<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1998
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20179
RECYCLING INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1103445
------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
9780 S. MERIDIAN BLVD, SUITE 180
ENGLEWOOD, COLORADO 80112
- ---------------------------------- ----------
(Mailing Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number, Including Area Code: (303) 790-7372
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK,
$.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock as of the close of the period covered by this Report.
CLASS NUMBER OF SHARES OUTSTANDING AS OF:
- ----------------------------- March 31, 1998
Common Stock, $.001 Par Value --------------
18,107,981
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS*
CONSOLIDATED BALANCE SHEETS - MARCH 31, 1998
AND SEPTEMBER 30, 1997 1-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE AND SIX MONTHS ENDED MARCH
31, 1998 AND 1997 3-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 1998 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15-22
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24-25
SIGNATURES 26
</TABLE>
- -----------------------
* The accompanying interim financial statements have been audited by an
independent certified public accountant. Only those statements corresponding
to a fiscal year-end (September 30) are audited.
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND SEPTEMBER 30, 1997
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1998 SEPTEMBER 30, 1997
-------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,008 $ 746
Accounts receivable, net 33,091 8,820
Inventories 17,451 4,183
Deferred income taxes 1,100 810
Prepaid expenses and other 2,811 445
-------------------------------------------------
Total Current Assets 56,461 15,004
-------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 150,120 33,227
-------------------------------------------------
OTHER ASSETS:
Notes receivable, related party 2,490 85
Deferred income taxes 1,098 585
Other assets, net of amortization 28,743 6,178
-------------------------------------------------
Total Other Assets 32,331 6,848
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TOTAL ASSETS $ 238,912 $ 55,079
-------------------------------------------------
-------------------------------------------------
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
1
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RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND SEPTEMBER 30, 1997
(THOUSANDS OF DOLLARS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, 1998 SEPTEMBER 30, 1997
-------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,280 $ 3,300
Accounts payable 8,296 2,661
Accounts payable - related parties - 438
Other current liabilities 5,940 1,049
-------------------------------------------------
Total Current Liabilities 17,516 7,448
-------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 139,831 29,456
Other long-term liabilities 14,612 -
-------------------------------------------------
Total long-term liabilities 154,443 29,456
-------------------------------------------------
Total Liabilities 171,959 36,904
-------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
Redeemable common stock,
$.001 par value, 363,636 shares issued and outstanding 1,500 1,500
-------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares authorized
69,378 and 10,000 shares issued and outstanding 19,660 500
Common Stock ($.001 par value), 50,000,000 shares authorized,
18,107,981 and 14,149,780 shares issued and outstanding 18 14
Additional paid-in capital 58,439 26,846
Accumulated deficit (12,664) (10,685)
-------------------------------------------------
Total Stockholders' Equity 65,453 16,675
-------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 238,912 $ 55,079
-------------------------------------------------
-------------------------------------------------
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
2
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RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 69,669 $ 12,741
Cost of sales and operating expenses 59,277 10,361
----------- -----------
Gross profit 10,392 2,380
Selling, general and administrative expenses 4,456 1,450
----------- -----------
Operating income 5,936 930
----------- -----------
Other income (expense):
Interest expense (4,864) (430)
Miscellaneous (60) 26
----------- -----------
Total other income (expense) (4,924) (404)
----------- -----------
Earnings before income taxes 1,012 526
Benefit (provision) for income taxes (406) 295
----------- -----------
Net earnings 606 821
Preferred stock dividends 275 280
----------- -----------
Net earnings available to common
shareholders $ 331 $ 541
----------- -----------
----------- -----------
Earnings per share:
Basic earnings per common share $ 0.02 $ 0.04
----------- -----------
----------- -----------
Weighted average common shares outstanding 17,982,000 13,881,000
----------- -----------
----------- -----------
Diluted earnings per common share $ 0.01 $ 0.04
----------- -----------
----------- -----------
Weighted average diluted common shares outstanding 25,730,000 13,939,000
----------- -----------
----------- -----------
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
3
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 101,117 $ 23,502
Cost of sales and operating expenses 85,753 19,813
----------- -----------
Gross profit 15,364 3,689
Selling, general and administrative expenses 6,893 2,663
----------- -----------
Operating income 8,471 1,026
----------- -----------
Other income (expense):
Interest expense (7,033) (889)
Miscellaneous (151) 34
----------- -----------
Total other income (expense) (7,184) (855)
----------- -----------
Earnings before income taxes and
extraordinary loss 1,287 171
Benefit (provision) for income taxes (493) 295
----------- -----------
Earnings before extraordinary loss 794 466
Extraordinary (loss) on early extinguishment
of debt, net of tax (2,414) -
----------- -----------
Net earnings (loss) (1,620) 466
Preferred stock dividends 359 280
----------- -----------
Net earnings (loss) available to common
shareholders $ (1,979) $ 186
----------- -----------
----------- -----------
Earnings (loss) per share:
Basic earnings (loss) per share:
Before extraordinary item $ 0.03 $ 0.01
Extraordinary item (0.14) -
----------- -----------
Basic earnings (loss) per common share $ (0.11) $ 0.01
----------- -----------
----------- -----------
Weighted average common shares outstanding 16,732,000 13,837,000
----------- -----------
----------- -----------
Diluted earnings (loss) per common share:
Before extraordinary item $ 0.02 $ 0.01
Extraordinary item (0.10) -
----------- -----------
Diluted earnings (loss) per common share $ (0.08) $ 0.01
----------- -----------
----------- -----------
Weighted average diluted common shares outstanding 24,676,000 13,976,000
----------- -----------
----------- -----------
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
4
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RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1998
(THOUSANDS OF DOLLARS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------- ---------- ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30,1997 10,000 $ 500 14,149,780 $ 14 $ 26,846 $ (10,685) $16,675
Preferred stock issued for
acquisitions 59,378 19,160 - - - - 19,160
Common stock issued for acquisitions - - 898,039 1 10,749 - 10,750
Common stock issued for cash - - 1,666,666 2 9,998 - 10,000
Common stock issued on
exercise of options and warrants - - 1,393,496 1 1,839 - 1,840
Issuance of warrants in connection
with debt financing - - - - 9,007 - 9,007
Preferred stock dividends - - - - - (359) (359)
Net (loss) - - - - - (1,620) (1,620)
------ ------- ---------- ------ --------- ---------- --------
Balances, March 31, 1998 69,378 $19,660 18,107,981 $ 18 $ 58,439 $ (12,664) $ 65,453
------ ------- ---------- ------ --------- ---------- --------
------ ------- ---------- ------ --------- ---------- --------
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
5
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-----------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ (1,620) $ 466
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 3,978 1,082
Prepaid loan fees 1,212 -
Non-operating activities 2,532 -
Deferred income taxes (803) (295)
Changes in Assets and Liabilities:
Accounts receivable (4,148) (1,209)
Inventories (2,624) 17
Prepaid expenses and other (357) 56
Accounts payable 3,075 15
Current liabilities, excluding debt 3,065 (246)
-----------------------------------------------
Net Cash provided by (used in) Operating Activities 4,310 (114)
-----------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures, net (2,820) (755)
Note receivable, related party (1,440) (70)
Other assets (4,744) (537)
Acquisitions, net of equity issued (114,947) -
Cash acquired in acquisitions 1,835 -
-----------------------------------------------
Net Cash (used in) Investing Activities (122,116) (1,362)
-----------------------------------------------
FINANCING ACTIVITIES:
Proceeds from borrowings 149,910 5,348
Principal payments on borrowings (33,208) (5,721)
Other long-term liabilities 1,678 -
Prepayment penalty on debt (2,532) -
Loan fees paid (8,600) -
Dividends Paid (20) -
Net proceeds from issuance of stock 11,840 926
-----------------------------------------------
Net Cash provided by Financing Activities 119,068 553
-----------------------------------------------
Increase (decrease) in cash 1,262 (923)
Cash, beginning of period 746 1,450
-----------------------------------------------
Cash, end of period $ 2,008 $ 527
-----------------------------------------------
-----------------------------------------------
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
6
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
GENERAL INFORMATION:
I. The financial statements included herein have been prepared by the
Company without audit except the September 30, 1997 balance sheet, which
was audited. The statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission and reflect
all adjustments, consisting of only normal recurring accruals which are,
in the opinion of management, necessary for a fair statement of the
results of operations for the periods shown. These financial
statements should be read in conjunction with the financial
statements and notes thereto included in the Company's latest report on
Form 10-K/A, dated September 30, 1997.
II. The results of operations for the three and six months ended March 31,
1998 and 1997 are not necessarily indicative of the results to be
expected for the full year.
III. Inventories as of March 31, 1998 and September 30, 1997, consisted of
the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MARCH 31, 1998 SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
(THOUSANDS OF DOLLARS)
Raw Materials $10,741 $2,590
Finished Goods 5,563 1,330
Other 1,147 263
- -------------------------------------------------------------------------------
Total $17,451 $4,183
- -------------------------------------------------------------------------------
</TABLE>
IV. RECENT ACQUISITIONS
The following acquisitions were accounted for using the purchase method of
accounting. The results of operations of the businesses acquired have been
included in the Company's consolidated financial statements since the date of
acquisition.
The purchase price allocation for the December 1997 acquisitions is
preliminary and is subject to the completion of appraisals and environmental
studies. In addition, certain working capital accounts are subject to
post-closing adjustments pursuant to the purchase agreements.
BRENNER COMPANIES, INC.
On December 5, 1997, a wholly owned subsidiary of the Company acquired
substantially all of the scrap metals recycling assets and business of Brenner
Companies, Inc. ("Brenner"), a privately held metals recycler with operations in
the Winston-Salem, North Carolina area. The assets acquired from Brenner
consist of heavy equipment, tools and rolling stock used in the business of
recycling ferrous and non-ferrous metals. The Company also purchased from
Brenner certain real property, buildings and leasehold improvements used in the
metals recycling business. The total purchase price for the Brenner assets was
$23.8 million, comprised of $15.7 million of cash, 14,000 shares of the
Company's Series F 6.5% Redeemable Convertible Preferred Stock (the "Series F
Preferred") having a stated
7
<PAGE>
value of $3.5 million, 14,000 shares of the Company's Series G 6.5%
Redeemable Convertible Preferred Stock (the "Series G Preferred") having a
stated value of $3.5 million and the assumption of $1.1 million of Brenner's
deferred compensation liabilities.
If not earlier redeemed or converted, on December 5, 2000, the Series F
Preferred will automatically convert into that number of shares of Common
Stock having an aggregate market value on the date of conversion of not less
than $3.5 million. Brenner has the right to require the Company to find a
purchaser of the shares of common stock received upon conversion of the
Series F Preferred (the "Series F Conversion Shares") on or before December
5, 2000. If the sale of the Series F Conversion Shares yields net proceeds
of less than $3.5 million, the Company will pay the difference to Brenner.
If not earlier redeemed or converted, on December 5, 2000, the Series G
Preferred will automatically convert into that number of shares of Common
Stock having an aggregate market value on the date of conversion of not less
than $3.5 million.
GROSSMAN BROTHERS COMPANY AND MILWAUKEE METAL BRIQUETTING CO., INC.
On December 5, 1997, a wholly owned subsidiary of the Company acquired
substantially all of the scrap metals recycling assets and business of
Grossman Brothers Company, Inc. and Milwaukee Metal Briquetting Co., Inc.
(collectively "Grossman"). Grossman was a privately held metals recycler
with operations in the Milwaukee, Wisconsin area. The assets acquired from
Grossman consisted of heavy equipment, tools and rolling stock used in the
business of recycling ferrous and non-ferrous metals. The Company is
leasing, pursuant to a capital lease with an option to purchase, the real
property, buildings and leasehold improvements used in the metals recycling
business. The total purchase price for Grossman was $7.4 million, comprised
of $3.7 million of cash, a capital lease with a present value of $2.7
million, 98,000 shares of Common Stock valued at $0.7 million which will be
held in escrow during the lease term, and the assumption of $0.3 million of
Grossman's liabilities.
WM. LANS SONS' CO., INC.
On December 8, 1997, the Company acquired from Bertram Lans, Bruce Lans and
Scott Lans all of the issued and outstanding capital stock of Wm. Lans Sons'
Co., Inc. ("Lans"), a privately held metals recycler with operations in the
South Beloit, Illinois, area. The assets owned by Lans consisted of heavy
equipment, tools and rolling stock used in the business of recycling ferrous
and non-ferrous metals. The Company also purchased from an affiliate of Lans
certain real property, buildings and leasehold improvements used in the
metals recycling business. The total purchase price for Lans was $25.5
million, comprised of $22.0 million of cash and 10,000 shares of the
Company's Series I 8% Redeemable Convertible Preferred Stock (the "Series I
Preferred") having a stated value of $3.5 million. If not earlier redeemed
or converted, on December 8, 1999, the Series I Preferred will automatically
convert into that number of shares of Common Stock having a market value on
the date of conversion of not less than $3.5 million.
CENTRAL METALS COMPANY, INC.
On December 5, 1997, a wholly owned subsidiary of the Company acquired
substantially all of the scrap metals recycling assets and business of Central
Metals Company, Inc. ("Central"), a privately held metals recycler with
operations in the Atlanta, Georgia area. The assets acquired from Central
consisted of heavy equipment, tools and rolling stock used in the business of
recycling ferrous and non-ferrous metals. The real property and buildings owned
and used by Central in the metals recycling business have been placed into
escrow and are being leased by the Company until Central can provide clear title
to these assets, at which time the Company will complete the purchase of the
real property and buildings. The Company is leasing certain equipment used in
the metals recycling business from an affiliate of Central. The total purchase
price for Central was $31.0 million, comprised of $20.7 million
8
<PAGE>
of cash and 800,000 shares of Common Stock, having an agreed value of $12.50
per share or $10 million. The Company also assumed $0.32 million of
Central's liabilities.
The Company has guaranteed that the aggregate market value of the 800,000
shares of Common Stock issued to Central will be at least $10 million on
December 4, 1999. If the market value of the Common Stock is less than $10
million, the Company will issue shares of Common Stock to Central having a
market value equal to the difference between $10 million and the market value
of the 800,000 shares of Common Stock initially issued to Central.
In connection with the acquisition, Central was issued warrants to acquire up
to 200,000 shares of the Company's Common Stock for $15.00 per share,
exercisable upon satisfaction of certain financial performance conditions
related to the operations of the acquired subsidiary (the "Contingent
Warrants"). The exercise price per share of the Contingent Warrants is
subject to adjustment at the time of exercise so that the aggregate spread
between the exercise price of all Contingent Warrants and the market value of
the Common Stock received upon exercise of the Contingent Warrants is not
less than $1 million. The value of the Contingent Warrants will be reflected
as an adjustment to the purchase price, as an increase in goodwill, when the
financial performance conditions are met by Central.
MONEY POINT LAND HOLDING CORPORATION AND MONEY POINT DIAMOND CORPORATION
On December 5, 1997, a wholly owned subsidiary of the Company acquired
substantially all of the scrap metals recycling assets and business of Money
Point Land Holding Corporation and Money Point Diamond Corporation
(collectively "Jacobson"). Jacobson was a privately held metals recycler
with operations in the Chesapeake, Virginia area. The assets acquired from
Jacobson consist of heavy equipment, tools and rolling stock used in the
business of recycling ferrous and non-ferrous metals. The Company also
purchased from Jacobson certain real property, buildings and leasehold
improvements used in the metals recycling business. The total purchase price
for Jacobson was $19.9 million, comprised of $16.9 million of cash and 10,000
shares of the Company's Series E Redeemable Convertible Preferred Stock (the
"Series E Preferred") having a stated value of $3.0 million.
If not earlier redeemed or converted, on December 5, 2000, the Series E
Preferred will automatically convert into that number of shares of Common
Stock having an aggregate market value on the date of conversion of not less
than $3.0 million. Unless Jacobson elects to retain the shares of Common
Stock received upon conversion of the Series E Preferred (the "Series E
Conversion Shares"), the Company will assist Jacobson in selling the Series E
Conversion Shares on or before January 4, 2001. If the sale of the Series E
Conversion Shares yields net proceeds of less than $3,000,000, the Company
will pay the difference to Jacobson.
UNITED METAL RECYCLERS, INC.
On December 5, 1997, a wholly owned subsidiary of the Company acquired
substantially all of the scrap metals recycling assets and business of United
Metal Recyclers, Inc. ("United"), a privately held metals recycler with
operations in the Kernersville, North Carolina area. The assets acquired
from United consist of heavy equipment, tools and rolling stock used in the
business of recycling ferrous and non-ferrous metals. The Company also
purchased from United certain real property, buildings and leasehold
improvements used in the metals recycling business and United's 50% interest
in another metals recycling facility located in the Smithfield, North
Carolina area. The total purchase price for the United assets and United's
50% interest in D.H. Griffin was $42.0 million, comprised of $36.0 million of
cash, 11,378 shares of the Company's Series H 6% Secured Redeemable
Convertible Preferred Stock having a stated value of $5.7 million and the
assumption of $0.3 million of United's liabilities.
9
<PAGE>
If not earlier redeemed or converted, on December 5, 2000, the Series H
Preferred will automatically convert into that number of shares of Common
Stock having an aggregate market value on the date of conversion of not less
than $5.7 million. United has the right to require the Company to find a
purchaser of the shares of common stock received upon conversion of the
Series H Preferred (the "Series H Conversion Shares") on or before December
5, 2000. If the sale of the Series H Conversion Shares yields net proceeds
of less than $5.7 million, the Company will pay the difference to United.
On December 5, 1997, in connection with the acquisitions referred to above,
the Company and all of its operating subsidiaries entered into a $150 million
Senior Credit Facility ("Credit Facility") with General Electric Capital
Corporation and BankBoston, N.A. as agents for the lenders. The Credit
Facility is comprised of a $45 million revolving credit facility, a $40
million term loan due December 5, 2003, with interest and principal payable
quarterly, a $40 million term loan due on the earlier of December 5, 2005 or
six months prior to the maturity of the Subordinated Notes discussed below with
interest and principal payable quarterly, and a $25 million acquisition line
of credit due December 5, 2003, with interest and principal payable quarterly.
The notes bear interest at either (i) the higher of (a) prime plus .75% or (b)
the Federal Funds rate plus 50 basis points per annum plus .75%, or (ii) at
the option of the Company upon certain conditions, the LIBOR rate plus 2.25%.
The proceeds from the Credit Facility are secured by substantially all of the
Company's assets and are to be used in part for acquisitions.
On December 5, 1997, in connection with the acquisitions referred to above,
the Company issued $60 million in Senior Subordinated Notes (the "Subordinated
Debt"), the proceeds of which were used in part for acquisitions. The
Subordinated Debt is guaranteed by all of the Company's operating subsidiaries.
The Subordinated Debt bears interest at 13% and matures in December 2005.
In connection with the Credit Facility and the issuance of the Subordinated
Debt, the Company sold 1,666,666 shares of its Common Stock for an aggregate
of $10 million to various accredited investors in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended. The $10
million in proceeds were used in part for acquisitions.
The Company issued warrants to acquire up to 1,266,000 shares of Common Stock
in connection with the issuance of the Subordinated Debt. The exercise price
of the warrants is $0.01 per share. Additionally, warrants were issued to
acquire 200,000 shares of Common Stock with an exercise price of $2.50 per
share as part of entering into the Credit Facility. For accounting purposes
the fair value of the warrants have been recorded as paid-in-capital and as a
discount to the respective debt which is amortized as interest expense over
the life of the debt.
10
<PAGE>
The following summarized unaudited pro forma results of operations assumes
that the acquisitions of Brenner, Grossman, Lans, Central, Jacobson, and
United, had occurred at the beginning of each period presented.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net sales $ 138,168 $ 125,829
Depreciation and amortization 4,495 4,292
Operating income 17,065 10,087
Earnings before income taxes and
extraordinary loss 7,528 3,112
Provision for income taxes 3,102 868
Extraordinary (loss) on early extinguishment of
debt, net of tax (2,414) (2,414)
Net earnings (loss) 2,012 (170)
Preferred stock dividends 556 836
Earnings (loss) available to common shareholders:
Basic $ 1,456 $ (1,006)
----------- -----------
----------- -----------
Diluted $ 1,456 $ (986)
----------- -----------
----------- -----------
Basic earnings (loss) per common share:
Earnings before extraordinary item $ 0.22 $ 0.09
Extraordinary item (0.14) (0.15)
----------- -----------
Basic earnings (loss) per common share $ 0.08 $ (0.06)
----------- -----------
----------- -----------
Weighted average number of common shares
outstanding 17,620,000 16,402,000
----------- -----------
----------- -----------
Diluted earnings (loss) per common share: (2)
Earnings before extraordinary item $ 0.15 $ 0.08
Extraordinary item (0.09) (0.13)
----------- -----------
Diluted earnings (loss) per common share $ 0.06 $ (0.05)
----------- -----------
----------- -----------
Weighted average number of common shares
outstanding 25,701,000 18,516,000
----------- -----------
----------- -----------
EBITDA (1) $ 21,560 $ 14,379
----------- -----------
----------- -----------
</TABLE>
(1) The Company has included the calculation of Earnings Before Interest,
Taxes, Depreciation, and Amortization (EBITDA) as a supplemental
schedule to the pro forma financial information. The EBITDA
calculation, which is not a measure of financial performance under
generally accepted accounting principles, was included as certain
investors use the data 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.
11
<PAGE>
(2) Potentially dilutive issues not included in the computation of pro
forma diluted earnings per common share:
For the six months ended March 31, 1998, warrants and options to
acquire 446,936 shares of common stock, at exercise prices of $6.25 to
$75.00 per share, were not included in the computation of diluted EPS
because the warrants' and options' exercise prices were greater than
the average market price of the common shares. Preferred shares
convertible into 2,148,258 common shares, at various conversion rates,
were not included in the computation of diluted EPS as the effect would
be anti-dilutive.
For the six months ended March 31, 1997, warrants and options to
acquire 4,961,804 shares of common stock at exercise prices of $1.50 to
$75.00 per share were not included in the computation of diluted EPS
because the warrants' and options' exercise prices were greater than
the average market price of the common shares. Preferred shares
convertible into 2,493,412 common shares, at various conversion rates,
were not included in the computation of diluted EPS as the effect would
be anti-dilutive.
The pro forma data is for informational purposes only and may not necessarily
reflect the results of operations of the Company had the acquired businesses
operated as part of the Company for the periods ended March 31, 1998 and 1997.
12
<PAGE>
V. SUPPLEMENTAL DISCLOSURES FOR EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- -----------------------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER COMMON SHARE:
NUMERATOR
Earnings before extraordinary (loss) $ 606 $ 821 $ 794 $ 466
Preferred stock dividends (275) (280) (359) (280)
----------- ----------- ----------- -----------
Earnings before extraordinary (loss) on early
extinguishment of debt available to common shareholders 331 541 435 186
Extraordinary (loss) on early extinguishment of debt - - (2,414) -
----------- ----------- ----------- -----------
Net earnings (loss) available to common shareholders $ 331 $ 541 $ (1,979) $ 186
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DENOMINATOR
Weighted average common shares outstanding 17,982,000 13,881,000 16,732,000 13,837,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE AMOUNTS
Basic earnings before extraordinary (loss)
on early extinguishment of debt $ 0.02 $ 0.04 $ 0.03 $ 0.01
Extraordinary (loss) on early extinguishment of debt - - (0.14) -
----------- ----------- ----------- -----------
Basic earnings (loss) $ 0.02 $ 0.04 $ (0.11) $ 0.01
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
NUMERATOR
Earnings before extraordinary (loss) on early
extinguishment of debt available to common shareholders $ 331 $ 541 $ 435 $ 186
Extraordinary (loss) on early extinguishment of debt - - (2,414) -
----------- ----------- ----------- -----------
Net earnings (loss) available to common shareholders $ 331 $ 541 $ (1,979) $ 186
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DENOMINATOR
Weighted average common shares outstanding 17,982,000 13,881,000 16,732,000 13,837,000
Effect of dilutive securities:
Options and warrants 7,366,000 58,000 7,699,000 139,000
Convertible preferred stock outstanding 382,000 - 245,000 -
----------- ----------- ----------- -----------
Weighted average common shares and assumed
conversions outstanding 25,730,000 13,939,000 24,676,000 13,976,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE AMOUNTS
Diluted earnings before extraordinary (loss)
on early extinguishment of debt $ 0.01 $ 0.04 $ 0.02 $ 0.01
Extraordinary (loss) on early extinguishment of debt - - (0.10) -
----------- ----------- ----------- -----------
Diluted earnings (loss) $ 0.01 $ 0.04 $ (0.08) $ 0.01
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
13
<PAGE>
Potentially dilutive issues not included in the computation of diluted
earnings per common share:
For the three and six months ended March 31, 1998, warrants and options to
acquire 446,936 shares of common stock, at exercise prices of $6.25 to $75.00
per share, were not included in the computation of diluted EPS because the
warrants' and options' exercise prices were greater than the average market
price of the common shares. Preferred shares convertible into 2,148,258 and
1,405,065 common shares, respectively, for the three and six months ended
March 31, 1998, at various conversion rates, were not included in the
computation of diluted EPS as the effect would be anti-dilutive.
For the three and six months ended March 31, 1997, warrants and options to
acquire 4,961,804 shares of common stock at exercise prices of $1.50 to
$75.00 per share were not included in the computation of diluted EPS because
the warrants' and options' exercise prices were greater than the average
market price of the common shares. Preferred shares convertible into 866,318
and 433,159, respectively, for the three and six months ended March 31, 1997
were not included in the computation of diluted EPS as the effect would be
anti-dilutive.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS RELEASES
AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR ITS OFFICERS,
DIRECTORS, OR EMPLOYEES ACTING ON ITS BEHALF, THAT ARE NOT STATEMENTS OF
HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF THE COMPANY TO BE
MATERIALLY DIFFERENT FROM HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS AND RISK FACTORS
DESCRIBED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE
COMMISSION. IN ADDITION TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS
AND UNCERTAINTIES, READERS ARE URGED TO CONSIDER STATEMENTS THAT INCLUDE THE
TERMS "BELIEVES," "BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR
THE LIKE TO BE UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE
HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR.
GENERAL
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 EAF technology. The Company's operations consist
of purchasing and processing unprepared scrap and selling processed scrap.
Scrap is categorized as either ferrous, containing iron and consisting
primarily of steel, or non-ferrous. Ferrous scrap is generated in two forms
consisting of prompt industrial scrap and old scrap. Prompt industrial scrap
is the material left over from manufacturing processes that use steel, such
as automobile and appliance manufacturing. Old scrap includes obsolete or
broken goods consisting of automobiles, refrigerators and other consumer and
industrial steel goods. The Company purchases unprepared scrap primarily from
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. Unprepared scrap is processed for resale by resorting,
cleaning, shearing and shredding by a variety of methods according to
customer specifications and market demand. The Company sells its processed
ferrous scrap to mini-mill steel producers, integrated steel producers,
foundries and brokers.
The Company has completed several acquisitions, each of which was financed in
part by borrowings and the issuance of common and/or preferred stock. See
"Recent Acquisitions." The acquisitions have been accounted for using the
purchase method of accounting and the operating results of the entities have
been included in the Company's consolidated financial statements since the
date of acquisition. Management believes these acquisitions will have a
positive impact on the Company's future results of operations and that the
historical results of operations of the acquired companies do not reflect the
operating efficiencies and improvements that the Company seeks to achieve by
integrating the acquired businesses into the Company's operations. The
Company plans to integrate certain functions such as administration, finance
and information systems which may be duplicated at certain newly acquired
companies.
The principal elements of the Company's cost of sales are raw materials,
direct labor and manufacturing overhead. The Company seeks to partially
offset fluctuations in raw material costs by entering into long-term supply
arrangements with certain customers, none of which is material to the
Company's operations. The Company purchases and processes many different
grades of ferrous and non-ferrous material with varying gross margins.
Accordingly, the Company's overall gross margin is impacted by its material
mix, raw material costs and its ability to efficiently process various
ferrous and non-ferrous materials.
15
<PAGE>
The following table sets forth selected statement of income data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
STATEMENT OF OPERATIONS DATA: MARCH 31, MARCH 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1998 1997
------------------ -----------------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and operating expenses 85.1 81.3 84.8 84.3
Gross profit 14.9 18.7 15.2 15.7
Selling, general and administrative expenses 6.4 11.4 6.8 11.3
Operating income 8.5 7.3 8.4 4.4
Interest expense and other 7.0 3.2 7.1 3.7
Earnings before income taxes and
extraordinary(loss) 1.5 4.1 1.3 .7
Income tax benefit (provision) (.6) 2.3 (.5) 1.3
Extraordinary (loss) on settlement of debt -- -- (2.4) --
Net earnings (loss) .9 6.4 (1.6) 2.0
EBITDA (1) 11.8% 11.8% 11.9% 9.0%
</TABLE>
(1) "EBITDA" represents, for any period, operating income before interest
expense, income taxes, depreciation and amortization. EBITDA is
presented because it is a widely accepted financial indicator of a
company's ability to service and/or incur indebtedness. Management
believes that presentation of EBITDA is helpful to investors. However,
EBITDA should not be considered as an alternative to net income as a
measure of the Company's operating results or cash flows as a measure of
liquidity. In addition, although the EBITDA measure of performance is
not recognized under generally accepted accounting principles, it is
widely used by industrial companies as a general measure of a company's
operating performance because it assists in comparing performance on a
relatively consistent basis across companies without regard to
depreciation and amortization, which can vary significantly depending on
accounting methods (particularly where acquisitions are involved) or
non-operating factors such as historical cost bases. Because EBITDA is
not calculated identically by all companies, the presentation herein may
not be comparable to other similarly titled measures of other companies.
RECENT ACQUISITIONS
Since September 30, 1997, the Company directly or indirectly, through its
subsidiaries, has consummated seven acquisitions (the "Recent Acquisitions") for
an aggregate purchase price of approximately $158 million. As the Recent
Acquisitions were accounted for using the purchase method of accounting, the
purchase price was allocated to the acquired assets at their estimated fair
value. The purchase price allocation for the Recent Acquisitions is preliminary
and is subject to the completion of appraisals and environmental studies. In
addition, certain working capital accounts are subject to post-closing
adjustments pursuant to the purchase agreements. The Recent Acquisitions were
financed in part with proceeds generated in December 1997 from the Credit
Facility, the sale of Subordinated Debt and proceeds from the sale of the
Company's Common Stock to various accredited investors in connection with the
Credit Facility. The acquisitions were also financed in part from the issuance
of the Company's preferred and Common Stock to the owners of the acquired
facilities.
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
16
<PAGE>
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
ferrous market prices, it seeks to minimize this risk by maintaining low
inventory levels of raw and processed scrap.
The results of operations for the three and six months ended March 31, 1998
and 1997 have been driven primarily by the Company's acquisition activity.
NET SALES. Net sales for the three and six months ended March 31, 1998, were
$69.7 million and $101.1 million, respectively. This is an increase of $56.9
million, or 446.8% and $77.6 million, or 330.2%, respectively, compared to
the same periods one year earlier. The increase was primarily related to
increased processing capacity resulting from the acquisition of ARC and AIC
during the third quarter of 1997 and the acquisition of Brenner, United,
Jacobson, Central and Grossman on December 5, 1997 and Lans on December 8,
1997 and increases in the average selling price of ferrous and non-ferrous
material. Total tons processed of ferrous material for the three and six
months ended March 31, 1998 increased by approximately 396.5% to 296,151 tons
and 285.3% to 448,626 tons, respectively, as compared to the same periods one
year earlier. The increase in total ferrous tons processed was primarily
related to new acquisitions as tons processed during the quarter by
facilities acquired prior to the second quarter of fiscal 1997 were almost
unchanged. Total pounds processed of non-ferrous material for the three and
six months ended March 31, 1998 increased by approximately 24.6% to
41,804,536 pounds and 43.7% to 55,548,766 pounds, respectively, as compared
to the same periods one year earlier. The increase was partially offset by a
decline in pounds processed of non-ferrous material during the three and six
month periods for facilities acquired prior to the second quarter of fiscal
1997.
The average sales price per ton of prepared ferrous material was $143 for the
three and six month periods ended March 31, 1998, an increase of 10.2% and
13.5%, respectively, compared to the same periods one year earlier. The
average sales price per pound of prepared non-ferrous material for the three
and six month periods ended March 31, 1998 were $0.47 and $0.46, respectively,
representing a decrease of 4.1% and 9.8%, respectively, compared to the same
periods one year ago. The decrease in the average sales price of prepared
non-ferrous material is primarily attributable to decreased demand and
changes in material mix. Net sales from brokerage activities for the three
and six month periods ended March 31, 1998 were $1.6 million and $2.7
million, respectively, increases of $0.6 million and $1.0 million,
respectively, compared to the same periods one year earlier. The increases
were primarily related to new acquisitions and increased brokerage volume at
facilities acquired prior to the second quarter of fiscal 1997.
GROSS PROFIT. Gross profit for the three and six months ended March 31, 1998
was $10.4 million and $15.4 million, respectively. This is an increase of
$8.0 million and $11.7 million, respectively, compared to the same periods
one year earlier. The increase in gross profit is principally attributable
to new acquisitions and increases in the average selling price of prepared
ferrous and non-ferrous material which were partially offset by increases in
the average purchase price of unprepared ferrous and non-ferrous material.
Gross profit margin for the three months ended March 31, 1998 was 14.9% as a
percentage of net sales compared to 18.7% for the same period in 1997. The
decrease in gross profit margin is primarily attributable to an increase in
the average purchase price of unprepared ferrous and non-ferrous material
resulting from the supply of material and material mix compared to the same
period one year ago. The decline in gross profit margins for the quarter was
also attributable to $0.5 million in nonrecurring repairs and maintenance in
anticipation of increasing material throughput to fully utilize existing
capacity and to process additional materials from the Company's anticipated
future acquisitions. Gross profit margin as a percentage of sales was 15.2%
for the six month period ended March 31, 1998, relatively unchanged as
compared to the same periods in 1997.
17
<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
(SG&A) expenses for the three months ended March 31, 1998 increased to $4.5
million compared to $1.5 million in the same period in 1997, an increase of
$3.0 million or 207%. SG&A for the six month period ended March 31, 1998,
increased to $6.9 million from $2.7 million in the same period in 1997, an
increase of 159%. The increase for the three and six month periods of 1998
was primarily the result of the new acquisitions and staffing and other
related administrative expenses in anticipation of planned growth. As a
percent of net sales, SG&A declined to 6.4% and 6.8% for the three and six
months ended March 31, 1998 from 11.4% and 11.3% during the same periods in
1997. As a result of continued emphasis on productivity improvements, the
Company has managed to achieve increases in net sales while achieving
significant decreases in support costs as a percentage of sales.
OPERATING INCOME. Operating income for the three month period ended March
31, 1998 increased to $5.9 million from $0.9 million in the same period in
1997, an increase of $5.0 million or 538%. Operating income for the six
months ended March 31, 1998 increased to $8.5 million from $1.0 million in
the same period in 1997, an increase of $7.5 million or 725.6%. The increase
was principally a result of the new acquisitions and increases in the average
selling price of ferrous and non-ferrous material and continued emphasis on
productivity improvements. Management is continuously monitoring the
operations of the facilities and has implemented certain cost cutting
strategies in an attempt to improve operating income without reducing net
sales.
INTEREST EXPENSE. Interest expense increased for the three months ended
March 31, 1998 to $4.9 million from $0.4 million in the same period in 1997,
an increase of $4.5 million. Interest expense for the six months ended March
31, 1998 increased to $7.0 million from $0.9 million in the same period in
1997, an increase of $6.1 million. The increases were primarily related to
increases in long-term debt to finance the acquisition of ARC and AIC in the
third quarter of fiscal 1997, and Brenner, United, Jacobson, Central,
Grossman and Lans in the first quarter of fiscal 1998 and the amortization of
transaction costs associated with the Credit Facility and Subordinated Debt.
MISCELLANEOUS. Miscellaneous expense for both the three and six months ended
March 31, 1998 includes $0.1 million and $0.2 million, respectively, of
expense for minority interest in the earnings of a metals recycling facility.
EARNINGS BEFORE EXTRAORDINARY (LOSS). Earnings before extraordinary (loss)
for the six months ended March 31, 1998 were $0.8 million compared to $0.5
million for the six months ended March 31, 1997. During the first quarter of
1998, the Company recorded a $2.4 million extraordinary loss net of a tax
benefit from early extinguishment of debt. The income tax benefit of $1.3
million was recorded as an increase in the deferred tax asset. As a result
of the foregoing, the Company's net loss during the six months ended March
31, 1998 was $(1.6) million.
INCOME TAX EXPENSE. The effective tax rate for the quarter was 40% resulting
in a provision for income taxes of $0.4 million compared to a $0.3 million
income tax benefit for the same period one year earlier. The benefit for the
quarter ending March 31, 1997 resulted from the realization of net operating
loss carry forwards. Income tax expense before the extraordinary item was
$0.5 million on earnings of $1.3 million for an effective tax rate of 38% for
the six months ended March 31, 1998. Management has determined that the
realization of the deferred tax asset of $2.2 million at March 31, 1998 is
more likely than not, as a result of the anticipated future taxable income
generated by the acquisitions.
The Company does not believe its businesses have been adversely affected by
general inflation.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARCH 31, 1998 September 30, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
(DOLLARS IN MILLIONS)
Current ratio 3.22:1 2.01:1
Working Capital $ 38.9 $ 7.6
- --------------------------------------------------------------------------------
</TABLE>
The increased liquidity at March 31, 1998 compared to September 30, 1997 is
primarily attributable to increases in accounts receivable and inventory from
acquisitions, financed with long-term debt proceeds as discussed below.
The Company invested $2.8 million in property and equipment, not including
property and equipment acquired in business acquisitions, during the six
months ended March 31, 1998 for expansion of the Company's ferrous and
non-ferrous processing capacity and general modernization and efficiency
upgrades. Planned capital expenditures for the remainder of fiscal 1998 for
the Company's existing facilities are estimated to be $3.0 million. Included
in this amount are capital expenditures for the Company's shredders and
materials handling equipment designed to increase capacity and improve
operating efficiencies. Management anticipates the capital expenditures will
be paid with long-term debt financing.
In December 1997, the Company and all of its operating subsidiaries entered
into a $150 million Senior Credit Facility ("Credit Facility") with General
Electric Capital Corporation and BankBoston, N.A. as agents for the lenders.
The Credit Facility is comprised of a $45 million revolving credit facility,
a $40 million term loan due December 5, 2003, with interest and principal
payable quarterly, a $40 million term loan due on the earlier of December 5,
2005 or six months prior to the maturity of the Subordinated Notes discussed
below with interest and principal payable quarterly, and a $25 million
acquisition line of credit due December 5, 2003, with interest and principal
payable quarterly. The notes bear interest at either (i) the higher of (a)
prime plus .75% or (b) the Federal Funds rate plus 50 basis points per annum
plus .75%, or (ii) at the option of the Company upon certain conditions, the
LIBOR rate plus 2.25%. The proceeds from the Credit Facility are secured by
substantially all of the Company's assets and are to be used for
acquisitions, repayment of existing indebtedness and general corporate
purposes. At March 31, 1998, approximately $9.6 million was outstanding
under the $45.0 million revolving credit facility and the Company was in
compliance with all covenants under the Credit Facility.
In December 1997, the Company issued $60 million in Senior Subordinated Notes
(the "Subordinated Debt"), the proceeds of which were used for acquisitions,
repayment of existing indebtedness and general corporate purposes. The
Subordinated Debt is guaranteed by all of the Company's operating
subsidiaries. The Subordinated Debt bears interest at 13% and matures in
December 2005.
The Company issued warrants to acquire up to 1,266,000 shares of Common Stock
in connection with the issuance of the Subordinated Debt. The exercise price
of the warrants is $0.01 per share. Additionally, warrants were issued to
acquire 200,000 shares of Common Stock with an exercise price of $2.50 per
share as part of entering into the Credit Facility. For accounting purposes
the fair value of the warrants have been recorded as paid-in-capital and as a
discount to the respective debt which is amortized as interest expense over
the life of the debt.
19
<PAGE>
In connection with the Credit Facility and the issuance of the Subordinated
Debt, the Company sold 1,666,666 shares of its Common Stock for an aggregate
of $10 million to various accredited investors in a transaction exempt from
the registration requirements of the Securities Act of 1933, as amended. The
$10 million in proceeds were used for acquisitions, repayment of existing
indebtedness and general corporate purposes.
On December 5, 1997, long-term debt of $32.1 million was repaid in advance of
scheduled maturity with proceeds in part from the Credit Facility and the
issuance of the Subordinated Debt and Common Stock as discussed above. As a
result of the early extinguishment of debt, the Company recognized $3.7
million in loan fees expense which includes a prepayment penalty of $2.5
million and $1.2 million of prepaid loan fees both of which were charged to
expense as an extraordinary item, net of a tax benefit of $1.3 million.
During the six months ended March 31, 1998, the Company received $1.8 million
in proceeds from the exercise of warrants and options into the Company's
Common Stock.
In March 1998 the Company commenced an exchange offer in which it offered to
exchange 0.2517291 shares of its Common Stock for each of its 2,641,827
outstanding Series G and Series J Common Stock purchase warrants. The
holders of 2,611,827 of such warrants were entitled to purchase one share of
Common Stock for $5.52 per share for each warrant held and the holders of
30,000 of such warrants were entitled to purchase one share of Common Stock
for $4.00 per share for each warrant held. The exchange offer was designed
to reduce the overhang to the market for the Common Stock. Following the
completion of the exchange offer on April 12, 1998, there were 403,666
warrants outstanding exercisable at $5.52 per share and 30,000 warrants
outstanding exercisable at $4.00 per share. All of such warrants expire on
December 27, 1999.
Management intends to continue seeking opportunities for expansion in the
metals recycling business and believes that the Company's liquidity, capital
resources and borrowing capabilities are adequate for its current operations.
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 financing, 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 purse its
acquisition strategy may be impaired and the results of operations for future
periods may be adversely affected.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of
operational systems. Based upon a review of its technology and software, the
Company has concluded that there are no material issues regarding its Year
2000 compliance that will not be resolved through normal software upgrades
and replacements that will be made through 1999. While the Company believes
its planning efforts are adequate to address its Year 2000 concerns, there
can be no guarantee that the systems of other companies on which the
Company's systems and operations rely will be converted on a timely basis and
will not have a material adverse effect on the Company.
20
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has implemented Financial Accounting Standards ("FAS") No. 128
"Earnings per Share". FAS 128 provides for the calculation of "basic" and
"diluted" earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of the entity, similar to fully diluted earnings per
share. In loss periods, dilutive common equivalent shares are excluded, as
the effect would be anti-dilutive.
The Company is also required to implement FAS No. 130, "Reporting
Comprehensive Income" and FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in fiscal 1998. FAS No. 130 establishes
standards for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distribution to owners. Among other disclosures, FAS No. 130 requires that
all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that displays with the same prominence as other financial
statements. FAS No. 131 supercedes FAS No. 14 "Financial Reporting for
Segments of a Business Enterprise." FAS No. 131 establishes standards on the
way that public companies report financial information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued
to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. FAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources in assessing
performance. FAS Nos. 130 and 131 require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on the future financial statement disclosures.
Results of operations, financial position and cash flows, however, will be
unaffected by implementation of these standards.
In February 1998, the FASB issued FAS No., 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits" which standardizes the
disclosure requirements for pensions and other post-retirement benefits and
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis. FAS No.
132 is effective for years beginning after December 15, 1997, and requires
comparative information for earlier years to be restated, unless such
information is not readily available. Management believes the adoption of
this statement will have no material impact on the Company's financial
statements.
EVENTS SUBSEQUENT TO MARCH 31, 1998
In April 1998, the Company commenced an offer of up to $250.0 million in
unsecured senior notes (the "Senior Notes") pursuant to an exemption from the
registration requirements of the Securities Act of 1935, as amended (the
"Offering"). Proceeds from the Offering, if completed, will be used to
refinance the indebtedness incurred under the Credit Facility and the
Subordinated Debt, fund in part pending acquisitions and the remainder used
for transaction costs related to the Offering and prepayment premiums with
respect to the Subordinated Debt and general corporate purposes. The terms of
the Senior Notes, including certain material provisions, have not been
determined.
21
<PAGE>
On April 15, 1998, the Company acquired for approximately $8.0 million the
remaining 50% interest of United Metal - D. H. Griffin Recyclers L.L.C. ("D.
H. Griffin") located in Smithfield, North Carolina. The purchase price was
financed with proceeds from the Company's acquisition line of credit. The
initial 50% interest was acquired in December 1997 as part of the Company's
acquisition of United Metal Recyclers. The Company will continue the metals
recycling operations of D. H. Griffin.
In April 1998, the Company's Chairman and Chief Executive Officer was issued
2,110,000 shares of common stock pursuant to exercising certain options at an
average exercise price of $1.48 per share netting proceeds to the Company of
$3,123,500.
In April 1998, the Company was notified that the Internal Revenue Service had
selected the Company's federal income tax return for the year ended September
30, 1996 for examination. The examination is scheduled to commence in June
1998.
Subject to completion of definitive documentation, the Company intends to
purchase seven companies engaged in metals recycling for an aggregate
purchase price of approximately $91.1 million. The Company will finance the
acquisitions in part with proceeds from the Credit Facility and issuance of the
Company's Preferred and Common Stock.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS.
None
ITEM 2 - CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended March 31, 1998, the Company issued 101,007
shares of its common stock as a result of the exercise of outstanding common
stock purchase warrants, the sale of which has been previously reported by the
Company. Aggregate proceeds received by the Company were $104,023. The
Warrants were originally sold pursuant to the exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act")
provided by Section 4(2) of the Securities Act and Regulation D Promulgated
thereunder. Based upon representations made to the Company and further
investigation by the Company, the Company believes that each purchaser of the
warrants was an accredited investor as that term is defined under Rule 501(a)
of Regulation D.
23
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
3(i).1 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series E
Redeemable Convertible Preferred Stock of Recycling Industries,
Inc. Incorporated by reference to Exhibit 3(i).1 to the
Company's current report on Form 8-K as filed with the
Commission on December 22, 1997 and amended on February 11,
1998 on Form 8-K/A, Commission File No. 0-20179.
3(i).2 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series F
61/2% Redeemable Convertible Preferred Stock of Recycling
Industries, Inc. Incorporated by reference to Exhibit 3(i).2
to the Company's current report on Form 8-K as filed with the
Commission on December 22, 1997 and amended on February 11,
1998 on Form 8-K/A, Commission File No. 0-20179.
3(i).3 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series G
61/2% Redeemable Convertible Preferred Stock of Recycling
Industries, Inc. Incorporated by reference to Exhibit 3(i).3
to the Company's current report on Form 8-K as filed with the
Commission on December 22, 1997 and amended on February 11,
1998 on Form 8-K/A, Commission File No. 0-20179.
3(i).4 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series H 6%
Secured Redeemable Convertible Preferred Stock of Recycling
Industries, Inc. Incorporated by reference to Exhibit 3(i).4
to the Company's current report on Form 8-K as filed with the
Commission on December 22, 1997 and amended on February 11,
1998 on Form 8-K/A, Commission File No. 0-20179.
3(i).5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Recycling Industries, Inc. - Designation of
Preferences, Limitations and Relative Rights of the Series I 8%
Redeemable Convertible Preferred Stock of Recycling Industries,
Inc. Incorporated by reference to Exhibit 3(i).5 to the
Company's current report on Form 8-K as filed with the
Commission on December 22, 1997 and amended on February 11,
1998 on Form 8-K/A, Commission File No. 0-20179.
3.1 Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, filed May 3, 1996, as amended,
Commission File No. 333-457
3.2 Amended Bylaws of Recycling Industries, Inc., incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, Commission File
No. 0-20179.
27 Financial Data Schedule*
</TABLE>
* Filed Herewith
24
<PAGE>
REPORTS ON FORM 8-K
1. Current report of Form 8-K/A dated February 11, 1998, reporting the
acquisitions of substantially all of the assets of Brenner, United,
Jacobson, Central and Grossman on December 5, 1997 and Lans on December
8, 1997. The 8-K/A includes the audited financial statements of
Brenner, United and Jacobson for the years ended December 31, 1994, 1995
and 1996, the audited financial statements of Central for the years
ended December 31, 1995, 1996 and the eleven months ended November 30,
1997, and the audited financial statements of Lans for the years ended
June 30, 1995, 1996 and 1997.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Recycling Industries, Inc.
Date: May 15, 1998 By /s/ Thomas J. Wiens
---------------------------------------------
Thomas J. Wiens, Chairman & Chief
Executive Officer
Date: May 15, 1998 By: /s/ Brian L. Klemsz
---------------------------------------------
Brian L. Klemsz, Principal Financial Officer
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,008
<SECURITIES> 0
<RECEIVABLES> 33,900
<ALLOWANCES> (809)
<INVENTORY> 17,451
<CURRENT-ASSETS> 56,461
<PP&E> 157,343
<DEPRECIATION> (7,223)
<TOTAL-ASSETS> 238,912
<CURRENT-LIABILITIES> 17,516
<BONDS> 0
0
19,660
<COMMON> 18
<OTHER-SE> 45,775
<TOTAL-LIABILITY-AND-EQUITY> 238,912
<SALES> 101,117
<TOTAL-REVENUES> 101,117
<CGS> 85,753
<TOTAL-COSTS> 85,753
<OTHER-EXPENSES> 6,893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,033
<INCOME-PRETAX> 1,287
<INCOME-TAX> 493
<INCOME-CONTINUING> 794
<DISCONTINUED> 0
<EXTRAORDINARY> (2,414)
<CHANGES> 0
<NET-INCOME> (1,620)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.08)
</TABLE>
