Directors deems relevant.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted on a pro forma basis to reflect: (i) the acquisition
of Mid-America Shredding on April 15, 1996; (ii) the Acquisition, including
the issuance of 363,637 shares of Common Stock in connection therewith; and
(iii) the Offering and the application of the net proceeds therefrom as
described under "Use of Proceeds." This table does not reflect Common Stock
reserved for issuance upon the exercise of outstanding options and warrants or
the Underwriter Warrants. See "Shares Eligible for Future Sale,"
"Underwriting" and "Description of Capital Stock." This table should be read
in conjunction with the historical and pro forma consolidated financial
statements of the Company, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term
debt..................................................... $ 4,766 $ 7,829
======= =======
Long-term debt, excluding current portion(1).............. $ 1,576 $ 5,478
Note payable to related parties........................... 945 945
Stockholders' equity:
Preferred Stock, no par value, 10,000,000 shares
authorized; 13,000 Shares of Series A Convertible
Preferred Stock issued and outstanding and no shares
issued and outstanding pro forma as adjusted(2)........ 1,312 --
Common Stock, $0.001 par value, 50,000,000 shares
authorized; 10,055,193 shares issued and outstanding
and 13,277,597 shares pro forma as adjusted(3)......... 10 14
Additional paid-in capital................................ 17,909 27,045
Retained earnings (deficit)............................... (8,338) (8,338)
------- -------
Total stockholders' equity.............................. 10,893 18,721
------- -------
Total capitalization.................................... $13,414 $25,144
======= =======
</TABLE>
- --------
(1) For a description of the Company's long-term debt, see Note 14 to the
Company's consolidated financial statements.
(2) The Company will redeem all of its outstanding Series A Convertible
Preferred Stock upon the consummation of the Offering. See "Use of
Proceeds."
(3) Excludes outstanding options and warrants to purchase Common Stock. See
"Description of Capital Stock--Warrants and Stock Options." Also excludes
271,504 shares issued subsequent to March 31, 1996.
13
<PAGE>
DILUTION
The net tangible book value of the Company (total assets less total
liabilities and intangible assets) on March 31, 1996 was $5,587,000 or $.56
per share. After giving effect to (i) the sale of the shares of Common Stock
offered by this Prospectus, (ii) the Acquisition, including the issuance of
363,637 shares of Common Stock in connection therewith, (iii) the intended use
of proceeds of the Offering and (iv) the issuance of 364,700 shares of Common
Stock in exchange for certain outstanding warrants, and excluding 271,504
shares issued subsequent to March 31, 1996, the adjusted net tangible book
value of the Company at March 31, 1996 would have been $1.00 per share,
representing an immediate increase in net tangible book value per share of
$.44 to existing shareholders and an immediate dilution of $3.125 to the
purchasers of Common Stock in the Offering. The following table illustrates
the per share dilution to investors in the Offering:
<TABLE>
<S> <C>
Offering price per share(1).............................................. $4.125
------
Net tangible book value per share before the Offering.................. .56
Increase per share attributable to the sale of Common Stock in the
Offering(2)........................................................... .44
------
Adjusted net tangible book value per share(2)............................ 1.00
------
Dilution to new investors................................................ $3.125
======
</TABLE>
- --------
(1) Before deductions of underwriting discounts and estimated offering
expenses payable by the Company.
(2) After deductions of underwriting discounts and estimated offering expenses
payable by the Company.
The following table sets forth as of March 31, 1996 the number of shares of
Common Stock issued by the Company, the total consideration to the Company and
the average price per share paid by existing shareholders and by the investors
in the Offering:
<TABLE>
<CAPTION>
SHARES ACQUIRED TOTAL CONSIDERATION AVERAGE
--------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ---------- -------------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing sharehold-
ers(1).................. 10,055,193 71.6 $ 17,919 52.1 $1.782
Investors in the Offer-
ing..................... 3,994,652 28.4 16,478 47.9 4.125
---------- ----- ---------- -------- ------
Total.................. 14,049,845(2) 100.0 $ 34,397 100.0 $2.448
========== ===== ========== ======== ======
</TABLE>
- --------
(1) Total consideration from existing shareholders represents the consolidated
shareholder's equity before the Offering.
(2) Has not been adjusted to reflect the 271,504 shares issued subsequent to
March 31, 1996, the 364,700 shares issuable in exchange for certain
warrants, the issuance of 363,637 shares of Common Stock in connection
with the Acquisition and the repurchase of 1,500,585 shares of Common
Stock upon consummation of the Offering. See "Description of Capital
Stock--Warrants" and "Use of Proceeds."
14
<PAGE>
SELECTED FINANCIAL INFORMATION
The statement of operations and balance sheet data included in the following
table for each of the five years ended September 30, 1995 have been derived
from the consolidated financial statements of the Company which have been
audited by independent accountants. The statement of operations and balance
sheet data included in this table for the six months ended March 31, 1995 and
1996 have been obtained from unaudited financial statements which, in the
opinion of management, include all adjustments necessary for a fair
presentation of the financial position and results of operations for these
periods. The results for the six months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the full year.
The pro forma financial data set forth below has been derived from the
Company's unaudited pro forma consolidated financial statements included
elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
------------------------------------------------------------- ----------------------------------
PRO FORMA(2) PRO FORMA(2)
1991 1992 1993 1994 1995 1995 1995 1996(3) 1996
------- ------- ------- --------- --------- ------------ --------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELLING PRICES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Revenues............... $ -0- $ -0- $ -0- $ 4,831 $ 13,853 $ 52,222 $ 7,117 $ 10,763 $ 25,124
Cost of sales.......... -0- -0- -0- 4,110 10,869 43,213 5,323 9,352 20,985
------- ------- ------- --------- --------- ---------- --------- --------- ----------
Gross profit.......... -0- -0- -0- 721 2,984 9,009 1,794 1,411 4,139
Selling and
administrative
expenses.............. 774 2,951 2,335 1,660 2,279 4,016 911 1,553 2,213
Loss from joint
ventures and equity
investee............. 839 462 467 -0- -0- -0- -0- -0- -0-
------- ------- ------- --------- --------- ---------- --------- --------- ----------
Income (loss) from
operations............ (1,613) (3,413) (2,802) (939) 705 4,993 883 (142) 1,926
Interest expense...... (78) (114) (156) (203) (407) (1,354) (198) (245) (666)
------- ------- ------- --------- --------- ---------- --------- --------- ----------
Income (loss) before
income taxes......... (1,691) (3,527) (2,958) (1,142) 298 3,639 685 (387) 1,260
Income tax provision
(benefit)............ -0- -0- -0- -0- (711) (338) -0- (437) 115
------- ------- ------- --------- --------- ---------- --------- --------- ----------
Income (loss) from
continuing operations,
net of income taxes... $(1,691) $(3,527) $(2,958) $ (1,142) $ 1,009 $ 3,977 $ 685 $ 50 $ 1,145
======= ======= ======= ========= ========= ========== ========= ========= ==========
Income (loss) per share
from continuing
operations, net of
income taxes.......... $ (0.93) $ (1.73) $ (1.24) $ (0.46) $ 0.17 $ 0.59 $ 0.20 $ 0.01 $ 0.11
======= ======= ======= ========= ========= ========== ========= ========= ==========
Net income (loss) after
extraordinary item and
income taxes.......... $(1,267) $(1,147) $(2,483) $ (924) $ 1,815 $ 4,783 $ 907 $ 98 $ 1,193
======= ======= ======= ========= ========= ========== ========= ========= ==========
Net income (loss) per
share................. $ (0.70) $ (0.56) $ (1.04) $ (0.37) $ 0.30 $ 0.71 $ 0.26 $ 0.01 $ 0.12
======= ======= ======= ========= ========= ========== ========= ========= ==========
Weighted average shares
outstanding........... 1,811 2,043 2,377 2,505 6,100 6,691 3,495 9,774 10,227
======= ======= ======= ========= ========= ========== ========= ========= ==========
BALANCE SHEET DATA(4):
Working capital
(deficit)............ $(3,310) $(2,721) $(3,853) $ (4,175) $ 376 NA $ (684) $ 105 $ 725
Property and
equipment............ 66 43 30 6,590 6,686 NA 6,798 8,421 20,191
Total assets.......... 2,982 1,865 1,147 9,618 10,297 NA 10,961 19,938 35,391
Total liabilities..... 7,737 2,801 3,853 6,852 3,843 NA 6,226 9,045 16,670
Stockholders' equity
(deficit)............ (4,755) (936) (2,706) 2,766 6,454 NA 4,735 10,893 18,721
OPERATING AND OTHER
DATA:
Shipments:
Ferrous (tons)........ -0- -0- -0- 24,600 57,100 228,500 28,900 55,500 121,500
Non-ferrous (pounds).. -0- -0- -0- 3,676,300 8,805,600 33,729,071 4,686,000 6,739,000 17,100,000
Average Selling
Price(5):
Ferrous (per ton)..... NA NA NA $ 100 $ 120 $ 135 $ 118 $ 123 $ 123
Net Cash Flow From:
Operating activities.. $ (359) $(1,613) $ (118) $ (862) $ 113 NA $ 908 $ (748) NA
Investing activities.. (580) (1,526) (617) (255) (926) NA (543) (978) NA
Financing activities.. 953 3,125 735 1,232 882 NA (241) 2,782 NA
EBITDA(6).............. $(1,600) $(2,979) $(2,445) $ (547) $ 1,489 $ 6,308 $ 1,337 $ 337 $ 2,869
</TABLE>
- -------
(1) Prior to May 1994, the Company was engaged in the development of the MSW
Technology. For comparative purposes, financial data prior to 1994
reflects the Company's efforts to develop such technology. The Company's
current operations commenced in May 1994 with the acquisition of NRI. The
financial information for fiscal 1994 reflects five months of operating
results of NRI. The financial information for fiscal 1995 reflects 12
months of operating results of NRI and reflects the efforts of the Company
to acquire other metals recycling facilities.
(2) The pro forma data gives effect to the acquisitions of Anglo Iron & Metal
(December 1995), Mid-America Shredding (April 1996) and Weissman (upon
consummation of the Offering) as if each had occurred at the beginning of
the periods presented. In addition, the pro forma information is based
upon available information and certain assumptions and adjustments. See
the notes to the pro forma financial statements.
(3) The operating results for the six month period ended March 31, 1996 are
not comparable to those of the corresponding period ended March 31, 1995
due to the acquisition of Anglo Iron & Metal that occurred in December
1995.
(4) As of March 31, 1996, on a pro forma basis, gives effect to the
consummation of the Offering at the Offering Price and the application of
the net proceeds therefrom as described in "Use of Proceeds."
(5) Average selling price for non-ferrous scrap is not meaningful as there are
significant differences in the price per pound of the various component
non-ferrous metals (e.g., aluminum, copper, brass) produced by the
Company.
(6) EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization")
represents operating income plus depreciation and amortization. The
Company has included EBITDA (which is not a measure of financial
performance under generally accepted accounting principles) because it
understands such data is used by certain investors to determine the
Company's ability to service its indebtedness. EBITDA is not a substitute
for income from continuing operations, net income or cash flows
presentation under generally accepted accounting principles.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Information," the Company's consolidated financial statements and
the notes thereto and the Company's pro forma financial statements and the
notes thereto, all included elsewhere herein.
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" below includes "forward looking statements" within the meaning of
Section 27A of the Securities Act, and is subject to the safe harbor created
by that section. Factors that could cause actual results to differ materially
from those contained in the forward looking statements are set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Risk Factors."
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 metals producers and
processors. Prior to May 1994, the Company was a development stage enterprise
engaged in the development of the MSW Technology. Although the Company has not
obtained a permit or constructed a facility utilizing the MSW Technology, the
Company is pursuing the licensing or sale of this technology to third parties.
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, which interest may decrease to 15% on June 30, 1996. See "Business--
History of the Company." On December 11, 1995, the Company acquired Anglo Iron
& Metal and, on April 15, 1996, the Company acquired Mid-America Shredding.
These acquisitions, except for the minority interest in the Georgia facility,
are accounted for under the purchase method for business combinations and,
accordingly, the results of operations for such acquired businesses are
included in the Company's financial statements only from the applicable date
of acquisition. As a result, the Company's historical results of operations
for the periods presented are not directly comparable.
The Company believes these acquisitions will have a positive impact on its
future results of operations, and accordingly believes that the Company's
historical results should be considered in conjunction with the pro forma
financial statements and the notes thereto included elsewhere herein.
Additionally, neither the historical nor the pro forma results of operations
fully reflect the operating efficiencies and improvements that are expected to
be achieved by integrating the acquired businesses into the Company's
operations. See "Business--Strategy."
RESULTS OF OPERATIONS
The Company's operating results depend in large part on its ability to
effectively manage the purchase, processing and sale of scrap metals. The
demand for processed ferrous and non-ferrous scrap is subject to general
economic, industry and market-specific conditions beyond the Company's control
which may result in periodic fluctuations in the sales prices of the Company's
products. The Company seeks to maintain its operating margins by adjusting the
purchase price for raw ferrous and non-ferrous scrap in response to such
fluctuations, subject to local market conditions. Although the Company is
unable to hedge against changes in market prices, it seeks to minimize this
risk by maintaining low inventory levels of raw and processed scrap.
SIX MONTHS ENDED MARCH 31, 1996 AND 1995
The results of operations for the six months ended March 31, 1996 were
impacted by a number of factors, including delays in processed scrap shipments
and lower gross margins at the Company's Nevada facility. In addition,
profitability was negatively affected by transition expenses incurred in
conjunction with the acquisition of its southern Texas facilities on December
11, 1995.
16
<PAGE>
Revenues. Revenues increased $3.7 million, or 51.2%, to $10.8 million for
the six months ended March 31, 1996 from $7.1 million for the six months ended
March 31, 1995. The increase in revenues was comprised of a $4.3 million
increase attributable to higher sales volume offset by a $590,000 decrease
attributable to lower average selling prices. The increase in revenues is
primarily due to the acquisition of the Company's southern Texas facilities on
December 11, 1995. The operations of the southern Texas facilities provided an
additional $4.4 million of revenues, which were partially offset by a $694,000
decrease in revenues from the operations of the Nevada facility. The main
factors responsible for the decline in revenues at the Nevada facility were a
decrease in non-ferrous scrap revenues of $648,000 and a decrease in paper
sales of $467,000, which were partially offset by an increase in ferrous
revenues of $421,000.
For the six months ended March 31, 1996, ferrous scrap revenues increased
$3.7 million, or 109.0%, to $7.1 million as shipments increased approximately
26,600 tons to 55,500 tons and the average selling price rose approximately $5
per ton to $123 per ton. Non-ferrous scrap revenues increased approximately
$412,000, or 14.0%, to $3.4 million as shipments increased 2.1 million pounds
to 6.7 million pounds. The increased non-ferrous scrap sales volume was
partially offset by a $.13 per pound decrease in average non-ferrous selling
prices to $.50 per pound. Total ferrous and non-ferrous scrap revenues rose to
$10.5 million. Paper sales decreased approximately $467,000, or 66.5%, for the
six months ended March 31, 1996 as average sales prices and volumes declined
relative to the comparable period of 1995.
Cost of Sales. For the six months ended March 31, 1996, cost of sales
increased $4.1 million to $9.4 million from $5.3 million for the six months
ended March 31, 1995, and increased as a percentage of revenues to 86.9% from
74.8%. This increase in cost of sales was primarily due to the increase in
sales volume of the Company's newly acquired southern Texas facilities. Of the
$4.1 million increase in cost of sales, approximately $3.7 million was related
to the acquisition of the southern Texas facilities and $400,000 was related
to the increased volume at the Nevada facility. Gross profit decreased to $1.4
million for the six months ended March 31, 1996 from $1.8 million for the six
months ended March 31, 1995. This decrease in gross profit was primarily due
to the decreases in ferrous and non-ferrous sales prices at the Company's
Nevada facility, without corresponding declines in raw material and direct
production costs.
Selling and Administrative Expenses. Selling and administrative expenses
increased to $1.6 million, or 14.4% of revenues, for the six months ended
March 31, 1996 from $911,000, or 12.8% of revenues, for the six months ended
March 31, 1995. Of this increase, $599,000 resulted from additional personnel
costs associated with acquired operations and expenses incurred in connection
with the Company's increase in personnel in anticipation of additional
acquisitions. Included in this amount was $205,000 of incentive compensation
paid to the Company's Chief Executive Officer upon the consummation of the
acquisition of the Company's southern Texas facilities.
Interest Expense. Interest expense was $245,000 for the six months ended
March 31, 1996 compared to $198,000 for the six months ended March 31, 1995.
Interest expense increased primarily due to higher average interest rates on
the Company's debt as well as additional debt incurred to finance the purchase
of the southern Texas facilities in December 1995.
Benefit from Income Taxes. For the six months ended March 31, 1996, the
Company recorded an increase to its net deferred tax asset of $441,000 which
resulted in a net deferred tax benefit of $437,000. As a result, at March 31,
1996, the Company has recognized a net deferred tax asset of $1.2 million, as
management has determined that the net operating loss carryforward was more
likely than not to be used in the near future due to the future taxable income
to be generated by the Company's southern Texas facilities. The net loss
before income taxes for the six months ended March 31, 1996 increased the net
operating loss carryforward by $339,000, providing approximately $7.2 million
of net operating loss carryforward available through 2009. No benefit from
deferred income taxes was recognized for the six months ended March 31, 1995.
Income from Continuing Operations, Net of Income Taxes. For the six months
ended March 31, 1996, the Company had income from continuing operations, net
of income taxes of $50,000, or $.01 per share, compared
17
<PAGE>
to $685,000, or $.20 per share, for the six months ended March 31, 1995. The
principal reasons for this decrease were the higher cost of sales and selling
and administrative expenses in the 1996 period described above.
Net Income. For the six months ended March 31, 1996, the Company had net
income of $98,000, or $.01 per share, compared to net income of $907,000, or
$.26 per share, for the six months ended March 31, 1995.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
The results of operations for the three months ended March 31, 1996 include
the effects of the acquisition of the Company's southern Texas facilities for
the entire period whereas the March 31, 1995 results reflect only the
operations of the Nevada facility. The key operating results for each of the
three month periods are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
--------- ---------
(THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues................................................... $ 7,304 $ 3,700
Cost of sales.............................................. 5,936 2,868
Gross profit............................................... 1,368 832
Selling and administrative expenses........................ 797 388
Income from continuing operations, net of income taxes..... 418 325
Net income................................................. 466 486
Net income per share....................................... $ .05 $ .13
Weighted average shares outstanding........................ 10,267 3,879
</TABLE>
Revenues. For the three months ended March 31, 1996, revenues increased $3.6
million, or 97.4%, to $7.3 million from $3.7 million for the three months
ended March 31, 1995. The increase in revenues was comprised of a $4.2 million
increase attributable to higher sales volume offset by a $626,000 decrease
attributable to lower average selling prices. The increase in revenues is
primarily the result of the acquisition of the Company's southern Texas
facilities on December 11, 1995. The operations of the southern Texas
facilities generated $3.9 million of revenues during the three months ended
March 31, 1996. Revenues for the Nevada facility declined 8.3% to $3.4 million
for the three months ended March 31, 1996 from $3.7 million for the three
months ended March 31, 1995.
Ferrous scrap revenues increased $3.3 million, or 181.1%, to $5.1 million
for the three months ended March 31, 1996, from $1.8 million for the three
months ended March 31, 1995. Total tons shipped increased to 38,300 tons for
the three months ended March 31, 1996 from 14,800 tons for the three months
ended March 31, 1995. The average selling price rose approximately $2 per ton
to $124 per ton for the three months ended March 31, 1996. Non-ferrous scrap
revenues rose approximately $612,000, or 40.7%, to $2.1 million reflecting the
acquisition of the southern Texas facilities. Total shipments for non-ferrous
materials increased 2.0 million pounds to a total of 4.3 million pounds, which
was partially offset by a decrease in average non-ferrous selling prices from
$.65 to $.48 per pound. Paper sales decreased approximately $280,000, or
72.5%, for the three months ended March 31, 1996 as average sales prices and
volumes declined relative to the comparable period in 1995.
Cost of Sales. For the three month period ended March 31, 1996, cost of
sales increased $3.0 million to $5.9 million from $2.9 million for the three
months ended March 31, 1995, and increased as a percentage of revenues to
81.3% from 78.3%. This increase in cost of sales was primarily due to the
increased sales volume related to the acquisition of the Company's southern
Texas facilities. The $3.0 million increase in cost of sales was primarily
related to the acquired operations of the southern Texas facilities. The
increase in cost of sales as a percentage of revenue was driven by decreased
sales prices without corresponding decreases in raw materials costs beginning
in the quarter ended December 31, 1995. The Company has adjusted purchase
prices for raw material over the course of the quarter ended March 31, 1996
and believes that future margins will reflect such
18
<PAGE>
changes. Overall gross profit improved by $536,000 to $1.4 million for the
three months ended March 31, 1996 compared to $832,000 for the three months
ended March 31, 1995.
Selling and Administrative Expenses. Selling and administrative expenses
increased to $797,000, or 10.9% of revenues for the three months ended March
31, 1996, from $388,000, or 10.5% of revenues, for the three months ended
March 31, 1995. Of this increase, $314,000 was the result of increased
personnel, selling and overhead costs related to acquired operations and to
overhead added in anticipation of additional growth.
Net Income. For the three months ended March 31, 1996, the Company had net
income of $466,000, or $.05 per share, compared to net income of $486,000, or
$.13 per share, for the three months ended March 31, 1995. Income from
continuing operations net of income taxes improved to $418,000 for the three
months ended March 31, 1996 from $325,000 for the three months ended March 31,
1995.
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 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, 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 costs of sales for the year ended September
30, 1995 was due to the full year of operations of the Nevada facility
compared to 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
19
<PAGE>
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 expense 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.
Net Income. For the year ended September 30, 1995, the Company generated net
income of $1.8 million, or $.30 per share, compared to a net loss of $924,000,
or $.37 per share, for the year ended September 30, 1994, and a loss of $2.5
million, or $1.04 per share, for the year ended September 30, 1993.
PRO FORMA COMBINED RESULTS OF OPERATIONS
The Company's pro forma combined operating results reflect the acquisitions
of Anglo Iron & Metal, Mid-America Shredding and Weissman as if each had
occurred at the beginning of each period presented. The pro forma operating
results for the 12 months ended September 30, 1995 include the 12 months ended
September 30, 1995 for the Company and the 12 months ended December 31, 1995
for Anglo Iron & Metal, Mid-America Shredding and Weissman. The pro forma
operating results for the six months ended March 31, 1996 include the
operating results of the Company, Anglo Iron & Metal, Mid-America Shredding
and Weissman for such period. Adjustments to the pro forma combined operating
results include changes in depreciation and amortization to reflect the new
cost basis of assets acquired; changes to selling and administrative expenses
to remove non-recurring salaries and benefits to officers and stockholders;
changes in interest expense to reflect debt incurred in financing the
acquisitions; and changes to the provision for income taxes to reflect the
utilization of the Company's net operating loss carryforward and alternative
minimum tax requirements. In addition, weighted average shares outstanding
have been adjusted to reflect the consummation of the acquisitions, as of the
beginning of the periods presented. No adjustments have been made to reflect
synergies or operating efficiencies. The pro forma operating results are not
necessarily indicative of the actual results which would have been reported
had the Company owned Anglo Iron & Metal, Mid-America Shredding and Weissman
in the periods presented.
20
<PAGE>
SIX MONTHS ENDED MARCH 31, 1996 AND FISCAL YEAR ENDED SEPTEMBER 30, 1995
Revenues. For the six months ended March 31, 1996, pro forma revenues for
the Company were $25.1 million. Of such revenues, the Company generated $10.8
million, Anglo Iron & Metal generated $2.7 million, Mid-America Shredding
generated $1.2 million and Weissman generated $10.4 million. For the 12 months
ended September 30, 1995, pro forma revenues for the Company were $52.2
million, of which the Company generated $13.9 million, Anglo Iron & Metal
generated $15.3 million, Mid-America Shredding generated $3.9 million and
Weissman generated $19.2 million.
Cost of Sales. For the six months ended March 31, 1996, pro forma cost of
sales for the Company was $21.0 million, or 83.5% of pro forma revenues. In
the six month period, the Company contributed $9.3 million, Anglo Iron & Metal
contributed $2.2 million, Mid-America Shredding contributed $1.2 million and
Weissman contributed $8.3 million to pro forma cost of sales. For the six
months ended March 31, 1996, gross profit was $4.1 million and the gross
margin was 16.5% on a pro forma basis. For the 12 months ended September 30,
1995, pro forma cost of sales for the Company was $43.2 million, or 82.7% of
pro forma revenues. In the 12 month period, the Company contributed $10.9
million, Anglo Iron & Metal contributed $13.7 million, Mid-America Shredding
contributed $3.5 million and Weissman contributed $15.1 million to pro forma
cost of sales. For the 12 months ended September 30, 1995, gross profit was
$9.0 million and the gross margin was 17.3% on a pro forma basis.
Selling and Administrative Expenses. For the six months ended March 31,
1996, pro forma selling and administrative expenses for the Company were $2.2
million, or 8.8% of pro forma revenues. In the six month period, the Company
contributed $1.5 million, Anglo Iron & Metal contributed $150,000, Mid-America
Shredding contributed $75,000 and Weissman contributed $435,000 to pro forma
selling and administrative expenses. For the 12 months ended September 30,
1995, pro forma selling and administrative expenses for the Company were $4.0
million, or 7.7% of pro forma revenues. In the 12 month period, the Company
contributed $2.3 million, Anglo Iron & Metal contributed $732,000, Mid-America
Shredding contributed $277,000 and Weissman contributed $728,000 to pro forma
selling and administrative expenses.
Interest Expense. For the six months ended March 31, 1996, pro forma
interest expense for the Company was $666,000. For the 12 months ended
September 30, 1995, pro forma interest expense for the Company was $1.4
million.
Benefit from Income Taxes. For the six months ended March 31, 1996, the
Company recognized a $115,000 provision for income taxes on a pro forma basis.
For the 12 months ended September 30, 1995, the Company recognized a $338,000
benefit from income taxes on a pro forma basis.
Income from Continuing Operations, Net of Income Taxes. Pro forma income
from continuing operations, net of income taxes was $1.1 million, or $.11 per
share, for the six months ended March 31, 1996 and $4.0 million, or $.59 per
share, for the 12 months ended September 30, 1995.
Net Income. Pro forma net income for the Company was $1.2 million, or $.12
per share, for the six months ended March 31, 1996, and $4.8 million, or $.71
per share, for the 12 months ended September 30, 1995.
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 $6.3
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 March
31, 1996, the Company had $7.3 million of debt outstanding, of which $4.8
million is due in the next 12 months.
21
<PAGE>
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 was to have been reduced to 15% if the Company did not invest an
additional $200,000 in Loef by June 30, 1996. The Company did not make this
payment and, pending the receipt of information regarding the current
operations and financial performance of Loef, the Company has taken the
position that its interest was not reduced to 15% on June 30, 1996.
On December 11, 1995, the Company acquired its southern Texas facilities by
acquiring substantially all of the assets of Anglo Metals, Inc., d/b/a Anglo
Iron & Metal, for $6.1 million. The purchase price was paid as follows: (i)
$2.1 million in cash; (ii) a $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.
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, assumed outstanding bank debt of $1.2 million and a $55,000
note payable over eight months.
For the six months ended March 31, 1996, net cash used by operations was
$748,000. During this period the Company generated net income of $98,000 and
depreciation and amortization of $479,000, which were partially offset by
deferred income tax of $441,000 and an extraordinary gain of $48,000.
Increases in accounts receivable, inventory, prepaid expenses, and current
assets amounted to $1,643,000, offset by an increase in accounts payable and
accrued liabilities of $807,000. Inventories and accounts receivable increases
were primarily related to the acquisition of the Company's southern Texas
facilities on December 11, 1995.
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 six months ended March 31, 1996, the Company used net cash in
investing activities of $978,000 compared to $543,000 for the six months ended
March 31, 1995. Such amounts primarily related to acquisition costs and
goodwill.
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
22
<PAGE>
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 $10.9 million at March
31, 1996, compared to $6.5 million at September 30, 1995, and $2.8 million at
September 30, 1994. This improvement in net worth is due to the issuance of
$2.3 million (net) of Common Stock during the quarter ended March 31, 1996,
the conversion of $1.1 million of bridge loan debt to equity, and the issuance
of $925,000 of Common Stock in connection with the acquisition of the southern
Texas facilities.
Working capital at March 31, 1996 was $105,000 as compared to $376,000 at
September 30, 1995. As of September 30, 1994, the Company had a working
capital deficit of $4.2 million. The improvement in working capital from
fiscal 1994 to fiscal 1995 reflects the increase in cash provided by a full
year of 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.
The planned capital expenditures over the next 12 to 24 months for the
Company's existing facilities, including the Weissman facility to be acquired
in the Acquisition, are estimated to be $2.0 million. Included in this amount
are capital improvements for the Company's shredders and materials handling
equipment designed to increase capacity and improve operating efficiencies.
The Company believes that the proceeds from the Offering, cash flow from
operations and availability under various credit facilities will be sufficient
to meet its currently anticipated working capital and capital expenditure
needs for existing operations, including the operations of Weissman, for at
least 12 to 24 months. The Company may, however, need to raise additional
capital to fund the acquisition and integration of additional metals recycling
businesses which is an integral component of the Company's strategy. The
Company may raise such funds through warrant exercises, bank financings or
public or private offerings of its securities. There can be no assurance that
the Company will be able to secure such additional financing. If the Company
is not successful in securing such financing, the Company's ability to pursue
its acquisition strategy may be impaired and the results of operations for
future periods may be adversely affected.
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 economic 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.
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.
23
<PAGE>
BUSINESS
HISTORY OF THE COMPANY
Recycling Industries, Inc. 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 metals
producers and processors. The Company was formed in December 1988 as a
Colorado corporation and commenced its metals recycling operations in May
1994. Upon consummation of the Acquisition, the Company will have increased
its revenues from $1.7 million for the quarter ended June 30, 1994 to pro
forma revenues of $12.8 million for the quarter ended March 31, 1996. Over the
same period, the Company's monthly metals shredding capacity has increased
over 300% and its total monthly metals processing capacity increased over
325%.
Giving effect to the Acquisition, upon completion of the Offering, the
Company will have the following operating subsidiaries:
Nevada Recycling, Inc., acquired by the Company in May 1994, 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, formed by
the Company to acquire the assets of Anglo Metals, Inc. in December 1995,
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.
Recycling Industries of Missouri, Inc. d/b/a Mid-America Shredding,
formed by the Company to acquire the assets of Mid-America Shredding, Inc.
in April 1996, operates a metals recycling facility in Ste. Genevieve,
Missouri, serving midwestern steel mills and markets along the Mississippi
River.
Weissman Industries, Inc. d/b/a Weissman Iron & Metal, to be acquired in
the Acquisition, operates a metals recycling facility in Waterloo, Iowa,
serving midwestern steel mills.
In addition, the Company currently has a minority interest in Loef, which
operates a metals recycling facility in Athens, Georgia, serving steel mills
and markets in the southeastern United States.
Of the Company's pro forma revenues for the six months ended March 31, 1996,
approximately 59% was attributable to sales of ferrous scrap, 40% was
attributable to sales of non-ferrous scrap, and the balance was attributable
to the Company's paper and plastic recycling and retail finished steel sales
conducted at certain of the Company's facilities.
INDUSTRY OVERVIEW
The Company estimates that the total revenues generated in the metals
recycling markets in 1995 were $19.1 billion, comprised of $8.9 billion
attributable to ferrous metals and $10.2 billion attributable to non-ferrous
metals. The Company believes that there are over 3,000 independent metals
recyclers in North America. Based upon reports published by the Institute for
Scrap Recycling Industries ("ISRI"), approximately 200 of these independent
metals recyclers operate heavy-duty automotive shredders, which constitute the
primary equipment used in processing large volumes of ferrous and non-ferrous
scrap for sale to steel and other metals producers. Because of the highly
fragmented nature of the industry, the Company believes that no single metals
recycler has a significant share of the national processed scrap market,
although certain recyclers may have a dominant share of their local or
regional market. Similar to the ongoing consolidation within the municipal
solid waste industry, the metals recycling industry has begun to experience
local market consolidation due to: (i) increasing capital requirements caused
by more stringent environmental and governmental regulations, and (ii) the
exit of
24
<PAGE>
aging independent recyclers who desire to sell closely-held businesses in the
absence of a successor owner or operator.
The Ferrous Scrap Market
The largest portion of the Company's operations involves the collection,
shredding and sale of ferrous scrap, the primary raw material for mini-mill
steel producers who utilize EAF technology. All of the Company's facilities
process ferrous scrap. The increase in EAF production from 14.8 million net
tons in 1966 to 40.6 million net tons in 1995 has resulted in strong demand
and prices for processed ferrous scrap. Demand for ferrous scrap is expected
to increase as a number of new EAFs come on line in the next several years,
such as North Star Steel Co.'s Kingman, Arizona plant (which began production
during the second quarter of 1996) located approximately 100 miles from the
Company's Nevada facility. According to industry estimates, the anticipated
continuing increase in EAF production to an estimated 50 million net tons by
the year 2000 may cause ferrous scrap shortages, resulting in further
increases in processed ferrous scrap prices.
The growth in EAF production has been fueled by the historically low prices
for prepared ferrous scrap, which give EAFs a production cost advantage over
integrated steel producers which operate blast furnaces whose primary raw
materials are coke and iron ore. Recent increases in prepared ferrous scrap
prices have eroded much of the EAFs' production cost advantage. As a result,
many EAF operators are examining alternatives to prepared steel scrap, such as
pre-reduced iron pellets, as a feedstock for EAFs. The Company believes,
however, that such alternatives to prepared ferrous scrap will be used
primarily as a supplemental feedstock to permit EAFs to utilize lower grades
of prepared scrap, and will not significantly reduce demand for prepared
ferrous scrap in the foreseeable future. Industry analysts' reports continue
to predict rising demand for prepared ferrous scrap over the next several
years. Because ferrous scrap represents the largest portion of the metals
recycling industry, the economic conditions of the industry are directly tied
to the strength of domestic steel producers utilizing EAF technology.
Accordingly, any decrease in domestic steel production may have an adverse
impact on the demand and price for prepared ferrous scrap.
Raw ferrous scrap is sourced primarily on a local basis, typically from
small independent salvage operations located near major developed urban areas.
These operations supply raw ferrous scrap to the Company in the form of
automobile bodies, appliances and structural steel. The geographic market for
prepared ferrous scrap is larger, tending to be within a 100 to 150 mile
radius of the metals recycler, but may include shipments to Asian markets via
deep water port facilities located on the west coast of the United States. The
primary limitation on the geographic size of the supply and resale markets in
the metals recycling industry are the transportation costs of raw and
processed ferrous scrap. For this reason, metal scrap processing facilities
tend to be located on or near key rail, interstate highway or water
transportation routes.
Although somewhat determined by local factors, the average domestic price
for prepared ferrous scrap has increased significantly in the past several
years from approximately $80 per ton in 1992 to over $140 per ton during 1995.
The current prices for prepared ferrous scrap range from $116 to $138 per ton
depending on the region and the quality of the prepared material.
The Non-Ferrous Scrap Market
Non-ferrous metals include copper, aluminum, brass, stainless steel, high
temperature alloys and other exotic metals. The non-ferrous scrap market is
less fragmented than the ferrous scrap market due to the higher intrinsic
values of the non-ferrous metals and the available commodity market prices for
these metals. Although supply sources are still local, the higher value of
these metals makes the shipment of prepared non-ferrous scrap economical over
longer distances, both domestically and internationally. The primary consumers
of prepared non-ferrous scrap are domestic and foreign secondary smelters. All
of the Company's facilities process non-ferrous scrap, primarily copper,
aluminum, brass and stainless steel.
Prices for non-ferrous scrap change based upon the daily publication of spot
and futures prices for the primary types of non-ferrous metals on the COMEX or
London Metal Exchange. These exchanges also permit
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suppliers and consumers of non-ferrous metals to hedge against price
variations through the purchase and sale of futures contracts on such
exchanges. The Company does not participate in the non-ferrous futures markets
and, instead, sells its non-ferrous processed scrap at a negotiated spot
price. Current prices for prepared prime grade aluminum scrap range from $.46
to $.68 per pound, and current prices for No. 1 prepared copper scrap range
from $.90 to $1.00 per pound. The Company seeks to protect against price
fluctuations by managing its raw and processed non-ferrous scrap inventory
levels.
Sales prices for non-ferrous scrap are cyclical in nature and are driven by
demand for finished non-ferrous metal goods and by levels of general economic
activity. Secondary smelters, utilizing processed non-ferrous scrap as raw
material, can produce non-ferrous metals at a lower cost than primary smelters
producing such metals from ore due to significant savings in energy
consumption, environmental compliance and labor costs. These cost advantages
and the long lead time necessary to construct new non-ferrous primary smelting
capacity result in sustained demand and strong prices for processed non-
ferrous scrap during periods of high demand for finished non-ferrous metal
products.
The Paper Recycling Market
The Company's paper recycling operations, currently conducted at its Nevada
facility, acquire waste paper products primarily through local 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 the collected waste paper by grade for shipment to domestic paper mills.
Prices for waste paper vary by grade and the Company purchases and sells such
grades at the spot price.
STRATEGY
The Company's objective is to become one of the largest metals recyclers in
North America through targeted acquisitions of independent metals recyclers.
The Company seeks to capitalize on the opportunity presented by the growing
demand for processed ferrous scrap, the expanding markets created by the rapid
proliferation of new EAF operations and the availability of metals recycling
facilities. By pursuing a consolidation strategy within the metals recycling
industry, the Company believes that it can significantly enhance the
competitive position and profitability of the operations that it acquires
through improved managerial and financial resources. The Company also believes
that geographic diversity will reduce its vulnerability to the dynamics of any
particular local or regional market. Furthermore, as EAF capacity and demand
for processed ferrous scrap continue to expand, the Company believes that
multi-regional and national EAF operators such as Nucor Corporation,
Birmingham Steel Corporation and North Star Steel Co. will increasingly rely
on suppliers who can provide a dependable quantity and quality of processed
scrap as well as a high degree of service. The Company believes that it is the
only metals recycling company pursuing a consolidation strategy on a national
basis and therefore will be in an ideal position to become a preferred
supplier to major EAF operators.
Identification and Acquisition of Metals Recycling Facilities
The Company seeks to identify potential acquisition targets with: (i)
dominant or strategic positions in local or regional markets; (ii) excess or
underutilized capacity; (iii) the ability to supply an existing or planned
metals production facility, such as an EAF; (iv) access to rail, water or
interstate highway transportation systems; and (v) either operational
shredding equipment, the ability to supply the Company's existing shredding
equipment or adequate facilities to permit the installation of such equipment.
Generally, the target should have sufficient asset value to enable the Company
to obtain acquisition financing on reasonable terms and should not present the
risk of significant environmental or other contingent liabilities. The Company
is continuously evaluating acquisition opportunities in light of the above
criteria. At the present time, the Company has no agreements with respect to
any future acquisition, other than Weissman.
Once an acquisition candidate has been identified, the Company commences an
in-depth due diligence evaluation of the target's operations, markets,
profitability and environmental history. The Company's due
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diligence evaluation includes independent third party appraisals for both fair
market and orderly liquidation values of the machinery and equipment, and
Phase I and II environmental studies of the operations and facilities of the
target company.
The Company has successfully commenced its industry consolidation strategy
by acquiring six metals recycling facilities over the past 24 months, and will
acquire a seventh facility upon consummation of the Offering. By continuing to
acquire facilities that meet the Company's criteria, the Company believes that
it can achieve rapid growth and expand its existing customer base.
Integration of Acquired Facilities
An essential component of the Company's acquisition strategy is improving
the operating efficiency, output and capacity of each acquired facility by
targeting three phases of the Company's operations: (i) the purchase of raw
scrap; (ii) the processing of raw scrap into saleable product; and (iii) the
sale of processed scrap. Each acquired facility is integrated into the
Company's operations through a comprehensive program that targets these
operating phases through the installation of management and financial
reporting systems, the implementation of expanded purchasing and marketing
programs, the centralization of operating functions to achieve economies of
scale, selective reductions in personnel and improved inventory and other
financial controls. When necessary, the Company implements a capital
improvements program to repair or replace outdated and inefficient equipment
to improve the facility's scrap processing operations and processed scrap
output. Through these programs, the Company has realized significant
improvements in operating results.
To achieve and monitor improvements in operating efficiency, the Company is
developing a reporting and training program designed to integrate the
typically unsophisticated management information systems of an acquired
facility into the Company's operations. In order to ensure a smooth transition
and maintain customer and supplier relationships, the Company generally seeks
to retain the acquired facility's existing operating management.
The Company utilizes a decentralized operating strategy that relies on local
managers experienced in the day-to-day operations of a particular facility and
its local markets. These managers are responsible for operating decisions such
as pricing and purchasing and for the profitability and growth of that
location. The Company will centralize certain administrative, equipment
acquisition, personnel and benefits functions at its corporate headquarters to
reduce overhead, eliminate redundant activities and personnel and increase
financial controls. The Company believes that, over the long term, such
centralization will result in reductions in administrative overhead and the
ability to reduce the cost of equipment and replacement parts.
OPERATIONS
Raw Scrap Purchasing
The primary sources of raw scrap are automobile salvage and wrecking yards,
demolition firms, ordinance depots, military bases, public utilities,
industrial facilities, metal fabricators, machine shops, railroads,
refineries, shipyards and numerous independent scrap collectors. Raw or
unprepared scrap is acquired from these sources in the form of automobile
bodies, structural steel from demolition sites, industrial scrap steel,
appliances and other goods fabricated from steel and other metals. The Company
purchases scrap at each of its facilities from industrial accounts and in
negotiated bulk purchases from large suppliers such as demolition sites,
military bases and railroads as well as smaller purchases from drive-in
sellers.
Industrial and governmental sources of raw scrap supply are the result of
long-term supply relationships and competitive bidding. Retail sources of
supply are paid spot prices for their items at the Company's facilities. The
Company employs full-time buyers to manage existing supply relationships and
secure new industrial and governmental supply accounts.
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<PAGE>
Due to the low value of unprepared scrap compared to its shipping cost, the
Company's facilities are strategically located near sources of supply, such as
major urban areas, and near major railway, interstate highway or water
transportation routes.
The continued availability of raw scrap is dependent upon, among other
things, the local economy, the level of demolition activity and the ability to
maintain supply relationships with local industrial and governmental sources
and automobile wreckers. Consistent with industry practice, the Company has
long-term supply arrangements with certain suppliers, although none of these
arrangements is material to the Company's operations.
Scrap Processing
Raw scrap metal is prepared for resale by sorting, cleaning, shearing and
shredding the metal into various sized pieces according to customer
specifications and market demand. Metal scrap that is ready for shipment to
the Company's customers is referred to as "prepared scrap."
The Company's sorting operations prepare the raw scrap for further
processing by a variety of methods according to the nature of the material
(i.e., ferrous or non-ferrous), size and composition. Raw scrap is handled
within the Company's facilities using conveyor systems, front-end loaders and
crane mounted electromagnets. Through the sorting process, the Company
determines whether particular items require preliminary preparation before
being shredded.
The Company's processing operations at each of its facilities are primarily
based upon the use of heavy-duty automotive shredders which are capable of
shredding an entire automobile body into fist-sized pieces of metal within 45
seconds. Through the operation of shredders, ferrous and non-ferrous items
such as automobiles, appliances and vending machines are shredded into various
sized pieces according to customer specifications. The shredded material is
then magnetically separated into ferrous and non-ferrous metals and non-
metallic items. The non-ferrous metals are further separated utilizing eddy
current separators. The prepared ferrous scrap is then sold to the Company's
customers. The prepared non-ferrous scrap is recovered as a mixture of
aluminum, zinc die-cast, stainless steel and copper and sold to the Company's
customers who further process and separate the mixture into constituent metals
for resale. The non-metallic portion of the shredded materials, referred to as
shredder fluff, is disposed of off site. The Company currently operates four
heavy duty automotive shredders with a monthly output capacity of
approximately 21,500 tons of prepared ferrous scrap.
Items which are too large or too heavy to be introduced into the shredder
are reduced by either torching or shearing, utilizing crane-mounted alligator
or stationary guillotine shears, into smaller pieces according to customer
specifications or to a size and weight that may be further processed by
shredding. Generally, non-ferrous items prepared by these methods are sold to
the Company's customers without further processing.
Many non-ferrous metals, such as copper, brass, aluminum, stainless steel,
zinc die-cast, and insulated wire (aluminum and copper), are purchased by the
Company in a form that is not capable of being processed through a shredder.
Each of the Company's facilities processes these items through a variety of
methods, including manual and automatic sorting, shearing, torching, baling,
wire stripping or a combination of these methods. Prepared non-ferrous items
are either sold in their separated form or baled into low-density bales in
accordance with customer specifications.
The Company's paper operations involve the sorting and baling of various
grades of waste paper and removing all off-grade material and foreign matter.
The sorted product is weighed, tagged and sold to domestic paper mills and
foreign paper brokers.
Processed Scrap Sales
The Company sells processed ferrous scrap primarily to regional and local
steel mills operating EAFs, although integrated steel manufacturers utilize
some ferrous scrap in their blast furnace operations. The price for
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processed ferrous scrap is dependent upon the uniformity of the processed
material, its cleanliness and the non-ferrous content of the processed
material. The Company has established relationships with regional steel
producers for the sale of processed ferrous scrap and anticipates that its
national strategy will improve these relationships. Most steel producers
purchase processed ferrous scrap on a 30-day basis at the beginning of each
month, thereby locking in the price and quantity purchased for such period.
Sales of processed ferrous scrap accounted for 59% of the Company's pro forma
revenues for the six months ended March 31, 1996.
The Company sells processed non-ferrous scrap primarily to foundries,
aluminum sheet and ingot manufacturers, copper refineries and smelters, brass
and bronze ingot manufacturers and other consumers. Ingot manufacturers
produce a semi-finished mass of a particular metal to a chemical specification
and shaped for convenient storage and transportation. The ingots are remelted
by manufacturers to produce finished products. Non-ferrous scrap is sold on a
spot market basis. Sales of non-ferrous materials accounted for 40% of the
Company's pro forma revenues for the six months ended March 31, 1996.
Scrap paper is sold to paper mills at spot prices dependent upon the grade
of the baled product. In addition, the Company's southern Texas facilities
utilize covered warehouse space to store and sell small quantities of finished
steel products such as angle iron, channel, flat bar, rounds and concrete
reinforcing bar. Paper and plastic recycling and retail finished steel sales
accounted for approximately 1% of the Company's pro forma revenues for the six
months ended March 31, 1996.
SIGNIFICANT CUSTOMERS
Three of the Company's customers accounted for approximately 48.2% of the
Company's pro forma revenues (17.7%, 17.7% and 12.8%, respectively) during the
three month period ended March 31, 1996. The loss of any one of these
customers would have a material adverse effect on the Company's business.
Sales of processed scrap are generally not seasonal but are affected by
periodic maintenance shutdowns of certain major customers.
TRANSPORTATION
Transportation cost is a significant factor in the sale of processed scrap
and limits the geographic market in which processed ferrous scrap may be sold.
Processed ferrous and non-ferrous scrap is shipped by the Company to its
customers by truck, rail car and barges. The Company competes for available
shipping space on each of these methods of transportation. The Company has not
entered into any long-term contracts for transportation.
COMPETITION
The scrap market is regionally competitive both in the purchase of raw scrap
and the sale of processed scrap. The Company competes for purchases of raw
scrap with numerous independent recyclers as well as with smaller scrap yards.
The Company's primary competition for processed scrap sales to its customers
are other regional or local metals recyclers.
The primary competitive factors in both the purchase and sale of scrap are
price, shipping costs and availability. In addition, the sale of processed
scrap is affected by the reliability of the metals recycler as a source of
supply and the quality of its processed scrap. The Company believes that its
professional management team, quality of processed scrap and emphasis on
customer service enable it to compete favorably in its markets. In addition,
the Company believes that its national growth strategy will increase its
market exposure to large purchasers of processed scrap, thereby giving it a
competitive advantage relative to independent local and regional metals
recyclers.
The Company believes that, because of the economic, environmental and zoning
impediments to establishing a new metals recycling facility, few new
facilities will be constructed in the foreseeable future. In addition, the
Company does not believe that substitutes for processed ferrous scrap, such as
pre-reduced iron pellets, will have a significant impact on the demand for
ferrous scrap in the foreseeable future.
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EMPLOYEES
The Company has approximately 300 full-time employees, most of whom are
employed by the Company's wholly-owned subsidiaries. The 60 employees of
Weissman are represented by the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America (the "UAW") under a
three-year collective bargaining agreement which expires on November 30, 1996.
Although negotiations have not yet commenced, the Company has no reason to
believe it will not reach a satisfactory agreement with the UAW prior to
expiration of the current contract. The Company believes its and Weissman's
relationships with their respective employees are good.
PROPERTIES
The Company's metals recycling facilities generally are comprised of
administrative offices, warehouses for the storage of repair parts and certain
types of raw and processed scrap, covered and open storage areas for raw and
processed scrap, a machine or repair shop for the maintenance and repair of
the facility's vehicles and equipment, scales for the weighing of scrap, and
loading and unloading facilities. Each facility has specialized equipment for
the processing of all grades of raw scrap which may include a heavy duty
automotive shredder to process both ferrous and non-ferrous scrap, crane
mounted alligator or stationary guillotine shears to process large pieces of
heavy scrap, wire stripping and chopping equipment, baling equipment and torch
cutting facilities. The Company believes its facilities are adequate for its
anticipated production. The following is a summary of the processing
capabilities at each of the Company's properties based on a single shift:
<TABLE>
<CAPTION>
MONTHLY
FACILITY SIZE MATERIALS SHREDDING
FACILITY LOCATION (ACRES) PROCESSED CAPACITY (TONS)
----------------- ------------- ------------------------ ---------------
<S> <C> <C> <C>
Las Vegas, Nevada(1).... 13 Ferrous and 5,000
non-ferrous scrap,
paper and plastics
Brownsville, Texas(2)... 7 Ferrous and
non-ferrous scrap
Harlingen, Texas(2)..... 7 Ferrous and 6,500
non-ferrous scrap
McAllen, Texas(2)....... 1 Ferrous and
non-ferrous scrap
San Juan, Texas(2)...... 8 Ferrous and
non-ferrous scrap
Ste. Genevieve, 32 Ferrous and 5,000
Missouri............... non-ferrous scrap
Waterloo, Iowa(3)....... 34 Ferrous and 5,000
non-ferrous scrap,
paper
--- ------
Totals................ 102 21,500
</TABLE>
- --------
(1) The former owners of the Las Vegas facility and other persons who provided
financing in connection with the acquisition of this facility, have the
right to reacquire such facility under certain circumstances, which right
will be extinguished upon the repurchase of 13,000 shares of Series A
Convertible Preferred Stock and 120,000 shares of Common Stock issued in
connection with the Company's acquisition of such facility. See "Use of
Proceeds" and Note 2 to the Company's consolidated financial statements.
(2) The Company's four Texas facilities are an integrated operation serving
the markets of southern Texas and northern Mexico. All shredding of raw
scrap purchased by these facilities occurs at the Harlingen, Texas
location.
(3) Represents the Weissman facility to be acquired in the Acquisition.
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Due to the nature of the items handled by the Company and the operation of
shredding equipment, each of the Company's facilities maintains a
comprehensive maintenance program. To reduce costs, each facility has its own
maintenance and repair personnel. The Company also has the ability to
fabricate certain parts of its operating equipment tailored to meet the needs
of a particular facility.
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 require the Company to pay a base rent plus
additional pro rata occupancy costs such as building operating costs, taxes
and utilities. Average total rents for the remaining term of the lease are
$13.50 per square foot per year.
LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation and is not
aware of any threatened litigation that could have a material adverse effect
on the Company's business, operating results or financial condition.
ENVIRONMENTAL MATTERS
In the course of processing ferrous and non-ferrous metals, the Company
inspects all inbound material several times prior to and during processing to
screen out matter that may be considered "hazardous materials" under various
environmental laws. Such materials may be contained in unprocessed items such
as automobile bodies, 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 and rejects high-risk items such as
transformers and batteries, certain items in the feed stream may inadvertently
contain hazardous materials that end up in shredder fluff, the by-product of
shredder operation. The Company disposes shredder-fluff at municipal or
private landfills on a truckload basis. Such disposal is not pursuant to long-
term contracts. To avoid classification as a hazardous waste, shredder fluff
must pass toxic leaching tests under certain environmental laws. Because of
the Company's screening of the feed stream and periodic independent testing of
the Company's facilities, it believes that the shredder fluff produced from
its operations does not contain hazardous materials in excess of allowable
limits and is suitable for disposal in municipal or private landfills. Changes
in the environmental laws or testing methods with respect to shredder fluff,
however, may change the classification and availability of suitable disposal
sites for shredder fluff, resulting in significant additional expense to the
Company. In addition, the premises upon which shredder operations are
conducted may become contaminated by hazardous materials through inadvertent
spillage or improper disposal, although the Company believes that such
contamination is unlikely.
The facilities and equipment of the Company are believed to be in
substantial compliance with the current requirements of all applicable
environmental laws and regulations. There are no capital expenditures planned
for new environmental control equipment, although changes in environmental
laws may require such expenditures in the future. The Company cannot predict
the amount of such expenditures, if any, to comply with future changes in
environmental laws or whether such costs can be passed on to its customers
through increases in the price of processed scrap. Accordingly, there can be
no assurance that such costs will not have a material adverse effect on the
Company.
In addition to the costs of compliance, certain environmental laws may
result in liability arising out of the past operations of the Company's
facilities, whether or not such operations were lawful at the time, and create
public rights of action against the Company for environmental contamination.
Generally, if the Company's past or present operations cause environmental
damage, the Company may be subject to fines and may be required to remediate
the damage. Such costs may have a material adverse effect on the Company.
The Company has implemented extensive procedures to ensure compliance with
applicable environmental laws. These procedures include screening all raw
scrap for hazardous materials prior to purchase and acceptance. Any hazardous
materials found in this process, such as automobile batteries, suspected PCB
contaminated
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<PAGE>
transformers and equipment containing freon, are segregated and rejected. The
Company refuses to accept any sealed or closed-end barrels of material which
may have contained a hazardous material. In addition to the screening process,
the Company retains environmental engineering firms to perform periodic
independent site reviews and sampling to ensure continued operational
compliance and detect any contamination that may have occurred on the
Company's facilities.
Prior to and as a condition to the consummation of any acquisition, the
target company's facilities will be tested and evaluated under the American
Society for Testing and Materials ("ASTM") standards for Phase I and Phase II
environmental site assessments to ascertain compliance with all environmental
laws and regulations. In addition, as many metals recyclers may be subject to
remediation liability with respect to their current or former sites as well as
off-site disposal of hazardous materials, the Company also performs an ASTM
Transaction Screen Process and regulatory action review to determine the
operating history of each target company and whether such companies have been
or are subject to any pending regulatory action for environmental
contamination.
The Phase I and Phase II environmental evaluations performed in connection
with the acquisition of the Company's Texas facilities indicated possible
contamination of portions of the real property associated with such
facilities. To allow sufficient time for further evaluation and the completion
of any necessary remediation, the Company has subleased those portions of the
real property which are free of contamination, as indicated by the
environmental studies performed prior to closing, and will acquire the balance
of the real property only upon completion of environmental studies and any
necessary remediation. In that connection, the Company has placed the shares
of Common Stock given as consideration for the Texas facilities into escrow
until the resolution of all environmental issues.
Loef, in which the Company currently has a minority interest, is a
potentially responsible party with respect to two superfund sites. The Company
has been indemnified by the former owners of Loef to the extent Loef's
liability for such matters as well as other non-environmental matters exceeds
$375,000 up to a maximum of $1 million. In addition, the real property upon
which the Loef facilities are located may have been contaminated with certain
hazardous materials. The former owners of Loef have agreed to pay for the
remediation of the contamination to the extent remediation costs exceed
$125,000 up to $400,000.
Weissman is a potentially responsible party with respect to one superfund
site. Based upon information Weissman has been able to obtain from the
Environmental Protection Agency and other potentially responsible parties at
the site, Weissman believes that its estimated cleanup liability is
approximately $30,000.
The environmental assessments performed with respect of the Company's Nevada
and Missouri facilities and Weissman's Iowa facility indicated no reportable
levels of contamination at such facilities.
RECENT DEVELOPMENTS
During the Company's fiscal quarter ended June 30, 1996, the Company
effected a major rebuild of the automotive shredder at its Nevada facility. As
a result of this rebuild, the shredder was out of service for approximately
three and one-half weeks during the quarter, during which time the facility's
operations were substantially curtailed. In addition, at June 30, 1996, the
Company had finished inventory at its facilities that could not be shipped due
to interruptions in transportation, which inventory is expected to be shipped
during July. As a result, the Company anticipates that it will report a net
loss of a few hundred thousand dollars for the quarter ended June 30, 1996.
The Company on July 1, 1996 executed a definitive agreement (as amended on
July 17, 1996) regarding the purchase of Weissman for a cash purchase price of
$12.4 million, including $1.5 million payable in the form of 363,637 shares of
Common Stock. Approximately $5.2 million of the $10.9 million cash portion of
the purchase
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<PAGE>
price will be funded through the proceeds of the Offering. The balance of the
cash portion of the purchase price for the Acquisition will be financed with
$2.2 million of revolving credit borrowings and $3.5 million of long-term debt
secured by the equipment and real property acquired. The Company has signed a
letter of intent for this financing and is currently negotiating the terms of
a definitive loan agreement. The acquisition of Weissman, which had 1995
revenues of $19.2 million, will increase the Company's monthly shredding
capacity by 5,000 tons. The Acquisition is expected to close on or about July
29, 1996. The Company has agreed to register the Common Stock issued in
connection with the Acquisition by September 30, 1996 and to guarantee that
the recipient will be able to sell such shares at a price not less than $4.125
per share within three years, which guarantee is to be secured by a second
lien on certain assets of Weissman.
On June 20, 1996, the Company entered into a $4.0 million secured credit
facility. This facility bears interest at prime plus 2.25% and expires on July
1, 1999, unless renewed.
On April 15, 1996, the Company acquired substantially all of the assets of
Mid-America Shredding, Inc., a metals recycler with operations in Ste.
Genevieve, Missouri, for total consideration of $1.9 million. The acquisition
of Mid-America Shredding, which had 1995 revenues of $3.9 million, increased
the Company's monthly shredding capacity by 5,000 tons.
On January 31, 1996 and April 8, 1996, the Company completed two private
placements of an aggregate of 1,454,159 shares of Common Stock and warrants to
purchase an additional 727,078 shares of Common Stock at $7.50 per share for
total consideration of approximately $3.6 million, including conversion of
$1,138,000 of the bridge financing indebtedness discussed above. The proceeds
from these private placements were used to complete the acquisition of Mid-
America Shredding and for general working capital purposes.
On January 17, 1996, the Company borrowed $1.6 million in short-term bridge
financing, which indebtedness bears interest at 10% per annum, with principal
and accrued interest due December 13, 1996 or upon the Company receiving gross
proceeds of $3.0 million or more through the sale of its securities prior to
that date. In connection with the bridge financing, the Company issued its
Series I Warrants to purchase 359,250 shares of Common Stock at $1.50 per
share, exercisable through the end of a three-year period commencing on the
effective date of a registration statement covering the shares issuable upon
their exercise. The proceeds from this bridge financing were used to complete
the acquisition of Anglo Iron & Metal and for general working capital
purposes. Because the Company failed to register the Common Stock underlying
the Series I Warrants by March 31, 1996, the exercise price was reduced by
$.15 per share and will be reduced by an additional $.15 per share on the last
day of each month until such registration is effected. On June 30, 1996, the
holders of 188,050 Series I Warrants exchanged their warrants for 148,560
shares of Common Stock, representing an effective exercise price of $.60 per
share (the anticipated exercise price as of September 30, 1996 in the absence
of registration). The Company has agreed to register the shares of Common
Stock received upon such exchange no later than September 30, 1996. The
holders of the Series I Warrants who accepted the exchange have agreed to
certain contractual "lock-up" restrictions with respect to the shares received
upon the exchange. See "Shares Eligible for Future Sale--Registration
Rights.".
On December 11, 1995, the Company acquired substantially all of the assets
of Anglo Metal, Inc., a metals recycler with operations in Brownsville,
Harlingen, McAllen and San Juan, Texas, for total consideration of $6.1
million. The acquisition of Anglo Iron & Metal, which had 1995 revenues of
$15.3 million, increased the Company's monthly shredding capacity by 6,500
tons.
In December 1995 (as subsequently amended), the Company agreed to purchase
1,380,585 shares of Common Stock issued to the holders of its outstanding
Series G Warrants in the Company's February and May 1995 private placements
for $4.00 per share in cash on or before July 31, 1996. In connection with
this repurchase, the Company
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<PAGE>
will pay a solicitation fee of $.10 per repurchased share to First Equity
Capital Securities, Inc., an NASD member firm who acted as placement agent for
certain private placements of the Company's securities. See "Use of Proceeds."
The repurchase price was determined through arm's length negotiation with the
representative of the holders of the Series G Warrants. The repurchase enabled
the Company to delay the required registration of certain shares of Common
Stock and the shares of Common Stock underlying the Series G Warrants held by
these securityholders from December 1995 to September 1996. In addition, in
connection with this repurchase, the holders of the Series G Warrants agreed to
certain contractual "lock-up" restrictions. See "Shares Eligible for Future
Sale--Registration Rights." In connection with the repurchase transaction, upon
consummation of the Offering, the Company will exchange 213,388 Placement
Agent's Warrants for 376,812 shares of Common Stock and 213,388 Series H
Warrants, representing an effective exercise price of $.60 per share of Common
Stock.
If the Company fails to repurchase these shares by July 31, 1996, certain
securityholders will be released from contractual "lock-up" restrictions with
respect to a total 5,627,847 shares of Common Stock, the exercise prices of the
Series G and J Warrants will be reduced from $7.50 to $4.00 per share, the
Company will be obligated to register the shares of Common Stock held by such
persons (including shares underlying the Series G and Series J Warrants) by
August 31, 1996 and the holders of a total of 5,627,847 shares of Common Stock
will have the right to require the Company to purchase up to one-third of their
shares for $4.00 per share upon the completion of any public or private
offering of the Company's Common Stock occurring any time after July 31, 1996.
See "Shares Eligible for Future Sale--Registration Rights."
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Upon consummation of the Offering, the Company's Board of Director's will be
expanded from five to six members, three of whom will not be officers or
employees of the Company or any of its subsidiaries ("Independent Directors").
The directors and executive officers of the Company and their positions are
set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
------------- --- ----------------------------------------------
<S> <C> <C>
Thomas J. Wiens 44 Chairman of the Board, Chief Executive Officer
Michael I. Price 55 Director, President, Chief Operating Officer
Jerome B.
Misukanis 53 Director, Treasurer, Chief Financial Officer(1)
Rebekah L. Coe 34 Director of Corporate Development, Secretary
Graydon H. Neher 46 Director(1)
Barry L. Plost 50 Director(1)
Sylvan Schefler 58 Director(2)
</TABLE>
--------
(1)Member of the Audit Committee.
(2)Mr. Schefler will be elected as a director following
consummation of the Offering.
Each director is elected to hold office until the next annual meeting of
stockholders, or until his successor is elected and qualified. Officers serve
at the discretion of the Board of Directors.
Certain information concerning the directors, executive officers and certain
key employees of the Company are set forth below:
THOMAS J. WIENS. Mr. Wiens has served as Chairman of the Board and Chief
Executive Officer of the Company since its inception. Mr. Wiens has served as
President of First Dominion Holdings, Inc. since 1987. Prior to founding the
Company, Mr. Wiens was involved in various entrepreneurial pursuits including
banking, communications, insurance and retail. Mr. Wiens has over ten years of
experience in the recycling industry. Mr. Wiens received a BA in Political
Science from American University and a MDIV from Yale University. Mr. Wiens
serves on the Board of Advisors of the Yale Divinity School and on the boards
of directors of various charitable organizations.
MICHAEL I. PRICE. Mr. Price has served as President of the Company since
March 1996 and as Chief Operating Officer since March 1994. Mr. Price was
elected to the Board of Directors of the Company in March 1994. Prior to
joining the Company, Mr. Price was President of Recovermat Technologies, Inc.,
a solid waste technology company, from 1992 to 1994. Previously, Mr. Price
served in various capacities in his 29 years in the metals recycling industry
with Joseph Smith & Sons, Inc. and The David J. Joseph Company. Mr. Price
received a BSIE from the General Motors Institute and completed an Executive
MBA program at Indiana University. Mr. Price is a director of ERS Industries,
Inc., a railroad supply company.
JEROME B. MISUKANIS. Mr. Misukanis has served as a member of the Company's
Board of Directors since March 1994 and as Treasurer and Chief Financial
Officer since February 1996. Prior to joining the Company, Mr. Misukanis was a
principal of Misukanis and Dodge, P.A., CPA, a public accounting firm, since
1991. Mr. Misukanis has worked in the recycling industry for 12 years. Mr.
Misukanis received a BA in accounting from the University of St. Thomas and
graduated from the Harvard Business School's Executive Management Program. Mr.
Misukanis also attended the William Mitchell College of Law. Mr. Misukanis is a
Certified Public Accountant.
REBEKAH L. COE. Ms. Coe has served as Director of Corporate Development for
the Company since August 1995 and Secretary since December 1995. Prior to
joining the Company, Ms. Coe was Executive Director of Alpine Mutual Fund Trust
Receivership, a mutual fund company, from 1992 to 1995. Prior to 1992,
35
<PAGE>
Ms. Coe served as Controller and General Business Manager for Production
Geophysical Services, a public oil and gas company. Ms. Coe has over 10 years
of experience in finance and accounting. Ms. Coe received her BBA degree in
accounting from Abilene Christian University.
GRAYDON H. NEHER. Mr. Neher was elected to the Board of Directors in June
1995. Mr. Neher has been President and a director of Chemco, Inc., a privately-
held oil and gas company since 1980. Mr. Neher is a director of Compa Food
Ministry, a non-profit food bank. Mr. Neher received a BA degree from the
University of Puget Sound.
BARRY L. PLOST. Mr. Plost was elected to the Board of Directors of the
Company in December 1995. Mr. Plost has served as Chairman, President and Chief
Executive Officer of SeraCare, Inc., a group of plasma collection centers,
since February 1996. Previously, Mr. Plost was with David Barrett, Inc., a
management consulting firm, from 1994 to 1996. Mr. Plost was President and
Chief Executive Officer of Country Wide Transportation Services, Inc., a
transportation and distribution company from 1991 to 1994. Mr. Plost is a
director of Care Concepts, Inc. Mr. Plost received a BA in Political Science
from the University of Illinois and an MBA from Loyola University.
SYLVAN SCHEFLER. Mr. Schefler is Vice Chairman of Prime Charter Ltd., an
investment banking firm and the underwriter of the Offering. Mr. Schefler has
served as Chairman of the Investment Banking Division and as a member of the
Executive Committee of Prime Charter Ltd. since September 1994. Mr. Schefler
has been a partner of Crystal Asset Management Group, Ltd., a merchant banking
firm since 1990. Previously, Mr. Schefler was Chief Executive Officer of
Hampshire Securities Corporation, an investment banking firm, from 1992 to 1994
and Co-Chairman of Dabney/Resnick and Wagner, Inc., an investment banking firm,
from 1990 to 1992. Mr. Schefler previously served in various capacities with
Drexel Burnham Lambert Incorporated for over thirty years, including as a
member of its Executive Committee and Board of Directors. Mr. Schefler has
served as a Director of GSE Systems, Inc., a supplier of software systems for
manufacturing industries, since August 1995. Mr. Schefler received a BA in
Political Science from Cornell University.
The Company's operating management is comprised of the following individuals:
LAWRENCE E. EMCH. Mr. Emch, age 53, has served as General Manager of the
Company's Nevada facility since December 1995. Prior to joining the Company,
Mr. Emch was an independent consultant in the metals recycling industry from
July 1994 through November 1995. Mr. Emch was Plant Manager for The David J.
Joseph Company, a leading metals broker and recycler, where he served as
manager of four different facilities from prior to 1991 to 1994. Mr. Emch has
served in various industrial engineering capacities for the past 30 years. Mr.
Emch attended Youngstown State University.
RONALD W. KRALOVETZ. Mr. Kralovetz, age 56, has served as the General Manager
of the Company's four southern Texas facilities since February 1996. Prior to
joining the Company, Mr. Kralovetz was a General Superintendent for Midwest
Steel Co., Inc., a dismantling company, from prior to 1991 to 1996. Mr.
Kralovetz began his career in the metals recycling business over 25 years ago
as a Plant Manager with Luria Brothers Co., Inc.
PETER F. PRINZ. Mr. Prinz, age 49, has served as Vice President and General
Manager of the Company's Missouri facility since May 1996. Prior to joining the
Company, Mr. Prinz was President of Hawco Manufacturing Company of Baton
Rougue, LA, a manufacturer of equipment for the metals recycling, dredging and
mining industries. Mr. Prinz was also employed by The David Joseph Company,
Inc. from 1982 to 1989 manager of their Newport, Kentucky metals recycling
plant. Mr. Prinz received a BS in Mechanical Engineering from the University of
Wisconsin.
CHARLES N. RUTH. Mr. Ruth, age 66, has served as Plant Engineer for the
Company's Nevada facility since January 1996. Prior to joining the Company, Mr.
Ruth was Plant Engineer at Joseph Smith & Sons, Inc., from prior to 1991 to
1996. Mr. Ruth has over 20 years of experience in the metals recycling
business, including engineering management at Luria Brothers Co., Inc. and
Vulcan Materials Company. Mr. Ruth received a BS in Mechanical Engineering from
Texas Tech University and is a registered professional mechanical engineer.
36
<PAGE>
CLIFFORD D. VELLINGA. Mr. Vellinga, age 54, has served as Assistant Manager
for the Company's Nevada facility since October 1995. Previously, Mr. Vellinga
served as Chief Financial Officer from 1987 to 1995. Mr. Vellinga has over 20
years experience in the construction and recycling industries. Mr. Vellinga
received a BA in Accounting from Weber State University.
As the Company expands, it will hire additional qualified individuals with
industry experience to manage the different segments of its operations. In
connection with the Acquisition and any future acquisitions, the Company
anticipates retaining the principals of the acquired company to facilitate
integration of the acquired operations into its consolidated group.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
The Board of Directors has established an Audit Committee comprised of
Messrs. Neher and Plost, both of whom are Independent Directors, and Mr.
Misukanis. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews with the independent public
accountants the plans of the audit engagement, approves professional services
provided by the independent accountants, reviews the independence of the
independent public accountants and reviews the adequacy of the Company's
internal accounting controls.
Compensation Committee
Promptly following the consummation of the Offering, the Board of Directors
will establish a Compensation Committee which will be comprised solely of
Independent Directors.
The Compensation Committee will determine compensation for the Company's
executive officers in addition to administering the Company's Stock Option
Plans, described below.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid to the Company's chief executive officer and all other executive officers
of the Company whose salary and bonus compensation for the year ended September
30, 1995 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-
ANNUAL COMPENSATION TERM COMPENSATION
------------------------ ------------------
NAME AND FISCAL OTHER ANNUAL SECURITIES
PRINCIPAL POSITION YEAR SALARY COMPENSATION UNDERLYING OPTIONS
------------------ ------ -------- ------------ ------------------
<S> <C> <C> <C> <C>
Thomas J. Wiens........... 1995 $222,000 $1,257,197(1) -0-
Chief Executive Officer
and Chairman of the 1994 147,000(1) -0- -0-
Board of Directors 1993 -0- -0- -0-
Michael I. Price.......... 1995 $142,500 -0- 150,000(2)
Chief Operating Officer
and President 1994 112,000(3) -0- 150,000
1993 -0- -0- -0-
</TABLE>
- --------
(1) Although accrued, the Company did not pay any cash compensation to Mr.
Wiens during fiscal 1994. During fiscal 1995, the unpaid 1994 salary of
$147,000 was forgiven by Mr. Wiens along with the transfer of certain
technology to the Company in exchange for the right to acquire shares of
the Company's Common Stock. The right was exercised on August 8, 1995 at
which time the Company issued 1,319,445 shares of Common Stock to Mr.
Wiens. The amount reported as "Other Annual Compensation" represents the
difference between the purchase price of the Common Stock under such right
and the market value of the Common Stock on August 8, 1995 related to the
forgiven salary. See "Certain Transactions."
(2) Represents the repricing of the option granted to Mr. Price in fiscal 1994.
See "Certain Transactions."
(3) Paid during fiscal 1995.
37
<PAGE>
OPTION GRANTS DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
The following table provides information regarding stock options granted to
the named executive officers during the fiscal year ended September 30, 1995.
In addition, in accordance with the rules and regulation promulgated by the
Commission, the table shows hypothetical gains or "option spreads" that would
exist for the respective options based upon assumed annual rates of
appreciation for the price of the Common Stock of 5% and 10% from the date the
options were granted over the full option term.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS MARKET RATES OF STOCK PRICE
SECURITIES GRANTED TO PRICE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE ON DATE EXPIRATION --------------------------
NAME OPTIONS GRANTED FISCAL YEAR PRICE OF GRANT DATE 0% 5% 10%
---- --------------- ------------- -------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas J. Wiens......... -- -- -- -- -- -- -- --
Michael I. Price........ 150,000(1) 74% $.90 $3.15(2) 12/31/98 $337,500 $468,030 $625,950
</TABLE>
- --------
(1) Represents repricing of option originally granted on January 1, 1994. See
"Certain Transactions."
(2) At the time of the repricing of the option, the Company was selling shares
of Common Stock in a private placement at approximately $.90 per share.
Accordingly, the Company believes the fair market value of the Common
Stock on that date was $.90 per share.
STOCK OPTION EXERCISES DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1995,
OUTSTANDING GRANTS AND GAINS AS OF SEPTEMBER 30, 1995
The following table shows stock options exercised by named executive
officers during the fiscal year ended September 30, 1995. In addition, this
table includes the number of shares covered by both exercisable and non-
exercisable stock options as of September 30, 1995 and the values for "in-the-
money" options which represent the positive spread between the exercise price
of any such existing stock options and the price of the Common Stock at
September 30, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES ACQUIRED VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME UPON EXERCISE REALIZED OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
---- --------------- -------- -------------------------- --------------------
<S> <C> <C> <C> <C>
Thomas J. Wiens......... -- -- -- --
Michael I. Price........ -- -- 0/150,000 0/$465,000
</TABLE>
DIRECTOR COMPENSATION
Independent Directors will receive an annual fee of $7,500 for their
services in that capacity and $1,500 for each Board of Directors or committee
meeting attended. In addition, the Independent Directors will be granted
options under the Company's 1995 Non-Employee Director Stock Option Plan,
described below. All directors are reimbursed for travel expenses incurred in
attending meetings.
STOCK OPTION PLANS
The Company has established two stock option plans, the Incentive Stock
Option Plan (the "Incentive Plan") and the Non-Qualified Stock Option Plan
(the "Non-Qualified Plan"). In addition, on December 27, 1995, the Board of
Directors adopted, subject to shareholder approval, the 1995 Non-Statutory
Stock Option Plan (the "1995 Plan") and the 1995 Non-Employee Director Stock
Option Plan (the "Director Plan"). The terms of each of these stock option
plans are discussed further below. All of the Company's stock option plans are
currently administered by the Board of Directors and will be administered by
the Compensation Committee upon its establishment as discussed above.
Incentive Plan
The Incentive Plan provides for the grant of stock options to officers,
regional managers, department heads, corporate counsel and other key employees
of the Company. An aggregate of 200,000 shares of Common Stock
38
<PAGE>
are authorized for issuance under the Incentive Plan. As of the date of this
Prospectus, options to purchase 20,000 shares of Common Stock at an exercise
price of $2.50 per share and 12,000 shares of Common Stock at an exercise price
of $6.25 per share have been granted under the Incentive Plan.
Options granted under the Incentive Plan are "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code. As a result, options
granted under the Incentive Plan must have an exercise price of not less than
the fair market value of the Common Stock on the date of grant or, if the
optionee is the owner of more than 10% of the outstanding Common Stock, the
exercise price of the options must not be less than 110% of the fair market
value of the Common Stock on the date of grant. Incentive stock options permit
the optionee to defer taxable income related to the exercise of the option
until subsequent disposition of the shares acquired in connection with such
exercise. Payment of the exercise price for options granted under the Incentive
Plan must be made in cash.
Options granted under the Incentive Plan are not exercisable for a period of
one year from the date of grant and, thereafter, vest at a rate of not less
than 25% per year for the remaining four years of the option term. The term of
any option granted under the Incentive Plan may not exceed five years. The
Incentive Plan provides that the aggregate fair market value of the shares of
Common Stock that may be granted to any single optionee under the Incentive
Plan may not exceed $200,000 during any calendar year. Options granted under
the Incentive Plan are exercisable only by the optionee during the optionee's
lifetime and are not transferable, except under limited circumstances. Options
that are exercisable as of the date the optionee's employment by the Company
terminates, other than by death, expire three months after such termination or
immediately if such termination was for cause. If the optionee dies, the
options shall be exercisable by the optionee's heirs for a six-month period
following the optionee's death. The Incentive Plan terminates on March 19,
2002.
Non-Qualified Plan
The Non-Qualified Plan provides for the grant of stock options to persons who
are not eligible for grants under the Incentive Plan, including the Company's
Independent Directors or persons who are closely related to the Company, such
as consultants and independent contractors, and who are recommended to receive
grants by the Company's Chief Executive Officer and Treasurer. An aggregate of
50,000 shares of Common Stock are authorized for issuance under the Non-
Qualified Plan. As of the date of this Prospectus, no options have been granted
under the Non-Qualified Plan.
Options granted under the Non-Qualified Plan must have an exercise price of
not less than the fair market value of the Common Stock on the date of grant
or, if the optionee is the owner of more than 10% of the outstanding Common
Stock, the exercise price of the options must not be less than 110% of the
market price of the Common Stock on the date of grant. Payment of the exercise
price may be made in cash or other non-cash consideration as may be approved
and valued by the Compensation Committee.
Options granted under the Non-Qualified Plan are not exercisable for a period
of one year from the date of grant and, thereafter vest at a rate of not less
than 25% per year for the remaining four years of the option term. The term of
any option granted under the Non-Qualified Plan may not exceed five years. The
Non-Qualified Plan provides that the total number of shares of Common Stock as
to which options granted under the plan may not exceed an aggregate value of
$200,000. Options granted under the Non-Qualified Plan are exercisable only by
the optionee during the optionee's lifetime and are not transferable, except
under limited circumstances. Options that are exercisable as of the date the
optionee's relationship with the Company terminates, other than by death,
expire three months after such termination. If the optionee dies, the options
shall be exercisable by the optionee's heirs for a six-month period following
the optionee's death. The Non-Qualified Plan terminates on March 19, 2002.
1995 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
39
<PAGE>
acquire 300,000 shares of Common Stock at an exercise price of $2.87 per share
were granted to Mr. Wiens, the Company's Chairman and Chief Executive Officer,
and options to acquire 450,000 shares of Common Stock at an exercise price of
$2.87 per share were granted to Mr. Price, the Company's Chief Operating
Officer and President. 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.
Payment of the exercise price may be made in cash, in shares of the Company's
Common Stock having a fair market value equal to the aggregate exercise price,
a combination of cash and shares of Common Stock or, subject to the approval of
the Compensation Committee, in whole or in part with monies received from the
Company as a compensatory cash payment.
The term of any option granted under the 1995 Plan may not exceed ten years.
Options granted under the 1995 Plan are not transferable, except under limited
circumstances. If the optionee ceases to be an employee, officer or employee
director of the Company or a subsidiary or parent corporation of the Company,
other than by reason of death, disability or cause, all unexercised options
granted under the 1995 Plan shall terminate 90 days thereafter. If the optionee
is terminated for cause, all unexercised options shall immediately terminate.
If the optionee's employment is terminated by reason of death, disability or
retirement, all unexercised options shall terminate one year thereafter.
Director Plan
The Director Plan provides for the grant of stock options to existing and
future Independent Directors of the Company. Each Independent Director will
receive an initial grant of options under the Director Plan to acquire up to
5,000 shares of the Company's Common Stock having an exercise price equal to
the fair market value of the Common Stock on the date such person first becomes
an Independent Director. Thereafter, each independent director who is serving
as a director on December 31 of each calendar year, commencing with December
31, 1996, will automatically be granted an option to acquire up to 5,000 shares
of Common Stock at an exercise price per share equal to the fair market value
per share of Common Stock on such date. Each Independent Director joining the
Board of Directors within 30 days of the consummation of the Offering will
receive options having an exercise price equal to the Offering Price. Messrs.
Misukanis, Neher and Plost, who were serving as Independent Directors on
December 27, 1995, each received an initial grant of 5,000 options 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.
Payment of the exercise price for options granted under the Director Plan may
be made in cash, in shares of the Company's Common Stock having a fair market
value equal to the aggregate exercise price, a combination of cash and shares
of Common Stock or, subject to the approval of the Compensation Committee, in
whole or in part with monies received from the Company as a compensatory cash
payment.
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. Options granted under the Director Plan are not transferable, except
under limited circumstances. If the optionee ceases to be an Independent
Director other than by reason of death, disability or cause, all unexercised
options shall terminate 90 days thereafter. If the optionee is removed from the
board for cause, all unexercised options shall immediately terminate. If the
optionee's service as a director is terminated by reason of death, disability
or retirement, all unexercised options shall terminate one year thereafter.
40
<PAGE>
PRINCIPAL SHAREHOLDERS
As of June 30, 1996, the Company's only class of outstanding voting
securities was its Common Stock, $.001 par value. The following table sets
forth information as of June 30, 1996 with respect to the ownership of the
Common Stock by all executive officers, directors and persons known by the
Company to beneficially own more than five percent of the Common Stock. The
following shareholders have sole voting and investment power with respect to
the shares, unless indicated otherwise:
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF SHARES OF
COMMON STOCK COMMON STOCK COMMON STOCK PERCENTAGE OF
BENEFICIALLY OWNERSHIP BENEFICIALLY COMMON STOCK
OWNED PRIOR TO PRIOR TO THE OWNED AFTER OWNERSHIP AFTER
NAME OF BENEFICIAL OWNER THE OFFERING OFFERING THE OFFERING THE OFFERING
- ------------------------ -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Stanley Becker.......... 913,475(1) 8.6% 694,536(1) 5.1%
55 East End Avenue, #7A
New York, New York
10028
Caside Associates....... 841,990(2) 7.8% 841,990(2) 6.2%
373 North Main St.
Fall River, MA 02720
J.E. McConnaughy, Jr.... 739,800(3) 7.0% 575,400(3) 4.2%
c/o JEMC Corporation
1011 High Ridge Road
Stamford, Connecticut
06905
Samuel Benjamin......... 673,200(4) 6.4% 523,600(4) 3.9%
2763 Roscomare Road
Los Angeles, California
90077
Certain Directors and
Executive Officers(5)
Thomas J. Wiens....... 2,814,003(6) 27.3% 2,814,003(11) 20.8%
Michael I. Price...... 154,000(7) 1.5% 154,000 1.1%
Jerome B. Misukanis... 18,000(8) .2% 18,000 .1%
Graydon H. Neher...... 36,000(9) .4% 28,000(9) .2%
Barry D. Plost........ 18,000(10) .2% 14,000(10) .1%
Directors and Executive
Officers as a group.... 3,040,003 28.9% 3,028,003 22.1%
</TABLE>
- --------
(1) Includes 297,659 shares underlying common stock purchase warrants. Upon
consummation of the Offering, the Company will purchase 198,439 shares of
Common Stock from Mr. Becker for $4.00 per share as part of the Company's
repurchase of 1,380,585 shares of Common Stock upon consummation of the
Offering. See "Use of Proceeds." Mr. Becker is also selling 20,500 shares
in the Offering. See "Selling Securityholders."
(2) Includes 304,440 shares underlying a stock option and 210,000 shares
underlying common stock purchase warrants. The shares held by Caside
Associates may be deemed to be beneficially owned by the partners of
Caside Associates, which 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 246,600 shares underlying common stock purchase warrants. Upon
consummation of the Offering, the Company will purchase 164,400 shares of
Common Stock from Mr. McConnaughy for $4.00 per share as part of the
Company's repurchase of 1,380,585 shares of Common Stock upon consummation
of the Offering. See "Use of Proceeds."
(4) Includes 224,400 shares underlying common stock purchase warrants. Upon
consummation of the Offering, the Company will purchase 149,600 shares of
Common Stock from Mr. Benjamin for $4.00 per share as part of the
Company's repurchase of 1,380,585 shares of Common Stock upon consummation
of the Offering. See "Use of Proceeds."
41
<PAGE>
(5) The business address of all directors and executive officers is 384
Inverness Drive South, Suite 211, Englewood, Colorado 80112.
(6) 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,
a corporation controlled by Thomas J. Wiens. In the event that the
Underwriters' over-allotment option is exercised in full, following the
Offering Mr. Wiens will beneficially own 2,314,003 shares of Common Stock,
representing approximately 16.9% of the outstanding Common Stock.
(7) Includes 150,000 shares underlying options.
(8) Includes 12,000 shares underlying options.
(9) Includes 12,000 shares underlying common stock purchase warrants. Upon
consummation of the Offering, the Company will purchase 8,000 shares of
Common Stock from Mr. Neher for $4.00 per share as part of the Company's
repurchase of 1,380,585 shares of Common Stock upon consummation of the
Offering. See "Use of Proceeds."
(10) Includes 6,000 shares underlying common stock purchase warrants. Upon
consummation of the Offering, the Company will purchase 4,000 shares of
Common Stock from Mr. Plost for $4.00 per share as part of the Company's
repurchase of 1,380,585 shares of Common Stock upon consummation of the
Offering. See "Use of Proceeds."
(11) Assumes that the Underwriters' over-allotment option is not exercised.
See "Underwriting."
CERTAIN TRANSACTIONS
On December 1, 1991 the Company entered into exclusive perpetual license
agreements related to the MSW Technology with First Dominion, a company owned
and controlled by Thomas J. Wiens. Under the original terms of the license
agreements, the Company was to pay certain license fees and royalties,
provided that the Company had raised additional equity and had constructed
operational facilities utilizing the MSW Technology. On January 25, 1995, the
Company paid $750,000 to First Dominion in exchange for (i) ownership of the
MSW Technology and certain other technology related to the recycling of
shredder fluff, (ii) 291,333 shares of Series B preferred stock owned by First
Dominion and (iii) the forgiveness of $750,000 of accrued salary, royalties
and other amounts due from the Company to Thomas J. Wiens and First Dominion.
In connection with this purchase, the Company granted to Mr. Wiens the right
to acquire $1,187,500 of Common Stock at a price equal to the lesser of 50% of
the fair market value of the Common Stock or $.90 per share, exercisable on
the day the Company reported gross revenues in excess of designated amounts.
On January 25, 1995, the last reported sales price of the Common Stock was
$3.15 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 and acquired 1,319,445 shares of Common
Stock at an acquisition price of $.90 per share.
During the fiscal years ended September 30, 1994 and September 30, 1995, the
Company received bridge loans from First Dominion in an aggregate amount of
$887,000. During fiscal 1994, this loan was converted to 591,333 shares of
Series B preferred stock at the request of First Dominion. The rights,
designations and preferences of the Series B preferred stock provided that the
Series B preferred stock was convertible into Common Stock on a five-for-one
share basis. The Company reacquired 291,333 shares of Series B preferred stock
from First Dominion in the transaction described above, and the remaining
shares of Series B preferred stock were transferred by First Dominion to a
third party and were subsequently converted into Common Stock.
On July 15, 1994, the Company issued to Caside Associates an option to
acquire 360,000 shares of Common Stock at an exercise price of $2.50 per
share. On January 25, 1995, to reflect the then-current offering price of the
Company's Common Stock in a private placement of its securities, the exercise
price of this option was reduced to $.90 per share and the Company issued to
Caside Associates warrants to acquire up to 180,000 additional shares of
Common Stock at an exercise price of $7.50 per share.
42
<PAGE>
On January 25, 1995, the Company repriced an option previously granted to
Michael I. Price and granted an option to Jerome B. Misukanis, executive
officers of the Company, to purchase up to 150,000 and 12,000 shares of Common
Stock, respectively, exercisable for nominal consideration. On August 3, 1995,
these options were amended to revise the exercise price to $.90 per share. At
the time of the repricing of these options, the Company was selling shares of
Common Stock in a private placement at approximately $.90 per share, which the
Company believes represented the fair market value of the Common Stock on that
date. The options expire on December 31, 1998.
SELLING SECURITYHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information with respect to the total number of shares of Common Stock
beneficially owned by each of the Selling Securityholders before and after
consummation of the Offering. All post-Offering totals reflect the Company's
agreement to repurchase shares from certain of the Selling Securityholders
following consummation of the Offering as described above in "Recent
Developments." Except for Stanley Becker, none of the Selling Securityholders
is an officer or director of the Company or the beneficial owner of five
percent or more of the outstanding Common Stock. The Underwriter will receive
a discount of seven percent of the Offering Price and a non-accountable
expense allowance of 1 1/2 percent of the Offering Price of the Shares of
Common Stock sold for the account of the Selling Securityholders, which
discounts and expenses will be withheld from the proceeds of the shares sold
by the Selling Securityholders. See "Underwriting." The Company will not
receive any of the proceeds of the sales of Common Stock by the Selling
Securityholders.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NUMBER OF SHARES OF COMMON STOCK COMMON STOCK
OF COMMON STOCK NUMBER OF BENEFICIALLY BENEFICIALLY
BENEFICIALLY OWNED SHARES OWNED AFTER OWNED AFTER
SELLING SECURITYHOLDER PRIOR TO OFFERING OFFERED OFFERING OFFERING
- -------------------------- ------------------ --------- ---------------- ------------
<S> <C> <C> <C> <C>
Anglo Iron & Metal,
Inc.(4)................ 227,693 100,000 127,693 1.0
Becker, Marshall........ 305,082(1) 30,000 275,086(1) 2.0
Becker, Stanley......... 913,475(2) 20,500 694,536(2) 5.2
Bender, Merrill......... 19,600 19,600 0 0
Fru-Con Construction,
Inc.................... 145,001 145,001 0 0
Heller, Matthew......... 13,000 13,000 0 0
Levine, Kenneth......... 305,082(1) 30,000 275,086(1) 2.0
Morse, Clayton.......... 4,600 4,600 0 0
Nathanson, Barry F. .... 358,823(3) 5,250 275,001(3) 2.0
Shafran, Hank........... 5,391 5,391 0 0
Smart, Thomas D., Jr. &
Susan M. Thevenet,
JTWROS................. 13,600 13,600 0 0
The Stockbrokers
Society, Inc. ......... 2,276 2,276 0 0
Strong, Albert.......... 2,000 2,000 0 0
Wittenstein, Frederick
M. .................... 312,852(5) 13,500 232,829(5) 1.7
Worden, Andrew B. ...... 16,160(6) 630 12,079(6) 0
</TABLE>
- --------
(1) Represents shares underlying warrants. Upon consummation of the Offering,
103,112 of these warrants will be exchanged into 176,228 shares of Common
Stock and 103,112 Series H Warrants.
(2) Includes shares underlying warrants to acquire 297,659 shares of Common
Stock. Upon consummation of the Offering, the Company will purchase
198,439 shares from Mr. Becker at $4.00 per share as part of the Company's
repurchase of 1,400,586 shares of Common Stock. See "Use of Proceeds."
43
<PAGE>
(3) Includes shares underlying warrants to acquire 117,858 shares of Common
Stock. Upon consummation of the Offering, the Company will purchase 78,572
shares from Mr. Nathanson at $4.00 per share as part of the Company's
repurchase of 1,380,585 shares of Common Stock. See "Use of Proceeds."
(4) Shares issued in connection with the Company's acquisition of its southern
Texas facilities.
(5) Includes shares underlying warrants to acquire up to 99,784 shares of
Common Stock. Upon consummation of the Offering, the Company will purchase
66,523 shares from Mr. Wittenstein at $4.00 per share as part of the
Company's repurchase of 1,380,585 shares of Common Stock. See "Use of
Proceeds."
(6) Includes shares underlying warrants to acquire up to 5,177 shares of
Common Stock. Upon consummation of the Offering, the Company will purchase
3,451 shares from Mr. Worden at $4.00 per share as part of the Company's
repurchase of 1,380,585 shares of Common Stock. See "Use of Proceeds."
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue up to 50,000,000 shares of Common Stock,
$.001 par value. At July 15, 1996, 10,326,697 shares of Common Stock were
outstanding. The shares of Common Stock have no preemptive, subscription,
conversion or redemption rights and may be issued only as fully paid and non-
assessable shares. On liquidation of the Company, each holder of Common Stock
is entitled to receive a pro rata share of the Company's assets available for
distribution to common shareholders after payments with respect to the
preferential rights of the Company's then outstanding preferred stock, if any.
Unless the holder is a "Substantial Stockholder" (as discussed below under
"Anti-Takeover Provisions"), all shares of Common Stock have equal voting
rights and have one vote per share in all matters to be voted upon by
shareholders. Cumulative voting in the election of directors is not allowed,
which means that the holders of a majority of the outstanding shares
represented at any meeting at which a quorum is present will be able to elect
all of the directors if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any directors.
A vote by the holders of a majority of the shares of Common Stock present at
a meeting at which a quorum is present is necessary to take action, except for
certain extraordinary matters which require the approval of a majority of the
outstanding shares of voting stock.
PREFERRED STOCK
The Company is authorized to issue up to a total of 10,000,000 shares of
preferred stock, no par value, issuable in one or more series designated by
the Board of Directors. Material provisions concerning the terms of any series
of preferred stock which may be issued, such as dividend rate, conversion
features and voting rights, are to be determined by the Board of Directors of
the Company at the time of such issuance. The ability of the Board to issue
preferred stock could also be used by it as a means for resisting a change of
control of the Company and, therefore, can be considered an "anti-takeover"
device.
The Company has issued and outstanding 13,000 shares of Series A Convertible
Preferred Stock (the "Series A Shares"), which were issued in connection with
the Company's acquisition of its Nevada operations. The Series A Shares have
no dividend rights, liquidation preference or voting rights, except in certain
limited circumstances. The Series A Shares will be redeemed along with 120,000
shares of Common Stock issued in connection with the acquisition of the
Company's Nevada facility for $2.4 million upon consummation of the Offering.
See "Use of Proceeds."
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Articles of Incorporation authorize the
Company's Board of Directors to limit the voting rights of any person or
entity that becomes a "Substantial Stockholder," defined as
44
<PAGE>
any stockholder designated by the Board of Directors who is the direct or
indirect beneficial owner of 10% or more of the Company's Common Stock,
including shares of Common Stock which may be issuable pursuant to any
agreement or upon the exercise of conversion rights, options or warrants. All
shares of Common Stock beneficially owned by a Substantial Stockholder in
excess of 10% will not be entitled to any voting rights and will be deemed not
outstanding for purposes of determining a quorum. As of the date of this
Prospectus, the Company's Board of Directors had not determined any person or
entity to be a Substantial Stockholder.
In addition to restricting the voting rights of a Substantial Stockholder,
the Company has the right to redeem all or a portion of the Common Stock
beneficially owned by a Substantial Stockholder at a redemption price equal to
the lesser of the average market price of the shares for each of the preceding
30 days prior to the date of the written redemption notice or the average
market price of the shares for each of the 30 trading days during which shares
of the Common Stock have been traded immediately preceding the date upon which
the Substantial Stockholder beneficially owned more than 5% of the issued and
outstanding Common Stock. A Substantial Stockholder has no rights, voting or
otherwise, regarding shares subject to a redemption notice.
The Company's Board of Directors has adopted an amendment to its Articles of
Incorporation to eliminate these provisions. This amendment will be submitted
to the Company's shareholders for approval at the 1996 annual meeting of
shareholders. The amendment will require the affirmative vote of holders of
two-thirds of the outstanding Common Stock and, if any preferred stock is
outstanding, two-thirds of the outstanding preferred stock.
WARRANTS
The Company has the following outstanding warrants to acquire an aggregate
of 4,184,693 shares of Common Stock:
<TABLE>
<CAPTION>
COMMON STOCK
EXPIRATION EXERCISE SECURITIES ISSUABLE ISSUABLE
TITLE OR SERIES DATE PRICE OUTSTANDING UPON EXERCISE UPON EXERCISE
- --------------------- ---------- -------- ----------- ------------------------ -------------
<S> <C> <C> <C> <C> <C>
Series A (1) $37.50 22,969 1 share of Common Stock 22,969
and 1 Series B Warrant
Series B (2) $75.00 22,969 Common Stock 22,969
Series G (8) (3) $ 7.50 2,136,878 Common Stock 2,136,878
Series H (4) $ 7.50 283,333 Common Stock 283,333
Series I (5) $ .90 171,200 Common Stock 171,200
Series J (8) (6) $ 7.50 727,078 Common Stock 727,078
Ally Capital 11/3/99 $ 5.00 53,600 Common Stock 53,600
Caside Associates 1/5/98 $ 7.50 180,000 Common Stock 180,000
Nevada Recycling 1/4/04 $ 1.25 20,000 Common Stock 20,000
Placement Agent's (7) 4/17/98 $ 1.80 139,828 2 Shares of Common Stock 279,656
and 1 Series H Warrant
Placement Agent's (7) 7/31/98 $ 1.80 73,560 2 Shares of Common Stock 147,120
and 1 Series H Warrant
Placement Agent's 1/31/99 $ 2.75 65,445 2 Shares of Common Stock 130,890
and 1 Series H Warrant
Placement Agent's 4/8/99 $ 2.75 4,500 2 Shares of Common Stock 9,000
and 1 Series H Warrant
--------- ---------
Total Outstanding 3,901,360 4,184,693
========= =========
</TABLE>
45
<PAGE>
- --------
(1) Exercisable for a three-year period commencing on the effective date of a
registration statement covering the Series A Warrants or the shares
issuable upon their exercise.
(2) Exercisable for a three-year period commencing on the effective date of a
registration statement covering the Series B Warrants or the shares
issuable upon their exercise.
(3) Currently exercisable and continuing for a three-year period commencing on
the effective date of a registration statement covering the shares
issuable upon their exercise and the shares of Common Stock purchased by
the holders of the Series G Warrants in the Company's February and May
1995 private placements. The exercise price of the Series G Warrants will
be reduced to $4.00 per share in the event that the Company fails to
repurchase certain shares of Common Stock by July 31, 1996 and will reduce
by $.50 per share for each month subsequent to September 1996 (August 1996
in the event such stock purchase is not effected by July 31) in which a
registration statement covering the shares issuable upon exercise of the
Series G Warrants is not effective. See "Business--Recent Developments"
and "Use of Proceeds." Notwithstanding the foregoing, 30,000 outstanding
Series G Warrants currently have an exercise price of $5.40 per share,
subject to reduction by $.35 each month until a registration statement
covering the shares issuable upon exercise of the Series G Warrants
becomes effective.
(4) Exercisable for a three-year period commencing on the exercise of the
Placement Agent's Warrants. Additional Series H Warrants will be issued
upon exercise of the Placement Agent's Warrants.
(5) The exercise price of the Series I Warrants was originally $1.50 per
share, but has been reducing by $.15 per share for each month subsequent
to March 31, 1996 in which a registration statement covering the Common
Stock issuable upon exercise of the warrants is not effective.
(6) 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 $4.00 per
share in the event that the Company fails to repurchase certain shares of
Common Stock by July 31, 1996 and will reduce by $.50 per share for each
month subsequent to September 1996 (August 1996 in the event such stock
purchase is not effected by July 31) in which a registration statement
covering the shares issuable upon exercise of the Series J Warrants is not
effective. See "Business--Recent Developments" and "Use of Proceeds."
Notwithstanding the foregoing, 40,665 outstanding Series J Warrants
currently have an exercise price of $7.15 per share, subject to reduction
by $.35 each month until a registration statement covering the shares
issuable upon exercise of the Series J Warrants becomes effective.
(7) Upon consummation of the Offering, the Company will exchange 213,388
Placement Agent's Warrants for 364,700 shares of Common Stock and 213,388
Series H Warrants. See "Business--Recent Developments."
(8) The Series G and Series J Warrants are subject to redemption by the
Company at $.25 per warrant at any time after the first anniversary of
consummation of the Offering in the event that the market price of the
Common Stock exceeds 133% of the then-effective exercise price of the
warrants for ten consecutive trading days.
STOCK OPTIONS
The Company has granted options to purchase an aggregate of 1,283,440 shares
of Common Stock at exercise prices ranging from $.90 to $6.25 per share,
including options to Messrs. Wiens, Price, Misukanis, Neher and Plost to
purchase 300,000, 450,000, 5,000, 5,000 and 5,000 shares of Common Stock,
respectively, at an exercise price of $2.87 per share. See "Management--Stock
Option Plans."
TRANSFER AGENT
The transfer agent for the Company's Common Stock and warrant agent for the
Company's warrants is American Securities Transfer, Inc., 938 Quail Street,
Suite 101, Lakewood, Colorado 80215.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 13,549,101
outstanding shares of Common Stock, based on the number of shares outstanding
on June 30, 1996. Of these shares, the 4,400,000 shares of Common Stock sold
in the Offering will be freely tradeable under the Securities Act, except for
any shares held by "affiliates" of the Company, as that term is defined under
the Securities Act and the regulations promulgated thereunder (an
"Affiliate"). The remaining shares (the "Restricted Shares") held by existing
stockholders were sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144 promulgated under the Securities
Act.
As of the closing of the Offering, a total of 3,028,003 shares of Common
Stock (including shares underlying outstanding options) held by the existing
stockholders will be subject to lock-up agreements in favor of the Underwriter
which provide that none of such shares may, without the prior written consent
of the Underwriter, be sold or otherwise disposed of for a period of 12 months
from the date of this Prospectus. Upon the expiration of the lock-up
agreements, all of such shares will be eligible for resale in the public
market subject to the provisions of Rule 144. The Underwriter may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements.
In general, under Rule 144, as currently in effect, any holder of Restricted
Shares, including an Affiliate of the Company, as to which at least two years
have elapsed since the later of the date of the acquisition of such Restricted
Shares from the Company or an Affiliate, is entitled within any three-month
period to sell a number of shares that does not exceed the greater of 1% of
the then-outstanding shares of Common Stock or the average weekly trading
volume of the Common Stock in the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. Affiliates of the Company must comply with the
requirements of Rule 144 (except for the two-year holding period requirement)
in order to sell shares of Common Stock which are not "restricted securities"
(such as shares acquired by Affiliates in the Offering).
Further, under Rule 144(k) a person who holds Restricted Shares as to which
at least three years have elapsed since the date of their acquisition from the
Company or an Affiliate, and who is not deemed to have been an Affiliate of
the Company at any time during the three months preceding a sale, is entitled
to sell such shares under Rule 144 without regard to volume limitations,
manner of sale provisions, notice requirements or availability of current
public information concerning the Company.
REGISTRATION RIGHTS
As described below, the holders of certain shares of the Company's Common
Stock and certain outstanding warrants and options are entitled to certain
rights with respect to the registration under the Securities Act of their
shares of Common Stock (the "Registerable Common Stock") or the shares of
Common Stock issuable upon exercise of their warrants or options (the
"Registerable Warrant Stock"). These rights are granted under the terms of
agreements between the Company and the holders of the Registerable Common
Stock or the Registerable Warrant Stock. In connection with such rights, the
Company has agreed to pay all registration expenses, other than fees of the
holder's own counsel, transfer taxes, and underwriting discounts and
commissions payable in connection with the registration of any shares of
Registerable Common Stock or Registerable Warrant Stock. In addition, the
Company has agreed to indemnify the holders of such securities against certain
liabilities arising under the Securities Act.
Required Registration
The Company has agreed with the holders of 5,365,013 shares of Registerable
Common Stock and 3,308,252 shares of Registerable Warrant Stock to include
such shares of Common Stock in a registration statement to be filed no later
than September 30, 1996. Of these shares, 5,627,847 shares of Registerable
47
<PAGE>
Common Stock and 2,813,924 shares of Registerable Warrant Stock are subject to
lock-up agreements in favor of the Company which provide that commencing on
June 30, 1996 (the "Commencement Date"): (i) none of such shares, warrants or
options may, without the prior written consent of the Company, be sold,
exercised or otherwise disposed of for a period of four months following the
Commencement Date; (ii) during the fifth month following the Commencement Date,
each such shareholder will sell no more than 5% of the shares of Registerable
Common Stock and, commencing with the fifth month following the Commencement
Date, each such shareholder may exercise the warrants held by such holder and
the shares of Registerable Warrant Stock received upon such exercise will not
be subject to these lock-up provisions; (iii) during the sixth month following
the Commencement Date each such shareholder will sell no more than 7.5% of the
shares Registerable Common Stock held by such holder; (iv) during each month
commencing with the seventh month and ending upon completion of the twelfth
month following the Commencement Date, each such shareholder will be permitted
to sell no more than 15% of the shares of Registerable Common Stock owned by
such holder; and (v) after expiration of the twelfth month following the
Commencement Date, the shares of Registerable Common Stock will no longer be
subject to these lock-up provisions. The Company is required to keep the
registration statement filed pursuant to this registration obligation effective
for a period of up to three years.
Piggyback Registration
Whenever the Company proposes to register any shares of Common Stock, the
Company is required to give notice to the holders of 836,823 shares of
Registerable Warrant Stock who have the right to include such shares in the
registration statement ("Piggyback Registration Rights"). In addition, upon
expiration of the registration statement filed under the Company's registration
obligation described in the preceding section, the holders of the Registerable
Common Stock and Registerable Warrant Stock included therein have limited
Piggyback Registration Rights.
The Piggyback Registration Rights are subject to certain conditions,
including the ability of an underwriter to limit the number of shares of
Registerable Common Stock and Registerable Warrant Stock included in the
registration statement or to exclude certain shares of Registrable Common Stock
or Registerable Warrant Stock from the Registration Statement.
Demand Registration
Holders of 479,586 shares of Registerable Warrant Stock are entitled to
require the Company to use its reasonable best efforts to register such shares
at the Company's expense within 150 to 180 days of their demand ("Demand
Registration Rights"). The Demand Registration Rights may only be exercised
once.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the form of which has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part. The Underwriters named below, acting
through Prime Charter Ltd. as representative (the "Representative"), have
severally agreed to purchase from the Company and the Selling Securityholders,
and the Company and the Selling Securityholders have agreed to sell to the
Underwriters, an aggregate of 4,400,000 shares of Common Stock. The
Underwriting Agreement provides that the Underwriters' obligations to pay for
and accept delivery of the shares of Common Stock are subject to certain
conditions precedent, and that the Underwriters are committed to purchase all
of the shares of Common Stock if any shares are purchased. Under certain
circumstances, the commitments of non-defaulting Underwriters may be increased
as set forth in the Underwriting Agreement.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Prime Charter Ltd.................................................. 2,365,000
BT Securities Corporation.......................................... 200,000
Cowen & Company.................................................... 200,000
EVEREN Securities, Inc............................................. 200,000
First of Michigan Corporation...................................... 70,000
Mesirow Financial, Inc............................................. 70,000
Roney & Co. ....................................................... 70,000
Scott & Stringfellow, Inc.......................................... 70,000
Stephens Inc....................................................... 70,000
Unterberg Harris................................................... 70,000
Van Kasper & Company............................................... 70,000
Brean Murray, Foster Securities Inc................................ 45,000
Burnham Securities Inc............................................. 45,000
Burns Pauli Mahoney Co............................................. 45,000
Coburn & Meredith, Inc............................................. 45,000
Commonwealth Associates............................................ 45,000
First Southwest Company............................................ 45,000
Frederick Company, Inc. ........................................... 45,000
Hoak Securities Corp............................................... 45,000
Huntleigh Securities Corporation................................... 45,000
JW Charles Securities, Inc......................................... 45,000
Keane Securities Co., Inc.......................................... 45,000
C.L. King & Associates, Inc........................................ 45,000
John G. Kinnard & Company, Incorporated............................ 45,000
Kirkpatrick, Pettis, Smith, Polian Inc............................. 45,000
Laidlaw Equities, Inc.............................................. 45,000
LT Lawrence & Company, Inc......................................... 45,000
The Ohio Company................................................... 45,000
Ormes Capital Markets, Inc. ....................................... 45,000
Pacific Crest Securities........................................... 45,000
Pennsylvania Merchant Group Ltd.................................... 45,000
Sanders Morris Mundy............................................... 45,000
---------
Total.......................................................... 4,400,000
=========
</TABLE>
The Underwriters propose initially to offer the shares of Common Stock
offered hereby to the public at the Offering Price set forth on the front
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $.17 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain dealers. After the Offering, the Offering Price, concession and
reallowance may be changed by the Underwriter.
The Company and the Selling Securityholders have agreed to pay to the
Representative on behalf of the Underwriters a non-accountable expense
allowance equal to 1 1/2% of the gross proceeds of the Offering, $85,000
49
<PAGE>
of which already has been paid by the Company to cover some of the
underwriting costs and due diligence expenses related to the Offering.
The Company and Thomas J. Wiens, the Company's Chief Executive Officer, have
granted to the Underwriters an option, exercisable during the 30-day period
after the date of this Prospectus, to purchase up to an aggregate of 660,000
additional shares of Common Stock at the Offering Price less underwriting
discounts and the non-accountable expense allowance. Of such option, Mr. Wiens
has been allocated the first 500,000 shares and the Company has been allocated
the remaining 160,000 shares. The Underwriters may exercise this option solely
to cover over-allotments, if any, made on the sale of the Common Stock offered
hereby. The Company will receive no proceeds from the exercise of the portion
of the over-allotment option allocated to Mr. Wiens.
The Company and the Selling Securityholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company has agreed to sell to the Representative or its designees, for
nominal consideration, the Underwriter Warrants to purchase an aggregate of
315,000 shares of Common Stock. The shares of Common Stock subject to the
Underwriter Warrants will be in all respects identical to the shares of Common
Stock offered to the public hereby. The Underwriter Warrants will be
exercisable for a four-year period commencing one year after the effective
date of the Registration Statement of which this Prospectus forms a part at a
per share exercise price equal to 135% of the Offering Price. During the
period beginning one year from the effective date of the Registration
Statement and ending five years after such effective date, the Company has
agreed at its expense to register under the Securities Act the shares of
Common Stock issued or issuable upon exercise of the Underwriter Warrants and,
for the period beginning one year from the effective date of the Registration
Statement and ending seven years after such effective date, to include such
shares of Common Stock in any appropriate registration statement which is
filed by the Company. The Underwriter Warrants will contain anti-dilution
provisions providing for appropriate adjustment of the exercise price and
number of shares that may be purchased upon the occurrence of certain events.
The Underwriter Warrants may be exercised by paying the exercise price in
cash, through the surrender of shares of Common Stock, through a reduction in
the number of shares covered thereby, or by using a combination of such
methods.
The Company and all of its executive officers and directors and certain of
its current stockholders have agreed not to offer, sell, contract to sell or
otherwise dispose of Common Stock or rights to acquire Common Stock without
the prior written consent of the Representative for a period of 12 months
after the date of this Prospectus. See "Shares Eligible For Future Sale."
LEGAL MATTERS
The legality of the shares of Common Stock being offered will be passed on
for the Company by Friedlob Sanderson Raskin Paulson & Tourtillott, LLC,
Denver, Colorado. The firm of Brownstein Hyatt Farber & Strickland, P.C.,
Denver, Colorado, has acted as counsel to the Underwriter in connection with
the Offering.
EXPERTS
The financial statements of the Company for the years ended September 30,
1993 and 1994 appearing in this Prospectus have been audited by AJ. Robbins,
P.C., independent certified public accountants, as stated in their report
appearing herein, and have been so included herein in reliance upon such
report given upon the authority of that firm as experts in accounting and
auditing. The financial statements of the Company for the year ended September
30, 1995 have been audited by BDO Seidman, LLP, independent certified public
accountants, as stated in their report appearing herein, and have been so
included herein in reliance upon such report given upon the authority of that
firm as experts in accounting and auditing.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<S> <C>
Financial Statements:
Pro Forma Explanatory Headnote.......................................... F-3
For the Year Ended September 30, 1995 (Unaudited)
Unaudited Pro Forma Consolidated Statement of Operations.............. F-6
For the Six Months Ended March 31, 1996 (Unaudited)
Unaudited Pro Forma Consolidated Balance Sheet........................ F-8
Unaudited Pro Forma Consolidated Statement of Operations.............. F-10
Notes to Pro Forma Consolidated Financial Statements.................... F-12
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants...................... F-14
Report of Independent Certified Public Accountants...................... F-15
Financial Statements:
Consolidated Balance Sheets........................................... F-16
Consolidated Statements of Operations................................. F-18
Consolidated Statement of Stockholders' Equity (Deficit).............. F-19
Consolidated Statements of Cash Flows................................. F-20
Notes to Consolidated Financial Statements.............................. F-21
Report of Independent Certified Public Accountants on Supplemental
Schedules.............................................................. F-44
Report of Independent Certified Public Accountants on Supplemental
Schedules.............................................................. F-45
Schedule I--Condensed Financial Information of Registrant:
Balance Sheets........................................................ F-46
Statements of Operations.............................................. F-47
Statements of Cash Flows.............................................. F-48
Notes to Condensed Financial Information of Registrant.................. F-49
ANGLO METAL, INC., DBA ANGLO IRON & METAL
Report of Independent Certified Public Accountants...................... F-50
Financial Statements:
Balance Sheets........................................................ F-51
Statements of Operations.............................................. F-52
Statement of Changes in Stockholders' Equity.......................... F-53
Statements of Cash Flows.............................................. F-54
Notes to Financial Statements........................................... F-55
MID-AMERICA SHREDDING, INC.
Report of Independent Certified Public Accountants...................... F-62
Financial Statements:
Balance Sheet......................................................... F-63
Statement of Operations............................................... F-64
Statement of Changes in Stockholders' Equity.......................... F-65
Statement of Cash Flows............................................... F-66
Notes to Financial Statements........................................... F-67
WEISSMAN IRON & METAL, A DIVISION OF WEISSMAN INDUSTRIES, INC.
Report of Independent Certified Public Accountants...................... F-72
Financial Statements:
Balance Sheets........................................................ F-73
Statements of Operations.............................................. F-74
Statement of Changes in Division Equity............................... F-75
Statements of Cash Flows.............................................. F-76
Notes to Financial Statements........................................... F-77
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
EXPLANATORY HEADNOTE
INTRODUCTION
The following unaudited pro forma condensed consolidated financial
statements give effect to the acquisitions by Recycling Industries, Inc. (the
Company) of the entities detailed below and are based on the estimates and
assumptions set forth herein and in the notes to such statements. This pro
forma information has been prepared utilizing the historical financial
statements and notes thereto, which are incorporated by reference herein. The
pro forma financial data does not purport to be indicative of the results
which actually would have been obtained had the acquisitions been effected on
the dates indicated or the results which may be obtained in the future.
The pro forma consolidated balance sheet assumes the acquisitions were
consummated at March 31, 1996. The pro forma consolidated statement of
operations for the year ended September 30, 1995 includes the operating
results of the Company for such period and the operating results of Anglo,
Mid-America and Weissman for the 12 months ended December 31, 1995. The pro
forma consolidated statement of operations for the six months ended March 31,
1996 includes the operating results of the Company, Anglo, Mid-America and
Weissman for such period. The operating results of Anglo, Mid-America and
Weissman for the three months beginning October 1, 1995 and ending December
31, 1995 have been included in the pro forma consolidated statement of
operations for both the year ended September 30, 1995 and the six months ended
March 31, 1996.
Anglo Metal, Inc. dba Anglo Iron & Metal
On December 11, 1995, the Company acquired substantially all of the assets
and the business of Anglo Metal, Inc. dba Anglo Iron & Metal (Anglo). The
assets acquired from Anglo consisted of a heavy duty automotive shredder,
inventories, metals shearing equipment, balers, heavy equipment, tools and
rolling stock used in the business of recycling ferrous and non-ferrous
metals. The Company also purchased from Anglo certain real property, buildings
and leasehold improvements used in the business of recycling ferrous and non-
ferrous metals.
The purchase price for Anglo was $6,065,000 comprised of: $2,079,000 in
cash; a $1,865,000 note which is to be paid in ten equal monthly installments
of $186,500 beginning in February 1996; a $446,000 secured promissory note
payable in 60 consecutive monthly installments of $9,000; a $750,000 unsecured
note payable in 72 equal consecutive monthly installments of $10,400; and
227,693 shares of the Company's common stock (Common Stock) valued at
$925,000.
Of the cash paid at the closing of the acquisition, $1,800,000 was obtained
through a sale-leaseback transaction with Ally Capital Corporation,
collateralized by all of Anglo's machinery and equipment, accounts receivable
and inventories, which has been recorded as a capital lease. The terms of the
sale-leaseback provide for 60 consecutive monthly lease payments of $41,000
with a bargain purchase option at the end of the lease term. The lease
contains numerous covenants for maintaining certain financial ratios and
earnings levels. The remaining $279,000 paid at closing was obtained from the
operating cash reserves and working capital of the Company.
F-3
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
EXPLANATORY HEADNOTE
The purchase price for Anglo has been allocated as follows:
<TABLE>
<S> <C>
Equipment under capital lease................................. $ 1,800,000
Contract to purchase land and buildings....................... 70,000
Covenant not to compete....................................... 1,000,000
Inventories................................................... 1,365,000
Purchase price in excess of net assets acquired............... 1,830,000
-----------
Total purchase price........................................ 6,065,000
Notes payable................................................. (3,061,000)
Common Stock.................................................. (925,000)
-----------
Cash paid at closing........................................ 2,079,000
Capital lease obligation.................................... (1,800,000)
-----------
Cash from operating capital................................. $ 279,000
===========
</TABLE>
Mid-America Shredding, Inc.
On April 15, 1996, the Company acquired the assets and the business of Mid-
America Shredding, Inc. (Mid-America). The assets acquired from Mid-America
consisted of real property, buildings, inventories, a heavy duty automotive
shredder, a wire chopping plant, heavy equipment and tools used in the
business of recycling ferrous and non-ferrous metals.
The purchase price for Mid-America was $1,925,000, comprised of $660,000 in
cash, a $55,000 note payable in eight equal monthly installments of $6,900,
and the assumption of Mid-America's outstanding bank debt of $1,210,000.
The purchase price for Mid-America has been allocated as follows:
<TABLE>
<S> <C>
Inventory..................................................... $ 55,000
Land.......................................................... 310,000
Buildings and improvements.................................... 560,000
Machinery and equipment....................................... 1,000,000
-----------
Total purchase price........................................ 1,925,000
Notes payable............................................... (1,265,000)
-----------
Cash paid at closing........................................ $ 660,000
===========
</TABLE>
Weissman Iron and Metal, a Division of Weissman Industries, Inc.
The Company has reached an agreement with the stockholders of Weissman
Industries, Inc. to acquire the business of Weissman Iron and Metal, a
division of Weissman Industries, Inc. (Weissman), through the purchase of all
of the outstanding common stock of Weissman.
The assets of Weissman consist of a heavy duty automotive shredder, metal
shearing equipment, a Coreco aluminum furnace, heavy equipment, tools and
rolling stock, real property and buildings, inventories and accounts
receivable used in the business of recycling ferrous and non-ferrous metals.
F-4
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--(CONCLUDED)
EXPLANATORY HEADNOTE
The purchase price for Weissman is anticipated to be allocated as follows:
<TABLE>
<S> <C>
Accounts receivable........................................... $ 1,600,000
Inventories................................................... 900,000
Buildings and improvements.................................... 3,000,000
Automotive shredder........................................... 1,500,000
Heavy equipment............................................... 3,400,000
Equipment and rolling stock................................... 1,200,000
Land.......................................................... 800,000
-----------
Total purchase price.......................................... 12,400,000
Notes payable................................................. (5,700,000)
Common stock.................................................. (1,500,000)
-----------
Cash to be paid at closing.................................... $ 5,200,000
===========
</TABLE>
The $5,700,000 notes payable will be secured by the assets of Weissman.
$3,500,000 of such notes will be payable in 60 monthly installments of
$75,000, including interest. The balance of $2,200,000 is pursuant to a
revolving credit facility bearing interest at prime plus 2.25%. The Company
has received a non-binding commitment from a commercial lender with respect to
a $10,000,000 facility that includes such notes payable.
F-5
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
RECYCLING ANGLO ANGLO
INDUSTRIES, INC. IRON & METAL IRON & METAL
SEPTEMBER 30, DECEMBER 31, PRO FORMA
1995 1995 ADJUSTMENTS
---------------- ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales......................... $13,812,000 $15,116,000 $ --
Brokerage..................... -- 216,000 --
Other income.................. 41,000 7,000 --
----------- ----------- ---------
13,853,000 15,339,000 --
----------- ----------- ---------
COST AND EXPENSES:
Cost of sales................. 10,869,000 13,739,000 (198,000)(7)
-- -- 12,000 (3)
Cost of brokerage............. -- 181,000 --
Management fees............... -- -- --
Personnel..................... 744,000 414,000 --
Professional services......... 527,000 66,000 --
Travel........................ 39,000 -- --
Occupancy..................... 83,000 -- --
Depreciation and
amortization................. 258,000 11,000 66,000 (3)
-- -- 167,000 (11)
Interest...................... 407,000 133,000 91,000 (9)
Environmental remediation
costs........................ -- -- --
Bad debt expense.............. 151,000 -- --
Other general and
administrative............... 477,000 336,000 (328,000)(5)
----------- ----------- ---------
13,555,000 14,880,000 (190,000)
----------- ----------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 298,000 459,000 190,000
INCOME TAXES (BENEFIT).......... (711,000) 140,000 (64,000)(8)
----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS, NET OF INCOME
TAXES.......................... $ 1,009,000 $ 319,000 $ 254,000
=========== =========== =========
NET INCOME (LOSS) AFTER
EXTRAORDINARY ITEM AND INCOME
TAXES.......................... $ 1,815,000 $ 319,000 $ 254,000
=========== =========== =========
INCOME PER SHARE:
Income from continuing
operations, net of income
taxes........................ $ .17
===========
Net income after extraordinary
item and income taxes........ $ .30
===========
Weighted average number of
common shares outstanding.... 6,099,694
===========
</TABLE>
See accompanying Headnote and Notes to Pro Forma Consolidated Financial
Statements
F-6
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--(CONTINUED)
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
MID-AMERICA MID-AMERICA WEISSMAN WEISSMAN CONSOLIDATED
SHREDDING SHREDDING IRON & METAL IRON & METAL PRO FORMA
DECEMBER 31, PRO FORMA DECEMBER 31, PRO FORMA SEPTEMBER 30,
1995 ADJUSTMENTS 1995 ADJUSTMENTS 1995
------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales................. $3,866,000 $ -- $16,207,000 $ -- $49,001,000
Brokerage............. -- -- 2,956,000 -- 3,172,000
Other income.......... -- -- 1,000 -- 49,000
---------- -------- ----------- --------- -----------
3,866,000 -- 19,164,000 -- 52,222,000
---------- -------- ----------- --------- -----------
COST AND EXPENSES:
Cost of sales......... 3,587,000 (86,000)(3) 12,235,000 160,000 (3) 40,138,000
-- -- -- (180,000)(5) --
Cost of brokerage..... -- -- 2,894,000 -- 3,075,000
Management fees....... -- -- 180,000 (180,000)(5) --
Personnel............. 247,000 -- 654,000 -- 2,059,000
Professional
services............. 6,000 -- 17,000 -- 616,000
Travel................ 1,000 -- -- -- 40,000
Occupancy............. -- -- -- -- 83,000
Depreciation and
amortization......... -- -- 7,000 -- 509,000
-- -- -- -- --
Interest.............. 125,000 -- -- 598,000 (9) 1,354,000
Environmental
remediation costs.... -- -- 30,000 (30,000)(7) --
Bad debt expense...... -- -- -- -- 151,000
Other general and
administrative....... 23,000 -- 124,000 (74,000)(5) 558,000
---------- -------- ----------- --------- -----------
3,989,000 (86,000) 16,141,000 294,000 48,583,000
---------- -------- ----------- --------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... (123,000) 86,000 3,023,000 (294,000) 3,639,000
INCOME TAXES (BENEFIT).. -- (10,000) -- 307,000 (338,000)
---------- -------- ----------- --------- -----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS,
NET OF INCOME TAXES.... $ (123,000) $ 96,000 $ 3,023,000 $(601,000) $ 3,977,000
========== ======== =========== ========= ===========
NET INCOME (LOSS) AFTER
EXTRAORDINARY ITEM AND
INCOME TAXES........... $ (123,000) $ 96,000 $ 3,023,000 $(601,000) $ 4,783,000
========== ======== =========== ========= ===========
INCOME PER SHARE:
Income from continuing
operations, net of
income taxes......... $ .59
===========
Net income after
extraordinary item
and income taxes..... $ .71
===========
Weighted average
number of common
shares outstanding... 6,691,024
===========
</TABLE>
See accompanying Headnote and Notes to Pro Forma Consolidated Financial
Statements
F-7
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
RECYCLING MID-AMERICA MID-AMERICA WEISSMAN WEISSMAN USE OF CONSOLIDATED
INDUSTRIES, INC. SHREDDING SHREDDING IRON & METAL IRON & METAL PROCEEDS PRO FORMA
MARCH 31, MARCH 31, PRO FORMA MARCH 31, PRO FORMA FROM MARCH 31,
1996 1996 ADJUSTMENTS 1996 ADJUSTMENTS OFFERING(12) 1996
---------------- ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................. $ 1,240,000 $ 18,000 $ (18,000)(4) $ 9,000 $ (9,000)(4) $1,128,000 $ 2,368,000
Trade accounts
receivable, net...... 2,149,000 109,000 (109,000)(4) 2,170,000 (570,000)(2) -- 3,749,000
Accounts receivable,
related parties...... 95,000 -- -- -- -- -- 95,000
Inventories........... 2,076,000 34,000 21,000 (2) 765,000 135,000 (2) -- 3,031,000
Prepaid expenses...... 353,000 -- -- 10,000 (10,000)(4) -- 353,000
Other current assets.. 216,000 -- -- -- -- -- 216,000
Deferred income
taxes................ 500,000 -- -- -- -- -- 500,000
----------- ---------- ----------- ---------- ---------- ---------- -----------
Total current
assets.............. 6,629,000 161,000 (106,000) 2,954,000 (454,000) 1,128,000 10,312,000
PROPERTY, PLANT AND
EQUIPMENT, net........ 8,421,000 2,823,000 (953,000)(2) 5,400,000 4,500,000 (2) -- 20,191,000
DEFERRED INCOME TAXES,
net................... 741,000 -- -- -- -- -- 741,000
OTHER ASSETS, net...... 4,147,000 -- -- -- -- -- 4,147,000
----------- ---------- ----------- ---------- ---------- ---------- -----------
$19,938,000 $2,984,000 $(1,059,000) $8,354,000 $4,046,000 $1,128,000 $35,391,000
=========== ========== =========== ========== ========== ========== ===========
</TABLE>
See accompanying Headnote and Notes to Pro Forma Consolidated Financial
Statements
F-8
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
MARCH 31, 1996
<TABLE>
<CAPTION>
RECYCLING MID-AMERICA MID-AMERICA WEISSMAN WEISSMAN USE OF CONSOLIDATED
INDUSTRIES, INC. SHREDDING SHREDDING IRON & METAL IRON & METAL PROCEEDS PRO FORMA
MARCH 31, MARCH 31, PRO FORMA MARCH 31, PRO FORMA FROM MARCH 31,
1996 1996 ADJUSTMENTS 1996 ADJUSTMENTS OFFERING(12) 1996
---------------- ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Bank overdraft........ $ -- $ -- $ -- $ 115,000 $ (115,000)(4) $ -- $ --
Notes payable......... -- 1,210,000 (1,155,000)(2) -- 2,200,000 (2) -- 2,255,000
Notes payable--related
party................ 1,927,000 -- -- -- -- -- 1,927,000
Trade accounts
payable.............. 1,235,000 129,000 (129,000)(4) 1,200,000 (1,200,000)(4) -- 1,235,000
Trade accounts
payable--related
parties.............. 140,000 143,000 (143,000)(4) -- -- -- 140,000
Accrued liabilities:
Interest.............. 30,000 -- -- -- -- -- 30,000
Payroll and other..... 267,000 16,000 (16,000)(4) 172,000 (172,000)(4) -- 267,000
Income taxes payable.. 86,000 -- -- -- -- -- 86,000
Due to factor, related
party................ 137,000 -- -- -- -- -- 137,000
Environmental
remediation
liabilities.......... -- -- -- 30,000 (30,000)(4) -- --
Current portion of
long-term debt....... 94,000 21,000 (21,000)(4) -- 562,000 (2) -- 902,000
-- -- 246,000 (2) -- -- -- --
Current portion of
long-term debt,
related parties...... 2,294,000 -- -- -- -- -- 2,294,000
Current portion of
obligation under
capital lease........ 314,000 -- -- -- -- -- 314,000
----------- ----------- ----------- ---------- ---------- ----------- -----------
Total Current
Liabilities......... 6,524,000 1,519,000 (1,218,000) 1,517,000 1,245,000 -- 9,587,000
----------- ----------- ----------- ---------- ---------- ----------- -----------
LONG-TERM DEBT:
Long-term debt, net of
current portion...... 124,000 2,000 (2,000)(4) -- 2,938,000 (2) -- 4,026,000
-- -- 964,000 (2) -- -- -- --
Long-term debt--
related parties, net
of current portion... 945,000 -- -- -- -- -- 945,000
Obligation under
capital lease, net of
current portion...... 1,452,000 -- -- -- -- -- 1,452,000
Purchase price
obligation........... -- -- 660,000 (2) -- 5,200,000 (2) (5,200,000) 660,000
----------- ----------- ----------- ---------- ---------- ----------- -----------
Total Long-Term
Debt................ 2,521,000 2,000 1,622,000 -- 8,138,000 (5,200,000) 7,083,000
----------- ----------- ----------- ---------- ---------- ----------- -----------
Total Liabilities.... 9,045,000 1,521,000 404,000 1,517,000 9,383,000 (5,200,000) 16,670,000
----------- ----------- ----------- ---------- ---------- ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock,
Series A............. 1,312,000 -- -- -- -- (1,312,000) --
Common stock.......... 10,000 -- -- -- -- 4,000 14,000
Additional paid-in
capital.............. 17,909,000 3,055,000 (3,055,000)(2) -- 1,500,000 (2) 7,636,000 27,045,000
Retained earnings
(deficit)............ (8,338,000) (1,592,000) 1,592,000 6,837,000 (6,837,000)(2) -- (8,338,000)
----------- ----------- ----------- ---------- ---------- ----------- -----------
Total Stockholders'
Equity.............. 10,893,000 1,463,000 (1,463,000) 6,837,000 (5,337,000) 6,328,000 18,721,000
----------- ----------- ----------- ---------- ---------- ----------- -----------
$19,938,000 $ 2,984,000 $(1,059,000) $8,354,000 $4,046,000 $ 1,128,000 $35,391,000
=========== =========== =========== ========== ========== =========== ===========
</TABLE>
See accompanying Headnote and Notes to Pro Forma Consolidated Financial
Statements
F-9
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
RECYCLING ANGLO ANGLO MID-AMERICA MID-AMERICA
INDUSTRIES, INC. IRON & METAL IRON & METAL SHREDDING SHREDDING
MARCH 31, MARCH 31, PRO FORMA MARCH 31, PRO FORMA
1996 1996 ADJUSTMENTS 1996 ADJUSTMENTS
---------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales................. $10,735,000 $7,240,000 $(4,433,000)(6) $1,170,000 $ --
Brokerage............. -- -- -- -- --
Other income.......... 28,000 28,000 (27,000)(6) -- --
----------- ---------- ----------- ---------- --------
10,763,000 7,268,000 (4,460,000) 1,170,000 --
----------- ---------- ----------- ---------- --------
COST AND EXPENSES:
Cost of sales......... 9,352,000 5,923,000 8,000 (3) 1,228,000 (39,000)(3)
-- -- (3,646,000)(6) -- --
-- -- (100,000)(7) -- --
Cost of brokerage..... -- -- -- -- --
Personnel............. 862,000 317,000 (225,000)(6) 60,000 --
Professional
services............. 264,000 30,000 -- 6,000 --
Travel................ 60,000 3,000 (3,000)(6) -- --
Occupancy............. 28,000 -- -- -- --
Depreciation and
amortization......... 101,000 20,000 32,000 (3) -- --
-- -- 42,000 (11) -- --
-- -- (20,000)(6) -- --
Interest.............. 245,000 109,000 (54,000)(6) 67,000 --
Management fee........ -- -- -- -- --
Other general and
administrative....... 238,000 193,000 (164,000)(5) 9,000 --
-- -- (75,000)(6) -- --
----------- ---------- ----------- ---------- --------
11,150,000 6,595,000 (4,205,000) 1,370,000 (39,000)
----------- ---------- ----------- ---------- --------
INCOME (LOSS) BEFORE
INCOME TAXES........... (387,000) 673,000 (255,000) (200,000) 39,000
INCOME TAXES (BENEFIT).. (437,000) 229,000 (87,000)(8) -- (63,000)(8)
----------- ---------- ----------- ---------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS,
NET OF INCOME TAXES.... $ 50,000 $ 444,000 $ (168,000) $ (200,000) $102,000
=========== ========== =========== ========== ========
NET INCOME (LOSS) AFTER
EXTRAORDINARY ITEM AND
INCOME TAXES........... $ 98,000 $ 444,000 $ (168,000) $ (200,000) $102,000
=========== ========== =========== ========== ========
INCOME PER SHARE:
Income from continuing
operations, net of
income taxes......... $ .01
===========
Net income after
extraordinary item
and income taxes..... $ .01
===========
Weighted average
number of common
shares outstanding... 9,773,913
===========
</TABLE>
See accompanying Headnote and Notes to Pro Forma Consolidated Financial
Statements
F-10
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--(CONTINUED)
FOR THE SIX MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
WEISSMAN WEISSMAN USE OF CONSOLIDATED
IRON & METAL IRON & METAL PROCEEDS PRO FORMA
MARCH 31, PRO FORMA FROM MARCH 31,
1996 ADJUSTMENTS OFFERING 1996
------------ ------------ -------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Sales.................... $ 7,881,000 $ -- $-- $22,593,000
Brokerage................ 2,476,000 -- -- 2,476,000
Other income............. 26,000 -- -- 55,000
----------- --------- ---- -----------
10,383,000 -- -- 25,124,000
----------- --------- ---- -----------
COST AND EXPENSES:
Cost of sales............ 5,858,000 80,000 (3) -- 18,574,000
-- (90,000)(5) --
Cost of brokerage........ 2,411,000 -- -- 2,411,000
Personnel................ 301,000 -- -- 1,315,000
Professional services.... 15,000 -- -- 315,000
Travel................... -- -- -- 60,000
Occupancy................ -- -- -- 28,000
Depreciation and
amortization............ 4,000 -- -- 179,000
Interest................. -- 299,000 (9) -- 666,000
Management fee........... 45,000 (45,000)(5) -- --
Other general and
administrative.......... 151,000 (36,000)(5) -- 316,000
----------- --------- ---- -----------
8,785,000 208,000 -- 23,864,000
----------- --------- ---- -----------
INCOME (LOSS) BEFORE INCOME
TAXES..................... 1,598,000 (208,000) -- 1,260,000
INCOME TAXES (BENEFIT)..... -- 473,000 -- 115,000
----------- --------- ---- -----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS, NET
OF INCOME TAXES........... $ 1,598,000 $(681,000) $-- $ 1,145,000
=========== ========= ==== ===========
NET INCOME (LOSS) AFTER
EXTRAORDINARY ITEM AND
INCOME TAXES.............. $ 1,598,000 $(681,000) $-- $ 1,193,000
=========== ========= ==== ===========
INCOME PER SHARE:
Income from continuing
operations, net of
income taxes............ $ .11
===========
Net income after
extraordinary item and
income taxes............ $ .12
===========
Weighted average number
of common shares
outstanding............. 10,227,134
===========
</TABLE>
See accompanying Headnote and Notes to Pro Forma Consolidated Financial
Statements
F-11
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--PRO FORMA ADJUSTMENTS
The adjustments relating to the pro forma consolidated statements of
operations are computed assuming the acquisitions of Anglo, Mid-America and
Weissman were consummated at the beginning of the applicable periods
presented. The adjustments relating to the pro forma consolidated balance
sheet are computed assuming the acquisitions of Mid-America and Weissman were
consummated at March 31, 1996 for the March 31, 1996 balance sheet.
NOTE 2--ACQUISITION OF SUBSIDIARIES
Mid-America
Reflects the acquisition of equipment, inventory, land and buildings for
assumption of debt and cash. The acquisition of Mid-America is recorded using
the purchase method.
Weissman
Reflects the acquisition of accounts receivable, inventory, buildings,
equipment and land for notes payable, common stock and cash. The acquisition
of Weissman is recorded using the purchase method.
NOTE 3--ADDITIONAL DEPRECIATION AND AMORTIZATION
Anglo and Weissman
Reflects additional depreciation of property and equipment due to the
increased cost of the assets acquired. Reflects amortization of goodwill using
the straight line method over 20 years for Anglo.
Mid-America
Adjusts depreciation of property and equipment due to the allocated cost of
the assets acquired.
NOTE 4--UNACQUIRED ASSETS AND LIABILITIES
Mid-America
Removes assets and liabilities that were not acquired or assumed by the
Company.
Weissman
Removes prepaid pension costs, accrued pension liabilities and other
liabilities not acquired or assumed in the acquisition.
NOTE 5--NON-RECURRING EXPENSES
Removes non-recurring expenses paid to former officers and stockholders of
the acquired businesses for salaries and benefits that will not be incurred in
the future under the terms of the acquisition agreements.
NOTE 6--DUPLICATE TRANSACTIONS FOR ANGLO
Removes 110 days of operations for Anglo subsequent to the acquisition,
which are included in the historical operations of the Company for the six
months ended March 31, 1996. The assets and liabilities of Anglo are included
in the Company's consolidated balance sheet at March 31, 1996.
F-12
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--NON-RECURRING REMEDIATION EXPENSES
Anglo
Removes non-recurring equipment costs, outside labor costs, direct labor
costs and landfill costs incurred for remediation costs in compliance with the
terms of the sale agreement.
Weissman
Removes estimated remediation costs in compliance with the terms of the sale
agreement that will not be incurred in the future.
NOTE 8--PROVISION FOR INCOME TAXES
Records provision for income taxes on the acquired operations including
recognition of benefit from utilization of net operating loss carryforward and
affects of alternative minimum income taxes.
NOTE 9--INTEREST EXPENSE
Reflects interest expense for notes payable used to finance the acquisition
of Weissman (interest at prime plus 2.25%; 10.5% at March 31, 1996) and Anglo
(interest at 14%).
NOTE 10--WEIGHTED AVERAGE SHARES OUTSTANDING
On a pro forma basis, weighted average shares are adjusted to reflect the
227,693 shares of Common Stock issued in the acquisition of Anglo and 363,637
shares of common stock issued in the acquisition of Weissman. Such adjustments
are assumed to be outstanding for the entire period for all periods presented.
NOTE 11--NON-COMPETE AND CONSULTING AGREEMENT
Reflects amortization of the non-compete and consulting agreement with the
president of Anglo over a six year term using the straight line method.
NOTE 12--USE OF PROCEEDS FROM PUBLIC OFFERING
Reflects estimated use of approximately $14,388,000 of net proceeds from the
public offering for: cash purchase price of Weissman $5,200,000; repurchase of
1,380,585 shares of the Company's common stock for $5,660,000; and to redeem
all of the Company's outstanding Series A convertible preferred stock and
120,000 shares of the Company's common stock issued in connection with the
acquisition of its Nevada facility for $2,400,000. The remaining $1,128,000
will be used for working capital and has been presented as cash in the pro
forma balance sheet. Also removes interest expense incurred during the pro
forma period for bridge loan indebtedness.
F-13
<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-14
<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-15
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1995 1994 1996
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................... $ 184,000 $ 115,000 $ 1,240,000
Trade accounts receivable, pledged, less
allowance for doubtful accounts of
$15,000, $25,000, and $10,000............ 1,026,000 898,000 2,149,000
Accounts receivable, related party........ 223,000 -- 95,000
Inventories............................... 497,000 243,000 2,076,000
Prepaid expenses.......................... 137,000 111,000 353,000
Other..................................... -- 40,000 216,000
Deferred income taxes..................... -- -- 500,000
----------- ---------- -----------
Total Current Assets.................... 2,067,000 1,407,000 6,629,000
NOTE RECEIVABLE, related party.............. -- 859,000 --
PROPERTY, PLANT AND EQUIPMENT, net.......... 6,686,000 6,590,000 8,421,000
DEFERRED INCOME TAXES, net.................. 800,000 -- 741,000
OTHER ASSETS................................ 744,000 762,000 4,147,000
----------- ---------- -----------
$10,297,000 $9,618,000 $19,938,000
=========== ========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-16
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- MARCH 31,
1995 1994 1996
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................ $ 61,000 $ 491,000 $ --
Notes payable-related parties........ -- 8,000 1,927,000
Trade accounts payable............... 655,000 906,000 1,235,000
Trade accounts payable-related
parties............................. 73,000 87,000 140,000
Professional services payable........ -- 255,000 --
Accrued liabilities:
Interest............................ 22,000 33,000 13,000
Interest-related party.............. 8,000 11,000 17,000
Payroll and other................... 107,000 544,000 267,000
Income taxes payable................ 86,000 -- 86,000
Due to related parties............... -- 276,000 --
Due to factor, related party......... 197,000 461,000 137,000
Current portion of long-term debt.... 227,000 2,502,000 94,000
Current portion of long-term debt,
related parties..................... 218,000 8,000 2,294,000
Current portion of obligation under
capital lease....................... 37,000 -- 314,000
----------- ------------ -----------
Total Current Liabilities.......... 1,691,000 5,582,000 6,524,000
----------- ------------ -----------
DEFERRED GAIN.......................... -- 751,000 --
----------- ------------ -----------
LONG-TERM DEBT:
Long-term debt, net of current
portion............................. 132,000 402,000 124,000
Long-term debt-related parties, net
of current portion.................. 1,979,000 117,000 945,000
Obligation under capital lease, net
of current portion.................. 41,000 -- 1,452,000
----------- ------------ -----------
Total Long-Term Debt............... 2,152,000 519,000 2,521,000
----------- ------------ -----------
Total Liabilities.................. 3,843,000 6,852,000 9,045,000
----------- ------------ -----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, no par value,
10,000,000 shares authorized:
Series A 13,000, 38,000 and 13,000
shares issued and outstanding...... 1,312,000 3,612,000 1,312,000
Series B 300,000, 591,333 and -0-
shares issued and outstanding...... 450,000 887,000 --
Common stock, $.001 par value,
50,000,000 shares authorized,
8,395,785, 3,005,704 and 10,055,193
shares issued and outstanding....... 8,000 3,000 10,000
Additional paid-in capital........... 13,120,000 8,269,000 17,909,000
Accrued salary payable in equity
security............................ -- 246,000 --
Accumulated (deficit)................ (8,436,000) (10,251,000) (8,338,000)
----------- ------------ -----------
Total Stockholders' Equity......... 6,454,000 2,766,000 10,893,000
----------- ------------ -----------
$10,297,000 $ 9,618,000 $19,938,000
=========== ============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-17
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
AND THE SIX MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------- ------------------------
1995 1994 1993 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales................. $13,812,000 $ 4,812,000 $ -- $10,735,000 $7,090,000
Other income.......... 41,000 19,000 -- 28,000 27,000
----------- ----------- ----------- ----------- ----------
Total Revenues...... 13,853,000 4,831,000 -- 10,763,000 7,117,000
----------- ----------- ----------- ----------- ----------
COSTS AND EXPENSES:
Cost of sales......... 9,156,000 3,516,000 -- 8,712,000 4,563,000
Cost of sales, related
parties.............. 1,713,000 594,000 -- 640,000 760,000
Personnel............. 744,000 327,000 830,000 862,000 263,000
Professional
services............. 527,000 553,000 432,000 264,000 290,000
Travel................ 39,000 60,000 43,000 60,000 19,000
Occupancy............. 83,000 50,000 60,000 28,000 25,000
Depreciation and
amortization......... 258,000 258,000 357,000 101,000 124,000
Interest.............. 407,000 203,000 156,000 245,000 198,000
Bad debt expense...... 151,000 25,000 -- -- --
Other general and
administrative....... 477,000 179,000 -- 238,000 190,000
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 11,150,000 6,432,000
----------- ----------- ----------- ----------- ----------
INCOME (LOSS) BEFORE
EQUITY IN NET (LOSS) OF
JOINT VENTURES, EQUITY
INVESTEE AND
EXTRAORDINARY GAIN..... 298,000 (1,142,000) (2,491,000) (387,000) 685,000
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) (387,000) 685,000
EXTRAORDINARY GAIN FROM
SETTLEMENT OF DEBTS.... 806,000 218,000 475,000 48,000 222,000
----------- ----------- ----------- ----------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES
(BENEFIT).............. 1,104,000 (924,000) (2,483,000) (339,000) 907,000
(BENEFIT) FROM INCOME
TAXES.................. (711,000) -- -- (437,000) --
----------- ----------- ----------- ----------- ----------
NET INCOME (LOSS)....... $ 1,815,000 $ (924,000) $(2,483,000) $ 98,000 $ 907,000
=========== =========== =========== =========== ==========
PRIMARY INCOME (LOSS)
PER COMMON SHARE:
Before extraordinary
item................. $ .17 $ (.46) $ (1.24) $ .01 $ .20
Extraordinary item.... .13 .09 .20 -- .06
----------- ----------- ----------- ----------- ----------
PRIMARY NET INCOME
(LOSS) PER COMMON
SHARE.................. $ .30 $ (.37) $ (1.04) $ .01 $ .26
=========== =========== =========== =========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 6,099,694 2,504,762 2,376,823 9,773,913 3,495,306
=========== =========== =========== =========== ==========
FULLY DILUTED INCOME
(LOSS) PER COMMON
SHARE:
Before extraordinary
item................. $ .16 $ (.43) $ (1.24) $ .01 $ .19
Extraordinary item.... .13 .08 .20 -- .06
----------- ----------- ----------- ----------- ----------
FULLY DILUTED NET INCOME
(LOSS) PER COMMON
SHARE.................. $ .29 $ (.35) $ (1.04) $ .01 $ .25
=========== =========== =========== =========== ==========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 6,307,694 2,623,069 2,376,823 9,981,913 3,703,306
=========== =========== =========== =========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-18
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995
AND THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
--------------------- ------------------ PAID-IN OPTION EQUITY ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL TO CEO SECURITY (DEFICIT) TOTAL
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 30,
1992........... -- $ -- 2,367,728 $ 3,000 $ 5,905,000 $ -- $ -- $ (6,844,000) $ (936,000)
Common stock
issued for
services....... -- -- 20,000 -- 149,000 -- -- -- 149,000
Contribution of
services....... -- -- -- -- 120,000 -- -- -- 120,000
Dilution of
predecessor
cost adjustment
property
option......... -- -- -- -- 444,000 -- -- -- 444,000
Net (loss)...... -- -- -- -- -- -- -- (2,483,000) (2,483,000)
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
Balances,
September 30,
1993........... -- -- 2,387,728 3,000 6,618,000 -- -- (9,327,000) (2,706,000)
Preferred stock
issued for
debt........... 591,333 887,000 -- -- -- -- -- -- 887,000
Preferred stock
issued for
acquisition
of NRI......... 38,000 3,612,000 -- -- -- -- -- -- 3,612,000
Common stock
issued for
cash........... -- -- 30,000 -- 56,000 -- -- -- 56,000
Common stock
issued for
services....... -- -- 39,600 -- 242,000 -- -- -- 242,000
Common stock
issued for
debt........... -- -- 548,376 -- 1,351,000 -- -- -- 1,351,000
Contribution to
capital........ -- -- -- -- 2,000 -- -- -- 2,000
Conversion of
accrued
salary......... -- -- -- -- -- -- 246,000 -- 246,000
Net (loss)...... -- -- -- -- -- -- -- (924,000) (924,000)
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
Balances,
September 30,
1994........... 629,333 4,499,000 3,005,704 3,000 8,269,000 -- 246,000 (10,251,000) 2,766,000
Redemption of
preferred stock
Series A....... (25,000) (2,300,000) -- -- -- -- -- -- (2,300,000)
Redemption of
preferred stock
Series B and
other equity
for Option to
CEO............ (291,333) (437,000) -- -- -- 683,000 (246,000) -- --
Common stock
issued for
acquisition
of MRI......... -- -- 120,000 -- 1,200,000 -- -- -- 1,200,000
Common stock
issued during
private
offering, net
of offering
costs of
$590,000....... -- -- 3,746,400 4,000 2,778,000 -- -- -- 2,782,000
Common stock
issued to
retire debt.... -- -- 166,666 -- 150,000 -- -- -- 150,000
Common stock
issued for
renegotiation
of payment
terms for a
stockholder
loan........... -- -- 10,000 -- -- -- -- -- --
Common stock
issued for
services....... -- -- 10,000 -- 25,000 -- -- -- 25,000
Common stock
issued for
interest on
bridge loans... -- -- 17,351 -- 16,000 -- -- -- 16,000
Common stock
issued on
exercise of
option to CEO.. -- -- 1,319,445 1,000 682,000 (683,000) -- -- --
Common stock
rounding due to
stock split.... -- -- 219 -- -- -- -- -- --
Net income...... -- -- -- -- -- -- -- 1,815,000 1,815,000
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
Balances,
September 30,
1995........... 313,000 1,762,000 8,395,785 8,000 13,120,000 -- -- (8,436,000) 6,454,000
Common stock
issued for
acquisition of
Anglo
(unaudited).... -- -- 227,693 -- 925,000 -- -- -- 925,000
Conversion of
preferred stock
series B
(unaudited).... (300,000) (450,000) 12,000 -- 450,000 -- -- -- --
Common stock
issued in
private
offering, net
of offering
costs of
$633,000
(unaudited).... -- -- 1,040,636 1,000 2,227,000 -- -- -- 2,228,000
Conversion of
bridge loans
(unaudited).... -- -- 323,523 1,000 1,137,000 -- -- -- 1,138,000
Common stock
issued for cash
(unaudited).... -- -- 55,556 -- 50,000 -- -- -- 50,000
Net income for
the period
(unaudited).... -- -- -- -- -- -- -- 98,000 98,000
-------- ----------- ---------- ------- ----------- --------- --------- ------------ -----------
Balances, March
31, 1996
(unaudited).... 13,000 $ 1,312,000 10,055,193 $10,000 $17,909,000 $ -- $ -- $ (8,338,000) $10,893,000
======== =========== ========== ======= =========== ========= ========= ============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-19
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
AND THE SIX MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------- ------------------------
1995 1994 1993 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (TO)
OPERATING ACTIVITIES:
Net income (loss)..... $ 1,815,000 $ (924,000) $(2,483,000) $ 98,000 $ 907,000
Adjustments to
reconcile net income
(loss) to net cash
used in operating
activities:
Depreciation and
amortization......... 784,000 392,000 357,000 479,000 454,000
Equity in net loss of
affiliates........... -- -- 467,000 -- --
Extraordinary gain
from settlement of
debts................ (806,000) (218,000) (475,000) (48,000) (222,000)
Abandonment of
projects............. -- 208,000 549,000 -- --
Contribution of
services............. -- -- 120,000 -- --
Issuance of stock for
services............. 25,000 244,000 149,000 -- --
Write-off acquisition
costs................ -- 72,000 -- -- --
Bad debt expense...... 151,000 25,000 -- -- --
Deferred income
taxes................ (800,000) -- -- (441,000) --
Changes in assets and
liabilities:
Trade accounts
receivable........... (154,000) (923,000) -- (1,123,000) (252,000)
Inventories........... (254,000) (243,000) -- (213,000) 52,000
Prepaid expenses...... (26,000) (111,000) -- (91,000) 5,000
Other current assets.. 33,000 (40,000) 8,000 (216,000) 32,000
Accounts payable...... (290,000) 506,000 736,000 647,000 (6,000)
Accrued liabilities... (451,000) 150,000 454,000 160,000 (62,000)
Income taxes payable.. 86,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net Cash Provided
(Used) by Operating
Activities.......... 113,000 (862,000) (118,000) (748,000) 908,000
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM (TO)
INVESTING ACTIVITIES:
Additions to
engineering plans.... -- -- (66,000) -- --
Additions to
equipment............ (472,000) (25,000) -- (302,000) (406,000)
Receivables-related
party................ -- -- 72,000 128,000 (81,000)
Sale of equipment..... -- 48,000 -- -- --
Collections on note
receivable........... -- 41,000 -- -- --
Additions to
acquisition costs and
goodwill............. (103,000) (319,000) (112,000) (604,000) (56,000)
Non-compete
agreement............ -- -- -- (200,000) --
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) (978,000) (543,000)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM (TO)
FINANCING ACTIVITIES:
Proceeds from
borrowings-related
parties.............. 321,000 632,000 676,000 1,593,000 --
Proceeds from other
borrowings........... -- 434,000 99,000 20,000 --
Principal payments on
borrowings........... (2,756,000) (199,000) (40,000) (401,000) (2,298,000)
Principal payments on
borrowings-related
parties.............. (383,000) (152,000) -- (411,000) (281,000)
Principal payments on
capital lease........ (34,000) -- -- (112,000) --
Proceeds from factor.. 7,335,000 2,450,000 -- 3,934,000 3,364,000
Payments to factor.... (7,599,000) (1,989,000) -- (3,994,000) (3,494,000)
Proceeds from issuance
of common stock...... 3,998,000 56,000 -- 2,278,000 2,782,000
Deferred offering
costs................ -- -- -- (125,000) (314,000)
----------- ----------- ----------- ----------- -----------
Net Cash Provided
(Used) by Financing
Activities.......... 882,000 1,232,000 735,000 2,782,000 (241,000)
----------- ----------- ----------- ----------- -----------
Increase in cash....... 69,000 115,000 -- 1,056,000 124,000
CASH, beginning of
period................ 115,000 -- -- 184,000 115,000
----------- ----------- ----------- ----------- -----------
CASH, end of period.... $ 184,000 $ 115,000 $ -- $ 1,240,000 $ 239,000
=========== =========== =========== =========== ===========
</TABLE>
See Note 21
See accompanying Notes to Consolidated Financial Statements
F-20
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS TO THE PERIODS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED
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.
Recycling Industries of Missouri, Inc. d/b/a Mid-America Shredding (Mid-
America), formed by the Company to acquire the assets of Mid-America
Shredding, Inc. in April 1996 (see Note 22), operates a metals recycling
facility in Ste. Genevieve, Missouri, serving midwestern steel mills and
markets along the Mississippi River.
The acquisitions have been accounted for under the purchase method of
business combinations and, accordingly, the results of operations of the
acquired businesses are included in the Company's financial statements only
from the applicable date of acquisition.
Unaudited Interim Financial Statements
In the opinion of management, the unaudited interim financial statements for
the six month periods ended March 31, 1996 and 1995 are presented on a basis
consistent with the audited annual financial statements and
F-21
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reflect all adjustments, consisting only of normal recurring accruals,
necessary for fair presentation of the results of such periods. The results of
operations for the interim period ending March 31, 1996 are not necessarily
indicative of the results to be expected for the year ended September 30,
1996.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock Based
Compensation. FAS 123 encourages the accounting for stock based employee
compensation programs to be reported within the financial statements on a fair
value based method. If the fair value based method is not adopted, then FAS
123 requires pro forma disclosure of net income and earnings per share as if
the fair value based method had been adopted. The Company has not yet
determined how FAS 123 will be implemented or its impact on the financial
statements. FAS 123 is effective for transactions entered into after December
15, 1995.
Acquisitions Costs
The Company had capitalized acquisition costs of $61,000, $164,000 and
$200,000 at September 30, 1995 and 1994, and March 31, 1996 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.
Concentration of Credit Risk
Concentrations of credit risk with respect to trade receivables exist due to
large balances with a few customers. At September 30, 1995 and 1994, and March
31, 1996, accounts receivable balances from significant customers were
$699,000, $711,000 and $1,454,000, or 65%, 79% and 68%, 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. Sales
to one customer in Mexico comprised 23.9% of sales for the six months ended
March 31, 1996. 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.
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,
F-22
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$12,000 and $369,000 for the periods ended September 30, 1995, 1994 and 1993,
and March 31, 1996 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.
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 and March 31, 1996 the Company has recorded a
net deferred tax asset of $800,000 and $1,241,000 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.
F-23
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1995 and March 31, 1996 the Company has federal income tax
loss carryforwards of approximately $6,900,000 and $7,200,000 respectively,
which if not utilized to offset future taxable income, expire in the years
2002 through 2009.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates and assumptions.
Reclassifications
Certain balances in the 1994 and 1993 financial statements have been
reclassified to conform to the 1995 presentation. The reclassifications had no
effect on financial condition or results of operations.
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:
<TABLE>
<S> <C>
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
===========
</TABLE>
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.
All of the above obligations are collateralized by the assets of NRI.
F-24
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-25
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA
RECYCLING ACI PRO FORMA SEPTEMBER 30,
INDUSTRIES, INC. OPTION ADJUSTMENT 1995
---------------- ----------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets.......... $ 2,067,000 $(1,707,000) $ -- $360,000
Other Assets............ 8,230,000 (7,475,000) (188,000) 567,000
----------- ----------- ---------- --------
$10,297,000 $(9,182,000) $(188,000) $927,000
=========== =========== ========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
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>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA
RECYCLING ACI PRO FORMA SEPTEMBER 30,
INDUSTRIES, INC. OPTION ADJUSTMENT 1995
---------------- ------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................ $13,853,000 $(13,847,000) $ -- $ 6,000
Costs and expenses...... 13,555,000 (12,007,000) 168,000 1,716,000
----------- ------------ --------- -----------
Income (loss) before
extraordinary gain..... 298,000 (1,840,000) (168,000) (1,710,000)
Extraordinary gain from
settlement of debts.... 806,000 -- -- 806,000
(Benefit) from income
taxes.................. (711,000) 711,000 -- --
----------- ------------ --------- -----------
Net income (loss)... $ 1,815,000 $ (2,551,000) $(168,000) $ (904,000)
=========== ============ ========= ===========
(Loss) per common share:
Before extraordinary
gain................. $ (.27)
Extraordinary gain.... .13
-----------
Net (loss) per
common share....... $ (.14)
===========
</TABLE>
[C] On December 11, 1995, the Company acquired substantially all of the
assets and the business of Anglo Metal, Inc. dba Anglo Iron & Metal (Anglo).
The assets acquired from Anglo consisted of a heavy duty automotive shredder,
inventories, metal shearing equipment, balers, heavy equipment, tools and
rolling stock used in the business of recycling ferrous and non-ferrous
metals. The Company also purchased from Anglo certain real property, buildings
and leasehold improvements used in the metal recycling business.
The purchase price for Anglo was $6,065,000 comprised of: $2,079,000 in
cash; $1,865,000 note which is to be paid in ten monthly installments of
$186,500 beginning in February 1996; a $446,000 secured promissory note
payable in 60 consecutive monthly installments of $9,000, including interest;
a $750,000 unsecured note payable in 72 equal consecutive monthly installments
of $10,400; and 227,693 shares of Common Stock valued at $925,000.
F-26
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The purchase price of Anglo has been allocated as follows:
<TABLE>
<S> <C>
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
===========
</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 and the six months ended March 31,
1996, the operations of NRI are included in the consolidated balances of the
Company. The unaudited pro forma results of operations which follow also
assume that the acquisition of Anglo had occurred at the beginning of each
period presented for 1995 and March 1996.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
------------------------------------ MARCH 31,
1995 1994 1993 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................... $29,192,000 $11,348,000 $ 9,781,000 $13,571,000
Income (loss) from
continuing operations, net
of taxes................... $ 1,582,000 $ (857,000) $(2,807,000) $ 326,000
Net income (loss) after
extraordinary items and
income taxes............... $ 2,388,000 $ (639,000) $(2,332,000) $ 374,000
Income (loss) from
continuing operations, net
of taxes per common share.. $ .26 $ (.34) $ (1.18) $ .03
Net income (loss) after
extraordinary items and
income taxes per common
share...................... $ .39 $ (.25) $ (.98) $ .04
</TABLE>
F-27
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 and March 31, 1996 were
$197,000, $461,000 and $137,000, respectively. Accrued finance charges at
September 30, 1995 and 1994 and March 31, 1996 were $8,000, $11,000 and
$17,000, respectively. Total finance charges for the years ended September 30,
1995 and 1994, and for the six months ended March 31, 1996 were $82,000,
$11,000 and $49,000, respectively.
F-28
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--INVENTORIES
Inventories which are pledged, consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------- MARCH 31,
1995 1994 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................. $350,000 $167,000 $1,779,000
Finished goods................................. 147,000 76,000 297,000
-------- -------- ----------
$497,000 $243,000 $2,076,000
======== ======== ==========
</TABLE>
NOTE 7--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (substantially all of which is pledged)
consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land.................................. $1,640,000 $1,340,000 $ 1,710,000
Building and improvements............. 365,000 365,000 372,000
Heavy machinery and equipment......... 1,472,000 1,432,000 1,519,000
Automotive shredder................... 3,161,000 3,103,000 3,180,000
Assets under capital lease............ 118,000 -- 1,918,000
Transportation equipment.............. 561,000 443,000 712,000
Office equipment...................... 121,000 114,000 131,000
---------- ---------- -----------
Total............................... 7,438,000 6,797,000 9,542,000
Less accumulated depreciation and
amortization......................... (752,000) (207,000) (1,121,000)
---------- ---------- -----------
$6,686,000 $6,590,000 $ 8,421,000
========== ========== ===========
</TABLE>
NOTE 8--OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------- MARCH 31,
1995 1994 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Acquisition costs............................ $ 61,000 $164,000 $ 200,000
Goodwill, net of accumulated amortization of
$29,000 and $7,000 and $40,000 (see Note
2).......................................... 188,000 168,000 2,544,000
Investment in affiliate, at cost............. 277,000 -- 277,000
Engineering plans, net of accumulated
amortization of $899,000, $682,000 and
$930,000.................................... 188,000 405,000 157,000
Non-compete agreement, net of accumulated
amortization
of $56,000.................................. -- -- 944,000
Patent rights................................ 25,000 25,000 25,000
Other........................................ 5,000 -- --
-------- -------- ----------
$744,000 $762,000 $4,147,000
======== ======== ==========
</TABLE>
F-29
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 and the period ended March 31, 1996, management
determined that the net operating loss generated from prior years in the
amount of $6,900,000 and $7,200,000 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 and $1,241,000 has been
recorded as of September 30, 1995 and March 31, 1996. 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 and $7,200,000 at March 31, 1996.
F-30
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- MARCH 31,
1995 1994 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Total deferred tax assets............... $1,021,000 $ 2,293,000 $1,241,000
Less valuation allowance................ (221,000) (2,293,000) --
---------- ----------- ----------
800,000 -- 1,241,000
Total deferred tax (liabilities)........ -- -- --
---------- ----------- ----------
Net deferred tax asset.................. $ 800,000 $ -- $1,241,000
========== =========== ==========
</TABLE>
The tax effects of temporary differences and net operating loss
carryforwards that give rise to deferred tax assets and (liabilities) are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------ MARCH 31,
1995 1994 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Temporary differences:
Property and equipment............. $(1,743,000) $(1,674,000) $(1,718,000)
Valuation allowance................ (221,000) (2,293,000) --
Research and development costs..... 78,000 78,000 78,000
Engineering plans.................. 306,000 232,000 325,000
Goodwill........................... 10,000 -- 16,000
Allowance for doubtful accounts.... 3,000 9,000 3,000
Non-compete agreement.............. -- -- 12,000
Alternative minimum tax credits.... -- -- 86,000
Net operating loss carryforwards... 2,367,000 3,648,000 2,439,000
----------- ----------- -----------
$ 800,000 $ -- $ 1,241,000
=========== =========== ===========
</TABLE>
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------- ------------------------
1995 1994 1996 1995
---------- ----- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current............................ $ 89,000 $ -- $ 4,000 $--
Deferred........................... (800,000) -- (441,000) --
---------- ----- ---------- ----
$(711,000) $ -- $(437,000) $--
========== ===== ========== ====
</TABLE>
F-31
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred income tax (benefit) expense are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------ -----------------------
1995 1994 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Bad debt expense......... $ 6,000 $ (8,000) $ -- $ 3,000
Depreciation expense..... 69,000 1,674,000 (25,000) 35,000
Engineering costs........ (74,000) (145,000) (19,000) (37,000)
Goodwill amortization.... (10,000) -- (6,000) (5,000)
Accrued salaries--
officers................ -- 20,000 -- --
Net operating loss
carryforward............ 1,281,000 (482,000) (72,000) (776,000)
Valuation allowance...... (2,072,000) (1,059,000) (221,000) 780,000
Non-compete agreement.... -- -- (12,000) --
Alternative minimum tax
credits................. -- -- (86,000) --
----------- ----------- --------- ---------
$ (800,000) $ -- $(441,000) $ --
=========== =========== ========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------------- -----------------------
1995 1994 1996 1995
----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Tax expense (benefit) at
federal statutory rates..... $ 374,000 $(314,000) $(115,000) $ (308,000)
Capital gains--MRI........... 1,190,000 -- -- 1,190,000
Change in valuation
allowance................... (2,072,000) 480,000 (221,000) (780,000)
Other........................ (203,000) (166,000) (101,000) (102,000)
----------- ---------- --------- ----------
$ (711,000) $ -- $(437,000) $ --
=========== ========== ========= ==========
</TABLE>
NOTE 11--ECONOMIC DEPENDENCY
The Company is economically dependent on major customers for annual sales.
Such customers comprised the following percentages of revenues:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------- MARCH 31,
1995 1994 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Customer A....................................... 37.9% 29.9% 14.8%
Customer B....................................... 16.2% 19.7% 20.6%
Customer C....................................... 10.8% 18.7% 7.8%
Customer D....................................... -- -- 23.9%
</TABLE>
F-32
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--NOTES PAYABLE
Notes payable outstanding at September 30, 1995 and 1994 consisted of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1995 1994
------- --------
<S> <C> <C>
Notes to entity, interest at prime (7.75% at September 30,
1994), for which the Company is not accruing interest
(approximately $160,000 at September 30, 1995). The Company
has received no requests for payment since December 1989 and
has recorded an allowance against the note payable balance
and recognized a $300,000 gain on extinguishment of debt
(see Note 18)............................................... $ -- $300,000
Note to individuals, interest at 18%, with principal due
various dates through January 1994 with certain notes
cosigned by an officer and director of the Company,
unsecured................................................... 43,000 65,000
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%, principal and
interest paid
March 1996.................................................. 18,000 30,000
------- --------
$61,000 $491,000
======= ========
</TABLE>
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. During the six months
ended March 31, 1996, FD advanced $5,000 to the Company which remains
outstanding at March 31, 1996.
The remaining balance of related parties notes payable at March 31, 1996
consists of $1,472,000 note payable (see Note 2[C] with an original obligation
balance of $1,865,000) related to the Anglo inventory acquisition and $450,000
of bridge loans. In December 1995 and January 1996, the Company borrowed
$1,575,000 of bridge financing represented by the notes payable--related
parties with interest at 10% per annum. Proceeds from the loans were used to
finance the Anglo acquisition and general corporate expenses. In January 1996,
principal of $1,125,000 and accrued interest of $13,000 were converted into
323,523 shares of Common Stock. In connection with the bridge financing, the
lenders were issued warrants to purchase a total of 359,250 shares of Common
Stock at $1.50 per share, exercisable through the end of a three-year period
commencing on the effective date of a registration statement covering the
underlying Common Stock. Principal and interest related to the bridge loans,
which were not converted into Common Stock, are due in December, 1996 and
January, 1997. If the Company defaults on repayment of the loans, the notes
are convertible to Common Stock at a conversion price of the lesser of $2.00
or 50% of the average closing price for the last 30 days after the default.
First Equity Capital Securities, Inc. received a finders fee of $79,000 in
connection with the bridge loans.
F-33
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- MARCH 31,
1995 1994 1996
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to former owners of NRC,
interest at varying amounts with monthly
payments of $38,732; due through February
2003; collateralized by the assets of the
Company. Notes were paid as part of the
restructure of NRI (see Note 2).............. $ -- $2,429,000 $ --
Notes payable to financial institution;
principal and interest at the prime rate plus
2%, respectively; due on demand; if no demand
is made, then in monthly payments of $12,190
through 1997; collateralized by equipment.... 122,000 252,000 86,000
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 41,000
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 91,000
-------- ---------- --------
359,000 2,904,000 218,000
Less current portion.......................... 227,000 2,502,000 94,000
-------- ---------- --------
Long-Term Debt.............................. $132,000 $ 402,000 $124,000
======== ========== ========
</TABLE>
Maturities of long-term debt are as follows for the periods ending:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
1996............................................ $227,000 $ --
1997............................................ 88,000 94,000
1998............................................ 25,000 71,000
1999............................................ 12,000 33,000
2000............................................ 7,000 15,000
Thereafter...................................... -- 5,000
-------- --------
$359,000 $218,000
======== ========
</TABLE>
F-34
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--LONG-TERM DEBT--RELATED PARTY
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- MARCH 31,
1995 1994 1996
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
$2,000,000 note payable to NRC with 22 monthly
payments of principal and interest at 10%;
due January 1997; monthly payments of $30,000
and one balloon payment in January 1997 of
$1,671,000; collateralized by stock, property
and equipment................................ $1,902,000 $ -- $1,813,000
$446,000 note payable to Anglo Metal, Inc.;
monthly payments of principal and interest at
8% of $9,000; due December 2000;
collateralized by real property and
buildings.................................... -- -- 428,000
$750,000 note payable to officer of Anglo
Metal, Inc.; monthly payments of principal
and interest at 9% of $70,000; due December
2001......................................... -- -- 719,000
Other notes due to related parties with
interest at 8.5% to 12%...................... 295,000 125,000 279,000
---------- -------- ----------
2,197,000 125,000 3,239,000
Less current portion.......................... 218,000 8,000 2,294,000
---------- -------- ----------
Long-Term Debt, Related Party............... $1,979,000 $117,000 $ 945,000
========== ======== ==========
</TABLE>
Maturities of long-term debt-related parties are as follows for the periods
ending:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
1996............................................ $ 218,000 $ --
1997............................................ 1,979,000 2,294,000
1998............................................ -- 209,000
1999............................................ -- 215,000
2000............................................ -- 223,000
2001............................................ -- 204,000
2002............................................ -- 94,000
---------- ----------
$2,197,000 $3,239,000
========== ==========
</TABLE>
Under the terms of the $2,000,000 note payable to NRC the Company is
required 1) to maintain adequate insurance coverage for its facilities,
equipment and operations; 2) to maintain certain financial ratios; 3) to
conduct the business of NRI substantially as conducted in December 1994; and
4) to obtain prior approval of NRC prior to incurring additional debt in
excess of predetermined amounts.
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.
F-35
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1995, 1994 and the six months ended March 31, 1996 and 1995, the
Company purchased raw materials from related entities in the amounts of
$1,713,000, $594,000, $640,000 and $760,000, 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.
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
F-36
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
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.
F-37
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $.50 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.
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.
F-38
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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-39
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments are as follows for the periods ending:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
1996............................................ $ 44,000 $ --
1997............................................ 45,000 90,000
1998............................................ 45,000 91,000
1999............................................ 46,000 92,000
2000............................................ 35,000 93,000
2001............................................ -- 52,000
Thereafter...................................... -- 140,000
-------- --------
$215,000 $558,000
======== ========
</TABLE>
Rent expense for the years ended September 30, 1995, 1994, 1993 and the six
months ended March 31, 1996, was approximately $47,000, $48,000, $48,000 and
$42,000, 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:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
Capitalized cost............................... $118,000 $1,918,000
Accumulated depreciation....................... (6,000) (72,000)
-------- ----------
$112,000 $1,846,000
======== ==========
Depreciation expense........................... $ 6,000 $ 66,000
======== ==========
</TABLE>
F-40
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
1996.......................................... $ 44,000 $ --
1997.......................................... 41,000 528,000
1998.......................................... 6,000 512,000
1999.......................................... -- 486,000
2000.......................................... -- 486,000
2001.......................................... -- 366,000
-------- ----------
Total future minimum payments................. 91,000 2,378,000
Amount representing interest.................. (13,000) (612,000)
-------- ----------
Present value of future minimum lease
payments..................................... 78,000 1,766,000
Less current portion.......................... (37,000) (314,000)
-------- ----------
$ 41,000 $1,452,000
======== ==========
</TABLE>
F-41
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 21--SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NONCASH
INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
--------------------- ----------------------------
1995 1994 1996 1995
---------- ---------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash paid for interest..... $ 407,000 $ -- $ 194,000 $ 222,000
========== ========== ============= =============
Stock issued for conversion
of bridge financing....... $ 150,000 $ -- $ 1,137,000 $ 150,000
========== ========== ============= =============
Acquisition of subsidiaries
for stock................. $ -- $6,725,000 $ 925,000 $ 1,200,000
========== ========== ============= =============
Purchase of equipment for
notes payable............. $ 56,000 $ 5,000 $ 25,000 $ 35,000
========== ========== ============= =============
Sale of 25% interest in
subsidiary for note
receivable................ $ -- $ 900,000 $ -- $ --
========== ========== ============= =============
Reversal of deferred gain
on sale of subsidiary..... $ 751,000 $ -- $ -- $ --
========== ========== ============= =============
Common stock issued for
relief of debt............ $ -- $1,351,000 $ -- $ --
========== ========== ============= =============
Preferred stock issued for
extinguishment of debt.... $ -- $ 887,000 $ -- $ --
========== ========== ============= =============
Conversion of accrued
salary to equity.......... $ -- $ 246,000 $ -- $ --
========== ========== ============= =============
Restructure of preferred
stock to debt............. $2,300,000 $ -- $ -- $ 2,300,000
========== ========== ============= =============
Issuance of common stock to
chief executive officer... $ 437,000 $ -- $ -- $ --
========== ========== ============= =============
Acquisition of equipment
under capital lease....... $ 113,000 $ -- $ -- $ 113,000
========== ========== ============= =============
Contract to acquire land
and building acquired for
note payable.............. $ -- $ -- $ 446,000 $ --
========== ========== ============= =============
Acquisition of Anglo
inventory for note
payable................... $ -- $ -- $ 1,366,000 $ --
========== ========== ============= =============
Capital lease obligation
incurred to finance Anglo
acquisition............... $ -- $ -- $ 1,800,000 $ --
========== ========== ============= =============
Intangible acquired for a
note payable.............. $ -- $ -- $ 750,000 $ --
========== ========== ============= =============
</TABLE>
NOTE 22--SUBSEQUENT EVENTS
Private Placement
On April 8, 1996 the Company completed a private placement. The Company
received $228,000 (net of offering costs of $20,000) from the sale of 90,000
shares of Common Stock and warrants (Series J Warrants) to acquire up to
45,000 shares of Common Stock at $7.50 per share. The Series J Warrants are
exercisable for a three-year period commencing on the effectiveness of a
registration statement covering the shares received upon their exercise. The
exercise price of the Series J Warrants will be reduced to $5.40 per share in
the event that the Company fails to repurchase certain shares of Common Stock
by May 31, 1996 and will reduce by $.35 per share for each month subsequent to
September 1996 (June 1996 in the event such stock purchase is not effected by
May 31) in which a registration statement covering the shares issuable upon
exercise of the Series J warrants is not effective.
In connection with the offering, the Company issued to the placement agent
4,500 warrants (placement agent warrants) to purchase two shares of Common
Stock and one Series H Warrant, which are exercisable for a
F-42
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
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:
<TABLE>
<S> <C>
Inventories................................................... $ 55,000
Land.......................................................... 310,000
Buildings and improvements.................................... 560,000
Machinery and equipment....................................... 1,000,000
----------
Total....................................................... $1,925,000
==========
</TABLE>
Agreement to Acquire Weissman
In April 1996, the Company reached agreement for the purchase of the stock
of Weissman Iron and Metal for $12,400,000 consisting of common stock and
cash, subject to adjustment at closing. Weissman operates in the business of
recycling ferrous and non-ferrous metals in and around Waterloo, Iowa.
Proposed Financing Agreement
In April 1996, the Company entered into a letter of intent for a $10,000,000
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
The Company has entered into a letter of intent with an underwriter to sell
shares of the Company's Common Stock in a public offering. Upon a registration
statement being declared effective, 4,400,000 shares are anticipated to be
sold including a number of shares to be agreed upon by certain security
holders.
F-43
<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-44
<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-45
<PAGE>
RECYCLING INDUSTRIES, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
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
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
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 par-
ty............................................. 182,000 --
------------ ------------
Total Current Liabilities..................... 778,000 1,707,000
------------ ------------
DEFFERED 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
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock................................... 1,762,000 4,499,000
Common stock...................................... 8,000 3,000
Additional paid-in capital........................ 13,120,000 8,269,000
Accrued salary payable in equity security......... -- 246,000
Accumulated (deficit)............................. (10,136,000) (10,044,000)
------------ ------------
Total Stockholders' Equity.................... 4,754,000 2,973,000
------------ ------------
$ 8,452,000 $ 5,556,000
============ ============
</TABLE>
The "Notes to Consolidated Financial Statements of Recycling Industries, Inc.
and Subsidiaries" are an integral part of these statements
See accompanying Notes to Condensed Financial Information of Registrant
F-46
<PAGE>
RECYCLING INDUSTRIES, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
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)
=========== ===========
</TABLE>
The "Notes to Consolidated Financial Statements of Recycling Industries, Inc.,
and Subsidiaries" are an integral part of these statements
See accompanying Notes to Condensed Financial Information of Registrant
F-47
<PAGE>
RECYCLING INDUSTRIES, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
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
=========== =========
</TABLE>
The "Notes to Consolidated Financial Statements of Recycling Industries, Inc.
and Subsidiaries" are an integral part of theses statements
See accompanying Notes to Condensed Financial Information of Registrant
F-48
<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:
<TABLE>
<S> <C>
5% note due December 1, 1995..................................... $125,000
========
</TABLE>
F-49
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Anglo Metal, Inc.
Harlingen, Texas
We have audited the accompanying balance sheets of Anglo Metal, Inc. dba
Anglo Iron & Metal, as of December 31, 1995 and 1994 and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Anglo Metal, Inc. dba
Anglo Iron & Metal, as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
AJ. Robbins, PC.
Certified Public Accountants and
Consultants
Denver, Colorado
March 22, 1996
F-50
<PAGE>
ANGLO METAL, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................... $ -- $ 146,000
Trade accounts receivable, pledged..................... 641,000 660,000
Other receivables, related parties..................... 70,000 75,000
Inventories............................................ 1,437,000 1,041,000
Prepaid expenses....................................... 56,000 52,000
---------- ----------
Total Current Assets................................. 2,204,000 1,974,000
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depre-
ciation and amortization of $703,000 and $614,000....... 1,300,000 1,332,000
---------- ----------
OTHER ASSETS:
Cash surrender value life insurance.................... 116,000 111,000
Other.................................................. 16,000 --
---------- ----------
Total Other Assets................................... 132,000 111,000
---------- ----------
$3,636,000 $3,417,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft......................................... $ 218,000 $ --
Trade accounts payable................................. 373,000 638,000
Line of credit, bank................................... -- 839,000
Accrued liabilities.................................... 34,000 53,000
Income taxes payable................................... 140,000 --
Environmental cleanup liabilities...................... 1,194,000 1,194,000
Due to Recycling Industries, Inc....................... 1,588,000 --
Current portion of long-term debt...................... -- 8,000
Current portion of capital lease....................... -- 64,000
---------- ----------
Total Current Liabilities............................ 3,547,000 2,796,000
---------- ----------
LONG-TERM DEBT:
Long-term debt, less current portion................... -- 226,000
Capital lease, less current portion.................... -- 46,000
---------- ----------
Total Long-Term Debt................................. -- 272,000
---------- ----------
Total Liabilities.................................... 3,547,000 3,068,000
---------- ----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 1,000,000 shares
authorized; 50,000 shares issued and outstanding...... 50,000 50,000
Retained earnings...................................... 39,000 299,000
---------- ----------
89,000 349,000
---------- ----------
Total Stockholders' Equity........................... $3,636,000 $3,417,000
========== ==========
</TABLE>
See accompanying Notes to Financial Statements
F-51
<PAGE>
ANGLO METAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Sales.................................... $15,116,000 $12,128,000 $10,189,000
Brokerage................................ 216,000 700,000 352,000
Other.................................... 7,000 38,000 20,000
----------- ----------- -----------
Total Revenues......................... 15,339,000 12,866,000 10,561,000
----------- ----------- -----------
COST OF SALES AND EXPENSES:
Cost of sales............................ 13,739,000 11,398,000 9,698,000
Cost of brokerage........................ 181,000 600,000 324,000
Environmental cleanup costs.............. -- -- 729,000
Personnel................................ 414,000 346,000 422,000
Professional services.................... 66,000 32,000 31,000
Depreciation and amortization............ 11,000 11,000 10,000
Interest................................. 133,000 102,000 56,000
Other general and administrative......... 336,000 205,000 156,000
----------- ----------- -----------
Total Cost of Sales and Expenses....... 14,880,000 12,694,000 11,426,000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.......... 459,000 172,000 (865,000)
PROVISION FOR INCOME TAXES................. 140,000 -- --
----------- ----------- -----------
NET INCOME (LOSS).......................... $ 319,000 $ 172,000 $ (865,000)
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements
F-52
<PAGE>
ANGLO METAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK
--------------
RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1992............... 50,000 $50,000 $1,290,000 $1,340,000
Net (loss)............................... (865,000) (865,000)
Dividends paid........................... (97,000) (97,000)
------ ------- ---------- ----------
Balance, December 31, 1993............... 50,000 50,000 328,000 378,000
Net income............................... 172,000 172,000
Dividends paid........................... (201,000) (201,000)
------ ------- ---------- ----------
Balance, December 31, 1994............... 50,000 50,000 299,000 349,000
Net income............................... 319,000 319,000
Dividends paid........................... (579,000) (579,000)
------ ------- ---------- ----------
Balance, December 31, 1995............... 50,000 $50,000 $ 39,000 $ 89,000
====== ======= ========== ==========
</TABLE>
See accompanying Notes to Financial Statements
F-53
<PAGE>
ANGLO METAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss).......................... $ 319,000 $ 172,000 $(865,000)
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Depreciation and amortization............ 105,000 113,000 100,000
Changes in:
Trade accounts receivable.............. 19,000 (335,000) 224,000
Other receivables, related parties..... 5,000 5,000 (24,000)
Inventories............................ (396,000) (135,000) 92,000
Prepaid expenses....................... (4,000) (24,000) 38,000
Bank overdraft......................... 218,000 -- (6,000)
Trade accounts payable................. (265,000) 73,000 (67,000)
Accrued liabilities.................... 7,000 (32,000) (111,000)
Income taxes payable................... 140,000 -- --
Environmental cleanup liabilities...... -- -- 729,000
--------- ---------- ---------
Net Cash Provided (Used) by Operating
Activities.......................... 148,000 (163,000) 110,000
--------- ---------- ---------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of property and equipment......... (56,000) (162,000) (168,000)
Proceeds from sale of equipment............ -- 2,000 --
Increase in deposits....................... (16,000) -- --
Increase in cash surrender value life
insurance................................. (5,000) (8,000) (41,000)
--------- ---------- ---------
Net Cash (Used) by Investing
Activities.......................... (77,000) (168,000) (209,000)
--------- ---------- ---------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Issuance of long-term debt................. 247,000 -- --
Payments on long-term debt................. (36,000) (8,000) (3,000)
Advances on line of credit................. 250,000 1,452,000 637,000
Repayment on line of credit................ (49,000) (867,000) (712,000)
Payments on capital lease obligation....... (50,000) (58,000) (40,000)
Dividends paid............................. (579,000) (201,000) 330,000
--------- ---------- ---------
Net Cash Provided (Used) by Financing
Activities.......................... (217,000) 318,000 212,000
--------- ---------- ---------
NET INCREASE (DECREASE) IN CASH.............. (146,000) (13,000) 113,000
CASH, beginning of year...................... 146,000 159,000 46,000
--------- ---------- ---------
CASH, end of year............................ $ -- $ 146,000 $ 159,000
========= ========== =========
CASH PAID FOR INTEREST....................... $ 48,000 $ 102,000 $ 56,000
========= ========== =========
</TABLE>
See Note 13
See accompanying Notes to Financial Statements
F-54
<PAGE>
ANGLO METAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Activity
Anglo Metal, Inc. dba Anglo Iron & Metal (Anglo) was incorporated in the
State of Texas in December 1985. Anglo operates in the metals recycling
industry (purchasing, processing, selling and brokering ferrous and non-
ferrous metals) with its operations located in southern Texas. Anglo operates
one of 12 heavy duty automotive shredders located in Texas. Processed scrap is
sold to steel mill customers and other metals processors throughout the
southern region of the United States and northern Mexico.
Sale of Anglo
On December 11, 1995, Anglo sold to Recycling Industries, Inc. (RII)
substantially all of the assets and the business of Anglo.
The assets sold consisted of a heavy duty automotive shredder, inventories,
metal shearing equipment, balers, heavy equipment, tools and rolling stock
used in the business of recycling ferrous and non-ferrous metals. Certain real
property, buildings and leasehold improvements used in the metals recycling
business were also sold.
The sales price for Anglo was $6,065,000 comprised of: $2,079,000 in cash;
$1,865,000 note which is to be paid in ten equal monthly installments of
$186,500 over ten months beginning in February 1996; a $446,000 secured
promissory note payable in 60 consecutive monthly installments of $9,000,
including interest; a $750,000 unsecured note payable in 72 equal consecutive
monthly installments of $10,000, including interest; and 227,693 shares of RII
common stock valued at $925,000.
Of the cash received at the closing of the sale, $1,800,000 was obtained
through a sale-leaseback transaction with Ally Capital Corporation,
collateralized by all of the machinery and equipment sold, accounts receivable
and inventory, which has been recorded as a capital lease. The terms of the
sale-leaseback provide for 60 consecutive monthly lease payments of $41,000
with a bargain purchase option at the end of the lease term. The lease
contains numerous covenants for maintaining certain financial ratios and
earnings levels. The remaining $279,000 paid at closing was obtained from the
operating cash reserves and working capital of RII.
RII signed a consulting and non-competition agreement with the president of
Anglo. The term of the noncompete portion is for a term of six years and is
valued at $1,000,000 which will be amortized over the term of the agreement
using the straight line method. The consulting portion is for a term of six
months and is payable $5,000 per month.
The real property sold and the common stock given by RII have been placed in
escrow to provide for the remediation of environmental contamination related
to the operations of Anglo prior to the acquisition.
The purchase price has been allocated as follows:
<TABLE>
<S> <C>
Equipment under capital lease................................ $ 1,800,000
Contract to acquire land and buildings....................... 70,000
Covenant not to compete...................................... 1,000,000
Inventories.................................................. 1,365,000
Purchase price in excess of net assets acquired.............. 1,830,000
-----------
Total purchase price....................................... 6,065,000
Notes payable................................................ (3,061,000)
RII common stock............................................. (925,000)
-----------
Cash paid at closing......................................... 2,079,000
Capital lease obligation..................................... (1,800,000)
-----------
Cash from operating capital................................ $ 279,000
===========
</TABLE>
F-55
<PAGE>
ANGLO METAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Concentration of Credit Risk
Concentrations of credit risk with respect to trade receivables exist due to
large balances with a few customers. At December 31, 1995 and 1994, accounts
receivable balances for three major customers were $336,476 and $320,335, or
54% and 49%, respectively, of the total accounts receivable balance. Ongoing
credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. Anglo does not maintain reserves for
potential credit losses since such past losses, in the aggregate, have not
been significant; therefore, the allowance for doubtful accounts receivable is
zero at December 31, 1995 and 1994. Customers are located throughout the
Southern region of the United States and Mexico.
Inventories
Inventories consist primarily of ferrous and non-ferrous scrap metal.
Inventory costs include material, labor and plant overhead. Inventory is
stated at lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and
amortization expense is provided on a straight-line basis using estimated
useful lives of 5 to 20 years for equipment and 40 years for building and
improvements. Depreciation and amortization expense of property, plant and
equipment was $105,000, $113,000 and $100,000 for the years ended December 31,
1995, 1994 and 1993, respectively. Maintenance and repairs are charged to
expense as incurred and expenditures for major improvements are capitalized.
When assets are retired or otherwise disposed of, the property accounts are
relieved of costs and accumulated depreciation and any resulting gain or loss
is credited or charged to operations.
Environmental Expenditures
Environmental expenditures that relate to current operations are capitalized
if costs improve Anglo's property as compared to the condition of the property
when originally constructed or acquired or if the costs prevent environmental
contamination from future operations. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded when
environmental assessments are made or remedial efforts are probable and the
cost can be reasonably estimated.
These amounts are generally accrued upon the completion of feasibility
studies or the settlement of claims, but in no event later than Anglo's
commitment to a plan of action.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Statements
The carrying amounts of cash, accounts receivable, accounts payable, and
accrued expenses approximate fair value because of the short maturity of these
items. The fair value of notes payable was estimated based on market values
for debt with similar terms. Management believes that the fair value of that
debt approximates its carrying value.
F-56
<PAGE>
ANGLO METAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Income Taxes
Anglo and its stockholders have elected under the Internal Revenue Code to
be an S-corporation for tax purposes. In lieu of corporate income taxes, the
stockholders of an S-corporation are taxed on their proportionate share of its
taxable income. Accordingly, no provision or liability for federal income
taxes has been included in these financial statements for Anglo for 1994 and
1993. On January 1, 1995, Anglo terminated its S-corporation election.
Effective January 1, 1995, Anglo adopted Statement of Financial Accounting
Standards No. 109 (FAS 109), Accounting for Income Taxes. Under this method,
deferred income taxes are recorded to reflect the tax consequences in future
years of temporary differences between the tax basis of the assets and
liabilities and their financial statement amounts at the end of each reporting
period. Valuation allowances will be established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is the tax payable for the current period and the change during the period in
deferred tax assets and liabilities. Deferred tax assets and liabilities have
been netted to reflect the tax impact of temporary differences. The adoption
of FAS 109 and termination of the S-corporation election resulted in
recognition of a net deferred tax asset of $250,000. Anglo has not recorded a
deferred tax asset at January 1, 1995 or December 31, 1995 since it was more
likely than not that the tax assets would not be realized. Therefore, the
adoption of FAS 109 and the termination of the S-corporation election did not
have a material effect on Anglo's financial statements and there was no
cumulative effect of this change in accounting for income taxes at January 1,
1995. There is also no effect on net income for the year ended December 31,
1995.
Cash
For purposes of reporting cash flows, Anglo considers all funds with
original maturities of three months or less to be cash equivalents.
NOTE 2--INVENTORIES
Inventories, pledged, consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
<S> <C> <C>
Raw materials....................................... $ 766,000 $ 866,000
Finished goods...................................... 671,000 175,000
---------- ----------
$1,437,000 $1,041,000
========== ==========
</TABLE>
Included in inventory are $50,000 and $10,000 of indirect costs at December
31, 1995 and 1994, respectively.
F-57
<PAGE>
ANGLO METAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, pledged, consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Land............................................. $ 10,000 $ 10,000
Building and improvements........................ 109,000 109,000
Heavy machinery and equipment.................... 1,762,000 1,482,000
Transportation equipment......................... 99,000 115,000
Asset under capital lease obligation............. -- 208,000
Office equipment................................. 23,000 22,000
---------- ----------
Total.......................................... 2,003,000 1,946,000
Less accumulated depreciation and amortization... (703,000) (614,000)
---------- ----------
Net............................................ $1,300,000 $1,332,000
========== ==========
</TABLE>
NOTE 4--CASH SURRENDER VALUE LIFE INSURANCE
Anglo is the beneficiary of a life insurance policy on the President of
Anglo. The face amount of the policy is $1,800,000. Anglo's cash surrender
value was $116,000 and $111,000 at December 31, 1995 and 1994, respectively.
The policy is collateral for bank debt.
NOTE 5--ACCRUED EXPENSES
Accrued expenses consists primarily of accrued salaries and related expenses
at December 31, 1995 and 1994.
NOTE 6--LINE OF CREDIT
Anglo has a revolving line of credit with a bank for a maximum of $250,000
with interest at prime plus 1% (10% at December 31, 1995) collateralized by
equipment, inventory, accounts receivable, officer life insurance policy and
stockholder and officer personal guarantees. The balance was zero at December
1995 (see Note 8).
NOTE 7--LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994
----- --------
<S> <C> <C>
Note payable to individual with original principal of
$245,000 and interest at 10% per annum; monthly principal
and interest payments of $2,600; collateralized by a
$1,800,000 key man life insurance policy; paid December 1995
(see Note 8)................................................ $ -- $222,000
Note payable to bank with original principal amount of
$17,200 and interest at 11% per annum; monthly principal and
interest payments of $800; collateralized by equipment; paid
December 1995 (see Note 8).................................. -- 12,000
----- --------
-- 234,000
Less current portion......................................... -- 8,000
----- --------
$ -- $226,000
===== ========
</TABLE>
F-58
<PAGE>
ANGLO METAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 8--DEBT RESTRUCTURE
In connection with the sale of Anglo to RII, certain debt of Anglo was paid
by RII prior to December 31, 1995 and has been recorded in the financial
statements as advances from RII, a current liability. The following is a
summary of the debt restructure.
In December 1995, RII entered into an agreement with an unrelated entity
(BAF) whereby BAF advances 80% of the purchased trade accounts receivable and
collects payments on purchased receivables from Anglo's customers. BAF charges
RII an administrative fee equal to 1% of the face amount of the purchased
receivables and a monthly finance charge in the amount of 10% of the average
daily outstanding balance of all purchased receivables. RII is required to
repurchase any receivables not collected from customers within 90 days. The
balance at December 31, 1995 was $11,000.
On December 13, 1995, RII entered into a capital lease with Ally Capital
Corporation for $1,800,000 of equipment acquired from Anglo (see Note 1). The
proceeds were used to pay off debt in the amount of $1,256,000 and capital
lease obligations of $60,000. The remaining balance of $484,000 was used to
reduce a $750,000 note payable that was guaranteed by Anglo.
NOTE 9--INCOME TAXES
The tax effects of temporary differences and net operating loss
carryforwards that give rise to deferred tax assets and (liabilities) at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
Temporary differences:
Property and equipment....................................... $(220,000)
Accrued environmental liabilities............................ 362,000
Inventories.................................................. 68,000
Valuation allowance.......................................... (210,000)
---------
$ --
=========
<CAPTION>
The provision for income taxes consists of the following at December 31,
1995:
<S> <C>
Current...................................................... $ 140,000
Deferred..................................................... --
---------
$ 140,000
=========
<CAPTION>
The components of deferred income tax (benefit) expenses are as follows as
of December 31, 1995:
<S> <C>
Depreciation and amortization.................................. $ 40,000
Valuation allowance............................................ (40,000)
---------
$ --
=========
<CAPTION>
Following is a reconciliation of the amount of income tax (benefit) expense
that would result from applying the statutory federal income tax rates to pre-
tax income the reported amount of income tax expense for the year ended
December 31, 1995:
<S> <C>
Tax expense (benefit) at federal statutory rates............... $ 170,000
Increase (decrease) resulting from:
Nondeductible items.......................................... 8,000
Depreciation and amortization................................ (40,000)
Other........................................................ 2,000
---------
$ 140,000
=========
</TABLE>
F-59
<PAGE>
ANGLO METAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
NOTE 10--ECONOMIC DEPENDENCY
The Company is economically dependent on major customers for annual sales as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................. 26% 25% 34%
Customer B.................................................. 18% 10% --%
Customer C.................................................. 10% --% --%
Customer D.................................................. 12% --% 12%
Customer E.................................................. --% --% 11%
Customer F.................................................. --% 12% --%
</TABLE>
NOTE 11--COMMITMENTS AND CONTINGENCIES
Loan Guarantee
Anglo is guarantor of a note payable for its stockholders to a bank with an
original principal of $750,000; interest at 10.5% per annum; monthly principal
and interest payments of $8,000. The note is collateralized by equipment,
personal guarantees of Anglo stockholders and president, and assignment of key
man life insurance policy; due December 1988. The note balance is $207,000 and
$717,000 at December 31, 1995 and 1994. Of the cash received at closing,
$484,000 was paid directly to the note holder by RII (see Note 8). RII is not
a guarantor for the remaining outstanding principal.
Litigation
Anglo Metal, Inc. and Anglo Iron & Metal are defendants in a lawsuit by the
State of Texas and Houston Lighting & Power, and Central Power & Light for
$924,000. Anglo is vigorously defending the case. A liability of $465,000 has
been recorded in the financial statements of Anglo. Under the terms of the
purchase agreement, RII shall not assume any liabilities of Anglo arising on
or before the closing date with respect to any action, event or occurrence.
Anglo is also a party to a number of lawsuits arising in the normal course
of business. In the opinion of management, the resolution of these matters
will not have a material adverse effect on Anglo's financial position.
Environmental Liabilities
Anglo is a party to proceedings before state and federal regulatory agencies
relating to environmental remediation issues. The assessment of the required
response and remedial costs associated with the cleanup is extremely complex.
Among the variables that management must assess are imprecise engineering
estimates, continually evolving governmental standards, potential recoveries
from insurance coverage and laws which impose joint and several liability.
During January 1993, Environmental Protection Agency (EPA) conducted an on
site investigation and discovered a violation of the Toxic Substance Control
Act, concerning illegal disposal of Poly Chlorinated Biphenyl (PCB) containing
capacitors. Anglo was assessed a $129,000 penalty and was ordered to remediate
the site and dispose of contaminated soil in accordance with EPA standards.
The initial engineering estimates for remediation and soil disposal are within
the range of $200,000 to $600,000. A liability for $729,000 has been recorded
in the Anglo financial statements. Under the terms of the acquisition of Anglo
by RII, the stock component of the purchase price has been escrowed for
remediation costs.
Leases
Anglo leases facilities under non-cancelable operating lease through 2005.
The monthly lease payments are $4,000 per month for the term of the lease.
Total rental expense for each of the three years 1995, 1994 and 1993 was
$47,000. Anglo also leased equipment under a capital lease for $208,000 which
was paid in December 1995.
F-60
<PAGE>
ANGLO METAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1995, 1994 AND 1993
Future minimum lease payments are as follows at December 31:
<TABLE>
<S> <C>
1996............................................................. $ 30,000
1997............................................................. 30,000
1998............................................................. 30,000
1999............................................................. 30,000
2000............................................................. 30,000
Thereafter....................................................... 150,000
--------
$300,000
========
</TABLE>
NOTE 12--RELATED PARTY TRANSACTIONS
In addition to transactions with related parties discussed throughout the
notes to the financial statements, the following related party transactions
have taken place.
Accounts receivable from related parties consist of advances made to one of
the officers of Anglo and to one of the stockholders. These advances are non-
interest bearing. The officer's balance was $59,000 and $64,000 for 1995 and
1994, respectively, and the stockholder's balance was $11,000 at the end of
1995 and 1994.
NOTE 13--SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOW FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1995, the long term debt of $1,256,000
and the capital lease of $60,000 were paid by RII.
During the year ended December 31, 1995, a capital lease in the amount of
$208,000 was entered into for the acquisition of equipment.
During the year ended December 31, 1995, $17,000 of equipment was acquired
with a note.
During the year ended December 31, 1995, $807,000 of the line of credit
balance was refinanced to a long-term installment note payable.
F-61
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Mid-America Shredding, Inc.
Ste. Genevieve, Missouri
We have audited the accompanying balance sheet of Mid-America Shredding,
Inc., as of December 31, 1995 and the related statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mid-America Shredding,
Inc., as of December 31, 1995 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
AJ. Robbins, PC.
Certified Public Accountants and
Consultants
Denver, Colorado
April 5, 1996
F-62
<PAGE>
MID-AMERICA SHREDDING, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................... $ 30,000 $ 18,000
Trade accounts receivable.......................... 87,000 109,000
Inventories........................................ 86,000 34,000
Prepaid expenses................................... 16,000 --
----------- -----------
Total Current Assets............................. 219,000 161,000
PROPERTY, PLANT AND EQUIPMENT, net................... 2,886,000 2,823,000
----------- -----------
$ 3,105,000 $ 2,984,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable, bank................................. $ 1,210,000 $ 1,210,000
Trade accounts payable............................. 82,000 129,000
Trade accounts payable, related party.............. 133,000 143,000
Accrued liabilities................................ 35,000 16,000
Current portion of long-term debt.................. 20,000 21,000
----------- -----------
Total Current Liabilities........................ 1,480,000 1,519,000
LONG-TERM DEBT, less current portion................. 7,000 2,000
----------- -----------
Total Liabilities................................ 1,487,000 1,521,000
----------- -----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 30,000 shares
authorized;
245 shares issued and outstanding................. -- --
Additional paid-in capital......................... 3,055,000 3,055,000
Accumulated (deficit).............................. (1,437,000) (1,592,000)
----------- -----------
Total Stockholders' Equity....................... 1,618,000 1,463,000
----------- -----------
$ 3,105,000 $ 2,984,000
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements
F-63
<PAGE>
MID-AMERICA SHREDDING, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1995 1996 1995
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
SALES...................................... $3,866,000 $ 452,000 $1,027,000
---------- --------- ----------
COST OF SALES AND EXPENSES:
Cost of sales............................ 3,587,000 439,000 814,000
Personnel................................ 247,000 124,000 157,000
Professional services.................... 6,000 5,000 2,000
Travel................................... 1,000 -- --
Interest................................. 125,000 35,000 30,000
Other general and administrative......... 23,000 4,000 15,000
---------- --------- ----------
Total Cost of Sales and Expenses....... 3,989,000 607,000 1,018,000
---------- --------- ----------
NET INCOME (LOSS).......................... $ (123,000) $(155,000) $ 9,000
========== ========= ==========
</TABLE>
See accompanying Notes to Financial Statements
F-64
<PAGE>
MID-AMERICA SHREDDING, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995.... 245 $-- $3,009,000 $(1,314,000) $1,695,000
Contributed capital......... -- -- 46,000 -- 46,000
Net (loss).................. -- -- -- (123,000) (123,000)
--- ---- ---------- ----------- ----------
Balance, December 31, 1995.. 245 -- 3,055,000 (1,437,000) 1,618,000
Net (loss).................. -- -- -- (155,000) (155,000)
--- ---- ---------- ----------- ----------
Balance, March 31, 1996 (Un-
audited)................... 245 $-- $3,055,000 $(1,592,000) $1,463,000
=== ==== ========== =========== ==========
</TABLE>
See accompanying Notes to Financial Statements
F-65
<PAGE>
MID-AMERICA SHREDDING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1995 1996 1995
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS (TO) FROM OPERATING ACTIVITIES:
Net income (loss)....................... $(123,000) $(155,000) $ 9,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 173,000 43,000 43,000
Changes in:
Accounts receivable................. 62,000 (22,000) 48,000
Inventories......................... 192,000 52,000 49,000
Prepaid expenses.................... 12,000 16,000 (9,000)
Trade accounts payable.............. (72,000) 47,000 13,000
Trade accounts payable, related
party.............................. 106,000 10,000 --
Accrued liabilities................. 22,000 (19,000) 4,000
--------- --------- ---------
Net Cash Provided (Used) by
Operating Activities............. 372,000 (28,000) 157,000
--------- --------- ---------
CASH FLOWS (TO) FROM INVESTING ACTIVITIES:
Purchase of property and equipment...... (484,000) (3,000) --
Proceeds from sale of property and
equipment.............................. -- 23,000 22,000
Construction in progress................ -- -- (204,000)
--------- --------- ---------
Net Cash Provided (Used) by
Investing Activities............. (484,000) 20,000 (182,000)
--------- --------- ---------
CASH FLOWS (TO) FROM FINANCING ACTIVITIES:
Proceeds from note payable, bank........ 144,000 -- 43,000
Payments on note payable, bank.......... (20,000) -- --
Payments on long-term debt.............. (18,000) (4,000) --
Payment on amount due to former
shareholder............................ (5,000) -- --
Capital contributions................... 26,000 -- 5,000
--------- --------- ---------
Net Cash Provided (Used) by
Financing Activities............. 127,000 (4,000) 48,000
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH........... 15,000 (12,000) 23,000
CASH, beginning of period................. 15,000 30,000 15,000
--------- --------- ---------
CASH, end of period....................... $ 30,000 $ 18,000 $ 38,000
========= ========= =========
CASH PAID FOR INTEREST ................... $ 127,000 $ 34,000 $ 30,000
========= ========= =========
</TABLE>
See Note 10
See accompanying Notes to Financial Statements
F-66
<PAGE>
MID-AMERICA SHREDDING, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Activity
Mid-America Shredding, Inc. (Mid-America) was incorporated in the state of
Missouri in July 1989. Mid-America operates in the metals recycling industry
(purchasing, processing and selling ferrous and non-ferrous metals). Mid-
America operates a heavy duty automotive shredder to separate metals into
ferrous and non-ferrous metals. Insulated copper or aluminum wire is processed
through a wire chopping machine to produce clean copper or aluminum chops.
Mid-America operates in Ste. Genevieve, Missouri.
Acquisition of Mid-America Shredding, Inc.
On April 15, 1996, the assets and business of Mid-America were sold to
Recycling Industries, Inc. (RII).
The assets sold by Mid-America consisted of real property, buildings,
inventories, a heavy duty automotive shredder, a wire chopping plant, heavy
equipment and tools used in the business of recycling ferrous and non-ferrous
metals.
The sales price for Mid-America was $1,925,000, comprised of $660,000 in
cash, a $55,000 note payable in eight equal monthly installments of $6,900,
and the assumption of Mid-America outstanding bank debt of $1,210,000.
The sale will be accounted for using the purchase method and the price will
be allocated as follows:
<TABLE>
<S> <C>
Inventories................................................... $ 55,000
Land.......................................................... 310,000
Buildings and improvements.................................... 560,000
Machinery and equipment....................................... 1,000,000
-----------
Total purchase price.......................................... 1,925,000
Notes payable................................................. (1,265,000)
-----------
Cash paid at closing........................................ $ 660,000
===========
</TABLE>
Unaudited Interim Financial Statements
In the opinion of management, the unaudited interim financial statements for
the three month period ended March 31, 1996 and 1995 are presented on a basis
consistent with the audited annual financial statements and reflect all
adjustments, consisting only of normal recurring accruals, necessary for fair
presentation of the results of such periods. The results of operations for the
interim period ending March 31, 1996 are not necessarily indicative of the
results to be expected for the year ended December 31, 1996.
Inventories
Inventories consist primarily of ferrous and non-ferrous scrap metal.
Inventory costs for finished goods include material, labor and plant overhead.
Inventories are stated at lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and
amortization expense is provided on a straight-line basis using estimated
useful lives of 10 to 20 years for equipment and 40 years for building and
improvements. Depreciation and amortization expense of property, plant and
equipment was $173,000 and $43,000 for the year ended December 31, 1995 and
for the three months ended March 31, 1996 (unaudited), respectively.
Maintenance and repairs are charged to expense as incurred and expenditures
for major
F-67
<PAGE>
MID-AMERICA SHREDDING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Environmental Expenditures
Environmental expenditures that relate to current operations are capitalized
if the costs improve Mid-America's property as compared to the condition of
the property when originally constructed or acquired or if the costs prevent
environmental contamination from future operations. Expenditures that relate
to an existing condition caused by past operations, and which do not
contribute to current or future revenue generation, are expensed. Liabilities
are recorded when environmental assessments are made or remedial efforts are
probable and the cost can be reasonably estimated. These amounts are generally
accrued upon the completion of feasibility studies or the settlement of
claims, but in no event later than Mid-America's commitment to a plan of
action.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Statements
The carrying amounts of cash, accounts receivable, accounts payable, and
accrued liabilities approximate fair value because of the short maturity of
these items. The fair value of the note payable, bank was estimated based on
market values for debt with similar terms. Management believes that the fair
value of that debt approximates its carrying value.
Income Taxes
Effective July, 1989, Mid-America and its stockholders elected under the
Internal Revenue Code to an S-corporation for tax purposes. In lieu of
corporate income taxes, the stockholders of an S-corporation are taxed on
their proportionate share of Mid-America's taxable income. Accordingly, no
provision or liability for federal income taxes has been included in these
financial statements for Mid-America for the year ended December 31, 1995 or
for the three months ended March 31, 1996.
Cash
For purposes of reporting cash flows, Mid-America considers all funds with
maturities of three months or less to be cash equivalents.
NOTE 2--INVENTORIES
Inventories, pledged, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Raw materials..................................... $74,000 $34,000
Finished goods.................................... 12,000 --
------- -------
$86,000 $34,000
======= =======
</TABLE>
Included in inventories are $2,000 of indirect costs at December 31, 1995.
F-68
<PAGE>
MID-AMERICA SHREDDING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, pledged, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Land and improvements............................. $ 359,000 $ 359,000
Building and improvements......................... 163,000 163,000
Heavy machinery and equipment..................... 1,703,000 1,676,000
Auto shredder mill................................ 1,304,000 1,304,000
Transportation equipment.......................... 50,000 46,000
Office equipment.................................. 10,000 10,000
---------- ----------
Total........................................... 3,589,000 3,558,000
Less accumulated depreciation and amortization.... (703,000) (735,000)
---------- ----------
$2,886,000 $2,823,000
========== ==========
</TABLE>
NOTE 4--ACCRUED LIABILITIES
Accrued liabilities consist primarily of accrued interest, accrued salaries
and related expenses at December 31, 1995 and March 31, 1996 (Unaudited).
NOTE 5--NOTE PAYABLE, BANK
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Note payable to bank with interest payable monthly
at prime plus one and one-half percent per annum
(10% at December 31, 1995 and 10.5% at March 31,
1996 (Unaudited); collateralized by property and
equipment, accounts receivable and inventories;
due on demand; guaranteed by stockholder......... $1,210,000 $1,210,000
========== ==========
</TABLE>
F-69
<PAGE>
MID-AMERICA SHREDDING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Retail purchase contract for equipment payable
to the vendor with original principal amount of
$21,000 and interest at 12% per annum; monthly
principal and interest payments of $1,000; due
February 1997.................................. $13,000 $11,000
Retail purchase contract for equipment payable
to the vendor with original principal of
$18,000 and interest at 12% per annum; monthly
principal and interest payments of $846; due
June 1997...................................... 14,000 12,000
------- -------
27,000 23,000
Less current portion............................ 20,000 21,000
------- -------
$ 7,000 $ 2,000
======= =======
The principal maturities for the long-term debts are as follows:
1996.......................................... $20,000 $21,000
1997.......................................... 7,000 2,000
------- -------
$27,000 $23,000
======= =======
</TABLE>
NOTE 7--COMMITMENTS AND CONTINGENCIES
Leases
Mid-America has two operating leases with a railroad company for a spur rail
track and industrial property located in Zell, Missouri with annual lease
payments of $2,000. In addition, an office trailer was leased for the year for
$4,000. Total rent expense was $6,000 and $1,500 for the year ended December
31, 1995 and the three months ended March 31, 1996 (unaudited), respectively.
Letter of Credit
Mid-America has issued a letter of credit for $50,000 which expires on
December 31, 1997. The local electric utility company constructed a power
substation and the letter of credit guarantees the utility company that the
substation will be used for its intended purpose by Mid-America. The letter of
credit has not been drawn upon as of March 31, 1996.
NOTE 8--RELATED PARTY TRANSACTIONS
During 1995, Mid-America purchased $116,000 of equipment, parts and repairs
from an electric supply company (a related party) which is owned by the
majority shareholder of Mid-America. At December 31, 1995, Mid-America owed
the related party $133,000. For the three months ended March 31, 1996
(unaudited), Mid-America purchased an additional $10,000 of equipment, parts
and repairs and owed the related party a total of $143,000 at March 31, 1996
(unaudited).
F-70
<PAGE>
MID-AMERICA SHREDDING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 9--ECONOMIC DEPENDENCY
Mid-America is economically dependent on three major customers for annual
sales. During 1995, the three customers accounted for 48%, 16% and 10% of
sales volume, respectively.
NOTE 10--SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NONCASH
INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1995, $39,000 of equipment was acquired
through the issuance of long-term debt.
The majority shareholder contributed equipment in the amount of $20,000 in
1995.
F-71
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Weissman Industries, Inc.
Waterloo, Iowa
We have audited the accompanying balance sheets of Weissman Iron and Metal,
a Division of Weissman Industries, Inc. (the Division), as of December 31,
1995 and 1994 and the related statements of operations, changes in division
equity and cash flows for each of the years in the three year period ended
December 31, 1995. These financial statements are the responsibility of the
Division's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Weissman Iron and Metal, a
Division of Weissman Industries Inc. as of December 31, 1995 and 1994 and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
AJ. Robbins, PC. Certified Public
Accountants and Consultants
Denver, Colorado
April 21, 1996
F-72
<PAGE>
WEISSMAN IRON AND METAL
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................ $ 9,000 $ 8,000 $ 9,000
Trade accounts receivable................... 1,527,000 1,579,000 2,170,000
Other receivables........................... 1,000 46,000 --
Inventories................................. 1,327,000 1,031,000 765,000
Prepaid expenses............................ 10,000 53,000 10,000
---------- ---------- ----------
Total Current Assets.................... 2,874,000 2,717,000 2,954,000
PROPERTY, PLANT AND EQUIPMENT, net............ 5,452,000 5,140,000 5,400,000
---------- ---------- ----------
$8,326,000 $7,857,000 $8,354,000
========== ========== ==========
LIABILITIES AND DIVISION EQUITY
CURRENT LIABILITIES:
Bank overdraft.............................. $ 39,000 $ 5,000 $ 115,000
Trade accounts payable...................... 983,000 612,000 1,200,000
Trade accounts payable, related party....... -- 21,000 --
Accrued liabilities:
Payroll and related taxes................. 246,000 245,000 145,000
Pension termination costs................. 27,000 -- 27,000
Environmental cleanup costs............... 30,000 -- 30,000
Sales and property taxes.................. 40,000 33,000 --
Other..................................... 31,000 20,000 --
---------- ---------- ----------
Total Current Liabilities............... 1,396,000 936,000 1,517,000
COMMITMENTS AND CONTINGENCIES:
DIVISION EQUITY............................... 6,930,000 6,921,000 6,837,000
---------- ---------- ----------
$8,326,000 $7,857,000 $8,354,000
========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements
F-73
<PAGE>
WEISSMAN IRON AND METAL
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- -----------------------
1995 1994 1993 1996 1995
----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales................. $16,207,000 $12,959,000 $9,378,000 $3,896,000 $3,941,000
Brokerage............. 2,956,000 1,352,000 241,000 1,192,000 446,000
Other................. 1,000 11,000 11,000 25,000 1,000
----------- ----------- ---------- ---------- ----------
Total Revenues...... 19,164,000 14,322,000 9,630,000 5,113,000 4,388,000
----------- ----------- ---------- ---------- ----------
COST OF SALES AND
EXPENSES:
Cost of sales......... 12,235,000 9,075,000 7,456,000 3,047,000 2,753,000
Cost of brokerage..... 2,894,000 1,348,000 237,000 1,158,000 436,000
Personnel............. 654,000 564,000 396,000 108,000 114,000
Professional
services............. 17,000 26,000 22,000 7,000 3,000
Other, general and
administrative....... 305,000 270,000 282,000 62,000 90,000
Depreciation and
amortization
expense.............. 7,000 7,000 7,000 2,000 2,000
Environmental cleanup
costs................ 30,000 -- -- -- --
Loss on disposal of
equipment............ -- -- -- 7,000 --
----------- ----------- ---------- ---------- ----------
Total Cost of Sales
and Expenses....... 16,142,000 11,290,000 8,400,000 4,391,000 3,398,000
----------- ----------- ---------- ---------- ----------
NET INCOME.............. $ 3,022,000 $ 3,032,000 $1,230,000 $ 722,000 $ 990,000
=========== =========== ========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements
F-74
<PAGE>
WEISSMAN IRON AND METAL
STATEMENT OF CHANGES IN DIVISION EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE THREE MONTHS ENDED
MARCH 31, 1996 (UNAUDITED)
<TABLE>
<S> <C>
Balance, December 31, 1992......................................... $ 5,818,000
Net income......................................................... 1,230,000
Unrecognized pension costs......................................... (64,000)
Distributions to related parties, net.............................. (635,000)
-----------
Balance, December 31, 1993......................................... 6,349,000
Net income......................................................... 3,032,000
Recognized pension costs........................................... 64,000
Distributions to related parties, net.............................. (2,524,000)
-----------
Balance, December 31, 1994......................................... 6,921,000
Net income......................................................... 3,022,000
Unrecognized pension costs......................................... (47,000)
Distributions to related parties, net.............................. (2,966,000)
-----------
Balance, December 31, 1995......................................... 6,930,000
Net income (unaudited)............................................. 722,000
Distributions to related parties, net (unaudited).................. (815,000)
-----------
Balance, March 31, 1996 (unaudited)................................ $ 6,837,000
===========
</TABLE>
See accompanying Notes to Financial Statements
F-75
<PAGE>
WEISSMAN IRON AND METAL
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1994 1993 1996 1995
----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS (TO) FROM
OPERATING ACTIVITIES:
Net income............ $ 3,022,000 $ 3,032,000 $1,230,000 $ 722,000 $ 990,000
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization....... 312,000 261,000 220,000 148,000 78,000
Loss on disposal of
equipment.......... 20,000 6,000 2,000 7,000 --
Changes in:
Trade accounts
receivable........ 52,000 (464,000) (618,000) (643,000) (405,000)
Other receivables.. (21,000) 30,000 (2,000) 1,000 (22,000)
Prepaid expenses... 67,000 (5,000) (2,000) -- (21,000)
Inventories........ (296,000) (66,000) (16,000) 562,000 (236,000)
Trade accounts
payable........... 371,000 156,000 243,000 217,000 206,000
Accrued
liabilities....... 66,000 47,000 106,000 (172,000) (119,000)
Bank overdraft..... 34,000 5,000 -- 76,000 (5,000)
Environmental
cleanup costs..... 30,000 -- -- -- --
----------- ----------- ---------- --------- ---------
Net Cash Provided
by Operating
Activities....... 3,657,000 3,002,000 1,163,000 918,000 466,000
----------- ----------- ---------- --------- ---------
CASH FLOWS (TO) FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (644,000) (648,000) (424,000) (103,000) --
Proceeds from sale of
property and
equipment............ -- -- -- -- 9,000
----------- ----------- ---------- --------- ---------
Net Cash Provided
(Used) by
Investing
Activities....... (644,000) (648,000) (424,000) (103,000) 9,000
----------- ----------- ---------- --------- ---------
CASH FLOWS (TO) FROM
FINANCING ACTIVITIES:
Unrecognized pension
costs................ (47,000) 64,000 (64,000) -- --
Distributions to
related parties...... (2,965,000) (2,525,000) (635,000) (815,000) (455,000)
----------- ----------- ---------- --------- ---------
Net Cash (Used) by
Financing
Activities....... (3,012,000) (2,461,000) (699,000) (815,000) (455,000)
----------- ----------- ---------- --------- ---------
NET INCREASE (DECREASE)
IN CASH............... 1,000 (107,000) 40,000 -- 20,000
CASH, beginning of
period................ 8,000 115,000 75,000 9,000 8,000
----------- ----------- ---------- --------- ---------
CASH, end of period.... $ 9,000 $ 8,000 $ 115,000 $ 9,000 $ 28,000
=========== =========== ========== ========= =========
CASH PAID FOR
INTEREST.............. $ -- $ -- $ 1,000 $ -- $ --
=========== =========== ========== ========= =========
</TABLE>
See accompanying Notes to Financial Statements
F-76
<PAGE>
WEISSMAN IRON AND METAL
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Activity
Weissman Industries, Inc. was incorporated in January 1975 in the State of
Iowa. Weissman Iron and Metal, a division of Weissman Industries, Inc.
(Weissman) operates in the metals recycling industry (purchasing, processing,
selling and brokering ferrous and non-ferrous metals) with its operations
located in Waterloo, Iowa. Weissman operates one of three heavy duty
automotive shredders in Iowa. Processed scrap is sold to steel mill customers
located in or around Waterloo, Iowa.
Agreement to Sell Weissman
The stockholders of Weissman Industries, Inc. have signed an agreement with
Recycling Industries, Inc. (RII) to sell the business of Weissman to RII,
through the sale of all the outstanding stock of Weissman Industries, Inc.
Prior to the sale of stock to RII, Weissman Industries, Inc. sold its other
operating divisions to unrelated entities. Since the other operations were
previously sold to unrelated entities, are not being acquired by RII and do
not effect Weissman, they are not included in the financial statements of
Weissman.
Both RII and Weissman Industries, Inc. have agreed to jointly elect section
338(h)(10) treatment under the Internal Revenue Code so that the sale of
Weissman will be treated as an asset sale for federal and state income tax
purposes.
The assets to be sold consist of a heavy duty automotive shredder, metal
shearing equipment, Coreco aluminum furnace, heavy equipment, tools and
rolling stock, real property, buildings, inventories and accounts receivable
used in the business of recycling ferrous and non-ferrous metals.
The sale price for Weissman is $12,400,000 and is allocated as follows:
<TABLE>
<S> <C>
Trade accounts receivable..................................... $ 1,600,000
Inventories................................................... 900,000
Buildings and improvements.................................... 3,000,000
Automotive shredder........................................... 3,000,000
Heavy equipment............................................... 1,900,000
Equipment and rolling stock................................... 1,200,000
Land.......................................................... 800,000
-----------
Total purchase price........................................ $12,400,000
===========
</TABLE>
Basis of Presentation
The accompanying financial statements include only the assets, liabilities,
equity and operations of the metals recycling division of Weissman Industries,
Inc. that is expected to be acquired by RII through a stock purchase agreement
upon the closing of a public offering of RII common stock.
Unaudited Interim Financial Statements
In the opinion of management, the unaudited interim financial statements for
the three month periods ended March 31, 1996 and 1995 are presented on a basis
consistent with the audited annual financial statements and reflect all
adjustments, consisting only of normal recurring accruals, necessary for fair
presentation of the results of such periods. The results of operations for the
interim period ended March 31, 1996 are not necessarily indicative of the
results to be expected for the year ended December 31, 1996.
F-77
<PAGE>
WEISSMAN IRON AND METAL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk
Concentrations of credit risk with respect to trade receivables exist due to
large balances with a few customers. At December 31, 1995 and 1994, and March
31, 1996 (unaudited) accounts receivable balances for three major customers
were $1,216,000, $967,000 and $1,477,000, or 80%, 61% and 69%, respectively,
of the total accounts receivable balance. Ongoing credit evaluations of
customers' financial condition are performed and, generally, no collateral is
required. Weissman does not maintain reserves for potential losses since such
past losses, in the aggregate, have not been significant; therefore, the
allowance for doubtful accounts receivable is zero at December 31, 1995 and
1994, and at March 31, 1996 (unaudited). Customers are located in the upper
Midwest region of the United States (in or around Waterloo, Iowa).
Inventories
Inventories consist primarily of ferrous and non-ferrous scrap metal.
Inventory costs for finished goods include material, labor and plant overhead.
Inventory is stated at lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and
amortization expense is provided on a straight-line basis using estimated
useful lives of 5 to 20 years for equipment and 40 years for building and
improvements. Depreciation and amortization expense of property, plant and
equipment was $312,000, $261,000, $220,000, $148,000 and $78,000 for the years
ended December 31, 1995, 1994 and 1993, and for the three months ended March
31, 1996 and 1995 (unaudited), 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.
Environmental Expenditures
Environmental expenditures that relate to current operations are capitalized
if the costs improve the Weissman property as compared to the condition of the
property when originally constructed or acquired or if the costs prevent
environmental contamination from future operations. Expenditures that relate
to an existing condition caused by past operations, and which do not
contribute to current or future revenue generation, are expensed. Liabilities
are recorded when environmental assessments are made or remedial efforts are
probable and the costs can be reasonably estimated. These amounts are
generally accrued upon the completion of feasibility studies or the settlement
of claims, but in no event later than Weissman's commitment to a plan of
action.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Statements
The carrying amounts of cash, accounts receivable, accounts payable, and
accrued expenses approximate fair value because of the short maturity of these
items.
Income Taxes
Effective December 30, 1988, Weissman Industries, Inc. and its stockholders
elected under the Internal Revenue Code to be an S-corporation for tax
purposes. In lieu of corporate income taxes, the stockholders of an
F-78
<PAGE>
WEISSMAN IRON AND METAL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
S-corporation are taxed on their proportionate share of taxable income.
Accordingly, no provision or liability for federal income taxes has been
included in these financial statements.
Upon completion of the sale of Weissman Industries, Inc. to RII, the tax
status of the Weissman Industries, Inc. will change from an S-corporation to a
taxable entity. Due to the tax effect of the sale there will be no significant
differences between financial statement and tax basis of assets and
liabilities and therefore the sale will not generate a deferred tax asset or
liability.
Cash
For purposes of reporting cash flows, Weissman considers all funds with
maturities of three months or less to be cash equivalents.
NOTE 2--INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................ $ 544,000 $ 526,000 $352,000
Finished goods........................... 783,000 505,000 413,000
---------- ---------- --------
$1,327,000 $1,031,000 $765,000
========== ========== ========
</TABLE>
Included in inventory is $165,000, $108,000 and $84,000 of indirect costs at
December 31, 1995 and 1994, and March 31, 1996 (unaudited), respectively.
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1995 1994 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land............................... $ 153,000 $ 153,000 $ 153,000
Building and improvements.......... 2,983,000 2,970,000 2,983,000
Heavy machinery and equipment...... 4,602,000 4,289,000 4,648,000
Roads and railroad tracks.......... 184,000 178,000 184,000
Transportation equipment........... 863,000 757,000 863,000
Office equipment................... 58,000 58,000 58,000
----------- ----------- -----------
Total............................ 8,843,000 8,405,000 8,889,000
Less accumulated depreciation.... (3,391,000) (3,265,000) (3,489,000)
----------- ----------- -----------
$ 5,452,000 $ 5,140,000 $ 5,400,000
=========== =========== ===========
</TABLE>
F-79
<PAGE>
WEISSMAN IRON AND METAL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--ECONOMIC DEPENDENCY
Weissman is economically dependent on three major customers for sales as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -----------------------
1995 1994 1993 1996 1995
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A................... 38% 32% 28% 45% 32%
Customer B................... 19% 22% 12% 5% 18%
Customer C................... 14% 16% 29% 15% 13%
</TABLE>
Weissman also purchased inventory from two of these customers as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -----------------------
1995 1994 1993 1996 1995
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A................... 5% 6% 9% 4% 7%
Customer B................... 20% 19% 15% 34% 18%
</TABLE>
NOTE 5--COMMITMENTS AND CONTINGENCIES
Environmental Liabilities
In November 1993, Weissman Industries, Inc. received a notice from the US
Environmental Protection Agency (EPA) that it may be a potentially responsible
party (PRP), along with hundreds of others, with regard to a recycling site in
Alabama which received a shipment of material from Weissman. Under the law, a
PRP may be ordered to perform response actions, may be liable for costs
incurred and may be required to pay damages for injury.
In October, 1995 the EPA notified Weissman Industries, Inc. that since
Weissman had a lower volumetric ranking, EPA intends to offer a de minimus
settlement to Weissman Industries, Inc. after completing negotiations with
larger ranking PRPs. Weissman has recorded an accrual in the amount of $30,000
for a de minimus settlement allowance.
The assessment of the required response and remedial costs associated with
the clean up is extremely complex. Among the variables that management must
assess are imprecise engineering estimates, continually evolving governmental
standards, potential recoveries from insurance coverage and laws which impose
joint and several liability.
Self Funded Employee Health Care Plan
Weissman maintains and self funds a health care plan for all full time
employees after 90 days of employment. A third party administrator is employed
to control costs. The maximum specific costs are covered by a reinsurance
provider.
Loan Guarantee
Weissman's trade receivables and inventories are collateral for a line of
credit with a maximum of $1,000,000 maintained by Weissman Industries, Inc.
There was $-0-, $775,000 and $-0- outstanding under this line of credit as of
December 31, 1995 and 1994, and March 31, 1996 (unaudited), respectively.
F-80
<PAGE>
WEISSMAN IRON AND METAL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Union Contract
Substantially all of the labor force that works in the recycling operations
in the yard are members of the International Union of United Automobile,
Aerospace and Agricultural Implement Workers of America and work under a
collective bargaining agreement which expires November 30, 1996. Management
has not yet commenced negotiations, however, in the past have successfully
negotiated contract renewals.
Turnings and Borings Contract
On September 1, 1991, Weissman entered into a service agreement with a
significant customer to process the customer's turnings and borings for a term
of seven years for a range of $13 to $22 per ton based on the product plus
approximately $4,000 per month for reimbursement of equipment costs.
NOTE 6--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.
Weissman purchases raw material inventory, sells miscellaneous services and
pays certain expenses to a related division of Weissman Industries, Inc. This
related division was sold to third parties in February 1995. The related party
transactions were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -----------------------
1995 1994 1993 1996 1995
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Purchase of inventory... $ 31,000 $168,000 $ 99,000 $ -- $31,000
Management fee charge... $180,000 $180,000 $180,000 $45,000 $45,000
Sales of services, net.. $ 19,000 $205,000 $168,000 $ -- $14,000
</TABLE>
The purchase of the raw material approximates the cost paid to other large
bulk suppliers of Weissman. Costs charged are based upon actual amounts paid
by Weissman.
The balances due from the other divisions are shown as distributions from
Division Equity.
NOTE 7--RETIREMENT PLAN
Weissman Industries, Inc. has a defined benefit plan (the Plan) covering
substantially all of its employees. The Plan provides for payment of
retirement benefits commencing between the ages of 55 and 65. After meeting
certain qualifications, an employee acquires a vested right to future
benefits. The benefits payable under the Plan are generally determined on the
basis of an employee's length of service and earnings. Annual contributions to
the Plan are sufficient to satisfy legal funding requirements.
Benefits under the Plan were frozen on October 31, 1995 and effective
December 30, 1995 the Plan was terminated. Upon receipt of a favorable
Internal Revenue Service determination letter and approval from Pension
Guaranty Trust the assets will be distributed to the participants. The
termination was approved by the union. The accrued loss due to curtailment at
the termination date was $47,000.
Upon adoption of Financial Accounting Standard Number 87 (FAS 87) Employers'
Accounting for Pensions in 1989, the fair value of Plan assets exceeded
projected benefit liability by $83,000. This initial net asset is being
amortized over 9.4 years.
Plan assets consist of a Group Annuity Contract with Principal Financial
Group.
F-81
<PAGE>
WEISSMAN IRON AND METAL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Weissman pension activity consists of approximately 43% of the total Plan.
The following disclosures are for Weissman:
In accordance with FAS 87, Weissman was required to record an additional
minimum pension liability at December 31, 1995 and 1993, and March 31, 1996
(unaudited). This amount represents the excess of the accumulated benefit
obligations over the fair value of Plan assets and accrued pension
liabilities. The liabilities have been offset by intangible assets to the
extent possible. Because the asset recognized may not exceed the amount of
unrecognized prior service cost, the balance of the liability at the end of
each period is reported as a separate reduction to Division Equity.
Amounts are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1994 1993 1996
------- ----- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Intangible assets.......................... $ -- $ -- $ 4,000 $ --
Reduction to Division Equity............... 47,000 -- 64,000 47,000
------- ----- ------- -------
Additional minimum liability............... $47,000 $ -- $68,000 $47,000
======= ===== ======= =======
</TABLE>
The net periodic pension cost is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- -----------------------
1995 1994 1993 1996 1995
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Service costs--benefits
earned during the
period................. $ 21,000 $ 25,000 $ 18,000 $ -- $ 5,000
Interest cost on
projected benefit
obligation............. 19,000 18,000 15,000 -- 5,000
Actual return on
assets................. (84,000) 15,000 (23,000) -- (21,000)
Net amortization and
deferral............... 60,000 (33,000) 3,000 -- 15,000
-------- -------- -------- ----- --------
Net periodic pension
cost............... $ 16,000 $ 25,000 $ 13,000 $ -- $ 4,000
======== ======== ======== ===== ========
</TABLE>
Assumptions used in the accounting were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- -----------------------
1995 1994 1993 1996 1995
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Discount rate.............. 6.25% 7.25% 5.75% -- 6.25%
Rate of increase in
compensation levels....... 5.26% 5.36% 6.00% -- 5.26%
Expected long-term rate of
return on assets.......... 7.75% 7.75% 7.75% -- 7.75%
</TABLE>
F-82
<PAGE>
WEISSMAN IRON AND METAL
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
The following table sets forth the plan's funded status and amounts
recognized in Weissman's balance sheet for its pension plan at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1995 1994 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrual present value of benefit
obligation:
Vested benefit obligation............. $ 358,000 $ 237,000 $ 358,000
========== ========== =========
Accumulated benefit obligation....... $ 358,000 $ 244,000 $ 358,000
========== ========== =========
Projected benefit obligation......... $(358,000) $(268,000) $(358,000)
Plan assets at fair value............ 330,000 263,000 330,000
---------- ---------- ---------
Projected benefit obligation in
excess of plan assets............... (28,000) (5,000) (28,000)
Items not yet recognized in earnings:
Unrecognized net loss............... 63,000 52,000 63,000
Unrecognized (net asset) at January
1, 1989............................ (15,000) (22,000) (15,000)
Unrecognized prior service cost..... -- 3,000 --
Contributions made prior to year
end................................ -- 6,000 --
Loss on curtailment................. (47,000) -- (47,000)
---------- ---------- ---------
Pension (liability) asset recognized
in the balance sheet............... $ (27,000) $ 34,000 $ (27,000)
========== ========== =========
</TABLE>
F-83
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS. ANY INFORMATION OR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR
MADE, MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN
RESPECT TO THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICI-
TATION WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. HOWEVER, IN THE EVENT OF A
MATERIAL CHANGE, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 11
Price Range of the Common Stock.......................................... 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Dilution................................................................. 14
Selected Financial Information........................................... 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 24
Management............................................................... 35
Principal Shareholders................................................... 41
Certain Transactions..................................................... 42
Selling Securityholders.................................................. 43
Description of Capital Stock............................................. 44
Shares Eligible for Future Sale.......................................... 47
Underwriting............................................................. 49
Legal Matters............................................................ 50
Experts.................................................................. 50
Change in Independent Accountants........................................ 51
Index to Financial Statements............................................ F-1
Financial Statements..................................................... F-3
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,400,000 SHARES
[LOGO OF RECYCLING INDUSTRIES, INC. APPEARS HERE]
RECYCLING
INDUSTRIES, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
Prime Charter Ltd.
JULY 18, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered. All expenses are
estimated except the registration fee and the NASD fee.
<TABLE>
<S> <C>
Registration and filing fee $11,695
NASD filing fee 3,892
Nasdaq National Market listing fee 50,000
Printing and engraving 100,000
Accounting fees and expenses 200,000
Underwriter's Expense Allowance 247,169
Legal fees and expenses 225,000
Blue sky fees and expenses 50,000
Transfer Agent 15,000
Miscellaneous 32,244
----------
Total $ 935,000
==========
</TABLE>
ITEM 14 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification provided under the Company's Articles of Incorporation
The Colorado Business Corporation Act (the "CBCA") authorizes the
indemnification of and advancement of expenses to directors, officers,
employees, fiduciaries and agents of a Colorado corporation against liabilities
which they may incur in such capacities. Article V.B of the Company's Amended
and Restated Articles of Incorporation provides that the Company shall indemnify
and may advance expenses to its directors to the maximum extent permitted by the
CBCA and shall indemnify its officers, employees or agents who are not directors
to the maximum extent permitted by the CBCA or to a greater extent as may be
consistent with law and provided for by resolution of the Company's shareholders
or directors, or in a contract. A summary of the circumstances in which such
indemnification is allowable under the CBCA is provided below, but that
description is qualified in its entirety by reference to the relevant section of
the CBCA.
In general, the CBCA provides that any director may be indemnified against
liabilities (including the obligation to pay a judgment, settlement, penalty,
fine or reasonable expense)
II-1
<PAGE>
incurred in a proceeding and have expenses advanced for such a proceeding
(including any civil, criminal or investigative proceeding whether threatened,
pending or completed) to which the director was made a party because he is or
was a director, except that, if the proceeding is brought by or in the right of
the Company, indemnification is permitted only with respect to reasonable
expenses incurred in connection with the proceeding. The CBCA prohibits
indemnification of a director in connection with a proceeding brought by or in
the right of the Company in which a director is adjudged liable to the Company,
or in connection with any proceeding charging improper personal benefit to the
director in which the director is adjudged liable for receipt of an improper
personal benefit.
Indemnity may be provided only if the director's actions resulting in the
liability: (i) were taken in good faith; (ii) were reasonably believed to have
been in the Company's best interest with respect to actions taken in the
director's official capacity; (iii) were reasonably believed not to be opposed
to the Company's best interest with respect to actions other than those taken in
the director's official capacity; and (iv) with respect to any criminal action,
the director had no reasonable cause to believe his or her conduct was unlawful.
Indemnification may be awarded only after the applicable standard of conduct has
been met by the director to be indemnified as determined by (i) a majority vote
of directors not party to the proceeding comprising a quorum of the Board of
Directors or, if a quorum cannot be obtained, by committee thereof consisting of
two or more directors not party to the proceeding; (ii) by independent legal
counsel selected by the Board of Directors; or (iii) by the shareholders.
The CBCA further provides that unless limited by the Company's articles of
incorporation, a director or officer who is wholly successful, on the merits or
otherwise, in defense of any proceeding to which he was a party, is entitled to
receive indemnification against reasonable expenses, including attorneys' fees,
incurred in connection with the proceeding. The Company's Amended and Restated
Articles of Incorporation do not limit the foregoing provisions.
The Company may indemnify or advance expenses to an officer, employee,
fiduciary or agent who is not a director to a greater extent than permitted for
indemnification of directors, if consistent with law and if provided for by its
articles of incorporation, bylaws, resolution of its shareholders or directors
or in a contract. The provision of indemnification to persons other than
directors is subject to such limitations as may be imposed on general public
policy grounds.
Upon petition by a director or officer, a court may order the Company to
indemnify such director or officer against liabilities arising in connection
with any proceeding. A court may order the Company to provide such
indemnification, whether or not he was entitled to indemnification by the
Company. To order indemnification, the court must determine that the director or
officer is fairly and reasonably entitled to indemnification in light of the
circumstances. With respect to liability incurred by a director or officer, or
in any proceeding
II-2
<PAGE>
where liability results on the basis that a personal benefit was received
improperly, a court may only require that the director or officer be indemnified
as to reasonable expenses incurred.
The CBCA specifies that any provisions for indemnification of or advances
for expenses to directors which may be contained in the Company's articles of
incorporation, bylaws, resolutions of its shareholders or directors, or in a
contract (except for insurance policies) shall be valid only to the extent such
provisions are consistent with the CBCA and any limitations upon indemnification
set forth in the articles of incorporation.
The CBCA also grants the power to the Company to purchase and maintain
insurance policies which protect any director, officer, employee, fiduciary or
agent against any liability asserted against or incurred by them in such
capacity arising out of their status as such. Such policies may provide for
indemnification whether or not the corporation would otherwise have the power to
provide for it. No such policies have been obtained by the Company.
Article V.A of the Company's Amended and Restated Articles of Incorporation
provides for the elimination of personal liability for monetary damages for the
breach of fiduciary duty as a director except for liability (i) resulting from a
breach of the director's duty of loyalty to the Company or its shareholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (iii) for approving payment of a
dividend, a stock repurchase, a distribution of assets to shareholders during
liquidation or the making or guaranteeing of a loan to a director, to the extent
that any such actions are illegal under the CBCA; or (iv) for any transaction
from which a director derives an improper personal benefit. This Article further
provides that the personal liability of the Company's directors shall be
eliminated or limited to the fullest extent permitted by the CBCA.
Indemnification Provided in Connection with the Offering
The Company and the Underwriter have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act, and, if
such indemnifications are unavailable or insufficient, the Company and the
Underwriter have agreed to damage contribution agreements between them based
upon relative benefits received from this offering and relative fault resulting
in such damages.
The Selling Securityholders and the Company have agreed to indemnify each
other against certain liabilities, including liabilities under the Securities
Act.
Indemnification Provided in Connection with Private Placements of the Company's
Securities
The placement agent for and investors in the private placements of the
Company's securities occurring in February and May, 1995 and January and March,
1996, have agreed to
II-3
<PAGE>
indemnify, to the extent permitted by law, the Company, its directors, its
officers and each person who controls the Company (within the meaning of the
Securities Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement of material fact or any
omission or alleged omission of a material fact required to be stated in a
registration statement, prospectus, private placement memorandum or any
amendment thereof or supplement thereto or necessary to make the statements
therein (in the case of a prospectus, in the light of the circumstances under
which they were made) not misleading, in each case to the extent, but only to
the extent, that any such loss, liability, claim, damage or expense arises out
of or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information or affidavits relating to such investors or the
placement agent furnished to the Company for use therein.
ITEM 15 - RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has sold its securities in the
following transactions pursuant to the exemption from the registration
requirements of the Securities Act provided by Section 4(2) of the Securities
Act for transactions not involving a public offering and Rule 506 of Regulation
D promulgated thereunder. The Company believes that each purchaser in such
transactions was an accredited investor within the meaning of Regulation D. The
share amounts and prices set forth below have been adjusted to reflect the
Company's one-for-five reverse split of the Common Stock effective June 27,
1995:
1. Between September 30, 1992 and September 30, 1994, the Company issued
567,291 shares of Common Stock to various creditors in exchange for the
cancellation of $1,040,249 of indebtedness owed to such creditors by the
Company.
2. On January 1, 1994, the Company granted to Michael I. Price, an
executive officer of the Company, an option to acquire 150,000 shares of Common
Stock at exercise prices ranging from $6.25 to $30.00 per share. As described in
paragraph 7, below, this option was repriced on January 25, 1995.
3. In connection with the Company's acquisition of its Las Vegas, Nevada
facility on May 12, 1994, the Company issued 38,000 shares of Series A
Convertible Preferred Stock valued at $2,500,000 to Nevada Recycling
Corporation, in partial payment of the purchase price for such acquisition. On
December 27, 1994, 25,000 of those shares were cancelled pursuant to a
restructuring of the terms of the Nevada facility acquisition. In connection
with such restructuring, the Company issued to Nevada Recycling (i) a $2,300,000
secured promissory note payable by the Company, (ii) 120,000 shares of the
Company's Common Stock valued at $1,200,000 and (iii) warrants to purchase
20,000 shares of Common Stock at an exercise price of $1.25 per share.
4. On May 13, 1994, the Company issued 591,333 shares of Series B
Convertible Preferred Stock to First Dominion Holdings, Inc. ("First Dominion"),
a corporation owned and controlled by Thomas J. Wiens, the Company's chief
executive officer, in satisfaction of
II-4
<PAGE>
outstanding indebtedness payable to First Dominion in the amount of
approximately $880,000 incurred prior to March 31, 1994.
5. On July 15, 1994, the Company issued an option to acquire 360,000
shares of Common Stock to Caside Associates (the "Caside Option"). The exercise
price of the Caside Option was originally $2.50 per share. On January 25, 1995,
to reflect the then-current offering price of the Company's Common Stock in a
private placement of its securities, the exercise price was reduced to $.90 per
share and the Company issued to Caside Associates warrants to purchase 180,000
shares of the Company's Common Stock at $7.50 per share. The Caside Option was
subsequently exercised with respect to 55,556 shares of Common Stock.
6. From September through December 1994, in connection with approximately
$459,000 of bridge loan financing provided to the Company by unaffiliated
lenders, the Company issued to the lenders warrants to acquire 39,880 shares of
Common Stock at an exercise price of $.90 per share. In April 1995, $450,000 of
bridge loans plus accrued interest were converted into 510,000 shares of Common
Stock and warrants to purchase 255,000 shares of Common Stock at an exercise
price of $7.50 per share.
7. On January 25, 1995, the Company repriced the option granted to
Michael I. Price on January 1, 1994 (see paragraph 2, above) and granted an
option to Jerome B. Misukanis, executive officers of the Company, to purchase up
to 150,000 and 12,000 shares of Common Stock, respectively, exercisable for
nominal consideration. On August 3, 1995, these options were amended to revise
the exercise price to $.90 per share. At the time of the repricing of these
options, the Company was selling shares of Common Stock in a private placement
at approximately $.90 per share, which the Company believes represented the fair
market value of the Common Stock on that date. The options expire on December
31, 1998.
8. On January 25, 1995, the Company granted NCO Investors III, L.P.
warrants to purchase a total of 100,000 shares of Common Stock in consideration
for lending the Company $125,000 and in consideration for financial consulting
services rendered. These warrants were cancelled on June 30, 1995 in connection
with the Company's acquisition of a 20% interest in The Loef Company. NCO
Investors III, L.P. and its affiliates own the remaining 80% interest in The
Loef Company.
9. On January 25, 1995, the Company granted Nagelvoort & Co. warrants to
purchase a total of 300,000 shares of Common Stock in exchange for services
rendered to the Company in connection with the financing of a proposed
acquisition. These warrants were cancelled on June 20, 1995 in connection with
the termination of the relationship between the Company and Nagelvoort & Co.
10. On January 25, 1995, the Company repurchased 291,333 shares of the
Company's Series B Convertible Preferred Stock, acquired the rights to certain
technology and received forgiveness of certain accrued obligations in exchange
for consideration of $750,000. In connection with this transaction, the Company
granted to Thomas J. Wiens the right to acquire Common Stock valued at
$1,187,000 at a purchase price equal to the lesser of 50% of the market value of
the Common Stock or $.90 per share. Upon exercise of this right on August 8,
1995, Mr. Wiens purchased 1,319,445 shares of Common Stock at $.90 per share.
11. From February 1, 1995 through April 17, 1995, the Company conducted a
private placement through First Equity Capital Securities, Inc. as Placement
Agent, of units consisting of 1,200 shares of Common Stock and Series C warrants
to purchase 600 shares of Common
II-5
<PAGE>
Stock at an exercise price of $7.50 per share, at an offering price of $1,080
per unit. Pursuant to this private placement, the Company sold 2,473,711 shares
of Common Stock and 1,295,876 warrants, including units issued in connection
with the cancellation of bridge debt described in paragraph 5 above, to 34
accredited investors. In connection with the private placement, the Company
issued to First Equity Capital Securities, Inc. 139,828 Placement Agent's
Warrants, each to acquire two shares of Common Stock and one Series H Warrant at
an exercise price of $1.80. Each Series H Warrant entitles the holder to acquire
one share of Common Stock at an exercise price of $7.50 per share.
12. From May 24, 1995 through July 31, 1995, the Company conducted a
private placement through First Equity Capital Securities, Inc. as Placement
Agent, of units consisting of 1,200 shares of Common Stock and Series E warrants
to purchase 600 shares of Common Stock at an exercise price of $7.50 per share,
at an offering price of $1,080 per unit. Pursuant to this private placement, the
Company sold 1,800,000 shares of Common Stock and 900,000 warrants to 42
accredited investors. In connection with the private placement, the Company
issued to First Equity Capital Securities, Inc. and certain selected dealers,
73,560 Placement Agent's Warrants, each to acquire two shares of Common Stock
and one Series H Warrant at an exercise price of $1.80. Each Series H Warrant
entitles the holder to acquire one share of Common Stock at an exercise price of
$7.50 per share.
13. In connection with the Company's acquisition of its southern Texas
facilities, on December 11, 1995, the Company issued 227,693 shares of Common
Stock valued at $925,000 to Anglo Metal, Inc., in partial payment of the
purchase price for that acquisition. In addition, in connection with the
equipment financing for the acquisition, the Company issued to Ally Capital
Corporation a warrant to acquire up to 53,600 shares of Common Stock at an
exercise price of $5.00 per share.
14. During December 1995 and January 1996, the Company borrowed $1,500,000
of bridge financing and issued to the bridge lenders Series I warrants to
acquire 359,250 shares of Common Stock at a purchase price of $1.50 per share,
exercisable through the end of a three-year period commencing on the effective
date of a registration statement covering the shares issuable upon their
exercise.
15. In December 1995, the holders of the Company's then outstanding Series
C and Series E warrants agreed to amend the terms of these warrants and related
registration rights, and to sell a specified percentage of the shares of Common
Stock acquired by them in the February 1995 and May 1995 private placements,
discussed above, to the Company for $3.40 per share. To evidence the amended
terms of the Series C and Series E warrants, the Company issued to each of the
holders of such warrants Series G warrants to replace all outstanding Series C
and Series E warrants.
II-6
<PAGE>
16. From January 17, 1996 through January 31, 1996, the Company conducted
a private placement through First Equity Capital Securities, Inc. as Placement
Agent, of units consisting of 2,000 shares of Common Stock and Series J warrants
to purchase 1,000 shares of Common Stock at an exercise price of $7.50 per
share, at an offering price of $5,500 per unit. Pursuant to this private
placement, the Company sold 1,364,156 shares of Common Stock and 682,079
warrants, including units issued upon the conversion of certain bridge
financing, to 60 accredited investors. In connection with the private placement,
the Company issued to First Equity Capital Securities, Inc. and certain selected
dealers, 65,445 Placement Agent's Warrants, each to acquire two shares of
Common Stock and one Series H Warrant at an exercise price of $2.75. Each Series
H Warrant entitles the holder to acquire one share of Common Stock at an
exercise price of $7.50 per share.
17. From February 15, 1996 through April 8, 1996, the Company conducted a
private placement through First Equity Capital Securities, Inc. as Placement
Agent, of units consisting of 2,000 shares of Common Stock and Series J warrants
to purchase 1,000 shares of Common Stock at an exercise price of $7.50 per
share, at an offering price or $5,500 per unit. Pursuant to this private
placement, the Company sold 90,000 shares and 45,000 warrants to nine accredited
investors. In connection with the private placement, the Company issued to First
Equity Capital Securities, Inc. and certain selected dealers, 4,500 Placement
Agent's Warrants, each to acquire two shares of Common Stock and one Series H
Warrant at an exercise price of $2.75. Each Series H Warrant entitles the holder
to acquire one share of Common Stock at an exercise price of $7.50 per share.
With respect to the sales of unregistered securities described in
paragraphs 2 through 17 above, based on representations made to the Company and
further investigation by the Company, the Company believes that (i) each
purchaser was an accredited investor as that term is defined under Rule 501(a)
of Regulation D promulgated under the Securities Exchange Act of 1934, as
amended ("Regulation D"), or (ii) alone, or with their purchaser representative
(as that term is defined in Rule 501(h) of Regulation D), had sufficient
knowledge and experience in financial and business matters that he was capable
of evaluating the merits and risks of an investment in the Company.
ITEM 16(A) - EXHIBITS
(a) The following is a complete list of exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
1.1 Amended Form of Underwriting Agreement.**
1.2 Form of Dealer Agreement.*
1.3 Form of Master Agreement Among Underwriters. *
3.1 Amended and Restated Articles of Incorporation.*
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.2 Amended and Restated Bylaws.*
4.1 Form of Common Stock Certificate.*
4.2 Certificate of Designations, Rights and Preferences for the
Series A Convertible Preferred Stock of Recycling Industries,
Inc. with Amendment.*
4.3 Form of Series G Warrant Agreement.*
4.4 Form of Series G Registration Rights Agreement.*
4.5 Form of Series I Warrant Agreement.*
4.6 Form of Series J Warrant Agreement.*
4.7 Form of Series J Registration Rights Agreement.*
4.8 Form of 1995 Placement Agents Warrant Agreement.*
4.9 Amended Form of Underwriter Warrant Agreement.*
4.10 Form of 1995 Placement Agents Registration Rights Agreement.*
4.11 Form of 1996 Placement Agents Warrant Agreement.*
4.12 Form of 1996 Placement Agents Registration Rights Agreement.*
5.1 Opinion of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC.*
10.1 Agreements Related to the Acquisition of Nevada Recycling, Inc.:
10.1.1 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;
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1.2 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;
10.1.3 Stock Exchange Agreement dated May 10, 1994 between
Recycling Industries, Inc. 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; and
10.1.4 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.
10.2 Agreements related to the Restructuring of the Acquisition of
Nevada Recycling, Inc.:
10.2.1 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;
10.2.2 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;
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.2.3 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;
10.2.4 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;
10.2.5 $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;
10.2.6 $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 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;
10.2.7 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;
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.2.8 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. 0-20179; and
10.2.9 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.
10.3 Agreements Related to the Acquisition of Metal Recovery, Inc.:
10.3.1 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, 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;
10.3.2 ACI Option Agreement dated February 28, 1995 by and between
Recycling Industries, Inc., Ralph Paglieri, Peter Lukesch
and Scott Fischer;*
10.3.3 Option Agreement by and between Thomas J. Wiens, Ralph
Paglieri, Peter Lukesch and Scott Fischer;*
10.3.4 Pledge and Hypothecation Agreement by and among Recycling
Industries, Inc., Nevada Recycling Corporation, Ralph
Paglieri, Peter Lukesch and Scott Fischer. *
10.4 Warrant Solicitation Agreement between First Equity Capital
Securities, Inc. and Recycling Industries, Inc.*
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.5 Placement Agency Agreement dated February 1, 1995 between First
Equity Capital Securities, Inc. and Recycling Industries, Inc.*
10.6 Placement Agency Agreement dated June 6, 1995 between First
Equity Capital Securities, Inc. and Recycling Industries, Inc.*
10.7 Placement Agency Agreement dated January 17, 1996 between First
Equity Capital Securities, Inc. and Recycling Industries, Inc.*
10.8 Amended and Restated Stock Acquisition Agreement dated July 10,
1995 by and among Recycling Industries, Inc., Thomas J. Wiens and
First Dominion Holdings, Inc.*
10.9 Agreements related to the Acquisition of Anglo Iron & Metal
10.10.1 Asset Purchase Agreement dated December 1, 1995 by and among
Recycling Industries of Texas, Inc., Recycling Industries,
Inc., Anglo Metal, Inc. d/b/a Anglo Iron & Metal and Robert
C. Rome, incorporated by reference to the Company's current
report on Form 8-K reporting an event of December 11, 1995,
as Amended April 15, 1996 on Form 8-K/A, Commission File No.
0-20179.
10.10.2 First Addendum dated December 11, 1995 to the Asset Purchase
Agreement dated December 1, 1995 by and among Recycling
Industries of Texas, Inc., Recycling Industries, Inc., Anglo
Metal, Inc. d/b/a Anglo Iron & Metal and Robert C. Rome,
incorporated by reference to the Company's current report on
Form 8-K reporting an event of December 11, 1995, as Amended
April 15, 1996 on Form 8-K/A, Commission File No. 0-20179.
10.10.3 Inventory Purchase Agreement dated December 11, 1995 by and
between Recycling Industries of Texas, Inc. and Anglo Metal,
Inc. d/b/a Anglo Iron & Metal, incorporated by reference to
the Company's current report on Form 8-K reporting an event
of December 11, 1995, as Amended April 15, 1996 on Form
8-K/A, Commission File No. 0-20179.
10.10.4 Consulting and Non-Compete Agreement dated December 11, 1995
by and between Recycling Industries of Texas, Inc. and
Robert C. Rome,
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
incorporated by reference to the Company's current report on
Form 8-K reporting an event of December 11, 1995, as Amended
April 15, 1996 on Form 8-K/A, Commission File No. 0-20179.
10.10.5 Real Estate Purchase Contract dated December 11, 1995 by and
between Recycling Industries of Texas, Inc. and Anglo Metal,
Inc. d/b/a Anglo Iron & Metal, incorporated by reference to
the Company's current report on Form 8-K reporting an event
of December 11, 1995, as Amended April 15, 1996 on Form
8-K/A, Commission File No. 0-20179.
10.10.6 Form of Proposed Remediation Escrow Agreement by and between
Recycling Industries of Texas, Inc., Recycling Industries,
Inc., Anglo Metal, Inc. d/b/a Anglo Iron & Metal,
incorporated by reference to the Company's current report on
Form 8-K reporting an event of December 11, 1995, as Amended
April 15, 1996 on Form 8-K/A, Commission File No. 0-20179.
10.10.7 Escrow Agreement dated December 11, 1995 by and between
Recycling Industries of Texas, Inc., Recycling Industries,
Inc., Anglo Metal, Inc. d/b/a Anglo Iron & Metal, Robert C.
Rome and Stewart Title of Hidalgo County, Inc., incorporated
by reference to the Company's current report on Form 8-K
reporting an event of December 11, 1995, as Amended April
15, 1996 on Form 8-K/A, Commission File No. 0-20179.
10.10.8 Master Lease Agreement dated December 12, 1995 by and among
Ally Capital Corporation as lessor and Recycling Industries
of Texas, Inc. and Recycling Industries, Inc. as co-lessees,
incorporated by reference to the Company's current report on
Form 8-K reporting an event of December 11, 1995, as Amended
April 15, 1996 on Form 8-K/A, Commission File No. 0-20179.
10.10.9 Equipment Schedule to the Master Lease Agreement dated
December 12, 1995 by and among Ally Capital Corporation as
lessor and Recycling Industries of Texas, Inc. and Recycling
Industries, Inc. as co-lessees, incorporated by reference to
the Company's current report on Form 8-K reporting an event
of December 11, 1995, as Amended April 15, 1996 on Form
8-K/A, Commission File No. 0-20179.
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.11 Agreements Related to the Acquisition of Mid-America Shredding,
Inc.:
10.11.1 Asset Purchase Agreement dated February 16, 1996 by and
among Recycling Industries of Missouri, Inc., Recycling
Industries, Inc., Mid-America Shredding, Inc. and Linda
Lawton incorporated by reference to Exhibit 10.1 to the
Company's current report on Form 8-K reporting an event of
April 15, 1996, Commission File No. 0-20179.
10.11.2 Assumption Without Release and Modification Agreement, dated
April 15, 1996, by and among Mid-America Shredding, Inc.,
Recycling Industries of Missouri, Inc., Recycling
Industries, Inc., Linda F. Lawton, Personal Representative
of the Estate of Robert L. Lawton, Deceased and Linda Lawton
incorporated by reference to Exhibit 10.2 to the Company's
current report on Form 8-K reporting an event of April 15,
1996, Commission File No. 0-20179.
10.11.3 Security Agreement, dated April 15, 1996, between Recycling
Industries of Missouri, Inc. and Southwest Bank of St. Louis
incorporated by reference to Exhibit 10.3 to the Company's
current report on Form 8-K reporting an event of April 15,
1996, Commission File No. 0-20179.
10.11.4 Continuing Unlimited Guaranty Agreement dated April 15,
1996, between Recycling Industries, Inc. and Southwest Bank
of St. Louis incorporated by reference to Exhibit 10.4 to
the Company's current report on Form 8-K reporting an event
of April 15, 1996, Commission File No. 0-20179.
10.11.5 Loan Agreement dated April 8, 1992, between Mid-America
Shredding, Inc. and Southwest Bank of St. Louis incorporated
by reference to Exhibit 10.5 to the Company's current report
on Form 8-K reporting an event of April 15, 1996, Commission
File No. 0-20179.
10.11.6 Promissory Note dated February 8, 1996, between Mid-America
Shredding, Inc. and Southwest Bank, Inc. incorporated by
reference to Exhibit 10.6 to the Company's current report on
Form 8-K reporting an event of April 15, 1996, Commission
File No. 0-20179.
10.12 Agreements Related to the Acquisition of Weissman Industries,
Inc.:
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.12.1 Stock Purchase Agreement Dated July 1, 1996 by and among
Wesley J. Weissman, Walt Weissman, Wayne Weissman, Nancy
Sarles, Recycling Industries of Iowa, Inc., and Recycling
Industries, Inc.*
10.12.2 Letter of Intent With Coast Business Credit*
10.12.3 Letter Agreement dated July 17, 1996, amending Exhibit
10.12.1 **
10.13 Form of Share Repurchase Offer and Agreement*
10.14 Form of Series I Warrant Exchange Offer and Agreement*
10.15 Amended Form of Share Repurchase Offer and Agreement*
10.16 Form of Series J Extension Offer and Modification Agreement*
10.17 Loan and Security Agreement dated June 14, 1996 by and among
Recycling Industries, Inc., Nevada Recycling, Inc., Recycling
Industries of Texas, Inc., Recycling Industries of Missouri,
Inc. and Coast Business Credit*
10.18 Form of Custody Agreement between Selling Securityholder and
Custodian*
11 Amended Statement Regarding Computation of Per Share Earnings**
18.1 Letter from AJ. Robbins, P.C. dated April 11, 1996, addressed to
the Securities and Exchange Commission, incorporated by reference
to the Company's Current Report on Form 8-K/A reporting an event
of March 25, 1996, Commission File No. 0-20179.
21.1 List of the subsidiaries of Recycling Industries, Inc.*
23.1 Consent of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC -
see Exhibit 5.1
23.2 Consent of AJ. Robbins, P.C.**
23.3 Consent of BDO Seidman, LLP**
24 Power of Attorney - See Signature Page of Registration Statement
27 Financial Data Schedule*
</TABLE>
____________
* Previously filed
** Filed herewith
ITEM 16(B) - FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements for the years ended September 30, 1995
and 1994 and for the six months ended March 31, 1996.
ITEM 17 - UNDERTAKINGS
II-15
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions discussed under Item 14 -
Indemnification of Directors and Officers, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Englewood,
State of Colorado, on July 17, 1996.
RECYCLING INDUSTRIES, INC.
By/s/ Thomas J. Wiens
--------------------------------
Thomas J. Wiens, Chairman and Chief
Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Thomas J. Wiens Principal Executive July 17, 1996
- ----------------------------- Officer and Director
Thomas J. Wiens
* Director July 17, 1996
- -----------------------------
Michael I. Price
* Principal Financial July 17, 1996
- ----------------------------- and Accounting
Jerome B. Misukanis Officer and Director
* Director July 17, 1996
- -----------------------------
Graydon H. Neher
* Director July 17, 1996
- -----------------------------
Barry Plost
</TABLE>
*By: /s/ Thomas J. Wiens
--------------------------
Thomas J. Wiens,
Attorney-in-fact
II-17
<PAGE>
Exhibit 1.1
4,400,00 Shares
RECYCLING INDUSTRIES, INC.
Common Stock
(Par Value $.001 Per Share)
UNDERWRITING AGREEMENT
July 18, 1996
PRIME CHARTER LTD.
810 Seventh Avenue
New York, New York 10019
Ladies and Gentlemen:
1. Introduction. Recycling Industries, Inc., a Colorado corporation (the
"Company"), proposes to issue and sell to Prime Charter Ltd. and the other
Underwriters listed on Schedule A hereto (collectively, the "Underwriters") an
aggregate of 3,994,652 shares (the "Primary Shares") of the Company's common
stock, par value $.001 per share (the "Common Stock"). In addition, certain
existing holders of Common Stock listed on Schedule B hereto (the "Selling
Stockholders") propose to sell to the Underwriters an aggregate of 405,348
shares of Common Stock (the "Secondary Shares"). The Company and its chief
executive officer Thomas J. Wiens ("Wiens") also propose to issue and sell to
the Underwriters an aggregate of not more than 660,000 additional shares of
Common Stock (the "Additional Shares") if requested by the Representative in
accordance with Section 9 hereof. The Primary Shares, the Secondary Shares and
the Additional Shares are collectively referred to herein as the "Shares." The
words "you" and "your" refer to the Underwriters. Prime Charter Ltd. is acting
as representative (in such capacity, the "Representative") of the several
Underwriters.
2. Representations and Warranties.
(a) The Company represents, warrants and agrees with the Underwriters
that:
(i) A registration statement on Form S-1 (File No. 333-4574)
under the Securities Act of 1933, as amended (the "Act"), with respect to the
Shares, including a form of prospectus subject to completion, has been prepared
by the Company in conformity with the requirements of the Act and the rules and
regulations (the "Rules and Regulations") of the
<PAGE>
Securities and Exchange Commission (the "Commission") thereunder. Such
registration statement has been filed with the Commission under the Act, and one
or more amendments to such registration statement may also have been so filed.
After the execution of this Agreement, the Company shall file with the
Commission either (A) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement filed with the Commission (or, if no such amendment shall
have been filed, in such registration statement), with such insertions and
changes as are required by Rule 430A under the Act or permitted by Rule 424(b)
under the Act as shall have been provided to and approved by the Representative
prior to the filing thereof, or (B) if such registration statement, as it may
have been amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by the
Representative prior to the filing thereof. As used in this Agreement, the term
"Registration Statement" means such registration statement, as amended at the
time when it was or is declared effective, including all financial schedules and
exhibits thereto; the Registration Statement shall be deemed to include any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus"
means each prospectus subject to completion that was distributed to prospective
investors; and the term "Prospectus" means the prospectus first filed with the
Commission pursuant to Rule 424(b) under the Act or, if no prospectus is
required to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement at the time when it was or is
declared effective.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus and has not instituted or, to
the best knowledge of the Company, threatened to institute any proceedings with
respect to such an order. When any Preliminary Prospectus was filed with the
Commission it (A) contained all statements required to be stated therein in
accordance with, and complied in all material respects with the requirements of,
the Act and the Rules and Regulations, and (B) did not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective and at all times subsequent
thereto up to and including the Closing Date (as defined in Section 3 hereof)
and any Additional Closing Date (as defined in Section 9 hereof), it (A)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the Rules and Regulations and (B) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading. When the
Prospectus and any amendment or supplement thereto is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement
is not required to be so filed, when the Registration Statement and any
amendment thereto containing such amendment or supplement to the Prospectus was
or is declared effective) and at all times subsequent thereto up to and
including the Closing Date and any Additional Closing Date, the Prospectus, as
2
<PAGE>
amended or supplemented at any such time (A) contained or will contain all
statements required to be stated therein in accordance with, and complied or
will comply in all material respects with the requirements of, the Act and the
Rules and Regulations, and (B) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (ii) shall not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
in reliance upon, and in conformity with, information furnished in writing to
the Company by or on behalf of the Underwriters expressly for use therein.
(iii) Each of the Company, Weissman Industries, Inc. and the
entities listed on Exhibit 21.1 of the Registration Statement (each a
"Subsidiary" and, collectively, the "Subsidiaries"), (A) is a duly incorporated
or organized and validly existing corporation or other organization in good
standing under the laws of its jurisdiction of incorporation or organization,
with full power and authority (corporate and other) to own or lease its
properties and to conduct its business as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus); and (B) is duly qualified to do business as
a foreign corporation and is in good standing in each jurisdiction in which the
conduct of its business requires such qualification or in which it owns or
leases property, in each case except for those jurisdictions in which the
failure to so qualify, individually or in the aggregate, has not had and is not
reasonably likely to have a Material Adverse Effect (as defined below). The
Subsidiaries are the only subsidiaries of the Company. "Material Adverse Effect"
means any development, change or circumstance that could be materially adverse
to the business, properties, assets, net worth, financial condition, results of
operation or prospects of the Company and the Subsidiaries, taken as a whole.
(iv) The Company has the duly authorized and validly
outstanding capitalization set forth under the caption "Capitalization" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and the Company will have the adjusted capitalization
set forth therein on the Closing Date, based on the assumptions set forth
therein. The securities of the Company conform to the descriptions thereof
contained in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus). The outstanding shares of Common Stock have been
duly authorized and validly issued by the Company and are fully paid and non-
assessable. Except as created hereby or referred to in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus),
there are no outstanding options, warrants, rights or other arrangements
requiring the Company or any Subsidiary at any time to issue any capital stock.
No holders of outstanding shares of capital stock of the Company are entitled as
such to any preemptive or other rights to subscribe for any of the Shares and
neither the filing of the Registration Statement nor the offering or sale of the
Shares as contemplated by this Agreement gives rise to any rights for or
relating to the registration of any securities of the Company. The Shares have
been duly authorized by all necessary corporate action on the part of the
Company, and on the Closing Date or any
3
<PAGE>
Additional Closing Date, as the case may be, after payment therefor in
accordance with the terms of this Agreement, (A) the Shares to be sold by the
Company hereunder on such date will be validly issued, fully paid and
nonassessable, and (B) good and marketable title to the Shares to be sold by the
Company hereunder on such date will pass to the Underwriters free and clear of
any lien, encumbrance, security interest, claim or other restriction whatsoever
other than those arising from the actions or inaction of the Underwriters.
Except for its equity interest in the Subsidiaries or as set forth in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), the Company does not, directly or indirectly, own any
stock or other equity interest in any corporation, partnership or other entity.
All of the outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued, are fully paid and nonassessable and are owned
directly or indirectly by the Company free and clear of any lien, encumbrance,
security interest, claim or other restriction whatsoever, except as disclosed in
the Registration Statement. The Company has reserved sufficient shares of
Common Stock for issuance upon the exercise of all outstanding options and
warrants (including the Underwriter Warrants (as defined in Section 3(c)
hereof)). The Company has received, subject to notice of issuance, approval to
have the Shares listed on the Nasdaq National Market, and the Company does not
know of any reason or set of facts which is likely to adversely affect such
approval.
(v) The financial statements and the related notes and
schedules thereto included in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present the consolidated financial condition, results of operations,
stockholders' equity and cash flows of the entities to which they relate at the
dates and for the periods specified therein. Such consolidated financial
statements and the related notes and schedules thereto have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein). The
Company's audited financial statements for the fiscal year ended September 30,
1995 have been examined and certified by BDO Seidman LLP, and the Company's
audited financial statements for prior fiscal years and the audited financial
statements of certain of the Subsidiaries have been examined and certified by
AJ Robbins, P.C. Each of BDO Seidman LLP and AJ Robbins, P.C. are independent
public accountants within the meaning of the Act and the Rules and Regulations
as indicated in its reports filed therewith. The selected historical financial
information and statistical data set forth under the captions "Summary Financial
Information" and "Selected Financial Information" in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) have
been prepared on a basis consistent with the financial statements contained in
the Registration Statement. The pro forma financial statements of the Company
and the Subsidiaries, and the related notes thereto, set forth in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), have been prepared in
conformity with the requirements of the Act and the Rules and Regulations and
present fairly the pro forma information shown therein; and the pro forma
adjustments on such pro forma financial statements have been properly applied on
the basis described in the related notes thereto. The pro forma financial data
set forth in the Prospectus (or, if the Prospectus is not in existence, the
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most recent Preliminary Prospectus) under the captions "Summary Financial
Information," "Selected Financial Information" and "Pro Forma Consolidated
Financial Statements" have been prepared on a basis consistent with the pro
forma consolidated financial statements of the Company and the Subsidiaries.
(vi) The Company and each of the Subsidiaries have filed all
necessary federal, state and local income, franchise and other tax returns,
domestic and/or foreign, and have paid all taxes shown as due thereunder, and
the Company has no knowledge of any tax deficiency which might be assessed
against the Company or any Subsidiary which is reasonably likely to have a
Material Adverse Effect.
(vii) The Company and each of the Subsidiaries maintain
insurance of the types and in amounts which they reasonably believe to be
adequate for their business, in such amounts and with such deductibles as is
customary for companies in the same or similar business, all of which insurance
is in full force and effect. The Company has no reason to believe that the
Company or the Subsidiaries will not be able to renew their existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue their business at a cost that
would not have a Material Adverse Effect, except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(viii) There is no action, suit, proceeding or investigation
pending or, to the Company's best knowledge, threatened, before or by any court,
regulatory body or administrative agency or any other governmental agency or
body, domestic or foreign, which (A) questions the validity of the capital stock
of the Company or this Agreement or the Underwriter Warrant Agreement (as
defined in Section 3(c) hereof) or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or the Underwriter
Warrant Agreement, (B) is required to be disclosed in the Registration Statement
which is not so disclosed (and such proceedings, if any, as are summarized in
the Registration Statement are accurately summarized in all material respects),
or (C) is reasonably likely to have a Material Adverse Effect.
(ix) The Company has full legal right, power and authority to
enter into this Agreement and to consummate the transactions provided for
herein. This Agreement has been duly authorized, executed and delivered by the
Company; and none of the Company's execution or delivery of this Agreement or
the Underwriter Warrant Agreement, its performance hereunder or thereunder, its
consummation of the transactions contemplated herein or therein, its application
of the net proceeds of the offering in the manner set forth under the caption
"Use of Proceeds," or the conduct of its business as described in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) conflicts or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or causes or will cause (or permits or will permit)
the maturation or acceleration of any liability or obligation or the termination
of any right under,
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or results in the creation or imposition of any lien, charge, or encumbrance
upon, any property or assets of the Company or any of the Subsidiaries pursuant
to the terms of (A) the certificate or articles of incorporation or bylaws (or
other organizational documents, as applicable) of the Company or any of the
Subsidiaries, (B) any indenture, mortgage, deed of trust, voting trust
agreement, stockholders' agreement, note agreement, partnership agreement, joint
venture agreement or other agreement or instrument to which the Company or any
of the Subsidiaries is a party or by which it is or any of them are or may be
bound or to which any of their respective properties is or may be subject, or
(C) any statute, judgment, decree, order, rule or regulation applicable to the
Company or any of the Subsidiaries of any government, arbitrator, court,
regulatory body or administrative agency or other governmental agency or body,
domestic or foreign, having jurisdiction over the Company, any of the
Subsidiaries or any of their respective activities or properties, except with
respect to matters described in clauses (B) or (C) above that are not
individually or in the aggregate reasonably likely to have a Material Adverse
Effect.
(x) There is no document or agreement of a character required
to be described in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) or to be filed as an exhibit to the
Registration Statement which is not described or filed as required. All
agreements or copies of agreements filed as exhibits to the Registration
Statement to which the Company or any of the Subsidiaries is a party or by which
it is or any of them are or may be bound or to which any of their assets,
properties or businesses is or may be subject have been duly and validly
authorized, executed and delivered by the Company or such Subsidiary, as the
case may be, and constitute the legal, valid and binding agreements of the
Company or such Subsidiary, as the case may be, enforceable against it or each
of them in accordance with their respective terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization or other
similar laws relating to enforcement of creditors' rights generally, and general
equitable principles relating to the availability of remedies). The descriptions
in the Registration Statement of contracts and other documents are accurate and
fairly present the information required to be shown with respect thereto by the
Act and the Rules and Regulations, and there are no contracts or other documents
which are required by the Act or the Rules and Regulations to be described in
the Registration Statement or filed as exhibits to the Registration Statement
which are not so described or filed as required, and the exhibits which have
been filed are complete and correct copies (excluding schedules and other
attachments not required to be filed under the Act or the Rules and Regulations)
of the documents of which they purport to be copies.
(xi) Subsequent to the most recent respective dates as of
which information is given in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
and except as expressly contemplated therein, neither the Company nor any of the
Subsidiaries has incurred, other than in the ordinary course of its business,
any liabilities or obligations, direct or contingent, purchased any of its
outstanding capital stock, paid or declared any dividends or other distributions
on its capital stock or entered into any material transactions not in the
ordinary course of business, and there
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has been no change in capital stock or indebtedness of the Company or any
Subsidiary or any other event or circumstance that could result in a Material
Adverse Effect. Neither the Company nor any of the Subsidiaries (or the manner
in which it or any of them conducts its business) is in breach or violation of,
or in default under, any term or provision of (A) its certificate or articles of
incorporation or bylaws (or other organizational documents, as applicable),
(B) any indenture, mortgage, deed of trust, voting trust agreement,
stockholders' agreement, note agreement, partnership agreement, joint venture
agreement or other agreement or instrument to which it is a party by which it is
or may be bound or to which any of its properties is or may be subject, or any
indebtedness, which breach or default individually or in the aggregate is
reasonably likely to have a Material Adverse Effect, or (C) any statute,
judgment, decree, order, rule or regulation applicable to it or of any
government, arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of the Subsidiaries or any of their respective activities or
properties, which breach or default individually or in the aggregate is
reasonably likely to have a Material Adverse Effect.
(xii) The Company has obtained and delivered to the
Representative agreements (the "Lock-Up Agreements") from each of the persons
and entities listed on Schedule C hereto, representing all of the Company's
executive officers and directors and certain holders of outstanding equity
securities of the Company (or securities convertible into or exchangeable or
exercisable for equity securities of the Company), to the effect that such
person or entity will not, commencing on the effective date of the Registration
Statement and continuing for a 12-month period thereafter, without the
Representative's prior written consent (not to be unreasonably withheld),
directly or indirectly, offer, sell, pledge or otherwise encumber (with certain
exceptions), or grant any option to purchase or otherwise dispose of, any shares
of Common Stock or any securities convertible into or exchangeable or
exercisable for Common Stock. The Company's existing lock-up agreements (the
"Existing Lock-Up Agreements") described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) are in
full force and effect.
(xiii) No labor disturbance by the employees of the Company or
any of the Subsidiaries exists or is, to the Company's best knowledge, imminent
which is reasonably likely to have a Material Adverse Effect.
(xiv) The Company has timely filed all required reports, forms
or other documents under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations thereunder. Since their
respective inceptions, neither the Company nor any of the Subsidiaries has
incurred any material liability arising under or as a result of the application
of the provisions of the Act or the Exchange Act.
(xv) The Company and the Subsidiaries own, or are licensed or
otherwise possess sufficient rights to use, the proprietary knowledge,
inventions, patents, trademarks, service marks, trade names, logo marks and
copyrights used in or necessary for the
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conduct of their business (collectively, "Rights") as described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). No claims have been asserted against the Company or
any of the Subsidiaries by any person with respect to the use of any such Rights
or which challenge or question the validity or effectiveness of any such Rights,
except for any of the foregoing which is not reasonably likely to have a
Material Adverse Effect. The use in connection with the business and operations
of the Company and the Subsidiaries of such Rights does not, to the Company's
best knowledge, infringe on the rights of any person. For purposes of this
provision, "knowledge" shall mean the knowledge of any of the executive officers
of the Company.
(xvi) No consent, approval, authorization or order of or
filing with any court, regulatory body, administrative agency or any other
governmental agency or body, domestic or foreign, is required for the Company's
performance of this Agreement or the Underwriter Warrant Agreement or the
consummation of the transactions contemplated hereby or thereby, except such as
has been or may be obtained under the Act or may be required under state
securities or blue sky laws in connection with the Underwriters' purchase and
distribution of the Shares.
(xvii) Except for the Underwriter Warrant Agreement and except
as set forth in the Prospectus (or if the Prospectus is not in existence, the
most recent Preliminary Prospectus), there are no contracts, agreements or
understandings between the Company and any person granting such person the right
to require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such person, or
to require the Company to include such securities under the Registration
Statement.
(xviii) None of the Company or any of its officers, directors or
affiliates (within the meaning of the Rules and Regulations) has taken, directly
or indirectly, any action designed to stabilize or manipulate the price of any
security of the Company, or which has constituted or which might in the future
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company, to facilitate the sale or resale of
the Shares or otherwise.
(xix) Neither the Company nor any of the Subsidiaries (A) has
made any material investment in any related entity, except as may be described
in the Prospectus (or, if the Prospectus is not yet in existence, the most
recent Preliminary Prospectus); (B) has any commitments to make any material
investments in any related entity after the date hereof; or (C) has any material
liability or obligation (absolute, accrued, contingent or otherwise), whether
due or to become due, which arises out of or relates to the operations or assets
of any related entity.
(xx) Each of the Company and the Subsidiaries has good and
marketable title to, or valid and enforceable leasehold interests in, all
properties and assets owned or leased by it, free and clear of all liens,
encumbrances, security interests, claims, restrictions, equities and defects,
except (A) such as are described in the Registration Statement or the Prospectus
(or,
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if the Prospectus is not in existence, the most recent Preliminary Prospectus)
or such as do not materially adversely affect the value of any such properties
or assets taken as a whole and do not interfere with the use made or proposed to
be made of any of such properties and assets in a manner that is reasonably
likely to have a Material Adverse Effect, and (B) liens for taxes not yet due
and payable as to which appropriate reserves have been established and reflected
in the financial statements included in the Registration Statement. The Company
and the Subsidiaries own or lease all such properties as are necessary to their
operations as now conducted or as proposed to be conducted, as set forth in the
Registration Statement or the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); and the properties and
business of the Company and the Subsidiaries conform in all material respects to
the descriptions thereof contained in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). All the leases and subleases of the Company and the
Subsidiaries, and under which the Company or any Subsidiary holds properties or
assets as lessee or sublessee, constitute valid leasehold interests of the
Company or such Subsidiary, free and clear of any lien, encumbrance, security
interest, claim, restriction, equity or defect, are in full force and effect,
and neither the Company nor any Subsidiary is in default in respect of any of
the terms or provisions of any such leases or subleases or has notice of any
claim which has been asserted by anyone adverse to the Company's or any of the
Subsidiaries' rights as lessee or sublessee under any such leases or subleases,
or affecting or questioning the Company's or any of the Subsidiaries' right to
the continued possession of the leased or subleased premises under any such
lease or sublease, except in each case which are not reasonably likely to have a
Material Adverse Effect.
(xxi) Neither the Company nor any Subsidiary has violated any
law, including without limitation any environmental, safety, health or similar
law applicable to its business, nor any federal or state law relating to
discrimination in the hiring, promotion, or pay of employees, nor any applicable
federal or state wages and hours law, nor any provisions of ERISA or the rules
and regulations promulgated thereunder, the consequences of which violation are
reasonably likely to have a Material Adverse Effect; and no legal or
governmental proceedings (whether civil, criminal or administrative) are pending
to which the Company or any Subsidiary is a party or to which the property of
the Company or any Subsidiary is subject, and to the Company's knowledge, no
such proceedings have been threatened against the Company or any Subsidiary or
with respect to any of their respective properties, nor does the Company
contemplate that any such action will be instituted or threatened in the future
which in any of the foregoing cases is reasonably likely to have a Material
Adverse Effect; and neither the Company nor any Subsidiary is subject to any
writ, decree, order, judgment or similar proclamation or adjudication which
would prohibit the Company or any Subsidiary from conducting its business in all
material respects as described in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(xxii) The Underwriter Warrants will conform to the description
thereof in the Registration Statement and in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and,
when sold to and paid for by the Representative (or
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its designee(s) in accordance with the Underwriter Warrant Agreement, will have
been duly authorized and validly issued and will constitute valid and binding
obligations of the Company and the holders thereof will be entitled to the
benefits of the Underwriter Warrant Agreement. The Warrant Shares (as defined
in Section 3(c) hereof) have been duly authorized and reserved for issuance upon
exercise of the Underwriter Warrants by all necessary corporate action on the
part of the Company and, when issued upon such exercise in accordance with the
terms of the Underwriter Warrant Agreement at the price therein provided, will
be validly issued, fully paid, nonassessable and free of preemptive rights and
will conform to the description thereof in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(xxiii) Each of the Company and the Subsidiaries holds all
franchises, licenses, permits, approvals, certificates and other authorizations
from federal, state and other governmental or regulatory authorities necessary
for the ownership, leasing and operation of its properties or required for the
present and proposed conduct of its business, and such franchises, licenses,
permits, approvals, certificates and other governmental authorizations are in
full force and effect and the Company and the Subsidiaries are in compliance
therewith, except where the failure so to obtain, maintain or comply with is not
reasonably likely to have a Material Adverse Effect.
(xxiv) No Subsidiary is currently prohibited or restricted,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on its capital stock, from repaying to the Company any
loans or advances to it from the Company or from transferring any of its
property or assets to the Company or any Subsidiary, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(xxv) None of the Company or any of the Subsidiaries is subject
to registration as an "investment company" under the Investment Company Act of
1940 or will be subject to such registration following issuance of the Shares.
None of the Company, any Subsidiary or, to the Company's knowledge, any
director, officer, agent, employee, or other person associated with, or acting
on behalf of, the Company or any Subsidiary has, directly or indirectly, used
any corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"); or made any
bribe, rebate, payoff, influence payment, kickback, or other unlawful payment.
The Company's internal accounting controls and procedures are sufficient to
cause the Company to comply in all material respects with the FCPA.
(xxvi) Except as described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), the
Company has not incurred any liability for a fee, commission, or other
compensation on account of the employment of a broker or
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finder in connection with the transactions contemplated by this Agreement.
Except as previously disclosed to the Representative in writing, to the best
knowledge of the Company, after due inquiry, no officer, director or stockholder
of the Company has any affiliation or association with the NASD or any member
thereof.
(xxvii) All issuances of securities by the Company described in
Item 15 of Part II of the Registration Statement were exempt from registration
under the Act and were exempt from or complied in all respects with the
provisions of all applicable state securities laws, and the materials
distributed or otherwise used in connection with any such issuance taken as a
whole (including any confidential offering memoranda, business plans, other
summaries of the Company's business or any material filed with any federal or
state securities authority) did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances in which
they were made, not misleading.
(b) Each of the Selling Stockholders (which shall include Wiens to the
extent of any Additional Shares sold pursuant to Section 9 hereof), severally
and not jointly, represents, warrants and agrees with the Underwriters that:
(i) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not result in a breach
by such Selling Stockholder of, or constitute a default by such Selling
Stockholder under, any indenture, deed of trust, contract, or other agreement or
instrument or any decree, judgment or order to which such Selling Stockholder is
a party or by which such Selling Stockholder may be bound.
(ii) Such Selling Stockholder has and will have at the Closing Date
good and marketable title to the Shares to be sold by the Selling Stockholder
hereunder, free and clear of any pledge, lien, security interest, encumbrance,
claim or equity other than pursuant to this Agreement; such Selling Stockholder
has full right, power and authority to sell, transfer and deliver the Shares to
be sold by such Selling Stockholder hereunder; and upon delivery of the Shares
to be sold by such Selling Stockholder hereunder and payment of the purchase
price therefor as herein contemplated, the Underwriters will receive good and
marketable title to the Shares purchased by them from such Selling Stockholder,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equity.
(iii) Such Selling Stockholder has duly executed and delivered in the
form heretofore furnished to the Representative a Power of Attorney and Custody
Agreement with Friedlob Sanderson Raskin Paulson & Tourtillot, LLC (the
"Custodian"). The Custodian is authorized to execute and deliver this Agreement
on behalf of such Selling Stockholder, to authorize the delivery of the Shares
to be sold by such Selling Stockholder hereunder, to accept payment therefor,
and otherwise to act on behalf of such Selling Stockholder in connection with
this Agreement.
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(iv) All authorizations, approvals and consents necessary for the
execution and delivery by such Selling Stockholder of the Power of Attorney and
Custody Agreement, the execution and delivery by or on behalf of such Selling
Stockholder of this Agreement, and the sale and delivery of Shares to be sold by
such Selling Stockholder hereunder (other than, at the time of the execution
hereof, the issuance of the order of the Commission declaring the Registration
Statement effective and such authorizations, approvals or consents as may be
necessary under state securities laws) have been obtained and are in full force
and effect; and such Selling Stockholder has the full right, power and authority
to enter into this Agreement and the Power of Attorney and Custody Agreement and
to sell, transfer and deliver the Shares to be sold by such Selling Stockholder
hereunder.
(v) For a period of one year from the date hereof, such Selling
Stockholder will not, without the prior written consent of the Representative
(which consent shall not be unreasonably withheld), directly or indirectly,
offer to sell, sell, grant any option for the sale of, or otherwise dispose of,
any Common Stock of the Company or any securities convertible into to
exercisable for Common Stock of the Company owned by such Selling Stockholder or
with respect to which such Selling Stockholder has the power of disposition,
other than to the Underwriters pursuant to this Agreement.
(vi) To the best knowledge of such Selling Stockholder, the
representations and warranties of the Company contained in Section 2(a) hereof
are true and correct; such Selling Stockholder has reviewed and is familiar with
the Registration Statement and the Prospectus contained therein and has no
knowledge of any material fact, condition or information not disclosed in such
Prospectus which could have a Material Adverse Effect; and such Selling
Stockholder's decision to sell the Shares to be sold by such Selling Stockholder
hereunder is not based upon any information concerning the Company or any
Subsidiary which is not set forth in such Prospectus.
(vii) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action which is designed to or which has constituted
or which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares.
(viii) Certificates in negotiable form for all Shares to be sold by
such Selling Stockholder hereunder have been placed in custody with the
Custodian for the purpose of effecting delivery hereunder.
(c) Any certificate signed by any officer of the Company and delivered to
the Representative or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby; and any certificate signed by or on behalf of any Selling
Stockholder and delivered to the Representative or to counsel for the
Underwriters shall be deemed a representation and warranty by such Selling
Stockholder to the Underwriters as to the matters covered thereby.
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3. Purchase, Sale and Delivery of the Shares and Underwriter Warrants.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, (i) the Company agrees to sell to each Underwriter, and each Underwriter
severally and not jointly agrees to purchase from the Company, the number of
Primary Shares set forth opposite its name on Schedule A hereto, and (ii) each
Selling Stockholder severally and not jointly agrees to sell to the Underwriters
the number of Secondary Shares set forth opposite its name of Schedule B hereto,
and each Underwriter severally and not jointly agrees to purchase from the
Selling Stockholders, the number of Secondary Shares set forth opposite its name
on Schedule A, in each case at a purchase price of $3.83625 per Share.
(b) Delivery of certificates, and payment of the purchase price, for
the Primary Shares and the Secondary Shares shall be made at the offices of the
Representative at 810 Seventh Avenue, New York, New York 10019, or such other
location as shall be agreed upon by the Company and the Representative. Such
delivery and payment shall be made at 10:00 a.m., New York City time, on
July 23, 1996 or at such other time and date thereafter as shall be agreed upon
by the Company and the Representative. The time and date of such delivery and
payment are herein called the "Closing Date." Delivery of the certificates for
the Primary Shares and Secondary Shares shall be made to the Representative for
the respective accounts of the Underwriters against payment of the purchase
price therefor by certified or official bank check in New York Clearing House
(next day) funds (i) in the case of the Primary Shares, drawn to the order of
the Company, and (ii) in the case of the Secondary Shares, drawn to the order of
the Custodian on behalf of the Selling Stockholders. The certificates for the
Shares to be so delivered will be in definitive, fully registered form, will
bear no restrictive legends and will be in such denominations and registered in
such names as the Representative shall request not less than two full business
days prior to the Closing Date. The certificates for the Primary Shares and
Secondary Shares will be made available to the Representative at such office or
such other place as the Representative may designate for inspection, checking
and packaging not later than 9:30 a.m., New York City time on the business day
prior to the Closing Date.
(c) On the Closing Date, the Company will further issue and sell to
the Representative, or at the direction of the Representative to its designees
including the Underwriters, other NASD members participating in the offering and
their respective bona fide officers or partners, for a purchase price of $.01
per warrant, warrants to purchase Common Stock (the "Underwriter Warrants")
entitling the holders thereof initially to purchase an aggregate of 315,000
shares of Common Stock, subject to adjustment as provided in the Underwriter
Warrants, for a period of four years, such period to commence one year after the
effective date of the Registration Statement. The Underwriter Warrants shall be
exercisable at a price equal to 135% of the public offering price per Share and
shall contain terms and provisions as set forth more particularly in the warrant
agreement relating thereto executed by the Company on the date hereof (the
"Underwriter Warrant Agreement") including, but not limited to, provisions
protecting the holders against dilution.
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The shares of Common Stock issuable upon exercise of the Underwriter Warrants
are referred to herein as the "Warrant Shares."
4. Public Offering of the Shares. It is understood that the Underwriters
propose to make a public offering of the Shares at the price and upon the other
terms set forth in the Prospectus.
5. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable. If required, the Company will file the Prospectus and any
amendment or supplement thereto with the Commission in the manner and within the
time period required by Rule 424(b) under the Act. During any time when a
Prospectus relating to the Shares is required to be delivered under the Act, the
Company (i) will comply with all requirements imposed upon it by the Act and the
Rules and Regulations to the extent necessary to permit the continuance of sales
of or dealings in the Shares in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission the Prospectus or the amendment referred to in the third sentence of
Section 2(a) hereof, any amendment or supplement to such Prospectus or any
amendment to the Registration Statement of which the Representative shall not
previously have been advised and furnished with a copy a reasonable period of
time prior to the proposed filing or as to which filing the Representative shall
reasonably object, unless (with respect to any time after the Closing Date) the
Company has received the written advice of its counsel that such amendment or
supplement is required by law, rule or regulation. If, at the time that the
Registration Statement becomes effective, any information shall have been
omitted therefrom in reliance upon Rule 430A promulgated under the Act, then
promptly following the execution of this Agreement, the Company will prepare,
and file or transmit for filing with the Commission in accordance with said Rule
430A, copies of the Prospectus including the information omitted in reliance on
Rule 430A.
(b) The Company shall cause each Subsidiary to comply with the
covenants and agreements set forth herein that are applicable to it.
(c) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative (i) when the Registration Statement,
as amended, has become effective and if the provisions of Rule 430A promulgated
under the Act will be relied upon, when the Prospectus has been filed in
accordance with said Rule 430A and when any post-effective amendment to the
Registration Statement has been filed and becomes effective; (ii) of any request
made by the Commission for amending the Registration Statement, for
supplementing any Preliminary Prospectus or the Prospectus or for additional
information; (iii) of any suspension of the qualification of the Shares for
offering or sale in any jurisdiction; or (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the
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Registration Statement or any post-effective amendment thereto or any order
preventing or suspending the use of any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto or the institution or threat of any
investigation or proceeding for that purpose, and the Company will use its best
efforts to prevent the issuance of any such stop order and, if issued, to obtain
the lifting thereof as soon as possible.
(d) The Company will (i) use its best efforts to arrange for the
qualification of the Shares for offer and sale under the state securities or
blue sky laws of such jurisdictions as the Underwriter may designate,
(ii) continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Shares, and (iii) make such applications, file
such documents and furnish such information as may be required for the purposes
set forth in clauses (i) and (ii) of this subsection (d); provided, however,
that the Company shall not be required to qualify as a foreign corporation or
file a general or unlimited consent to service of process in any such
jurisdiction or take any action that would subject the Company to taxation in
such jurisdiction if it is not already so subject.
(e) The Company consents to the use of the Prospectus and any
amendment or supplement thereto by the Underwriters and all dealers to whom the
Shares may be sold in connection with the offering or sale of the Shares and for
such period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith. If, at any time when a prospectus relating
to the Shares is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading, or if it becomes
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the Rules and Regulations, the Company promptly will so notify the
Representative and, subject to Section 5(a)(ii) hereof, will promptly prepare
and file with the Commission an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that will correct such statement or
omission or effect such compliance, each such amendment or supplement to be
reasonably satisfactory to counsel to the Underwriters.
(f) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company will make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Underwriters, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations.
(g) The Company will furnish to its stockholders, as soon as
practicable, annual reports (including financial statements audited by
independent public accountants) and
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unaudited quarterly reports of earnings, and during the period of three years
after the date hereof will deliver to the Underwriters:
(i) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity,
and cash flows of the Company for such fiscal year, accompanied by a copy
of the report thereon of independent public accountants;
(ii) concurrently with furnishing such quarterly reports to its
stockholders, statements of income for the Company for each quarter in the
form furnished to the Company's stockholders;
(iii) as soon as they are available, copies of all information
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all publicly
available reports and financial statements furnished to or filed with the
Commission, the NASD or the Nasdaq National Market;
(v) every press release and every material news item or
article of interest to the financial community in respect of the Company or
its affairs which was released or prepared by the Company; and
(vi) any additional information of a public nature concerning
the Company or its business which the Underwriters may reasonably request.
The foregoing financial statements will be on a consolidated basis to the
extent that the accounts of the Company and its subsidiaries are consolidated,
and will be accompanied by similar financial statements for any subsidiary which
is not so consolidated.
(h) The Company will appoint a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock approved by the
Representative; and the Company will not change or terminate such appointment
for a period of two years after the Closing Date without first obtaining the
Representative's consent.
(i) The Company will furnish, without charge, to each Underwriter or
on such Underwriter's order, at such place as such Underwriter may designate,
copies of each Preliminary Prospectus, the Registration Statement, and any pre-
effective or post-effective amendments thereto (two of which copies will
manually be signed and will include all financial statements and exhibits) and
the Prospectus and all amendments and supplements thereto, in each case as soon
as available and in such quantities as such Underwriter may reasonably request.
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(j) The Company will not, directly or indirectly, without the prior
written consent of the Representative, issue, offer, sell, pledge or otherwise
encumber, or grant any option to purchase or otherwise dispose of, any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock for a 12-month period after the date hereof except pursuant to
this Agreement or the Underwriter Warrant Agreement or except for (i) issuances
of Common Stock pursuant to the exercise of stock options outstanding on or
granted subsequent to the date hereof pursuant to a stock option or other
employee benefit plan described in the Prospectus and in existence on the date
of this Agreement, or (ii) issuances of Common Stock pursuant to the exercise of
warrants outstanding on the date hereof and disclosed in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus);
provided, however, that the Representative shall not unreasonably withhold such
consent in connection with the issuance, offer or sale of shares of Common Stock
(or securities convertible into or exchangeable or exercisable for Common Stock)
by the Company to an unaffiliated third party in connection with an acquisition
in which the Company uses such shares as part or all of the consideration paid
by it.
(k) The Company will cause the Shares to be duly listed on the Nasdaq
National Market prior to the Closing Date.
(l) None of the Company, any of its officers or directors or any of
their affiliates (within the meaning of the Rules and Regulations) will take,
directly or indirectly, any action designed to, or which might in the future
reasonably be expected to cause or result in, stabilization or manipulation of
the price of any securities of the Company.
(m) The Company will apply the net proceeds of the offering received
by it in substantially the manner set forth under the caption "Use of Proceeds"
in the Prospectus. Prior to the application of such net proceeds, the Company
will invest or reinvest such proceeds only in Eligible Investments, which shall
mean the following investments so long as they have maturities of one year or
less: (i) obligations issued or guaranteed by the United States or by any
person controlled or supervised by or acting as an instrumentality of the United
States pursuant to authority granted by Congress; (ii) obligations issued or
guaranteed by any state or political subdivision thereof rated either Aa or
higher or MIG 1 or higher, by Moody's Investors Service, Inc. or AA or higher,
or an equivalent, by Standard & Poor's Corporation; (iii) commercial paper which
is rated either Prime-1 or higher or an equivalent by Moody's Investors Service,
Inc. or A-1 or higher or an equivalent by Standard & Poor's Corporation; and
(iv) fully insured certificates of deposit or time deposits of banks or trusts
companies organized under the laws of the United States having a minimum equity
of $50,000,000.
(n) The Company will timely file all such reports, forms or other
documents as may be required from time to time under the Act, the Rules and
Regulations and the Exchange Act and the rules and regulations thereunder; and
all such reports, forms and documents filed will comply as to form and substance
with the applicable requirements under
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the Act, the Rules and Regulations and the Exchange Act and the rules and
regulations thereunder.
(o) The Company will not take any action to facilitate the sale of
any shares of Common Stock pursuant to Rule 144 under the Act if any such sale
would violate any of the terms of the Lock-Up Agreements or the Existing Lock-Up
Agreements.
(p) During a period of three years after the date hereof, the Company
will continue to retain BDO Seidman LLP as its independent auditors; provided,
however, that, upon written notice to the Representative during such period, the
Company may retain a "Big Six" firm of independent certified public accountants.
(q) On the Closing Date, the Company shall have elected Sylvan
Schefler to its Board of Directors (the "Board").
(r) The Company will supply the Representative, within thirty (30)
days prior to the end of each of the fiscal years ending September 30, 1996,
1997 and 1998, with a quarterly budget for the succeeding fiscal year. For each
period covered by a budget to be supplied to the Representative, the Company
also will supply financial statements prepared in detail substantially similar
to the financial statements previously delivered to the Representative so as to
allow comparison to the budgets.
(s) During a period of three years after the Closing Date, the
Company will permit an agent of the Representative to observe the meetings of
the Board, will reimburse such agent for all expenses incurred in attending
Board meetings (including but not limited to food, transportation and lodging)
and shall pay such agent the same amount of monies as is paid to an independent
director per meeting attended. During such three-year period, the Company will
hold no less than four formal meetings of the Board each year at which meetings
minutes shall be taken and such agent will be invited to attend.
(t) During a period of three years after the date hereof, the Company
shall provide at its sole expense to the Representative (i) copies of its daily
transfer sheets and (ii) copies of the Nasdaq National Market monthly summaries
of trading activity of the Company.
(u) During such period as the Company is subject to the periodic
reporting requirements of the Exchange Act, the Company shall supply to the
appropriate parties such information as may be necessary or desirable, and shall
otherwise use its best efforts so that during such period the Company will be
listed in one or more of the securities manuals published by Standard & Poor's
Corporation and Moody's Investors Service, Inc. or another comparable publisher
and that, at all times during such period, such listing will, at a minimum,
contain the names of the Company's officers and directors, a balance sheet as of
a date not more than fifteen (15) months prior to such time and a statement of
operations for either the fiscal year preceding such date or the most recent
fiscal year of operations.
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6. Expenses.
(a) Regardless of whether the transactions contemplated by this Agreement
are consummated, and regardless of whether for any reason this Agreement is
terminated, the Company will pay, and hereby agrees to indemnify the
Underwriters against, all fees and expenses incident to the performance of the
obligations of the Company, including, but not limited to, (i) fees and expenses
of accountants and counsel for the Company, (ii) all costs and expenses incurred
in connection with the preparation, duplication, printing, filing, delivery and
shipping of copies of the Registration Statement and any pre-effective or post-
effective amendments thereto, any Preliminary Prospectus and the Prospectus and
any amendments or supplements thereto (including postage costs related to the
delivery by the Underwriters of any Preliminary Prospectus or Prospectus or any
amendment or supplement thereto), this Agreement, the Underwriter Warrant
Agreement and all other documents in connection with the transactions
contemplated herein, (iii) fees and expenses relating to the qualification of
the Shares under state securities or blue sky laws, including the costs of
preparing and mailing the preliminary and final blue sky memoranda and filing
fees and disbursements and fees of counsel and other related expenses, if any,
in connection therewith, (iv) filing fees of the Commission and the NASD
relating to the Shares, (v) any fees and expenses in connection with the listing
of the Shares on the Nasdaq National Market, (vi) costs and expenses incident to
the preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Shares, including transfer agent's and registrar's fees and any
applicable transfer taxes incurred in connection with the delivery to the
Underwriters of the Shares to be sold by the Company pursuant to this Agreement,
and (vii) costs and expenses of the Company incident to any meetings with
prospective investors in the Shares. In addition to the foregoing, the Company
and the Selling Stockholders shall provide the Representative on behalf of the
Underwriters with a non-accountable expense allowance in the amount of 1.5% of
the gross offering proceeds to be received by the Company and the Selling
Stockholders, respectively, $85,000 of which has previously been paid by the
Company to the Representative and shall be credited against the Company's
portion of the expense allowance. The unpaid portion of the expense allowance,
based on the gross proceeds from the sale of the Primary Shares and Secondary
Shares, shall be deducted from the funds to be paid by the Underwriters in
payment for the Primary Shares and Secondary Shares pursuant to Section 3 of
this Agreement on the Closing Date. To the extent any Additional Shares are
sold, any remaining expense allowance based on the gross proceeds from the sale
of the Additional Shares shall be deducted from the funds to be paid by the
Underwriters in payment for the Additional Shares, pursuant to Section 9 of this
Agreement, on any Additional Closing Date. The Company represents, warrants and
agrees that all such payments and reimbursements will be promptly and fully
made; if the Company shall fail to pay any portion of the expense allowance set
forth herein within ten days of receipt of a written request therefor, the
Company shall be liable to the Underwriters for reasonable counsel fees and
costs incurred in the collection of such amount.
(b) If the purchase of the Shares as herein contemplated is not
consummated for any reason other than by reason of the Representative's election
pursuant to Section 11(a)
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or in the case of an individual Underwriter other than such Underwriter's
default under this Agreement, then the Company shall reimburse each non-
defaulting Underwriter for its out-of-pocket expenses (including counsel fees
and disbursements and including blue sky fees and expenses referred to in
subsection (a) above) in connection with any investigation and preparation made
by it in respect of marketing of the Shares or in contemplation of the
performance by it of its obligations hereunder, and the Representative may
retain any portion of the expense allowance referred to in subsection (a) above
that was previously paid to it.
7. Conditions of the Underwriters' Obligations. The obligation of the
Underwriters to purchase and pay for the Shares is subject to the continuing
accuracy in all material respects of the representations and warranties of the
Company and the Selling Stockholders herein as of the date hereof and as of the
Closing Date as if they had been made on and as of the Closing Date; the
accuracy in all material respects on and as of the Closing Date of the
statements of officers of the Company made pursuant to subsection (f) below; the
performance in all material respects by the Company on and as of the Closing
Date of its covenants and agreements hereunder; and the following additional
conditions:
(a) If the Company has elected to rely on Rule 430A under the Act,
the Registration Statement shall have been declared effective, and the
Prospectus containing the information omitted pursuant to Rule 430A shall have
been filed with the Commission not later than the Commission's close of business
on the second business day following the date hereof or such later time and date
to which the Representative shall have consented; if the Company does not elect
to rely on Rule 430A, the Registration Statement shall have been declared
effective not later than 11:00 a.m., New York City time, on the date hereof or
such later time and date to which the Representative shall have consented; if
required, in the case of any changes in or amendments or supplements to the
Prospectus in addition to those contemplated above, the Company shall have filed
such Prospectus as amended or supplemented with the Commission in the manner and
within the time period required by Rule 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or, to the knowledge of the Company or the Representative, shall
be threatened or contemplated by the Commission; and the Company shall have
complied with any request of the Commission for additional information to be
included in the Registration Statement or the Prospectus or otherwise.
(b) The Representative shall not have in good faith advised the
Company that the Registration Statement or any amendment thereto contains an
untrue statement of fact which, in the Representative's opinion, is material and
is required to be stated therein or is necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall have
received the favorable opinion of Brownstein Hyatt Farber & Strickland, P.C.,
counsel to the Underwriters,
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with respect to the issuance and sale of the Shares, the Registration Statement,
the Prospectus and such other related matters as the Representative reasonably
may request, and such counsel may rely, as to all matters governed by the laws
of jurisdictions other than the law of the States of New York and Colorado and
the federal law of the United States, upon the opinions of counsel satisfactory
to the Representative (which may include counsel to the Company) and such
counsel shall have received such documents and other information as they request
to enable them to pass upon such matters.
(d) On the Closing Date, the Representative shall have received the
opinion of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC, counsel to the
Company and the Selling Stockholders, addressing the matters set forth below:
(i) Each of the Company and the Subsidiaries (A) is a duly
incorporated and validly existing corporation in good standing under the
laws of its jurisdiction of incorporation, with full power and authority
(corporate and otherwise) to own or lease its properties and to conduct its
business as described in the Registration Statement or the Prospectus, and
(B) is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction (x) in which the conduct of its business
requires such qualification or (y) in which it owns or leases property, in
each case except for those jurisdictions in which the failure to so qualify
has not had and is not reasonably likely to have a Material Adverse Effect.
(ii) The Company has the authorized capital stock as set forth
in the Prospectus; the securities of the Company conform as to legal
matters in all material respects to the descriptions thereof contained in
the Prospectus; the outstanding shares of Common Stock have been duly
authorized and validly issued by the Company, are fully paid and
nonassessable, and are free of any preemptive or other rights to subscribe
for any of the Shares; the Company has duly authorized the issuance and
sale of the Shares to be sold by it hereunder; such Shares, when issued by
the Company and paid for in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and will conform as to legal
matters in all material respects to the description thereof contained in
the Prospectus and will not be subject to any preemptive, subscription or
other similar rights; the Shares have been approved for listing on the
Nasdaq National Market; and, to the best of such counsel's knowledge, there
are no outstanding warrants, options or other rights granted by the Company
to purchase shares of its Common Stock or other securities other than as
described in the Prospectus;
(iii) The Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best knowledge of such counsel,
are threatened or contemplated under the Act; the
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Registration Statement originally filed with respect to the Shares and each
amendment thereto and the Prospectus and, if any, each amendment and
supplement thereto (except for the financial statements, schedules and
other financial, market and statistical data included therein and
information provided by the Underwriters for inclusion therein (which for
the purposes hereof shall be limited to the information set forth under the
heading "Underwriting" in the Prospectus), as to all of which such counsel
need not express any opinion), complied as to form in all material respects
with the requirements of the Act and the Rules and Regulations; the
descriptions contained and summarized in the Registration Statement or the
Prospectus of contracts and other documents as they pertain to legal
matters are accurate and fairly represent in all material respects the
information required to be shown by the Act and the Rules and Regulations;
to the best knowledge of such counsel, there are no contracts or documents
which are required by the Act to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement
which are not so described or filed as required by the Act and the Rules
and Regulations; to the best knowledge of such counsel, there is not
pending or threatened against the Company or any Subsidiary any action,
suit, proceeding or investigation before or by any court, regulatory body,
or administrative agency or any other governmental agency or body, domestic
or foreign, of a character required to be disclosed in the Registration
Statement or the Prospectus which is not so disclosed therein; and the
statements set forth under the headings "Business," "Management,"
"Principal Shareholders," "Certain Transactions," "Selling
Securityholders," "Description of Capital Stock" and "Shares Eligible for
Future Sale" in the Prospectus, insofar as such statements constitute a
summary of the legal matters, documents or proceedings referred to therein,
provide an accurate summary of such legal matters, documents and
proceedings;
(iv) The Company has the full legal right, power, and authority
to enter into this Agreement and to consummate the transactions provided
for herein; this Agreement has been duly authorized, executed and delivered
by the Company; and this Agreement, assuming due authorization, execution
and delivery by each other party hereto, is a valid and binding agreement
of the Company. None of the Company's execution or delivery of this
Agreement, its performance hereof, its consummation of the transactions
contemplated herein or its application of the net proceeds of the offering
in the manner set forth under the caption "Use of Proceeds" conflicts or
will conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitutes a default under, or
results in the creation or imposition of any lien, charge or encumbrance
upon, any property or assets of the Company or any of the Subsidiaries
pursuant to the terms of (A) the certificate or articles of incorporation
or bylaws of the Company or any of the Subsidiaries, (B) any indenture,
mortgage, deed of trust, voting trust agreement, stockholders' agreement,
note agreement, partnership agreement, joint venture agreement or other
agreement or instrument known to such counsel to which the Company or any
of the Subsidiaries is a party or by which it or any of them is or may be
bound or to which any of their respective properties may be subject, or
(C) any
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statute, rule or regulation of any regulatory body or administrative agency
or other regulatory body or administrative agency or other governmental
agency or body, domestic or foreign, having jurisdiction over the Company
or any of the Subsidiaries or any of their respective activities or
properties, or any judgment, decree or order, known to such counsel, of any
government, arbitrator, court, regulatory body or administrative agency or
other governmental agency or body, domestic or foreign, having such
jurisdiction, except with respect to clauses (B) or (C) above that is not
reasonably likely to have a Material Adverse Effect; and, to the knowledge
of such counsel, no consent, approval, authorization or order of any court,
governmental agency or body, domestic or foreign, has been or is required
for the Company's performance of this Agreement or the consummation of the
transactions contemplated hereby, except such as have been obtained under
the Act or may be required under state securities or blue sky laws in
connection with the purchase and distribution by the Underwriters of the
Shares;
(v) To the best of such counsel's knowledge, no claims have
been asserted against the Company to the effect that the conduct of the
business of the Company and the Subsidiaries is in violation of any
federal, state or local statute, administrative regulation or other law,
domestic or foreign, or that the Company and the Subsidiaries have failed
to obtain all licenses, permits, franchises, certificates and other
authorizations from state, federal and other regulatory authorities as are
necessary or required for the ownership, leasing and operation of their
properties and the conduct of their business as presently conducted and as
contemplated in the Prospectus ;
(vi) The issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and, except and as otherwise set forth in the Prospectus,
are owned directly or indirectly by the Company, free and clear of any
perfected security interests or, to the best knowledge of such counsel, any
other liens, encumbrances, claims or security interests; no Subsidiary is
currently prohibited, directly or indirectly, from paying any dividends to
the Company, from making any other distribution on its capital stock, from
repaying to the Company any loans or advances to it from the Company or
from transferring any of its property or assets to the Company or any
Subsidiary, except as described herein or as described in or contemplated
by the Prospectus;
(vii) The Company has full legal right, power, and authority to
enter into the Underwriter Warrant Agreement and to consummate the
transactions provided for therein; and the Underwriter Warrant Agreement
has been duly authorized, executed and delivered by the Company, and is a
valid, legal and binding agreement of the Company, enforceable against the
Company in accordance with its terms (except as enforceability may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and other similar laws affecting creditors' rights generally and
to general principles of equity, regardless of whether enforcement is
considered in a proceeding in equity or at law.
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(viii) The Underwriter Warrants conform as to legal matters to
the description thereof in the Registration Statement and in the Prospectus
and are duly authorized and validly issued and constitute valid, legal and
binding obligations of the Company enforceable in accordance with the terms
thereof; the Warrant Shares have been duly and validly authorized and
reserved for issuance upon exercise of the Underwriter Warrants and, when
issued upon exercise in accordance with the terms of and for the
consideration set forth in the Underwriter Warrant Agreement, will be duly
and validly issued, fully paid and nonassessable and free of preemptive
rights.
(ix) The Company is not an "investment company" as defined in
Section 3(a) of the Investment Company Act and, if the Company conducts its
business as set forth in the Registration Statement and the Prospectus,
will not become an "investment company" and will not be required to
register under the Investment Company Act.
(x) Such counsel has read all contracts referred to in the
Registration Statement and the Prospectus, and such contracts are fairly
summarized or described therein, conform in all material respects to the
descriptions thereof contained therein, and are filed as exhibits thereto,
as required, and such counsel does not know of any contracts or documents
required to be so summarized, disclosed or filed which have not been so
summarized, disclosed or filed, and such counsel does not know of any
statutes or regulations or pending or threatened legal or governmental
proceedings required to be disclosed in the Prospectus which have not been
described as required.
(xi) Based on its review of the Company's records and its
participation in certain of such transactions, nothing has come to such
counsel's attention that causes it to believe that the issuances of
securities by the Company referred to in Item 15 of Part II of the
Registration Statement were not exempt from registration under the Act or
were not exempt from, or did not comply in all material respects with, the
provisions of all applicable state securities laws.
(xii) This Agreement and the Power of Attorney and Custody
Agreement have been duly authorized, executed and delivered by each of the
Selling Stockholders.
(xiii) Based on its review of the Company's stock records,
nothing has come to such counsel's attention that causes it to believe that
any of the Selling Stockholders does not have good and marketable title to
the Secondary Shares to be sold by such Selling Stockholder hereunder and
full power, right and authority to sell such Secondary Shares or that, upon
the delivery of and payment for the Secondary Shares as herein
contemplated, the Underwriter will not receive good and marketable title to
the Secondary Shares purchased by it from the Selling Stockholders, free
and clear of any mortgage, pledge, lien, security interest, encumbrance,
claim or equity.
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In addition, Friedlob Sanderson Raskin Paulson & Tourtillott, LLC shall
state that in the course of the preparation of the Registration Statement and
the Prospectus, it has participated in conferences with officers and
representatives of the Company, representatives of the Company's independent
public accountants and with your representatives and your counsel, at which the
contents of the Registration Statement and the Prospectus and related matters
were discussed, and (without taking any further action to verify independently
the statements made in the Registration Statement and the Prospectus and, except
as stated in the foregoing opinion, without assuming responsibility for the
accuracy, completeness or fairness of such statements) nothing has come to such
counsel's attention that causes it to believe that either the Registration
Statement as of the date it is declared effective and as of the Closing Date
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus as of the date
thereof and as of the Closing Date contained or contains any untrue statement of
a material fact or omitted or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need not express any opinion with respect to the financial
statements, schedules and other financial or statistical data included in or
excluded from the Registration Statement or the Prospectus or any information
provided by the Underwriters expressly for inclusion therein (which for the
purposes hereof shall be limited to the information set forth under the heading
"Underwriting" in the Prospectus)).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the law of the States of New
York and Colorado and the federal law of the United States, such counsel may
rely upon or substitute the opinion of other counsel reasonably satisfactory to
the Representative. The foregoing opinion shall also state that the
Representative is justified in relying upon such opinion of other counsel, and
copies of such opinion shall be delivered to the Representative and counsel to
the Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date of
such opinion.
(e) At the time that this Agreement is executed by the Company, the
Representative shall have received from each of BDO Seidman LLP and AJ Robbins,
P.C. a letter as of the date this Agreement is executed by the Company in form
and substance satisfactory to it (the "Comfort Letters"), and on the Closing
Date the Representative shall have received from each of such firms a letter
dated the Closing Date stating that, as of a specified date not earlier than
five days prior to the Closing Date, nothing has come to the attention of such
firm to suggest that the statements made in the Comfort Letters are not true and
correct.
(f) On the Closing Date, the Representative shall have received a
certificate, dated the Closing Date, of the principal executive officer and the
principal financial and accounting
25
<PAGE>
officer of the Company to the effect that each of such persons has carefully
examined the Registration Statement and the Prospectus and any amendments or
supplements thereto and this Agreement and the Underwriter Warrant Agreement,
and that to the best of their knowledge:
(i) The representations and warranties of the Company in this
Agreement and the Underwriter Warrant Agreement are true and correct in all
material respects, as if made on and as of the Closing Date, and the
Company has complied in all material respects with all agreements and
covenants and satisfied in all material respects all conditions contained
in this Agreement and the Underwriter Warrant Agreement on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best knowledge of each of
such persons, are contemplated or threatened under the Act, and any and all
filings required by Rule 424 and Rule 430A have been timely made;
(iii) The Registration Statement and Prospectus and each
amendment and each supplement thereto, if any, contain all statements and
information required to be included therein under the Act and the Rules and
Regulations, and neither the Registration Statement nor any amendment
thereto includes any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading and neither the Prospectus (or any
supplement thereto) nor any Preliminary Prospectus includes or included any
untrue statement of a material fact or omits or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, up to and
including the Closing Date, neither the Company nor any of the Subsidiaries
has incurred, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent; neither the
Company nor any of the Subsidiaries has purchased any of its outstanding
capital stock or paid or declared any dividends or other distributions on
its capital stock; neither the Company nor any of the Subsidiaries has
entered into any material transactions not in the ordinary course of
business; and there has not been any change in the capital stock or
consolidated long-term debt or any increase in the consolidated short-term
borrowings (other than any increase in short-term borrowings in the
ordinary course of business) of the Company or any Material Adverse Effect;
neither the Company nor any of the Subsidiaries has sustained any material
loss or damage to its property or assets, whether or not insured; there is
no litigation which is pending or, to the Company's knowledge, threatened
against the Company or any of the Subsidiaries which is required under the
Act or the Rules and Regulations to be set forth in an amended or
supplemented
26
<PAGE>
Prospectus which has not been set forth; and there has not occurred any
event required to be set forth in an amended or supplemented Prospectus
which has not been set forth.
References to the Registration Statement and the Prospectus in this
paragraph (f) are to such documents as amended and supplemented at the date of
the certificate.
(g) The Representative shall have received a certificate of the
Custodian, dated as of the Closing Date, to the effect that (i) the
representations and warranties of each Selling Stockholder contained in Section
2(b) are true and correct with the same force and effect as though expressly
made at and as of the Closing Date and (ii) each Selling Stockholder had
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Date.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, up to and including the
Closing Date, there has not been (i) any change in the capital stock or debt of
the Company or decrease in the net current assets or stockholders equity of the
Company from the amounts specified in the Comfort Letters, or (ii) any change,
or any development involving a prospective change, in the business or properties
of the Company or the Subsidiaries taken as a whole, which change or decrease in
the case of clause (i) or change or development in the case of clause (ii) makes
it impractical or inadvisable in the Representative's judgment to proceed with
the public offering or the delivery of the Shares as contemplated by the
Prospectus.
(i) The Representative shall have received a Lock-Up Agreement from
each person who is or will be after the Closing a director or executive officer
of the Company or who is listed on Schedule C as contemplated by Section
2(a)(xii) hereof.
(j) The Shares shall have been duly approved for trading on the Nasdaq
National Market.
(k) The Company shall have furnished the Representative with such
further opinion letters, certificates or documents as the Representative or
counsel to the Underwriters may reasonably request. All opinions, certificates,
letters and documents to be furnished by the Company will comply with the
provisions hereof only if they are reasonably satisfactory in all material
respects to the Representative and to counsel to the Underwriters. The Company
shall furnish the Representative with conformed copies of such opinions,
certificates, letters and documents in such quantities as you reasonably
request. The certificates delivered hereunder shall constitute representations,
warranties and agreements of the Company as to all matters set forth therein as
fully and effectively as if such matters had been set forth in this Agreement.
(l) The Common Stock shall be qualified in such states as the
Representative may request pursuant to Section 5(d), and each such qualification
shall be in effect and not subject to any stop order or other proceeding on the
Closing Date.
27
<PAGE>
(m) The Company shall have executed and delivered to the
Representative the Underwriter Warrant Agreement in a form deemed acceptable by
the Representative and a certificate or certificates evidencing the Underwriter
Warrants.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several (and actions in respect
thereof) to which such Underwriter or such controlling person may become subject
under the Act or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or the
Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or any blue sky application or other document executed by the Company
specifically for the purpose of qualifying, or based upon written information
furnished by the Company filed in any state or other jurisdiction in order to
qualify, any or all of the Shares under the securities or blue sky laws thereof
(any such application, document or information being hereinafter called a "Blue
Sky Application"), or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading and will reimburse, as
incurred, such Underwriter or such controlling persons for any reasonable legal
or other expenses incurred by such Underwriter or such controlling persons in
connection with investigating, defending or appearing as a third party witness
in connection with any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of or is based upon
any untrue statement or alleged untrue statement or omission or alleged omission
made in any of such documents in reliance upon and in conformity with
information furnished in writing to the Company on behalf of such Underwriter
expressly for use therein; provided, further, that such indemnity with respect
to any Preliminary Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) from whom the
person asserting any such loss, claim, damage, liability or action purchased
Shares which are the subject thereof to the extent that any such loss, claim,
damage, liability or action (i) results from the fact that such Underwriter
failed to send or give a copy of the Prospectus (as amended or supplemented) to
such person at or prior to the confirmation of the sale of such Shares to such
person in any case where such delivery is required by the Act and (ii) arises
out of or is based upon an untrue statement or omission of a material fact
contained in such Preliminary Prospectus that was corrected in the Prospectus
(as amended and supplemented), unless such failure resulted from noncompliance
by the Company with Section 5(i) hereof. The Company acknowledges that the
statements with respect to the public offering of the Shares set forth under the
heading "Underwriting" in the Prospectus have been furnished by the Underwriters
to the Company expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriters for inclusion in the
Prospectus. The indemnity agreement
28
<PAGE>
contained in this subsection (a) shall be in addition to any liability which the
Company may have at common law or otherwise.
(b) Each Underwriter severally and not jointly agrees to indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any and all losses, claims, damages or liabilities (and
actions in respect thereto to which the Company or any such director, officer,
or controlling person may become subject, under the Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or the Prospectus or any Preliminary Prospectus,
or any amendment or supplement thereto or in any Blue Sky Application, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with information furnished in writing by
such Underwriter to the Company expressly for use therein; and will reimburse,
as incurred, all reasonable legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action.
The Company acknowledges that the statements with respect to the public offering
of the Shares set forth under the heading "Underwriting" in the Prospectus have
been furnished by the Underwriters to the Company expressly for use therein and
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Prospectus. The indemnity agreement contained
in this subsection (b) shall be in addition to any liability which any
Underwriter may have at common law or otherwise.
(c) Each Selling Stockholder agrees, severally in the proportion that
the number of Shares being sold by such Selling Stockholder bears to the total
number of Shares and not jointly, to indemnify and hold harmless each
Underwriter, each person (if any) who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, the Company,
its directors, each of its officers who signed the Registration Statement, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act against any and all loss,
liability, claim, damage and expense described in the indemnity contained in
subsection (a) of this Section 8, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or the Prospectus or any
Preliminary Prospectus (or any amendment or supplement thereto) in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of such Selling Stockholder expressly for use in the Registration
Statement (or any amendment thereto) or the Prospectus or any Preliminary
Prospectus (or any amendment or supplement thereto).
29
<PAGE>
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 8, notify such indemnifying party or
parties of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8 or to the extent that
the indemnifying party was not adversely affected by such omission. In case any
such action is brought against an indemnified party and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties against which a claim is to be made will be entitled to
participate therein and, to the extent that it or they may wish, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party has
reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and otherwise
to participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or other
expenses (other than the reasonable costs of investigation) subsequently
incurred by such indemnified party in connection with the defense thereof unless
(i) the indemnified party has employed such counsel in connection with the
assumption of such different or additional legal defenses in accordance with the
proviso to the immediately preceding sentence, (ii) the indemnifying party has
not employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel to the indemnified party at the expense of the
indemnifying party. In addition to the foregoing, no indemnifying party shall,
without the prior written consent (not to be unreasonably withheld) of an
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not any Underwriter or
any such indemnified party or any person who controls any Underwriter or any
such indemnified party within the meaning of Section 15 of the Act or Section 20
of the Exchange Act is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional release
of the Underwriters and any such indemnified party and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
(e) If the indemnification provided for in this Section 8 is
unavailable to hold harmless an indemnified party under this Section 8 in
respect of any losses, claims, damages or liabilities (or actions in respect
thereto referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) (i) in such
proportion as is
30
<PAGE>
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of each of the contributing parties, on
the one hand, and the party to be indemnified, on the other hand, in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. In any
case where the Company is a contributing party and any Underwriter is the
indemnified party, the relative benefits received by the Company on the one hand
and such Underwriter on the other hand shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares (before
deducting expenses) bear to the total underwriting discounts received by such
Underwriter hereunder, in each case as set forth in the table on the cover page
of the Prospectus. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by such Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the underwriting
discount applicable to the Shares purchased by such Underwriter hereunder. No
person guilty of fraudulent misrepresentation (within the meaning of Section 11
(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this subsection
(e), (i) each person, if any, who controls an Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act shall have the same
rights to contribution as such Underwriter and (ii) each director of the
Company, each officer of the Company who has signed the Registration Statement,
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Company, subject in each case to this subsection (e). Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect to
which a claim for contribution may be made against another party or parties
under this subsection (e), notify such party or parties from whom contribution
may be sought, but the omission so to notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any other
obligation (x) it or they may have hereunder or otherwise than under this
subsection (e) or (y) to the extent that such party or parties were not
adversely affected by such omission. The contribution agreement contained in
this subsection (e) shall be in addition to any liabilities which any
indemnifying party may have at common law or otherwise.
31
<PAGE>
9. Right to Increase Offering. At any time during a period of thirty
(30) days after the date of the Prospectus, the Representative, by no less than
two business days' prior notice to the Company and Wiens, may designate a
closing(s) (which may be concurrent with, and part of, the closing on the
Closing Date or may be an additional closing or closings held on a date
subsequent to the Closing Date; in either case any such date shall be referred
to herein as an "Additional Closing Date") at which the Underwriters may
purchase all or less than all of the Additional Shares in accordance with the
provisions of this Section 9 at the purchase price per share to be paid for the
Primary Shares; provided, however, that a maximum of three Additional Closing
Dates shall be allowed pursuant to this Section 9. In no event shall any
Additional Closing Date be later than ten (10) business days after written
notice of election to purchase Additional Shares is given.
Wiens shall sell the first 500,000 of the Additional Shares purchased
pursuant to this Section 9 and the Company shall sell the balance of the
Additional Shares purchased pursuant to this Section 9. Subject to the
foregoing, each of Wiens and the Company agrees to sell to each Underwriter on
each Additional Closing Date such Underwriter's pro rata portion (equal to the
percentage determined by dividing the number of Primary Shares to be purchased
by such Underwriter by the total number of Primary Shares to be purchased by all
Underwriters) of the number of Additional Shares specified in such notice, and
each Underwriter agrees to purchase such Additional Shares from Wiens on such
Additional Closing Date. Such Additional Shares may be purchased by the
Underwriters solely for the purpose of covering over-allotments made in
connection with the sale of the Primary Shares.
No Additional Shares shall be sold or delivered unless the Primary Shares
and Secondary Shares previously have been, or simultaneously are, sold and
delivered. The right to purchase the Additional Shares or any portion thereof
may be surrendered and terminated at any time upon notice by the Representative
to the Company and Wiens.
Except to the extent modified by this Section 9, all provisions of this
Agreement relating to the transactions contemplated to occur on the Closing Date
for the sale of the Primary Shares and Secondary Shares shall apply, mutatis
mutandis, to any Additional Closing Date for the sale of Additional Shares.
10. Representations, Etc. to Survive Delivery. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company, the Selling Stockholders and the
Underwriters, respectively, set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of the Underwriters, and will survive delivery of and payment for the
Shares. Any successor or successors to any Underwriter shall be entitled to the
indemnity, contribution and reimbursement agreements contained in this
Agreement.
11. Effective Date and Termination.
(a) This Agreement shall become effective at 11:00 a.m., New York
City time, on the first business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative in its sole discretion shall release
32
<PAGE>
the Shares for sale to the public unless prior to such time the Representative
shall have received written notice from the Company that it elects that this
Agreement shall not become effective, or the Representative shall have given
written notice to the Company that the Representative on behalf of the
Underwriters elects that this Agreement shall not become effective; provided,
however, that the provisions of Sections 6 and 8 hereof and this Section 11
shall at all times be effective. For purposes of this subsection (a), the
Shares to be purchased hereunder shall be deemed to have been so released upon
the earlier of notification by the Representative to securities dealers
releasing such Shares for offering or the release by the Representative for
publication of the first newspaper advertisement which is subsequently published
relating to the Shares.
(b) This Agreement (except for the provisions of Sections 6 and 8
hereof) may be terminated by the Representative on behalf of the Underwriters by
notice to the Company in the event that the Company or the Selling Stockholders
have failed to comply in any material respect with any of the provisions of this
Agreement required to be performed at or prior to the Closing Date or any
Additional Closing Date, or if any of the representations or warranties of the
Company or the Selling Stockholders are not accurate in any material respect, or
if the covenants, agreements or conditions of or applicable to the Company or
the Selling Stockholders herein contained have not been complied with in any
material respect or materially satisfied within the time specified on the
Closing Date or any Additional Closing Date, respectively, or if prior to the
Closing Date or any Additional Closing Date:
(i) the Company or any of the Subsidiaries shall have
sustained a loss (regardless of whether or not such loss was insured) by
explosion, strike, fire, flood, accident or other calamity of such a
character as to interfere materially with the conduct of the business and
operations of the Company and the Subsidiaries taken as a whole;
(ii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in securities
generally on the New York Stock Exchange or the Nasdaq National Market
shall have been suspended or a material limitation on such trading shall
have been imposed or minimum or maximum prices shall have been established
on any such exchange or market system;
(iii) a banking moratorium shall have been declared by New York
or United States authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an outbreak
or escalation of any other insurrection or armed conflict involving the
United States; or
(v) there shall have been a material adverse change in
(A) general economic, political or financial conditions or (B) the present
or prospective business, financial condition or results of operations of
the Company and the Subsidiaries taken as
33
<PAGE>
a whole that, in each case, in the Representative's judgment makes it
impracticable or inadvisable to make or consummate the public offering or
the sale or delivery of the Shares on the terms and in the manner
contemplated in the Prospectus and the Registration Statement.
(c) Termination of this Agreement under this Section 11 after the
Primary Shares and Secondary Shares have been purchased by the Underwriters
hereunder shall be applicable only to the Additional Shares. Termination of
this Agreement shall be without liability of any party to any other party other
than as provided in Sections 6 and 8 hereof.
12. Default by One of More of the Underwriters. If one or more of the
Underwriters shall fail to purchase the Shares to be purchased by it on the
Closing Date (the "Defaulted Shares"), the Representative shall have the right,
within 24 hours thereafter, to make arrangements for one or more of the non-
defaulting Underwriters, or any other underwriters, to purchase all but not less
than all of the Defaulted Shares in such amounts as may be agreed upon and upon
the terms set forth herein. If, however, the Representative shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Shares does not exceed 10% of the
Primary and Secondary Shares, the non-defaulting Underwriters shall be obligated
to purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
(b) if the number of Defaulted Shares exceeds 10% of the Primary
Shares and Secondary Shares, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter.
No action pursuant to this Section 12 shall relieve any defaulting Underwriter
from liability in respect of its default. In the event of any such default
which does not result in a termination of this Agreement, the Representative and
the Company shall each have the right to postpone the Closing Date for a period
not exceeding seven days in order to effect any required changes in the
Registration Statement or the Prospectus or in any other documents or
arrangements.
13. Notices. All communications hereunder shall be in writing and (i) if
sent to the Representative shall be mailed or delivered or telegraphed and
confirmed by letter or telecopied and confirmed by letter to Prime Charter Ltd.
at 810 Seventh Avenue, New York, New York 10019, Attention: Mary Celeste Anthes,
(ii) if sent to the Company or Wiens, shall be mailed or delivered or
telegraphed and confirmed to the Company or Wiens, as the case may be, at 384
Inverness Drive South, Suite 211, Englewood, Colorado 80112, Attention: Thomas
J. Wiens, or (iii) if sent to the Selling Stockholders, to the Custodian at 1400
Glenarm Place, Third Floor, Denver, Colorado 80202, Attention: Gerald Raskin.
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<PAGE>
14. Successors. This Agreement shall inure to the benefit of and be
binding upon the Company, the Selling Stockholders and the Underwriters and
their respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person, except that the
representations, warranties, indemnities and contribution agreements of the
Company and the Selling Stockholders contained in this Agreement shall also be
for the benefit of any person or persons, if any, who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and except that the Underwriters' indemnity and contribution agreements shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement, and any person or persons,
if any, who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act. No purchaser of Shares from any Underwriter
will be deemed a successor because of such purchase.
15. Applicable Law, Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the choice of law or conflict of law principles thereof. Each party
hereto consents to the jurisdiction of each court in which any action is
commenced seeking indemnity or contribution pursuant to Section 8 hereof and
agrees to accept, either directly or through an agent, service of process of
each such court.
16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
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<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
the Underwriters' acceptance thereof in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
RECYCLING INDUSTRIES, INC.
By:
---------------------------------------
Thomas J. Wiens
Chairman of the Board
SELLING STOCKHOLDERS
By:
---------------------------------------
Custodian and Attorney-in-Fact
Accepted as of the date first written:
PRIME CHARTER, LTD., Individually
and as Representative of the
several Underwriters
By:
---------------------------
Sylvan Schefler
Vice Chairman
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<PAGE>
SCHEDULE A
----------
Underwriters
------------
<TABLE>
<CAPTION>
Underwriter Primary Shares Secondary Shares
- ----------- -------------- ----------------
<S> <C> <C>
Prime Charter Ltd. 2,147,136 217,864
BT Securities Corporation 181,575 18,425
Cowen & Company 181,575 18,425
EVEREN Securities, Inc. 181,575 18,425
First of Michigan Corporation 63,551 6,449
Mesirow Financial, Inc. 63,551 6,449
Roney & Co. 63,551 6,449
Scott & Stringfellow, Inc. 63,551 6,449
Stephens Inc. 63,551 6,449
Unterberg Harris 63,551 6,449
Van Kasper & Company 63,551 6,449
Brean Murray, Foster Securities, Inc. 40,854 4,146
Burnham Securities, Inc. 40,854 4,146
Burns Pauli Mahoney Co. 40,854 4,146
Coburn & Meredith Inc. 40,854 4,146
Commonwealth Associates 40,854 4,146
First Southwest Company 40,854 4,146
Frederick Company, Inc. 40,854 4,146
Hoak Securities Corp. 40,854 4,146
Huntleigh Securities Corporation 40,854 4,146
JW Charles Securities, Inc. 40,854 4,146
Keane Securities Co., Inc. 40,854 4,146
C.L. King & Associates, Inc. 40,854 4,146
John G. Kinnard & Company, Incorporated 40,854 4,146
Kirkpatrick, Pettis, Smith, Polian Inc. 40,854 4,146
Laidlaw Equities, Inc. 40,854 4,146
LT Lawrence & Company, Inc. 40,854 4,146
The Ohio Company 40,854 4,146
Ormes Capital Markets, Inc. 40,854 4,146
Pacific Crest Securities 40,854 4,146
Pennsylvania Merchant Group Ltd. 40,854 4,146
Sanders Morris Mundy 40,854 4,146
</TABLE>
37
<PAGE>
SCHEDULE B
----------
Selling Stockholders
--------------------
<TABLE>
<CAPTION>
Stockholder Number of Shares
- -------------------------------- ----------------
<S> <C>
Becker, Marshall 30,000
Becker, Stanley 20,500
Bender, Merrill 19,600
Fru-Con Construction, Inc. 145,001
Heller, Matthew 13,000
Levine, Kenneth 30,000
Morse, Clayton 4,600
Nathanson, Barry F. 5,250
Rome, Robert C. 100,000
Schafran, Hank 5,391
Smart & Thevenet, P.C. 13,600
The Stockbrokers Society, Inc. 2,276
Strong, Albert 2,000
Wittenstein, Frederick M. 13,500
Worden, Andrew B. 630
</TABLE>
38
<PAGE>
SCHEDULE C
----------
Parties to Lock-Up Agreements
-----------------------------
Directors
---------
Thomas J. Wiens
Michael I. Price
Jerome B. Misukanis
Graydon H. Neher
Barry L. Plost
Executive Officers
------------------
Rebekah L. Coe
Stockholders
------------
First Dominion Holdings, Inc.
Real Heroes, Inc.
-----------------
<PAGE>
EXHIBIT 10.12.3
[RECYCLING INDUSTRIES, INC. LOGO APPEARS HERE]
July 17, 1996
Mr. Wes Weissman
Weissman Industries, Inc.
1500 Airline Highway
Waterloo, IA 50703
Via Fax: (702) 233-0453
Dear Wes:
It was great to talk to you today. I greatly appreciate your agreeing to
take $1.5 million of Recycling Industries, Inc. stock as part of the acquisition
of Weissman Industries, Inc.
This letter will serve as an Amendment to the Stock Purchase Agreement
between Weissman Industries, Inc. and Recycling Industries, Inc. dated July 1,
1996 (the "Stock Purchase Agreement").
The parties hereby agree to alter the terms of the Stock Purchase Agreement
as follows:
1. Purchase Price remains $12.4 million, subject to adjustment as
provided in the Stock Purchase Agreement.
2. Payment $10.9 million in cash at Closing.
3. $1.5 million in Recycling Industries, Inc. common stock.
4. The common stock will be issued at $4.125. Therefore, 363,637 shares
of Recycling Industries, Inc. common stock will be issued to you. You
will have the right to transfer all of these shares of common stock to
Weissman Financial, a Nevada general partnership, and the guaranty set
forth in paragraph six below, will be transferable to Weissman
Financial to the same extent as the shares are transferred.
5. The shares will be registered and free trading no later than September
30, 1996.
<PAGE>
Mr. Wes Weissman
July 17, 1996
Page 2
6. Additionally, Recycling Industries, will guarantee that you will be
able to sell these shares at a price of not less than $4.125 per share
within three years from Closing. This guarantee will be secured by a
second security position on the equipment and real estate of Weissman
Industries, Inc. located in Waterloo, Iowa. The principal balance of
the first security position cannot exceed $3.5 million. While the
security interest is outstanding, Recycling Industries will not sell
any equipment or real estate of Weissman Industries, Inc. without
substituting collateral of equal or greater value.
7. At the closing, the parties will enter into a mutually acceptable
guaranty and security agreement on the terms set forth herein.
8. Except as otherwise modified by this Agreement, the terms of the Stock
Purchase Agreement remain in full force and effect.
Sincerely,
AGREED AND ACCEPTED:
/s/ Wes Weissman /s/ Thomas J. Wiens
___________________________ Thomas J. Wiens
Wes Weissman Chairman and Chief Executive Officer
<PAGE>
EXHIBIT 11
Computation of Earnings Per Common Share
<TABLE>
<CAPTION>
Six Months Ended Proforma Proforma
Years Ended September 30, March 31, Year Ended Six Months Ended
------------------------------ -------------------- -------------- ----------------
1995 1994 1993 1996 1995 Sept. 30, 1995 March 31, 1996
---- ---- ---- ---- ---- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Primary Earnings
Net income (loss) $ 1,815,000 $ (924,000) $ (2,483,000) $ 98,000 $ 907,000 $ 4,783,000 $ 1,193,000
============ ========== ============ ========== ========== =========== ===========
Shares
Weighted average number of 5,142,498 2,504,762 2,376,823 9,010,567 3,495,306 5,142,498 9,010,567
common shares outstanding
Assumed exercise of options
and warrants (as determined
by the application of the treasury
stock method) 957,196 -- -- 763,346 -- 957,196 763,346
Common shares issued for
acquisition of Anglo Iron & Metal -- -- -- -- -- 227,693 89,584
Common shares issued for acquisition
of Weissman Iron & Metal -- -- -- -- -- 363,637 363,637
------------ ---------- ------------ ---------- ---------- ----------- -----------
Weighted average number
of shares outstanding
as adjusted 6,099,694 2,504,762 2,376,823 9,773,913 3,495,306 6,691,024 10,227,134
============ ========== ============ ========== ========== =========== ===========
Primary earnings per common share:
Net income (loss) $ 0.30 $ (0.37) $ (1.04) $ 0.01 $ 0.26 $ 0.71 $ 0.12
---- ----- ----- ---- ---- ---- ----
Fully Diluted Earnings
Net income (loss) $ 1,815,000 $ (924,000) $(2,483,000) $ 98,000 $ 907,000
============ ========== =========== ========== ==========
Shares
Weighted average number of
common shares outstanding 6,099,694 2,504,762 2,376,823 9,773,913 3,495,306
Assuming conversion of convertible
preferred stock 208,000 118,307 -- 208,000 208,000
--------- --------- ---------- --------- ---------
Weighted average number of common
shares outstanding as adjusted 6,307,694 2,623,069 2,376,823 9,981,913 3,703,306
========= ========= ========= ========= =========
Fully diluted earnings per common share:
Net income (loss) $ 0.29 $ (0.35) $ (1.04) $ 0.01 $ 0.25
------ ------- ------- ------- -------
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
reports dated:
<TABLE>
<CAPTION>
REPORT DATE: FINANCIAL STATEMENTS OF:
------------ ------------------------
<S> <C>
March 22, 1996 Anglo Metal, Inc.
dba Anglo Iron & Metal
April 5, 1996 Mid-America Shredding, Inc.
April 21, 1996 Weissman Iron & Metal,
a Division of Weissman Industries, Inc.
November 3, 1995 Recycling Industries, Inc.
</TABLE>
and to the reference made to our firm under the caption "Experts" included in
or made part of this S-1 Registration Statement.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
JULY 18, 1996
<PAGE>
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Recycling Industries, Inc.
Denver, Colorado
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report dated May 17, 1996, relating to the
consolidated financial statements of Recycling Industries, Inc. which is
contained in that Prospectus and of our report dated May 17, 1996 relating to
the supplemental schedules which are contained in the Registration Statement.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO SEIDMAN, LLP
Denver, Colorado
July 18, 1996
