<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or
15(d) of The Securities Act of 1934
Date of Report (Date of earliest event reported):
August 4, 1998 (May 21, 1998)
RECYCLING INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 0-20179 84-1103445
- --------------------------------------------------------------------------------
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification
of incorporation) Number)
9780 South Meridian Blvd., Suite 180
Englewood, Colorado 80112
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 790-7372
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On May 21, May 22, May 28 and May 29, the Registrant completed the
following significant acquisitions and other insignificant acquisitions
included in ITEM 5. The purchase price for each acquisition is subject to
post-closing adjustments pursuant to the Asset Purchase Agreements.
<PAGE>
ACQUISITION OF THE ASSETS OF REPUBLIC ALLOYS, INC.
On May 22, 1998, Recycling Industries of Charlotte, Inc., a wholly-owned
subsidiary of the Registrant, acquired substantially all of the scrap metals
recycling assets and business of Republic Alloys, Inc. ("Republic"), a privately
held metals recycler and crane operator with operations in the Charlotte, North
Carolina area.
The assets acquired from Republic consist of heavy equipment, tools and
rolling stock used in the business of recycling ferrous and non-ferrous metals.
The Registrant also purchased approximately 13.5 acres of real property,
buildings and improvements used in the metals recycling business.
The total purchase price for Republic was $12,868,600, comprised of
$10,160,000 in cash, 5,080 shares of the Registrant's Series K Redeemable
Convertible Preferred Stock having a stated value of $2,540,000, or $500 per
share and 30,000 shares of the Registrant's Common Stock, $.001 par value per
share, having a stated value of $168,600, or $5.62 per share.
The cash portion of the purchase price was financed, in part, from the
Registrant's credit facility and proceeds from the New Subordinated Notes
described in Item 5, below. The purchase price was determined through arm's
length negotiations.
The Registrant will continue the metals recycling operations of Republic.
The crane business was not acquired by the Registrant.
ACQUISITION OF PEANUT CITY IRON & METAL CO., INC.
On May 28, 1998, Recycling Industries of Suffolk, Inc., a wholly-owned
subsidiary of the Registrant, acquired substantially all of the scrap metals
recycling assets and business of Peanut City Iron & Metal Co., Inc. ("Peanut
City"), a privately held metals recycler with operations in the Suffolk,
Virginia area.
The assets acquired from Peanut City consist of heavy equipment, tools and
rolling stock used in the business of recycling ferrous and non-ferrous metals.
The Registrant also purchased from Peanut City approximately 3 acres of real
property, buildings and improvements used in the metals recycling business.
<PAGE>
The total purchase price for Peanut City was $3,400,000, comprised of
$2,897,500 in cash and 1,005 shares of the Registrant's Series J Redeemable
Convertible Preferred Stock having a stated value of $502,500, or $500 per
share.
The cash portion of the purchase price was financed, in part, from the
Registrant's credit facility and proceeds from the New Subordinated Notes
described in Item 5, below. The purchase price was determined through arm's
length negotiations.
The Registrant will continue the metals recycling operations of Peanut
City.
ACQUISITION OF FEREX CORPORATION
On May 28, 1998, Recycling Industries, Inc. acquired all of the capital
stock of Ferex Corporation ("FEREX"), headquartered in Tyler, Texas.
Ferex is a metals recycler and auto crusher with operations in Arkansas,
Oklahoma and Texas. Ferex operates 16 facilities, a scrap brokering business,
six mobile auto crushing units that operate in a six state geographic region,
one non-ferrous shredder and one non-ferrous wire chopper operation.
The total aggregate purchase price for Ferex was $46,347,000, comprised
of $28,936,000 in cash, 556,944 shares of the Registrant's Common Stock,
$.001 par value per share having a value of $6.125 per share or $3,411,000 on
May 28, 1998 and $14,000,000 of assumed liabilities. The purchase price is
subject to post-closing adjustments pursuant to the Agreement and Plan of
Share Exchange.
The cash portion of the purchase price was financed, in part, from
the proceeds of the Registrant's credit facility and proceeds from the New
Subordinated Notes described in ITEM 5, below. The purchase price was
determined through arm's length negotiations.
The Registrant will continue the operations of Ferex.
<PAGE>
ITEM 5. OTHER EVENTS.
ACQUISITION OF THE ASSETS OF C&J CRUSHING, INC.
On May 21, 1998, Recycling Industries, of Greensboro Inc., a wholly-owned
subsidiary of the Registrant, acquired substantially all of the scrap metals
recycling assets and business of C&J Crushing, Inc. ("C&J Crushing"), a
privately held North Carolina corporation with operations in the Landis, North
Carolina area.
The assets owned by C&J Crushing consist primarily of heavy equipment,
tools and rolling stock used in the business of recycling ferrous and
non-ferrous metals. The Registrant also purchased from C&J Crushing
approximately 3.5 acres of real property, buildings and improvements used in
the metals recycling business.
The total purchase price for C&J Crushing was $1,450,000, comprised
of $1,160,000 of cash and 580 shares of the Registrant's Series L Redeemable
Convertible Preferred Stock valued at $290,000, or $500 per share. The
purchase price was financed, in part, from the Registrant's credit facility
and proceeds from the New Subordinated Notes. The purchase price was
determined through arm's length negotiations.
The Registrant will continue the metals recycling operations of C&J
Crushing.
ACQUISITION OF THE ASSETS OF PRO RECYCLING, LLC
On May 22, 1998, Recycling Industries of Wisconsin, Inc., a wholly-owned
subsidiary of the Registrant, acquired substantially all of the scrap metals
recycling assets and business of Pro Recycling, L.L.C. ("Pro Recycling"), a
privately-held Wisconsin limited liability company with operations in the
Milwaukee, Wisconsin area.
The assets of Pro Recycling consist primarily of heavy equipment, tools
and rolling stock used in the business of recycling ferrous and non-ferrous
metals. Also as part of the transaction the Registrant also purchased from
Lewinsky Iron and Metal and AA Investment three separate parcels of real
property, buildings and improvements used in the metals recycling business.
The total purchase price for Pro Recycling was $3,000,000, comprised
of $2,485,000 of cash and 1,030 shares of the Registrant's Series M
Redeemable Convertible Preferred Stock valued at $515,000, or $500 per share.
The cash portion of the purchase price was financed, in part, from the
Registrant's credit facility and proceeds from the New Subordinated Notes.
The purchase price was determined through arm's length negotiations.
The Registrant will continue the metals recycling operations of Pro
Recycling.
ACQUISITION OF MCKINNEY SMELTING, INC.
On May 29, 1998, Ferex Metals Recycling of McKinney, Inc., a wholly
owned subsidiary of Recycling Industries, Inc., completed the acquisition of
substantially all of the assets of McKinney Smelting, Inc., with operations
in the McKinney, Texas area.
The assets acquired from McKinney consist of heavy equipment, tools and
rolling stock used in the business of recycling ferrous and non-ferrous metals.
The total purchase price for McKinney was $2,940,000 and was funded,
in part, from the proceeds of the Registrant's credit facility and the New
Subordinated Notes. The purchase price was determined through arm's length
negotiations.
The Registrant will continue the operations of McKinney.
NEW SUBORDINATED NOTES
On May 29, 1998, the Registrant issued an additional $50 million of 13%
Subordinated Notes, due in 2005, placed to a group of investors that includes
Sun America Life Insurance Company (the "New Subordinated Notes"). The terms of
the New Subordinated Notes are substantially similar to the $60 million of
Subordinated Notes issued by the Registrant on December 4, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) PRO FORMA FINANCIAL INFORMATION.
1. Unaudited pro forma consolidated financial statements for Recycling
Industries, Inc. and Subsidiaries and introduction and notes.
(b) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
1. Required financial statements of significant business acquired:
- Republic Alloys, Inc.
- Peanut City Iron & Metal Co.
- Ferex Corporation
C & J Crushing, Inc., Pro Recycling L.L.C., and McKinney Smelting, Inc.
do not require audited financial statements as these businesses acquired are
not significant to the Registrant.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECYCLING INDUSTRIES, INC.
Date: August 4, 1998
By /s/ Thomas J. Wiens
------------------------
Thomas J. Wiens, Chairman and CEO
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
SIX MONTHS ENDED MARCH 31, 1998
(THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
RECYCLING
INDUSTRIES, INC. CONSOLIDATED
& SUBSIDIARIES ACQUISITIONS PRO FORMA PRO FORMA
MARCH 31, 1998 (Note 2) ADJUSTMENTS MARCH 31, 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 101,117 $ 35,118 $ 37,224 (8) $ 173,459
Cost of sales and operating expenses 82,704 28,835 26,005 (8) 137,213
(331) (16)
Depreciation 3,049 158 485 (8) 5,123
1,431 (4)
---------------------------------------------------- ------------------
Gross profit 15,364 6,125 9,634 31,123
---------------------------------------------------- ------------------
Depreciation and amortization 506 52 570 (4) 1,131
3 (8)
Selling, general and administrative expenses 6,387 4,453 2,467 (8) 12,819
(488) (10)
---------------------------------------------------- ------------------
Operating income 8,471 1,620 7,082 17,173
---------------------------------------------------- ------------------
Other income (expense):
Interest expense (7,033) (317) (5,514) (5) (12,989)
(125) (8)
Miscellaneous (151) 237 619 (8) 412
(293) (15)
---------------------------------------------------- ------------------
Total other income (expense) (7,184) (80) (5,313) (12,577)
---------------------------------------------------- ------------------
Earnings before income taxes 1,287 1,540 1,769 4,596
and extraordinary loss
Income tax provision (493) (47) (1,443) (6) (1,983)
---------------------------------------------------- ------------------
Earnings (loss) before extraordinary loss on
extinguishment of debt 794 1,493 326 2,613
Preferred stock dividends 359 - 197 (14) 556
---------------------------------------------------- ------------------
Net earnings available to common
shareholders $ 435 $ 1,493 $ 129 $ 2,057
---------------------------------------------------- ------------------
---------------------------------------------------- ------------------
Earnings per common share (Note 12):
Basic earnings per common share
before extraordinary item $ 0.03 $ 0.11
-------------- ------------------
-------------- ------------------
Weighted average shares outstanding 16,732,000 1,475,000 (12) 18,207,000
-------------- ------------------ ------------------
-------------- ------------------ ------------------
Diluted earnings per common share
before extraordinary item $ 0.02 $ 0.07
-------------- ------------------
-------------- ------------------
Weighted average shares outstanding 24,676,000 3,165,000 (12) 27,841,000
-------------- ------------------ ------------------
-------------- ------------------ ------------------
</TABLE>
See accompanying introduction and notes to unaudited pro forma
consolidated financial statements.
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
RECYCLING
INDUSTRIES, INC. CONSOLIDATED
& SUBSIDIARIES PRIOR ACQUISITIONS PRO FORMA PRO FORMA
SEPTEMBER 30, 1997 ACQUISITIONS (Note 2) ADJUSTMENTS SEPTEMBER 30, 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 62,424 $ 182,712 $ 75,753 $ 23,516 (9) $ 344,405
Cost of sales and operating expenses 53,408 144,416 60,804 21,231 (9) 279,528
(331)(16)
Depreciation 1,771 3,503 1,848 2,278 (4) 9,942
542 (9)
------------------------------------------------------------------ ---------------
Gross profit 7,245 34,793 13,101 (204) 54,935
------------------------------------------------------------------ ---------------
Depreciation and ammortization 821 40 7 1,538 (4) 2,406
Selling, general and administrative expenses 3,400 12,089 6,812 886 (9) 18,143
(5,044)(10)
------------------------------------------------------------------ ---------------
Operating income 3,024 22,664 6,282 2,416 34,386
------------------------------------------------------------------ ---------------
Other income (expense):
Interest expense (2,616) (1,502) (800) (20,638) (5) (25,978)
(422) (9)
Miscellaneous 73 2,648 354 496 (9) 1,205
(2,366)(15)
------------------------------------------------------------------ ---------------
Total other income (expense) (2,543) 1,146 (446) (22,930) (24,773)
------------------------------------------------------------------ ---------------
Earnings (loss) before income taxes 481 23,810 5,836 (20,514) 9,613
and extraordinary loss
Income tax benefit (provision) 595 - (648) (3,338) (6) (3,391)
------------------------------------------------------------------ ---------------
Earnings (loss) before extraordinary loss
on extinguishment of debt 1,076 23,810 5,188 (23,852) 6,222
Preferred stock dividends 364 - - 1,095 (14) 1,459
------------------------------------------------------------------ ---------------
Net earnings available to common
shareholders $712 $ 23,810 $ 5,188 $ (24,947) $ 4,763
------------------------------------------------------------------ ---------------
------------------------------------------------------------------ ---------------
Earnings per common share (Note 12):
Basic earnings per common share
before extraordinary item $ 0.05 $ 0.28
-------------- ---------------
-------------- ---------------
Weighted average shares outstanding 13,894,000 3,151,000 (12) 17,045,000
-------------- --------------- ---------------
-------------- --------------- ---------------
Diluted earnings per common share
before extraordinary item $ 0.05 $ 0.20
-------------- ---------------
-------------- ---------------
Weighted average shares outstanding 15,058,000 12,773,000 (12) 27,831,000
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
See accompanying introduction and notes to unaudited pro forma
consolidated financial statements.
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RECYCLING
INDUSTRIES, INC. CONSOLIDATED
& SUBSIDIARIES ACQUISITIONS PRO FORMA PRO FORMA
MARCH 31, 1998 (Note 2) ADJUSTMENTS MARCH 31, 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 2,008 $ 5,578 $ 497 (2) $ 2,505
(5,578) (3)
Accounts receivable, net 33,091 7,103 3,536 (2) 36,627
(7,103) (3)
Inventories 17,451 1,631 1,496 (2) 18,947
(1,631) (3)
Deferred income taxes 1,100 (327) 327 (3) 1,100
Prepaid expenses and deposits 2,811 163 200 (2) 3,011
(163) (3)
--------------------------------------------------------- --------------------
Total Current Assets 56,461 14,148 (8,419) 62,190
--------------------------------------------------------- --------------------
PROPERTY, PLANT AND EQUIPMENT, NET 150,120 10,170 22,878 (2) 172,998
(10,170) (3)
--------------------------------------------------------- --------------------
150,120 10,170 12,708 172,998
--------------------------------------------------------- --------------------
OTHER ASSETS:
Notes receivable - 854 792 (2) 792
(854) (3)
Note receivable, related party 2,490 - - 2,490
Deferred income taxes 1,098 272 (272) (3) 1,098
Other asssets, net of amortization 28,743 771 44,921 (2) 75,782
(771) (3)
2,118 (7)
--------------------------------------------------------- --------------------
Total Other Assets 32,331 1,897 45,934 80,162
--------------------------------------------------------- --------------------
TOTAL ASSETS $238,912 $ 26,215 $ 50,223 $ 315,350
--------------------------------------------------------- --------------------
--------------------------------------------------------- --------------------
</TABLE>
See accompanying introduction and notes to unaudited pro forma
consolidated financial statements.
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RECYCLING
INDUSTRIES, INC. CONSOLIDATED
SUBSIDIARIES ACQUISITIONS PRO FORMA PRO FORMA
MARCH 31, 1998 (Note 2) ADJUSTMENTS MARCH 31, 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,280 $ 1,475 $ (1,475) (3) $ 3,280
Accounts payable 8,296 2,200 630 (2) 8,926
(2,200) (3)
Other current liabilities 5,940 328 325 (2) 6,265
(328) (3)
Intercompany payable - - (5,436) (2) -
5,436 (7)
-------------------------------------------- ----------------------
Total Current Liabilities 17,516 4,003 (3,048) 18,471
-------------------------------------------- ----------------------
LONG-TERM DEBT:
Long-term debt, less current maturities 139,831 8,086 66,302 (2)(13) 202,815
(8,086) (3)
(3,318) (7)
Deferred income taxes - - 3,000 (2) 3,000
Other long-term liabilities 14,612 - 1,025 (2) 15,637
-------------------------------------------- ----------------------
Total Long-term Debt 154,443 8,086 58,923 221,452
-------------------------------------------- ----------------------
Total Liabilities 171,959 12,089 55,875 239,923
-------------------------------------------- ----------------------
COMMITMENTS & CONTINGENCIES:
Redeemable common stock 1,500 - - 1,500
-------------------------------------------- ----------------------
STOCKHOLDERS' EQUITY:
Preferred Stock 19,660 - 3,848 (2)(11) 23,508
Common Stock 18 193 (193) (3) 18
Additional paid-in capital 58,439 1,355 4,626 (2)(11) 63,065
(1,355) (3)
Retained earnings (deficit) (12,664) 12,398 (12,398) (3) (12,664)
Partners' equity - 180 (180) (3) -
-------------------------------------------- ----------------------
Total Stockholders' Equity 65,453 14,126 (5,652) 73,927
-------------------------------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $238,912 $ 26,215 $ 50,223 $ 315,350
-------------------------------------------- ----------------------
-------------------------------------------- ----------------------
</TABLE>
See accompanying introduction and notes to unaudited pro forma
consolidated financial statements.
<PAGE>
RECYCLING INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
Acquisitions:
REPUBLIC ALLOYS, INC. ("Republic"), PEANUT CITY IRON & METAL CO. ("Peanut
City"), FEREX CORPORATION ("Ferex"), C&J CRUSHING, INC. ("C&J Crushing"), PRO
RECYCLING, L.L.C. ("Pro Recycling"), and MCKINNEY SMELTING, INC.
("McKinney").
Prior Acquisitions:
Also included in the pro forma are the historical financial statements of
Brenner Companies, Inc. ("Brenner"), Grossman Brothers Company, Inc. and
Milwaukee Metal Briquetting Co., Inc. (collectively "Grossman"), Wm. Lans
Sons' Co., Inc. ("Lans"), Central Metals Company ("Central"), Money Point
Land Holding Corporation and Money Point Diamond Corporation (collectively
"Jacobson"), and United Metal Recyclers, Inc. ("United") which were acquired
on December 5 and December 8, 1997. The operating results for United
Metal - D.H. Griffin Recyclers L.L.C. ("Griffin") for the three months ended
December 31, 1997 have been included in the Company's pro forma statement of
operations because the Company acquired United's 50% interest in Griffin with
the acquisition of United. The remaining 50% interest in Griffin was acquired
by the Company on April 15, 1998.
NOTE 1 - INTRODUCTION
The unaudited pro forma condensed consolidated balance sheet and statement of
operations present the financial position of the Company as of March 31, 1998
as if the Acquisitions for the entities listed above had occurred on March
31, 1998 and the results of operations for the six months ended March 31,
1998 and the twelve months ended September 30, 1997, occurred at the
beginning of the periods presented.
The unaudited pro forma consolidated statement of operations for the six
months ended March 31, 1998 reflects the operations of Republic, Peanut City,
Ferex, C&J Crushing, Pro Recycling, and McKinney.
The unaudited pro forma consolidated statement of operations for the year
ended September 30, 1997 was prepared by combining the following:
Prior Acquisitions - The audited consolidated statement of operations for the
Company includes from the date of acquisition, the results of operations for
the acquisitions completed during the year ended September 30, 1997. The pro
forma statement of operations reflects the unaudited statement of operations
for the periods prior to the date of acquisitions of Addlestone Recycling
Corporation ("ARC") and Addlestone International Corporation ("AIC") for the
six and nine months ended March 31, 1997 and June 30, 1997, respectively, the
unaudited statement of operations for each of Brenner, Grossman, Central,
Jacobson, United and Griffin for the twelve months ended December 31, 1997
and the audited statement of operations of Lans for the year ended June 30,
1997.
Acquisitions - The pro forma consolidated statement of operations includes
the historical operations for Republic, Peanut City, Ferex, C&J Crushing and
Pro Recycling for the year ended December 31, 1997 and McKinney for the nine
months ended September 30, 1997.
<PAGE>
The adjustments relating to the pro forma consolidated statements of
operations are computed assuming the acquisitions of ARC, AIC, Brenner,
Grossman, Lans, Central, Jacobson, United, Griffin, C&J, Pro Recycling,
Republic, Peanut City, Ferex, and McKinney were consummated at the beginning
of the periods presented. The adjustments relating to the pro forma
consolidated balance sheet are computed assuming the acquisitions were
consummated at March 31, 1998 for the March 31, 1998 balance sheet except for
ARC, AIC, Brenner, Grossman, Lans, Central, Jacobson, United, and Griffin,
which are included in the Company's balance sheet at March 31, 1998.
NOTE 2 - ACQUISITON OF SUSIDIARIES
Represents the acquisition of Republic, Peanut City, Ferex, C&J Crushing, Pro
Recycling, and McKinney to include the results of operations as if these
acquisitions occurred at the beginning of the periods presented. The Company
acquired the assets and assumed certain liabilities for C&J Crushing, Pro
Recycling, Republic, Peanut City, McKinney and purchased all of the issued
and outstanding capital stock of Ferex. The preliminary purchase allocation
to record the acquisitions, at March 31, 1998 for the March 31, 1998 pro
forma balance sheet, are presented in Exhibit I using the purchase method of
accounting. Certain working capital accounts are subject to post-closing
adjustments pursuant to the Asset Purchase Agreement and certain property and
equipment amounts are pending final appraisal information. The net change to
working capital or property and equipment are not anticipated to have a
material effect on the Company's pro forma consolidated balance sheets or
results of operatons. The preliminary purchase price allocation includes
certain estimates including; allowance for uncollectible accounts receivable,
inventory shrinkage reserves and costs to register stock issued in connection
with the acquisitions. Additionally, the Company has included $1.0 million in
other long-term liabilities for amounts estimated for environmental
remediation costs of certain properties acquired in the acquisitions.
Reflects the debt and equity issued in connection with the businesses
acquisitions as discussed in note 13 and 11.
NOTE 3 - UNACQUIRED ASSETS, LIABLITIES AND OPERATIONS
Removes assets and liabilities of acquired companies. See Note 2 and Exhibit
I for preliminary allocation of the acquisitions purchase price for the
assets acquired and liabilities assumed.
NOTE 4 - ADDITIONAL DEPRECIATION AND AMORTIZATION
Reflects additional depreciation from the incremental increase of assets
acquired at fair market value as compared to their historical costs using the
straight-line method with lives ranging from three to twenty-five years. The
incremental adjustment totaled $1,431 and $2,278 for the six months ended
March 31, 1998 and twelve months ended September 30, 1997, respectively.
Amortization of goodwill has been recorded in the pro forma statement of
operations based on the allocation of the purchase price. Goodwill has been
amortized using the straight-line method over 40 years. The incremental
adjustment totaled $570 and $1,538 for the six months ended March 31, 1998 and
twelve months ended September 30, 1997, respectively.
NOTE 5 - INTEREST EXPENSE
Reflects additional interest expense in the pro forma statements of
operations as a result of the financing discussed in Note 13 below and the
$150 million senior credit facility at 9.5%, and issuing $60 million in
senior subordinated notes at 13.0% to finance in part the acquisitions of
Brenner, Grossman, Lans, Central, Jacobson, United, and Griffin.
<PAGE>
NOTE 6 - PROVISION FOR INCOME TAXES
Income taxes have been provided on the pro forma operations of the completed
acquisitions. The effective tax rate is 43% for the six months ended March
31, 1998 primarily as a result of non-deductible goodwill amortization and
36% for the twelve months ended September 30, 1997 primarily as a result of
the reduction of the deferred tax asset valuation allowance by the company
net of non-deductible goodwill amortization. No provision or liability for
income taxes is reflected in the historical financial information as the
entities that were previously S-corporations or partnerships and the taxes
were the obligation of the shareholders or partners with the exception of
Ferex and McKinney which are C-corporations.
NOTE 7 - ELIMINATIONS
Records inter-company transactions and balances resulting from the financing
of the acquisitions.
NOTE 8 - ADDITIONAL TRANSACTIONS - Unaudited pro forma consolidated
statements of earnings for the six months ended March 31, 1998:
Reflects the operations of Brenner, Grossman, Lans, Central, Jacobson,
United, and Griffin from October 1, 1997 to the date of acquisition.
Subsequent to their acquisition, the operations of Brenner, Grossman, Lans,
Central, Jacobson, United, and Griffin are included in the historical
operations of the Company. The assets and liabilities of Brenner, Grossman,
Lans, Central, Jacobson, United, and Griffin are included in the Company's
consolidated balance sheet at March 31, 1998.
NOTE 9 - ADDITIONAL TRANSACTIONS - Unaudited pro forma consolidated
statements of earnings for the twelve months ended September 30, 1997:
Includes the operations of ARC and AIC prior to their acquisition.
Subsequent to their acquisition, the operations of ARC and AIC are included
in the historical operations of the Company. The pro forma adjustments
include the results of operations of ARC and AIC from October 1, 1996 through
the acquisition date. The assets and liabilities of ARC and AIC are included
in the Company's consolidated balance sheet at March 31, 1998.
NOTE 10 - NON-RECURRING EXPENSES
Removes non-recurring expenses paid to former officers and stockholders of
the acquired business for salaries and benefits that will not be incurred in
the future under terms of the acquisition agreements. Also, reflects the
elimination of management fees paid to affiliates of the entities acquired,
an adjustment to remove commissions paid to an affiliated Foreign Sales
Corporation, and an adjustment to remove the incremental legal and
professional fees incurred by the entities acquired directly related to the
acquisitions.
NOTE 11 - ISSUANCE OF COMMON AND PREFERRED STOCK
Records the issuance of Common Stock to acquire Ferex and Preferred Stock to
acquire C&J Crushing, Peanut City, Pro Recycling, and Republic
NOTE 12 - EARNINGS PER SHARE
<PAGE>
Reflects the issuance of common stock and the common stock equivalents of
preferred shares issued pursuant to the acquisition of the entities. See
Exhibit II.
NOTE 13 - LONG-TERM DEBT
Records the effect of the issuance of an additional $50 million of 13%
Subordinated Notes to finance the acquisition of Ferex and McKinney and the
$16.3 million, at 9.5%, increase in the Company's credit facility to finance
the acquisition of C&J Crushing, Peanut City, Pro Recycling, and Republic.
NOTE 14 - PREFERRED STOCK DIVIDENDS
Reflects the preferred stock dividends on the Preferred Stock issued to
acquire ARC, Brenner, Lans, Jacobson and United. There are no dividend
provisions for C&J Crushing, Peanut City, Pro Recycling and Republic.
NOTE 15 - JOINT-VENTURE EARNINGS
Pro forma adjustments to remove Brenner's joint-venture earnings in United
for the eleven months ended November 30, 1997.
NOTE 16 - INVENTORY
Reflects a change in accounting principal in the valuation of inventory from
LIFO to FIFO, as if the entity acquired had utilized FIFO for the period
presented.
NOTE 17 - GENERAL AND ADMINISTRATIVE
The Company does not anticipate selling, general and administrative expenses
to increase significantly as a percent of sales as a result of the completed
acquisitions. Increases in general and administrative expenses at the
corporate office are anticipated to be offset by reductions in general and
administrative costs at the subsidiaries as certain administrative offices
are combined into regional locations. As a result of combining the offices,
certain functions which are currently duplicated by having multiple offices
will be combined at one location. The operating efficiencies which may be
achieved by the Company have not been reflected in the pro forma as these
costs are not quantifiable at this time.
<PAGE>
Recycling Industries, Inc. and Subsidiaries
Preliminary Purchase Allocation
Exhibit I
<TABLE>
<CAPTION>
Description C&J Crushing Ferex Corporation Peanut City Pro Recycling
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADJUSTED PURCHASE PRICE ALLOCATION:
Cash $ - $ 497,079 $ - $ -
Accounts receivable 83,060 1,797,726 481,624 246,393
Inventories - 869,554 92,755 297,061
Prepaid expenses - 135,749 - -
Prepaid income taxes - 64,000 - -
Property and equipment 1,432,928 12,243,321 3,218,127 56,629
Note receivable - 791,700 - -
Goodwill - 33,280,700 - 2,648,239
Accounts payable - (629,762) - -
Accrued liabilities (30,490) (57,951) (36,240) (46,717)
Deferred income taxes - (3,000,000) - -
Environmental reserve (50,000) (200,000) (300,000) (100,000)
----------------------------------------------------------------------------
Total adjusted purchase price allocation 1,435,498 45,792,116 3,456,266 3,101,605
----------------------------------------------------------------------------
FINANCING:
Notes payable (1,145,498) (50,000,000) (2,766,430) (2,485,529)
Contributed capital - (1,228,603) (187,336) (101,076)
Contributed capital - preferred stock (290,000) - (502,500) (515,000)
----------------------------------------------------------------------------
Total financing (1,435,498) (51,228,603) (3,456,266) (3,101,605)
----------------------------------------------------------------------------
OTHER ALLOCATIONS:
Inter-company receivable - Financing - 5,436,487 - -
----------------------------------------------------------------------------
- 5,436,487 - -
----------------------------------------------------------------------------
Net - - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
<TABLE>
Consolidated
Republic Alloys McKinney Total
---------------------------------------------------------------
---------------------------------------------------------------
<S> <C> <C> <C>
ADJUSTED PURCHASE PRICE ALLOCATION:
Cash $ - $ - $ 497,079
Accounts receivable 926,650 - 3,535,453
Inventories 165,411 71,376 1,496,157
Prepaid expenses - - 135,749
Prepaid income taxes - - 64,000
Property and equipment 2,957,712 2,968,624 22,877,341
Note receivable - - 791,700
Goodwill 8,992,269 - 44,921,208
Accounts payable - - (629,762)
Accrued liabilities (153,921) - (325,319)
Deferred income taxes - - (3,000,000)
Environmental reserve (275,000) (100,000) (1,025,000)
---------------------------------------------------------------
Total adjusted purchase price allocation 12,613,121 2,940,000 69,338,606
---------------------------------------------------------------
FINANCING:
Notes payable (9,905,121) - (66,302,578)
Contributed capital (168,000) (2,940,000) (4,625,015)
Contributed capital - preferred stock (2,540,000) - (3,847,500)
---------------------------------------------------------------
Total financing (12,613,121) (2,940,000) (74,775,093)
---------------------------------------------------------------
OTHER ALLOCATIONS:
Inter-company receivable - Financing - - 5,436,487
---------------------------------------------------------------
- - 5,436,487
---------------------------------------------------------------
Net - - -
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit II
(thousands of dollars, except per share amounts)
Pro forma earnings per share and weighted average number of common shares
outstanding have been computed as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1998 September 30, 1997
---------------------- ------------------------
<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
NUMERATOR
Acquisitions
Earnings before extraordinary (loss) on early
extinguishment of debt, historical $ 794 $ 1,076
Pro forma earnings before extraordinary (loss) on
early extinguishment of debt, Acquisitions 1,493 28,998
Pro forma adjustments related to Acquisitions 326 (23,852)
---------------------- ------------------------
Earnings before extraordinary (loss) on early
extinguishment of debt reflecting Acquisitions 2,613 6,222
Preferred stock dividends (556) (1,459)
---------------------- ------------------------
Net earnings available to common shareholders
reflecting Acquisitions $ 2,057 $ 4,763
---------------------- ------------------------
---------------------- ------------------------
DILUTED EARNINGS PER COMMON SHARE:
NUMERATOR
Acquisitions
Net earnings available to common shareholders
reflecting Acquisitions $ 2,057 $ 4,763
Preferred stock dividends, add back - 795
Interest expense on convertible debt, add back - 146
---------------------- ------------------------
Net earnings available to common shareholders
reflecting Acquisitions $ 2,057 $ 5,704
---------------------- ------------------------
---------------------- ------------------------
BASIC EARNINGS PER COMMON SHARE:
DENOMINATOR
Weighted average common shares outstanding,
historical 16,732,000 13,894,000
Incremental adjustment for common shares
issued in connection with:
Acquisitions 1,475,000 3,151,000
---------------------- ------------------------
Weighted average common shares outstanding,
pro forma Acquisitions 18,207,000 17,045,000
---------------------- ------------------------
---------------------- ------------------------
PER SHARE AMOUNTS
Basic earnings before extraordinary (loss) on
early extinguishment of debt, historical $ 0.03 $ 0.05
---------------------- ------------------------
---------------------- ------------------------
Basic earnings before extraordinary (loss) on
early extinguishment of debt, Acquisitions $ 0.11 $ 0.28
---------------------- ------------------------
---------------------- ------------------------
</TABLE>
Pro forma earnings per share and weighted average number of common shares
outstanding (continued)
<PAGE>
Pro forma earnings per share and weighted average number of common shares
outstanding (Continued)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1998 September 30, 1997
--------------------- ------------------------
<S> <C> <C>
DILUTED EARNINGS PER COMMON SHARE:
DENOMINATOR
Weighted average diluted common shares
outstanding, historical 24,676,000 15,058,000
Incremental adjustment for:
Acquisitions 1,475,000 3,151,000
Convertible notes -- 1,154,000
Warrant conversions 443,000 1,260,000
Contingent stock issuances 287,000 884,000
Preferred conversions 960,000 6,324,000
--------------------- ------------------------
Recent Acquisitions subtotal 3,165,000 12,773,000
Weighted average common shares and assumed
preferred conversions outstanding, pro forma
adjusted to reflect Acquisitions 27,841,000 27,831,000
--------------------- ------------------------
--------------------- ------------------------
PER SHARE AMOUNTS:
Diluted earnings before extraordinary (loss) on
early extinguishment of debt, historical $ 0.02 $ 0.05
--------------------- ------------------------
--------------------- ------------------------
Diluted earnings before extraordinary (loss) on
early extinguishment of debt, Acquisitions $ 0.07 $ 0.20
--------------------- ------------------------
--------------------- ------------------------
</TABLE>
<PAGE>
Republic Alloys, Inc.
Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
March 31, 1998
------------------------
<S> <C>
Current Assets
Accounts Receivable - Net $ 1,427,700
Inventory 290,011
------------------------
Total Current Assets 1,717,711
------------------------
Property & Equipment, Net 551,961
------------------------
Total Assets 2,269,672
------------------------
Liabilities
Current Liabilities
Accounts Payable 331,577
Other Liabilities 224,574
------------------------
Total Current Liabilities 556,151
------------------------
Net Assets $ 1,713,521
------------------------
------------------------
</TABLE>
<PAGE>
Republic Alloys, Inc.
Income Statement
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
March 31, 1998 March 31, 1997
---------------------------- ----------------------------
<S> <C> <C>
Net Sales $ 2,733,105 $ 3,003,250
Cost of Goods Sold 2,249,618 2,254,867
---------------------------- ----------------------------
Gross Profit 483,487 748,383
General & Administrative
141,089 131,023
---------------------------- ----------------------------
Net Income $ 342,398 $ 617,360
---------------------------- ----------------------------
---------------------------- ----------------------------
</TABLE>
<PAGE>
REPUBLIC ALLOYS, INC.
Notes to Unaudited Financial Statements
General Information:
1. The accompanying unaudited statements of net assets and revenues, and
expenses relate to the scrap metals division of Republic Alloys, Inc.
"Republic".
The statements of net assets of Republic at March 31, 1998
include certain assets of the scrap metals business acquired by the
Company pursuant to an asset acquisition agreement dated February 16,
1998. The statements of net assets do not include assets and
liabilities of the business that are not intended to be transferred to
the Company under the terms of the asset acquisition agreement.
Accordingly, statements of cash flows are not included or applicable to
the business sold. During the period covered by the financial
statements, the scrap metals division operated as an integral part of
Republic's overall operations and separate financial statements were
not prepared. The accompanying financial statements include historical
revenues and expenses of the scrap metals division of Republic plus
allocated overhead costs, which are not necessarily indicative of the
costs and expenses which would have resulted if the business had been
operated as a separate company. General and administrative expenses
include only those expenses that relate directly or indirectly to the
operations of the scrap metals divisions.
2. Inventories as of March 31, 1998 consisted of the following:
Raw Materials $ 290,011
Finished Goods ---
---------------
Total $ 290,011
---------------
---------------
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Republic Alloys, Inc.
Charlotte, North Carolina
We have audited the accompanying statements of net assets of the scrap
metals division of Republic Alloys, Inc. as of December 31, 1997 and 1996, and
the related statements of revenues and expenses for the years 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 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 financial statements referred to above present fairly,
in all material respects, the net assets of Republic Alloys, Inc. at December
31, 1997 and 1996, and its revenues and expenses for the years then ended, in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Charlotte, North Carolina
March 27, 1998
<PAGE>
REPUBLIC ALLOYS, INC.
STATEMENTS OF NET ASSETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable:
Trade............................................................................... $ 819,831 $ 815,169
Other............................................................................... 2,832 --
Inventories........................................................................... 283,170 371,996
------------ ------------
Total current assets.................................................................. 1,105,833 1,187,165
Equipment, less accumulated depreciation (Note 2)..................................... 582,626 884,232
------------ ------------
1,688,459 2,071,397
------------ ------------
LIABILITIES
Accounts payable:
Trade............................................................................... 445,779 673,589
Other............................................................................... 10,902 25,738
Environmental remediation liability (Note 6).......................................... 80,000 361,939
------------ ------------
Total liabilities..................................................................... 536,681 1,061,266
------------ ------------
Commitments and Contingencies (Notes 4, 5, and 6)
Net assets............................................................................ $ 1,151,778 $ 1,010,131
------------ ------------
------------ ------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
<PAGE>
REPUBLIC ALLOYS, INC.
STATEMENTS OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenue............................................................................ $ 11,309,722 $ 11,713,307
Cost of sales...................................................................... 6,557,360 7,415,490
------------- -------------
Gross profit....................................................................... 4,752,362 4,297,817
Operating expenses................................................................. 2,717,015 2,869,580
------------- -------------
2,035,347 1,428,237
Other:
Gain on reversal of environmental remediation accrual (Note 6)................... 281,939 --
------------- -------------
Excess of revenues over expenses................................................... $ 2,317,286 $ 1,428,237
------------- -------------
------------- -------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
<PAGE>
REPUBLIC ALLOYS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying statements of net assets and revenues and expenses relate
to the scrap metals division of Republic Alloys, Inc. (the Company). The Company
processes and sells scrap metal products. The Company's customers are primarily
engaged in the distribution of metal products, industrial manufacturing and
utilities and are concentrated throughout the Eastern United States.
The statements of net assets of Republic Alloys, Inc. at December 31, 1997
and 1996, include certain assets of the scrap metals business to be acquired by
Recycling Industries, Inc. pursuant to an asset acquisition agreement dated
February 16, 1998. The statements of net assets do not include assets and
liabilities of the business that are not intended to be transferred to the
purchaser under the terms of the asset acquisition agreement. Accordingly,
statements of cash flows are not included or applicable to the business being
sold. During the periods covered by the financial statements, the scrap metals
division operated as an integral part of the Company's overall operations and
separate financial statements were not prepared. The accompanying financial
statements include historical revenues and expenses of the scrap metals division
of the Company plus allocated overhead costs as described herein, which are not
necessarily indicative of the costs and expenses which would have resulted if
the business had been operated as a separate company. General and administrative
expenses include only those expenses that relate directly or indirectly to the
operations of the scrap metals division. The financial statements have been
prepared to substantially comply with the rules and regulations of the
Securities and Exchange commission for the business being acquired.
REVENUE RECOGNITION
The Company recognizes revenue at the time title to goods transfers to the
buyer.
BUSINESS CONCENTRATIONS
Financial instruments that are potentially subject to concentration of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
many different industries.
INVENTORIES
Inventories, which consist primarily of processed and unprocessed scrap
metal, are valued at the lower of cost (first-in, first-out) or market.
CONCENTRATION OF CREDIT RISK
A significant amount of the Company sales are made to the various foundries
through brokers. Company sales made through one broker for the years ended
December 31, 1997 and 1996, were 41 percent and 49 percent, respectively, of
total Company sales.
Three customers and one customer accounted for 63 percent and 42 percent of
the accounts receivable balance as of December 31, 1997 and 1996, respectively.
<PAGE>
REPUBLIC ALLOYS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EQUIPMENT AND DEPRECIATION
Equipment is stated at cost. Depreciation is computed over the estimated
useful lives of the assets using accelerated methods for financial reporting
purposes.
INCOME TAXES
The Company has elected to be taxed as a subchapter S corporation.
Accordingly, the absence of a provision for federal and state income taxes is
due to the election by the Company and consent of its shareholder to include
taxable income from the Company on the shareholder's individual tax returns.
USE OF ESTIMATES IN PREPARING 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE>
REPUBLIC ALLOYS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ACQUISITION OF NET ASSETS
On February 16, 1998, Recycling Industries, Inc. a public company, entered
into a purchase agreement to acquire the assets of the scrap metals division of
the Company for $12.1 million.
2. EQUIPMENT
Major classes of equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Machinery................................................... $ 2,119,816 $ 2,329,986
Transportation equipment.................................... 296,923 297,132
Furniture and fixtures...................................... 14,298 14,298
Containers.................................................. 526,675 506,923
------------ ------------
2,957,712 3,148,339
Less accumulated depreciation............................... 2,375,086 2,264,107
------------ ------------
Net equipment............................................... $ 582,626 $ 884,232
------------ ------------
------------ ------------
</TABLE>
3. RELATED PARTY
The Company leases land on which the Company operates from the Company's
majority shareholder. No formal lease agreement exists between the two parties.
Lease payments made to the shareholder for the scrap division were $93,100 and
$83,300 for years ended December 31, 1997 and 1996, respectively.
4. PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all employees.
Contributions to the plan are at the discretion of the shareholder. Company
contributions for the scrap division for the years ended December 31, 1997 and
1996, were approximately $87,000 and $79,000, respectively.
5. OPERATING LEASES
The Company leases various truck equipment under operating leases. Minimum
lease payments as December 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
1998............................................... $ 83,000
1999............................................... 83,000
2000............................................... 83,000
2001............................................... 18,000
----------
$ 267,000
----------
----------
</TABLE>
<PAGE>
REPUBLIC ALLOYS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL LIABILITIES
In connection with the recycling and processing of 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
their raw materials, certain items processed may inadvertently contain such
materials, which could result in contamination of the waste by-products and
premises. The Company has completed a Phase I examination and has not discovered
any environment problems. However, changes in environmental laws and inadvertent
handling of hazardous materials may result in certain potential violations of
current laws and regulations subjecting the Company to fines and responsibility
for costs attributable to remediation. However, the amounts, if any, cannot be
estimated and management believes that they would not be material to the
Company's statement of net assets, but could be material to the Company's
statements of revenues and expenses in a given period.
During 1997, the Company recorded a gain of $281,939 representing a
reduction of an estimated liability in connection with the environmental clean
up of a former customer's site. The Company's expects its remaining liability of
$80,000 is sufficient to meet its obligations.
<PAGE>
Peanut City Iron & Metal Company, Inc.
Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
March 31, 1998
-------------------------
<S> <C>
Current Assets
Cash $ 946,412
Accounts Receivable 384,129
Inventory 228,540
-------------------------
Total Current Assets 1,559,081
Property, Plant & Equipment, Net 646,560
-------------------------
Total Assets $ 2,205,641
-------------------------
-------------------------
Liabilities & Stockholders' Equity
Current Liabilities
Accounts Payable $ 29,914
Note Payable 225,726
Other Current Liabilities 3,710
-------------------------
Total Current Liabilities 259,350
-------------------------
Stockholders' Equity
Common Stock 14,000
Retained Earnings 1,932,291
-------------------------
Total Stockholders' Equity 1,946,291
-------------------------
Total Liability & Equity $ 2,205,641
-------------------------
-------------------------
</TABLE>
<PAGE>
Peanut City Iron & Metal Company, Inc.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 31, 1998 March 31, 1997
-------------------------- --------------------------
<S> <C> <C>
Net Sales $ 1,243,997 $ 1,088,305
Cost of Sales 998,882 861,615
-------------------------- --------------------------
Gross Profit 245,115 226,690
General & Administrative 160,054 175,895
-------------------------- --------------------------
Operating Income 85,061 50,795
Other Income 35,195 8,301
-------------------------- --------------------------
Net Income $ 120,256 $ 59,096
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
<PAGE>
Peanut City Iron & Metal Company, Inc.
Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 31, 1998 March 31, 1997
-------------------------- --------------------------
<S> <C> <C>
Operating Activities:
Net income $ 120,256 $ 59,096
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation 46,500 48,000
Changes in Assets and Liabilities:
Accounts receivable 357,061 (167,163)
Inventory (40,175) (100,220)
Accounts payable (68,340) 12,025
Current liabilities, excluding debt (8,006) (5,947)
-------------------------- --------------------------
Net cash provided by (used in) operating activities 407,296 (154,209)
-------------------------- --------------------------
Investing Activities:
Capital expenditures, net (832) (17,142)
Other assets 46,597 --
-------------------------- --------------------------
Net cash provided by (used in) investing activities 45,765 (17,142)
-------------------------- --------------------------
Financing Activities:
Repayment of borrowings (21,611) 90,690
Distributions to stockholders (60,000) --
Other (144,518) --
-------------------------- --------------------------
Net cash provided by (used in) financing activities (226,129) 90,690
-------------------------- --------------------------
Increase (decrease) in Cash 226,932 (80,661)
Cash, beginning of period 719,480 129,479
-------------------------- --------------------------
Cash, end of period $ 946,412 $ 48,818
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
<PAGE>
PEANUT CITY IRON & METAL COMPANY, INC.
Notes to Unaudited Financial Statements
General Information:
1. The Financial Statements included herein have been prepared by the Company
without audit.
2. Inventories as of March 31, 1998 consisted of the following:
Raw Materials $ 78,290
Finished Goods 150,250
----------------
TOTAL $ 228,540
----------------
----------------
<PAGE>
The Officers and Directors
Peanut City Iron & Metal Co., Inc.
Suffolk, Virginia
We have audited the accompanying balance sheet of Peanut City Iron & Metal
Co., Inc. as of December 31, 1997, and the related statements of income,
retained earnings 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
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 financial statements referred to above present fairly,
in all material respects, the financial position of Peanut City Iron & Metal
Co., Inc. as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Company recorded
a liability for environmental remediation costs which required a retroactive
restatement of retained earnings.
/s/ Goodman & Company, L.L.P.
One Commercial Place
Norfolk, Virginia
February 25, 1998, except for Notes 2
and 6, as to which the date is
May 28, 1998
<PAGE>
PEANUT CITY IRON & METAL CO., INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 719,480
Accounts receivable........................................................... 729,564
Advances--employees........................................................... 11,626
Inventory..................................................................... 188,365
----------
Total current assets........................................................ 1,649,035
Property, plant and equipment
Land.......................................................................... 51,110
Building...................................................................... 345,792
Equipment..................................................................... 1,347,349
Autos and trucks.............................................................. 230,247
Leasehold improvements........................................................ 2,610
Office equipment.............................................................. 40,014
----------
2,017,122
Less--accumulated depreciation................................................ 1,324,894
----------
692,228
----------
Other assets
Cash surrender value of life insurance........................................ 46,597
----------
$2,387,860
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.............................................................. $ 98,254
Note payable--current portion................................................. 86,443
Accrued expenses.............................................................. 11,716
Environmental remediation cost liability...................................... 300,000
----------
Total current liabilities................................................... 496,413
----------
Long-term note payable.......................................................... 160,894
----------
Stockholders' equity
Common stock--$100 par; 500 shares authorized,
140 shares issued and outstanding........................................... 14,000
Retained earnings............................................................. 1,716,553
----------
Total stockholders' equity.................................................. 1,730,553
----------
$2,387,860
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PEANUT CITY IRON & METAL CO., INC.
STATEMENT OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Balance at beginning of year.................................................... $ 954,442
Prior period adjustment......................................................... 213,464
----------
Balance at beginning of year, as restated....................................... 1,167,906
Distribution.................................................................... (60,000)
Net income...................................................................... 608,647
----------
Balance at end of year.......................................................... $1,716,553
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PEANUT CITY IRON & METAL CO., INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Sales........................................................................... $5,566,407
----------
Cost of sales
Beginning inventory........................................................... 173,030
Purchases..................................................................... 3,450,471
Labor......................................................................... 437,549
Freight....................................................................... 66,117
Supplies...................................................................... 56,357
Ending inventory.............................................................. (188,365)
----------
3,995,159
----------
Gross profit.................................................................... 1,571,248
----------
Operating expenses
Depreciation.................................................................. 202,404
Officers' salaries............................................................ 109,200
Repairs and maintenance....................................................... 91,724
Office salaries............................................................... 75,117
EPA settlement expense........................................................ 67,602
Insurance..................................................................... 49,807
Watchmen...................................................................... 48,274
Payroll taxes................................................................. 46,146
Miscellaneous office expense.................................................. 44,824
Group insurance............................................................... 43,847
Utilities..................................................................... 40,138
Auto and truck expense........................................................ 26,980
Interest expense.............................................................. 22,237
Professional services......................................................... 18,110
Telephone..................................................................... 17,963
Taxes and licenses............................................................ 17,546
Life insurance expense........................................................ 14,423
Commission expense............................................................ 12,956
Advertising................................................................... 11,310
Travel expense................................................................ 10,297
Pension plan.................................................................. 10,255
Rental expense................................................................ 9,079
Contributions................................................................. 3,959
----------
994,198
----------
Operating income................................................................ 577,050
Other income
Miscellaneous income.......................................................... 14,675
Interest income............................................................... 16,922
----------
Net income...................................................................... $ 608,647
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PEANUT CITY IRON & METAL CO., INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net income..................................................................... $ 608,647
Adjustments to reconcile to net cash provided by operating activities:
Depreciation................................................................. 202,404
Changes in:
Accounts receivable........................................................ (430,128)
Advances to employees...................................................... (474)
Inventory.................................................................. (15,335)
Accounts payable........................................................... 98,254
Accrued expenses........................................................... (14,800)
---------
Net cash provided by operating activities................................ 448,568
---------
Cash flows from investing activities
Purchase of property and equipment............................................. (232,287)
Collection on Money Point Diamond Corp. note receivable........................ 300,000
Increase in cash surrender value--life insurance............................... (3,856)
---------
Net cash provided by investing activities................................ 63,857
---------
Cash flows from financing activities
Increase in notes payable...................................................... 215,068
Principal payments on notes payable............................................ (77,494)
Distribution to stockholders................................................... (60,000)
---------
Net cash provided by financing activities................................ 77,574
---------
Net increase in cash and cash equivalents........................................ 589,999
Cash and cash equivalents at beginning of year................................... 129,481
---------
Cash and cash equivalents at end of year......................................... $ 719,480
---------
---------
Supplemental disclosure of cash flow information.................................
Cash paid during the year for interest......................................... $ 22,237
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PEANUT CITY IRON & METAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1--ORGANIZATION AND BUSINESS
The Company is a closely held Virginia corporation organized in 1948 as a
scrap metal processor.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventory is stated at the lower of cost or market on the first-in,
first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The assets are depreciated
using the straight-line or accelerated methods over the following lives:
<TABLE>
<S> <C>
Building.................................................. 15 years
Equipment................................................. 5 to 18 years
Autos and trucks.......................................... 3 to 5 years
Office equipment.......................................... 3 to 5 years
Leasehold improvements.................................... 3 years
</TABLE>
INCOME TAXES
The Company elected to be taxed as an "S" corporation beginning in 1972. As
such, the Company pays no income taxes because profits and losses pass directly
to the shareholders.
BAD DEBTS
The Company evaluates each of its accounts receivable individually, and
provides a charge to income which is appropriate, in the opinion of management,
to absorb probable credit losses.
CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of temporary cash investments
and accounts receivable. The Company places its temporary cash investments with
high credit quality financial institutions. As of December 31, 1997, the Company
had funds in a single financial institution in excess of amounts insured by the
FDIC.
The Company's customers are not concentrated in any geographic region, but
are concentrated in the scrap metal processing business. One customer accounts
for 34% of accounts receivable at December 31, 1997. Approximately $36,000 of
the Company's accounts receivable are due from a related corporation, which also
accounted for $799,000 of the Company's sales.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
ENVIRONMENTAL REMEDIATION COSTS
Liabilities for ongoing environmental compliance measures are recorded in
the balance sheet, and related expenses are included in the normal operating
expenses of conducting business. The Company is currently involved with
environmental compliance and remediation activities. The Company accrues for
certain environmental remediation-related activities for which commitments or
clean-up plans have been developed or for which costs or minimum costs can be
reasonably estimated.
In conjunction with the Company's acquisition by Recycling Industries,
Inc., (see note 6) environmental studies were performed which indicated
certain environmental matters that have existed for more than one year.
Previously, it had not been the Company's policy to obtain such studies, and
the Company was unaware of the indicated environmental matters. As a result,
the financial statements were retroactively restated to reflect a $300,000
decrease in retained earnings, and the recordation of a $300,000 liability to
cover estimated remediation costs to address the clean-up of soil and ground
water contamination at the operating site. Management believes that it is
reasonably possible that additional costs may be incurred in the near term
beyond the amount accrued as the result of new information. However, the
amounts, if any, cannot be estimated and management believes that they would
not be material to the Company's financial position, but could be material to
the Company's results of operations and cash flows in a given period.
ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses and disclosure of contingent assets and
liabilities for the reported periods. Actual results could differ from those
estimates and assumptions.
<PAGE>
PEANUT CITY IRON & METAL CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 3--LONG-TERM DEBT
<TABLE>
<S> <C>
Notes payable to General Electric Capital Corporation,
collateralized by certain equipment; monthly payments of $7,204
plus interest adjusted monthly to the rate listed for one month
commercial paper plus 2.80% to 3.42%............................ $ 247,337
Less--current portion............................................ 86,443
---------
Non-current portion.............................................. $ 160,894
---------
---------
</TABLE>
Maturities of the long-term debt are as follows:
<TABLE>
<S> <C>
1998...................................... $ 86,443
1999...................................... $ 86,443
2000...................................... $ 61,114
2001...................................... $ 13,337
---------
247,337
---------
---------
</TABLE>
NOTE 4--LONG-TERM LEASE
The Company leases a forklift from Allstate Equipment Co., Inc. for $471 per
month including 8% interest through 2001.
NOTE 5--PRIOR PERIOD ADJUSTMENT
Cash surrender value of life insurance of $42,741 had not been recorded in
prior years and accounts receivable and sales for one customer of $170,722 was
not recorded in the proper period. Retained earnings at December 31, 1996 had
been adjusted to reflect these amounts.
NOTE 6--SUBSEQUENT EVENT
On May 28, 1998, Recycling Industries of Suffolk, Inc., a wholly-owned
subsidiary of Recycling Industries, Inc. (Recycling), acquired substantially
all of the scrap metals recycling assets and business of the Company. The
assets acquired consist of heavy equipment, tools and rolling stock used in
the business of recycling ferrous and non-ferrous metals. Recycling also
purchased approximately 3 acres of real property, buildings and improvements
used in the metals recycling business from the Company. Recycling plans to
continue the metals recycling operations of the Company.
The total purchase price was $3,400,000, comprised of $2,897,500 in cash
and 1,005 shares of Recycling's Series J Redeemable Convertible Preferred
Stock having a stated value of $502,500 or $500 per share.
NOTE 7--YEAR 2000 SYSTEMS CONTINGENCY
The Year 2000 presents problems for entities that are dependent on computer
hardware and software to perform date dependent calculations and logic
comparisons. A great deal of software and microchip technology that is still
operational was developed in the past utilizing two digit years rather than four
digit years (example: 97 instead of 1997). Technology utilizing two digit years
most likely will not be able to distinguish the year 2000 from 1900, and
therefore may shut down or perform date sensitive calculations and comparisons
as much as 100 years and infinite dollar amounts in error. The problem may also
affect non-financial computer or chip dependent systems, such as, security
systems, communication systems, time clocks, process controls, and the like.
Management has been advised of this potential problem not only in its own
systems, but, also the potential effects on the Company of malfunctions in
systems of its customers, suppliers, vendors, etc. Management will begin a
program of due diligence in addressing the potential impact of the Year 2000
software problems on the Company and its operations. Management anticipates the
Company will be found to be, or corrected to be, Year 2000 compliant.
* * * * *
<PAGE>
Ferex Corporation and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
March 31, 1998
----------------------
<S> <C>
Current Assets
Cash $ 340,455
Accounts receivable 1,021,649
Notes receivable - current portion 480,108
Inventory 1,871,144
Prepaid expenses 135,029
----------------------
Total current assets 3,848,385
Property & equipment, net 8,461,193
Other assets, net of amortization 1,030,059
----------------------
Total Assets $13,339,637
----------------------
----------------------
Liabilities & Stockholders' Equity
Current Liabilities
Accounts payable $ 338,840
Current maturities of long term debt 1,417,161
----------------------
Total current liabilities 1,756,001
----------------------
Deferred income taxes 429,000
Long term debt, less current portion 7,617,986
Stockholders' Equity
Common stock, $.01 par value 159,251
Additional paid-in capital 1,372,386
Retained earnings 2,005,013
----------------------
Total stockholders' equity 3,536,650
----------------------
Total Liability & Equity $13,339,637
----------------------
----------------------
</TABLE>
<PAGE>
Ferex Corporation and Subsidiaries
Consolidated Income Statement
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
March 31 1998 March 31 1997
-------------------------- --------------------------
<S> <C> <C>
Net sales $ 11,602,610 $ 8,570,281
Cost of sales and operating expenses 10,896,941 7,733,475
-------------------------- --------------------------
Gross profit 705,669 836,806
General & administrative expenses 561,944 427,688
-------------------------- --------------------------
Operating income 143,725 409,118
Other income (expense)
Interest expense (194,572) (104,954)
Miscellaneous 16,665 38,503
-------------------------- --------------------------
Total other income (expense) (177,907) (66,451)
-------------------------- --------------------------
Net income (loss) before taxes (34,182) 342,667
Income tax expense (benefit) (5,379) 116,492
-------------------------- --------------------------
Net income (loss) $ (28,803) $ 226,175
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
<PAGE>
Ferex Corporation and Subsidiaries
Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
March 31, 1998 March 31, 1997
------------------------- -------------------------
<S> <C> <C>
Operating Activities:
Net Income $ (28,803) $ 226,175
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 109,354 173,574
Changes in assets and liabilities:
Accounts receivable (695,028) (515,433)
Inventory (660,889) (130,473)
Prepaid expenses and other 60,876 (127,354)
Accounts Payable (27,534) 118,661
Current liabilities, excluding debt (98,671) 125,459
------------------------- -------------------------
Net cash used in operating activities (1,340,695) (129,391)
------------------------- -------------------------
Investing Activities:
Capital expenditures, net (326,536) (999,542
Other Assets (409,595) (18,186)
------------------------- -------------------------
Net cash used in investing activities (736,131) (1,017,728)
------------------------- -------------------------
Financing Activities:
Proceeds from debt, net 1,879,000 1,320,384
Loan fees -- (32,800)
------------------------- -------------------------
Net cash provided by financing activities 1,879,000 1,287,584
------------------------- -------------------------
Increase (decrease) in cash (197,826) 140,465
Cash, beginning of period 538,281 177,443
------------------------- -------------------------
Cash, end of period $ 340,455 $ 317,908
------------------------- -------------------------
------------------------- -------------------------
</TABLE>
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
Notes to Unaudited Financial Statements
General Information:
1. The Financial Statements included herein have been prepared by the Company
without audit.
2. Inventories as of March 31, 1998 consisted of the following:
Raw Materials $ 1,403,358
Work in Process 467,786
Finished Goods --
-------------------
TOTAL $ 1,871,144
-------------------
-------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Ferex Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ferex
Corporation and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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
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 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 consolidated financial position of
Ferex Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Belew Averitt LLP
February 27, 1998
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................................... $ 538,281 $ 177,443
Accounts receivable, trade (Notes 4 and 8)......................................... 133,150 46,317
Inventory (Notes 4 and 10)......................................................... 1,210,255 940,709
Federal income taxes receivable.................................................... 97,000 --
Vendor and employee advances....................................................... 96,471 135,229
Notes receivable, current portion (Note 2)......................................... 238,400 273,343
Prepaid expenses................................................................... 171,703 33,432
------------- ------------
Total current assets............................................................. 2,485,260 1,606,473
PROPERTY AND EQUIPMENT, net (Notes 3, 4 and 10)...................................... 8,244,011 3,757,901
OTHER ASSETS
Notes receivable, less current portion (Note 2).................................... 225,972 207,606
Intangibles, net of accumulated amortization of $38,394 and $23,059, respectively
(Note 10)........................................................................ 90,311 55,646
Financing costs, net of accumulated amortization of $96,950 and $0, respectively... 215,014 275,661
Other (Notes 9 and 10)............................................................. 89,167 --
------------- ------------
Total other assets............................................................... 620,464 538,913
------------- ------------
$ 11,349,735 $ 5,903,287
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 4)...................................... $ 1,033,618 $ 364,205
Accounts payable................................................................... 366,374 76,811
Accrued expenses................................................................... 98,671 88,616
Federal income taxes payable....................................................... -- 117,000
------------- ------------
Total current liabilities........................................................ 1,498,663 646,632
LONG-TERM DEBT, less current maturities (Note 4)..................................... 6,122,650 2,875,819
DEFERRED INCOME TAXES (Note 5)....................................................... 429,000 197,000
COMMITMENTS (Note 9)................................................................. -- --
SHAREHOLDERS' EQUITY
Common stock; $.01 par value, 50,000,000 shares authorized; 15,925,111 and
15,400,111 shares issued and outstanding, respectively........................... 159,251 154,001
Additional paid-in capital......................................................... 1,372,386 1,115,136
Retained earnings.................................................................. 2,030,285 914,699
------------- ------------
3,561,922 2,183,836
Less notes receivable, shareholders................................................ (262,500) --
------------- ------------
Total shareholders' equity....................................................... 3,299,422 2,183,836
------------- ------------
$ 11,349,735 $ 5,903,287
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
SALES (Note 8)...................................................... $ 41,425,488 $ 29,797,987 $ 19,947,124
COST OF SALES....................................................... 37,461,248 26,817,308 17,951,151
------------- ------------- -------------
GROSS PROFIT........................................................ 3,964,240 2,980,679 1,995,973
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................ 1,861,058 1,319,070 915,765
------------- ------------- -------------
2,103,182 1,661,609 1,080,208
OTHER INCOME (EXPENSE)
Interest expense.................................................. (580,044) (180,372) (116,810)
Interest income................................................... 49,002 123,294 47,427
Other............................................................. 167,190 (47,114) (6,401)
------------- ------------- -------------
(363,852) (104,192) (75,784)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES.......................................... 1,739,330 1,557,417 1,004,424
INCOME TAXES (Note 5)............................................... 623,744 585,188 360,211
------------- ------------- -------------
NET INCOME.......................................................... $ 1,115,586 $ 972,229 $ 644,213
------------- ------------- -------------
------------- ------------- -------------
EARNINGS PER SHARE.................................................. $ .07 $ .06 $ .04
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING....................... 15,793,861 15,379,578 15,167,713
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED NOTES
------------------------ PAID-IN EARNINGS RECEIVABLE
SHARES AMOUNT CAPITAL (DEFICIT) SHAREHOLDERS TOTAL
------------ ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 15,075,111 $ 150,751 $ 970,886 $ (701,743) $ -- $ 419,894
Issuance of stock to shareholders for
guaranty of loan (Note 7)............. 75,000 750 21,750 -- -- 22,500
Issuance of stock in acquisition of
assets................................ 100,000 1,000 49,000 -- -- 50,000
Net income.............................. -- -- -- 644,213 -- 644,213
------------ ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1995............ 15,250,111 152,501 1,041,636 (57,530) -- 1,136,607
Issuance of stock in acquisition of
assets................................ 50,000 500 24,500 -- -- 25,000
Issuance of stock to shareholder and
former president (Note 7)............. 100,000 1,000 49,000 -- -- 50,000
Net income.............................. -- -- -- 972,229 -- 972,229
------------ ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1996............ 15,400,111 154,001 1,115,136 914,699 -- 2,183,836
Exercise of stock options
(Notes 6 and 7)....................... 525,000 5,250 257,250 -- (262,500) --
Net income.............................. -- -- -- 1,115,586 -- 1,115,586
------------ ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1997............ 15,925,111 $ 159,251 $ 1,372,386 $ 2,030,285 $ (262,500) $ 3,299,422
------------ ---------- ------------ ------------ ------------ ------------
------------ ---------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................... $1,115,586 $ 972,229 $ 644,213
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation.............................................. 1,165,423 437,859 173,015
(Gain) loss on sale of property and equipment.............................. (167,190) (43,055) 10,640
Stock compensation......................................................... -- 50,000 22,500
Deferred income taxes...................................................... 232,000 120,500 56,346
(Increase) decrease in:
Accounts receivable, trade............................................... (86,833) 142,198 (81,063)
Receivables from officers and related parties............................ -- -- 19,000
Vendor and employee advances............................................. 38,758 (100,405) (17,287)
Inventory................................................................ (269,546) (405,678) (70,835)
Prepaid expenses......................................................... (128,438) (24,375) (9,058)
Increase (decrease) in:
Accounts payable......................................................... 289,563 (30,704) (72,627)
Accounts payable, related party.......................................... -- -- (13,897)
Accrued expenses......................................................... 10,055 25,555 46,040
Federal income taxes, net................................................ (214,000) 45,900 (106,840)
---------- ---------- ---------
Net cash provided by operating activities.................................... 1,985,378 1,190,024 600,147
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment.............................................. 92,600 92,130 61,500
Collection of notes receivable............................................... 304,592 225,315 300,745
Sale of interest-bearing deposit............................................. -- -- 100,000
Acquisitions of property and equipment....................................... (1,010,578) (468,296) (593,082)
Prepayment of rent........................................................... (99,000) -- --
Purchase of customer list.................................................... (50,000) -- --
Issuance of notes receivable................................................. (279,792) (334,872) (17,762)
---------- ---------- ---------
Net cash used by investing activities........................................ (1,042,178) (485,723) (148,599)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt............................................................ (8,572,377) (889,627) (793,932)
Payment of financing costs................................................... (47,500) (275,661) --
Proceeds from issuance of debt............................................... 8,037,515 429,235 485,000
---------- ---------- ---------
Net cash used by financing activities........................................ (582,362) (736,053) (308,932)
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH................................................ 360,838 (31,752) 142,616
CASH AND CASH EQUIVALENTS, beginning of year................................... 177,443 209,195 66,579
---------- ---------- ---------
CASH AND CASH EQUIVALENTS, end of year......................................... $ 538,281 $ 177,443 $ 209,195
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................................................ $ 483,844 $ 186,539 $ 116,443
---------- ---------- ---------
---------- ---------- ---------
Taxes paid................................................................... $ 582,748 $ 324,096 $ 401,569
---------- ---------- ---------
---------- ---------- ---------
NON-CASH TRANSACTIONS
Inventory and property and equipment acquisitions financed by the assumption
of debt.................................................................... $4,451,106 $2,013,058 $ 745,991
---------- ---------- ---------
---------- ---------- ---------
Notes receivable from sale of equipment...................................... $ 315,975 $ 56,500 $ --
---------- ---------- ---------
---------- ---------- ---------
Notes receivable shareholders from exercise of stock options................. $ 262,500 $ -- $ --
---------- ---------- ---------
---------- ---------- ---------
Long-term debt refinanced.................................................... $ -- $2,387,809 $ --
---------- ---------- ---------
---------- ---------- ---------
Issuance of common stock in exchange for inventory and/or property and
equipment acquisitions..................................................... $ -- $ 25,000 $ 50,000
---------- ---------- ---------
---------- ---------- ---------
Reduction of notes receivable from equipment reacquired...................... $ 307,742 $ -- $ 17,691
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Ferex Corporation and Subsidiaries (the Company) is in the business of
purchasing, processing and selling ferrous and nonferrous scrap material. The
Company's headquarters are located outside of Tyler, Texas. The subsidiaries
include K & L Auto Recycling, Inc. (K & L) which operates mobile crushers in the
states of Texas, Oklahoma, Arkansas, Missouri, Kansas, Nebraska and New Mexico;
and Ferex Metals Recycling, Inc. (FMR) which operates 14 scrap yards in Texas,
Oklahoma and Arkansas.
CONSOLIDATION
The consolidated financial statements include the accounts of Ferex
Corporation and its wholly-owned subsidiaries K & L and FMR. Intercompany
transactions and accounts have been eliminated in consolidation.
CASH
The Company considers highly-liquid investments with original maturities of
three months or less when purchased to be components of cash. The Company
maintains a significant portion of its cash balances with two financial
institutions.
Included in cash at December 31, 1997 was $50,000 of restricted cash, as
required by the bank with which debt is held (Note 4).
ACCOUNTS RECEIVABLE, NOTES RECEIVABLE AND ADVANCES
At December 31, 1997, accounts receivable, trade, is shown net of an
allowance for doubtful accounts of $9,517. Management believes all accounts
receivable as of December 31, 1996 and all advances as of December 31, 1997 and
1996 were fully collectible; therefore, no respective allowance for doubtful
accounts was recorded. Notes receivable result from 1) the sale of equipment to
various buyers, which are collateralized by the related equipment; 2) the
exercise of stock options by employees, which are collateralized by the related
shares of stock; and 3) a personal loan made to an employee and shareholder,
which is uncollateralized. Management believes the fair value of the
collateralized assets equals or exceeds the note balances; therefore, no
allowance for doubtful accounts was recorded.
INVESTMENTS
Long-term investment securities included in the balance sheets at December
31, 1997 and 1996 have been classified as held-to-maturity, as described in Note
2, and recorded at the lower of cost or market value.
INVENTORY
Inventory consists primarily of scrap material and is stated at the lower of
cost (using the average cost method) or market.
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over a 5 to 15-year
period. Expenditures for maintenance and repairs, as well as minor renewals, are
charged to operations as incurred. Betterments and major renewals are
capitalized. Upon retirement or sale of an asset, the cost of the asset and the
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is charged to operations.
INTANGIBLES
Intangibles include organizational costs and customer lists which are
amortized over 60 months, and goodwill and other costs which are amortized over
15 years, each on a straight-line basis.
FINANCING COSTS
Financing costs are amortized over the original estimated life of the loan
of 60 months, using the interest method.
ADVERTISING COSTS
Advertising and promotional related expenses are charged to operations when
incurred. Advertising expenses for 1997, 1996 and 1995 were $50,894, $31,490 and
$10,854, respectively.
INCOME TAXES
The Company utilizes the asset and liability method of computing deferred
income taxes. In the event differences between the financial reporting bases and
the tax bases of the Company's assets and liabilities result in deferred tax
assets, an evaluation of the probability of being able to realize the future
benefits indicated by such assets is considered necessary. A valuation allowance
is provided for a portion or all of the deferred tax assets when it is more
likely than not that such portion, or all of such deferred tax assets, will not
be realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), encourages, but does not require,
companies to record compensation cost for stock-based compensation plans at fair
value. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair value of the Company's
stock at the measurement date (generally the date of the grant) over the amount
the employee must pay to acquire the stock.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128). Accordingly, earnings per share of common
stock are computed on the basis of the
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
weighted average number of common shares outstanding during the periods. Fully
diluted earnings per share amounts are materially the same as earnings per share
of common stock. The number of shares used in the earnings per share
calculations for 1996 and 1995 have been restated to reflect the adoption of
SFAS 128.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For the majority of the Company's financial instruments, including cash,
accounts receivable, debt, accounts payable and accrued expenses, the carrying
amounts approximate fair value due to their short maturities.
MANAGEMENT ESTIMATES
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
during the reporting period. Actual results may vary from management's
estimates.
2. NOTES RECEIVABLE
At December 31, 1997 and 1996, the Company held $464,372 and $480,949,
respectively, of various installment notes receivable from vendors, shareholders
and employees. In 1997, monthly principal installments approximated $25,000;
interest ranged from 10% to 12% per annum; and the notes were collateralized in
most instances by the assets to which they related.
Future principal collections under notes receivable at December 31, 1997
were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998.................................................... $ 238,400
1999.................................................... 123,036
2000.................................................... 72,155
2001.................................................... 30,781
----------
$ 464,372
----------
----------
</TABLE>
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
3. PROPERTY AND EQUIPMENT
Major classifications of property and equipment at December 31, 1997 and
1996 are summarized below:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land........................................ $ 132,439 $ 132,439
Autos and small trucks...................... 625,410 209,832
Transportation equipment.................... 1,688,629 905,266
Equipment................................... 6,580,795 2,712,357
Office furniture and equipment.............. 231,743 129,302
Leasehold improvements...................... 527,949 239,809
------------ ------------
9,786,965 4,329,005
Less accumulated depreciation............... 1,542,954 571,104
------------ ------------
$ 8,244,011 $ 3,757,901
------------ ------------
------------ ------------
</TABLE>
The Company recorded depreciation and amortization expense related to these
assets of $1,041,941, $428,858 and $164,081 for the years ended December 31,
1997, 1996 and 1995, respectively.
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
4. LONG-TERM DEBT
At December 31, 1997 and 1996, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Term note payable to bank with interest at 9% on first $140,852 of principal, then at
LIBOR plus 300 points (8.906% at December 31, 1997); due in monthly installments of
$23,475 through December 3, 1997, then $35,213 through December 3, 1998, then
$46,951 through November 3, 2001, unpaid balance and accrued interest due December
3, 2001; collateralized by accounts receivable, inventory and equipment............. $ 2,535,340 $ 2,817,044
Term note payable to bank with interest at 9% on first $125,000 of principal, then at
LIBOR plus 300 points (8.906% at December 31, 1997); principal due in monthly
installments of $41,667 through November 3, 2001, unpaid balance and accrued
interest due December 31, 2001, collateralized by accounts receivable, inventory and
equipment........................................................................... 2,000,000 340,480
Lines-of-credit payable to bank with interest only at 8.812% on $1,801,633 unpaid
balance and 9% on $517,553 unpaid balance through December 31, 1999 when the unpaid
balance and accrued interest are due; collateralized by accounts receivable,
inventory and equipment............................................................. 2,319,186 --
Notes payable to equipment vendor with principal only payments of $11,441 payable
though September 10, 1998; interest accruing thereafter at varying rates of 7.9% and
8.9% per annum; due in monthly installments of $4,768 through June 10, 2002;
collateralized by certain equipment................................................. 257,620 --
Notes payable to vehicle and equipment vendors, payable in monthly installments of
$1,357, including interest at varying rates of 5.9% and 9.99% per annum; maturing
April 20, 2000 and May 5, 2003; collateralized by certain vehicle and equipment..... 44,122 --
Notes payable to individual with interest at 10%; unpaid balance and accrued interest
due June 3, 1997; collateralized by equipment....................................... -- 82,500
------------ ------------
7,156,268 3,240,024
Less current portion.................................................................. 1,033,618 364,205
------------ ------------
$ 6,122,650 $ 2,875,819
------------ ------------
------------ ------------
</TABLE>
On February 12, 1998, the Company entered into an amendment to credit
agreement which changed the due dates and a debt compliance ratio on the
lines-of-credit payable. This change has been reflected in the financial
statements and maturities of long-term debt.
The terms of the line-of-credit as of December 31, 1996 were such that the
related balance incurred as of December 31, 1997, up to a maximum of $2,000,000,
would be converted to a term note on that date. As of December 31, 1997, the
$2,000,000 term note referred to above is the result of that conversion.
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
4. LONG-TERM DEBT (CONTINUED)
The future scheduled maturities of long-term debt at December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998................................................. $ 1,033,618
1999................................................. 3,445,582
2000................................................. 1,121,859
2001................................................. 1,543,241
2002................................................. 11,968
------------
$ 7,156,268
------------
------------
</TABLE>
At December 31, 1997, the Company had approximately $2,680,000 of unused
lines-of-credit with a bank for the following purposes:
<TABLE>
<S> <C>
Working capital...................................... $ 482,000
Acquisition of scrap yards........................... 2,198,000
---------
$2,680,000
---------
---------
</TABLE>
5. INCOME TAXES
Components of income taxes as of December 31, 1997, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current................... $ 340,344 $ 397,188 $ 268,865
Deferred.................. 232,400 120,500 56,346
State....................... 51,000 67,500 35,000
---------- ---------- ----------
$ 623,744 $ 585,188 $ 360,211
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
As of December 31, 1997 and 1996, the Company had deferred tax liabilities
of approximately $429,000 and $197,000, respectively, which were primarily
attributable to depreciation differences in property and equipment for financial
statement and tax reporting purposes.
The Company's Federal income tax rate differs from the Federal statutory
rate of 34%, primarily due to certain expenses, which are deductible for
financial reporting purposes but not deductible for income
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
5. INCOME TAXES (CONTINUED)
tax purposes. The reconciliation of the expected and the reported provision for
current Federal income tax is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT % AMOUNT % AMOUNT %
---------- --------- ---------- --------- ---------- ---------
Tax at Federal statutory rate.......................... $ 591,372 34.0 $ 529,522 34.0 $ 341,504 34.0
Effect of nondeductible expenses....................... 8,525 0.5 6,882 0.4 10,195 1.0
Other.................................................. (9,813) (0.6) 4,234 0.3 (14,588) (1.5)
State income taxes, net of Federal..................... 33,660 1.9 44,550 2.9 23,100 2.3
---------- --- ---------- --- ---------- ---
$ 623,744 35.8 $ 585,188 37.6 $ 360,211 35.8
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
6. STOCK OPTIONS
During 1996, the Company granted 525,000 stock options to 4 key employees.
The options were granted at an exercise price of $0.50 per share, the fair
market value of the stock as determined by the Company's Board of Directors. The
options became exercisable in increments of 128,750 shares in 1996, 1997 and
1998 and 138,750 in 1999. On March 31, 1997, the Company allowed all of the
stock options granted to be exercised regardless of the stated exercise date.
Related notes receivable were executed under the terms detailed in Notes 2 and
7. There were no outstanding options as of December 31, 1997.
The Company applies APB 25 and related interpretations in accounting for its
stock options. Accordingly, no compensation cost has been recognized. Had
compensation cost for the stock options been determined based on the fair value
at the grant date consistent with the method of SFAS 123, approximately $176,000
in gross compensation costs would have been recognized in the year ended
December 31, 1996. The Company's net income and earnings per share as of
December 31, 1996 would have been reduced to the pro forma amounts net of income
taxes indicated below:
<TABLE>
<S> <C> <C>
Net income.............................. As reported $ 972,229
Pro forma $ 856,229
Earnings per share...................... As reported $ 0.06
Pro forma $ 0.06
</TABLE>
The weighted average fair value at date of grant for options granted during
1996 was $1.36 per option. The fair value of each option grant is estimated
using the Black-Shoales option-pricing model with the following weighted-average
assumptions used:
<TABLE>
<S> <C>
Dividend yield........................................ 0%
Expected volatility................................... 0%
Risk-free rate of return.............................. 6.63%
Expected life......................................... 4 years
</TABLE>
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
7. RELATED PARTY TRANSACTIONS
At December 31, 1997 the Company held $262,500 of notes receivable related
to the exercise of stock options by certain current and former employees of the
Company. The terms of the notes include interest only, payable at 5.83% per
annum through March 31, 2000 when the principal balance and all remaining
accrued but unpaid interest are due. These notes are included as a reduction to
shareholders' equity.
In 1996 a shareholder and former president was issued 100,000 shares of the
Company's stock in lieu of cash compensation earned as of the date of his
resignation.
In 1996 the Company purchased $30,000 of equipment from a shareholder and
the chairman of the Board of Directors.
In 1995, certain shareholders were issued 75,000 shares of the Company's
stock for their personal guaranty of specific Company debt.
8. CONCENTRATIONS OF BUSINESS RISK
By management's choice, a major portion of the Company's revenue was derived
from one customer in 1997, 1996 and 1995. Revenues from this customer accounted
for approximately 86%, 90% and 97% of sales during 1997, 1996 and 1995,
respectively. The accounts receivable balance from the major customer was
approximately $26,000 and $16,500 as of December 31, 1997 and 1996,
respectively.
Management believes the loss of revenue from the major customer would not
have a material effect on the Company because of the adequate availability of
other buyers for the Company's scrap materials.
9. LEASE COMMITMENTS
The Company leases collection yards, office facilities and various equipment
under short-term rental agreements. Office facilities are leased from a
shareholder for $1,500 a month through January 1997 and then $1,700 a month
through January 31, 2000. Rent expense was $200,818, $172,253 and $62,621 for
operating leases during the years ended December 31, 1997, 1996 and 1995,
respectively.
The total future minimum rental payments required for noncancellable
operating leases at December 31, 1997, are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998...................................... $ 207,000
1999...................................... 207,000
2000...................................... 188,300
2001...................................... 166,000
2002...................................... 93,100
Thereafter................................... 147,000
------------
$ 1,008,400
------------
------------
</TABLE>
Included in other assets at December 31, 1997 is prepaid rent of
approximately $99,000 for a collection yard. The lease term expires November 30,
2007.
<PAGE>
FEREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
10. ACQUISITIONS
At various times during 1997 and 1996, the Company acquired the assets of
several scrap yards, all of which have been accounted for under the purchase
method. Accordingly, the total purchase price was allocated to assets acquired,
with no recognition of goodwill, as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Property and equipment................... $ 2,354,211 $ 754,767
Prepaid rent............................. 100,000 --
Inventory................................ 45,221 371,504
Customer list............................ 50,000 --
------------ ------------
$ 2,549,432 $ 1,126,271
------------ ------------
------------ ------------
</TABLE>
No individual acquisition amounted to more than 20% of total assets at the
beginning of each respective year.
Total revenue from the operation of the scrap yards by the Company after the
acquisitions was approximately $5,497,000 and $2,112,000 for years ended
December 31, 1997 and 1996, respectively.
11. SUBSEQUENT EVENTS
Subsequent to year-end, the Company signed a letter of intent for the
acquisition of an additional scrap yard in Texas for $2,940,000. In connection
with this acquisition, the bank (Note 4) has approved extending the Company's
credit facilities to a maximum of $12,500,000. Repayment and interest terms
under the new agreement are similar to the prior note.
In connection with the bank's expansion of the Company's credit facilities,
the Company paid an amendment fee of $25,000 at closing, and is obligated to pay
an additional $62,500 fee.
